Microenvironmental factors affecting business

Micro-Environmental Factors in Business

The micro-environment of a business includes the factors in the immediate area of operation affecting its performance and decision making freedom. They include competitors, customers, distribution channels, suppliers, and the public. These factors affect the performance of the business in several ways and understanding them is important for strategy formulation. It also helps in organizational planning for operational efficiency and financial success. These factors are important for any business. Below is a brief analysis of these micro-economic factors that affect nearly every business.

Customers:

Customers are considered the most important factor in the microenvironment because of the impact they have on business. Their importance has grown higher in the 21st century.  Moreover, the better a business knows its customers, the healthier is its bottom line. A company can create promotional strategies and campaigns to attract and retain its customers effectively by understanding them better.  Being more customer-oriented helps in this hypercompetitive era because customized service helps retain your customers longer.  Sometimes, it also helps at generating new revenue streams as you can sell more to your existing customer base if you understand its preferences better.  There are several more things that show the central importance of customers in the context of business.  Businesses are using every means to strengthen their customer connection. It is not just about earning from them but knowing them, including and retaining them for longer. Customer engagement has become a key focus for businesses and it is also because of the growing competition.

Employees:

Employees are one of the very important micro-economic factors affecting the performance of any business. The performance of the employees is one of the primary drivers of organizational performance and productivity.  Research has also highlighted the key role HR plays in the success of a business. A large number of successful companies have excellent HR policies in place. They offer the best training and salaries to their employees, like Google, Facebook, Microsoft, Apple, and Amazon. Apple is also focusing on inclusion and diversity as well as employee engagement. Motivated and skilled employees are essential for the success of a business.  This is also why companies focus on attracting and retaining the best talent. Leading companies offer a mix of financial and non-financial benefits to maximize employee satisfaction. 

Suppliers and distribution channels:

Managing the supply chain and distribution network should also be a primary focus of businesses that strive to be successful. A well-managed supply chain reduces operational costs and improves efficiency. Some companies that have managed efficient supply chains have been able to pass the savings to their customers. For example, Costco and Walmart are large retailers with well-managed supply chains. They have been able to maintain lower prices through supply chain optimization. Selecting the right distribution channels and optimising them also affects operational efficiency and improves the bottom line. Apart from sales, customer service is also just as important. You need to be within your customers’  reach if you want to see your business being popular and successful. The importance of managing the supply chain and distribution network has also grown because of the fact that it helps reduce operating expenses.

Competitors:

Competition is everywhere and in every industry.  The level of competition in any industry has a major effect on profits.  The higher the number of your competitors, the lower is your market share. When several businesses are battling for winning market share in a limited space, the chances of market growing saturated quicker are higher. Not just this, competition affects businesses in other ways too. To stand out in a highly competitive market is not easy and businesses must differentiate to attract customers. Moreover, the pressure of competition also compels businesses to regularly update their business and marketing strategies.  However, sometimes competition can be a positive factor and can help churn demand.

Shareholders and Investors:

Shareholders and investors are among the most important internal stakeholders for any business. Businesses also exist for creating shareholder value. These people have helped you grow your business and expect returns on their investment.  You share both your risks and profits with them.  So, any business must create healthy profits to keep its investors happy.

Public and Media:

A company’s image also decides its fortune in the market.  So, every brand in the 21st century needs a strong brand image. It is why they are investing in social and environmental concerns to create a responsible social image. Often this also translates into financial success for businesses. Brands with a good brand image are easily noticed and are therefore successful at attracting customers. The public supports the companies that have an ethical image and if you are not a responsible business, chances of a poor image in public and media are higher. Image means a lot in today’s environment and sometimes lost reputation can be very difficult to regain.

These were some of the most important micro-economic factors that are a part of the immediate operational environment of businesses. Customers, employees, and shareholders are people you need to really care for. Having motivated employees leads to good business performance. Maximising customer satisfaction improves your bottom line. So, the satisfaction of both should be a focus of businesses. However, shareholder happiness is also important.  Apart from these things, a strong brand image is just as essential and businesses must care for their image in the public and the media. If businesses understand these micro-economic factors and their effect, they can plan and formulate strategies effectively.

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Pratap, Abhijeet. “MICROENVIRONMENTAL FACTORS AFFECTING BUSINESS.” Notesmatic, July 2017, notesmatic.com/2017/07/microenvironmental-factors-affecting-business/.

Pratap, A. (2017, July). MICROENVIRONMENTAL FACTORS AFFECTING BUSINESS. In Notesmatic. Retrieved from https://notesmatic.com/2017/07/microenvironmental-factors-affecting-business/

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.