Components of Business Environment

3 min read

Components of Business Environment

Business is brought to life with the help of multiple factors that ensure its ability to build and support the service and customer relationships. These factors constitute the business environment and it is important to understand how they work because they help to make realistic plans while recognizing opportunities and threats. Besides, they assist in improving the overall performance and increase the growth and profitability of the organization. Mainly, there are two components of the business environment, internal and external, which are segregated into various other factors. So, check out the article of Components of Business Environment below.

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Components of Business Environment

Internal Environment

These refer to the controllable factors of the business environment.

Human Resource

Human Resource - Components of Business Environment

The quality of employees plays a huge role in determining the survival of a business. Besides, the characteristics of human resources such as morale, commitment, and skill can give rise to the success of the business. Therefore, organizations should motivate them through incentives, securities, bonuses, and more.

Financial Resource

Financial Resource

Finance is the life force of running a business. Every firm should have sufficient financial resources to support both the working capital and fixed capital requirements. Moreover, proper management of financial resources is essential for an organization to function effectively. If there is abundance, it could spend on research and marketing activities.

Plans & Policies

Plans & Policies - Components of Business Environment

Plans and policies of a business should be tailored towards the objectives. So that they can help to reach them within the specified time frame. The hierarchy is responsible to take such decisions and put the policies into place ahead of time.

Shareholders & Board of Directors

As shareholders hold great importance in the ownership of the business, they have an undeviating interest in the performance of the firm. Besides, they elect the board of directors so that they could represent their interest on the board. The members in the board are thus, responsible for formulating pertinent plans.

Organizational Culture

Organizational Culture

Organizational culture is a set of values that the business stands for and operates under. Although the organizational culture in different firms varies, each of them helps to bind their human resource with the specific organization’s rules and regulations. Moreover, it creates a strong influence on the process of changes in the business.

External Environment

The external business environment is further classified into micro and macro environments.

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Micro Environment

Micro Environment - Components of Business Environment

1. Customers:

Customers are the sole receivers of the business, and globalization has made the process of customer satisfaction more challenging. While setting the objectives and long term goals, organizations should keep in mind the customers’ requirements and expectations, and meet them accordingly.

2. Competitors:

For a business to have a cutting edge advantage, it must be aware of the competitor’s activities as well as products, prices, and promotion strategies. They must then be incorporated into the organization’s threat category and tackled with relevant measures accordingly.

3. Suppliers:

Suppliers of an organization account for all the raw materials, machinery, and other supplies that are necessary for an organization to function. It is the company’s responsibility to keep a continuous check on the quality of the supplies while maintaining good relations with its suppliers.

4. Society:

The society has certain expectations from a business which is increasing day by day as interests of the public are ever-changing. Companies should assign the public relations department to handle all the complaints and suggestions from the society and bring possible changes accordingly.

5. Marketing Intermediaries:

Often, customers are located with the help of agents and brokers who are the marketing intermediaries of the company. Their main task is to advertise and distribute the products and services to the final customers. Wholesalers, retailers, media, advertising agencies, and banks, all fall under marketing intermediaries.

Macro Environment

Macro Environment - Components of Business Environment

1. Demographic:

People are the end receivers of the goods and services, therefore businesses should study the size, age, sex ratio, education, occupation, and status of the population as they impact the business to a great extent.

2. Technological:

With an increase in modern technological adaptations, cost-effective methods are introduced that are highly beneficial to businesses. Technology has brought multiple changes in methods of productivity and packaging that has helped to improve the quality of goods significantly.

3. Cultural:

Similar to organizational culture, environmental culture also impacts organizations to a great extent. The environmental culture influences the activities of a business and vice versa. That being said, firms should focus on the values and norms of society and they are an integral part.

4. Economic:

The economic environment consists of multiple elements including economic policies, economic systems, corporate profits, inflation rate, the balance of payments, consumer income, and more. The economic environment is both vital and complex for any organization as each of these factors has significant importance in determining the functionality of the business.

5. Political:

Every organization should abide by the rules and regulations of the government to maintain its existence in the industry. Besides, a stable political environment is necessary for the progression of any firm.

6. Legal:

Certain laws and regulations are set by states or countries that businesses should follow through to operate in the market. The legal environment in thus, responsible for creating a framework of policies that every firm, small or big, should maintain in order to function.

7. Natural:

Natural environment can work for or against a specific business depending on the kind of goods or services they provide. Therefore, before establishing an organization the following natural environment factors should consider – weather, climatic conditions, natural resources, port facilities, and topography.

Every organization should give equal importance to all the internal and external business components to ensure that it reaches its utmost potentiality. While the internal factors are determined by the company itself, the external factors are prone to changes through variation in circumstances. This necessitates the organizations to be ready to tackle any possible changes and tweak their objectives and goals to fit the current situation. Thus, at the end of the day, businesses depend on these components and vice versa.

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kacnika mom
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kacnika mom
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