What is Business Environment? Internal & External Business Environment

In today’s fast-paced business environment, it is very important that you have a sound understanding of your immediate business environment. In order to shake up the industry, you need to see the competitive landscape clearly first. And that is possible by being up to date on what others are doing.

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Definition of Business Environment:

The literal definition of an organization’s business environment includes a superset of both internal and external factors that influence the operations of a company on the ground in all the facilities it operates. Business environment is a very wide term including suppliers, wholesalers, retailers, vendors, employees, consultants, directors. Some management gurus even include the kind of technology used and management practices followed like kaizen as part of the business environment.

What is Business Environment?

The difference between a successful and failed enterprise is quite often attributed to a lack of supportive ecosystem.

America has 40% of the world’s wealth as entrepreneurs can create a very big company in a small span of time owing to a super supportive ecosystem. In other countries, similar ideas do not fructify into cash-generating businesses as infrastructure and regulatory bottlenecks pose an obstacle.
The best talent also flows to western countries as it gets higher rewards. If you study in the east, your investment will be x and returns will be 2x but in the west, returns are 4x or 8x.

Let us now list out the components of a business environment as organization are open systems and not closed ones as most people think.

Internal Business Environment:

Your internal business environment consists of your employees, peers on the management board, suppliers, vendors and all people engaged in the development of product or service. You must be fully transparent with your internal stakeholders including your shareholders and debenture holders. Be honest with them about the revenue guidance, business challenges, competitive landscape.

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Being honest does not mean highlighting your weaknesses but giving a clear-cut position of your company so that they do not receive any surprises and repose faith in you during periods of slow growth. Companies that have been honest with their internal stakeholders often see more investments when the profit graph is going down which can be used to cover business expenses during a downturn.

External Business Environment

This can be very challenging as the more territories you cover; the greater degree of complexity enters your business. Language issues, weather issues, topography issues suddenly rear their head making it hard to deliver your product or service. Regulations differ in states and countries and you need to have a very ingenious manpower to solve critical challenges at every step.

Importance of Business Environment

Having a supportive business environment is important for businesses to prosper. When communism was at its peak after the World War, being wealthy was looked down upon as evil as imperialism and the pursuit of wealth had brought destruction to all corners of the globe.

But now wealth is celebrated. Earlier people wanted to become job seekers, today they want to become job creators by starting up their own businesses. It’s a healthy trend that needs both push and protection from the government. Big companies have become stagnant in terms of hiring and in most economies of the world, a jobless recovery is what you can see in the near term.

Tools to analyze the business environment

There are several tools offered by management gurus to help executives decipher their immediate business environment. And obtain actionable insights to CXO’s help emerge as better decision makers. There are times when businesses are faced with challenges that are beyond the control of the business.These include socio, political, legal and technological factors that need to be factored in during decision making. They can greatly affect the functioning of a business.

SWOT Analysis: An acronym for strength-weakness-opportunity-threat analysis. It is by far the most used and over-used tool to determine business strategy. About two hundred years back managers used to compare balance sheets of their competitors to determine the course to adopt but this lateral thinking approach changed the business landscape forever.Identifying areas for growth and expansion can be best done through this tool.
BCG Matrix: That considers the life-cycle of the product to help in decision making. It plots the life-cycle of the product from start to end and the investments which need to go in the brand building and product development at each stage.
There are other theories like the PARETO Principle which states that 80% of the business is supplied by 20% of the customers. It is a very important tool in terms of market segmentation and helps in targeting the right set of consumers to cater to.
Peter Principle: which states that employees rise to their level of incompetence is as important today as it was a century ago. And so is the Maslow need hierarchy theory that defines needs in order of importance. Employee achievement can often be defined through these two triggers.

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As a business manager, you need to keep in mind that the business environment is continuously changing. To win, most of the time, you need to adapt swiftly to the changing business environment. Only those entities that are the most adaptable to change can survive.

Another pesky issue faced by global managers is that the environment of one country is radically different from the other. For example business situation in South, Asia is more stable than Middle-east. Conducting business becomes a huge challenge then. Environmental analysis becomes a force multiplier in such a scenario and can help a manager steer the business in the right direction.

Sometimes a better software can save a business by streamlining operations and plugging leakages. And the expense incurred can be treated as an investment in the future of the enterprise.Threats from suppliers and vendors also need to be taken into account before rolling out the product in the market. If adequate demand pull for your product is there in the market, then there are fewer chances that suppliers will cut off supply as long as you pay them on time and retain their trust.

Reputation management is important for retaining and preserving the business environment. Social media plays a huge role in helping businesses keep their image and meet the objectives of the business as outlined in the mission statement. The mission statement is required at the incorporation stage of the company and reflects the long-term purpose of the company. Once the company has achieved critical mass in terms of employee numbers and revenue growth, it has to look backward and give back to the society of where it draws its wealth. Only then can it acquire legitimacy and widen the ambit of its customer base by winning the respect of consumers.

Even non-profits are acutely conscious of the business environment, they inhabit and they do a lot more to improve the business landscape by focusing on the basics so that companies can build on that sound and efficient social infrastructure. Social entrepreneurship is an offshoot of this phenomenon itself.

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So, you see that developing products and delivering them to millions of customers worldwide is possible only when you have a solid grip on your business environment.