UNDERSTANDING THE DIFFERENCE between internal and external business environments is very important. These environments have a major effect on the operations and performance of the company.
To fully understand the difference between internal and external business environments and how they apply to your company, you need to establish what each environment represents. As the name suggests, “internal” business environment refers to internal factors and resources that affect the running of the business. This primarily includes the workforce. The employees play a vital role in affecting the company’s performance. If you have well trained, motivated employees, you are more likely to get good output from them. However, if you have unmotivated employees who don’t work hard or dig in their heels when a new plan is proposed, this will definitely affect your company’s production levels.
Another factor is the company assets available, such as plants and machinery, motor vehicles, and any other equipment used in production. If you have adequate assets in good condition, your production will be better than if you don’t. Another component of the internal business environment is your available finances. This includes your capital, if you’re just starting out. In an established business, this includes all the money available to facilitate the day-to-day running of the business.
The “external” business environments include factors: political, technological, economical, legal, demographic and socio-cultural. These factors may not have an immediate direct effect on your business, but they will play a role in shaping your business with time. For instance, if your country faces economic hardships, your business may not do so well. Your market’s spending habits will change accordingly, your raw materials costs will also change, and you may end up reducing your production and letting go of some of your employees. Retrenchment is one of the biggest negative impacts of economic problems.
Technology can have negative or positive impacts on a business. Technological developments can help make your work easier and increase your productivity; it can also allow for the expansion of your business. However, it can lead to the reduction of your workforce due machines which, therefore, means loss of jobs for some people. For instance, a job that was previously done by ten people may now be done by one person who will be operating the machines.
External environments may also affect your ability to acquire loans from banks or other financial institutions. For instance, when the economy goes down, financial institutions don’t lend money easily. This is because they are also affected by the economy; they may, therefore, have inadequate funds. Most institutions also consider these times very risky for lending out money.
Many people and businesses may not be in a position to pay back the loans that they get. Economic crisis will also affect the internal operations of a business. For instance, the business will not have a lot of financial resources due to the loss of a ready market. Some businesses also end up retrenching some of their clients due to the reduction of work and inability of the company to maintain the employees’ payment packages.
Sometimes external and internal environments are intertwined. For instance, political and economic issues will affect the availability of a workforce and other resources. They will also affect the availability of finances to the business. During political unrests, most businesses are not able to operate normally and some end up shutting down all together.
Other external environments that can affect the internal environment include legal restrictions. Sometimes, laws are passed that affect some businesses. For instance, some of the laws like the increase of taxes on some goods and services affect the business. When tanning taxes were increased in America, a lot of Americans stopped going to tanning salons. The business operations were reduced and the clients decreased in numbers.
Other factors that can be described as part of the external environment include natural disasters or calamities, such as tornados, hurricanes and tsunamis. These calamities affect the operations of the business. They affect the workforce, the market, and all other resources and, in most cases, they lead to the closure of the business due to property destruction.
The central difference between internal and external business environments is that, one can be controlled while the other one can’t. However, you have some control over your internal business environment. You can control your management and resources to ensure that you realize good production levels at your company. External environments, on the other hand, aren’t easy to control or manage. In fact, some of these factors can lead to the closure of your business.
The main reason why the external environments are hard to control is because, at times, they can be unpredictable. For instance, it may be hard to plan ahead for the occurrence of a natural disaster. Furthermore, you may not be in a position to do anything about them when they occur, unlike internal environments that you may be able to control and manage effectively. If you maintain a corporate risk assessment, you can put up measures to deal with any problems that may occur as a result of issues with the internal environment. However, it’s hard to prepare for external environments since some of the issues that occur aren’t predictable.