Component or Classification of Business Environment

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Component or Classification of Business Environment
Component or Classification of Business Environment

Component / Classification of Business Environment

The business environment is composed of the events and conditions inside as well as outside the organization. Hence, it may broadly be classified into internal and external environments as discussed below.

Internal Environment

The internal environment consists of the conditions and resources which are internal to an organization. It is also called the firm or resource environment. The internal environment is controllable to the firm in the long run. It determines the relative strengths and weaknesses of the firm. Strengths are the positive internal characteristics that the organization can exploit to achieve its strategic goals. Weaknesses are internal characteristics that might inhibit or restrict the organization’s performance. Understanding how to leverage the firm’s internal components is a key issue of decision-makers. A sound internal environment helps create a competitive advantage that leads a business towards the way of goal achievement.

Elements of Internal Environment

There are different components or elements that form the internal environment of an organization. They are mentioned below.

1. Organizational goals and policies: 

Goals are the long-term desired outcomes of an organization. They are the end results. All the organizational activities are directed towards the achievement of goals. Profit growth, market growth, and social responsibility are some of the goals of a business.

Policies are broad guidelines for organizational activities, they bring coordination among the organizational units or departments.
An organization with precise and well-communicated goals and policies is regarded as stronger.

2. Organizational resources: 

Resources are the foundation for strategy. They are inputs into a firm’s production process, such as capital, equipment, employee skills, patents, and finance. The unique bundles of resources generate competitive advantages, resource management is very important in strategic management. Resources may be tangible and intangible.

Tangible resources: They can be seen or touched. The following are some of the tangible resources.

  • Financial resources: Fund acquisition capacity, and internal fund generation capacity.
  • Organizational resources: Information, structure, formal planning, organizing, control, and coordination.
  • Physical resources: Layout of machine and equipment, and access to raw material.

Intangible resources: They cannot be seen or touched. Following are some of the intangible resources.

  • Human resources: Knowledge, skill, capability, and leadership.
  • Innovation resources: Tactics, and innovation capacity.
  • Reputational resources: Customer relationship, brand loyalty, quality, and reliability.

3. Organizational structure: 

Organizational structure specifies jobs and relationships. It defines job allocation, responsibility, and accountability. A clear and swift organizational structure is very important for the implementation of a particular strategy.

4. Organizational culture: 

The shared value, norms, behavior, and belief of an organization is collectively known as organizational culture. It refers to the complex set of ideologies, symbols, and core values that are prevalent throughout the firm. It influences how the firm conducts business. Culture is the social energy that drives the organization.

External environment

The external environment of a business comprises the factors which are external to a firm. Firms must be aware of and fully understand the different segments of the external environment to deal with uncertainty and achieve strategic competitiveness. Firms understand the external environment by acquiring information about competitors, customers, stakeholders as well as other conditions. The external environment of the firm is composed of operating and remote environments. The operating environment consists of stakeholders as customers, shareholders, suppliers, media, government, pressure, groups, and financial institutions. Similarly, the remote or general environment includes political, economic, socio-cultural, technological, legal, and global forces.

Elements of the external environment

The external environment is composed of the conditions that are outside the business. They are not normally influenced by a business. The external environment of a business may be further divided into two groups.

a. General/Remote/Macro Environment
b. Operating/Task Environment

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