Why Is Internal Business Environment Important?

  • By: Change Strategists
  • Time to read: 9 min.

Every business maintains an environmental relationship on two fronts: an internal and external environment. The internal environment interacts closely with the firm and can either make or mar the company without proper coordination.

The internal business environment is important because it is easier to control those factors occurring within the company than the external business environment. Also, the internal business environment determines the extent to which an establishment can leverage external environmental factors for organizational success.

Although both environments are important, the control we have over the internal environment means that’s the one we should focus on.

What Makes the Internal Business Environment Significant?

Business environments significantly influence all aspects of running a profitable or failed business because of the elements or factors bound to either side of the spectrum. From employee management to corporate culture, in-house elements significantly influence a business’s success. 

The reason is largely due to the ease of control for those internal elements bound to the internal business environment.

Examples include but are not limited to: business owners, managers, employees, resources, corporate culture, etc.

These internal elements influence an establishment’s ability to integrate effectively with the larger external business environment.

A business’s internal environment comprises several elements like the organization’s management, employees, philosophy, goals and objectives.

As a result, unless you run a sole proprietorship, your workers constitute a huge part of your business’s internal environment.

So your workers must be excellent at their jobs, whether it involves product or service production. 

Similarly, the firm’s managers must be competent in lower-level employee management and coordinating other aspects of the organization’s internal environment. 

However, a well-managed internal business environment does not guarantee automatic immunity to other internal business problems like work politics, conflicts, etc., all of which can drag an otherwise flourishing company to the mud. 

What Is an Internal Business Environment?

The internal business environment is the spectrum of business environment that deals with factors within the organization. Its somewhat private nature makes it unique as the internal workings of every business are different. It is also defined as a business environment with direct controllable market features. 

The internal business environment involves all features that contribute to the internal functions and coordination of the enterprise, including personnel, machines, etc. This environment actively influences the creation, communication and delivery of market offerings a firm has to offer, whether tangible or intangible. 

Robot manufacturing

They also include all forces directly impacting the company’s daily activities, including company culture (positive or negative). Some areas included when considering the factors that influence a business’s internal environment are: Physical, financial, human, and access to natural resources, including current organizational processes. 

Internal Business Environment vs. External Business Environment: Practical Examples

Now that you know what the internal business environment is, understanding how it differs from the external business environment will improve your ability to leverage its significance for sustainable business development and transformation. 

Internal Business Environment ExamplesExternal Business Environment Examples
Employees and Managers: They determine the success rate of a business by effectively discharging their duties and maintaining a healthy workplace. 
Managers oversee the coordination of projects and tasks within the organization
The Economy: There isn’t much in store for a business during bad economic times, no matter how well-organized the firm might be. 
Customers will be unable to patronize businesses when they earn poorly and cannot meet their personal financial demands.
Funding and Resources: Businesses require adequate funding to survive, including a firm’s ability to pay its workers. 
Availability of material resources provides the means for executing organizational projects.
Business Competition: Competition in business is inevitable, even among companies producing ultra unique products. 
New market entrants affect the scramble for available customers between existing and newer companies.  Some businesses may fold due to their inability to keep up with the competition. 
Company Culture: A conducive workplace culture with mutual respect breeds productive and efficient employees, which are critical for business success and sustenance. Government Policy and Politics: Changes in government policy heavily impact businesses, with additional taxes and import duties, etc. 
Government policies also affect consumer behavior.  
 Customers and Suppliers: They are responsible for driving sales and profitability as they heavily impact your cost and profit margin. 

Pros and Cons of Business Environment Analysis

Careful business environmental analysis is critical for building business policies and strategies that work. So, now that you know how the internal business environment differs from the external, it is time to learn the advantages and disadvantages of business environment analysis. 

Here is a table to help your understanding.

Pros of Business Environment AnalysisCons of Business Environment Analysis
It facilitates the attainment of business objectives by allowing the business to formulate strategies that align with the environment. It does not predict the future and therefore does not protect the business against sudden debilitating environmental changes. 
It allows the business to identify potential threats through sensitivity to warning signs that could harm the enterprise.An environmental analysis does not guarantee organizational effectiveness.
It keeps the firm up to date with the regular events in the marketplace to allow for easy adjustment to the invisible market forces of demand and supply.It may not always be reliable.
It helps you identify business opportunities even among threats by being resourceful.The analysis lacks a strategic approach. 
Environmental analysis is a proactive measure that gives insight into changes that may affect the future of the enterprise.  

What Factors Affect or Influence the Internal Business Environment?

Below are the essential factors that determine the internal business environment of an establishment.

Value System

Value systems of a company refer to its ethical structure or philosophy. It signifies the basic convictions behind the running of the enterprise toward attaining its objectives. It coordinates the activities of employees, including their attitudes to customers and the general public. 

Additionally, the value system of a business affects the policies adopted, including engaging in corporate social responsibility.

Mission, Goals and Objectives

An organization’s mission refers to the overall purpose for its existence and the rationale behind its policies and economic and strategic activities. In addition, the goal or objectives could be making long-term profits and dominating the market competition. 

Company or Organization Structure

Company structure includes all decision makers within the firm and their influence over the overall company process control. Quick and accurate decision-making is one of the hallmarks of an effective company structure, as delays can cost the business a big deal.

Top Management Policies and Corporate Culture

Two primary types of corporate culture exist: closed and threatening, open and participatory. The closed system includes the top management officials of the firm in the decision-making process, leaving the middle or lower-level workers out. 

Such a system is employed for classified business cases where top officials can not trust the lower ranking officials with sensitive information. 

In contrast, in the open system, there is free communication and relationship between the top-level managers and the lower-ranking officials without classified information. It promotes an inclusive work culture where everyone is involved in decision-making. 

However, in recent times, most establishments are beginning to adopt a more democratic system of operations where the open system is preferred to establish a healthier work culture. 

Human Resources Quality

The human resources available in any company indicate the company’s quality because the personnel make up a significant part of the internal environment. As a result, the human resources quality of any firm is not limited to the professional abilities of the personnel but their interpersonal and social skills. 

Employees influence the internal business environment by making it attractive or repulsive to potential customers and stakeholders. Additionally, every establishment creates an operational system for handling and coordinating personnel activities such as program and project management. 

Program and project managers organize the activities of other team members such that there is a perfect hierarchy and order within the firm. It also creates room for specialization and division of labor for effective organizational management. 

Physical Resources and Technology

Physical resources like equipment and technology are part of a firm’s internal environment as they influence its operational efficiency by enhancing its competitive advantage. Competitive advantage is critical for business success and increased return on investment. 

The reason is that the quality of machines, equipment and technology at an organization’s disposal greatly elevates its quality and quantity of production, making it outstanding. For instance, they can save cost and time with automation. 

However, it is vital to understand that increased technological advancement can incur more production costs for the firm. As a result, the utmost discretion is advised, and firms should only acquire more equipment at the right time. 

Characteristics of Internal vs. External Business Environment

Both internal and external business environments affect the strategic management of a business. However, the internal business environment significantly affects the human elements within an organization responsible for the strategy for attaining organizational goals. 

Therefore understanding how both business environments influence strategic planning ensures better organizational management. Business change is constant, and every business should be able to detect and anticipate business environmental changes to stay on top of things, especially with strategic planning. 

Here is how the internal and external business environments differ regarding strategic planning.

Internal Business EnvironmentExternal Business Environment
It is more associated with the human elements and resources of the organization.It is more associated with the firm’s material elements and other extraneous factors.
It controls how workers undertake tasks that align with the mission and vision of the enterprise.It controls how the business management responds to economic stimulus to maintain financial stability.
Strategic planning and process management techniques make the internal business environment controllable and changeable.The external business environment is not easily controllable or changeable as there are greater forces beyond the firm’s internal management.
It involves more proactive measures.  The business managers do not control other competitors’ activities, economic conditions or government policies but can adjust to suit the situation.
 Business managers can only influence how the business reacts to external business environment elements. 

How do the Elements of the Internal Business Environment Affect an Enterprise’s Strategic Planning?

An enterprise’s internal business elements affect the functionality of its strategic planning. Here is how.

Internal Environmental FactorsInfluence on Organizational Planning Strategy
Human resourcesHuman resources, especially the management committee, are responsible for creating and assigning organizational tasks.
Organizational cultureWorkers’ attitudes to work define the enterprise’s organizational culture and influence profitability.
Organizational structureOrganization structure refers to the business policies operating within the firm, including situation framework and strategic planning. 
Leadership and ManagementThe leadership and management of a firm decide the strategic plans and other business operating procedures to drive the firm toward attaining the business goals and objectives. 
Material resources/Assets/Financial capacityAn organization’s material resources or assets influence its strategic planning as abundant reserves lead to more robust plans. An organization with a higher financial reserve can execute bigger plans such as organizational expansion.

Frequently Asked Questions

What Makes Internal Environmental Factors Critical for Business Success?

Internal environmental factors influence an establishment’s capacity to achieve its goals and objectives. They constitute the inner strengths and weaknesses of the business not obvious to competitors or the external environment and are somewhat a part of the private affairs of the enterprise.

How Do You Define the Internal Environment in Business?

The internal environment in business refers to the internal elements of the organization, such as current employees, management, and company culture, all of which define the company’s inner workings.

Which Is More Important for an Organization Between Internal and External Factors?

None of the two factors is superior to the other as they serve different purposes for any firm. The internal factors are essential for the internal coordination of the affairs within the company, while the external factors are responsible for the firm’s relationship with the external environment. 

Final Thoughts

An internal conflict is regarded as a grave situation. In the same way, the importance of the internal business environment cannot be overemphasized. Even though the vast external environment appears overwhelming, every business requires significant internal decorum to achieve success. Hopefully, this piece helps put things in perspective!