External Environment

External Environment:

Companies operate in the external environment that forces and shape opportunities as well as threats. These forces are not controllable by the company.  Only after the careful analysis of these factors the business policy can be formulated. The external business environment consists of macro environment and micro environment.

Environmental components are multidimensional and often complex in nature. There is a close relationship among various elements of business environment. It can be classified on the basis of time such as past, present and future environment. Similarly, on the basis of place it can be local, regional, or national environment. On economic basis it is of two types; economic and non-economic environment. The environment can also be classified into micro and macro environment.

It is clear  the micro as well as macro environment consists of many factors interacting and influencing each other. Some of these factors are beyond the control of the company. The penalty of ignoring environmental factors is heavy. It not only reduces profit margins and retards further growth of the company but it also arouses social hostility, which makes it increasingly difficult for a company to function. We will now discuss these factors in detail. 

(a) Micro Environment of Business:

The Microenvironment includes those factors, which are interacting with business frequently and are seen around. These are very closely related to business. These are:

(i)     Suppliers: Suppliers provide resources needed by the company to produce the particular goods and services. They also supply factors of production including labour, equipments, and machineries. The growth and smooth functioning of a company depends very much on supplier’s environment. The management should constantly keep an eye on the changes in supply conditions. Rising supply costs may face a price increase that may affect sales. Further supply shocks may badly affect the production schedule and company may fail to fulfil its promises to customers, exports etc. which might damage goodwill of the company in future dealings.

(ii)   Company: The working in a company is divided into various departments. All these departments and their activities are interlinked into a chain. For smooth functioning, it is essential that all these work in perfect harmony for accomplishing the objectives of the company.

(iii)  Market: Intermediary Firms: These firms help the company in marketing selling advertising etc.  its product to the final buyers. These are called intermediary firms as they help the company as an intermediary. The company management has to keep good relations with all these intermediaries for the successful operations of business.

(iv)  Customers: Company produces goods and services for the customers. It is essential to gather information through market research about the taste, habits, and desires of the customers. The final consumers are classified in to households, firms, government, international buyers, and retail stores.

(v)   Competitors: Every company faces a wide range of competitors, such as desire competitors: i.e., is the immediate desire that the consumer might want to satisfy; generic competitors: the different ways of satisfying desires; form competitors; and brand competitors. These competitors are the available alternatives in the market. If the company is unaware of their competitors, they may pose a threat to the company’s business in future.

(vi) Public: Public is the interest group. A public can help or hurt a company’s efforts to serve the market. “A public is any group that has an actual or potential interest in or impact on an organisation’s ability to achieve its objectives”. A company is surrounded by seven types of public:   a.    Financial Public, b.    Media Public, c.    Government public, d.    Local public, e. Customer groups or consumer organisations, f. public, and g. Internal public

(vii)  Types of Ownership: Modern Businesses are conducted by the following types of ownership: i) Sole Proprietorship, ii) Partnership, iii) Joint stock Companies or Corporation, iv) Cooperative firms, and v) Trusteeship firms.

(viii)   These above constituents of the micro environment of a firm or company operate in a larger macro environment of forces. After discussing the components of micro environment we shall now discuss the components of macro-environment.

(B)  Macro Environment of Business

The six basic macro environment of business are: Natural Environment, Demographic Environment, Social and Cultural Environment, Political Environment, Legal Environment, and Technological Environment. As stated earlier macro factors are generally more uncontrollable than the micro factors. It will be better to discuss these factors in detail in my next blog.