Components of business environmentOn 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. therefore. 2. stereo sets and so on and from firms offering savings and investment schemes like banks. A company may have different categories of consumers like individuals. 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. apart from the risk of loosing business consequent to the winding up of business by the customer or due to the customer’s. Uncertainty regarding the supply or other supply constraints often compel companies to maintain high inventories causing cost increases. those who supply the inputs like raw materials and components to the company. 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. households. Customers As it is often exhorted. Depending on a single customer is often too risky because it may place the company in a poor bargaining position. industries and other institutions. refrigerators.1. distribution logistics etc. These includes the suppliers. The micro environment consists of the actors in the company’s immediate environment that affects the performance of the company. a change in the attitude or behavior of the supplier may also affect the company. many companies give high importance to Vendor development. Recognizing the critical importance of the supplier factor. cooking ranges. 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. They are important also for brand extension. For example. the customer of a tyre company may include individual automobile owners. technology and efficiency of the productive apparatus. competitors. the Indian market is becoming more exposed to the global competition and the Indian customer is becoming more global in his shopping. insurance companies. The choice of the customer segments should be made by considering a number of factors including the relative profitability. among other things. marketing intermediaries. External Environment: The external environment is made up of micro and macro environment. selling and distributing its goods to final buyers. multiple sources of supply often help reduce such risks. In many cases. A business exists only because of its customers. Consequent to the liberalization. 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. helps solve the supply problem. R&D and technological capabilities. public sector transport undertakings and other transport operators. the competition for a company’s television may come not only from other T. a prerequisite for the business success. 3. quality of the marketing men. Similarly. are among the factors which influence the competitiveness of a firm. stability of demand. Many companies restructured their business portfolio and strategies. outsourcing is more beneficial. lock out or any other production problem with that supplier may also seriously affect the company. where feasible. Hence. determine a company’s ability to innovate and compete. Not only that the markets of other countries are becoming more open. Monitoring the customer sensitivity is. Financial factors like financial policies. however. Because of the sensitivity of the supply.V. 4. strategies and decisions. the customer environment is increasingly becoming global. dependability. automobile manufacturers.switching over to the competitors of the company. brand equity and distribution network have direct bearing on marketing efficiency.e. growth prospect and the extent of competition. It is very risky to depend on a single supplier because a strike. mutual funds and of course the capital market. 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 competitive environment in India has been undergoing a sea change. the major task if a business is to create and sustain customers. manufacturers but also from two-wheelers. The importance of reliable source/ sources of supply to the smooth functioning of the business is obvious. customers and the publics. new product introduction etc. companies all around the world are increasingly resorting to partnering/ relationship marketing. financial position and capital structure are also important internal environment affecting business performances. In many industries where a seller’s market existed a buyer’s market has emerged. For example. With the growing globalisation. Marketing Resources like the organisation for marketing. Vertical integration.” . Physical Assets and Facilities like the production capacity. For example. Suppliers An important force in the micro environment of a company is the suppliers. i. The business of the cola companies was around 60-70% down when media and the research company spread the news. The set-up of industrial undertakings and the socio-economic infrastructure also exercise significant influence on the economic environment. physical distribution firms which assist the company in stocking and moving goods from their origin to their destination such as warehouses and transportation firms. the protests that taken place against the cola companies when it was declared that they contain pesticides. the economic environment will be non-conductive to business activities. The capital market comprises the various financial institutions (banking and non-banking) which affect business investment. the dependence of business on the economic environment is total and it is not surprising because. marketing service agencies which assist the company in targeting and promoting its products to the right markets such as advertising agencies. a solution may be their domestic manufacturers. ownership of factors production. the composition of trade etc. their policies and strategies. the pattern of investment. The components of these environment are discussed as below. as it is rightly said. Important macro environment factors include economic environment. Thus. . 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 success of a company depends on its adaptability to the environment. Publics A company may encounter certain publics in its environment. Media publics.e. The economic system comprises various sub-systems wherein individual enterprises carry on their income earning activities. It also depends on the economic environment to sell the finished goods. socialist or mixed economy. Besides the financing capabilities. Some companies are seriously affected by such publics. production relations. the capital formation priorities. The government influences the economic environment of business through economic planning. controls on prices and wages and commercial policies affecting export and import. A public is any group that has an actual or potential interest on an organisation’s ability to achieve its interests. Marketing intermediaries are vital link between the company and the final customers. both direction and speed. Accordingly the economic system of a country may be characterised as capitalist. attitudes (including attitude towards risk). naturally. industrial regulations. citizens action publics and local publics are some examples. or a wrong selection of the link. For example. if the cost of the imported components increases substantially because of the depreciation of the domestic currency. and financial intermediaries which finance marketing activities and insure business risks. Structure of economy – the structure of economy comprise of the structure of national output. are very important. ability to provide non-finance assistance etc. industry and service. Economic environment Economic environment refers to all those economic factors which have a bearing on the functioning of a business unit. business cycles and economic growth are important factors influencing the economic environment. technological environment and global environment. These factors determine the structural equilibrium or dis-equilibrium between different sectors like agriculture. business is one unit of the total economy. generally. The nature of economic system is determined by such factors as the nature of property rights. the occupational distribution of labor force employed. i. marketing research firms. functioning of price mechanism etc. demographic environment. The business sector enters into transactions with all other sectors and these transactions give shape to the economic environment of business. Business depends on the economic environment for all the needed inputs. more uncontrollable than the micro forces. social/ cultural environment. Role of the government – the role of the government is crucial determinant of the economic environment. If there is no balance between the speed and direction of the government policies. political and regulatory environment. role of public sector. fiscal policies and budgets. 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 marketing intermediaries include middlemen such as agents and merchants who help the company find customers or close sales with them. The government policy must contain velocity. Organisation and development of capital market – The organisation and development of capital market is another important determinants of the national economic environment. The macro environment is also known as General Environment and Remote Environment. may cost the company heavily. These policies also determine the tempo of development and size of domestic market and its dynamism affects business. media firms and consulting firms. For example. The national economy functions through the interaction between these sectors. A dislocation or disturbance of the link. role of government planning. When the macro environment is uncontrollable. The macro forces are. business laws. Hindustan lever faced major challenge when it faced a collective boycott in Kerala on the issue of trade margin. 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. Financiers Another important micro environmental factor is the financiers of the company. • Literacy level • Education match with the skill requirements of industry and manpower utilization – specialized vocational and technical training. Demographic factors such as size of the population. size and general health of the labor force and entrepreneurial ability and available natural resources. family size. age composition. the declaration of emergency and president rule. It is through business that technology reaches to people. language. • Forting policy – alignment or non-alignment. employment pattern etc. High population growth rate also indicates an enormous increase in labor supply. labor mobility etc. A rapid increasing population indicates a growing demand for many products. Socio-cultural environment The socio-cultural environment comprise of the following factors: • View towards achievement and work. The great depression in the US sent its shock waves to a number of other countries. growth rate. religion etc. sex composition etc. • Defense and military policy – trading with potential enemies. tariffs. • View towards scientific methods – whether people believe in religion or reason through science. 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. spatial dispersal. foreign infiltrations etc. The success of business depends upon its ability to meet the challenges arising out of the political and legal environment. of the population. liberal arts or technical. nature and extent of bureaucracy. trade agreements. affect the demand of the products of business. delegation etc. educational level. It is particularly important for the industries directly depending upon imports or exports and import competing industries. • Legal rules governing the business – their formulation and implementation. role of business schools and executive development programmes. Demographic environment Demographic factors like size. family organisation. judicial system etc of the country. Political environment Political environment consists of the following force: • Political organisation – ideology of the government. family size. strategic developments etc. philosophy of the political parties. red tape. responsibility. • View towards workers’ participation. Legal environment consists of constitutional provisions. influence of primary groups. traditions and conventions are rigid or flexible etc. image of the country and its leaders etc. are all factors which are relevant to business. life expectancy. • Attitude towards education and acquisition of knowledge • Type of education – formal or informal. wealth and income • View towards management. The high oil price has led to an increase in the demand for automobile models that are economic in fuel consumption. business donations to political parties. customs unions etc. caste system. speed and direction of public policies etc.Nature of factor endowment and its exploitation – The nature of factor endowment and its exploitation is another determinant of economic environment. caste. growth rate. • Flexibility and adaptability of law – constitutional amendments. business laws. These hikes have increased the cost of production and the price of certain products such as fertilizer. The demand for natural fibers increased because of oil crisis. and effectiveness. Technological environment Technological environment exercises considerable influence on business. their efficiency. • Inter-organisation and individual co-operation or conflict with each other labor unions. age composition. It has been observed that major international developments have their spread effects on domestic business. election upheavals. occupational status. • Political stability – impact of factors like civil war. Oil price hikes have seriously affected a number of economies. International environment The international environment is very important from the point view of certain categories of business. whether resistance to change operates or not. synthetic fiber etc. Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. economic stratification of the population. whether customs. Factor endowment implies relative supply of real capital and land per capita. • View towards change and risk taking – whether businessmen are risk takers or risk-averters. The degree of resource exploitation has a bearing on the economic environment of business. co-operative societies etc live in harmony or in conflict with each other. businessmen should be ever alert to adopt changed technology to their business. Technology changes fast and to keep pace with it. role of professional training institutes etc. authority. changes in the form and structure of the government administration. Legal and political environment provides a framework within the business has to function. quantity and quality of higher education. • Class structure. Now a days . Internet and mobile has emerged as powerful sources of reaching people and dealing and marketing the products.technology has changed the way of doing business. .
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