Business and its Environment - Business Studies Form 1 Notes

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Meaning of Business

  • The term business refers to any activity carried out by an individual or by an organisation with the aim of making profit. The term can also be used to refer to firms or entities which profit goods and services for the purpose of making profit.

Purpose of a Business

  • The main purpose of a business is to make profit. This is done through the provision of goods and services to people who need them at a fee.
  • To make profit, businesses should do the following:
    • Satisfy their customers
    • Reduce operating costs (expenses)
    • Compete favourably with other businesses
  • The purpose of a business therefore is to:
    • Make profit
    • Provide goods and services to the community
    • Expand and grow the business by buying more stock and opening new branches
    • Survive and remain in business for a long time

Business Activities

  • A business activity is any activity that involves the production, provision and sale of goods and services with the aim of making profit.

Types of Business Activities

  1. Extraction
    • Refers to the removing of goods from their natural setting.
    • Extraction involves activities such as mining, farming, lumbering and fishing.
  2. Processing of raw materials
    • Refers to the changing of the form of goods without combing with others.
    • Examples of processing activities include grinding maize into flour, refining crude oil to obtain diesel, petrol and kerosene.
  3. Manufacturing
    • Refers to the combining of different raw materials to come up with a final product e.g. baking of bread by combining wheat, flour, yeast, sugar, margarine and water.
  4. Construction
    • Refers to the building of structures such as roads, bridges and houses
  5. Distribution of goods
    • Refers to all activities involved in moving goods from the production point to where they are needed.
    • People who carry out distribution are known as distributors.
    • Examples of distributors are the wholesalers and the retailers.
  6. Trade
    • Refers to the buying and selling of goods with the aim of making profit.
    • People who are involved in trade are known as traders.
  7. Provision of services
    • Refers to the selling of services to the consumers by individuals or organisations.
    • Examples of service providers include teachers, doctors, lawyers etc.

Importance of Business Activities

  1. Facilitates the provision of goods and services to the society
  2. Bridges the gap between producers and consumers
  3. Promotes healthy competition which leads to improvement in quality of goods and services
  4. Generates profit

Types of Business Environments and their Components

  • The term business environment refers to conditions or factors which affect business operations.
  • There are two types of business environments, namely;
    1. Internal business environment
    2. External business environment

Internal Business Environment

  • Internal business environment consists of factors which affect business operations that originate from within the organisation. Internal business environment is also known as micro environment.

Components of Internal Business Environment

These are factors which constitute internal business environment. They include the following;

  • Resources
  • Business structure
  • Business culture
  • Owners
  • The managers

These factors are discussed below

  1. Resources
    • Resources refers to whatever that can be used to achieve set objectives.
    • Business resources includes the following;
      1. Human resources
        • Refers to the workforce or employees in the business.
        • The quality of human resources influences the quality of goods and services produced by the business therefore the business must employ people with relevant skills to do the work assigned to them.
      2. Financial resource
        • Financial resources refers to money required to facilitate the operations of a business.
        • A business with adequate properly allocated and well managed financial resources is likely to perform better.
      3. Physical resources
        • These are tangible facilities such as buildings, machinery and furniture which belong to the business.
        • These facilities enables smooth operation of the business.
      4. Technology
        • Technology refers to skills and methods used in production. Use of appropriate and up-to-date technology ensures quality goods and services are produced
  2. Business structure
    • Refers to the formal arrangement of activities that are carried out by various levels of the organisation so as to ensure that objectives of the business are achieved.
    • Business structure lays down the duties and responsibilities of workers in the organisation. It also defines the relationship among workers in the organisation
    • A well laid out business structure contributes to the success of the business in the following ways
      • It enables each employee know what is expected of him
      • It enhances team work
      • It ensures that there are no conflicts and disagreements among workers
      • Ensure proper control in the business
    • A poor business structure will most likely lead to business failure
  3. Business culture
    • Refers to the combination of employees’ expectations, beliefs and values within the business.
    • Business culture is normally passed from one generation of employees to the next.
    • For instance a business which has a culture of involving employees in decision is likely to perform better than the one that does not involve employees in decision making.
  4. Owners
    • The owners of the business make major decision influencing the operations of the business besides providing necessary finances to start and run the business.
    • Good decisions will lead to business success while poor decisions are likely to lead to business failure

External Business Environment

  • External environment consists of factors from outside which affect the operations of the business. These factors may present opportunities or threats to the business.
  • External environment of a business is also known as the macro environment.

Components of External Business Environment

Refers to factors which constitute the external environment of a business. These factors are discussed below

  1. Economic environment
    • These are factors which influence the ability of buyers to buy the goods and services offered by the business.
    • These factors may include:
      • Level of buyers’ income
      • Changes in tax rates
      • Changes in prices of related products
    • The ability of buyers to buy determines the level of profitability of the business.
  2. Demographic environment
    • Refers to the changes in the population.
    • Such changes may include:
      • Changes in the size of the population
      • Changes in the geographical distribution of the population
      • Changes in age and sex structure of the population
      • Changes in birth and death rates in the population
      • Changes in population density
    • Each of the above changes will influence demand for goods and services produced by businesses, for instance an increase in population size increases demand for goods and services whereas a decrease in population size decreases demand for goods and services
  3. Legal-political environment
    • The government influences the operation of businesses by passing laws and policies that regulate their activities.
    • Such laws may relate to:
      • Taxation
      • Price control
      • Quality and measures
    • Businesses will therefore be forced to operate within the laws set out by the government.
    • On the other hand, political stability creates a conducive environment for businesses to operate in whereas political instability creates unfavourable business environment leading to business failure.
  4. Technological environment
    • Technology refers to the level of knowhow and efficient use of tools and equipment and other resources. Use of appropriate technology ensures business success whereas use of poor technology is likely to business failure.
  5. Cultural environment
    • Culture refers to the norms that regulate behaviours of people in the society. 
    • Culture includes customs, values and beliefs that are practiced by members of a given society. Culture is passed from generation to generation
    • Culture dictates how people live and what products to consume e.g. Muslims do not eat pork.
    • Culture will therefore influence the types of goods and services the business sells.
  6. Competitive environment
    • This is an environment whereby firms compete for customers in their efforts to maximize profit. This environment is present where firms sell similar products or products which serve the same purpose.
    • Competitive environment could take the following forms:
      • Generic competition
        - This refers to competition where products are used for the same purpose even though such products are different e.g. cinemas and discos.
      • Enterprise competition
        - This refers to competition where firms deal in similar products e.g. shoe selling businesses
        - Competition determines the ability of the business to continue operating in the sense an organisation which cannot cope with competition will find itself out of business.
  7. Physical environment
    • Physical environment includes such factors such as relief, climate and infrastructure such as roads, water supply, electricity, security etc.
    • These factors may affect the operation of the business both positively and negatively. For instance, good infrastructure supports business activities whereas poor infrastructure discourages such activities.


In summary, the external environment of a business is composed of the following:

  • Customers
  • The government
  • The economy
  • Competitors
  • Suppliers
  • The community
  • Technology
  • The physical environment e.g. vegetation, air, water, soil etc.

Healthy Business Environment

  • A healthy business environment refers to a situation where a business operates in harmony with both its external and internal environments.
  • A business should do the following to ensure a healthy business environment
    1. It should ensure that the environment is clean
    2. It should comply with all laid down legal requirements such as obtaining a trade license
    3. It should charge fair prices for its goods and services
    4. It should pay its workers fairly and treat them humanely
    5. It should pay its suppliers promptly
    6. It should pay government taxes fully
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