Every business functions as part of an environment, which is known as its business environment. The business environment consists of all those components that influence the decisions, actions, strategies and objectives of a business organization in some way or the other.
The business environment can be widely classified into an internal environment and an external environment. In this article, we will explain these two kinds of business environment in detail and discuss the differences between them.
Definitions and meanings
The internal environment of a business consists of all the factors that are directly involved with the organization and which have a direct impact on its business and routine activities. These factors are generally within the control of the organization, irrespective of whether they are tangible or intangible. They can be divided into strengths and weaknesses, depending on their positive or negative effects on organization’s core objectives.
The internal environment mainly consists of the physical, financial, technological and human resources available for use in a organization.
- Physical resources: These are the physical assets of an organization, for example plant, building, machinery, equipment, etc., which are used to transform inputs into outputs.
- Financial resources: These comprise of the capital and funds that are part of an organization. Companies allocate funds to those activities that offer maximum output by incurring the least cost. Hence, the goal is optimum resource allocation.
- Human resources: All those who are employed in the organization and possess the skills and expertise needed to carry out the activities of the business. The human resources take operational and managerial decisions regarding the organization.
- Technological resources: The technical knowledge that is employed while manufacturing the products and services of the organization.
It is quite possible for a business to adjust its internal environmental factors to be consistent with the requirements of external environment.
External environment refers to all the factors and conditions that are external to the organization and have an impact on its decisions, objectives and overall performance. External environment provides input (raw materials, labor, money, energy) to the organizations, which are then converted into products or services and returned to the external environment as outputs. Organizations generally do not have control over these outside factors.
Organizations need to take into account all of their external environment factors and adjust their business plans and objectives accordingly. This would ensure that their business continues to function smoothly and in an uninterrupted manner. In addition, the external environment provides opportunities and threats to the organizations. Hence, when the company adjusts its internal environment with the external environment, it becomes possible for it to take advantage of environmental opportunities and to avoid environmental threats.
The external environment is typically divided into two categories – micro environment and macro environment:
- Micro environment: The micro environment includes all those factors that have a direct impact on the activities of the organization because they are present in the immediate environment surrounding the organization. These factors have an impact on organization performance and are somewhat controllable. Micro environment includes customers, competitors, suppliers, public and intermediaries.
- Macro environment: The macro environment usually has an impact on the entire industry and not just a specific organization. It is also known as the general environment and cannot be controlled by the organization. Hence, the organization needs to adapt their operations in accordance with the changes in the macro environment. The macro environment includes the economic environment and the non-economic environment, consisting of the political, legal, demographic, socio-cultural, technological and global environment.
Difference between internal and external environment
The main points of difference between internal and external environment are listed below:
Internal environment is the environment that is directly connected with the organization. It includes all those factors, conditions and events that are present within the organization and are capable of directly influencing the strategic decisions and operations of the organization. In contrast, external environment comprises of the factors that are outside the organization and which can have an impact on the operations, performance, decisions and profitability of the organization.
It is possible to control internal environmental factors, whereas the external environmental factors are generally not controllable.
Organizations may receive either strengths or weakness from the internal environmental factors. However, external environmental factors either offer opportunities or present threats to the organization.
4. Effect of changes
If there is any change in the internal factors, only the company is affected because these factors are specific to that company. On the other hand, any changes in the external factors have an impact on the entire industry and hence, all the organizations functioning in the industry are influenced by these modifications.
5. Impact on the organization
Internal environment includes all those factors that are capable of affecting the decisions, operations and objectives of the organization. In contrast, the external environment includes all the factors that have an impact on the growth, profitability, survival, image and expansion of the company in a positive or negative manner.
The internal environment consists of different resources, including human, technological, physical and financial. On the other hand, the external environment includes the micro environment and the macro environment, which consists of the economic environment and the non-economic environment, i.e. political, legal, socio-cultural, demographic and the global environment.
Internal vs external environment – tabular comparison
A comparison of internal and external environment in tabular for is given below:
|All those factors that are present within the organization and have a direct impact on its operations||All those factors that are present outside the organization and which do not directly influence its operations|
|Internal factors can be controlled by the organization||External factors cannot be controlled by the organization|
|Strengths and weaknesses||Opportunities and threats|
|Effect of changes|
|Specific to the organization||Industry-specific|
|Impact on the organization|
|Affects the operations, decisions and objectives of the organization||Affects growth, survival and profitability of the organization|
|Physical, financial, human and technological resources||Micro and macro environment|
Conclusion – internal vs external environment
As explained in this article, the main difference between internal and external environment is that the internal environment includes factors that have a direct influence on the organization, while the external environmental factors do not affect the organization directly. In addition, the effect of internal factors is specific to the organization, whereas external factors influence an entire industry and not a specific organization.
It is important for businesses to obtain a thorough understanding of the business environment of which they are a part so that they can survive and sustain a consistent growth in the long term. Comprehending internal and external environmental factors allows companies to align their internal environment with the external environment so as to achieve maximum benefits from the opportunities present in the environment, while avoiding the threats.