A business concept that looks perfect on paper may prove imperfect in the real world. Sometimes failure is due to the internal environment – the company's finances, personnel or equipment. Sometimes it's the environment surrounding the company. Knowing how internal and external environmental factors affect your company can help your business thrive.
In a bad economy, even a well-run business may not be able to survive. If customers lose their jobs or take jobs that can barely support them, they'll spend less on sports, recreation, gifts, luxury goods and new cars. High interest rates on credit cards can discourage customers from spending. You can't control the economy, but understanding it can help you spot threats and opportunities.
Unless you're a one-person show, your employees are a major part of your company's internal environment. Your employees have to be good at their jobs, whether it's writing code or selling products to strangers. Managers have to be good at handling lower-level employees and overseeing other parts of the internal environment. Even if everyone's capable and talented, internal politics and conflicts can wreck a good company.
Unless your company is unique, you'll have to deal with competition. When you start your company, you fight against established, more experienced businesses in the same industry. After you establish yourself, you'll eventually have to face newer firms that try to slice away your customers. Competition can make or break you – look at how many brick-and-mortar bookstores crashed and burned competing with Amazon.
Even in a great economy, lack of money can determine whether your company survives or dies. When your cash resources are too limited, it affects the number of people you can hire, the quality of your equipment, and the amount of advertising you can buy. If you're flush with cash, you have a lot more flexibility to grow and expand your business or endure an economic downturn.
Changes in government policy can have a huge effect on your business. The tobacco industry is a classic example. Since the 1950s, cigarette companies have been required to place warning labels on their products, and they lost the right to advertise on television. Smokers have fewer and fewer places they can smoke legally.
The percentage of Americans who smoke has dropped by more than half, with a corresponding effect on industry revenues.
Your internal culture consists of the values, attitudes and priorities that your employees live by. A cutthroat culture where every employee competes with one another creates a different environment from a company that emphasizes collaboration and teamwork. Typically, company culture flows from the top down. Your staff will infer your values based on the type of people you hire, fire and promote. Let them see the values you want your culture to embody.
Next to your employees, your customers and suppliers may be the most important people you deal with. Suppliers have a huge impact on your costs. The clout of any given supplier depends on scarcity: If you can't buy anywhere else, your negotiating room is limited. The power of your customers depends on how fierce the competition for their dollars is, how good your products are, and whether your advertising makes customers want to buy from you, among other things.
Mastering some of the forces that impact your business is more challenging than handling others. The extent to which you can control them differs. You can change how internal and external factors affect your firm. You cannot make the economy grow. But, you can encourage spending. Learning more about the factors at work will better equip you.
I will not go into much detail about external factors. I will discuss elaborately how internal factors can impact a business. I will talk about the most popularly assessed internal factors.
The internal business environment comprises of factors within the company which impact the success and approach of operations. Unlike the external environment, the company has control over these factors. It is important to recognize potential opportunities and threats outside company operations. However, managing the strengths of internal operations is the key to business success.
The role of company leadership is an essential internal factor. Your leadership style and other management style impact organizational culture. Often, firms provide a formal structure with its mission and vision statements. Some cultural implications which result from leadership approaches are:
- Value of employees
- The positive or negative nature
- Effectiveness of communication level of family-friendliness
The strength of employees is also an essential internal business factor. Check if employees are motivated, hard-working and talented. They will produce better results compared to an unmotivated and less talented workforce. The processes and relationships between and within departments can also improve effectiveness and efficiency.
In a high performing workplace, the workers not only have talent, but they also work better together. The employees and departments collaborate on ideas and resolutions.
The internal factors basically include the inner strengths and weaknesses. Internal factors can affect how a company meets its objectives. Strengths have a favorable impact on a business. Weaknesses have a harmful effect on the firm.
Some examples of areas which are typically considered in internal factors are:
- Financial resources like funding, investment opportunities and sources of income.
- Physical resources like company’s location, equipment, and facilities
- Human resources like employees, target audiences, and volunteers
- Access to natural resources, patents, copyrights, and trademarks
- Current processes like employee programs, software systems, and department hierarchies
Companies must also consider softer elements like company culture and image, the role of key staff, operational efficiency and potential.
Below, I have mentioned the most common internal factors. These might affect your business in various ways.
- Organizational and operational
These are a part of the operational and administrative procedures. This includes disorganized or inaccurate record keeping. Interruptions to your supply chain and outdated or faulty IT systems are also factors you should evaluate. If you do not overcome these, your customers might see you as unreliable. You can also lose all your data.
These affect your firm’s ability to reach the goals in the business plan. They could be due to the impacts of changes in technological evolutions or customer demand. These factors could pose as threats as they can alter how customers perceive your product. Based on these, customers might think a product is overpriced, dull and outdated.
Your business needs innovation in order to keep up with competitors. It is essential to get one step ahead. Innovation could come in the form of marketing. It could also be through promotional initiatives in the marketing plan, staff training, and welfare. Embracing new technology is the best way to keep up with technological advancements.
A lack of innovation can pose a serious risk to a growing business. No innovation will cause a company to remain boring. The company will become dull, stagnant and irrelevant.
The financial risks depend on the financial structure of your business. It is also dependent on your business transactions and the financial systems. For example, changes in interest rates or being overly reliant on one customer could affect business.
Employees are vital to business success. But, there are risks associated with them. For an industry, strike action could lead to a lot of problems.
INTERNALS FACTORS IN SWOT
The internal factors of a business are often studied in a SWOT analysis. The SWOT matrix is a structured planning method. You can use SWOT analysis to analyze your company and its environment. It assesses the strengths, weaknesses, opportunities, and threats. The strengths and weaknesses of a project or business are internal factors. Opportunities and threats are external elements.
STRENGTHS
Strengths are the features of your business which allow you to work more effectively than competitors. Your specialist technical knowledge could be your strength. You will have to consider your strengths from own point of view. You should also give importance to customers’ and clients’ view.
You must be honest and realistic. When you try to find company’s strengths, try to answer the below questions:
- What is it that you do well?
- What benefits do you have over your competitors?
- What makes you stand out from the competitors?
WEAKNESSES
Weaknesses are the areas which have scope for improvement. Find out if your business is new products or skills. Also, try to find if you have a lower productivity or higher cost base than your competitors.
You will have to face the unpleasant truths about your firm and be realistic. Ask the following questions:
- What are you bad at?
- Is there anything you could be better at?
- What should you avoid?
- What leads to problems or complaints?
The greatest thing about internal factors is that you have control over most of them. Changing internal factors often involves some indirect costs. Some of the factors are a result of the way you run your business. Example of this includes reputation, credit worthiness, and image. Other factors depend on your business decisions. Example of this includes management structure and staffing