Definition

Definition of the Business environment, both Internal and External with their Components

Business environment:

The business environment includes all those internal and external factors that affect a company’s operations. It includes strengths, weaknesses, internal power relationships, orientations of the organization, economic, socio-cultural, demographic, natural, global, technological trends, cross-border development, clients and suppliers, technological development, laws and government activities.

There are two types of business environment. The types of business environment and their components/elements are given below-     

Internal Environment:

The internal business environment consists of an organization’s components like present employees, management structure and above all corporate culture-defining employee behavior. Some of these elements affect the organization totally while some affect only the manager. A manager’s leadership style has a direct impact on the employees. Traditional managers directly instruct the employees, but the progressive managers encourage employees to give innovative idea during decision making. The manager has control over the philosophical as well as leadership style changes. 

The important internal factors are as follows-

1. Culture:

A business organization’s main goal is profit maximization. Again persons in top positions in any organizational hierarchy have some unique norms and values influencing the overall organizational policies, working language, system, practices, etc. and overall internal environment.

This may refer to the culture of the organization which is the collective behavior of people that are part of an organization. The culture of an organization is also called the personality of the same.

2. Vision, mission, and objectives:

Vision, mission, and objectives of a company indicate its priorities, philosophy, politics, etc. A vision is a broad idea of what an organization wants to achieve in future. A mission is what the organization does to accomplish the vision. An objective is a specific statement to attain the goals of an organization with the definite time period.

Incepta’s vision ‘to become a research based international pharmaceutical company’ led it to enter foreign markets. To achieve this vision, Incepta had to set a mission and to go along with the mission; it had to set time-sensitive, certain and attainable objective.

3. Top Management Structure:

The composition of the board of directors is a very critical factor for the development and performance of a company as they are the highest decision-making authorities. Top management structure can be professionally managed or family controlled or can be a mixture of both. Nominee of financial institutions can have large holdings in companies; the shareholding pattern can lead to important managerial implications.

4. Power Structure:

The internal power structure and the relationship between the board of directors and the higher officials majorly affect the decision-making process of the organization.

5. Human Resources:

Competence, commitment, attitude, and motivation of the people working in a company largely defines the quality of human resources of that company. It plays an important role in the success of the organization. The role of the human resource department of an organization is really crucial because they are responsible for recruiting eligible people and ensuring employee welfare and positive employee relation.

6. Physical Resources and the Technology:

The functioning and competitiveness of a firm are influenced by the firm’s production capacity, technology, R& D, work distribution channels, etc. Physical resources include buildings, facilities, materials, waste, plant, equipment, and machinery including IT, Security, Insurance, etc. Technological resources include intellectual property, accumulated experience, and skills, software license, patents, and copyright, etc. Both types of resources are important for a successful business.

7. Company Image and Brand Equity:

Company image or reputation refers to the manner in which a company, its activities, and its products and services are recognized by the customers/clients and investors. Brand equity defines a value premium that a company generates from a product with a renowned name when compared to a generic equivalent.  A company’s image and brand equity play a major role in raising funds, forming a joint venture and other alliance, choosing dealers and suppliers, etc.

External Environment:

External environment refers to external factors outside the business organization influencing the functioning of the business.

There are two types of external environment-

A. Micro Environment.

B. Macro Environment.

A. Micro Environment:

The microenvironment or working environment includes the factors which exist within the organization influencing its function. Some elements of the microenvironment can play particular roles in a firm.

The most crucial factors of the microenvironment are as follows-

1. Suppliers:

Business enterprises require a number of suppliers, who supply raw materials and components to the organization.

2. Customers:

Customers are the most influential factor because they are the focal point of any business. Proper identification of the needs, desires, tastes, liking, etc. of customers mainly defines the success of a business. A business should always focus on the point that customer is always right. Companies create different slogans to attract customers such as the slogan of Banglalink is, “You first.” Here You refers to customers.

3. Market Intermediaries:

Market intermediaries, such as, agents, brokers, who help the business to find customers, act as a link between business and consumer. They assist in almost every business.

4. Competitors:

Competitors’ actions and reactions adjust the activities of a business. A company should be aware of this factor because it will affect the upcoming profit or revenue. A company’s marketing team should be very active in determining and analyzing the competitor’s strategies. Otherwise, it will be difficult to survive in the market.

5. Public:

Public means any group having actual or potential interest in the business as well as having an impact on the business, growth of consumer groups and which can also affect a newly developed business’s function. Public, the term is most commonly used to describe a company's shares or any other financial assets that are traded in the secondary markets.

B. Macro Environment:

Macro environment has major peripheral and uncontainable factors that affect an organization’s decision making and affects its policies and performances. It includes all the condition and factors that exist in the economy as a whole not in any particular sector or within the organization. Following components are included in these factors –

1. Economic environment:

Economic factors like employment, income, inflation, interest rates, productivity, and wealth influencing the purchasing power of consumers and institutions are included in the economic environment of an organization. Business enterprise conducts its functions with the goal of profit maximization. So, it is essentially an economic institution.

2. Political environment:

A country’s political and economic environment are interdependent- one reflecting the ideologies of the other. It includes political stability and the government policies. Both managers and owners of the business are alert about the political environment to assume the effect of government actions on their company policies.

3. Socio-cultural environment:

The norms and culture of a given group or society are components of the socio-cultural environment.

4. Technological environment:

The technological advancement of a country which is an inspiration to the economic revival determines the development of a business. Technology provides a cost-effective alternative to traditional labor-intensive methods but its capital intensive. A business’s technological environment should include up to date technologies and remove the obsolete ones.

5. Legal environment:

The legal environment includes the terms and conditions where the business is conducted. It develops codes and procedures for numerous kinds and aspects of business dealing with variations and thus hugely affects the functioning of the organization.

In conclusion, we can say that a businessperson must consider the above elements or components of the business environment in order to keep pace with the competitive business market.  

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