Business environment can be divided into two parts:
Internal environment involves those forces which are within the control of business organization. Production planning, production policies, purchase policies and provision, position of suppliers and its condition, personnel policies and programmes, financial position of business organization etc. are the main components of internal environment. These forces create weakness and strength in an organization. Strengths in those forces is a favorable term for business and it always should try to reduce weakness in internal environment. My previous post was on components of economic environment.
Elements of Internal Environment
There are different components or elements that form the internal environment of an organization. They are mentioned below:
Organizational goals and policies:
Goals are the long term desired outcomes of an organization. They are the end results. All the organizational activities are directed towards the achievement of goals. Profit growth, market growth and social responsibility are some of the goals of a business.
Policies are broad guidelines for organizational activities. They bring coordination among the organizational units or department.
Resources are the foundation for strategy. They are inputs into a firm’s production process, such as capital, equipment, employee skills, patents and finance. They unique bundles or resources generate competitive advantages. Resources may be tangible and intangible.
Tangible resources: They can be seen or touched. The following are some of the tangible resources.
Financial resources: Fund acquisition capacity, and internal fund generation capacity
Organizational resources: Information, structure, formal planning, organizing, control and coordination
Physical resources: Layout of machine and equipment and access to raw material
Intangible resources: They cannot be seen or touched. Following are some of the intangible resources.
Human resources: Knowledge, skill, capability and leadership
Innovation resources: Tactics, and innovation capacity
Reputational resources: Customer relationship, brand loyalty, quality and reliability
Organizational structure specifies jobs and relationship. It defines the job allocation, responsibility and accountability. Clear and swift organizational structure is very important for the implementation of a particular strategy.
The shared value, norms, behavior and belief of an organization is collectively known as organizational culture. It refers to the complex set of ideologies symbols, and core values that are prevalent throughout the firm. It influences how the firm conducts business. Culture is the social energy that drives the organization.
External environment consists of those forces which cannot be controlled by business organization. So they are uncontrollable factors. These factors create opportunities and threats in an organization. Opportunities creating is a good symptom for business organization and it should remove threats to catch those golden chances. Economic factor, social and cultural factors, political and legal factor, technological changes, geographical and demo graphical situation of a country, etc. are the important factor of this environment. Business organization cannot alone change the economic condition of a country, political and legal rules and formalities, culture of people, changing technology, geographical situation as well as increasing population of a country.
Sometimes other factors customers, suppliers, government, creditors, competitors, customers etc. can also be included in external factor but yet they can be controlled by an organization.
Elements of external environment:
The external environment is composed of the conditions that are outside the business. They are not normally influenced by the business. The external environment of a business may be further divided into two groups:
The general environment is composed of the factors that are broad and affect the industries and the firms competing each other. The general environment should be scanned, monitored, forecasted, and assessed to determine their effects on the firm i.e. to recognize and evaluate opportunities and threats. The different components of general environment are:
The economic environment refers to the nature and direction of the economy in which a firm competes or may compete. In general, firms seek to compete in relatively stable economy with strong growth potential.
The state of economic environment determines the general health and well being of an organization. The components of economic environment are;
Economic system: It determines the degree of private participation in economy and role of market forces. Three types of economic system are prevalent. They are;
Free market economy: It is based on private sector ownership of the factors of production.
Centrally planned economy: It is based on public ownership of all the factors of production.
Mixed system: It is based on co-existing both private and public sectors.
They are the economic guidelines of the government. They aim at development and growth of different sectors of economy. Some of the important economic policies are;
Monetary policy: It deals with money supply, interest rates, credit availability and exchange rates.
Fiscal policy: It is related to taxation and government expenditure and regulates the level of aggregate economic activity.
Industrial policy: It is concerned with industrial licensing, location, incentives, facilities, foreign investment, technology transfer, and nationalization of industries.
They represent economic soundness of a country. They are represented by;
Gross domestic product (GDP): It is the broadest measure of a country’s economy. It represents the total market value of all goods and services produced in a country during a given year.
Inflation: It represents changes in the level of retail prices for the basic consumer basket. Inflation is tied directly to the purchasing power of a currency.
Employment indicators: They involve number of jobs created or destructed; percentages of active and unemployed workforce. They indicate the economic health of a country.
Balance of payment: It represents the ratio between the amount of payments received from abroad and the amount of payments going abroad.
Income distribution: It shows how a notion’s total GDP is distributed amongst its population.
Business Cycles: They affect the health of organization. They may be depression (contraction), recovery (revival), prosperity and recession.
Regional and global economic integration are also the important components of economic environment. Economic integration facilitates removing or minimizing tariffs and other restrictions on economy at international level. It promotes cooperation and free trade among the countries. Economic integration has been promoted by SAARC, APEC, ASEAN, EU and the WTO.
Political environment of business refers to the government actions which affect the operation of a business. These actions may be on local, regional, national or international level. Managers pay close attention to the political environment to measure how government actions will affect their company.
The political segment represents how organization try to influence government and they understand the influences of government actions on their strategic move.
The basic components of political environment are:
Political Ideology: It may be defined as a set of ideas, principles and philosophy. The main political ideologies are:
Democratic: Under democratic ideology, the power is vested on people. Fundamental rights are ensured. The private sector is regarded as the indispensible part of development of the country.
Totalitarian: Under it, the power is centralized to the government that does not tolerate parties of differing opinion. The private sector doesn’t flourish under such ideology.
Constitution: Constitution is the fundamental law of the country. It is the duty of every citizen to follow the constitution.
Political parties: Political parties are regarded as the pillars of democratic system. They try to win the support of the people to elect their representatives and form legislation.
Government and its Branches: It involves legislative, executive, judiciary and other constitutional bodies.
Legislative: It main responsibility is formulation and enactment of law. It also forms the executive i.e. the government.
Executive: It refer to the organ of the state that is responsible for the overall administration of the nation. It is composed of the government and its organs as bureaucracy, army and police.
Judiciary: It refers to the court of law. It is responsible for settling disputes and interpreting the rules and laws if required. It has the right of judicial review under the constitution.
Other Constitutional Bodies: They involve the constitutional bodies created by law. Some of them are; The Commission for the Investigation of Abuse of Authority, Office of the Auditor General, Federal Public Service Commission, Election Commission and National Human Rights Commission:
The legal environment of a business is composed of the constitution, business related laws, courts and law administration. The legislative framework of a country provides both opportunities and threats to the business.
The components of the legal environment are mentioned below:
Constitution: It is the fundamental law of a country.
Business Law: They consist of an array of laws that regulate business activities.
Courts of law: They are the institutions to define and solve legal disputes.
Law administrators: They are the various law enforcement agencies, which ensure implementation of the laws as well as judgments made by the courts of law.
A business is a social system. It conducts its activities in the society. Socio-Cultural environment is the sum of all the cultural elements that affect the operation of a business directly or indirectly.
The norms, value, belief, attitudes, language, symbols, and behavior which are learned and developed over time collectively from culture. It is a complex phenomenon and transfers over generations. Some of the important constituents of socio-cultural environment are mentioned below:
Attitudes: It is a positive or negative concept towards product, person, organization, and other elements.
Beliefs: Beliefs are descriptive thoughts about something. They are based on knowledge, experience and religion.
Religion: Religion reflects and shapes culture. It is shared beliefs, values and rituals.
Language: It is a medium of communication. It also reflects culture.
Education: It is a continuous process of learning. Education is very important for developing and nurturing culture.
Family structure and social organizations. Social organization are in the form of common interest group and communities.
The technological segment of business environment includes the institutions and activities involved in creating new knowledge and translating it into new products, processes, and materials. Technology has pervasive and diversified scope. Hence, it affects many parts of a society. Given the rapid pace of technological change, it is vital for firms to study the technological segment thoroughly. The importance is that early adopters of new technology often achieve higher market shares and earn higher returns. The following are the important elements of technological environment.
Level of technology: It may be manual, mechanized, automated, computerized and robotized technology.
Pace of change: It is the stage and speed of the technological change.
Technology transfer: It implies technology imported from foreign countries.
Research and development budget: It is the spending by the government or business organizations for technological adaptation, up-gradation and development.
The physical environment refers to potential and actual changes in the physical environment. It also refers the business practices that are intended to positively respond to those changes. There are many parts of the physical environment that firms should consider.
Energy consumption: It is concerned with both organizations and nations.
Environment policy: Companies are required to develop environmentally friendly policies due to increasing concern about sustaining the quality of the physical environment.
Compliance of environmental laws: Business should comply with all environmental laws. Besides, they should seek to understand their impact and continuously improve the business practices in many areas.
Natural resources: It involves the availability and the sustainable use of the natural resources like water, land, forest, mines and minerals.
The global environment of a business includes relevant global markets international political events, and critical cultural characteristics of global markets. With globalization, markets are becoming more global.
Globalization of business markets may create opportunities to enter new markets as well threats that new competitors may pose. The markets from which firms generate sales and income are one indicator of the degree to which they are participating in the global economy. Firm competing in global markets should recognize the different socio-cultural and institutional attributes of global markets.
The operating or task environment is composed of the factors that are directly related to the competitive position of a business. It consists of different stakeholders who have direct or indirect interest in the performance of the business. Stakeholders support and response play important roles in the growth and development of a business. A business can influence the stakeholders through effective strategy.
The components of task environment are mentioned below:
Customer is the most important component of task environment. All the business activities are directed towards satisfying customer needs and retaining them effectively. Customers may be an individual, family or business. Besides purchasing goods and services, they are also the source of information and ideas. Strategic management should always focus on addressing the changing needs and demands of customers and build a long term relationship with them.
Suppliers are the persons or firms that provide inputs to the business needed to produce goods and services. The quality of product depends on the quality of input. Besides quality; price, delivery time and other terms and conditions are also very important for a business. A good relationship with the suppliers always create opportunities to the business.
Competitors are the firms that provide similar products in the similar market. Businesses compete for customers. Hence, a business needs to analyze the competitors through competitive intelligence in which a firm gathers data and information to understand competitors objectives, strategies, assumptions and capabilities. Competition takes place within the strategic group. A strategic group is a set of firms emphasizing similar strategic dimensions to use a similar strategy. Hence, the activities of key competitors from the same strategic group are very important for a business.
Financial institutions are very important for a business, since they provide fund for short as well as long term financial requirements. Besides fund, they also provide other services. They may be bank, insurance companies and other institutions related to capital market. A should relationship with the financial institutions always creates opportunities to the business.
Distribution management is one of the important factors that determines the effectiveness of a business. A sound distribution system enables a business to avail the product and services to the consumer in a stipulated time. Distributors even provide strong manpower and cash support to the supplier or manufacturer’s promotional efforts. Hence, it is essential for a business to have a close relationship with the distributors.
A business is very closely related to media. Medias always have a very close look on the business activities. They largely influence the image of a business. A number of opportunities may be created with a continuous interaction with the media. It is necessary to address the media promptly.
Government regulates the business system. It further formulates different policies for the development of business in the country. It attempts to protect the interest of the consumer as well general public. Hence, the regulations and policies of the government exert considerable impact on the operation of a business.
Environmentalists, consumer advocates, and women’s group are some of the pressure groups that influence the business activities directly. They exert pressure to the business on the issues of price, quality, employment and environment protection. A business needs to address the issues raised by the pressure groups as promptly as possible.