6 Environmental Factor Analysis

1. Learning Outcomes

After studying this module, you shall be able to

1.             Understand the concept of business environment

2.             Learn about its characteristics

3.             Differentiate between internal and external environment

4.             Analyse the different classifications of environment influencing the industry as well as strategy

5.             Understanding the need to study the Business Environment

2. Concept of Business Environment

Environment generally refers to the objects, surroundings, circumstances and the whole situation which affect someone or something existence. However, in context of business, environment refers to the factors which have a bearing on the working and functioning of business. It consists of all those forces both internal and external that affect the working of a business. It includes to the conditions, forces, events and situations within which business enterprises have to operate. Business and its environment are closely related and the effective of interaction of the two leads a business to success. An organisation can survive and grow only when it is able to keep pace with the changing environment.

DEFINITION

“Business Environment is the total of all things external to firms and individuals, which affect their organization and operations”. – Wheeler

“Environment factors of constraints are largely if not totally external and beyond the control of individual industrial enterprises and their arrangements. These are essentially the ‘givers’ within which firms and their managements must operate in a specific country and they vary, often greatly from country to country”. – Barry M. Richman and Melvyn Copen

“The environment includes outside the firm which can lead to opportunities for or threats to the firm. Although, there are many factors, the most important of the sectors are socio – economic, technical, supplier, competitors, and government”. – Glueck and Jauch

3.  Characteristics of Environment

A) Environment is Complex – The business environment essentially includes many of factors, and is a combination of many factors like political, economic, legal, social, cultural, technological etc. These factors affect the business in many ways. Therefore, the influence that they exercise on business cannot be recognised independently.

B) Environment is Dynamic – Environment is a mixture of many factors which are constantly changing. It is only because of these changes in the factors of environment that makes environment dynamic. The environmental factors changes with passage of time. The plans and policies of business also have to be changed to keep pace with changing environment.

C)   Environment affects different firms differently – It is not necessary that any particular change in environment should affect all businesses in a similar manner. One business may welcome a change in environment, while some other business may feel adverse effect of the same change. Therefore, environment may affect different business units in different manner.

D)  Environment has both short-term and long-term impact – Every change in environment has both short-term and long-term impact on business. The changed environment affects the profitability, productivity and development of business in both short-term and long-term.

E)  Unlimited effect of external environmental factors – External factors of business environment are uncontrollable. These factors have very deep effect on business. Sometimes the effect of these factors is so deep that it may take the business to closure e.g. decision of government to ban tobacco will compel such businesses to wind-up its operations.

F)  Uncertain – The external environment is very uncertain. There can be sudden change in it at any time. Because of its uncertain nature, its study and analysis is difficult.

G)  Interdependent components – Various components of business environment are interdependent of each other. Different components of environment affect each other. For example, economic environment affects social environment and is also affected by it.

H) Includes both internal and external environment – Business environment includes both internal and external environments. Internal environment relates to environment within the organisation which is controllable. External environment is outside the organisation which is uncontrollable. Business organisations have to change its activities along with changes in external environment.

4. Components of Business Environment

An organisation functions in the business environment which can be further divided into two components –

A)   The Internal environment (Related with the factors internal to an organisation, which are considered as controllable)

B)    The External environment (Related with the factors external to an organisation, and are uncontrollable)

INTERNAL ENVIRONMENT –

A number of elements which exist inside an organisation are termed as its internal environment. These factors act as strengths for an organisation and may also become a reason of weaknesses of the organisation. These internal factors have an impact on the organisational decisions and strategy. The following are some of the internal factors of the internal environment:

1.   Management Philosophy and value system – The values and ideologies of the promoters and founders of the organisation affect the selection of business, working of the organisations, principles and policies adopted, its working culture. These values, when shared and followed across the organisations facilitate the success.

2. Mission and Objectives – The mission of a business enterprise expresses its vision in words, while its objectives are the actionable and measurable steps to achieve the mission. The mission and objectives guide the business philosophy, policy, priorities and its business domain

3. Management Structure and Nature – Business decisions are also influenced by the structure of organisation, board of directors’ composition, organisational hierarchy, extent of professionalization of management etc.

4.  Internal  Power  Relationship  –  Top  management’s  support  to  the  lower  levels  of management, workers, shareholders and BODs also impacts the decision-making and working of the organisation.

5.  Human Resources – The success of the organisation depends on the quality of people it has. The skills, quality, morale, commitment and attitude of the human resources may acts as a source of strength or weakness for the organisation.

6. Company Image and Brand Equity – The reputation and image of the company is critical for raising capital and finances, making joint ventures and other alliances. Brand equity also plays a relevant role in sale and purchase contracts, new product launches etc.

In addition to the above, few other elements internal to business enterprise influence the decision making. These are –

• Physical Assets and facilities owned by an enterprise have an impact on its effective working. These include production Capacity, technology, and logistics etc.
• R & D and technological capabilities, enable the enterprise to innovate and come up with competitive offers in the market.
• Financial Factors consists of financial policies, position, capital structure of the business, as all the other important business strategies and decisions are dependent on financial resources possessed by the enterprise.
• Marketing resources directly influence the efficiency of marketing activities of the business, for instance, distribution network, structure of marketing function, skills and quality of people in marketing function etc. the marketing resources also facilitate the business in brand extensions and product developments etc.

EXTERNAL ENVIRONMENT

The external environment relates to all the factors which exist outside the business enterprise i.e. are external to the business. Further, the external environment offers opportunities and also creates threats for the business. These include factors such as economic, socio- cultural, legal, demographic etc. These factors are beyond the control the company.

The external environment consists of two types of environment, viz. micro environment and macro environment.

Micro Environment/ Operating Environment –

The Micro environment includes a number of factors which exist in the company’s immediate environment and have a bearing on the company’s performance. These can be discussed as –

• Suppliers – includes people who those who provide various inputs to the organisation like raw materials, machinery, labour etc.
• Marketing Intermediaries – Intermediaries help a company in promoting, selling and distributing its goods to final buyers.
• Competitors – All the business organisations which sell similar product in the market and also those enterprises with whom the organisation has to compete for the discretionary income of the consumers.
• Customers – The purpose of every business’s existence is serving the needs of its customers, thus keeping a track of customers needs is critical for the business success.
• Publics – Any group of people who have an actual or potential interest in or impact on an organization’s ability to achieve its interests, like Media, NGOs etc.

The micro environment is also known as task environment and operating environment.

Macro Environment/ General Environment –

The Macro or general environment consists of factors in the general environment like –

1) Demographic – Demographic environment studies human population with reference to its size, density, literacy rate, sex-ratio, age composition etc. The demand for goods and services, quantity and quality of production, distribution etc., all are affected by demography. For instance – a rapidly growing population indicates growing demand for many products.

2) Economic – A business firm closely interact with its economic environment. Economic environment is generally related to those external forces, which have direct economic effect upon business. Economic environment is a sum total of

a.  Economic conditions in the market

b.  Economic policies of the government

c.  Economic system of the country.

a. Economic conditions – It includes nature of economy, the stage in economic development, national income, per capita income etc. These operate in the market and influence the demand and supply of goods and services.

b. Economic policies – Economic policies means policies formulated by the government to shape the economy of the country. These include monetary and fiscal policies, export-import policy, industrial policy, licensing policy, budgetary policy etc. The economic policies of the government affect the business. This impact may be positive or negative e.g. liberation of the economy has adversely affected the small scale industry in India.

c. Economic systems – Economic systems means the classification of economies on the basis of role of the government in the functioning of the economy. Economic system can be classified as

• Capitalist Economy – There exists least government control in regulating the working of a market e.g. U.S.A.
• Socialist Economy – The government has major control over all activities e.g. China.
• Mixed Economy – It combines the features of both capitalist and socialist economy where both private and public sector play an equally important role e.g. India.

3)  Natural – Business firms use natural resources like water, land, iron, crude oil etc. All business units are directly or indirectly dependent upon natural environment. The geographical and ecological factors viz. natural resources, weather and climatic conditions, topographic factors, location aspects in the global context, ort facilities, etc. are all relevant to business. Therefore, business firms are responsible for ecological imbalance. So they should take necessary measures to control pollution. Business operations have caused considerable changes in ecological balance and natural environment of the country. The applications of modern technology in industry leads to rapid economic growth at a huge social cost a measured by the deterioration of physical environment i.e. air pollution, water pollution, noise pollution etc. So business enterprises have to calculate net social cost of its venture.

4) Technological – Technology enables the application of theories and knowledge into practice. Technological advancements make it possible to improve the quality of products, increase the output and decrease the cost of product. But the fast changing technologies may also make products and plants obsolete in shorter time frames creating problems for the enterprises. Technological changes are rapid and to keep pace with it, businessmen need to be alert and flexible in order to quickly incorporate them in their business organization so as to survive and succeed in the competitive business world.

5) Political – Political and Government environment are closely related with the economic system and policy. Political environment is the influence which the political institutions namely the legislature, the executive and the judiciary exert in developing and controlling business activities. Business decisions are greatly influenced by the developments in the political environment. A change in the government brings about a change in attitude, preference, objectives etc. Business firms need to keep a track of all political events, anticipate changes in government policies and frame production and marketing strategies accordingly.

6) Socio – Cultural – Socio – cultural fabric is an important environment factor that should be analyzed while formulating the business strategies. Every society has a culture of its own. Culture includes knowledge, belief, art, morals, laws, customs and other capabilities and habits acquired by an individual as a member of society. Cultural values are passed on from one generation to another. Culture thus determines the types of goods and services a business should produce. While attempting to succeed, the business organisations cannot ignore the traditions, value system, taboos, tastes, and preferences of a society. The purchase and consumption patterns of customers, their beliefs, customs, preferences, education, all these factors have an impact on the business. Thus, business should realize the cultural differences and bring out products accordingly.

7) Legal Environment / Regulatory Environment – Legal environment includes laws, which define and protect the fundamental rights individuals and organizations. It creates a framework of rules and regulations within which business units have to operate. Business firm must have up to date and complete knowledge of the laws governing production and distribution of goods and services. Some of the important laws are Indian Companies Act, 1956, The Consumer Protection Act, 1986, The MRTP Act, 1969, The Essential commodities Act, 1955 etc.

Mega Environment –

Mega environment mainly consist of International Environment which is very important from the point of certain categories of business. For example –

A.   Import and Export dependency –

• Industries which directly depend on Imports or exports
• Import – Competing Industries
• A boom in the export market, changes in govt. EXIM policy may encourage export oriented industries.
• A liberalization of imports may also help some industries which use imported items, but will also have an adverse effect on the competing industries.

B. World trade linkage – Oil price hikes have seriously impacted many economies, which has further lead to an increase in the cost of production and prices of products such as fertilizers, synthetic fabrics, etc. Such development affects the demand, consumption and investment pattern.

The international environment is an outcome of political and economic conditions in the international market. Business firms engaged in the foreign trade are more affected by the changes in the international environment factors like war, civil disturbances, political instability, changes in trade policies in other countries with which India has trading links do affect Indian exporters and importers. Therefore, business firms, which cater to foreign trade, must constantly monitor implications of international environment on their business. The components of international environment are

• Import and Export policy of a country.
• Rules and regulations laid down by International Institutions like IMF, World Bank etc.
• The policies of trading blocs like SAARC, EEC, ASEAN etc.
• Foreign exchange regulations like tariffs, quotas.
• Trade cycle like boom, recession at world level

5.  Significance/ Need of the Study of Business Environment

It is essential for a business enterprise to keep itself aware of surrounding environment because the success of business depends to a great extent on its business environment. The study of business environment is relevant for organisations to –

• Frame policies
• Ensure optimum utilisation of resources
• Analyse competitors’ strategies and formulate counter-measures
• Keep business dynamic and innovative
• Provide input for decision-making
• Find out the strengths of business
• Identify weaknesses of business
• Find out the opportunities available to business
• Identify threats posed to business
• Know the internal environment
• Understand market conditions
• Adjust with technological advancements
• Understand international events and their impact on business
• Understand economic policies of Government and their impact on business
• Understand political situation and its effect on business
• Foresee the impact of socio-cultural factor

6. Problem in Understanding the Environment Influences

The managers have to deal with various problems in varied situations with regards to the business environment –

• The issues relating to the business environment opens more challenges for managers, making decision-making more difficult. Managers, while making decisions have to conceive all the possible environmental influences, however, getting an overall picture of the whole business environment is a tedious task.
• The second problem faced by the managers is of uncertainty. While, the management and managers are expected to be well aware of the ever changing technologies, but in reality these changes are happening at the faster pace than ever before. Thus, it becomes difficult to predict all the changes and as a result few changes are either predictable or unpredictable by the managers. Managers always are trying to develop better understanding of the events taking place in future in the external environment, in order to avoid uncertainty.
• The managers have to face complex and rigid problems relating the business environment. While attempting to resolve such problems, the managers have to take risks to work in accordance with the environment.

7. Summary

• Business and its environment are closely related and the effective of interaction of the two leads a business to success.
• Business environment is complex and principally is a combination of many factors like political, economic, legal, social, cultural, technological etc.
• Environment is dynamic, a mixture of many factors which are constantly changing.
• Any particular change in environment may not affect all businesses in a similar manner.
• Every change in environment has both short-term and long-term impact on business.
• Business environment includes both internal and external environments. Internal environment relates to environment within the organisation which is controllable. External environment is outside the organisation which is uncontrollable.
• The Internal environment (related with the factors internal to an organisation, which are considered as controllable) consists of factors which act as strengths and weaknesses for the business enterprise.
• The External environment (related with the factors external to an organisation, and are uncontrollable) includes all the possible opportunities and threats which exist in its external environment.
• The external environment consists of two types of environment, viz. micro environment and macro environment.
• The Micro environment includes a number of factors which exist in the company’s immediate environment and have a bearing on the company’s performance.
• The Macro or general environment consists of factors in the general environment like – demographic, natural, legal, political, cultural etc.
• Mega environment mainly consist of International Environment which is very important from the point of certain categories of business.
• The success of business depends to a great extent on its business environment.
• Strategic managers have to face different circumstance in their business like diversity of environmental changes, uncertainty, complex and rigid nature of problems.