Business Organizations: External and Internal Environment

Introduction: Business Organizations

1. The External and Internal Business Environment

Introduction to Business Environment

• Business decisions and strategies are shaped by the business environment.
• Business environment encompasses all internal and external forces, elements, and factors influencing a business's development, performance, and outcomes.
• A comprehensive understanding of the business environment is critical for effective decision-making.

Meaning of Business

• The term "business" originates from "busy," signifying activity.
• Business is defined as an organization where individuals collaborate to achieve a common objective.
• It is an economic activity involving the exchange, purchase, sale, or production of goods and services.
• The primary motive of a business is to generate profits and satisfy customer needs.

Scope of Business

• Business activities in an economy include:
  • Extraction of oil, natural gas, or minerals.
  • Manufacturing of commodities.
  • Trade: Buying goods in one location/country and selling them in another.
  • Construction of buildings, roads, bridges, etc.
  • Providing services such as ticketing, warehousing, transportation, banking, and insurance.
• Most business activities involve the production/processing or distribution of goods and services.

Business Activities

• Industry
  • Primary
    • Extractive
    • Genetic
  • Secondary
    • Manufacturing
    • Construction
  • Tertiary or Service
• Trade
  • Commerce
    • Home
      • Wholesale
      • Retail
    • Foreign
      • Import
      • Export
      • Entrepot
  • Auxiliaries to trade
    • Transport
    • Communication
    • Warehousing
    • Insurance
    • Banking & Finance
    • Advertising

Objectives/Goals of Business

• Profit
• Growth
• Power
• Employee satisfaction & Development
• Quality Products & Services
• Market Leadership
• Joy of Creation
• Service to Society
• Good Corporate Citizenship

Business Objectives (Continued)

1. Profit:
   • The main goal for any business. Profit is the excess of income over expense.
   • $Profit = Income - Expense$
   • Serves as an incentive, motivator, productivity sustainer, and basis for growth.
2. Growth:
   • Business expansion in all areas over time.
   • Growth includes increased profit, revenue, capacity, employees, and employee prosperity.
3. Power:
   • Businesses possess resources like money, material, and manpower.
   • These resources grant economic and political power to owners and managers.
   • Enlightened businessmen use their power for societal good.
4. Employee Satisfaction and Development:
   • Employee satisfaction reflects contentment with their job.
   • Development enhances employee skills and knowledge.
   • Implementation includes labor welfare measures, safety and security, and training facilities.
5. Quality Products and Services:
   • Businesses that prioritize quality survive competition and lead the market.
   • Consistent quality fosters brand loyalty which is crucial for success.
6. Market Leadership:
   • Gaining and maintaining market leadership is challenging due to intense competition.
   • Factors include quality, cost, innovation, supply, and after-sales service.
7. Joy of Creation:
   • Businesses use strategies to transform ideas and innovations into useful products and services.
8. Service to Society:
   • Businesses are part of society and have obligations towards it.
   • Service is the primary objective for non-profit enterprises, and a secondary objective for profit-making ones.
   • Services include providing safe, quality goods at reasonable prices, employment, and ecological protection.
9. Good Corporate Citizenship:
   • Compliance with laws, tax payments, and care for employees and customers.

Definition of Business Environment

• Business Environment Definition:
  • "Business Environment refers to all external forces which have a bearing/relation on the functions of business.”
  • "Business environment refers to all the forces, elements and factors which influence the development, performance and outcome of a business”.
• Definitions by Experts:
  • Keith Davis: “the aggregate of all conditions ,events and influences that surround and affect business. ”
  • Bayord O.Wheeler: “ the total of all things external to firms and industries which affect their organisation and operation. ”
  • ArthurM. Weimer: “business environment encompasses the climate or set of conditions, economic, social, political or institutional in which business operations are conducted. ”

Business Environment

• Internal Environment
• External Environment
  • Micro Environment
  • Macro Environment

Internal Environment

• Internal factors are those within the company and under its control (tangible or intangible).
• These factors are assessed and categorized as strengths or weaknesses.
• Positive factors are strengths, while those hindering development are weaknesses.
• Numerous criteria are considered within the company.

Internal Environment Factors

1. Plans & Policies
2. Value Proposition
3. Vision, Mission, and Objectives
4. Human Resources
5. Financial and Marketing Resources
6. Corporate Image and Brand Equity
7. Plant/Machinery/Equipment (Physical assets)
8. Labor Management
9. Inter-personal Relationship with employees
10. Internal Technology Resources & Dependencies
11. Organizational structure
12. Quality and size of infrastructure
13. Task Executions or Operations
14. Financial Forecast
15. The founder's relationship and their decision-making power.

External Environment

• External factors are outside the company that affect its ability to function.
• Some elements can be influenced by company marketing, while others require adjustments.
• External environment comprises outside factors that impact business operations; the business must act or react to maintain operations.
• The external environment is broken down into:
  • Micro Environment
  • Macro Environment

Micro Environment

• Includes micro factors affecting business strategy, decision making, and performance.
• Consists of actors in the company’s immediate environment.
• Includes suppliers, marketing intermediaries, competitors, customers, and the public.
• Macro environment consists of larger societal forces affecting all actors in the micro environment.
• Micro environmental factors are more closely linked to the company than macro factors.
• Micro factors are specific to a firm.

Factors of Microenvironment

• Supplier
• Customer
• Labour
• Competitor
• Market intermediaries
• Public
• Employees
• Shareholder
• Media & Social media

Micro Environment Factors

1. Suppliers:
   • Important for smooth business functioning. They provide inputs like raw materials and components.
   • A reliable supply source is crucial.
   • Supply uncertainties increase costs due to high inventory maintenance.
   • Reasons for multiple supply sources:
     • Reduces risk associated with single supplier issues (strikes, lockouts, production problems)
     • Mitigates impacts of supplier attitude or behavior changes.
2. Customers:
   • Have a direct impact on the micro environment.
   • Customer categories include: industrial customers, retailers, wholesalers, government bodies, and foreign customers.
   • Businesses must understand customer needs and buying behavior.
   • Customer acceptance is influenced by economic and non-economic factors (attitudes, desires, expectations).
3. Labor:
   • In large organizations, workers are organized into trade unions.
   • Unions negotiate for higher wages, bonuses, and better working conditions.
   • They may pressure management and resort to tactics like strikes.
4. Competitors:
   • Play a vital role; businesses must adjust activities based on competitor behavior.
   • Types of competition:
     • Desire competition: Limited disposable income and many unsatisfied desires.
     • Generic competition: Competition among alternatives satisfying a particular desire.
     • Product form competition: Consumer choices between different forms of the product.
     • Brand competition: Competition between different brands of the same product.
5. Market Intermediaries:
   • Firms that help promote, sell, and distribute goods to final buyers.
   • Includes agents, merchants, physical distribution firms, marketing services agencies, and financial intermediaries.
   • Vital links between the company and customers.
   • Disruptions or wrong choices can be costly.
6. Public:
   • Any group with an actual or potential interest in or impact on an organization’s ability to achieve its interest.
   • Examples: Media, citizen, action, and local publics.
   • Actions by local publics can cause companies to suspend operations or minimize pollution.
   • Some public actions may cause problems, while others offer opportunities.
7. Employees:
   • Skilled employees contribute to achieving organizational goals.
   • Begins with hiring and continues through regular training and development.
   • Training helps employees work effectively to achieve organizational goals.
   • Low motivation and low-skilled employees can negatively impact sales.
8. Shareholders:
   • Influence the company, especially regarding investments and returns.
   • Demand for profit increases impacts business success in the long-run.
   • Maintaining strong relations with shareholders is vital for long-term success.
9. Media and Social Media:
   • Media actions can significantly impact an organization.
   • Maintaining good media relations is critical; some organizations have public relations departments.
   • Social media applications (Facebook, YouTube, Twitter, Instagram) are effective ways to reach customers and build a positive brand image.

Macro Environment

• Consists of major external and uncontrollable factors influencing decision making, performance, and strategies.
• These factors include: economic, demographic, legal, political, social, technological, and natural conditions.
• Macro forces are generally more uncontrollable than micro forces.
• Company success depends on adapting to the environment.
• For example, domestic manufacture may be a solution to increased import costs due to currency depreciation.
• Companies operate within a larger context called the Macro Environment.
• This environment shapes opportunities but also poses threats.

The Macro Environment: DESTEP Model

The Macro Environment consists of 6 different forces or factors:

• Political forces
• Ecological forces
• Demographic forces
• Technological forces
• Economic forces
• Socio-Cultural forces

Macro Environment Factors (Continued)

1. Demographic Forces:
   • Relate to people and human populations (size, income distribution, age, gender, family size, family life cycle, education, religion, race, nationality, social class, occupation, etc.).
   • People are the driving force for market development due to their needs.
   • Large and diverse demographics offer both opportunities and challenges.
   • Marketers should monitor demographics closely as changing demographics mean changing markets.
2. Economic Forces:
   • Affect consumer purchasing power and spending patterns.
   • Important criteria: GDP, GDP real growth rate, GNI, Import Duty rate and sales tax/VAT/GST, unemployment, inflation, disposable personal income, and spending patterns.
3. Socio-Cultural Forces:
   • Affect society’s basic values, preferences, and behaviors.
   • Formed by people's cultural and societal group memberships that shape their beliefs and values.
   • Cultural blunders occur when businesses fail to understand foreign cultures.
4. Technological Forces:
   • Create new technologies and market opportunities.
   • Wireless communication, smartphones, and tablets are examples.
   • Every new technology replaces an older one.
   • Marketers must adapt to the technological environment to avoid outdated products.
5. Ecological Forces:
   • Relate to natural resources needed as inputs by business activities.
   • Environmental concerns have grown strongly.
   • Companies should be aware of world, air, and water pollution.
   • Important trends include raw material shortages and the need for renewable resources.
   • Companies need to consider and implement environmental sustainability.
   • This includes using renewable energy sources and responding to consumer demands for environmentally responsible products.
6. Political Forces:
   • Limit every business through laws, government agencies, and pressure groups.
   • Marketing decisions are influenced by developments in the political environment.
   • Before entering a new market, companies should know about its legal and political environment.
   • Laws covering environmental protection, product safety, competition, and pricing might require adaptation.

Environment Analysis

• A process of identifying relevant variables and analyzing them to understand their impact on the organization.
• Vital for business success and is a strategic tool.
• Identifies all external and internal elements that can affect an organization’s performance.
• Assesses the level of threat or opportunity factors might present.
• Involves four processes: scanning, monitoring, forecasting, and assessment.

Techniques of Environment Analysis

1. SWOT Analysis
2. PESTEL Analysis

Techniques of Environment Analysis - SWOT

1. SWOT Analysis

• SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.
• Strengths and weaknesses are identified by analyzing the internal environment.
• Opportunities and threats are identified by analyzing the external environment.
• SWOT analysis can be modified into TOWS (Threats, Opportunities, Weaknesses, and Strengths).
• Strengths
  • What an organization excels at and what separates it from the competition.
  • Examples: a strong brand, loyal customer base, a strong balance sheet, unique technology.
• Weaknesses
  • What stops an organization from performing at its optimum level.
  • Areas where the business needs to improve to remain competitive.
  • Examples: a weak brand, higher-than-average turnover, high levels of debt, an inadequate supply chain, or lack of capital.
• Opportunities
  • Favorable external factors that could give the organization a competitive advantage.
  • For example, reducing tariffs in a country enables a car manufacturer to export its cars into a new market.
• Threats
  • Factors that have the potential to harm an organization.
  • Examples: a drought impacting a wheat-producing company, rising costs for materials, increasing competition, or a tight labor supply.

Techniques of Environment Analysis - PESTLE

2. PESTLE Analysis

• PESTLE (or PESTEL) analysis consists of various factors that affect the business environment.
• Each letter signifies a set of factors that can affect every industry directly or indirectly.
  • P - Political factors
  • E - Economic factors
  • S - Social factors
  • T - Technological factors
  • L - Legal factors
  • E - Ecological factor
• Managers sometimes use PEST analysis, focusing on political, economic, social and technological factors.
• Other acronyms for the same set of factors include STEP, STEEP, STEEPLE, STEPLED, STEPJE and LEPEST, some of which gauge additional factors like ethical and demographical factors.