Every business faces two types of environments simultaneously i.e Internal Environment and External Environment.

1. INTERNAL ENVIRONMENT

All those factors within an organization which impart strengths or cause weaknesses constitute the internal environment. These factors can be controlled by business but they are quite important in shaping the
behaviour of people working in it. Hence, managers have to take internal factors into account while taking actions.

2. EXTERNAL ENVIRONMENT

All those factors outside the organization which provide opportunities or pose a threat to the organization make up the external environment.

These factors are those over which the business organization has no
control.

According to William Glueck and Jauck

“In environment there are external factors, which constantly bring opportunities and threats to the business firm. In includes Economic, Social, Technological and Political conditions.”

Examples of situations that may cause change in the external environment include:

(i) Improvement in production techniques
(ii) Fluctuations in the levels of demand
(iii) Fluctuations in interest rates
(iv) Changes in laws and regulations
(v) Changes in taxation
(vi) New social trends, fashions or life styles
(vii) International influences

TYPES OF EXTERNAL ENVIRONMENT

MICRO ENVIRONMENT

Micro environment consists of factors in the company’s immediate environment that affect the performance of the company. These include the suppliers, marketing intermediaries, competitors, customers and the public.

According to Philip Kotler
“The micro environment consists of factors in the company’s immediate environment which affect the performance of the business unit. These include suppliers, marketing intermediaries, competitors, customers and the public.”

According to Hill and Jones
“The micro environment of a company consists of elements that directly affect the company such as competitors, customers and suppliers.”

MICRO ENVIRONMENT

1. Suppliers
Suppliers are important for any business unit. Suppliers are those who supply the inputs like raw material and components to the company. Organizations should keep two things in mind regarding suppliers:

Reliability
Multiple suppliers

2. Customers or clients
A business exist only because of its customers. Hence, a major task of a business is to create and sustain customers. Monitoring the customer’s sensitivity is a pre-requisite for business success.
A company may have different types of customers
(i) Individual and household customers
(ii) Government bodies
(iii) Foreign customers
(iv) Retail customers
(v) Wholesale customers
To succeed in capturing and sustaining customers, following points must be kept in mind:

(i) Buyer’s behaviour data can be used in constructing a customer profile.
(ii) Geographical factors should also be analyzed to know the opportunities and threats.
(iii) In the era of free trade, foreign customers can be attracted by making such products which can compete with foreign products.
(iv) Single customer of a company is full of risks as it places the company in a poor bargaining position.
(v) The business firm should make separate products for separate segments. Following can be the basis of segmentation:
(a) Income level of customers
(b) Age of customers
(c) Personality and life style of customers
(d) Tastes and preferences of customers
(e) Quantity to be purchased by customers
(f) Education level of customers

3. Competitors
Competitor means other business units which are making similar products or a very close substitute of our product. Competitors play a vital role in running the business enterprise. Business has to adjust its various activities according to the behaviour of the competitors.

4. Market Intermediaries
Every business enterprise may be assisted by market intermediaries which include agents, brokers who help the company find customers. It is a link between company and final consumer. Market intermediaries help the company to promote, sell and distribute its goods to final buyers.
Examples: Wholesalers, retailers, advertising agencies, consultancy firms, banks, insurance companies, warehouse, transport agencies etc.

5. Public
Public is any group that has actual or potential interest in the business. To achieve this interest, it has its impact on the business. Public includes users and non-users of the product like Environmentalists, NGOs, Local Community, Media.

EXTERNAL ENVIRONMENT

A company and the forces operate in a larger Macro environment that shape opportunities and pose threats to the company. These factors are generally more uncontrollable than the micro forces.

According to Philip Kotler
“Macro environment includes forces that create opportunities and pose threat to the business unit. It includes economic, demographic, natural, technological, political and cultural environments.”

According to Hill and Jones
“The macro environment consists of the broader economic, social, political, legal, demographic and technological setting within which the industry and the business units are placed.”

1. ECONOMIC ENVIRONMENT
Economic environment consists of economic factors that influence the business in a country. It is very complex and dynamic in nature that keeps on changing with the change in policies or political situations.

Key components of economic environment are:

(A)Economic Conditions of Public
(B) Economic Policies
(C ) Economic System

2. POLITICAL-LEGAL ENVIRONMENT

Political environment affects different business units significantly. A stable and dynamic political environment is essential for business growth. Whenever there is a change in the Government in a democratic country, it is a sign of change in economic policies. The Political environment of business depends on:

1. Ideology of the Government
2. Political Establishment
3. Political Stability in the country
4. Relations with other countries
5. Defense and Military Policy
6. Centre State Relationship
7. Approach of Opposition parties towards business

LEGAL ENVIRONMENT

Legal environment constitutes the laws framed by the Government and various legislations passed in the parliament. The businessman cannot overlook the legislations because he has to perform his business transactions with in the framework of legal environment. Every aspect for business is regulated by law in India. Government has also framed legislations which regulate and control the business.

Some of the main legislations regulating the business are as follows:

1. Industrial Dispute Act, 1947
2. Factories Act, 1948
3. Consumer Protection Act, 1986
4. Companies Act, 1956
5. Foreign Exchange Management Act 1999
6. Securities and Exchange Board of India Guidelines, 2000

3. SOCIAL & CULTURAL ENVIRONMENT
Business is an integral part of society and both influence each other. Influence exercised by social and cultural factors is known as socio-cultural environment. These factors include: attitude of people, family system, caste system, religion, education, marriage, habits and preferences, languages, urbanization, customs and traditions, ethics etc.

4. TECHNOLOGICAL ENVIRONMENT
A systematic application of scientific knowledge is known as technology. Everyday there are vast changes in products, services, lifestyles and living conditions, these changes must be analyzed by every business unit and should adapt these changes.

5. DEMOGRAPHIC ENVIRONMENT
Demographic environment refers to the study of the features of population i.e. size of population, growth rate, gender ratio, age composition, income level, education level, family size, family structure etc. All these factors affect size of demand, tastes, fashion, liking, preferences of consumer etc.

6. NATURAL OR ECOLOGICAL ENVIRONMENT
It includes geographical and ecological factors such as natural resources, weather and climatic conditions, port facilities, topographical factors such as soil, rivers, rainfall, pollution etc. Every business unit must look for these factors before choosing the location for their business.

7. INTERNATIONAL/ GLOBAL ENVIRONMENT
International environment is important for industries directly depending on import and export. A recession in foreign market or protection policy by foreign nations may create difficulties for industries depending on exports. Liberalization of import may help some industries but may adversely affect other industries.

Following factors of International environment affect business:

1. Globalization
2. Liberalization
3. International agreements and declarations
4. International terrorism
5. Cultural exchange