Internal and External Factors of Business Environment

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.

1. Physical Assets and Facilities like the production capacity, technology and efficiency of the productive apparatus, distribution logistics etc. are among the factors which influence the competitiveness of a firm. 2. R&D and technological capabilities, among other things, determine a company’s ability to innovate and compete. 3. Marketing Resources like the organisation for marketing, quality of the marketing men, brand equity and distribution network have direct bearing on marketing efficiency. They are important also for brand extension, new product introduction etc. 4. Financial factors like financial policies, financial position and capital structure are also important internal environment affecting business performances, strategies and decisions.

External Environment: The external environment is made up of micro and macro environment. 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. The micro environment consists of the actors in the company’s immediate environment that affects the performance of the company. These includes the suppliers, marketing intermediaries, competitors, customers and the publics.

Suppliers An important force in the micro environment of a company is the suppliers, i.e. those who supply the inputs like raw materials and components to the company. The importance of reliable source/ sources of supply to the smooth functioning of the business is obvious. Uncertainty regarding the supply or other supply constraints often compel companies to maintain high inventories causing cost increases. 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. Because of the sensitivity of the supply, many companies give high importance to Vendor development. Vertical integration, where feasible, helps solve the supply problem. 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. In many cases, however, outsourcing is more beneficial. It is very risky to depend on a single supplier because a strike, lock out or any other production problem with that supplier may also seriously affect the company. Similarly, a change in the attitude or behavior of the supplier may also affect the company. Hence, multiple sources of supply often help reduce such risks. Recognizing the critical importance of the supplier factor, companies all around the world are increasingly resorting to partnering/ relationship marketing.

Customers As it is often exhorted, the major task if a business is to create and sustain customers. A business exists only because of its customers. Monitoring the customer sensitivity is, therefore, a prerequisite for the business success. A company may have different categories of consumers like individuals, households, industries and other institutions. For example, the customer of a tyre company may include individual automobile owners, automobile manufacturers, public sector transport undertakings and other transport operators. Depending on a single customer is often too risky because it may place the company in a poor bargaining position, apart from the risk of loosing business consequent to the winding up of business by the customer or due to the customer’s- switching over to the competitors of the company. The choice of the customer segments should be made by considering a number of factors including the relative profitability, dependability, stability of demand, growth prospect and the extent of competition. With the growing globalisation, the customer environment is increasingly becoming global. Not only that the markets of other countries are becoming more open, the Indian market is becoming more exposed to the global competition and the Indian customer is becoming more global in his shopping.

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. For example, the competition for a company’s television may come not only from other T.V. manufacturers but also from two-wheelers, refrigerators, cooking ranges, stereo sets and so on and from firms offering savings and investment schemes like banks, insurance companies, mutual funds and of course the capital market. Consequent to the liberalization, the competitive environment in India has been undergoing a sea change. Many companies restructured their business portfolio and strategies. In many industries where a seller’s market existed a buyer’s market has emerged.

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, selling and distributing its goods to final buyers.”

The marketing intermediaries include middlemen such as agents and merchants who help the company find customers or close sales with them, physical distribution firms which assist the company in stocking and moving goods from their origin to their destination such as warehouses and transportation firms; marketing service agencies which assist the company in targeting and promoting its products to the right markets such as advertising agencies, marketing research firms, media firms and consulting firms; and financial intermediaries which finance marketing activities and insure business risks. Marketing intermediaries are vital link between the company and the final customers. A dislocation or disturbance of the link, or a wrong selection of the link, may cost the company heavily. Hindustan lever faced major challenge when it faced a collective boycott in Kerala on the issue of trade margin.

Financiers Another important micro environmental factor is the financiers of the company. Besides the financing capabilities, their policies and strategies, attitudes (including attitude towards risk), ability to provide non-finance assistance etc. are very important.

Publics A company may encounter certain publics in its environment. A public is any group that has an actual or potential interest on an organisation’s ability to achieve its interests. Media publics, citizens action publics and local publics are some examples. Some companies are seriously affected by such publics. For example, the protests that taken place against the cola companies when it was declared that they contain pesticides. The business of the cola companies was around 60-70% down when media and the research company spread the news.

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. The macro environment is also known as General Environment and Remote Environment. The macro forces are, generally, more uncontrollable than the micro forces. When the macro environment is uncontrollable, the success of a company depends on its adaptability to the environment. For example, if the cost of the imported components increases substantially because of the depreciation of the domestic currency, a solution may be their domestic manufacturers. Important macro environment factors include economic environment, political and regulatory environment, social/ cultural environment, demographic environment, technological environment and global environment. The components of these environment are discussed as below.

Economic environment Economic environment refers to all those economic factors which have a bearing on the functioning of a business unit. Business depends on the economic environment for all the needed inputs. It also depends on the economic environment to sell the finished goods. naturally, the dependence of business on the economic environment is total and it is not surprising because, as it is rightly said, business is one unit of the total economy. 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. The economic system comprises various sub-systems wherein individual enterprises carry on their income earning activities. The nature of economic system is determined by such factors as the nature of property rights, ownership of factors production, production relations, role of government planning, role of public sector, functioning of price mechanism etc. Accordingly the economic system of a country may be characterised as capitalist, socialist or mixed economy. Structure of economy – the structure of economy comprise of the structure of national output, the occupational distribution of labor force employed, the capital formation priorities, the pattern of investment, the composition of trade etc. These factors determine the structural equilibrium or dis-equilibrium between different sectors like agriculture, industry and service. The national economy functions through the interaction between these sectors. The business sector enters into transactions with all other sectors and these transactions give shape to the economic environment of business. Organisation and development of capital market – The organisation and development of capital market is another important determinants of the national economic environment. The capital market comprises the various financial institutions (banking and non-banking) which affect business investment. The set-up of industrial undertakings and the socio-economic infrastructure also exercise significant influence on the economic environment. Role of the government – the role of the government is crucial determinant of the economic environment. The government influences the economic environment of business through economic planning, fiscal policies and budgets, industrial regulations, business laws, controls on prices and wages and commercial policies affecting export and import. The government policy must contain velocity, i.e. both direction and speed. If there is no balance between the speed and direction of the government policies, the economic environment will be non-conductive to business activities. 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. These policies also determine the tempo of development and size of domestic market and its dynamism affects business. Thus, business cycles and economic growth are important factors influencing the economic environment.

Nature of factor endowment and its exploitation – The nature of factor endowment and its exploitation is another determinant of economic environment. Factor endowment implies relative supply of real capital and land per capita, size and general health of the labor force and entrepreneurial ability and available natural resources. The degree of resource exploitation has a bearing on the economic environment of business.

Demographic environment Demographic factors like size, growth rate, age composition, sex composition etc. of the population, family size, economic stratification of the population, educational level, language, caste, religion etc. are all factors which are relevant to business. Demographic factors such as size of the population, growth rate, age composition, life expectancy, family size, spatial dispersal, occupational status, employment pattern etc. affect the demand of the products of business. A rapid increasing population indicates a growing demand for many products. High population growth rate also indicates an enormous increase in labor supply. The population growth rate is an important environment factor which affects business. Cheap labor and a growing market have encouraged many multinational corporations to invest in developing countries like India and china.

Political environment Political environment consists of the following force: • Political organisation – ideology of the government, philosophy of the political parties, nature and extent of bureaucracy, red tape, influence of primary groups, business donations to political parties, image of the country and its leaders etc. • Political stability – impact of factors like civil war, changes in the form and structure of the government administration, the declaration of emergency and president rule, election upheavals, foreign infiltrations etc. • Forting policy – alignment or non-alignment, tariffs, customs unions etc. • Defense and military policy – trading with potential enemies, trade agreements, strategic developments etc. • Flexibility and adaptability of law – constitutional amendments, speed and direction of public policies etc. • Legal rules governing the business – their formulation and implementation, their efficiency, and effectiveness. Legal environment consists of constitutional provisions, business laws, judicial system etc of the country. Legal and political environment provides a framework within the business has to function. The success of business depends upon its ability to meet the challenges arising out of the political and legal environment.

Socio-cultural environment The socio-cultural environment comprise of the following factors: • View towards achievement and work, wealth and income • View towards management, authority, responsibility, delegation etc. • View towards workers’ participation. • View towards change and risk taking – whether businessmen are risk takers or risk-averters, whether resistance to change operates or not, whether customs, traditions and conventions are rigid or flexible etc, • View towards scientific methods – whether people believe in religion or reason through science. • Inter-organisation and individual co-operation or conflict with each other labor unions, co-operative societies etc live in harmony or in conflict with each other. • Class structure, family organisation, caste system, labor mobility etc. • Attitude towards education and acquisition of knowledge • Type of education – formal or informal, liberal arts or technical, quantity and quality of higher education. • Literacy level • Education match with the skill requirements of industry and manpower utilization – specialized vocational and technical training, role of business schools and executive development programmes, role of professional training institutes etc.

International environment The international environment is very important from the point view of certain categories of business. It is particularly important for the industries directly depending upon imports or exports and import competing industries. It has been observed that major international developments have their spread effects on domestic business. The great depression in the US sent its shock waves to a number of other countries. Oil price hikes have seriously affected a number of economies. These hikes have increased the cost of production and the price of certain products such as fertilizer, synthetic fiber etc. The high oil price has led to an increase in the demand for automobile models that are economic in fuel consumption. The demand for natural fibers increased because of oil crisis.

Technological environment Technological environment exercises considerable influence on business. Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. It is through business that technology reaches to people. Technology changes fast and to keep pace with it, businessmen should be ever alert to adopt changed technology to their business. Now a days

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.