Business Environment – factors



What is business environment?

It refers to conditions or factors that affect business operation. These factors could be within the business (internal environment) or from outside the business (external)

The Environmental Factors may be classified as:

1. Internal Factors

2. External Factors

Classification of External Factors :
Micro Factors & External Macro Factors
External Micro Factors:

1. Suppliers: They are the people who provide the necessary resources needed to produce goods & services. Policies of the suppliers have a significant influence over the marketing manager’s decisions because it is laborers, etc. A company must build friendly & long-term relationship with suppliers.
2. Marketing Intermediaries: They are the people who assist the flow of products from the producers to the consumers; they include wholesalers, retailers, agents, etc. These people create place & time utility. A company must select an effective chain of intermediaries, to make the goods reach the market in time. The middlemen give necessary information to the manufacturers about the market. If a company does not satisfy the middlemen, they neglect its products & may push the competitor’s product.

3. Consumers: The main aim of production is to meet the demands of the consumers. Hence, consumers are the center point of all marketing activities. If they are not taken into consideration, before taking the decisions, the company is bound to fail in achieving its objectives. Its target consumer influences a company’s marketing strategy. E.g., If a manufacturer wants to sell to the wholesaler, he may directly sell to them, if he wants to sell to another manufacturer, he may sell through his agent, or if he wants to sell to the ultimate consumer, he may sell through wholesalers or retailers. Hence each type of consumer has a unique feature, which influences a company’s marketing decision.
4. Competitors: A prudent marketing manager has to be in constant touch regarding the information relating to the competitor’s strategies. He has to identify his competitor’s strategies, build his plans to overtake them in the market to attract competitor’s consumers towards his products.

Any company faces three types of competition:


a) Brand Competition: It is a competition between various companies producing similar products. E.g., The competition between BPL & Videocon companies.
b) The Product Form Competition: It is a competition between companies manufacturing products, which are substitutes to each other Eg: Competition between coffee & Tea.
c) The Desire Competition: It is the competition with all other companies to attract consumers towards the company. E.g., The competition between the manufacturers of TV sets & all other companies manufacturing various products like automobiles, washing machines, etc.

Hence, to understand the competitive situation, a company must understand the nature of market & the nature of customers. Nature of the market may be as follows:
I. Perfect Market
II. Oligopoly
III. Monopoly
IV. Monopolistic Market
V. Duopoly

5. Public: A Company’s obligation is not only to meet the requirements of its customers but also to satisfy the various groups. The public is defined as “any group that has an actual or potential ability to achieve its objectives.” The significance of the influence of the public on the company can be understood by the fact that almost all companies maintain a public relation department. Positive interaction with the public increase its goodwill irrespective of the nature of the public. A company has to maintain cordial relation with all groups, the public may or may not be interested in the company, but the company must be interested in the views of the public.

Public may be various types. They are:

a. Press: This is one of the most important groups, which may make or break a company. It includes journalists, radio, television, etc. Press people are often referred to as unwelcome public. A marketing manager must always strive to get positive coverage from the press people.
b. Financial Public: These are the institutions, which supply money to the company. E.g., Banks, insurance companies, stock exchange, etc. A company cannot work without the assistance of these institutions. It has to give the necessary information to this public whenever demanded to ensure that timely finance is supplied.

c. Government: Politicians often interfere in the business for the welfare of the society & for other reasons. A prudent manager has to maintain good relationships with all politicians irrespective of their party affiliations. If any law is to be passed, which is against the interest of the company, he may get their support to stop that law from being passed in the parliament or legislature.
d. General Public: This includes organizations such as consumer councils, environmentalists, etc. as the present day concept of marketing deals with social welfare, a company must satisfy these groups to be successful.

External Macro Environment:

These are the factors/forces on which the company has no control. Hence, it has to frame its policies within limits set by these forces:

1. Demography: It is defined as the statistical study of the human population & its distribution. This is one of the most influencing factors because it deals with people who form the market. A company should study the population, its distribution, age composition, etc. before deciding the marketing strategies. Each group of the population behaves differently depending upon various factors such as age, status, etc. if these factors are considered, a company can produce only those products which suits the requirement of the consumers. In this regard, it is said that “to understand the market you must understand its demography.”

2. Economic Environment: A company can successfully sell its products only when people have enough money to spend. The economic environment affects a consumer’s purchasing behavior either by increasing his disposable income or by reducing it. E.g., During the time of inflation, the value of money comes down. Hence, it is difficult for them to purchase more products. The income of the consumer must also be taken into account. E.g., In a market where both husband & wife work, their purchasing power will be more. Hence, companies may sell their products quite easily.

3. Physical Environment or Natural Forces: A company has to adopt its policies within limits set by nature. A man can improve quality but cannot find an alternative for it.
Nature offers resources but in a limited manner. A product manager utilizes it efficiently. Companies must find the best combination of products for the sake of efficient utilization of the available resources. Otherwise, they may face an acute shortage of funds. E.g., Petroleum products, power, water, etc.
4. Technological Factors: From the customer’s point of view, improvement in technology means an increase in the standard of living. In this regard, it is said that “Technologies shape a Person’s Life.”
Every new invention builds a new market & a new group of customers. New technology improves our lifestyle & at the same time creates many problems. E.g., Invention of various consumer comforts like washing machines, mixers, etc. have resulted in improving our lifestyle, but it has created severe problems like power shortage.
E.g., Introduction to automobiles has improved transportation, but it has resulted in problems like air & noise pollution, increased accidents, etc. In simple words, the following are the impacts of technological factors on the market:

a) They create new wants
b) They create new industries
c) They may destroy old industries
d) They may increase the cost of Research & Development.
5. Social & Cultural Factors: Most of us purchase because of the influence of social & cultural factors. The lifestyle, values, believes, etc. are determined, among other things by the society in which we live. Each society has its own culture. Culture is a combination of various factors which are transferred from older generations & which are acquired. Our behavior is guided by our culture, family, educational institutions, languages, etc.

The society is a combination of various groups with different cultures & subcultures. Each community has its behavior. A marketing manager must study the society in which he operates.
Consumer’s attitude is also affected by their society within a society. There will be various small groups, each having its own culture.
E.g., In India, we have different cultural groups such as Assamese, Punjabis, Kashmiris, etc. The marketing manager should take note of these differences before finalizing marketing strategies.
Culture changes over a period of time. He must try to anticipate the changes new marketing opportunities.

The Political/Legal environment

The government closely monitors businesses and passes laws and policy that regulate their activities. Many business decisions are hence only after careful analysis consequences of these laws and policies. For example, a business person may opt to invest in area A instead of area B because area A has tax advantages, like lower tax rates or even no taxes for a given period. Firms are required by law to sell goods that meet specific standards. For example, those manufacturing foodstuff and drugs are required to state their expiry dates. On the other hand, political stability creates a conducive environment for business to thrive. Moreover, in a situation where the political climate is a hostile or unfavorable business cannot do well.

Internal Factors Affecting the Performance of a Business

Your marketing plan addresses a variety of external factors that determine how consumers will view and accept your product or service. Solving that piece of the puzzle isn’t the only requirement for a profitable business, however. If consumers are clamoring for what you sell, but you can’t deliver it efficiently, you’ll lose opportunities to grow, expand, maximize your products, and even keep your doors open. Knowing what internal aspects of your operation to keep on top of will help you run the most profitable business possible.


No matter what policies and procedures you implement to build a strong organization, people must manage them. The most critical internal factor that affects how your business performs is your people. Create a long-term organization chart to help you build the most efficient staff. Use a human resources professional to help you attract, hire and retain employees. Provide ongoing training, including management, communications and leadership seminars for your managers and continuing education and training for your workers. If you can’t afford a full-time human resources person, meet with an HR firm to create plans to build and manage your staff, and perform quarterly audits of your efforts.


Many of the decisions you make regarding your business depend on accurate financial reports to guide you. Even if your accountant is correct, if you have limited data, such as from an annual budget, general ledger or bank statements, you won’t be able to set optimal prices, manage your overhead and production costs and maintain adequate cash flow. Create a financial reporting system that includes profit-and-loss statements, an up-to-day balance sheet, receivables, and payables reports, cash flow projections, debt tracking, and budget variance analyses.


The more up-to-date your computers, software, phone systems, faxes and copy machines, the more efficient and productive your staff will be. Solicit input from your staff regarding what tools they feel will help them perform better. In addition to keeping current with technology, keep your employees trained in using what you provide them. From time to time, look at the equipment you use to make your product and determine if new machinery can help you manufacture quicker, with higher quality and at a lower cost than you are now.


One reason many small businesses fail is a lack of adequate capital. For example, you might have good sales but slow receivables. If you don’t have adequate cash reserves or access to credit to pay your bills while you wait for customers to pay invoices, you might lose access to your suppliers, have to cut back on marketing or take out costly loans to make payroll. Work with your financial manager to create internal controls that help you maintain adequate working capital.

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