Components of business environment – Internal and External

Components of Business Environment

The components of business environment include a wide array of elements that have a direct or indirect impact on a business’s operations, strategies, and overall success. By understanding and analyzing the components of business environment organizations can aim to make informed decisions, identify opportunities, and mitigate potential risks.

An understanding of the environment and changes related to it is very essential for business enterprises. Those business enterprises which scan their environment and are always prepared to adapt to changes may achieve success. Contrary to this, enterprises which fail to adjust to their environment are unable to survive in the long term. 

The components of business environment can be broadly classified into:

(i) Internal business environment, and

(ii) External business environment.

1. Internal Environment

An environment that has a direct influence on the business is termed an internal environment. The internal factors which influence the business environment are controllable in nature i.e. they remain under the control of the business. Hence, the factors like physical facilities, organisation and functional means can be revised and transformed as per the requirements of the environment. Through understanding the internal components of business environment the strengths and weaknesses of the business are revealed.

The strategy and decisions of internal organisation are determined by the following internal components of business environment: 

1) Value System

The selection of a business, its mission, vision, objectives, business policies and practices are all elements of the value system in an organisation. The founders and management team of a business play an important role in the decision making of the value system.

2) Mission and Vision and Objectives

Vision is a wider view to define the future prospects of the business. Vision aids in meeting the purposes of the business organisation. The mission is the short-term action through which objectives are attained.

3) Management Structure and Nature

Generally, business decisions are influenced by the organisational structure. This structure comprises the board of directors, managers, executives, etc. The number of fellows in an organisational structure determines the duration of decision making

4) Internal Power Relationships

Coordination between the levels of organisational structure is very important. The three levels, i.c., top, middle, and bottom levels, must have a mutual relationship among them. This helps the organisation to operate smoothly.

5) Human Resource

Human resource is a key part of any organisation. They define the strength and weaknesses of an organisation. The essential requirements of human resources include skills, quality, commitment, sincerity, the right attitude, etc. The level of employee participation and initiative differs from organisation to organisation and is determined by the corporate culture.

6) Company Image and Brand Equity

The internal environment of the company is affected by the image that it carries in the market. The image of the organisation helps in raising capital, mergers, other alliances etc. Likewise, brand equity also affects the organisation.

7) Miscellaneous Factors

Various other factors that determine the success or failure of a business are as follows: 

i) Physical Assets and Facilities

The availability of assets and facilities is essential for the smooth functioning of the business. The facilities influencing the competitiveness of the company include production, technology, labour, etc.

ii) Research and Development

The ability to innovate and compete is determined by the R&D department of an organisation. However, it is one of the external factors; it also influences the internal environment of the business.

iii) Marketing Resources

The marketing effectiveness of an organisation is directly influenced by the resources such as the marketing department of the organisation, marketing personnel, distribution channel, and brand equity. 

iv) Financial Factors

Finance is the lifeblood of an organisation. Proper allocation of financial resources affects the business performance, business policies and strategies. Some important factors influencing the internal environment are financial policies, capital, etc.

2. External Environment 

The environment of any business is also affected by many external factors which cannot be controlled. The external components of business environment include economic, social, cultural, political, technological, and natural elements. These factors have a deep impact on the business and are beyond its control. It also reveals the business opportunities and challenges that are analyzed.

A business has to deal with the external environment as well as internal elements, external elements are also important for the business. The external components of business environment also include customers, competition, government policies, society, etc.

The following external components of business environment are as follows:

  1. Customer
  2. Competitor
  3. Government
  4. Society

There is also one more aspect of the business environment that is not under the control of the firm. Such a scenario is called the external environment. It is also divided into two subclasses:

(a) Micro-environment

It includes all factors within the immediate environment of the business enterprise that may affect its ability to serve customers. The following are the major factors.

(i) Competitors

There are many firms i.e. units of production in any business. There are many types of competition among such firms. According to the market structure, there may be many firms in an industry or a few or only one.

All the units of the product they produce may be homogeneous or may have product differentiation. The form of competition will be different in different situations. 

This competition can be generic or over a brand. In this way, many types of competition have to be faced by business enterprises which are not under the control of any one firm.

(ii) Customers

The objective of the business enterprise is to earn profit. For this, he has to sell the products produced. Therefore, one of the main functions of an entrepreneur is to attract customers. Sales maximization may be one of the many objectives of oligopolistic firms. 

  • There are many types of customers of business enterprises, such as individuals, wholesalers, retailers, investors, public institutions, foreign customers, etc.
  • The customer can be one, such as the government, or a few or many. An entrepreneur does not just focus on increasing the number of customers but also tries to ensure that they remain associated with the enterprise stably.
(iii) Suppliers

The job of business entrepreneurs is to convert inputs into outputs. Therefore, they must continue to get all types of inputs regularly and at reasonable prices. The policy of vertical integration is adopted to avoid the careless, thoughtless behaviour of the supplier of the inputs.

(iv) Public

Public or public means the group that shows its interest in the success of the entrepreneur or whose actions have an effect on the functioning of the enterprise. Such groups may include the general public, customer organizations, local people, government, financial institutions, employees working in the enterprise, media persons, etc.

(v) Marketing Channels

Every firm needs middlemen who help in selling the goods produced by it. Such intermediaries can be agents or traders. These people help the company to sell its products in the right market. For this, the help of advertising, radio, TV, and consulting firms can also be taken.

  • Some authors believe that the factors that determine the microclimate are those over which the entrepreneur can have more or less control. Therefore, they discuss these factors separately from the external scenario and divide the factors affecting the business scenario into individual and population rather than dividing them into internal and external.

(b) Macro-environment

In this scenario, those factors are discussed which are not under the control of anyone’s business. These factors are of two types:

  1. Economic factors, and 
  2. Non-Economic factors 

(1) Economic factors include the following:

 (i) Population factors

 (ii) Economic factors 

 (iii) Technological and Non-Technological factors, and 

 (iv) International factors 

(B) The non-economic factors are as follows:

(i) Socio-cultural factors 

(ii) Political and legal factors, and 

(iii) Physical factors

A combined analysis of all these factors and components of business environment is given below.

(1) Demographic Environment

The effect of population on the firm is many. The greater the population of the country, the greater the market for the commodity in that country will be more spacious. But the size of the population is not everything. Along with size, the education level of the population, level of per capita income, distribution of income, male-female percentage, distribution of population based on age, etc. also have an effect. Apart from these, the rate of growth of the population, level of employment, number of unemployed, etc. also, affect the demand for a firm.

The explosive growth of population has put all the countries in trouble, as the amount of natural resources has started decreasing in comparison to the population. Due to this, the problems of food supply, mineral deposits, water supply, etc. are becoming dire, the cities are getting crowded and the transport crisis has arisen. Due to all this, the quality of life is getting degraded. This problem has become more serious due to the rapid growth of the population and the low level of productivity in developing countries.

(2) Physical Environment

An important concept is that the physical landscape is the major determinant of the economic development of a country. The physical landscape includes the natural resources of the country, their distribution, the fertile power of the land, water, air, forests, mountains, minerals, infrastructure, etc. A closer look reveals that the developing countries are either in the tropics or in an area with a very cold climate. So the question arises, is the physical landscape the main determinant of economic development? It would not be correct to say that the physical landscape alone is not everything for business growth. Along with the physical environment, the conditions of supply of capital, skilled labour, technology, managerial experience, etc. are also no less important.

(3) Economic Environment

The business enterprise is primarily an economic organization. Therefore its development ultimately depends on the economic environment. An unfavourable economic scenario proves to be helpful while an unfavourable environment hinders the growth of enterprises. Major parts of the economic scenario – agricultural policy, industrial policy, financial policy, trade policy, monetary policy and fiscal policy, economic structure, saving and investment policy, the economic role of government, efficiency of public industries, government control, state of competition, foreign capital and investment policy, etc. It is clear that the economic landscape is very wide and multi-dimensional, and deals with almost all aspects of the business.

(4) Social Environment

The social environment is the opposite of the private environment. Society is a human institution that is related to all the people who live in it. The scope of the word social is so large that it includes family, caste, rural, modern intellectual, economic, political, religious, educational, cultural, and welfare. The social environment is made up of factors like tendencies, desires, aspirations, education and intellectual level, values, beliefs, customs, traditions, etc.

Business is a social institution. Therefore it is influenced by the social environment and also affects it. The following factors affect the formation of the social environment:

  1. Population size and composition
  2. Perception of family structure-function
  3. Willingness to work, perception towards labour, etc.:
  4. Society’s attitude towards managers: favourable and accepting or unfavourable and faulty:
  5. Society’s thinking: Orthodox means superstitious or scientific and rational. 
  6. Scientific thinking is helpful in the development of business;
  7. Being loyal to the rights, and obligations of society has a favourable effect on the development of business;
  8. If the courageous or the entrepreneur is ready to take the risk, then the growth of the business gets boosted.

What type of goods will be produced and marketed, market strategy, organization, prices and ideals of business are influenced by the social environment.

On the other hand, social systems and the environment are also influenced by business activities. Organization of business, operation of a business, innovation, dissemination and dissemination of information, new ideas, etc. all affect the social environment. It is not possible to change many elements of the social environment in the short run. Therefore, the business has to make adjustments according to the existing social environment.

(5) Cultural Environment

The culture of a nation is reflected by the arts, literature, customs, food, lifestyle, etc. The mental attitude of a person is also evident from the culture. Attitude towards women also reflects the cultural values ​​of society. The scope of the social environment is so vast that the cultural environment gets absorbed in it.

(6) Political and Legal Environment

​​There is a close relationship between business and political-cum-legal scenarios. The political environment and legal landscape are formed based on the economic and social goals, ideologies, and values ​​of the society. In a welfare state, steps are taken to protect the interests of consumers, unemployed people, poor, retired employees, and old people. 

These steps have an impact on the structure and growth rate of business enterprises. Enterprises have to operate within the limits of the rules and acts passed by the government. If such rules and regulations are in the interest of the development of enterprises and encourage them, then they will have a favourable effect on the business. That is why Arthur Lewis says that “the behaviour of the government plays an important role in encouraging and discouraging economic activities”. 

Government and its behaviour come under politics and law. That is why the government must act wisely. Lewis can be quoted once again as saying that “no nation has achieved economic development without the positive and constructive inspiration of a sensible government.”

Along with sensible government and creative inspiration, political stability is also necessary so that the business can grow uninterrupted.

(7) Technological Environment

To increase the pace of economic development, along with capital accumulation, the use of advanced technology is also necessary. Long-term development depends only on technological progress, as it brings about an increase in the productivity of labour, capital, and other resources. Kuznets has talked about five types of technological advancement, namely- 

  1. Scientific discovery, 
  2. Innovation, 
  3. Invention,
  4. Improvement, and
  5. Spread of innovation.

A business that cannot adapt itself to technological changes lags. Technological progress has been very fast in the last four decades, especially in the field of information; the business which will not be able to keep pace with this progress will be left behind in the race.

(8) International Business Environment

Some businesses are not limited to the border of any one country but are spread over many countries, such as import-export, import of raw materials and machine parts, oil, etc. Such industries are more influenced by the international environment. The international environment includes all the environments such as economic, political environment, social, cultural, physical, legal environment, etc. In the context of many countries, as a result of the revolution in the field of transport and communication, the world has become very small; this earth has become a huge village. 

In the current open economy era, the effect of the international environment is not only on domestic companies but also on multinational companies. The domestic company may also have to source raw materials from other countries and may have a large or small part of its total production to sell in the foreign market. Therefore, the economic and economic environment of the countries in which it exports can have an impact on this export. The price policy of oil-producing countries also affects the business activities of oil-importing countries.

For Example:

In 1990 McKinsey studied the relative productivity of nine industries in Japan, Germany, and the USA. The study found that productivity in manufacturing industries in Japan was 17 per cent lower than in the US, and in Germany, it was 21 per cent lower than US productivity. The reason for the difference was not the scale of production, technology, and skill of the workers.

The most important information in McKinsey’s study was the importance of globalization. This means competing with the top leaders of particular industries. The study revealed that

The productivity of Japanese workers in the automobile industry was higher than that of American workers. So when Japan started investing directly in setting up automobile plants in the United States, there was a dramatic improvement in the productivity of these factories. There were two reasons for this improvement – the use of advanced technology and increased competition.

It is concluded from this study that the international scenario can be sufficiently helpful in the growth of domestic business. This requires leaving the market open for trade, capital, and ideas to come from the most advanced countries and allowing for fierce competition with companies that adapt to the most advanced technology.

The international scenario is related to Commercial Policy, foreign policy, defence policy, foreign exchange policy, international treaties, international trade agreements, foreign economic recession, protection policy, etc. The international landscape is not static; it’s always changing. With this change, business enterprises also have to keep changing and adjusting.

The business scenario is the sum of several components. Its second feature is that it changes periodically.

The following are the major components of business environment:

(1) Economic Component

Under this, those economic events and activities discussed have an impact on the business environment. In other words, these events and activities and their changes have an impact on the operation and efficiency of the business. The major economic components are economic policies, demand, and supply conditions and changes occurring in them, saving and investment situations and changes occurring in them, import-export situations and trends, etc.

(2) Geographical Component

It includes natural resources; Such as minerals, environment, climate, land structure, forests, mountains, etc. are discussed.

(3) Social and Cultural Component

Those social traditions are under social components. Trends, customs, aspirations, level of education, and social values. Etc. are discussed which have an impact on the business environment. For example, the rapid economic development of Western countries is closely linked to the promotion of Protestantism.

The cultural values ​​of the society have an impact on the business environment of the country. Such values ​​also affect the willingness and ability of the workers to work, which ultimately affects the business environment. The field of culture is vast. It includes art, literature, lifestyle, human aspiration, knowledge, beliefs, traditions, customs, ideas, social preferences, etc.

(4) Political and Administrative Component

Political ideology and administrative systems affect the business environment. Hence these are seen as a component. In a democratic system, the government works in the interest of public welfare. In this environment, people voluntarily participate in the works of economic development. 

On the contrary, in communist and dictatorial countries, people are forced, they are forced. In the condition of compulsion, there is no interest in working in democratic countries. When people know that the administration will work in their interest only, then such an administration starts getting the support of the people themselves. All these have a favourable effect on the business environment. Hence it becomes an important component.

(5) Legal Component

The Justice System, law related to the right to property, succession rules, labour law, labour union-related acts, etc. are the components of this class. If such factors have a favourable effect on the business environment, then surely this environment will be conducive to economic development.

(6) Scientific and Technological Component

A conducive environment for business gives prominence to the development of science and technology.

(7) International Environment

Today the economy of any country is not closed, but it is open. There is trade, commercial, technical, etc. relationship between one country with another. If the international situation remains favourable, the business environment will be conducive to the domestic economic condition of the country. Therefore, the foreign environment has also become an important factor, especially in the new era of globalization.

The various components of the environment that affect the business and the characteristics of these components can be summarized as follows: Environmental factors affecting the business and their characteristics:

Environmental Factors Affecting Business

  1. Economic environment, 
  2. Socio-cultural environment, 
  3. Political and legal environment, 
  4. Technological environment, 
  5. Geographic and ecological environment, 
  6. Population-related, 
  7. Global characteristics of environmental factors

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