TOPIC : INTERNAL ENVIRONMENT

AAYUSH RASTOGI
BBA (B&I)
00114901818
3rd SEMESTER
INTRODUCTION

The environment is something which surrounds a given system , an economy , an

industry or a business firm. It consists of a numerous external factors or forces affecting
the phenomenon directly or indirectly. The environment expands or contracts according
to the size of phenomenon it surrounds.
For example – As the size of a business firms increases the business environment will
contract. Consequently the area of influence of the firm will expand weakening the
impact of the external forces.
The combination of internal and external factors that influence a company's operating
situation. The business environment can include factors such as: clients and suppliers; its
competition and owners; improvements in technology; laws and government activities;
and market, social and economic trends.

Environment refers to “the total of all things external to firms and industries which affect
their organisation and operation.”
The environment is not merely uncertain on accoumt of technological dynamics, but also
be hostile until it is monitored and adopted properly.This calls for collection, storage, and
analysis of information. Larger business firms have ann edge over the smaller ones on
account of their better access to information.
Each business firms interacts with the environment for its survival, stability, and growth’
particularly in decision making under different market conditions. The prevailing
environment may act as either a stimulant or a constraint for the firm. The former is
favourable for the prospect of business.
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Nature Of Business Environment

 Related to Economic Activities

The main objective of the business is to earn profits.Hence, the business environment is
related to the economic activities of the person (entrepreneur) like trade, commerce,
industries, and direct services etc.
 Dynamic Concept
The business environment is the dynamic concept. The components of the environment
are also subject to change according to the country timings, circumstances, etc.
 Effects Various Factors
The business environment is affected by various factors.These factors are interrelated and
affect each other. Human factors, as well as physical factors, kept in control, but it is not
possible for mutual factors.
 Inter-Relationship
The business and its environment are interdependent and also have natural effects.The
entrepreneur or the owner of the business cannot overlook this environment and its
factors.
 The Market of Business
The environment of the business is the market of the business also because
every entrepreneur provides his products and services to this environment in he earns
income profits from environment alone.
 Effect of Economic Systems
Economic systems also affect the business environment. The business environment of
any particular country is in consonance with capitalist, communist, socialist, and mixed
systems, etc.For example, the public sector and private sector, both developed in India, as
the adoption of the mixed economy.
Privatization and the capitalist economic system is gradually effective.
 Internal and External Environment of the Institutions
Every enterprising institution has two types of environment. Internal and external.The
institution has control over its internal environment, but it has no control over the
external environment.
Hence, the business organization has to mold itself, according to the external
environment.
 Formulation of Working Plans
While planning a business institution formula that effectively achieves its objectives and
goals.During the formulation of these working plans, environment-related information is
kept into consideration.
 Creation of Utilities by Transformation
Whatever the business organization gets from the environment, is returned back to the
environment.In this process, he carries out the transformation of sources, by which
various types of utilities are created.The requirements and Expectations of the consumers
are satisfied by these utilities (form, place, time and rights).
 Two Way Communication Arrangement
Every business institution keeps regular contacts with its environment. It has to keep
knowledge of the ongoing changes and also has to provide information about its products
and services policies etc. to the environment.
This way, it has to adopt two-way communication arrangements.
 Complementary and Dependent
The entrepreneurial environment is the part of the total economic and non-economic
environment, within which entrepreneurship develop. Such conditions, favorable
entrepreneurial environment results in the creation of a favorable business environment.
Thus, it is evident the business environment and Entrepreneurial
environment complement each other and are also dependent on each other.
 Complicated System
The business environment is a complicated system, which is the outcome of various
factors or components of elements.Besides, they also affect the business activities in
various forms.
 Classifications of Boundary Lines, Controlling Factors, Pressures, and
Restrictions
The environment clarifies the boundaries, controlling factors, pressures, and restrictions,
within which the firm has to carry out its business activities.
Importance Of Business Environment

The survival and success of business firms depend on their preparedness to adapt to the
changing environment besides their inherent capabilities (financial , physical , human and
other resources). The firms which ignore the environment changes to fail to formulate
and implement business plans. Thus, they are unlikely to survive in the long run. While
the firms which systematically analyse and diagnose the environment are more effective.
Some of the advantages of knowledge of environment and changes therein are as follows:
 First Mover Advantage
Knowledge of environment helps a business firm to take advantage of early
oppurtunities instead of losing them to competitors. For example -Maruti Suzuki was
the first to recognise the requirement of small car by large middle class.
 Early warning signals
Awareness of environment gives an early warning signal of a crisis so that the firm
can take timely action to minimise its adverse impact , if any.
 Customer Focus
Understanding of environment enables the management to be sensitive to the
changing needs and expectatation of customers.
 Strategy Formulation
Persistent monitoring of business environment helps in getting information required
for strategy formulation. Accordingly, business firms can respond to the strategies of
the rivals as well as frame effective strategies to pose challenges for the competitors
through expansions , contraction , diversion , diversification or other changes in the
business.
 Change Leader
Business firms can act as a change leaders by creating a drive for change at the grass
root level. In order to decide the nature , magnitude or direction of change , business
firms as change agents have to understand the aspirations of the people by monitoring
the environment to identify oppurtunities and threats affecting their business. This
process is called as 'environmental scanning . With this , the firm can consider the
impact of various environment forces , issues , events and trends on its business
operations. By reducing uncertainities, they can eliminate procedural delays by
delegating authority.
 Public Image
An organisation can improve its image by being sensitive and responsive to the
expectation of people.
 Ongoing Learning
Environmental study serves as an ongoing learning process for the business leaders.
Such dynamic approach of understanding the broad- based changing scenario and
reacting timely as well as in appropriate manner makes the organisation successful.
Types of Environment

Business environment may be classified on the basis of time, space, market forces and
factors. One can think of past, present and future environment of business on the basis of
time. Based on ‘space’ we may think of local, regional, national and international
environment of business. ‘Market Forces’ of demand and supply or non –market
institutions like Government classify environment as market and non- market
environment of business. Further, environment can be economic and non-economic. This
most useful classification is external and internal environment.
The elements or forces within an individual firm effect its behaviour. These are by and
large within the control of decision making power of the firm. This forms the internal
environment including various functional areas like personnel, finance, marketing,
production, operational research and so on. On the other hand the external environment
includes forces, like shareholders , customers , creditors , suppliers , distributors ,
technology , ecology , society , government etc.
The strengths and weaknesses under SWOT analysis pertain to internal environment,
while oppurtunities and threats pertain to external environment. By and large, business
environment is external. With strengths , a firm can seize the opportunity and capitalise
on it. But weakness make the firm the victim of threat in the environment. The SWOT
analysis precedes the formulation of strategic planning and tactical decisions by the firm.

Internal Environment

A Business organization derives strength (the capability to gain strategic advantage over
its rival firms) from the internal environment. This environment also leaves weakness on
the firm that is constrant creating a strategic disadvantage.Changes in philosophy and/or
leadership style are under the control of the manager.
It encompasses the climate, culture, machines/equipment, work and work processes,
members, management and management practices.
Various internal factors which affect business decision are as follows :
 Value System
The value system of an organisation means the ethical beliefs that guide the organisation
in achieving its mission and objective. The value system of a business organisation also
determines its behaviour towards its employees, customers and society at large. The value
system of the promoters of a business firm has an important bearing on the choice of
business and the adoption of business policies and practices. Due to its value system a
business firm may refuse to produce or distribute liquor for it may think morally wrong to
promote the consumption of liquor.

The value system of a business organisation makes an important contribution to its

success and its prestige in the world of business. For instance, the value system of J.R.D.
Tata, the founder of Tata group of industries, was its self-imposed moral obligation to
adopt morally just and fair business policies and practices which promote the interests of
consumers, employees, shareholders and society at large.

Infosys Technologies which won the first national corporate governance award in 1999
attributes its success to its high value system which guides its corporate culture. Thus
value system of a business firm has an important bearing on its corporate culture and
determines its behaviour towards its employees, shareholders and society as a whole.

 Mission and Objectives

The objective of all firms is assumed to be maximization of long-run profits. But mission
is different from this narrow objective of profit maximization. Mission is defined as the
overall purpose or reason for its existence which guides and influences its business
decision and economic activities.

The-choice of a business domain, direction of its development, choice of a business

strategy and policies are all guided by the overall mission of the company. For example,
“to become a world-class company and to achieve global dominance has been the
mission of ‘Reliance Industries of India’.

 Organisation Structure
Organisation structure means such things as composition of board of directors, the
number of independent directors, the extent of professional management and share -
holding pattern. The nature of organisational structure has a significant influence over
decision making process in an organisation. An efficient working of a business
organisation requires that its organisation structure should be conducive to quick decision
making. Delays in decision making can cost a good deal to a business firm.

The board of directors is the highest decision making body in a business organisation. It
takes general policy decisions regarding direction of growth of business of the firm and
supervises its overall functioning. Therefore, the managerial capability of the board of
directors is of crucial importance for the functioning of a business firm and for
achievement of its overall mission and objectives.

It is therefore highly desirable to increase the extent of professional management of

private corporate companies. Many private corporate firms in India are managed by
family members of their promoters which is not conducive to the efficient working of
these firms. In some Indian companies the majority of shares is held by the promoters of
the company themselves.

 Corporate Culture and Style of Functioning of Top Management:

Corporate culture and style of functioning of top managers is important factor for
determining the internal environment of a company. Corporate culture is generally
considered as either closed and threatening or open and participatory.

In a closed and threatening type of corporate culture the business decisions are taken by
top-level managers, while middle level and work-level managers have no say in business
decision making. There is lack of trust and confidence in subordinate officials of the
company and secrecy pervades throughout in the organisation. As a result, among lower
level managers and workers there is no sense of belongingness to the company.

On the contrary, in an open and participatory culture, business decisions are taken at
lower levels of management, and top management has a high degree of trust and
confidence in the subordinates. Free communication between the top level management
and lower-level managers is the rule in this open and participatory type of corporate
culture. In this open and participatory system the participation of workers in managerial
tasks is encouraged.

 Quality of Human Resources

Quality of human resources of a firm is an important factor of internal environment of a
firm. The success of a business organisation depends to a great extent on the skills,
capabilities, attitudes and commitment of its employees. Employees differ with regard to
these characteristics.

It is difficult for the top management to deal directly with all the employees of the
business firm. Therefore, for efficient management of human resources, employees are
divided into different groups. The manager may pay little attention to the technical details
of the job done by a group and encourage group cooperation in the interests of a
company. Due to the importance of human resources for the success of a company these
days managers should know how to select and manage efficiently human resources of a
company.

 Labour Unions
Labour unions are other factor determining internal environment of a firm. Unions
collectively bargain with top managers regarding wages, working conditions of different
categories of employees. Smooth working of a business organisation requires that there
should be good relations between management and labour union.

Each side must implement the terms of agreement reached. Sometimes, a business
organisation requires restructuring and modernisation. In this regard, the terms and
conditions reached with the labour union must be implemented in both letter and spirit if
cooperation of workers is to be ensured for the reconstruction and modernisation of
business.
 Company Image and Brand Equity
The image and brand equity of the company has an important role in raising finance,
forming alliances, choosing dealers as well as suppliers launching new products,
expanding or diversifying business, entering global markets etc.

 Physical Resources and Technological Capabilities

Physical resources such as plant and equipment, and technological capabilities of a firm
determine its competitive strength which is an important factor determining its efficiency
and unit cost of production. R&D capabilities of a company determine its ability to
introduce innovations which enhance productivity of workers.

It is however important to note that rapid technological progress, especially

unprecedented growth of information technology in recent years has increased the
relative importance of ‘intellectual capital and human resources as compared to physical
resources of a company.