The business environment is the total of internal and external forces. It affects the daily activities of your company. It plays a very important role in the working of the organization.
Let us understand this with an example. Suppose that you have a business.
The employees working in your firm will comprise of the working environment. As a result, every individual employee will carry some interest.
A change may take place in their interest. So, it can affect the company and its day-to-day activities.
For example, you have employed heavy machines for the production process. Now there comes an upgraded machine in the market which can produce more products in less time.
You need to replace your current machine with this new machine. As a result you can better compete in the market and be ahead of your competitors.
What’s’ in it for me?
- Features of the Business Environment
- Importance of Business Environment
- Types of the Business Environment
- Conclusion
- Frequently Asked Questions
Features of the Business Environment
The Totality of Forces
The business environment is the total of all the internal and external forces. Hence, a company should consider both the forces to manage and run its business.
Specific and General Forces
Specific forces are those which affect the firm and their day-to-day working. For instance, employees, investors, competitors, customers, etc.
General forces include all those forces which affect the daily activities of all the firms placed under one industry. Such as, technological, social, economic, legal, etc.
Dynamic in Nature
It is dynamic. It means it keeps on changing and never remains stable. Such as technological changes, political changes, change in taste, and preferences of the customers, etc.
Uncertainty
It is very uncertain. As it keeps on changing, it is very difficult to predict the future demand of the market. So one has to always keep an eye on the changing environment.
Inter-Relatedness
Different elements of the business environment inter-relates to each other. If one element changes, it leads to the change in other related elements.
For instance, nowadays people are more concerned about their health. As a result, there has been an increased demand for less oily foods, diet coke, etc. These will help them stay fit and healthy.
Complexity
There are many elements that cause an impact on any business. They act in totality, at a time. Hence, they are termed as complex.
We can identify the impact of every element of the business environment if we study them one at a time but it is difficult to analyze the extent of an impact if we take them together.
Relativity
It follows a relative concept. It means the demand for a product differs from country to country and region to region.
For example, there is more demand for a diet coke in America and less in India.
Importance of Business Environment
Helps in Identifying the Opportunity
Since it is dynamic, the business organization should always keep an eye on the changes taking place. They should grab the opportunity to take the first-mover advantage.
For example, when the coronavirus entered India, there was a huge demand for masks and sanitizers. So some people immediately saw the opportunity and started selling masks and sanitizers at a higher price.
Helps to Identify Threats
It does not help a firm to identify opportunities but also helps in identifying threats.
For example, suppose a new company enters the market with new strategies. So you should see this as a threat and take some immediate action to safeguard your market share.
Helps in Tapping Useful Resources
Every organization gets useful resources from the environment for the production of goods and services. It can be land, labor, or capital.
In return, companies serve society by providing goods and services. They use friendly methods to produce their products.
Helps in Coping with Rapid Changes
It changes now and then. Either there will be changes in the technological, social, cultural, legal, economic, or political environment.
So it is the responsibility of the business manager to analyze every dimension of the changes taking place. They should be ready to take effective action towards it for the smooth running of the organization.
Helps in Assisting in Planning and Policy
The company should plan its future actions and plan policies. As a result, they can cope up with the rapid changes taking place.
Hence, it helps the company to keep updating its functions to compete and survive in the market.
Helps in Improving Performance
It also helps in improving the performance of the organization. According to the changing dimensions of the market, the organization keeps updating itself to improve its present performance.
This helps them to stay in the market and succeed for a longer period. This gives them a competitive edge over the other competitors in the market.
Types of the Business Environment
Internal Environment
An internal environment, also known as the micro-environment, is one that affects the functions of the organization directly.
It includes all those elements which are connected to the functioning of the organization. The company has full control of these elements. Various components of the internal environment are:
Employees
All the people working for the organization – to reach a common goal – carry individual interest with them. So along with satisfying the customer needs, a business organization should also look towards the needs of the employees.
If they feel that they are not getting in return what they want from the organization, they will either stop working for you and go for a strike. As a result, your company’s working environment will change.
Have a look at the video below which shows the reviews of the Amazon employees about the workplace condition.
Customers
It is been said that,
“Customer is the King”
So the company should keep the customer on top. It should serve them with the best product which will meet their needs and wants.
The company has to keep track of the changing tastes and preferences of their customer so that they can update their product as per the demand of the market.
Competitors
These are the companies that are in the same industry in which your company operates. They are always ready to capture the market share of the existing companies.
So, you also need to keep an eye on your competitors to grab the first-mover advantage and disrupt their market alongside protecting yours.
Suppliers
You should keep a good relationship with your suppliers. They are the one who is going to provide you with all the resources required for the manufacturing and selling of the products.
If they find you cheating on them or trying to use any faulty means to fraud them, then they will immediately cut their supply of materials. This can lead to breakage of the business relation.
Investors
Investors are the stakeholders of the company who invest their money in your company to get the profit of the company in return. And not just the profits but the ownership of your company.
They always seek to maximize their wealth. So you should also meet your investors by giving them a fair return on their investment.
Your aim towards them should be to maximize their wealth. Else they may shift their investment to other companies and your market may fall.
Creditors
Creditors are the person or any financial institute which provides credit to your company. They first check the credibility of the company and then provide you with the credit.
Hence, your target must be to return the money along with the said interest to these financial institutes within the given time frame. Else they may stop providing you with the credits.
External Environment
Also termed as macro-environment includes all those elements which are out of control of the company. The change in these environments does not affect only one individual company. They indirectly affect the companies equally coming under the same industry.
Have a look at the video below and you will understand how important an external environment is for a company.
It is very important to keep track of changes in the external environment as well along with the internal environment. This helps grab the opportunity and gain a competitive edge. Various external environments are as follows:
Technological Environment
It comprises all those technologies used in the business for manufacturing, transporting, storing, and delivering of the products. There is a rapid change taking place in the technology field.
Companies should be updated with these advanced technologies. They should implement them for their daily activities to make their work easier.
Social Environment
It comprises of the society where the firm has been set up. Your company should not take up those activities which will harm the environment.
Also if any section of the society faces any problem, the company should come up and solve it. This helps in building goodwill for the company among the people.
Cultural Environment
It indicates all the needs and wants of the customers as per their culture they follow.
A company should do thorough research about its customer‘s habit, their behavior, their culture, and then form an offering to serve them with the best product.
The taste and preferences of the customer always change. A company should always keep track of it.
Political Environment
It consists of all the rules and policies formed by the government of a particular country. Your company should follow the rules and guidelines of the country you are doing a trade-in.
The government may bring changes in it from time to time or form some new policies. Hence, it affects the day-to-day activities of the firm.
Legal Environment
It consists of the legal frameworks of a country formulated by the government. A company should also abide by the company laws formed by the world level institutes such as WTO (World Trade Organisation). Any breakage of the law can lead to winding up of the company.
To know more about WTO (World Trade Organisation), check this out.
Economic Environment
It includes all the indicators of the economic condition of a country such as GDP, GNP, per capita income, poverty level, death rate, mortality rate, etc.
The company should do thorough research on the economic condition of the country and formulate a plan for future activities to be taken up.
Conclusion
So these were the different internal and external environmental elements. They play a major role in shaping your business.
If ignored, it can lead you to shut down your company. Hence, it should be taken care of and you should always be ready for the uncertainty.
Frequently Asked Questions
Let us take you as an example. Earlier you might love to watch movies, listening to music, etc on television. But now you have a mobile phone with advanced features inbuilt in it.
I am sure you must be spending most of your time or maybe all your time watching stuff on your mobile rather than television. See, you had a shift in your taste and preference. Hence, it is dynamic and it keeps on changing with time.
It is complex because every element of it acts in their way and they affect the business together which makes it difficult to understand it.
For example, suppose due to some reason the government increased the tax rate. Now this will affect your business. It might reduce your profit or can decrease or increase your sales volume. It can be anything.
So here, a change took place in a political, legal, and economic environment which will affect your business.
The business environment in India is very complex and dynamic. As many different types of people, religion and culture reside in India, the government has to make policies considering every aspect. So there is political instability.
Also, the economic condition of India is not so good. Unemployment is huge in number so this matters.
Technology is also not so advanced and the employees of a company do not know to run the advanced machines.
There are many social issues in India. People here still carry conservative thinking. Hence, this also affects the company after all they are only the customer.
