Inevitable changes in the internal business environment and external business environment bring both threats and opportunities to businesses.
Internal business environment
The internal environment focuses on factors that are within the company and affects its operational ability to serve customers. It includes all of the elements that form the company the company itself:
1. Business functions. A business organization is a system of interconnected parts which must work together to achieve its business aim. For a business to operate and be successful, all four business departments (Finance, Marketing, Human Resources (HR) and Operations / Production) must carry out various tasks effectively.
2. Buildings and other tangible assets. All of the office spaces, land, facilities, factories, equipment, tools, machinery, vehicles, and so on that belong to the business and are showed as Fixed Assets on the Balance Sheet. Some companies such as manufacturing businesses will need professional machinery and large factory buildings while small consulting firms or web design agencies will own fewer tangible assets to conduct their business operations.
3. Current employees. This includes both the CEO, The Board of Directors, managers, workers and administration stuff. Some people say that employees are the company’s greatest assets. It is believed that by hiring the right people and devoting time and spending money to train and develop employees, they will automatically deliver a high-quality service to the customers. So, take care of your employees first, and then they will take care of your customers properly.
4. Customers. Both past, current and potential customers and consumers. In the opinions of many managers, customers are always right, so the customer satisfaction and loyalty are of the utmost importance to any business. It is because without having stable customer base, companies cannot generate enough sales revenue to survive in the short-term and grow in the long-term.
5. Suppliers. Suppliers are essential to any business as they provide raw materials and components which the business uses on daily basis to produce products and provide services. What the business wants from its suppliers is to provide high-quality supplies at a good price.
6. The Product Portfolio. Big multinational companies own popular products in their product portfolios such as BigMac from McDonald’s, Coke from The CocaCola Company, Whopper from BurgerKing or Aspirin from Bayer.
7. Business procedures. With clear and smart procedures, the company can optimize and streamline its operations to be able to effectively and promptly respond to the needs of the customers and future market changes. Those companies that lack clarity and proper regulations may be slow and inefficient.
8. Intangible assets. That includes corporate culture, patents, trademarks, copyrights, trade secrets, Research and Development (R&D) capabilities, etc. These days, intangible assets account for a larger percentage of the company’s assets. Intangible assets may provide a competitive advantage to the business over its rivals.
Certain internal parts of the business have unique characteristics that can provide competitive advantage over other companies on the market, or add value to the products. Therefore, internal business strategy needs to focus on choosing source of competitive advantage that the firms builds upon over the years. The strategy could be based on competing on price (very low prices offered by as Ryanair, Walmart or IKEA) or based on outstanding quality (very high-quality cars made by Audi or BMW).
Having the specific knowledge about the internal business environment allows managers to devise appropriate strategies to maintain, or improve the business’s internal competitiveness to win over in an ever-changing and dynamic business world outside of the business walls.
External business environment
All businesses depend for their survival and growth on understanding the external business environment. Managers will use the strength of elements that form internal environment to respond properly and timely to external factors that are beyond their control.
Many of the external factors may limit and constrain decisions that business managers can take. The main influences from external environment that have impact business performance, decision-making and firm’s competitive strategy (its ability to compete against domestic and international rivals) may also create opportunities and enable a business to become even more successful.
Different businesses are affected by different external factors to varying degrees. This will largely depend on several factors such as:
1. Business size. Larger businesses, especially public-limited multinational companies, are more stable to cope with external shocks to the internal business environment. Small and new firms have it more difficult to exist. So, business size matters.
2. Quality of the management team. Experienced, knowledgeable and skilled managers are more able to predict and successfully react to changes in the external environment and crisis situations. Younger, less-skilled and less-skilled managers are less able to respond to those changes.
3. Customers’ loyalty. Businesses with a loyal customer base around the world are less exposed to the threats of competition, hence less affected by external changes such as brand switching. Start-ups and smaller businesses with less established customer base only in one region are more exposed to the influences from the outside of the business
4. Size of The Product Portfolio. Firms that have a diversified product portfolio and sell their products in overseas markets are more able to handle changes in the external environment and minimize risk. On another hand, firms that specialize in one product only in a specific market are more vulnerable to external threats and may even get out of business.
5. Levels of long-term debt. Gearing refers to the extent to which a business relies on external long-term borrowing. Businesses that are highly geared (Gearing Ratio > 50%) are more defenseless, if there are adverse changes in the external business environment, e.g. if interest rates increase, then holing high level of debts will require the business to pay very high amount of interest that will significantly reduce Net Profit After Interest and TAX. Businesses that are less geared (rely on own resources more with Gearing Ratio < 50%) are less impacted by the changes in the external business environment.
The legal requirements imposed by governments through rules and regulations are one of the most obvious constraining external influences on business activity. Economic factors like interest rates, exchange rates, fiscal policies, or applying new technology in advance of rival firms are other good examples too. Changes in social, cultural, technological and environmental factors will also affect business strategy to some extent.
