The Business Environment
What you must understand
Businesses operate inside layers of influence. The internal environment (owners, managers, employees, culture, resources) is largely controllable. The micro environment (customers, competitors, suppliers, intermediaries, the public) is directly relevant but only partly controllable. The macro environment (political, economic, social, technological, legal, environmental - PESTLE) is outside the firm's control and must be scanned and responded to. Distinguish opportunities from threats: both come from outside; strengths and weaknesses sit inside. Understand market conditions (competition intensity, buyer power, supplier power, substitution, new entrants) and how stakeholders hold differing interests and power.
Traps in questions
- Confusing a competitor's move (micro/threat) with a recession (macro/threat).
- Listing a firm's weak cash flow as an environmental factor - it is internal.
- Describing a factor without linking it to a consequence for the business; markers reward the impact chain.
- Treating PESTLE as a list to memorise rather than a scanning tool that generates specific implications.
- Ignoring that the same factor can be an opportunity for one firm and a threat for another.
Rule of thumb
For any environmental factor, write the chain: factor → effect on the firm → likely strategic response → risk if ignored. If you cannot complete the chain, you have described, not analysed.
Worked example
A café near a new university campus. Macro: rising student population (social) creates demand. Micro: two rival cafés open (competitors) raising rivalry. Internal: limited seating (weakness). Chain: enrolment growth → higher lunch demand → but rivalry plus limited seating caps share → response: extend trading hours and add takeaway → risk: losing students to rivals with seating.