Introduction
In the modern business world, it is necessary for the management to have a deeper understanding of the business environment; both internal and external environment. Also, there is an inevitable need to further determine all the environmental factors that have an effect to the business operations on a day to day basis. Such knowledge is crucial with regards to the ability to predict the consumer behavior and act accordingly (Fernando , 2011). On the other hand, the determination price elasticity of demand ensures the competitive advantage gain by a business firm due to the ability to appropriately meet the consumer needs in time. Therefore, this paper aims providing a detailed discussion on the types of business environment and the issues they generate to a business entity. Also, the paper explains the various types of price elasticity of demand and the factors that tend to yield an effect to the demand elasticity ( McEachern, 2012)
The Business Environment
A business environment refers to the all the factors that have an influence to the business operations and its overall performance in both short and long run. The business environment is composed of two classifications: The internal and the external business environment.
1. The Internal Business Environment
The internal business environment is widely accepted to refer to the business in itself as well as the resultant challenges that emanate from within the business inner circle. It is majorly consistent of the forces closer enough to the company to affects its product and service delivery activities. Given its close proximity to the business operations, a firm has an exclusive ability to project its total control over the challenges posed by the internal environment (also referred to as the micro-environment). The micro-environmental aspects include the following:
a). Business Organization
In itself, the firm's initial environment influences its operations. The business Organization consists of all the operational departments, for instance, finance department and the research and development section. Others can include the marketing department and the Human resources that foresee all the matters related to the personnel. Each of these departments affects the business operations both positively and negatively. For instance, the research and development department is mandated to foster innovation in product and service delivery, hence improving the competitiveness of the firm. As such, there is a need for proper cooperation and adequate communications between the departmental heads to ensure the smooth flow of business activities.
b). Suppliers and Distributors
Product suppliers and distributors are tasked with bridging the time gap between the product development and the eventual delivery to the consumers. Therefore, the business should hold a higher esteem towards them in order to guarantee their satisfaction, hence improve the operation and service delivery status. This can be achieved through timely pay and quick response to the raised concerns.
c). Customers
Customers buy and utilize goods and services offered by a business entity. In return, the organization gets resources from the consumer with which to fund the day to day business operations. This relationship portrays the level of interdependence that exists between the two, whose damage can result in business inoperability. To further strengthen the relationship and increase the consumer base, the business management should meet the consumer needs at all time so as to guarantee their satisfaction hence loyalty.
d). The publics
The publics refer to the groups that impact the ability of the business entity to meet its objectives. Financial institutions and the media fraternity are just some of the examples of the publics. For instance, failure by the financial institution to lend funds to the organization during its time of need can consequently cripple its operations. On the other hand, negative portrayal of the enterprise’s image by the media can lead to shrinking of the consumer base and can scare away business investors.
2. The External Business Environment
At times referred to as macro-environment, it is the combination of forces from the society at large with the ability to threaten or boost the business operations. The macro-environment is composed of concepts including economic factors, advances and adoption of technology and political interference. Others include the market demographic status and the consumer culture.
a). Political Environment
Political factors mainly refer to the government activities aimed at regulating the business activities within the country’s borders. It also includes the political status for instance instabilities and social unrest that can bring the business operations to a halt. The government, though the legislative arm, is tasked with the creation of laws and regulations that are aimed at boosting or inhibiting the business operations. Lack of adherence to such can lead to legal repercussions like fines or withdrawal of business operation license.
b). Technology Environment
An embrace of technology in business operation ensures efficiency and timeliness while keeping the operational cost at a minimum. Additionally, proper utilization of e-commerce is certain to boost the product sales, thus improving the overall performance of the firm through the increased profit margins. On the other hand, fully digitizing business operations can threaten the business existence and operations in the remote areas and during times of unforeseen power outage (Wetherly, 2013).
c). Social Environment
Essentially, social environment focuses on activities occurring in the society that are interrelated to business, hence the effect. For example, the emergence of movements around the globe that advocates for environmental concern by business entities can successfully lead to the closure of timber factories in the affected areas. Also, seasonal changes lead to seasonal demands of related products such as clothing and footwear, thus the seasonal effect to the business due to fashion trends.
d). Economic Environment
Most of the factors affecting the economic situation of a given country consequently harbor a direct effect on the business operations. During recession times, the business entities are forced to lay off the employees due to the poor market performance. Such layoffs further minimize the business quality production capability, lowering the consumer confidence. On the other hand, booming economy ensures the expansion of business operations due to increased consumer demands.
Problems Generated by the Environmental Factors
1. Uncertainty
Economic changes lead to the business uncertainty, especially in the countries frequently exposed to economic shocks due to fluctuations in currency exchange rates and the inflations. As such business managers find it hard to engage in long term planning and strategies.
2. Strict Business Regulations
In countries yet to realize market liberalization, for instance, the communist China China
3. Unfair Competition
Environmental factors such as technology have encouraged unfair competitive practices, for instance, the unprecedented hacking of corporation's websites with a malicious intent of stealing business strategies and secrets to gain a competitive edge. Lately, most financial institutions have reported breaches in their internet security traceable to competitors.
4. Integrity
The integrity of business entities is frequently violated by government regulations and the freedom of the media. For instance, a number of media houses have reported business operations without the management’s conscience, exposing the firm’s image that the Public Relations department has spent a lot of resources to conceal from the consumers so as to maintain their level of confidence. The exposure, in some cases, has scared away the potential investors.
5. Supply Chain Problems
Fluctuations in the market demands have, in the past, lead to shrinking inventory production, storage, and distribution. Additionally, the supply companies that were affected to the global crisis more than five years ago are still struggling to be accepted by the loan lending financial institutions, thus further complicating the supply chain for most business entities.
Types of Price Elasticity of Demand
Price elasticity of demand is an economic measure utilized in determining the rate of responsiveness of the quantity of goods and services demanded by a consumer, to the resultant price changes. It is represented by the following formula (Tewari, 1996):
The following are the different types of PED
1. Perfectly Inelastic Demand: Occurs when an increase in price does not affect, whatsoever, the change in the quantity demanded. It is a common occurrence in a monopolistic environment. The phenomenon is illustrated in the graph below:
2. Inelastic Demand: Occurs when a unitary increase in price of a commodity leads to a slight decrease in the quantity demanded (less than 1), as illustrated in the graph below;
3. Unit Elastic Demand: Occurs when a unitary change in the price of a commodity results in an equal unit in the decrease of the quantity demanded of a commodity. See the graph below:
4. Elastic Demand: In an elastic demand, a unitary increase in the price of a commodity results in a sharper decline in the quantity demanded. It is usually the case in a highly competitive environment.
5. Perfectly Elastic Demand: Any increase in price results in the commodity losing market demand. The graph below better illustrates the scenario.
Factors Affecting the Demand Elasticity
There are a number of factors that affect the demand elasticity. They include the following (Chauhan, 2009):
1. The Substitute goods availability
It is observable that the elasticity of demand gets higher with the ready availability of substitute commodity. This is because the consumers can always opt for the alternatives offered by the competitors as per the positive or the negative changes in its price.
2. The Extensiveness of a good or service definition
The more extensive the definition of a product or a service is, the minimal the elasticity. For instance, restaurant Y’s chicken and chips likely have a higher elasticity of demand due to the significantly available substitutes; however, generalizing food yields lower elasticity due to the lack of an alternate substitute.
3. Income
Notably, the higher the representation of the percentage of the consumer’s income the product has, the higher the level of elasticity. Consumers pay keen attention to the price tag on the commodity especially when their income level is lower.
4. Product or Service Necessity
The demand for basic human wants like food and medical prescriptions are widely considered to be inelastic as its consumption is inevitable for a comfortable survival regardless of the price tag.
5. Duration
For a variety of goods, if the price change holds for a longer period, it is likely that the elasticity will become higher. The main reason for this observation is that with time, the consumers incline towards finding other substitutes. For instance, an instant fuel price increase in the short-run ensures continued consumption as the users find other less expensive alternative means of transport.
6. Consumer Loyalty to a Brand
Consumer sensitivity to sudden changes in price is often overridden by their personal brand attachment, resulting to the observed inelasticity in the demand pattern. It is a common phenomenon for a product that has had years of existence in the marketplace
References
Chauhan, S. P. S. (2009). Microeconomics: An Aadvanced Treatise. New Delhi PHI Learning.
McEachern, W. A. Mason , OH
Rimanoczy, I. , & Turner, E. (2008). Action reflection learning: Solving Real Business Problems by Connecting Learning with Earning. Mountain View , Calif
Tewari, D. D. New Delhi
Wetherly, P., & In Otter, D. (2013). The Business Environment: Themes and Issues.
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