Components of business environment

On the basis of extent of intimacy with the firm, the environmental factors may be classified into different levels or types. There are broadly two types of environment, the internal environment, i.e. factors internal to the firm and the external environment i.e. factors external to the firm which have relevance to it. The internal factors are generally regarded as controllable factors because the company has control over these factors; it can alter or modify such factors as its personnel, physical facilities, organisation and functional means such as marketing mix to suit the environment. The external factors on the other hand are, by and large, beyond the control of a company. The external or environmental factors such as the economic factors, socio-cultural factors, government and legal factors, demographic factors etc., are therefore generally regarded as uncontrollable factors. Some of the external factors have a direct and intimate impact on the firm (like the suppliers and distributors of the firm). These factors are classified as micro environment, also known as task environment and operating environment. There are other external factors which affect an industry very generally (such as industrial policy, demographic factors etc.). they constitute what is called macro environment, general environment or remote environment. We may therefore consider the business environment at three levels: • Internal environment • Micro environment/ task environment/ operating environment • Macro environment/ general environment/ remote environment Although business environment consists of both internal and external environments, many people often confine the term to the external environment of business.

Internal Environment:
The important internal factors which have a bearing on the strategy and other decision are outlined below. ⇒ Value system: The value system of the founders and those at the helm of the affairs has important bearing on the choice of business, the mission and objectives of the organisation, business policies and practices. It is a widely accepted fact that the extent to which the value system is shared by all in the organisation is an important factor contributing to success. After the EID Parry group was taken over by the Murugappa group, one of the most profitable businesses (liquor) of the ailing Parry group was sold off as the liquor business did not fit into the value system of the Murugappa group. The value system and ethical standards are also among the factors evaluated by many companies in the selection of the suppliers, distributors, collaborators etc. ⇒ Mission and Objectives: The business domain of the company, priorities, directions of development, business philosophy, business policy etc., are guided by the mission and objectives of the company. Ranbaxy’s thrust in to the foreign markets and development have been driven by its mission “to become a research based international pharmaceutical company.” Arvind Mills’ mission- “ to achieve global dominance in select businesses built around our core competencies through continuous product and technical innovation, customer orientation and focus on cost effectiveness” – has driven its future development strategy including the portfolio strategy, and indicated the thrusts required in the functional areas to help achieve the mission. ⇒ Management structure and Nature: The organizational structure, the composition of the Board of Directors, professionalisation of management etc., are important factors influencing business decisions. Some management structures and styles delay decision making while some others facilitate quick decision-making. The Board of Directors being the highest decision making body which sets the direction for the development of the organisation and which oversees the performance of the organisation, so the quality of the board is very critical factor for the development and performance of the company. ⇒ Internal power relationship: Factors like the amount if support the top management enjoys from different levels of employees, shareholders and Board of Directors have important influence on the decisions and their implementation. The relationship between the members of Board of Directors and between the chief executives is also a critical factor. ⇒ Human resources: The characteristics of the human resource like skill, quality, morale, commitment, attitude etc., could contribute to the strength and weaknesses of an organisation. Some organisations find it difficult to carry out restructuring or modernization because of resistance by employees whereas they are smoothly done in some others. ⇒ Company image and Brand equity: The image of the company matters while raising finance, forming joint ventures or the other alliances, soliciting marketing intermediaries, entering purchase or sale contracts, launching new products etc. Brand equity is also relevant in several of these cases. ⇒ Miscellaneous Factors: There are a number of other internal factors which contribute to the business success/ failures or influence the decision-making. They include the following.

A business exists only because of its customers. where feasible. a change in the attitude or behavior of the supplier may also affect the company. however. 3. outsourcing is more beneficial. Physical Assets and Facilities like the production capacity.” . therefore. new product introduction etc. public sector transport undertakings and other transport operators. They are important also for brand extension. brand equity and distribution network have direct bearing on marketing efficiency. companies all around the world are increasingly resorting to partnering/ relationship marketing.switching over to the competitors of the company. the customer of a tyre company may include individual automobile owners. are among the factors which influence the competitiveness of a firm. growth prospect and the extent of competition. determine a company’s ability to innovate and compete. A company may have different categories of consumers like individuals. the Indian market is becoming more exposed to the global competition and the Indian customer is becoming more global in his shopping. Consequent to the liberalization. With the growing globalisation. insurance companies. financial position and capital structure are also important internal environment affecting business performances. Competitors A firm’s competitors include not only the other forms which market the same or similar products but also all those who compete for the discretionary income of the consumer. Hence. marketing intermediaries. Similarly. industries and other institutions. dependability. the competition for a company’s television may come not only from other T. the customer environment is increasingly becoming global. competitors. The micro environment consists of the actors in the company’s immediate environment that affects the performance of the company. Recognizing the critical importance of the supplier factor. those who supply the inputs like raw materials and components to the company. strategies and decisions. Not only that the markets of other countries are becoming more open. apart from the risk of loosing business consequent to the winding up of business by the customer or due to the customer’s. cooking ranges. refrigerators. Monitoring the customer sensitivity is. households. 4. The choice of the customer segments should be made by considering a number of factors including the relative profitability. Because of the sensitivity of the supply.e. lock out or any other production problem with that supplier may also seriously affect the company. customers and the publics. among other things. technology and efficiency of the productive apparatus. the competitive environment in India has been undergoing a sea change. These includes the suppliers. i. For example. Nirma has always been a believer of the logic that captive production plants for raw materials is the best way to production costs in check and it has gone for a huge backward integration. Micro Environment: Micro environment is also known as the task environment and operating environment because the micro environmental forces have a direct bearing on the operations of the firm. distribution logistics etc. R&D and technological capabilities. In many industries where a seller’s market existed a buyer’s market has emerged. 2. multiple sources of supply often help reduce such risks. Financial factors like financial policies. Suppliers An important force in the micro environment of a company is the suppliers. automobile manufacturers. Many companies restructured their business portfolio and strategies. a prerequisite for the business success. stability of demand. It had been pointed out that factories in India maintained indigenous stock of 3-4 months and imported stocks of 9 months as against an average of a few hours or two weeks in Japan. In many cases. Vertical integration. manufacturers but also from two-wheelers. It is very risky to depend on a single supplier because a strike. The importance of reliable source/ sources of supply to the smooth functioning of the business is obvious.V. Marketing Intermediaries The immediate environment of a company may consist of a number of marketing intermediaries which are “firms that aid the company in promoting. Depending on a single customer is often too risky because it may place the company in a poor bargaining position. mutual funds and of course the capital market. helps solve the supply problem. many companies give high importance to Vendor development. For example. quality of the marketing men. Uncertainty regarding the supply or other supply constraints often compel companies to maintain high inventories causing cost increases. Marketing Resources like the organisation for marketing. For example.1. External Environment: The external environment is made up of micro and macro environment. stereo sets and so on and from firms offering savings and investment schemes like banks. the major task if a business is to create and sustain customers. Customers As it is often exhorted. selling and distributing its goods to final buyers.

A dislocation or disturbance of the link. demographic environment. Thus. Media publics. The components of these environment are discussed as below. Hindustan lever faced major challenge when it faced a collective boycott in Kerala on the issue of trade margin. The business of the cola companies was around 60-70% down when media and the research company spread the news. political and regulatory environment. Organisation and development of capital market – The organisation and development of capital market is another important determinants of the national economic environment. the capital formation priorities. ability to provide non-finance assistance etc. fiscal policies and budgets. Structure of economy – the structure of economy comprise of the structure of national output. The macro environment is also known as General Environment and Remote Environment. Financiers Another important micro environmental factor is the financiers of the company. The business sector enters into transactions with all other sectors and these transactions give shape to the economic environment of business. Role of the government – the role of the government is crucial determinant of the economic environment. as it is rightly said. the dependence of business on the economic environment is total and it is not surprising because. the success of a company depends on its adaptability to the environment. the occupational distribution of labor force employed. and financial intermediaries which finance marketing activities and insure business risks. business is one unit of the total economy. The national economy functions through the interaction between these sectors. the economic environment will be non-conductive to business activities. marketing service agencies which assist the company in targeting and promoting its products to the right markets such as advertising agencies. production relations. The economic system comprises various sub-systems wherein individual enterprises carry on their income earning activities. controls on prices and wages and commercial policies affecting export and import. Accordingly the economic system of a country may be characterised as capitalist. business cycles and economic growth are important factors influencing the economic environment. business laws. industrial regulations. more uncontrollable than the micro forces. naturally. industry and service. Economic environment Economic environment refers to all those economic factors which have a bearing on the functioning of a business unit. the composition of trade etc. role of government planning. a solution may be their domestic manufacturers. the pattern of investment. Macro Environment: A company and the forces in its macro environment operate in a large macro environment of forces that shape opportunities and pose threats to the company. may cost the company heavily. The capital market comprises the various financial institutions (banking and non-banking) which affect business investment. ownership of factors production. The government policy must contain velocity. or a wrong selection of the link. The set-up of industrial undertakings and the socio-economic infrastructure also exercise significant influence on the economic environment. functioning of price mechanism etc. if the cost of the imported components increases substantially because of the depreciation of the domestic currency. Business depends on the economic environment for all the needed inputs. citizens action publics and local publics are some examples. For example. technological environment and global environment.The marketing intermediaries include middlemen such as agents and merchants who help the company find customers or close sales with them. Besides the financing capabilities. physical distribution firms which assist the company in stocking and moving goods from their origin to their destination such as warehouses and transportation firms. both direction and speed. marketing research firms. Following are the economic factors affecting functioning of a business: Nature of economic system – the nature of economic system of a country is crucial determinant of the form of economic environment.e. Marketing intermediaries are vital link between the company and the final customers. For example. media firms and consulting firms. It also depends on the economic environment to sell the finished goods. A public is any group that has an actual or potential interest on an organisation’s ability to achieve its interests. These factors determine the structural equilibrium or dis-equilibrium between different sectors like agriculture. Set of monetary and non-monetary policy – The set of monetary and non-monetary policies affects the vulnerability of the economy to business fluctuations of depression and boom. attitudes (including attitude towards risk). the protests that taken place against the cola companies when it was declared that they contain pesticides. their policies and strategies. If there is no balance between the speed and direction of the government policies. role of public sector. generally. These policies also determine the tempo of development and size of domestic market and its dynamism affects business. social/ cultural environment. Publics A company may encounter certain publics in its environment. socialist or mixed economy. When the macro environment is uncontrollable. The nature of economic system is determined by such factors as the nature of property rights. are very important. Important macro environment factors include economic environment. The macro forces are. The government influences the economic environment of business through economic planning. i. Some companies are seriously affected by such publics. .

Political environment Political environment consists of the following force: • Political organisation – ideology of the government. Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. spatial dispersal.Nature of factor endowment and its exploitation – The nature of factor endowment and its exploitation is another determinant of economic environment. • Forting policy – alignment or non-alignment. • Defense and military policy – trading with potential enemies. • Literacy level • Education match with the skill requirements of industry and manpower utilization – specialized vocational and technical training. The demand for natural fibers increased because of oil crisis. International environment The international environment is very important from the point view of certain categories of business. sex composition etc. educational level. liberal arts or technical. • Class structure. foreign infiltrations etc. Legal environment consists of constitutional provisions. strategic developments etc. • Inter-organisation and individual co-operation or conflict with each other labor unions. age composition. responsibility. Demographic factors such as size of the population. whether resistance to change operates or not. philosophy of the political parties. co-operative societies etc live in harmony or in conflict with each other. their efficiency. family organisation. Technological environment Technological environment exercises considerable influence on business. • Attitude towards education and acquisition of knowledge • Type of education – formal or informal. caste system. role of business schools and executive development programmes. traditions and conventions are rigid or flexible etc. tariffs. size and general health of the labor force and entrepreneurial ability and available natural resources. Now a days . • View towards workers’ participation. whether customs. Legal and political environment provides a framework within the business has to function. and effectiveness. age composition. Socio-cultural environment The socio-cultural environment comprise of the following factors: • View towards achievement and work. changes in the form and structure of the government administration. quantity and quality of higher education. Cheap labor and a growing market have encouraged many multinational corporations to invest in developing countries like India and china. • View towards scientific methods – whether people believe in religion or reason through science. occupational status. affect the demand of the products of business. life expectancy. synthetic fiber etc. • Legal rules governing the business – their formulation and implementation. businessmen should be ever alert to adopt changed technology to their business. red tape. These hikes have increased the cost of production and the price of certain products such as fertilizer. language. It is particularly important for the industries directly depending upon imports or exports and import competing industries. the declaration of emergency and president rule. delegation etc. Technology changes fast and to keep pace with it. caste. election upheavals. business laws. family size. The degree of resource exploitation has a bearing on the economic environment of business. authority. wealth and income • View towards management. labor mobility etc. trade agreements. business donations to political parties. customs unions etc. growth rate. employment pattern etc. The population growth rate is an important environment factor which affects business. judicial system etc of the country. influence of primary groups. speed and direction of public policies etc. Factor endowment implies relative supply of real capital and land per capita. are all factors which are relevant to business. nature and extent of bureaucracy. • Political stability – impact of factors like civil war. Oil price hikes have seriously affected a number of economies. of the population. growth rate. family size. A rapid increasing population indicates a growing demand for many products. High population growth rate also indicates an enormous increase in labor supply. The great depression in the US sent its shock waves to a number of other countries. Demographic environment Demographic factors like size. The success of business depends upon its ability to meet the challenges arising out of the political and legal environment. economic stratification of the population. • Flexibility and adaptability of law – constitutional amendments. religion etc. The high oil price has led to an increase in the demand for automobile models that are economic in fuel consumption. • View towards change and risk taking – whether businessmen are risk takers or risk-averters. It has been observed that major international developments have their spread effects on domestic business. image of the country and its leaders etc. role of professional training institutes etc. It is through business that technology reaches to people.

.technology has changed the way of doing business. Internet and mobile has emerged as powerful sources of reaching people and dealing and marketing the products.

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