Business environment is the name given to the conditions faced by a company, throughout its life cycle, in a specific country or region. In general, the business environment considers complex conditions such as, for example, issues relating to procedures for opening and closing companies or collecting taxes.
Despite being a difficult variable to measure, the World Bank uses a methodology called “Doing Business” to measure, analyze, and compare regulations applicable to companies in more than 180 economies around the world.
These indicators guide the creation of policies to reduce bureaucracy and guide actions to simplify entrepreneurship and business management and also, from the point of view of businesspeople, to evaluate countries and regions where they intend to invest.
Act as an individual micro-entrepreneur, manage a company, undertake or embark on the world of business. Whatever you think, we know that our country has certain peculiarities when it comes to the business environment. But what is this? Why is it important to know how it works?
Follow here the explanations you need to master the subject and do well regardless of the area of activity!
First of all, let’s understand what the business environment is all about. It comprises all external factors that can impact decisions and the way of managing a business activity, whether they are elements such as a form of government, or political, social, or economic characteristics, among other conditions. Based on this, let’s think of our country as our business environment. Our labor laws, the decisions that governments make that impact the economy, and the current scenario in the country. All of this can interfere, directly or indirectly, with your business, right? That’s why knowing your business environment is essential.
But knowing is not everything. You also need to understand how the elements affect your company and extract the best from them. In this way, a good business environment is created, which favors the scenario of your business activity.
In short: imagine that you decide to work in agriculture. You need to know the soil, and the climatic conditions, choose what best suits your set of available characteristics, and the necessary equipment to, only then, have a chance of success at the end of the harvest, right? This is how it works to have a good business environment!
What are the main elements of a business environment?
Now that we know what a business environment is, let’s see what its main elements are. In a business environment, it is very important for executives to know the four perspectives for analysis: market strength, industry strength, macroeconomic forces, and key trends. Let’s see what each of them refers to.
Market strength analysis allows you to validate the operating segment and develop consistent strategies for the company’s main customers. Here it is worth thinking about the factors that affect the market in which we operate, the segments (in growth or decline, the main one and the one that is being poorly served), evaluating the needs and demands of customers, and studying the cost of change for customers (what is the weight of my brand to them?). Finally, what is the revenue attractiveness of your business? Anyway, anyone tasked with market analysis must at least have a business analysis certificate.
Who are your competitors? Is it difficult to create a similar venture? Are there substitute products/services for what my company offers? What is the ability of my stakeholders to influence my business model? The answers to these questions allow you to make an assessment of your business’s competitive ability.
When we talk about trends, we are projecting our vision for the future, for what the market shows us as possible changes. Therefore, we evaluate the spheres of technology, social and cultural trends, socioeconomic and regulatory spheres, that is, laws and taxes that can influence consumption. By analyzing them, the manager can plan and outline strategies that keep his business competitive even in scenarios of significant change.
These forces are like a runaway car: we cannot control it, but we can think of defense strategies. Therefore, knowing the global market, the capital market, commodities, and economic infrastructure allows us to take measures to mitigate impacts on the business. Want a real example of this? The Coronavirus pandemic. It affected the whole world, some markets went into total recession, and others showed an increase. It is up to whoever manages a company to analyze all of this to act dynamically, as the behavior of the global economy changes.
How does the business environment impact investments and productivity?
When we talk about the business environment, it is important to remember that it refers to the life cycle of companies. Therefore, complex aspects are taken into account and, at the same time, specific to cities, states, or countries, such as the procedures for opening and closing companies or collecting taxes. Due to the complexity of the elements involved, the World Bank sought to capture information related to the business environment with the aim of measuring, analyzing, and comparing regulations for companies and their application in almost all economies in the world, a method that became known as Doing Business. Based on the indicators, those interested in investing look for economies that provide a business environment favorable to their business activity.
As a consequence of the investments made, we have an increase in the capital stock (consisting of production machinery). Productivity is directly related to the physical capital (machines) and human capital (workforce) of a country. Therefore, a quality business environment works like a magnet for success: it attracts more investment which, consequently, affects productivity. It’s a snowball, but in the most positive sense possible for the business world.