Components of Business Environment Explained | Internal and External Environment

Q. Discuss the components of Business Environment in detail.

OR

What do you mean by internal and external environment of business ? How they affect the success of a business ? 

Ans. Business Environment is the sum total of internal and external factors within which the enterprise operates. These factors may have both positive and negative influence on the growth of entrepreneurship. The internal factors are within the control of business whereas the external factors like economic environment, political environment, socio-cultural environment, technological environment, international environment are beyond the control of business. Similarly, competition is external factor which significantly affects the business but is beyond the control of business. The success of business lies in understanding the environmental change and adapting its business policies.

Components of Business Environment: Various factors affecting the success of a business can be categorised in two areas viz, internal factors and external factors. These factors are as follows:

1. Internal Environmental factors: The internal business environment includes factors within the organization that impact the approach and success of an enterprise. Internal environment include five things as man, material, money, machinery, management available with the business. The components of internal environment are usually within the control of the business. Quality of human resources as component of internal environment is largely responsible for success or failure of business unit. Motivated, hardworking and talented workers generally produce better results than unmotivated, less talented employees. If employees of an organisation are skilful and committed towards the the organisation then it can take the business to the big heights. If workers are not satisfied then their efficiency will go down, they may even go on strike and it may badly affect the organisation. In a high performing work place, employees not only have talent but also they work well together.

2. External Environment Factors: External Environment refers to external aspects of the surroundings of the business enterprise which have influence on the functioning of the business. The external aspects of surroundings are beyond the control of the business. The success of a business enterprise depends to a great extent on its awareness about its surroundings, environment and adaptability to changes in the environment. 

External environment factors are as follows:

(A) Micro External Environmental Factors: Operating environment is also known as micro environment or competitive or task environment. These factors can be influenced or controlled by the firm. It consists of company’s immediate environment that affects the performance of the company. It includes suppliers, customers, market intermediaries, competitors and public. 

1. Suppliers: Every business enterprise requires a number of suppliers who supply raw materials and components to the company. If an entrepreneur has no good relation with their suppliers then it affects their enterprise in negative sense. If supplier does not provide raw material to the entrepreneur in time, he cannot produce the goods timely. This creates the negative impact on the outside parties towards an enterprise. So, for success of an enterprise, the entrepreneurs should maintain good relations with their suppliers.

2. Customers: The other micro environmental factor is the customers. For success of an enterprise, the entrepreneurs should maintain good relations with their customers. Success of a business organisation depends upon identifying customers, their needs, tastes, liking, etc. and by enhancing the level of customers’ satisfaction. Because of increase in competition, attracting and satisfying the customers, has become more challenging. For attracting new customer, companies conduct consumer research, design product as per needs and requirements of customer, spend heavily on advertisement, provide after sale services, etc. The task of customer satisfaction has become more challenging with increase in globalisation. With growing globalisation, various multinational corporations are entering into our markets and with the reduction in tarrif duties, more imported products are available in our markets. Hence, customers are becoming more global in their shopping, because they can choose from domestic products and foreign products. So, an entrepreneur special concentration on this area.

3. Market Intermediaries: Like suppliers marketing intermediaries also form an important components of the company’s overall value delivery system. Marketing intermediaries help the company to promote, sell and distribute its products to final buyers. Marketing intermediaries may be individuals or firms or agencies. They include: 

(i) Resellers: Resellers are wholesalers and retailers who buy and sell merchandise. They help the company to find the customers and make sales to them.

(ii) Physical Distribution Firms: They include, media firms, warehousing and transport agencies, shipping companies, purchase agents, etc. They help the company to stock and move goods from their point of origin to their destinations.

(iii) Marketing Services agencies: They include, media firms, advertising agencies, marketing research agencies, marketing consultancy firms, etc. They help the company to target and promote its products to the right markets.

(iv) Financial intermediaries: They include Bank credit and finance companies, Insurance companies and other financial service agencies that help in financial transaction or insure against the risk associated with the buying and selling of goods.

So, this is area which can decide the future of the business. An entrepreneur should keep in mind all these points, for successful running of a business.

4. Competitors: Competitors are those individuals and firms who sell similar goods and services in the same market. It is therefore, necessary to build an efficient system of marketing. No single competitive marketing strategy is best for all companies. Each entrepreneur should consider its own size and industry position compared to those of its competitors. Large firms with dominant position in the industry can use certain strategies that smaller firms cannot afford. Therefore, small firms can develop strategies, which give them better rates of return than large firms. The competitive environment consists of many things, which every businessman must take into consideration, while studying the marketing environment and for achieving success in the business.

5. Public: Public is any group that has actual or potential interest in the business. Broadly speaking, it includes the followings:

(i) Financial Public: It includes banks, investors, shareholders, etc. They influence the company’s ability to obtain funds.

(ii) Media Public: It includes newspapers, magazines, radios and television, etc. They carry news, features and editorial opinion about the company.

(iii) Government Public: It includes Government departments and agencies. Entrepreneur must often consult with lawyers and experts on the issues of product safety, truth in advertisement and other matters.

(iv) Internal Public: It includes managers, workers and other employees of the company. Large companies use newsletters and other means of information to inform and motivate their internal public. When employees good about their company, this positive attitude spills over to external public.

(v) Local Public: It includes neighbourhood residents and community organisations. Large companies generally appoint a community relation officer as P.R.O. to deal with the community. They attend meetings, answer questions and contribute for public cause.

So, it is clearly understandable that these factors can change the direction of the business. To achieve success, it becomes necessary for the entrepreneur to understand the importance of this factor and work accordingly.

(B) Macro Environment Factors: Macro Environment means general environment of business. It consists of demographic, economic, social, cultural, political, legal, technological and physical factors which influence marketing policies and operations. 

Macro Environment factors includes the following:

1. Economic Environment: By economic environment, we mean the purchasing power and desire to spend the income by the consumers, which results in effective demand, which in turn, influenced by economic conditions. Hence, economic conditions play a significant role in the success of the business. Economic environment refer to those factors which have impact on the working of business viz., economic system, economic policy, nature of economy, trade cycles, economic resources, level of income, distribution of income and wealth, statutory provisions, etc. Economic environment is very complex in nature. It is very dynamic. It keeps on changing with the change in government policies, change in political situations, etc. It contains the following: 

(i) Economic System: An economy system is a way in which an entrepreneur is organised to decide the following three basic questions of the economic organisation. 

● What product should be produced and in what quantities?

● How should the products be produced?

● For whom should the products be produced?

The economic system of a country may be as follows:

(a) Capitalism: Such economy is dominated by private sector. Here private sector has much important role in economic activities. It is also called open economy. e.g. economy of USA, UK.

(b) Socialism: Such economies are state owned economies. Government plays major role in economic development of such economies.

(c) Mixed Economy: In such economies, both public and private sector co-exist.

(ii) Economic Policies: Macro economic policy as determined and changed from time to time impacts business conditions more directly. The policy design can be a response to actual economic conditions or problems or to create a favoritable conditions in the near future. The basic objective of this policy is to stimulate or maintain growth, achieve economic stability, increase employment, stabilize balance of payments, correct regional imbalances and make the economy more competitive.

Important economic policies are: (a) Monetary policy (b) Fiscal policy (c) Export Import policy (d) Foreign Investment Policy (e) Industrial Policy (f) Industrial Licensing Policy. 

Besides these policies, Government has also framed legislation which regulates and controls the business. The main legislation regulating the business are as follows:

(a) Industrial Disputes Act, 1947

(b) Factories Act, 1948

(c) Industrial Development and Regulation Act, 1951

(d) Companies Act, 2013

(e) Consumer Protection Act, 1986

(f) Foreign Exchange Management, 1999

(g) Securities and Exchange Board of India Guidelines, 2000

(h) Competition Act, 2002

(iii) Economic Conditions: Economic environment exercises the most direct and immediate influence on entrepreneurship. Capital, labour, raw material and markets are the main economic factors. 

(a) Capital: Capital is one of the most important pre-requisites to establish an enterprise. Availability of capital facilitates the entrepreneur to bring together the labour of one, machine of another and raw material of another to combine them to produce goods. Capital is, therefore regarded as lubricant to the process of production. With an increase in capital investment, capital output ratio tends to increase. This results in increase to profits which ultimately goes to capital formation.

(b) Labour: The quality of Labour is another factor which affects the birth of entrepreneurship. Division of labour depends on the size of market leads to improvement in the productive capacities of labour due to an increase in the dexterity (skill) of labour. So, labour problem does not prevent entrepreneurship from emerging. 

(c) Raw Material: The necessity of raw materials hardly needs any emphasis for establishing any industrial activity and therefore its influence in the emergence of entrepreneurship. In the absence of raw materials neither any enterprise can be established nor can an entrepreneur emerge.

(d) Market: The size and composition of market both influence entrepreneurship in their own ways.

An entrepreneur must understand the type of economic system, various policies, Act, regulations of the government. All these factors are very important as they decide the success of a business. These may not be in the control of businessman, but he can be in safer zone by understanding them.

2. Political Environment: Political environment of the economy affects different units significantly. Political environment mainly includes the following:

(i) Political ideology of government 

(ii) Political stability in the country 

(iii) Relation of government with other countries 

(iv) Defence and military policy

(v) Welfare activities of government 

(vi) Centre state relationship

(vii) Thinking of opposition parties towards business 

Political ideology of government refers to the political thinking, approach and vision of the government towards various economic and  social activities of the country. Political ideology affects the business unit. It decides as to what type of business activities should the country have, what areas should be opened for private sector, what should be reserved for public sector. Laws and regulations covering all aspects of business are enacted by the government. 

In order to be a successful entrepreneur, it is expected to have a close look on the political environment of the country. This will always be helpful for him, as he will act according to the changing environment.

3. Socio-Cultural Environment: Business is an integral part of society and both influence each other. Social and cultural environment refers to influence and exercise by certain social and cultural factors which are beyond the control of business unit. Such environment includes:

(a) Attitude of people at work

(b) Family system

(c) Caste system

(d) Religion 

(e) Education

(f) Marriage

(g) Habits and preferences

(h) Languages

(i) Urbanisation

(j) Customs and traditions

(k) Value system

(l) Social responsibility of the business 

Social-Cultural environment influence the business in the long run. Our society is ever changing. New demands are created and old ones are lost. It is a essential for the success of business to prepare marketing plan according to the changing need of the society and thereby satisfy new social demands. Main aspects of social environment are: 

(a) Change an our lifestyle and social values e.g. changing role of women emphasises on quality of goods instead of quantity of goods, more preferences to recreational activities etc.

(b) Major social problem e.g. concern for pollution, need for safety in products, social responsible marketing etc.

(c) Growing consumerism is the symbol of increasing desires of the consumers. The growing consumerism is the result to two primary factors: (a) Increasing educational level of consumers (b) Scientific and technical progress. 

So, an enternepreneur is also expected to be aware about the changing social cultural environment. This will help him to achieve and maintain the success of his business.

4. Technological Environment: Technology represents the application of scientific knowledge for practical purpose. Information technology tools such as computers and mobile phones for processing, storage and transfer of data, internet communication have increased in recent years. An entrepreneur should consider the technological environment because changes in technology are uncontrollable.

The success of every business in future depends upon the factor that how efficiently they adopt the technological change. This area is the most crucial one and cannot be ignored at any cost.

5. National Environment: It includes geographical and ecological factors such as natural resources, weather and climatic conditions, port facilities to topographical factors such as soil, land forms, sea, rivers, rainfall, water pollution etc. Climatic and weather conditions affect the location of certain industries like textiles industry in maharashtra and gujarat. Similarly, geographical factors affect the location of certain industries, like iron and steel industries is located near raw material source in Bihar and Orissa. Sugar industry has been set up near to those areas where sugarcane is cultivated. Exports oriented industries are located near ports so that transportation cost can be minimized

Weather and climatic factors affect the demand pattern for clothing, building material, room heaters, air conditioner etc. Ecological (environmental) have also become significant in the study of business environment. Environment pollution in the form of air pollution, water pollution and noise pollution have caused disturbances in ecological balance. The entrepreneur must keep in mind geographical factors, pollution factors. In brief it includes:

(i) Climatic and weather conditions 

(ii) Availability of natural resources 

(iii) Topographical factors, physical features of a place

(iv) Pollution control 

(v) Location aspect

(vi) Port facilities 

Success of business is undoubtedly affected by these factors collectively. Ignorance of any of these factors may adversely affect the business unit. So an entrepreneurial project should be established after considering all these factors.

6. Demographic Environmental Factors: Demographic environment is the study of features of population viz. its size, its growth rate, age composition, sex composition, income level, education level, family size, family structure, etc. All these demograhic factors affect size of demand, taste, fashion, liking, preferences of consumer, etc. Demographic environment differs from country to country and from place to place within the same country. Important demographic factors are:

(i) Size of population and population growth

(ii) Age compososition

(iii) Sex composition 

(iv) Education level

(v) Family size and structure 

(vi) Economic satisfaction of population 

(vii) Urban-Rural population 

All the demograhic factors affect the success of every venture. Giving less weightage to these factors or ignoring these factors can lead to the failure of the business. So, demograhic factors always remain an area of concern of every entrepreneur.

7. International Environment: The international environment is particularly important for industries directly depending on import or export. The present era is of globalisation. At the company level, globalization means two things (a) the company commits itself heavily with several manufacturing locations around the world (b) it also means ability to compete in domestic markets with foreign competitors. It has been observed that major international development has its impact on domestic market. For example, due to globalisation, Indian electronic market has depressed, oil price hikes have increased the cost of production of certain industries like fertilizers, synthetic fibers, etc. If a enterprise has to survive in the open market, it has to modify its products according to different customers,  needs and tastes. They must acquaint themselves at the advanced means of transport and communication, foreign languages, currencies of different countries, legal provision, etc. 

If a business is prevailing in international market and acquaints itself with the changing environment, the success rate will be higher. They will earn more and more profit. So, they should consider these factor with right perspective.