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“Environmental Factors Determining Economic Security of Businesses and Its

Elements”

AUTHORS

Olena Arefyeva

ARTICLE INFO

Olena Arefyeva (2004). Environmental Factors Determining Economic Security of

Businesses and Its Elements. Problems and Perspectives in Management, 2(2)

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Thursday, 02 September 2004

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Problems and Perspectives in Management, 2/2004 

205

Environmental Factors Determining Economic Security of 

Businesses and Its Elements 

Olena Arefyeva

1

The activity of economic agents in emerging market relations requires a rapid determina-

tion of factors conditioning the availability of economic security of businesses, adaptation to dy-

namics of external environment through liquidation of existing threats. The establishment of mar-

ket economy foundations leads to competition between the market players, which, in its turn, is a 

source of risk. 

Therefore, economic security management can be considered as an inherent part of the 

system of business management aimed at standing up against internal and external risks of its per-

formance. Taking safeguards to provide for enterprise’s security is necessary to protect its activity 

from negative effects of external environment and support a condition of the most effective use of 

all types of resources to prevent threats and provide for stable situation and stable operation of the 

business at present and in the future. 

With the aim to work out timely administrative decisions, it is appropriate to determine 

factors conditioning economic security of businesses. Studying literature dedicated to this problem 

allows us to draw a conclusion about ambiguity of experts’ opinions concerning the number of 

factors, their structure and significance. Most economists identify factors contributing to business 

crisis as such that contribute to bankruptcy. Among them the following authors, such as 

L.O.Ligonenko, G.Abdul and T.A.Istomina should be mentioned. They consider that studying the 

key factors economic security of the business, that cause the crisis development of an enterprise, is 

a conclusive stage of bankruptcy diagnostics. Since factors conditioning a crisis development of 

the enterprise are, at the same time, a format for realization of certain types of financial risks and 

threats. The aforementioned factors can be divided into two main groups: 

a) independent from business activity (external or exogenous factors); 

b) dependent on business activity (internal or endogenous factors). 

The crisis development external factors, in their turn are split into three following sub-

groups: 

1.

Social and economic factors of the overall country’s development. Only these factors 

influencing the economic performance of a certain business (i.e. factors shaping the 

potential for bankruptcy risk) make the subject for consideration. 

2.

Market factors. When considering market factors, tendencies of development nega-

tive for this business in terms of commodity (including raw materials and manufac-

tured goods) and financial markets (money, stock and foreign exchange) are under 

study. 

3.

Other external factors. The enterprise itself determines these factors’ structure with 

taking into account the specific character of its economic performance. 

In the course of the crisis development analysis, internal factors are also divided into three 

following sub-groups depending on money flows peculiarities, namely: factors related to manufac-

turing operation; factors related to investment activity and factors related to financial activity. 

This approach is comprehensible, since management did not pay enough attention to eco-

nomic security of businesses during the period of economic transition in Ukraine, which resulted 

in the fact that many domestic enterprises found themselves in crisis. Among the main causes, the 

following should be mentioned: firstly, high prime cost of production and the lack of demand for 

it, which led to an emergence of the great number of loss-making businesses. In 2001, loss-making 

businesses made 43% of the total number of enterprises. Secondly, in 2001, accounts payable 

made UAH 258401.8 mln and accounts receivable UAH 185277.6 mln respectively; almost half of 

them were overdue. As a result, many businesses are insolvent and bankruptcy cases are brought to 

court. Nearly five thousand bankruptcy or debtor’s solvency recommencement cases were brought 

                                                          

1

Doctor of Economics, professor of European University

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Problems and Perspectives in Management, 2/2004 

206

to court only in 2001. Almost 50% of cases resulted in liquidation of businesses, 1% – endorse-

ment of a rehabilitation plan, 6% – amicable agreement, 7% – meeting creditors’ requirements; the 

rest of the cases are closed without any consideration or under other grounds. With the view to bar 

from a crisis situation, a system of businesses’ economic security should be worked out  

S. Glushchenko elaborated another approach to determination of business’ economic se-

curity; he directly associates businesses economic security with financial risk management [1]. 

Financial risk management is a process with the help of which the economic agent influences the 

risk situation by making rational changes in the level of business’ economic security in order to 

provide for a required level of profit. 

Business’ economic security allows the enterprise to effectively operate in risk situation. 

The indicator of business’ economic security can be defined as a level of immunity of all the sys-

tems of the enterprise in pursuing economic operation under risk situation. 

The situation is a totality of factors creating conditions for making a decision and imple-

mentation of a specific type of economic activity at some specific moment. 

Ensuring business’ economic security is related to the following: management and staff 

security; security of culture; security of information and decision-making; manufacturing security; 

legal security; financial security; espionage security. 

Management and staff security means physical security of life and health for senior, mid-

dle, and junior management and executive staff. 

Security of culture is related to relations between the employees within the organization, 

between the organizations in the person of management and the staff, relations with external cul-

tures (with the culture of clients and territories where the enterprise or its units are situated). 

Security of information and decision-making covers keeping of know-how, scientific re-

searches and innovation elaborations, economic extension plans by limiting access for outsiders to 

market confidential information. 

Manufacturing security provides for protection from negative effect on buildings, con-

structions, equipment, manufacturing technology, raw materials, materials, semi-finished produc-

tion, as well as providing for a possibility to diversify production manufacturing, re-orient to an-

other suppliers, rapid technical re-equipment in case of its including to a new production manufac-

turing. 

Legal security per se is aimed at keeping available patents and obtaining new ones, li-

censes, authorizations; preventing or bringing to a minimum penalties, fines, forfeits and responsi-

bility for violation of existing legislation. 

The aim of financial security is to provide for a quality budgeting, reduction of tax bur-

den, the inflow of required investment and obtaining profit. 

F.Yevdokimov considers ensuring of business’ economic security as a process of forestal-

ling various losses from unfavorable factors in all areas of its manufacturing and financial activity. 

Both internal and external factors can produce negative effects: subjective and objective ones. The 

state legislative and legal system, regulating the country’s economic and social development as 

well as its security, is an external factor that influences business’ economic security. 

Technical and economic security (manufacturing potential of an enterprise, timely reno-

vation of production funds, level of production capacity development), resources’ security (sup-

porting manufacturing process with main types of resources, energy), financial security (level of 

profitability, market share, access to loans, money liquidity, exchange value of securities, optimum 

capital structure), intellectual and personnel elements (maintaining the staff’s high level of qualifi-

cation), security of information (establishment of the system of economic support for decisions on 

economic security), social safety net (level of wages, structure of family incomes, enterprise’s 

status) are among the areas of enterprise’s economic activity that provide for its economic security. 

E.A. Oleynikov considers internal environment as the main source for ensuring business’ 

economic security (BES); he identifies the functional elements of BES as a totality of main areas 

of enterprise’s economic security that substantially differ from each other by their contents [2]. 

A general scheme of main areas of BES is shown in Figure 1. 

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Problems and Perspectives in Management, 2/2004 

207

Having at their disposal the actual (current) meaning of the level of economic security 

and for the purpose of its future planning, the enterprise’s management (managers and chief ex-

perts) should establish a number of functional elements to envisage the possible threats and to be 

able to minimize the losses arising in the process of calculations. 

Financial security 

Intellectual security 

Technical and 

technological security 

Labor safety 

Political and 

legal safety 

Business’ 

economic 

security 

Security 

Resources’ 

security 

Security of 

information

Social safety net 

Ecological security 

Fig. 1. General scheme of main BES elements [2, p.109] 

It is appropriate, in our view, to determine factors of business’ economic security based 

on their rating and to split them into two groups: 

x

External factors: a change in the form of property, a change in priorities of the state 

concerning industrial policy, a change of environment (consumers-suppliers), reduc-

tion of production and consumer’s demand as well as internal market reduction, 

credit system, lack of access to development resources, lack of stability of legislative 

framework and tax system, unemployment growth, international competition; 

x

Internal factors: ineffective management and marketing, low level of use of all the 

types of resources and fixed assets in particular, ineffective structure of assets, growth 

of accounts receivable, scanty stock and its non-competitiveness (Figure 2). 

It is evident that the level of economic security is based on efficiency of this enterprise’s 

offices in preventing threats and eliminating losses from negative impacts on the different aspects 

of economic security. The sources of such negative impacts can be deliberate and non-deliberate 

actions of people, organizations, including state authorities, international organizations or rival 

businesses; negative impacts can also be a result of coincidence of objective circumstances, such 

as the financial market state, scientific discoveries and technological developments, force major 

circumstances, etc. According to their subjective conditionality those negative impacts can be di-

vided into the following categories: 

Objective negative impacts – are those that emerge without involvement and in spite of 

the will of an enterprise or its employees. 

Subjective negative impacts emerge because of ineffective work of the enterprise in gen-

eral, or its employees. 

A substantial difference should also be noted between the factors that cause a crisis and 

those that contribute to business’s economic security.  

The crisis can be called forth by the lack of financial discipline, poor management, bad 

technologies, and non-competitive production, which are actually the results of negligence and the 

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Problems and Perspectives in Management, 2/2004 

208

lack of the system of business’s economic security. Whereas achieving business’s economic secu-

rity means pursuance of purposeful actions to avoid negative tendencies in the development of an 

enterprise, which, in its turn, allows the company to comply with the interests of economic agents, 

employees, creditors, state and society. 

There are also differences between managing factor mechanisms. Therefore, crisis (bank-

ruptcy) is addressed by means of economic and legal measures; whereas economic security, in 

most cases, is a result of economic, organizational and technical order. 

Within economic environment, businesses, generally, work in close contact with other 

structures. Consideration of their economic security factors and their market status is  possible 

only within its interaction with other objects. 

Consequently, the main elements of threat to business’ economic security (within Ukrain-

ian market) are the following: 

1.

Elements of the state economic security are as follows: reduction of science-based 

production; lack of developed banking and insurance system, as well as guarantees 

from trust organizations; state budget deficit; the outflow of capital; high taxes on 

producers; low level of economic statistics credibility; weak law enforcement agen-

cies and mass media; poverty and misery of the majority of population; strikes. 

2.

Elements of regional economic security are as follows: lack of legislative framework 

that regulates the rights and duties of the regions; lack of the regional banks network; 

failure to change local taxes and charges; failure to compile a free regional financial 

balance sheet; lack of economic infrastructure or its insufficient level of develop-

ment; unsatisfactory level of managerial staff qualifications; mass media; documen-

tation circulation, information and reporting; control and revision bodies; unsatisfac-

tory awareness of population of the essence of economic reforms and unsatisfactory 

instilling into the minds of population the idea of their being masters of the region 

and, by and large, of the state. 

3.

Elements of business’ economic security are the following: availability of legislative 

framework and its enforcement; methods of economic regulation on behalf of the 

state (in the first turn, tax policy and taxation system); level of the state intervention 

into economy, marketing system preparation; unsatisfactory level of personnel train-

ing; mass media; documentation circulation, information and reporting; control and 

revision bodies; negotiating with clients; issues of technical and physical security of 

enterprises and entrepreneurship. 

When examining the issue of economic security, it is possible to conclude about the ne-

cessity of a comprehensive approach. Until now, there is a lack of a single view on the comprehen-

sive systemic approach to ensuring economic security of objects, functioning security services, 

their mutual interaction and their interaction with law-enforcement bodies. The majority of senior 

managers still fail to understand the principle of ensuring security as one of the basic elements in 

economic activity. Therefore, the issue of economic security is often treated as a secondary one. 

In our view, the principles of business’ economic security should include the following 

components: the priority of warning measures – non-admission of emerging real threats; legiti-

macy – actions within the framework of existing legal acts; comprehensive use of forces and 

means to develop program on complex ensuring of security; coordination and interaction within 

the enterprise – safeguards against threats are implemented on the basis of concerted efforts of all 

units; combination of disclosure with conspiracy – awareness of the staff about security safeguards 

within permissible limits; competency – security issues should be addressed by professionals; eco-

nomic feasibility – costs should not exceed the optimum level; activity planning – security activity 

should be based on a comprehensive security program; systemic approach- i.e. taking into account 

the whole range of factors influencing security. 

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