COMPONENTS OF BUSINESS

ENVIRONMENT

After discussing the meaning of business environment, now we will discuss the various
components of business environment. The

various components of business environment are-

External environment consists of those factors that affect a business enterprise from outside.
External environment includes shareholders, competitors, customers, society, government
laws and regulations, policies and technology.  External environment is generally classified
into micro environment and macro environment. The micro environment consists of factors in
the company's immediate environment that affects the performance of the company.  These
include the suppliers, marketing intermediaries, competitors, customers and the public. On
the other hand, macro external environment includes larger factors such as economic,
demographic, technological, political, natural and cultural factors. We will explain below micro
and macro types of external environment of business. Different players in the micro
environment normally do not affect all the companies of a particular industry in a similar way.
However, sometimes micro environment of the various firms of an industry remains almost
same.

External Micro- Environment 

Micro environment includes those players whose decisions and actions have a direct impact
on the company. Production and selling of commodities are the two important aspects of
modern business. Accordingly, the micro environment of business can be divided. The
various constituents of micro environment are as under:

Suppliers of inputs: An important factor in the external micro environment of a firm is the
supplier of its inputs such as raw materials and components.  Normally, most firms do not
depend on a single supplier of inputs.  To reduce risk and uncertainty business firms prefer to
keep multiple suppliers of inputs.

Customers: The people who buy and use a firm’s product and services are an important part
of external micro environment.  Since sales of a product or service is critical for a firm's
survival and growth, it is necessary to keep the customers satisfied.  A concern for customers’
satisfaction is essential for the success of a business firms.  Besides, a business firm has to
compete with rival firms to attract customers and thereby increase the demand and market for
its product.

Marketing intermediaries: In the firm's external micro environment, marketing intermediaries

play an essential role of selling and distributing its products to the final customers.  Marketing
provides an important link between a business firm and its ultimate customers.

Competitors: Different firms in an industry compete with each other for sale of their products.
This competition may be on the basis of pricing of their products and also non- price
competition through competitive advertising such as sponsoring some events to promote the
sale of different varieties and models of their products. As a consequence of liberalisation and
globalisation of the Indian economy since the adoption of economic reforms there has been a
significant increase in the competitive environment of business firms.  Now, Indian firms have
to compete not only with each other but also with foreign firms whose products can be
imported. In America, American firms faced a lot of competition from the Japanese firms
producing electronic goods and automobiles.

Publics: Finally, publics are an important force in external micro environment. 

Environmentalists, media groups, women’s associations, consumer protection groups, local
groups, Citizens Association are some important examples of publics which have an
important bearing on the business decisions of the firm.  The existence of various types of
publics influences the working of business firms and compels them to be socially responsible.

External Macro Environment 

Apart from micro environment, business firms face large external environmental forces.  An
important fact about external macro environmental forces is that they are uncontrollable by
the management. Because of the uncontrollable nature of macro forces a firm has to adjust or
adapt it to these external forces. These factors are:

Economic Environment: Economic environment includes all those forces

which have an economic impact on business. Accordingly, total economic environment
consists of agriculture, industrial production, infrastructure, planning, basic economic
philosophy, stages of economic development, trade cycles, national income, per capita
income, savings, money supply, price level and population. Business and economic
environment is closely related. Business usually collect all its required inputs from the
economic environment available and also absorbs the output of business units.

Political-legal Environment: Business firms are closely related to the

government. The political- legal environment includes the activities of three political
institutions, namely, legislature, executive and judiciary which usually play a useful role in
shaping, directing, developing and controlling business activities. The legislature takes
decisions on a particular course of action, the executive implements those decisions through
government agencies and the judiciary serves as a watch-dog for ensuring public interest in
all the activities of legislature and executive. In order to attain a meaningful business growth,
a stable and dynamic political-legal environment is very important.

Technological Environment: Technological environment is exercising

considerable influence on business. Technology implies systematic application of scientific or
other organised knowledge to practical tasks or activities. Business makes it possible for
technology to reach the people in proper format. As technology is changing fast, businessmen
should keep a close look on those technological changes for its adaptation in their business
activities.

Global or International Environment : Global environment plays an

important role in shaping business activity. With the liberalisation and globalisation of the
economy, business environment of an economy has become totally different wherein it has to
bear all shocks and benefits arising out of global environment.

Socio-cultural Environment : Social and cultural environment also

influences the business environment indirectly. These includes people’s attitude to work and
wealth, ethical issues, role of family, marriage, religion and education and also social
responsiveness of business. The social and cultural environment also influences the demand
for a variety of goods and the type of employees the industry require. Moreover, the obligation
of business to society also depends on the cultural milieu in which the firm is operating.

Demographic Environment: The demographic environment includes the

size and growth of population, life expectancy of the people, rural-urban distribution of
population, the technological skills and educational levels of labour force.  All these
demographic features have an important bearing on the functioning of business firms.  The
labour force in the country is always changing.  This will cause changes in the work force of a
firm.  The business firms have to adjust to the requirement of their employees. They have to
provide child care services, labour welfare programmes etc. The demographic environment
affects both the supply and demand sides of business organisations. The technological and
educational skills of the workers of a firm are determined by the human resources available in
the economy which are part of the demographic environment.  The size of the population and
its rural- urban distribution determine the demand for the products of industrial firms. The
growth rate and the age composition of the population determine the demand pattern of
goods. If the child population is high then the demand for baby foods and baby clothes will be
high. On the other hand, if the life expectancy of the people is high then the demand for
goods will be those that will cater to the tastes and needs of elderly people. The demographic
environment is also important for business firms as it determines the choice of technology by
them.

Natural Environment : Natural environment influences business in diverse

ways. Business in modern times is dictated by nature. The natural environment is the ultimate
source of many inputs such as raw materials and energy, which firms use in their productive
activity.  In fact, the availability of natural resources in the region or country is the basic factor
in determining business activity in it. The natural environment which includes geographical
and ecological factors such as minerals and oil reserves, water and forest resources, weather
and climatic conditions are all highly significant for various business activities.  For example,
steel producing industries are set up near the coalmines to save cost of transporting coal to
distant locations. The natural environment also affects the demand for goods. For example, in
places where temperatures are high, the demand for coolers and air conditioners are high. 
Similarly, weather and climatic conditions influence the demand pattern for clothing, building
materials for housing etc. Natural calamities like floods, droughts, earthquake etc. are
devastating for   business activities.

 Ecological Environment: Due to the efforts of environmentalists and

international organisations such as the World Bank the people have now become conscious
of the adverse effects of depletion of exhaustible natural resources and pollution of
environment by business activity. Accordingly, laws have been passed for conservation of
natural resources and prevention of environment pollution. These laws have imposed
additional responsibilities and costs for business firms.  But it is socially desirable that these
costs are borne by business firms if we want sustainable economic growth and also healthy
environment for human beings.

     
Internal Environment   
The factors in internal environment of business are to a certain extent controllable because
the firm can change or modify these factors to improve its efficiency. However, the firm may
not be able to change all the factors.
The various internal factors are:

Value system : The value system of an organisation means the

ethical beliefs that guide the organisation in achieving its mission and objectives.  It is a
widely acknowledged fact that the extent to which the value system is shared by all in the
organisation is an important factor contributing to its success.

Mission and objectives : The business domain of the company,

direction of development, business philosophy, business policy etc are guided by the mission
and objectives of the company.  The objective of all firms is assumed to be maximisation of
profit.  Mission is defined as the overall purpose or reason for its existence which guides and
influences its business decision and economic activities.

Organisation structure : The organisational structure, the

composition of the board of directors, the professionalism of management etc are important
factors influencing business decisions. The nature of the organisational structure has a
significant influence over the decision making process in an organisation.  An efficient working
of a business organisation requires that the organisation structure should be conducive for
quick decision-making. 

Corporate culture : Corporate culture is an important factor for

determining the internal environment of any company.  In a closed and threatening type of
corporate culture the business decisions are taken by top level managers while the middle
level and lower level managers have no say in business decision-making.  This leads to lack
of trust and confidence among subordinate officials of the company and secrecy pervades
throughout the organisation.  This results in a sense of alienation among the lower level
managers and workers of the company. In an open and participating culture, business
decisions are taken by the lower level managers and top management has a high degree of
confidence in the subordinates.  In this type of culture, participation of workers in managerial
tasks is encouraged. Development of work culture and the growing involvement of the
workers or employees in company affairs and the sympathetic attitude of the management
towards its employees are all equally responsible for maintaining a healthy internal
environment in the business.

Quality of human resources  :  Quality of employees that is of

human resources of a firm is an important factor of internal environment of a firm.  The
characteristics of the human resources like skill, quality, capabilities, attitude and commitment
of its employees etc could contribute to the strength and weaknesses of an organisation. 
Some organisations find it difficult to carry out restructuring or modernisation plans because
of resistance by its employees.  Due to the importance of human resources for the success of
the company, now-a-days there are special courses for managers so as to be able to select
and manage efficiently the human resources of a company.

Labour unions : Labour unions collectively bargains with the

managers for better wages and better working conditions of the different categories of
workers. For the smooth working of a business firm good relations between management and
labour unions is required.

Physical resources and technological capabilities : Physical

resources such as, plant and equipment and technological capabilities of a firm determine its
competitive strength which is an important factor for determining its efficiency and unit cost of
production.  Research and development capabilities of a company determine its ability to
introduce innovations which enhances productivity of workers. It is, however, important to
note that the rapid technological growth and the growth of information technology in recent
years have increased the relative importance of intellectual capital and human resources as
compared to physical resources of a company.  The growth of Bill Gates’ Microsoft Company
and Murthy’s Infosys technologies is mostly due to the quality of human resources and
intellectual capital than to any superior physical resources.