Business establishes, grows or operates and dies in the environment. It exchanges resources in the environment. It collects inputs i.e. Man money, materials, machines etc. And provides output i.e. Goods and services in the environment. Environment means surrounding. Business environment defines as a force that affects organizational performance. It includes internal and internal factors. It provides opportunities and threats. The external environment is not controllable but manageable (must adopt) by the organisation but the internal is controllable by the business itself.
According to Keith David, ” Business environment is the aggregate of all conditions, events and influences that surrounds the business and affect it.”
According to Stephen P. Robbins and Mary Coulter, ” Environment refers to institutions forces that affect the organisations’ performance.”
Components of Business Environment:
The business environment can be classified into two major categories depending on their effect on the business:
- Internal Environment
- Shareholders & Board of Director
- Organisational resources
- Organisational Structure
- Organisational Culture
- External Environment
- General Environment (PEST – Macro Environment)
- Political-Legal environment (P)
- Economic environment (E)
- Socio-Cultural environment (S)
- Technological environment (T)
- Task Environment – (MESO Environment)
- Pressure Group
- Financial Institutions
- Strategic Alliance
- General Environment (PEST – Macro Environment)
A. Internal environment
It is defined as all the forces or conditions that are available within an environment that affects an organization and business. These environmental components are controllable to the management. It shows both strength and weaknesses of the organisation.
- Employees: Business hires employees. It is the major internal factor. It works inside the business. It can be controlled by the business. Employees differ in skill, knowledge, morality, and attitude and so on. When managers and employees have a difference in goals and beliefs then conflict may arise. The task of management is to divide the work and assign the work to a suitable employee and handle the conflict.
- Shareholders & Board of Director: Management deals with many shareholders. Shareholders have the right to ownership, power of management and voting right. The actual management of the organization is carried out by elected representatives of shareholders jointly known as the board of directors. Boards of directors have the responsibility of overseeing the management of the organization. It plays a major role in the formation of objectives, policies, strategies of the organization as well as their implementation.
- Organisational resources: Organisational resources, human and non-human resources, have a direct influence on the success of a business. Only the organisation which can maximise the utilisation of available resource which leads to minimising the wastage and reduction of production cost can get success.
- Organizational structure: It is located inside the organization. The arrangement of various facilities, the pattern of relationships among the various department, responsibility, authority and communication is the organization structure. It also included specialization and span of control.
- Organizational culture: The sets of values that help the members to understand what an organization stands for how it does work, what it considers, cultural values of business forces of business and so on. It helps in direction of activities.
B. External environment: external Environmental Factors are those forces and condition that comes from outside of the organisation and cannot be controlled by the business is called the external environment. It is located outside the business. It affects organizational performance. The external environment made up of two components:
- Task environment
- General Environment:
General Environment (PEST):
- Political-legal environment: It is defined as rules and regulations determined by the government. Businesses must fulfil the demand of the government. There should be no violation of the rules and regulations of government. The government can set the limits of what a business can do legally. The stable political environment of a nation can ensure a stable business environment for business. Government regulations and legal issues affect a company’s ability to be profitable and successful, and this factor looks at how that can happen. Issues that must be considered include tax guidelines, copyright and property law enforcement, political stability, trade regulations, social and environmental policy, employment laws and safety regulations.
- Economic environment: It indicates the condition of the economy in which a business organization operates. The economy is one of the most determining factors to the success of the company even though it is an external element. It has a continuous and great impact on business. Within the economy, some contributing factors such as the fluctuation of interest rate, economic crisis, and so on directly and strongly affects the consumption of buyers, and consequently, the profits of businesses. The businessperson must have a constant watch on this factor.
- Social environment: Social factors—our attitudes, values, ethics, and lifestyles—influence what, how, where, and when people purchase products or services. They are difficult to predict, define, and measure because they can be very subjective. Businesses can be established where there a good environment. The business also helps in employment opportunities generation. There should be a socio-cultural understanding and application of anti-pollution measures.
- Technological environment: It defines the methods available for converting resources into product or services. It transforms inputs into output. Inputs mean material, capital, man, machine. It affects business. It helps to change the level of job, skill, and product and so on. There can be innovation, development of scientific techniques that encouraged mass production and distribution. The application of technology can stimulate growth under capitalism or any other economic system. Technology is the application of science and engineering skills and knowledge to solve production and organizational problems. New equipment and software that improve productivity and reduce costs can be among a company’s most valuable assets.
- Customers: Customer is the one who buys/consume/use the goods and services. They are the fundamental source of income for a business organization. Customers interest, need and wants are changing frequently. Businesses must address/fulfil customer changes demand to service in the market.
- Suppliers: Suppliers are all types of organizations who supply the resources needed for the business. If the supplier changes their strategy/stop supplying or increases the price of material or reduces the quantity of material then it would be more costly for the business organisation.
- Competitors: Competitors are the rivals that compete with the organisation for different resources. No business can ignore the competitor’s strategy so the management/manager of the organisation must have the ability to see the future of the organisation.
- Government: Government always gives the priority for their citizen and they always think about the wellbeing of their citizen. Every new legislation enacted by government can be a challenging issue for the organisation. It enacted different rule and regulation to protect their people from unfair business practice and misconduct of business organisation. Every business organisation must need to follow the rule & regulation of a country enacted by the government to run its business in the country.
- Pressure Group: Different interest group who are working in society are pressure group. They can be a big challenge for the organisation to run their business smoothly. Ama Samuha, Child Right Activist, Human Right Activist, environmental activist etc are the example of it.
- Financial Institutions: Financial Institution supply capital for business as per business requirement. Every business needs long-term loan for establishment of business and short-term loan for day to day operation. Every business organisation need to maintain good relationships with financial institution.
- Strategic Alliance: Strategic alliance are those organisation who works together in a joint venture to achieve their goal. such an alliance helps to get expertise from other company to gain new business idea and knowledge. Airlines and Travel Agency, University and Educational Consultancy, Real Estate and Engineering consultancy are the example of strategic alliance.