There two major types of business environments are:
1. Micro-environment
- Internal environment
- Immediate External environment
2. Macro-environment (Remote or General external environment)
Micro-environment
Also referred to as task environment or operating environment, Micro Environment is the environment comprising all factors that directly bear on the firm’s regular business operations. It is divided into internal and immediate external environments.
- Internal business environment
The internal environment is composed of various elements present inside the organization that can affect or affect the choices, activities, and decisions of the organization. These are factors that the management has complete control over and are determined and influenced by the administration. The internal business environment can also be defined as the factors within an organization that can influence the organization’s decisions. The Internal environment factors are well summarized by Mc Kinsey 7Ss Strategy Model but are highlighted as below:
- Vision, Mission, and Objectives: The company’s vision describes its future position. The mission defines the company’s business, and the reason for its existence and objectives imply the ultimate aim of the company and the ways to reach those ends.
- Organizational Structure: The organization’s structure determines how activities are directed in the organization to reach the ultimate goal.
- Corporate Culture: The organization’s values, beliefs, and behavior that ascertains how employees and management communicate and manage external affairs.
- Human Resources: Human resource is the most valuable asset of the organization, as the success or failure of an organization depends on the organization’s human resources.
- Physical Resources: These are the tangible assets of the organization that play an essential role in ascertaining the company’s competitive capability.
- Technological capabilities imply the technical know-how of the organization.
- Members: These include the board, management, employees, owner, etc
This can further be best explained by Mc Kinsey’s 7Ss Strategy.
The 7S Model has 7Ss that are classified as “hard” and “soft” elements. The management can easily identify and influence the hard elements, whereas the corporate culture influences soft elements, which are intangible. The hard elements are as follows:
- Strategy
- Structure
- Systems
The soft elements are as follows:
- Shared values
- Skills
- Style
- Staff
Organizations utilize the framework as a strategic planning tool to highlight how seemingly separate business components are actually interconnected and reliant on one another to achieve overall success. The factors are discussed as below:
- Strategy: An organization’s strategy is its blueprint to remain competitive in its industry and market. Establishing a long-term plan that is aligned with the other aspects of the Model and clearly expresses the organization’s mission and goals is an excellent method.
- Structure: The organization’s corporate hierarchy, chain of command and divisional makeup define how the operations function and interconnect. It essentially lays out the management structure and worker obligations.
- Systems: The daily procedures, workflow, and decisions that make up the everyday operations within the corporation are referred to as company systems.
- Shared values: Shared values are the company’s generally acknowledged standards and conventions that impact and moderate the behavior of all employees and management. This might be spelled out in company guidelines distributed to employees. In practice, shared values refer to the behavior that is expected in the workplace.
- Skills: The talents and capacities of an organization’s employees and management define the types of accomplishments and work that can be accomplished. There may come a moment when a corporation evaluates its available talents and determines that it needs to make adjustments to meet its strategy’s objectives.
- Style: Style refers to how management leads the organization by example and approach, as well as how this affects performance, productivity, and corporate culture.
- Staff: The term “staff” refers to the company’s employees, as well as the size of the workforce, their motivations, and how they are trained and prepared to complete the tasks at hand.
- Immediate external business environment
These are factors outside the business boundaries, but with a direct effect on the business and business decisions, the management has some control but not full power as it can only influence. The factors include:
- Customers and Consumers – Customers are buyers, while consumers are ultimate users of the company’s products. They directly affect company decisions, and the management can only influence but not control them.
- Competitors – These are organizations that compete for either or both resources and markets. They affect company decisions directly.
- Market – The market is much more than the sum of all the customers. The organization must study the market in terms of its actual size, the potential for growth, its attractiveness, Price Sensitivity of the market, the existing distribution system of the market, maturity of the market, etc. They directly influence decisions.
- Suppliers – Suppliers can influence the industry’s cost structure and are a significant force in determining management decisions.
- Intermediaries – Most customers are unaware of the manufacturer of the products they buy since they approach retailers, departmental stores, chain stores, or online stores. Their availability has a direct impact on decisions.
- Media – Media management, whether electronic media, press media, or social media, is essential for image and reputation. This has a direct effect on company sales.
Macro-environment/ Remote External Environment
Also called the external environment, it is the overall broader and remote environment that affects how all businesses operate, which, in turn, affects the economy as a whole. Macro environment forces affect the larger economy, and the management does not have any control over these factors as they affect the entire population. These factors are best explained by the PESTEL/DEPEST Model as summarized.
- Political Factors which is the attitude the government has towards the business
- Economic Factors relate to forces that affect how consumers spend and their purchasing power. It is essential to understand a variety of metrics and data, including Gross Domestic Product (GDP) and its real growth rate, Unemployment rates, Inflation, Disposable personal income Existing spending patterns, among others.
- Socio-Cultural Factors shape the individuals in such matters as how to spend their money. They include age, gender, size, occupation, and need.
- Technological Factors refer to creating new technologies and how they shape products, product development, and access to new market opportunities.
- Ecological Factors are natural forces that shape the environment, such as ease of access to natural resources used in production, pollution, etc.
- Legal factors refer to the laws and regulations that dictate both the industry it operates in and any specific rules it may be subjected to.