Unit 1-Business Environment

Introduction to

Business Environment

All living creatures including human beings live within an environment. Apart from the natural environment, environment of humans include family, friends peers and neighbors. It also includes man-made structures such as buildings, furniture, roads and other physical infrastructure. The individuals do not live in a vacuum. They continuously interact with their environment to live their lives.

INTRODUCTION

Just like human beings, business also does not function in an isolated vacuum. Businesses function within a whole gambit of relevant environment and have to negotiate their way through it. The extent to which the business thrives depends on the manner in which it interacts with its environment. A business, which continually remains passive to the relevant changes in the environment, is destined to gradually fade-away in forgetfulness.

INTRODUCTION

To be successful business has not only recognized different elements of the environment but also respect adapt to or have to manage and influence them. The business must continuously monitor and adapt to the environment if it is to survive and prosper. Disturbances in the environment may spell extreme threats or open up new opportunities for the firm. A successful business has to identify, appraise, and respond to the various opportunities and threats in its environment.

INTRODUCTION

The term ‘business environment’ connotes external forces, factors and institutions that are beyond the control of the business and they affect the functioning of a business enterprise. These include customers, competitors, suppliers, government, and the social, political, legal and technological factors etc. While some of these factors or forces may have direct influence over the business firm, others may operate indirectly. Thus, business environment may be defined as the total surroundings, which have a direct or indirect bearing on the functioning of business. It may also be defined as the set of external factors, such as economic factors, social factors, political and legal factors, demographic factors, technical factors etc., which are uncontrollable in nature and affects the business decisions of a firm

Definitions of Business Environment

According to Bayard O. Wheeler as “the total of all things external to firms and industries which affect their organization and operation”.

According to Arthur M. Weimer, business environment encompasses the ‘climate’ or set of conditions, economic, social, political or institutional in which business operations are conducted.

According to Glueck and Jauch, “The environment includes factors 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, technological, supplier, competitors, and government.”

Definitions of Business Environment

A business firm is an open system. It gets resources from the environment and supplies its goods and services to the environment.

There are different levels of environmental forces.

Some are close and internal forces whereas others are external forces. External forces may be related to national level, regional level or international level.

These environmental forces provide opportunities or threats to the business community.

Concept of Business Environment

Every business organization tries to grasp the available opportunities and face the threats that emerge from the business environment.

Business organizations cannot change the external environment but they just react.

They change their internal business components (internal environment) to grasp the external opportunities and face the external environmental threats.

It is, therefore, very important to analyze business environment to survive and to get success for a business in its industry.


It is, therefore, a vital role of managers to analyze business environment so that they could pursue effective business strategy.

A business firm gets human resources, capital, technology, information, energy, and raw materials from society.

It follows government rules and regulations, social norms and cultural values, regional treaty and global alignment, economic rules and tax policies of the government.

Thus, a business organization is a dynamic entity because it operates in a dynamic business environment.


Business environment is the sum total of all factors external to the business firm and that greatly influences their functioning.

It covers factors and forces like customers, competitors, suppliers, government, and the social, cultural, political, technological and legal conditions.

The business environment is dynamic in nature, which means, it keeps on changing.

The changes in business environment are unpredictable. It is very difficult to predict the exact nature of future happenings and the changes in economic and social environment. .

Business Environment differs from place to place, region to region and country to country.

Features of Business Environment

(i) System Approach: In original, business is a system by which it produces goods and services for the satisfaction of wants, by using several inputs, such as, raw material, capital, labour etc. from the environment.

(ii) Social Responsibility Approach: In this approach business should fulfill its responsibility towards several categories of the society such as consumers, stockholders, employees, government etc.

(iii) Creative Approach: As per this approach, business gives shape to the environment by facing the challenges and availing the opportunities in time. The business brings about changes in the society by giving attention to the needs of the people.

Nature of Business Environment

Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments

Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It helps the business enterprises for meeting the challenges successfully.

Giving Direction for Growth: The interaction with the environment leads to opening up new frontiers of growth for the business firms. It enables the business to identify the areas for growth and expansion of their activities.

Significance of Business Environment

Continuous Learning: Environmental analysis makes the task of managers easier in dealing with business challenges. The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business.

Image Building: Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working.

Meeting Competition: It helps the firms to analyse the competitors’ strategies and formulate their own strategies accordingly.


Help to understand internal Environment: It is very much important for business enterprise to understand its internal environment, such as business policy, organisation structure etc. In such case an effective management information system will help to predict the business environmental changes.

Help to Understand Economic System: The different kinds of economic systems influence the business in different ways. It is essential for a businessman and business firm to know about the role of capitalists, socialist and mixed economy.

Help to Understand Economic Policy: Economic policy has its own importance in business environment and it has an important place in business. The business environment helps to understand government policies such as, export-import policy, price policy; monetary policy, foreign exchange policy, industrial policy etc. have much effect on business.


INTERNAL ENVIRONMENTIt is defined as all the forces or conditions that are

available within an environment that affects on organization and business. It is also known as controllable factors because business can control them. It includes

I. Employees: Business hires employees. It is the major internal factor. It works inside the business. It can be controlled by the business. Employees differ in skill, knowledge, morality, and attitude and so on. When managers and employees have difference in goals an beliefs then conflict may arise. The task of management is to divide the work and assign the work to the suitable employee and handle the conflict.

ELEMENTS BUSINESS ENVIRONMENT

II. Shareholders: Management deals with many shareholders. Shareholders have the right of ownership, power of management and voting right. The actual management of organization is carried out by elected representative of shareholders jointly known as boar of directors. Boards of directors have the responsibility of overseeing the management of organization. It plays the major role in formation of objectives, policies, strategies of the organization as well as their implementation.

III. Organization structure: It is located inside the organization. The arrangement of various facilities, pattern of relationships among the various department, responsibility, authority and communication is the organization structure. It also included specialization and span of control.


IV. Organization culture: The sets of values that help the members to understand what organization stand for how it does work, what it considers, cultural values of business forces of business and so on. It helps in direction of activities.

V) Value System: The value system of the founders and those at the helm of affairs has important bearing on the choice of business, the mission and the objectives of the organization, business policies and practices

VI) Mission, Vision and Objectives: Vision means the ability to think about the future with imagination and wisdom. Vision is an important factor in achieving the objectives of the organization. The mission is the medium through which the objectives are achieved


EXTERNAL ENVIRONMENT

Micro external forces have an important effect on business operations of a firm.

However, all micro forces may not have the same effect on all firms in the industry. For example, suppliers, an important element of micro level environment, are often willing to provide the materials at relatively lower prices to big business firms.


Suppliers of Inputs: An important factor in the external environment of a firm is the suppliers of its inputs such as raw materials and components. A smooth and efficient working of a business firm requires that it should have ensured supply of inputs such as raw materials. If supply of raw materials is uncertain, then a firm will have to keep a large stock of raw materials to continue its transformation process uninterrupted. This will unnecessarily raise its cost of production and reduce its profit margin.

To ensure regular supply of inputs such as raw materials some firms adopt a strategy of backward integration and set up captive production plants for producing raw materials themselves.


Suppliers of Inputs: Further, energy input is an important input in the manufacturing business. Many large firms such as Reliance industries have their own power generating plants so as to ensure regular supply of electricity for their manufacturing business. However, small firms cannot adopt this strategy of vertical integration and have to depend on outside sources for supply of needed inputs.

Further, it is not a good strategy to depend on a single supplier of inputs. If there is disruption in production of the supplier firm due to labour strike or lock-out, it will adversely affect the produc tion work of a firm. Therefore, to reduce risk and uncertainty business firms prefer to keep multiple suppliers of inputs.


Customers: The people who buy and use a firm’s product and services are an important part of external micro-environment. Since sales of a product or service is critical for a firm’s survival and growth, it is necessary to keep the customers satisfied. To take care of customer’s sensitivity is essential for the success of a business firm.

A firm has different categories of customers. For example, a car manufacturing firm such as Maruti Udyog has individuals, companies, institutions, government as its customers. Maruti Udyog, therefore, has catered to the needs of all these types of customers by producing different varieties and models of cars.


Marketing Intermediaries: In a firm’s external environment marketing intermediaries play an essential role of selling and distributing its products to the final buyers. Marketing intermediaries include agents and merchants such as distribution firms, wholesalers, retailers.

Marketing inter mediaries are responsible for stocking and transporting goods from their production site to their destination, that is, ultimate buyers. There are marketing service agencies such as marketing research firms, consulting firms, advertising agencies which assist a business firms in targeting, promoting and selling its products to the right markets.


Competitors: Business firms compete with each other not only for sale of their products but also in other areas. More generally, market forms of monopolistic competition and differen tiated oligopolies exist in the real world.

In these market forms different firms in an industry com pete with each other for sale of their products. This competition may be on the basis of pricing of their products. But more frequently there is non-price competition under which firms engage in competition through competitive advertising, sponsor ing some events such as cricket matches for sale of different varieties and models of their products, each claiming the superior nature of its products.


Competitors: For example, competition for a firm producing TVs does not come only from other brands of TV manufacturers but also from manufacturers of air conditioners, refrigerators, cars, washing machines etc. All these goods compete for attracting disposable incomes of the final consumers. Competition among these diverse products is generally referred to as desire competition as all these goods fulfill the various desires of the consumers who have limited disposable incomes.

As a consequence of liberalisation and globalisation of the Indian economy since the adoption of economic reforms there has been a significant increase in competitive environment of business firms. Now, Indian firms have to compete not only with each other but also with the foreign firms whose products can be imported


Publics: Finally, publics are an important force in external micro environment. Public, according to Philip Kotler “is any group that has an actual or potential interest in or impact on a company’s ability to achieve its objective”. Environmentalists, media groups, women associations, consumer protection groups, local groups, citizens associations are some important examples of publics which have an important bearing on environment of the firms.

For example, a consumer protection firm in Delhi headed by Sunita Narain came out with an amazing fact that cold drinks such as Coca Cola, Pepsi Cola, Limca, Fanta had a higher contents of pesticides which posed threat to human health and life. This produced a good deal of adverse effect on the sale of these products in 2003-04. The Indian laws are being amended to ensure that these drinks must not contain pesticides beyond European safety standards.


Macro external forces have an important effect on business operations of a firm. It includes:

I. Economic environment: It indicates the condition of economy in which business organization operates. It has continuous and great impact on business. It includes national income, production, inflation, savings, investment, price, government activities. Business person must have constant watch on this factor.

A) Economic policies: Economic policies related to budget , industrial policy , fiscal policy , export and import policy and business should see what changes are done in these and business has to changes their business policies according to these changes .

B) Economic regulation: Different laws and regulations are at international level and national level. These are all called economic regulation and business has to respect all of these while it is operating business.


II. Political or legal environment: It is defined as rules and regulations determined by the government. Business must fulfil demand of government. There should be no violation of rules and regulation of government. Business should avoid unfair trade and should provide essential information to the government.

III. Social environment: Business must have good environment where a business can be established neatly. Business also helps in employment opportunities generation. There should be socio cultural understanding and application of anti pollution measures.


IV. Technological environment: It defines about the methods available for converting resources into product or services. It transforms inputs into output. Inputs means material, capital, man, machine. It affects on business. It helps to change the level of job, skill, and product and so on. There can be innovation, development of scientific techniques which encouraged mass production and distribution.

V. Natural Environment: Natural environment is also external factor of business . Because , business cannot fully control on natural environment . Many points like season , raining , floods , earth quake are natural and happens according to fluctuation in it . These are also main element of business because business has to face all these factors . But some of loss from these factors can be transferred with effective schemes of insurance.


VI. Demographic Factors: Size of population and their growth rate includes in demo graphic element and factor of business environment. Increasing trend of population will increase demand of products and support business to produce more products. But if death rate is increasing or demo graphic factor like religion are preventing to use the products of business. At that time business has to change their business or make other plans according to situation.

VII. International Environment: International environment includes WTO, IMF, WB, SAARC (South Asian Association for Regional Cooperation) and G20 meetings and their rules and regulations can effect on any type of business. Business has to exist in world market, and then it should understand their effect and take action according to these rules and regulation


Unit 1-Business Environment

Education