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Chapter: 12th Commerce : Chapter 19 : Business Environment : Environmental Factors

Types of Business Environment

The Business Environment can be classified as follows: I) Internal Environment II) External Environment

Types of Business Environment

The Business Environment can be classified as follows:

I) Internal Environment

II) External Environment

Internal environment refers to those factors within an organisation e.g Policies and programmes, organisational structure, employees, financial and physical resources. These factors can be changed or altered and hence are known as controllable factors.

External environment  refers to those factors outside the business These factors by and large are beyond the control of a business and hence uncontrollable .e.g economic, political and socio-cultural factors.


1. Internal Environment

Internal Environment Factors

The major internal factors affecting business decisions are

i. Values system: The values of the founder/ owner of the business , percolates down to the entire organisation and has a profound effect on the organisation. The success of an organisation depends upon the sharing of value system by all members. External business associates like suppliers and distributors consider the value system practised by an organisation with strong culture of ethical standards and values.

ii. Vision and objectives: The vision and objectives of a business guides its operations and strategic decisions. Example ‘Amul the taste of India’ Gujarat Co-operative Milk Marketing Federation GCMMF

Two Indian companies TATA Steel and WIPRO have been named as the world’s most ethical companies by American Think tank Ethisphere Institute. Infosys, Murugappa group, TVS group

Vision: Liberate our farmers from economic oppression and lead them to prosperity.

iii. Management structure and ature: The structure of management/board and their style of functioning, the level of professionalism of management, the composition of the board are the various factors which affects the decision making. Since the board is the highest decision making authority, it’s composition, degree of professionalism and style of operations plays a very critical role in the growth and development in an organisation.

iv. Internal power relations: This refers to the internal power relations that exist in an organisation. The relations among board members , between board members and the CEO and the level of support enjoyed by the board from its’ stakeholders namely employees and shareholders are significant factors which affects decision making and its implementation in an organisation.

v. Human resources : The success of an enterprise is solely dependent on its manpower. Therefore the quality, skill competency, right attitude and commitment of its human resources is essential for the success of an organisation.

vi. Company image: The image of an organisation plays an important role in introducing new products, selecting agents and dealers for distribution, forging alliances with suppliers, expanding and entering new markets both domestic and international, raising finance etc.

vii. Other factors: The firm’s ability to innovate reflected by its research and development, the strength of its financial position and the capital structure, the efficiency in managing the marketing and distribution network ,and the physical resources like plant, building technology are the other major factors on which affects the success of a business.


2. External environment

All factors outside the business which have a bearing on the working of a business can be termed as the external environment. This is subdivided into micro or task environment and macro or general environment.


3. Micro Environment

Micro Environment Factors

This refers to those factors which are in the immediate environment of a business affecting its performance. These include the following:

i) Financiers: The financiers of a business which includes the debenture holders and financial institutions play a significant part in the running of a business. Their financial capability, policies strategies, attitude towards risk and ability to give non–financial assistance are all important to a business.

ii) Suppliers: In any organisation the suppliers of raw materials and other inputs play a very vital role. Timely procurement of materials from suppliers enables continuity in production and reduces the cost of maintaining stock/inventory. Organisations generally obtain supplies from a panel of suppliers instead of relying on a single source. Organisations have realised the importance of nurturing and maintaining good relationship with the suppliers.

iii) Marketing Channel members: The marketing inter-mediaries serve as a connecting link between the business and its customers .The middlemen like dealers, wholesalers and retailers ensure transfer of product to customers .physical distribution is facilitated by transporters, and warehouses help in storing goods. Market research agencies help the firm to understand the needs of the customers while advertising agencies help in promoting the products and services. Insurance firm is another marketing intermediary which provides coverage for risk in business.

iv) Public This refers to any group like media group, citizen action group and local public which has an impact on the business. The public group has the ability to make or mar a business. Many companies had to face closure due to actions by local public.

v) Customers: The aim of any business is to satisfy the needs of its customers. The customer is the king and the fulcrum around which the business revolves. Hence it is essential for any business to understand the needs of its varied customers like individuals, retailers, wholesalers, industries and government sector. Customer relationship management aims at creating and sustaining cordial relations with customers.

vi) Competitors: All organisations face competition at all levels local, national and global. Competitors may be for the same product or for similar products. It is important for a business to understand its competitors and modify their business strategies in the face of competition.

For example. the closure of Sterlite Copper factory in Thoothukudi due to protests by environment protection group in 2018.


4. Macro Environment:

Macro Environment Factors

This is the general or overall environment in which the business operates. The success of a business is dependent on its ability to adapt to the macro environment, since these are uncontrollable factors. They offer enormous opportunities to business and also poses serious threats to business. The general or remote environment factors are as follows;

I. Economic environment: The business is an integral part of the economic system prevalent in a nation. The multiple variables in the macro environment system which has a bearing on a business include

1) The nature of economy based on the stage of development: The countries across the globe can be categorised on the basis of growth and per capita income as developed nations, developing nations and under developed nations. The USA, Japan, Germany, Canada and Australia developed economies generally have high degree of technological advancement, very strong and robust industrial base, and high standard of living. Many of these developed nations have successfully integrated the computer based technologies with their existing business. Developing nations like India, China, Brazil Mexico are middle income economies are characterised by low to moderate industrial growth, the inequality in the distribution of income, high population, a low standard of living and slow absorption of technology. Under developed nations are low income economies with a very low degree of technology adoption and a very poor standard of living.

2) The nature of economic system: The economic systems can be classified as Capitalistic, Socialistic and Mixed economy. Capitalistic economy is a free enterprise market where individual ownership of wealth is predominant. Socialistic economy is a state controlled with a lot of restrictions on private sector. Mixed economy is a combination of both state owned and private sector ownership.

3) The economic policies of a nation: Monetary policy, fiscal policy, Export-import policy, Industrial policy Trade policy, Foreign exchange policy etc are part of the economic environment.

4) Economic indices: The Economic indices like GDP, GNP national income, per-capita income, balance of payments, rate of savings and investments etc. form an important part of economic environment.

5) Development of financial market: The organisation and development of money market, capital market securities market and, the banking system has a greater impact.

6) Economic structure: The Economic structure includes capital formation, investment pattern, composition of trade balance, occupational distribution of workforce, and the structure of national output.

II. Socio-Cultural environment - Business is a part of the society .Social environment refers to the sum total of factors of the society in which the business is located. Social and cultural environment of society affects the business. It is dynamic and includes the behaviour of individuals, the role and importance of family, customs, traditions, beliefs and values, religion and languages, the ethical values. The literacy level, and the social attitudes of the people of the society. The socio-cultural environment also includes the following;

1) The social institutions and groups

2) Family structure prevalent in the society

3) Role of marriage as an institution

4) Caste system in the society

5) Customs , beliefs and values

6) Demographic factors which includes the size, composition, literacy level, distribution and mobility of the population

7) The lifestyle of people and their tastes, likes and preferences.

III. Political and Legal environment – The framework for running a business is given by the political and legal environment. The success of a business lies in its ability to adapt and sustain to political and legal changes. The legislative, executive and judiciary are the three political institutions which directs and influences a business.The major elements of the legal and political environment are

1) Political stability is reflected by the following parameters like the election system, the law and order situation, the role and structure of Military and Police force, the declaration of President’s rule, civil war etc

2) Political organisation refers to the ideology and philosophy of the political parties, the government, the role and degree of authority of bureaucracy, the level of political consciousness among citizens and the funding of political parties by business houses and the clout wielded by them.

3) The image of the leader and the country in the inter-national arena.

4) Legal framework of business and their degree of flexibility.

5) The constitution of the nation.

6) The Foreign policy of the country with special reference to tariffs and free trade.

IV. Geo-physical environment – The natural, geographical and ecological factors have a bearing on the business. These are as follows;

1) the availability of natural resources like minerals oil .etc, since setting up of industries requires availability of raw materials

2) the weather and climatic conditions and availability of water and other natural resources is essential for the agricultural sector .

3) topographical factors like the terrain impacts type of business since the demand and consumption pattern may vary in these regions. E.g in the the hilly region mode of transport will have to be modified to tackle the terrain.

4) ecological factors are now gaining momentum, since the governments across the globe are framing stringent policies for ecological conservation and prevention of pollution. The ban on use of plastic bags imposed by the Ooty corporation is an example.

5) location of certain industries is influenced by the geographical conditions For e.g In Tamilnadu the concentration of cotton textile industry in Coimbatore is due to conducive weather conditions. .

6) availability of natural harbours and port facilities for transporting goods .

V. Technological environment

The development in the IT and telecommunications has created a global market. Technology is widely used in conducting market research for understanding the special needs of the customer. Digital and social media are used as a platform for advertising and promoting the products/services. Data-mining and data analytics are used to know the customer better. Technology is used in managing inventory, storing goods in warehouses, in distributing goods and in receiving payment. This dynamic environment also includes the following ;

1) the level of technology available within the country

2) rate of change in technology

3) technology adopted by competitors

4) technological obsolescence

VI. Global environment

With the rapid growth of technology the physical boundaries are fast disappearing and the new global market is emerging. The international environmental factors which affects a business are as follows;

1) Differences in language and culture

2) Differences in currencies

3) Differences in norms and practices

4) Differences in tastes and preferences of people

5) The tax structure relating to import and export.

6) Differences in the degree of adoption of technology.

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12th Commerce : Chapter 19 : Business Environment : Environmental Factors : Types of Business Environment |

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