Business activity is constrained (limited) by the environment in which the business operates. There are a number of important components of this environment including:
- The actions of competitors.
- legal requirements. E.g. what is legally expected
- social requirements and expectations. The sorts of expectations that society has of businesses e.g. to operate in an ethical way
- economic constraints e.g. the amount of income that consumers generally have to spend
- technological constraints. Often what businesses are able to produce and sell and how they operate is determined by the technologies available to them.
Businesses are constrained by a host of factors in their surrounding environment. For example, legal constraints determine how they produce (e.g. Health and Safety and Product Safety laws). Social constraints determine the tastes and buying patterns of consumers. For example, in recent years consumers have turned increasingly to healthy foods as an alternative to ones that a heavily saturated in fats and contain high levels of sugar.
Businesses need to be constantly aware of these environmental constraints and how they alter over time. They need to take what is termed an anticipatory approach ie. to anticipate changes that are likely to take place in the future in the business environment. By anticipating change businesses are able to adjust the way they operate to be ahead of competitors.
Businesses that take a reactive approach i.e. which only change when or after the environment alters will be left behind.
Studying environmental constraints and environmental change is important to businesses that want to plan ahead.
Some of the most important environmental constraints on a business include:
- the actions of competitors
- changes in consumer demand and changing tastes
- legal changes
- changes in technology and
- changes in the economic environment.