Components/Factors Affecting Business Environment

The following Factors Affecting Business Environment:

  1. Internal Environment and
  2. External Environment

Internal Factors Affecting Business Environment

Environment that has a direct influence on the business is termed as internal environment. The internal factors which influence the business environment are controllable in nature. Hence, the factors like physical facilities, and organisation and functional means can be revised and transformed as per the requirements of the environment.

The following key internal factors Affecting Business Environment:

  1. Value system: The selection of business, its mission, vision, and objectives, business policies and practices are all elements of value system in an organisation. The founders and management term of a business enterprise plays an important role in the decision making of the value system.
  2. Mission and Vision and Objectives: Vision is a broader view to define the future prospects of the business. Vision aids in meeting the objectives of the business organisation. Mission is the short term action through which objectives are attained.
  3. Management Structure and Nature: Generally, business decisions are persuaded by the organisational structure. This structure comprises of board of directors, managers, executives, etc., The number of members in an organisational structure determines the duration of decision making.
  4. Internal Power Relationship: The coordination between the levels of organisational structure is very important. The three levels top, middle and bottom level must have mutual relationship among them. This helps to organisation to function smoothly.
  5. Human Resource: Human resource is the key compent of any organisation. They define the strength and weakness of an organisation. The essential requirements of human resource include skills, quality, commitment, sincerity, right attitude, etc., The level of employee’s participation and initiative varies from organisation to organisation and is determined by the organisational culture.
  6. Company Image and Brand Equity:   The internal environment of the enterprise is affected by the image that it carries in the outside market. The image of the organisation helps in raising capital, mergers, and other alliances etc. Likewise brand equity also influences the organisation.
  7. Miscellaneous Factors:  Various other factors that determine the success or failure of a business are as follows:

i. Assets and Physical Facilities: The availability of assets and facilities its very important for the smooth functioning of the business. The facilities influencing the competitiveness of the firm include technology, production, labour, etc.

ii. Research and Development: The capability 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: Marketing effectiveness of an organisation is directly influenced by the resources such as marketing department of the company, marketing personnel, distribution channel, and brand equity.

iv. Financial Factors: Financial is the life blood of an organisation. Proper allocation of financial resources affect the business performance, business policies and strategies. Some important factors  influencing  the internal environment are financial policies, financial capital etc.

External Factors Affecting Business Environment

The external factors Affecting Business Environment are those factors are beyond  the control pf business enterprise. Therefore, success of a firm is highly dependent on the capability to appropriately adjust and design the internal factors. This helps to make most of the opportunities and overcome threats in the environment . Usually, the business environment is considered as the external environment of the business. But every business enterprise comprises of two vital elements:

  • Micro Environment Factors Affecting Business Environment
  • Macro Environment Factors Affecting Business Environment

Micro Environment

The micro environmental factors are more closely related to the company in contrast to the macro factors. The micro factors affect different industries in different ways. Thus , a firm may apply the micro factors which are applicable for a particular business activity. For example, the micro environment of a restaurant can be its customers, other restaurants, suppliers of raw material, human resources, etc.

The success or failure of a firm depends onhow effectively it deals with its micro elements such as:

  • Customers: Customers is the most important element of the business enterprise. The main aim of any business is to attract and retain its customers. This helps the business to attain long term survival and profitability. Therefore, to increase the loyal customers, business enterprise should carefully observe the needs and wants of the customers and fulfill them effectively. The business enterprises must also analyse the changing tastes and preferences of the customers interest as this may adversely affect the company. Hence, customer is the central focus of the business environment.
  • Suppliers: Suppliers are those who supply raw materials,components and machines to the business enterprises. The suppliers are an important micro factor in the business environment. They should be trustworthy and cordial with business enterprises. This will help the enterprises to attain the customer expectations and companies will become free from the burden of keeping heavy stocks.
  • Marketing Intermediaries: Intermediaries are those who act as a mediator between the manufacturer and final consumer. The number of marketing intermediaries varies according to the size and type of distribution network. Marketing intermediaries are beneficial to the organization only when there is a proper coordination between channels without any hurdle.
  • Competitors: The organizations which manufacture similar products and try to conquer over the market share are termed as competitors. To earn more profit and stay competitive, the company needs to monitor the competitor’s activities and than prepare its future plan. This helps the company to remain beyond its competitors in the long run.

Macro Environment

  • Political Environment: The factors such as state, government,political institutions, policies and legislation,public and private stakeholders influence the business environment. The stability and success of the business depends on the prevailing political environment. Sometimes, the changes made in the government policies and regulations affect the smooth functioning of the business.
  • Economic Environment: The economic conditions of a country may affect the business decisions and plans of an organization. The factors such as economic growth rate, unemployment ratio, foreign exchange rates, and inflation and deflation conditions can help or create problems in the management of the business environment.
  • Social Environment
  • Technological Environment
  • Legal Environment.
  • Demographic Environment: The demographic changes have a huge impact on the business decisions. The demographics differ from place to place. These changes can be in the size of population,age,composition,ethnicity,income levels etc. Before formulating any strategy for present and future, the business must consider these demographic factors.