Business Environment Overview: Micro and Macro Factors

MEANING OF BUSINESS ENVIRONMENT ❅ environmentimplies all the internal and the external factors that have an impact on the business . ❅ The factors may be the internal power relationship and orientation of the organization , government policies and regulations etc. ❅ The term ' business environment ' means the sum total of all individuals , institutions and other forces like government policies and regulations , nature of the economy , socio cultural factors , demographic factors , natural factors etc. that may affect the performance of business . ❅ Business environment is the combination of internal and external factors that influence a company's operating system . ❅ Business environment are of two types : 1. Internal environment : The factors that are internal to the organization 2. External environment : The factors that are external to the organization ✿ From the above section it is become clear that every business organization is a part of the business environment , within which it operates . ✿ No entity can function in isolation because there are many factors that are directly or indirectly related to the business , which is known as business environment . MICRO AND MACRO ENVIRONMENT ❀ The external environment is broadly classified into two categories , i.e. microenvironment and macro environment . ( i ) Micro Environment of Business : ❇ Micro environment refers to the environment which is in direct contact with the business organization and can affect the routine activities of business straight away . ❇ It is associated with a small area in which the firm functions . ❇ Micro environment deals suppliers , competitors , marketing intermediaries ( like dealers , wholesalers etc. ) , customers , pressure groups and the general public . a . Supplier : Banks and other similar organizations that supply money to the organization are also termed as suppliers .The firms that supply raw materials and machineries are also included in suppliers . b . Customers are also an important factor in the micro environment of business . The customers or the clients absorb the output of an organization and a business exists to meet the demands of the customers . Customers could be individuals , industries , government and other institutions . c . Labor force is also an important part of the internal environment of business . The employees of the business enterprise produce and provide the services for the customers . d . In addition to the above , theadvertising agencies , business associates , competitors , regulatory agencies and the marketing intermediaries are also a part of the micro environment . ( ii ) Macro environment of Business : ♡ Macro environment refers to the forces and institutions outside the organization that can potentially affect the performance of the organization . ♡ These forces originate beyond the firm's operating situation . ♡ The study of Macro Environment is known as PESTLE Analysis . ♡ PESTLE stands for the variables that exist in the environment , i.e. Population & Demographic , Economic , Socio Cultural , Technological , Legal & Political , and Environmental . ♡ These variables , encompass economic and non - economic factors like social concerns , government policies , family structure , population size , inflation , GDP aspects , income distribution , ethnic mix , political stability , taxes and duties etc. Differences between Micro Environment and Macro Environment ༺ The following are the major differences between micro and macro environment : 1. Micro environment is the environment which is in immediate contact with the firm . The environment which is not specific for a particular firm but has the ability to influence the working of all the business groups is known as Macro Environment . 2. Micro Environment may also be considered as internal environment of business , whereas Macro Environment is the external environment . 3. The factors of the micro environment affect the particular business only , but the macro environmental factors affect all the business entities . 4. The micro environmental factors are controllable by the business to some extent ; however the macroeconomic variables are uncontrollable . 5. The elements of the micro environment affect directly and regularly on the firm ; in case of the macro environment it is not that direct and regular . IMPORTANCE OF BUSINESS ENVIRONMENT ლ There is a close and continuous interaction between the business and its environment . If managed well , this interaction helps in strengthening the business firm and using its resources more effectively . ლ As stated above , the business environment is multifaceted , complex , and dynamic in natureand has a far - reaching impact on the survival and growth of the business . ლ To be morespecific , proper understanding of the social , political , legal and economic environment helps the business in the following ways : ( a ) Determining Opportunities and Threats : ⛧ The interaction between the businessand its environment would identify opportunities for the business and threats to the business as well . ⛧ It helps the business enterprises for meeting the challenges successfully ( b ) Giving Direction for Growth : ❥ The interaction with the environment leads to openingup new frontiers of growth for the business firms . ❥ It enables the business to identify theareas for growth and expansion of their activities . ( c ) Continuous Learning : ✮ Environmental analysis makes the task of managers easier indealing with business challenges . ✮ The managers are motivated to continuously updatetheir knowledge and skills to meet the predicted changes in realm ofbusiness . ( d ) Efficiency development : ✲ Environmental understanding helps the business organisations inimproving their functioning by showing their sensitivity to the environment within which theyare working . ✲ For example , in view of the shortage of power , many companies haveset up Captive Power Plants ( CPP ) in their factories to meet their own requirement ofpower ( e ) Meeting Competition : ༊˚ It helps the firms to analyse the competitors ' strategies andformulate their own strategies accordingly ( f ) Identifying Firm's Strength and Weakness : ☫ Business environment helps to identify the individual strengths and weaknesses in view of the technological and globaldevelopments ENVIRONMENTAL ANALYSIS ֍ The purpose of environmental analysis is to identify the existing and emerging threats and opportunities to help formulate appropriate strategies . ֍ It is a strategic tool . ֍ In today's changing world , many new things develop over time and the whole scenario can alter in a very short time . ֍ As discussed in the previous sections , businesses are influenced by their environment . ֍ All the situational factors which determine day to day circumstances impact firms . So , businesses must constantly analyse the internal and external environment and the market . Environmental analysis can be divided into four stages namely : Scanning , Monitoring , Forecasting and Assessment . a ) Scanning is the process of analysing the environment for identification of the factors which has an impact on the business . b ) Monitoring represents a process whereby analysts observe environmental changes ( over time ) to see if an important trend begins to emerge c ) Forecasting represents the process where analysts develop feasible projections of what might happen - and how quickly as a result of the changes and trends detected through scanning and monitoring . d ) Assessing is to determine the timing and significance of the effects of changes and trends in the environment on the strategic management of a firm . The commonly used analysis of the environment is the PESTLE analysis . PESTLE stands for : P : Political factors E : Economic factors S : Social factors T : Technological factors L : Legal factors E : Environmental factor Let us discuss about the factors in detail : a . Political factors : ☂ Changes in the political system , changes in the internal power structure of political parties including the changes in leadership , political alliance etc. has implications for business . ☂ The political factors take the country's current political situation . ☂ It also reads the effect of global politics on the country and business . ☂ Some political factors that are taken into consideration are : Government policies Taxeation laws and tariff Entry mode regulations b . Economic factors : ☽ Economic factors involve all the determinants of the economy which include general economic conditions , GDP growth rate , per capita income , distribution of income , investment , price trends etc. It helps to set up strategies in line with changes . Following is the list of some determinants that can be assessed to know how economic factors affect business : ⚘ The inflation rate ⚘ The interest rate ⚘ Disposable income of buyers ⚘ Credit accessibility ⚘ Unemployment rates ⚘ The monetary or fiscal policies ⚘ The foreign exchange rate c . Social factors : ☘ The social factors includes the population growth / decline , age structure of population , ethnic composition of population , occupational pattern , migration , factors related to family , lifestyle etc. d . Technological factors : ❈ Technologyis advancing daily and continuously . ❈ The advancement is greatly influencing businesses . ❈ Performing environmental analysis on these factors will help a business to stay up to date with the changes . Firms can use the following factors for their benefit : ࿐ New discoveries ࿐ Rate of technological ࿐ obsolescence ࿐ Rate of technological advances ࿐ Innovative technological platforms e . Legal factors : ♡ Legislative changes take place from time to time . Many of these changes affect the business environment . ♡ If a regulatory body sets up a regulation for industries , that law would impact industries and business in that economy . ♡ So , businesses should also analyse the legal developments in respective environments . The following are some of the legal factors : ༊˚ Product regulations ༊˚ Employment regulations ༊˚ Competitive regulations ༊˚ Patent infringements ༊˚ Health and safety regulations f . Environmental factors : ❥ The location and topography influences business and trades . ❥ Changes in climatic changes can affect the trade . ❥ Some environmental factors are : Geographical location The climate and weather Waste disposal laws Energy consumption regulation People's attitude towards the environment The following are the benefits of environmental analysis : ✩ The very idea of environmental analysis makes one aware of the environment - organization linkage . ✩ It helps an organization to identify present and future threats and opportunities . ✩ It helps to understand the transformation of the industry environment . ✩ It contributes in identification of risks . ✩ It helps in formulation of strategies . ✩ It keeps the mangers informed , alert and dynamic . LET US SUM UP ლ After going through the unit we have come through the following : ❥ Business involves the activities like production or purchase of goods for sale , or exchange of goods or supply of services to satisfy the needs of other people . ❥ Business may be classified in the following ways : ☫ Business that produces Goods ☫ Business which produces Services ☫ Business that distribute Goods ☫ Business that facilitate distribution of Goods ☫ Business that deals in Finance and Financial Services Goods ❥ Business is an activity that is carried out with the intention of making financial benefits and it has the following characteristics : ☫ Exchange of goods and services for Income ☫ Profit Motive ☫ Recurring Activities ☫ Risks ☫ Society Oriented ❥ Business activity has two branches . They are as follows : ☫ Industry ☫ Commerce ❥ Industry is an activity concerned with conversion of raw materials or semi - finished goods into finished goods . ❥ Industry provides two types of goods namely consumer goods and Industrial goods . ❥ Commerce has been defined as " the sum total of those processes which are engaged in the removal of the hindrance of persons ( trade ) , Place ( transport and insurance ) , and time ( warehousing ) in the exchange ( banking ) of commodities ". ❥ Business Environment refers to the sum total of all individuals , institutions and other forces like governmentpolicies and regulations , nature of the economy , socio cultural factors , demographic factors , natural factors etc. that may affect its performance . ❥ It is broadly classified into two categories , i.e. microenvironment and macro environment . ❥ The purpose of environmental analysis is to identify the existing and emerging threats and opportunities to help formulae appropriate strategies . ❥ Environmental analysis can be divided into four stages namely : Scanning , Monitoring , Forecasting and Assessment . ❥ The business enterprises need to understand the forces and emerging trends in different sectors of the broad environment . ❥ These could be economic environment , social environment , political and legal environment etc.