The components of business environment are classified into two broad categories.

  1. Internal Environment
  2. External Environment
    1. Internal Environment: It is defined as all the controllable forces and conditions within an organization that influence organizational behavior. An organization’s internal environment has following sub components:
      1. Employees: They are the main components and important assets of organizations. They are responsible to work as per the direction, goals, rules and regulation of the company .For their better performance, organizations have to motivate and satisfied them with fair and equitable rewards policies. The organizations’ productivity can be enhanced only by the dedication, loyalty, and cooperation of employees.
      2. Shareholder and Board of Directors: Shareholders being the owners of business, have a direct interest in the performance of the organization. The board of directors is elected by them (shareholders) who represents shareholders’ interest in the board. The board is responsible to manage company and formulate appropriate plans. They evaluate overall organizational performance and provide direction to the top level management for the growth of an organization.
      3. Organizational culture: Every organization has its own culture. Culture refers to set of values, beliefs, norms of an organization under which it operates. It helps to bind all the employees and comply with organizational rules and regulations. Culture has a powerful influence on the process of organizational change and decision making.
      4. Labour Union: Labour union represents the employees or labor working in an organization. It takes problems and feeling of the labors to the management for constructive solutions. The good relation between labor union and management avoids unnecessary disturbances in organizations.
      5. Organizational Structure: Structure is a framework of an organization. It clarifies the authority and responsibility roles and relations, hierarchy of management and coordination activities for business.
    2. External Environment: External environment is the condition and forces outside the organization that are relevant to its operation and influence the organizational activities. There are two categories of external environment. They are:
      1. General Environment
      2. Task/Operation Environment
  1. General Environment: General environmental factors have indirect impact on the activities and outcomes of the firms. Following are the components of general environment:
      1. Political Environment: It refers to the influence from government institutions, strategies of political parties, policies of state and local government and relationship between government and business. Mangers must know about political environment because:
        • It imposes certain legal constraint on the business.
        • It establishes a market atmosphere that maybe pro-business or anti-business.
        • It has the potential to provide stability needed for long-term planning.
      2. Economic Environment: Economic conditions are critical to the success of the organizations. It is defined as the nature and direction of the economic system of a country and their impact on the individual organization. The economic factors such as: national   income, saving ,investment, monetary policies, economic growth, interest rate, consumption pattern etc, have great impact on functioning of an organization. Therefore, managers should devote much of their time and resources to forecast the economy and possible changes.
      3. Socio-Cultural Environment: The socio-cultural environment affects the behavior of people and their organizations. It includes values, belief, lifestyle, family system, opinions and assumptions widely held by the citizen of the particular country. These elements of society impact the business organizations.
      4. Technological Environment: Technology is the practical application of scientific knowledge. Radical development has occurred over the past several years in communication, information and automation including robotics. This development brings both opportunity and threats for the organizations. Thus, organizations should utilize their strength to gain from opportunity and neutralize the threats.
    2. Task Environment: Task environment has direct impact on the operation of the Following are the components of task environment.
      1. Customers: Customers exchange resources, usually in the form of money for an organization’s product and services. A customer maybe an individual, family, a business house or an institution. Customer not only buys the product or services they also give valuable ideas, opinions and reaction related to it. Thus, manager should maintain close relationship with them.
      2. Suppliers: Suppliers are the organizations which provide resources like materials, men, machines etc to other firms. As the quality and price of the raw material received from the suppliers determine the quality of the output, the business firm tries to obtain lower prices, better quality and fast deliveries. This strengthens the competitive position of organizations.
      3. Government: The role of the government is to regulate business system and to protect the interest of customers and general public. It formulates rules and regulation, business policies etc under which every firms need to operate. Therefore, government has great influence on corporate policies, procedures and business practices of modern organizations.
      4. Competitors: It refers to organizations that compete for resources with other organizations and provides the similar or substitute product and services to the same group of people. The organization must analyze the competition and established clearly defined marketing strategies in order to provide superior customer satisfaction and to increase market share.
      5. Media: The media keeps eye on the vital decision or actions of the business firms having general public interest. Therefore managers need to have good communication with both media and external audiences and deal with them effectively and promptly.
      6. Financial institutions: Organizations depends on a variety of financial institutions such as: banks, insurance companies, capital markets, etc to supply fund for maintaining and expanding their business activities. The terms and conditions of loans and advances and quality of promptness of their services have an impact on the performance of business firms.
      7. Special Interest Group: It refers to environmentalist, unions, consumer advocates, civic society and other professional organization. These organizations pressurized the company to advance their position on the issues like quality services, reasonable price, waste management, environmental protection etc.