Business Environment and Its Main Factors

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Business Environment and Its Main Factors

The business environment is a significant aspect, which strongly influences the efficiency of the firm operation and includes such internal and external factors as a value system, effective objectives, suppliers, market competition, technologies improvement, government policy, and social trends, which are essential derivatives of the firm’s prosper. The business organization cannot exist in the closed environment. Prosper of the firm strongly depends on the multiple factors, which induce it for further investigations with the aim to avoid the negative influence of the problematic aspects.

Business environment means all of the internal and external factors that influence the operation of the company. Business environment has dynamic nature, which constantly change in relation to the economic and social aspects. Cooperation with the environment leads to opening up the new potential of growth for the firms. It also helps the business to identify the areas for growth and development of its activities. The managers get motivation to update their knowledge and skills to meet the possible changes in the business area.

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External constraints include various aspects, which cannot be controlled. Internal factors imply an influence of different principles, which operate inside the organization and directly affect the business issues. Internal factors include multiple significant elements, which influence on the business development and comprise a value system, missions and objectives, and financial factors (Kokemuller 2015). Value system implies business culture focused on the participants’ compliance with the definite business framework. Missions and objectives are concentrating on the different priorities and policies of the business, which correspond to the main goals. Financial factors include financial policy and capital structure, which influence the business performance. External factors include micro- and macro environment elements. Micro environment elements comprise suppliers, competitors, and market intermediaries (Kokemuller 2015). Macro environment elements include economic factors, social factors, political, and technological factors (Kokemuller 2015). Economic factors are basing on the economic policies and such conditions as rate growth, inflation, and restrictive trade practices, which form an economic environment. Social factors represent society’s purchasing preferences and belief of the people in their buying power. Political factors concern the management of the public affairs and its influence on the business. Technological factors are focusing on the improvement of the products’ quality with help of the new technologies, which support efficient development in the long run.

The close interaction of the business with external and internal factors provokes a significant impact, which often negatively influences the business prosperity. Thus, with the aim of identification a right and effective solution of a problem it is important to perform a constant analysis of the business condition. PESTEL analysis will help the business to identify the key success factors, possible opportunities, and threats for the organization. PESTEL analytical tools apply political, economical, social, technological, environmental, and legal issues (Pandey 2015). For example, analysis of the economic factors will help to develop the business through minimizing the costs and maximising the profit. Analysis of such social factors as demographic shifts, beliefs, and attitudes of the customers will help to identify necessary trainings to support a sustainable supply chain initiative and develop the employees’ work performance skills. Investigation of the technological factors will help to identify technological innovations, which will provoke the reduction of operational costs and will increase the manufacturing quality and capacity. A deep analysis of the environmental factors may help to solve such significant issues as energy conserving, production of less waste, and reduction of the resources used by the suppliers. A deep studying and analysis of the legal issues will also help to avoid possible law impact. For example, the business will concentrate more on the laws, which concern discrimination, health and safety at work, labour relations, and regulation of monopolies (Pandey 2015).

The business may also reduce a negative effect of the internal factors using the SWOT analysis. SWOT analysis will help to identify new solutions and possible changes. The influence of micro environment factors may be predicted with a help of Porter’s 5 forces and Porte’s four corner model. Porter’s 5 Forces will help to identify weak and strong points of the business (Kokemuller 2015). Thus, business will have an opportunity to explore competition in the industry, possibility of a new entrance, a power of suppliers and customers, and identify a threat of the substitute products. Porter’s four corners model is an effective tool for exploring the course of customer’s actions. Using of such predictive model will help to form a future strategy and understand the competitors’ motivate factors.

The business environment comprises multiple factors, which significantly influence the firm’s prosper and its position on the market. Thus, it is very important for the firm to develop its strategy using various types of analysis, which will help to identify the weak and strong points of the business, explore competition in the industry, new entrance, and possible legal problems.

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Perfect Competition and Equilibrium in the Short and Long Run

A perfectly competitive market is a market where competition reaches its greatest level. Perfectly competitive markets correspond to the wide range of the positive characteristics but also have a range of disadvantages, which have a negative effect on the business development. Thus, it is important for the firm to control the situation and to keep track of the market changes.

The positive characteristic of the perfect market include freely available knowledge to all participants, high level of customers’ knowledge, and absence of barriers to entry or exit the market. It also provides production of identical units of output, regulation of prices by the whole industry, and absence of a need for the government regulation (Machovec 1995). Nevertheless, perfect competition has some disadvantage. For example, irrational investment of money may be caused by copying of the new production techniques by the rival. Such phenomenon is caused by the homogeneous character of the product. The other significant disadvantage is a lack of the products’ variety, which reduces the interest of the customer (Khan Khan 2007). Besides, the monopolistic environment may decrease competition in relation to the quality and design.

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Equilibrium in the Long Run

In the long run, firms are attracted into the industry in case the incumbent firms get abnormal profits. Such situation is caused by the absence of the barriers to entry. The influence of this entry is represented in the Fig. 1, which shows the shift of the industry supply curve to the right. Apparently, that the price falls down until the point where all abnormal profits are exhausted (Perfect competition, 2015). Thus, the firm will leave the market in case of great losses, which will provoke the shift of the industry supply to the left. That aspect will induce raise of the price and enables those left in the market to drive the normal profits. The abnormal profit received by the firm in the short run acts as motivation for the new firms to enter the market. Such situation will help to increase the industry supply and will reduce the market prices for all firms until receiving the normal profit (Perfect competition, 2015).


MR – Marginal Revenue;

ATC – Average Total Cost

MC – Marginal Cost.

The analysis also showed a range of the benefits in the long run like perfect knowledge, which reduce the need in advertising and absence of monopoly power because of no barriers to entry. The Fig.2 shows that the businesses will raise productivity because the equilibrium will occur in case P=MC, which cause allocative efficiency (Perfect competition, 2015). In the long run, equilibrium will occur at an output when MC=ATC, which has also a high efficiency (Perfect competition, 2015).


Equilibrium in the Short Run

There are four conditions of equilibrium of the firm in the short run: abnormal profit case, normal profit case, loss minimizing case, and shut down case. (Сhand 2015).

The short-run equilibrium of the firm can be represented with help of the total cost curves. The firm can minimize the profit at that level of output where the difference between the total costs and total revenue is maximum as it shown in the Fig. 3. The total revenue curve is an upward line curve, which starts from O (Сhand 2015). Such phenomenon is caused by the small sells or a great quantity of the product in case the price is constant and under the perfect competition.


If the firm produces nothing, total revenue will be equal to zero. The firm will maximize the profits at the level of output where is formed a maximum gap between the TR curve and the 1C curve. The figure shows that the maximum amount of the profit is measured by TP at OQ output. At outputs lower or higher that OQ between A and B points, the profits of the firm reduce (Сhand 2015). In case the firm produces OQ1 output, the losses of the firm will become maximum because the TC curve is above the TR curve. At Q1, the profit of the firm will be equal to zero (Сhand 2015).

Thus, the perfect competition is a profitable aspect for the firm, which helps it to make good profits in the long run and super-normal profit in the short run. However, prosper of the business also strongly depend on its constant development. The firm should always remain up-to-date with evolving technologies and search for new solutions because even perfect competition has number of disadvantages connected with a homogeneous character of the product, which reduces an interest of the customers.