The Business Environment

Understanding the six forces of influence

The business environment is the complex realm of factors and conditions that influence all participants (principally composed of consumers, businesses, and governments) that are engaged in various market exchanges.  It is the amalgam of all the forces of influence that are external to—and outside the control of—any one person or company.  The business environment is dynamic; engaging and connecting myriad business concepts in a complex and multifaceted interplay of issues, causes, and effects that can manifest in foreseeable, as well as unpredictable and unprecedented, risks and outcomes.

As a means to better understanding and analyzing its complexities, the business environment has been organized under six major forces of influence:  Sociocultural, Competitive, Technological, Economic, Political & Regulatory, and Natural.  These six forces are interrelated, constantly in action, and constantly changing.  Each of these forces exerts some degree of influence or effect on any given business at any given time.  Depending on the scenario and situation, some forces of influence are more important than others, and some at different times than others.  To be successful a company must thoroughly understand the business environment and its effects. 

Systematic and timely observation of the business environment is necessary to help a company develop and maintain an edge over its competition, and to anticipate important changes among issues that are beyond its control.  This is done for the purpose of preparing for and successfully adjusting to the changes that are induced by the business environment.

To accomplish the mission of understanding the business environment, two critical functions must be undertaken in a systematic and timely way.  The first is to observe and analyze[1] the business environment.  The purpose of this effort is to identify and comprehend as best as possible the nature of the situation in which the company is operating.  The second function builds on the first by synthesizing[2] the information gained from observation and analysis.  This knowledge should then be used to make competent decisions on the issues of when and how to utilize the company’s limited resources in its ongoing effort to adapt itself to the forces of the business environment, as well as to support the achievement of the company’s mission and strategic objectives.

Analysis and synthesis of the business environment can provide the critical information necessary to recognize and take advantage of current trends, as well as help to predict coming market shifts.  It also enables a company to identify potential threats, as well as opportunities that may be linked to changes in the business environment.

The six forces of influence are defined according to their general sphere of effect.  A single issue or factor in the business environment can frequently be categorized under more than once force.  This is partially due to the generalities inherent to dividing the business environment into only six categories of influence.  The business environment could be further categorized and refined into major orders and sub-orders of forces.  However, this would do away with the efficiency gained by thinking in less-convoluted (though not over-simplified) terms.

Most importantly, the fact that a single issue can be categorized simultaneously under more than one force of influence is evidence of the complexities and interconnected nature of the forces of the business environment.  It should also help to emphasize the need for developing a contextual understanding of the whole of the business environment.

The forces of influence are described in more detail below:

Sociocultural Forces
Sociocultural forces include the influences in a society, its cultures, and sub-cultures that bring about changes in perceptions, attitudes, beliefs, norms, customs, and lifestyles.  Changes in a population’s demographic characteristics have a significant bearing on individual behavior because they lead to changes in how people live and how they consume products.  This then influences how businesses market their products and compete for customers.

Competitive Forces
Competition is generally defined as other firms that market products (goods, services, or ideas) similar to, or that can be substituted for, your company’s products.  It is important to consider that few companies compete head-on with their entire lines of product offerings.  Usually there exist competitive overlaps of segments of firms’ product offerings resulting in different competitors for different target markets or product categories.  This is often not obvious at first-glance.

Technological Forces
Technology, very simply, is any application of human ingenuity that improves or increases efficiency.  It is important for companies to determine when and how a technology is changing an industry, and to understand the strategic influence of the new technology.  The technological force has effects on a company’s new products and processes, its operations, as well as on other organizations, and on society in general.

Economic Forces
Changes in general economic conditions affect (and are affected by) supply and demand, buying power, willingness to spend, consumer expenditure levels, and the intensity of competitive behavior.  Economic forces in the business environment influence both business and consumer decisions and activities, as well as government oversight.

Political & Regulatory Forces
Political and regulatory forces of the business environment are closely interrelated.  The current political climate of a country or region will help define future legal and regulatory forces.  Companies are interested in encouraging laws and regulations that are favorable to their businesses.  Federal, state, and local governments, along with various regulatory agencies, create and enforce laws and regulations regarding business practices within the United States, as well as outside the U.S.  Federal, state, and local laws influence business decisions and activities.  International law, treaties, trade agreements, and the laws of other nations will also influence and affect business decisions and activities for those companies doing business outside of their home country.

Natural Forces
Natural forces include three major types of influence.  The first is the normally occurring effects of the Earth on business, society, and government.  This includes the seasons, major events like Earthquakes, storms (tornadoes, cyclones, hurricanes, typhoons, monsoons/flooding), droughts, and other major weather-induced events.  As the effects of the global Climate Crisis have started to take hold we are experiencing increased volatility and irregularity in the occurrence of these events, as well as challenges for predicting future events and their effects.

The natural forces category also includes the physical resources available to our societies, businesses, and governments.  Important physical resources range from the life-giving, like water and food supplies (rice, corn, and wheat to name a few), to the power-giving, such as oil and natural gas deposits.  We utilize thousands of specific resources, available to us from the Earth in finite supply.  A few examples include iron ore deposits for construction, Uranium-235/238 for nuclear power, coltan (columbite-tantalite) that is needed to produce the element Tantalum which is required for nearly any electronic device that uses small compact capacitors (mobile phones, hearing aids, GPS, anti-lock brakes, etc.).  The physical resources aspect of the natural force has become increasing important in the last half century as the human population on Earth has increased exponentially placing untold strain on the finite supply of resources and thereby significantly impacting people and societies, as well as our human-made market systems, economies, and governments.

Finally, the natural force also includes biological and ecological issues, ranging from human health and disease issues, to the health, well-being, and balance of Earth’s flora and fauna.  It has been said that the single greatest achievement of the 20th Century was the eradication of Smallpox, a statement which provides an indication of just how important this force can be in relation to the functioning of our societies.  Together these three aspects compose the natural environment, which will always dominate any human-made force.

[1] Analyze – To examine something in great detail in order to understand it better or discover more about it; to find out what something is made up of by identifying its constituent parts.

[2] Synthesize – To combine different ideas, influences, or concepts into a new whole.  The process of gaining contextual understanding.