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Mandeep kaur

Learning Outcome:

After completing this module the students will be able to: Understand the concepts of business environment.

Describe the features & importance of business environment. Discuss the various factors affecting business environment.

1. Introduction

The term ‘Business Environment’ is a combination of words business and environment. Business is associated with performing activities in the form of production or purchase of goods or rendering services with the motive of earning profit. Businesses operate with the aim of delivering goods and services to the society for mutual profit. In general, environment is the aggregate of conditions that influence the community or the circumstances that surround someone. Business does not work in a vacuum, it also affects the environment in which it operates. Business environment comprises all conditions external and internal to an organization which affects its every aspect, be its economic, political or technological and so on.

2. Concept of Business Environment

Business environment represents an aggregate of all conditions, events, and factors that surround and influence the decision-making capabilities of the business. Every organization performed under the influence of external and internal forces. The survival and success of an organisation depend on upon how quickly it adapt to the changing environment. The external and internal forces keep on changing in the contemporary world in the form of economic reforms, political changes, technological innovations that keep affecting the functioning of business. Business environment includes internal and external forces influencing business activities. The internal factors are controllable factors, a business can exercise control over internal factors like company’s objectives and strategy, financial, physical and human resources etc.

External factors include that forces which are beyond the control of the business and significantly affect the every aspect of a business enterprise like socio-cultural, demographic, political, economic and global environment. Environmental changes are so rapid that have direct and indirect implication for business. These changes bring opportunities as well as threats. Business is expected to identify, assess and respond to various opportunities and threats to ensure smooth functioning of business. The success of a business lies in its alertness to adapt changes occurring in the environment.

2.1 According to M.Weimer, “Business Environment encompasses the climate or set of conditions, economic, social, political or institutional in which business operations are conducted”

2.2 According to Bayard O. Wheeler, “Business Environment is the total of all things external to business firms and industries which affect their organization and operations.”

2.3 In the words of Paire and Anderson, “Business environment is the sum of those inputs to an organization which are under the control of other organizations or interest groups or are influenced by the interaction of several groups, such as the economy.”

3. Features of Business Environment

Ø Business environment is an inherent part of business. Business requires a good framework of economic, legal, political, social-cultural factors to perform its work smoothly.

Ø Complexity: Business environment has become extremely complex as it is governed by internal and external forces. The external changes are rapid one that is highly unpredictable. Businesses operating under such complexity required to adapt changes for seizing opportunities.

Ø Dynamic: Business environment is actively changing and proactive attention to changes allows business to flourish. Changing customer preferences, competitor strategies, technological improvements and operating business in many countries are the major challenges in today’s business environment.

Ø Uncertainty: Risk is an inherent feature of business. External forces posed challenges, risks, and uncertainty to business. For instance, it is very difficult to anticipate changes in fashion and trends by the marketer.
Ø Business environment is multi-dimensional: Environmental changes may not affect all the business in a similar manner. For some business change is welcomed as an opportunity while other may take it as a threat or unfavorable. These changes can have short-term as well as long-term impact on productivity and profitability of business.

Importance of Business Environment

Understanding the social, political, legal and economic environment helps the business in the following ways:

The internal environment helps the firm to identify the strengths and weaknesses of business enterprises in terms of global developments.

The forces of external environment help the firms to identify the various opportunities and threats to the business.

Business environment helps the firms to formulate their own strategies after analyzing the competitors’ strategies.

A Proper understanding of internal and external forces of environment enables the enterprises to identify the areas for growth and expansion of their activities.

Understanding of interaction of business with environment helps the organization to formulate its broad strategies and long-term policies that should match with society needs.

Environmental understanding enables the business enterprises to adapt itself as per the dynamic changes, condition or events of the environment.

Components of Business Environment or (Factors affecting Business Environment)

Source: http://eiilmuniversity.ac.in

There are two set of factors – Internal and external that influences business. Internal environment refers to internal factors that outline the strength and weaknesses of an organization in relation to its external environment. Internal environment includes all the factors over which organization has a considerable degree of control such as human resources, organization culture, organization structure, location, company’s image etc.

Internal environment represents the world inside of an organization. Internal factors are controllable factors and organization can alter, modify, introduce or phase out such factors as per requirement of the environment.

5.1 Internal environment: The following components comprise the internal environment of the business firm.

Ø Organization culture: Organization culture is widely acknowledged component of the internal environment of the business. The culture of an organization refers to values, style and learned ways that shape the collective behavior of humans within an organization. Employees performing work in business enterprises hold some value system that influences their working languages, ethical standards, working style and mutual interaction. A healthy culture shared by all within organization promotes mutual cooperation and provides satisfaction among all employees acts as a great internal strength of the business firm.

Ø Vision, mission, and objectives: Vision, mission and objectives of a company provide a roadmap that guides its philosophies, priorities, policies. For instance, Wal-mart stores Vision is “To become the worldwide leader in retailing” and Mission is “To help people save money so they can live better”

Ø Top management structure: Top management supports the growth of the organization. The composition of the board of directors and the extent of professionalism of management greatly affects the success and failure of an organization for achieving its vision, mission, and objectives. The quality, attitude and behavior of highest decision-making authority is a critical factor for the development of the company. Shareholding pattern split among promoter, promoter group and public could have important implication for business. Experienced top management facilitates quick decision making that acts as internal strength of an organization.

Ø Human resources: Workforce is an entitled as greatest asset of an organization as it plays an important role in both strategy implementation and management system. A committed and talented workforce with leadership skills ensures the success of the business. Business leaders need to attract, develop and retain the best people necessary to seize elusive opportunities, for reducing cost and optimize performance.

Ø Company’s image: Company’s image is more than its colorful logos, artistic designs, and creative website etc. The image perceives by the mind of customers conveys lot that influences its sales and profitability. Launching new products, attracting potential customers, restraining competitive attacks, raising finance, forming joint ventures greatly depends on upon company’s image. Brand equity can prove the greatest strength of the company in the form of brand loyalty or repeated sales.

Ø Miscellaneous factors: Miscellaneous factors that highly affect decision-making capabilities of business include-

i) Natural resources: Adequate access to natural resources such as water, wood, iron, coal, mineral deposits etc. considered valuable available for commercial disposal.

ii) Financial resources: Money available in the form of cash and securities held by an organization is a prominent criterion to determine its real internal strength. Financial resources determine company’s size and capacity to expand its operations as against competitors.

iii) Physical resources: Physical resources include production facilities mainly machinery, IT equipment, vehicles and distribution networks, physical infrastructure etc available to an organization needed for smooth running of business.

iv)Research & development capabilities: Investment in research & development activities ensures company’s ability to innovate new products for meeting diverse customer expectations.

Others factors such as the location of business, patents & trade secrets, operational capabilities &structure forms part of the business internal environment that influence the functioning of business.

5.2 External environment: External environment connotes that fall outside the organization boundaries and beyond the control of the business enterprise. The external environment forces are an extensive and multidimensional phenomenon. It represents the world outside the business which has a direct bearing on the functioning of business. External factors are uncontrollable factors that can offer opportunities as well as pose threats to the business.

“The environment of business consists of all those external things to which it is exposed and by which it may be influenced directly or indirectly.”

– Reinche and schoell

“In environment, there are external factors, which constantly bring opportunities and threats to the business firm. It includes social, economic, technological and political conditions.”

– William Glueck and Jauck

Firms are expected to monitor changes in the external environment which are uncertain needed for well being of business concern. All factors comprise external environment may not relevant for particular business. Firms need to focus on such forces that affect its decision-making capabilities. The external business environment is classified into the micro and macro environment.

5.2.1 Micro Environment

“The micro environment consists of factors in the company’s immediate environment which affects the performance of business unit. These include suppliers, marketing intermediaries, competitors, customers and the public.” – Philip Kotler

“The micro environment of a company consists of elements that directly affect the company such as competitors, customers and suppliers. – Hill and Jones

Micro Environment of business discussed as follows-

Ø Customers: The survival of business solely depends on the satisfied customers. In today competitive environment attracting and retaining customer has become more challenging. In order to satisfy the different needs, tastes and likings of customers business spend heavily on consumer research, product designing & advertising and after sales services. For a business depending upon a single customer can prove risky. Different categories of customers include

Individuals & households

Industries & other commercial establishments Government & other institutions.

Choice of the customer should be done by considering relative profitability, dependability, the stability of demand, growth prospects, the extent of competition etc.

In the present scenario, with the concept of market segmentation business houses delivering products to customers for satisfying their needs. The segmentation of consumer market can be done on the basis of Income level of customer Demographic factors mainly age, gender, occupation etc. Geographical area

Personality, lifestyle and attitude of the customer.

In a competitive market, where choices to customers are abundant and have more power to control market big MNCs are also striving for retaining foreign customers.

Ø Suppliers: Suppliers are those who supply inputs and components in the form of raw material, labor and capital to the company for the production process. Suppliers provide the resources needed by the company such as labor, material, storage and credit facility. For smooth functioning of the business source/sources of supply should be reliable. A reliable source of supply ensures quality input material, less ordering and carrying cost, minimum buffer stock that further reduce its cost of carriage and insurance charges. Depend on a single source of supply can prove risky for a business during the strike and lockout situation. The wrong choice of supplier can cause the company to lose cost advantage benefit as well as loss of trust among customer as it happened in ‘Toyota’.

During 2009-11, Toyota had to recall nearly 10 million vehicles all around Europe as the accelerators were not working properly. It was because the suppliers had supplied faulty mechanical accelerators. Due to faulty accelerators there were many accidents out of which nearly 89 were fatal and ended in death. Out of 10 million cars nearly 7 million were Toyota Camry and Corolla. Toyota repaired all these cars and sent them back to their owners, but they lost the trust of the customers. Business houses need to choose best suppliers that should supply quality inputs with the reliable delivery system at low cost. Ultimately supply of quality inputs determines the finished product quality.

Ø Competitors: Business gets affected by action and reaction of competitors. Healthy competition between rival firms drives innovation that expands its product range in order to build a better relationship with customers. The rivalry among firms such as coke vs. Pepsi is for capturing maximum market share which is producing and delivering similar products. In today’s globalized world domestic firms are also facing cut- throat competition from big MNCs serving the customers with wide variety of products. Most popular type of competition is ‘brand competition’ where national and international brands are striving for winning same customer base. For buying Android phones the brand Nokia, Samsung, Micromax, HTC, Gionee, Lava , Sony, Nexus , Apple, ZTE, Huawei, TCL, Lenovo etc is available for customer choice. Competitors’ analysis is crucial for business in order to – Identifying its own weaknesses as against competitors Identifying weaknesses of its competitors

Formulating strategies to combat competition.

The competitive environment ensures availability of desired products to the consumer at affordable prices.

Ø Market intermediaries: For a business it is difficult to make products available to each and every segment of customer. An intermediate agency that connects the company and final consumer are crucial for promotion, selling and distribution of goods. Market intermediaries include agent, brokers, wholesalers, retailers and distribution companies that help the business house to make products available to existing customers as well as finding new customers. The reliable channel of distribution provides timely feedback of customer about products which is essential for strategic policy formulation. Apart from the promotion of company’s products, market intermediaries also provide feedback regarding unfulfilled demands of customers and untapped market by a business unit which can become the source of innovation and new product developments.

Ø Public: In the words of Philip Kotler,” a public is any group that has an actual or potential interest in or impact on a company’s ability to achieve its objectives”. The environmentalists, consumer protection groups, media, local people, student unions, religious groups etc. can affect the working of the business. The firm has a primary duty to satisfy the general public at large along with customers. Creating positive image among the public has a long-term impact on the company well being. Survival and overall success of business depend on how society perceived their activities. Good public relation helps to get a favorable response related to a company whereas adverse situation can pose a threat to the business. For instance, an advertisement for a skin whitening product in Thailand has drawn criticism on social media claiming in ad “you need to be white to win” runs with the tagline. Suggesting people with dark skin are losers is definitely racist. Yulihan Group (Thai Co.) apologized for this controversy.

5.2.2 Macro Environment: It is also known as General / Remote environment.

“Macro environment includes forces that create opportunities and pose threats to the business units. It includes economic, demographic, natural, technological, political and culturalenvironments.” – Philip Kotler

“The macro environment consists of the broader economic, social, political , legal, demographic and technological setting with in which the industry and the business units are placed.”

– Hill and Jones

Important macro environment factors include economic environment, political and regulatory environment, social/cultural environment, demographic environment, technological environment. These factors are discussed as follows:

Ø Economic environment

The survival and success of each and every business enterprise depend fully on its economic environment. It refers to all factors related to the areas of production, distribution, income and wealth have a bearing on the function of business. The main factors that affect the economic environment are:

(a) Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organizations and their operations.

Aspects of economic conditions GDP, GNP, Balance of Trade, Balance of Payment, Inflation, Poverty, Savings & Investment, International Debt, Per Capita Income, Foreign exchange reserve, Foreign trade, Capital market etc

(b) Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time.

Aspects of economic policies Industrial policy, Fiscal policy, Monetary policy, Foreign investment policy, Export –Import policy (Exim policy)

The government keeps on changing these policies from time to time in view of the developments taking place in the economic scenario, political expediency, and the changing requirement. Every business firm has to function strictly within the policy framework and respond to the changes therein.

(c) Economic System: The world economy is primarily governed by three types of economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. India has adopted the mixed economy system which implies co-existence of public sector and private sector. Economic environment may put constraints and may offer opportunities to business. For instance, with the easing of investment caps and controls, India’s high-value industrial sectors – defense, construction, and railways – are now open to global participation.

Ø Social and cultural environment

Social environment consists of customs and traditions of a society in which business exists. Culture refers to knowledge, beliefs, art, morale, law, customs, habits and capabilities of individuals acquired from society. The social-cultural environment of a nation determines the value system of the society which, in turns affects the functioning of business.

Aspects of social and cultural environment Social Customs & traditions, Values & Beliefs, Ethical standards, Work Ethics, Language, Conflict & cohesiveness, Quality of life, Birth & Death, Education/ literacy level, Consumption habits, Family structure, Human relationship etc.

Strategies of business should be appropriate in the social- cultural environment. For e.g. Nestle brews a very large variety of instant coffee to satisfy different nation’s tastes. As far as culture is concerned, beef consumption is regarded as forbidden in countries like India, China, and Thailand etc. Perception about color also varies from country to country like Green favorite in the Muslim world but represents illness in Malaysia.

Ø Political environment

It constitutes all the factors related to government affairs such as the type of government in power, the attitude of government towards different groups of societies, policy changes etc. It has an immediate and great impact on business transactions so businessmen must scan their environment very carefully so as to make changes accordingly.

Aspects of political environment

Present political system, Constitution of country, Government interventions in business, Profile of political leaders, Foreign policy of government, Ideology of political parties etc.

The political environment has a close relationship with the economic system. Important economic policies such as industrial policy, policy toward foreign capital & technology, fiscal policy, and foreign trade policy are often political decisions. For e.g. India improved its position from last year’s 134 to 130 in the World Bank Doing Business 2016 ranking. The rise in the 2016 ranking was primarily on account of improvement in two areas – ease of starting a business and securing an electricity connection. World Bank official lauds efforts of Modi Government as it took four months in 2005 to start a business in India, but it takes only 29 days in 2015.

Ø Legal environment

It constitutes laws and regulations passed by parliament which can never be overlooked by businessmen as he has to perform business transactions within the framework of the legal environment. The important legislations that concern the business enterprises include:

Companies Act, 2013
Foreign Exchange Management Act, 1999
The Factories Act, 1948
Industrial Disputes Act, 1972
Payment of Gratuity Act, 1972
Industries (Development and Regulation) Act, 1951
Prevention of Food Adulteration Act, 1954
Trade Marks Act, 1999
Consumer Protection Act, 1986
Environment Protection Act 1986
Competition Act, 2002

They provide opportunities to businessmen along with putting on some constraints. For e.g. Companies Act, 2013 has replaced the old Companies Act, 1956 and partially made effective w.e.f. 12th September 2013 that contain comprehensive provisions to govern all listed and unlisted companies in the country. GST will put in place a state-of-the-art indirect tax system by 1st April 2016. This will create a unified and common domestic market by replacing a confusing array of taxes and preventing their cascading effects.

Ø Demographic environment

It refers to environmental factors related to density, location, age, gender, race, and occupation etc. of the population. Basically, it’s a study of the human population living in an area. Its study provides the base for decision making and policy formulation. Major demographic changes include a change in family structures and labor force diversity such as women participation, ethnic diversity etc.

Aspects of demographic environment

Population size, Density, Location, Age, Sex, Jobs, Income level. Life style, Education, Heredity etc.

For instance, Census 2011 data shows that India’s working age population (15- 64 years) is now 63.4% of the total population, as against just short of 60% in 2001. Further the ‘dependency ratio’ the ratio of children (0-14) and the elderly (65-100) to those in the working age has also shrunk to 0.55. India is poised to become the world’s youngest country by 2020, with an average age of 29 years, and account for around 28% of the world’s workforce. The International Labour Organisation (ILO) has predicted that by 2020, India will have 116 million workers in the work starting age bracket of 20 to 24 years, as compared to China’s 94 million. In 2011, IMF reported that India’s demographic dividend has the potential to add 2 percentage points per annum to India’s per capita GDP growth over the next two decades.

Ø Technological environment

Technology is a most important element of the macro environment. It refers to changes taking place in the methods of production, use of new equipment and machinery to improve the quality of the product. A businessman must closely monitor the technological changes taking place in the industry so as to implement them in a competitive environment. For instance, bulky computers with CPU, keyboards and mouse have changed into portable laptops and netbook which help in accessing the internet immediately.

Aspects of technological environment

Innovation and improvements, Scientific improvements, Development in IT sector, Import & export of technology, Technological advancements in computers etc.

Internet and telecom system changed the whole world. The phenomenal growth of the internet and associated World Wide Web (WWW) has made e-commerce possible allowing businesses to communicate and collaborate beyond borders. Via Instagram and Twitter, businesses can stay in touch with customers and provide them help to solve problems. Mobile devices like smartphones and tablets, combining with the power of internet have revolutionized the way we work. The Internet has simplified business processes with the help of video conferencing, cloud computing and instant messaging. The result is greater productivity and efficiency. This calls for substantial investment in Research and Development in order to remain competitive in the business world.

Conclusion

From the foregoing discussion, it can be concluded that there is a strong relationship between business and environment. All factors comprise internal and external have an impact on business decisions. For survival and success in this competitive environment, no firm can afford to ignore changes occurring in their relevant business environment. Business houses required keeping themselves updated about specific changes that can pose a threat to business. It is very clear that business environment is a mixture of complex, dynamic, uncertain and uncontrollable factors within which a business operates and with the help of internal factors the company tries to identify new ways to rectify the external environment problems.

Few important sources to learn more about Monetary Policy:

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