Environment or business environment is something that is external to the firm or one which surrounds an organisation. These external forces are uncontrollable where the firm is to respect the components of external environment.
The success of a business is generally dependent on its business environment. A successful business has to identify, appraise, and respond to the various opportunities and threats in its environments.
To be successful, the business has to not only recognize different elements of its own environment but also respect/adapt or has to manage and influence them. The business must continuously monitor and adapt itself to the environment if it is to survive and prosper.
Prof. Gerald Bell defined business environment in more elaborative way. According to him, “an organisation’s external environment consists of those things outside an organization such as customers, competitors, government, supplies, financial firms and labour pools that are relevant to an organisation’s operations.”
Learn about:- 1. Introduction to Business Environment 2. Definitions and Meaning of Business Environment 3. Concept 4. Nature 5. Elements 6. Features 7. Factors 8. Types 9. Approaches 10. Importance 11. Political and Legal Environment.
Business Environment: Introduction, Definitions, Concept, Types, Nature, Elements, Features and Importance
- Introduction to Business Environment
- Definitions and Meaning of Business Environment
- Concept of Business Environment
- Nature of Business Environment
- Elements of Business Environment
- Features of Business Environment
- Factors of Business Environment
- Types of Business Environment
- Approaches of Business Environment
- Importance of Business Environment
- Political and Legal Environment of Business Environment
Business Environment – Introduction
Environment or business environment is something that is external to the firm or one which surrounds an organisation. These external forces are uncontrollable where the firm is to respect the components of external environment.
As opposed to external environment, each firm enjoys a unique position as to its value system, human and material resources, and internal power relations and so on which are controllable. The internal forces over which the firm has control determine to what extent the firm can influence and get in turn, the share of opportunities and threats that come along opportunities.
During the last decade many changes have taken place in the world economy and especially in corporate environment. The business environment today is turbulent and laced with uncertainty which is continuously changing and is full of opportunities and challenges. The companies are necessitated to change their manufacturing practices, technologies and identify the opportunities at the right time and face them with right strategy can only gain competitive advantage.
The successful companies are no longer competing on single dimension, such as cost. Instead, companies must excel on two or more of the traditional strategic elements. They must not only focus on producing a low cost product but additionally maintain high quality and customer service levels. There is a shift in corporate strategy from ‘product driven’ to ‘market driven’ strategy.
Customer satisfaction has become the corporate goal to succeed in this business environment. Especially the growing intensity of competition has forced many business enterprises to seek more innovative and communication skills and systems. In the current industrial scenario it becomes difficult in the industry to sustain and survive unless the costs are correctly accounted for, controlled and reduced so as to sustain and remain in the industry.
Advanced manufacturing technologies such as Robotics, Computer Aided Design and Manufacture, Flexible Manufacturing Systems, Optimized Production Technology, Just-in-Time etc., are revolutionizing the design, revolutionizing of manufacturing at shop-floor, quality etc., creating areas for improved opportunities. They have dramatically changed the manufacturing cost behaviour patterns.
The direct cost component of product cost is decreasing while depreciation, engineering and information processing costs are increasing. These changes have resulted in higher overhead rates and a shrinking base of direct cost over which to allocate those costs.
The business environment has gone through rapid transformations.
The changes in the business environment can be analyzed from two dimensions viz.:
i. Internal Changes and
ii. External Changes
i. Internal Changes:
The internal business environmental changes starts from a departmental level specialization. The company needs to focus towards optimizing the business process cutting across various departments.
ii. External Changes:
It is now increasingly getting difficult for companies to compete on their own – companies are forming collaborative partnerships and collaborative supply chain that is competing with another supply chain; enable to build customer loyalties, helping penetration into remote customer bases. Product life cycles are getting shorter day by day.
Customers are demanding more amount of information, transparency and personal touch rather than being bunched into one homogeneous group. Companies need to treat each individual customer differently and have to demonstrate genuine customer service.
Business Environment – Meaning and Definitions: Given by Gluek and Jauch, Philip Kotler, Andrews and Prof. Gerald Bell
The success of a business is generally dependent on its business environment. A successful business has to identify, appraise, and respond to the various opportunities and threats in its environments. To be successful, the business has to not only recognize different elements of its own environment but also respect/adapt or has to manage and influence them. The business must continuously monitor and adapt itself to the environment if it is to survive and prosper.
“A business environment represents all external forces, factors or conditions that exert some degree of impact on the business decisions, strategies and actions taken by the firm.”
According to Gluek 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 factors are socio-economic, technological, supplier, competitors, and government.”
Business Environment refers to all those external forces, such as economic, social, political, regulatory, technological, natural and competitive factors which affects the business.
Prof. Keith Davis defines business environment as the aggregate of all conditions, events, and influence that surround and affect it.
According to Philip Kotler, A Company’s environment consists of factors and forces that are external to the business management function of the firm and that impinge on the management’s ability to develop and maintain successful transactions with its customers.
Andrews also defines the environment of a company as the pattern of all external influences that affect its life and development.
Prof. Gerald Bell defined business environment in more elaborative way. According to him, “an organisation’s external environment consists of those things outside an organization such as customers, competitors, government, supplies, financial firms and labour pools that are relevant to an organisation’s operations.”
On the basis of above definitions, it can be stated that business environment defines the external perspectives of a business firm and these perspectives or factors decide the firm’s behaviour and performance. However, it is for the management to assess the impact of these perspectives or variables and adopt them in their strategies.
Business Environment – Concept
The environment of any organization is the aggregate of all conditions, events and influences that surround and affect it. It includes factors outside the firm which can lead to opportunities for or threats to the firm.
More specifically, an organization’s external environment consists of those things outside an organization such as customers, competitors, government units, suppliers, financial firms, and labor pools that are relevant to an organization’s operations. Since the environment affects an organization in several ways, it is of crucial significance to understand it.
The environment has also been defined by dividing the environmental forces and events into direct-action environment and indirect-action environment. Direct-action environment consists of those factors that directly affect and are affected by the organization’s operations including suppliers, labor unions, laws and governmental regulatory agencies, customers and competitors. These specific forces exert direct influence on the organization’s decision-making.
The indirect-action environment comprises those factors that do not exert an immediate, direct effect on an organization’s operations nevertheless influence them. General economic conditions, technological, socio-cultural and political developments, inter groups and events in foreign countries are such indirect-action factors.
These general factors provide a broad framework for different organizations and influence all the organizations in the same manner. However, this kind of classification may be theoretically very useful but is blurred in real life because what are general environmental factors for one organization may be specific for another.
Authors have classified environment into general environment, the operating or task environment and organizational environment. The general environment of an organization refers to general economic conditions, technology, socio-cultural and political development, and the events in foreign countries that are broad in scope and have long term implications for organizations, provide a broad parameter for different organizations.
The operating or task or competitive or industry environment has relatively specific and immediate implications for an organization, and consists of customers, competitors, labor, suppliers and laws.
Business Environment – Nature
The characteristics of environment have thrown some light on the nature of environment. We all know that environment throws open opportunities along with threats. If one accepts the opportunity, one cannot reject the threat associated with it.
The crux of the issue is to know the pattern of opportunity and threats. In some cases, the opportunity side is higher than threat and in some cases opposite is true. Therefore, in other cases, they may be proportionate. To decide this, it is a must to understand the exact nature of environment. The nature of environment can be expressed in terms of complexity and variability.
Environmental complexity is concerned with the heterogeneity and range of activities which are not relevant to an organisation’s operations. That is, more diverse the relevant environmental activities and more these are, the higher the complexity. The heterogeneity speaks of the variety of activities in the environment affecting the organisation.
One thing is sure that complexity or no complexity of environment is a matter of perception. It is because, the same environment one organisation perceives as unpredictable, complex and dynamic, another organisation might see it as simple, static and easily comprehensive.
Any organisation dealing with a simple environment has lesser number of critically significant information categories for decision making. When the environmental segments are the same and limited, the organisations need not process the information to the depth as things are clear. On the contrary, those units working under complex and dynamic environment, there is need for in-depth analysis of information verified from different angles.
The degree of variability of an environment has the impact on the working of an organisation. Environment being dynamic by nature, the issue is that of what is the rate of variability? That matters if the change or variability is normal, it is not a problem. The problem arises when it is higher or lower than the normal rate.
What is lower or higher is again a matter of individual perception. Mr. John Child, in his article, “Organisational Structure, Environment and Performance- the Role of Strategic Choice”, refers to environmental variability as “the degree of change that may be seen as a function of three variables – (i) the frequency of change in relevant activities, (ii) the degree of difference involved at each, and (iii) the degree of irregularity in the overall patterns of change. There are four types of environmental movement – low-stable change, high stable change, low-unstable change, and high- unstable change all having different effects on an organisation.”
By influencing the task performance, the degree of variability in the environment affects the organisational functioning. Hence, more in the variability in the environment, more will be the uncertainty in the task performance.
In this connection, J. Galbraith says, “greater the task uncertainty, the greater the amount of information that must be processed among the decision-makers during task execution in order to achieve a given level of performance. Here, it is pertinent to note that he defines uncertainty as the difference between the amount of information required to perform the task and the amount of information already possessed by the organisation.”
The fundamental effect of uncertainty is to- limit the ability of the organisation to plan in advance or to make decisions about activities in advance or to make decisions about activities in advance of their execution. Taking both the extremes of nature of environment complexity and variability, one can structure a continuum ranging from simple to complex or turbulent.
Here, ‘turbulent’ environment is one which is characterised by the features:
1. Growth is not extrapolatable.
2. Historical strategies fail.
3. Profitability does not follow growth.
4. The future is highly uncertain.
5. The environment is full of surprises.
On the other hand, “simple” environment enjoys the below mentioned features:
1. Growth may be extrapolatable.
2. Historical strategies work with minor modifications.
3. Profitability follows growth.
4. The future is lowly uncertain.
5. Environment is full of regular things.
Thus, the turbulent environment has high degree of complexity and high degree of variability as opposed to simple environment.
Business Environment – 9 Main Elements: People, Community Environment, Physical or Ecological Environment, Economic Environment and a Few Others
No firm can exist without the availability of manpower. People are involved in other elements of the environment in the form of customers, sellers, workers, managers, suppliers, buyers, borrowers, lenders, etc. Therefore the quality and quantity of people involved in various elements of a firm’s environment will affect the functioning of a firm.
ii. Community Environment:
A firm is regarded as a citizen of the community as person is. It has, therefore, an obligation to contribute towards the betterment of the community by giving financial assistance and extending other facilities to the community. It has to behave as a good neighbour and a model employer.
iii. Physical or Ecological Environment:
It includes all types of natural resources including air, land and water, etc., geographical and climatic conditions, etc. All these constituents of ecological environment affect the working of a firm.
iv. Economic Environment:
It includes a number of factors like fiscal and monetary policies, industrial policy, agricultural policy, structure of economy, rate of growth of economy, etc., which all have a great impact on the functioning of a firm.
v. Political and Legal Environment:
Political system, form of government, ideology of the ruling party, political stability, etc., play a very important role in determining the nature, scope and functioning of a firm. Besides, in order to regulate business and labour the government enacts a number of Acts which affect the working of a firm to a very great extent. For example, in India the government has passed a large number of Acts and regulations which a firm is supposed to abide by.
vi. Socio-Cultural Environment:
A firm is a socio-economic, open and adaptive system and, therefore, has to respond to changes in the socio-cultural environment. It has to adapt itself according to changes in social values, attitudes, life-styles, traditions, beliefs, culture, ethics, etc.
vii. Technological Environment:
Technological changes shape changes in the style of living of consumers by giving to new products and also affecting their prices. Technological environment includes discoveries, innovations, inventions, etc., which create a lot of competition among producers by providing new opportunities and also pose certain threats. A business firm has to adapt itself to all such happening in the technological environment.
A business firm is also affected to some extent by the type, quality, potentiality, nature, sex composition, age composition, etc., of the population of the community or country in which it is located.
Due to fast and substantial development in the means of transport and communication the working of a firm may be affected by the happening in other countries also. Economic recession, protection, policy, import restriction policy of foreign countries may have a serious implication for a firm. Similarly, foreign policy, foreign exchange policy of the country may also affect the working of a firm.
More details as to how the various constituents of business environment affect the business or business firms can be had from a detailed account given earlier in this chapter under the sub-head ‘Macro-environment of Business’. It is not only that these constituents affect the business or business firms but the business firms also affect these constituents, though in a very limited way.
In addition to the above nine elements of a firm’s environment, there are some other elements also like the philosophy of the firm, way of its working, type of its ownership, competitors, suppliers, marketing channels, public, etc., which too have a bearing on the functioning of a firm. A detailed account of these may be known from an earlier discussion under the sub-head ‘Micro-environment of Business’.
Business Environment – 8 Major Features: Specific and General Forces, Dynamic Nature, Complex in Nature, Affects Different Firms Differently and a Few Others
The business environment influences significant operations of a business.
Features of business environment are as follows:
Feature # 1. Specific and General Forces:
Business environment consists of specific forces like suppliers, customers, competitors, financiers, etc., which directly and separately influence the operations of business in an industry. General forces are overall social, environmental, economic, political, etc., encompassing individuals, institutions, societal norms or changes that affect business operations in a particular industry indirectly and / or equally.
Feature # 2. Dynamic Nature:
Business environment is very flexible and keeps changing as there are multiple factors in action at any given time. It is not static and cannot be monitored or predicted. Business policies and objectives need to accordingly adapt to the dynamic nature of the business environment.
Feature # 3. Complex in Nature:
Business environment is a combination of multiple factors (micro or macro level) which affects businesses differently. These factors consist of number of events, conditions and influences arising from different sources leading to a complex environment. Interactions between these factors can create new sets of influences and conditions making it difficult to determine which factor led to a particular situation or set of situations. For example, the outbreak of diseases or epidemics like Ebola, Swine flu, etc., can create a complex environment for pharmaceutical and healthcare industries who seek feasible solutions to contain and eradicate such diseases.
Feature # 4. Affects Different Firms Differently:
A particular change does not necessarily affect all businesses in the same manner. One business may embrace a change while another business may experience adverse effects. For example- growth in e-commerce retailing through mobile applications and internet on phones can positively affect online retail websites like Myntra, Flipkart, etc. but may negatively affect large retail stores.
Feature # 5. Short-Term and Long-Term Impact:
Every change in the business environment has a short-term and a long-term impact on businesses. In the short-term, businesses can experience increase in profits or productivity while in the long-term they can experience goodwill and reputation.
6. Unlimited effect-Business environment can have unlimited effect on businesses. For example, the discovery of the steam engine during the industrial revolution has had an unlimited effect on most large businesses around the globe that largely depend upon mechanisation and automation.
Feature # 7. Uncertainty:
Business environment is characterised with uncertainty as it is very difficult to predict possible changes, mainly when changes are taking place too frequently. For example, changes in IT industry or fashion industry lead to uncertainty among businesses in those industries.
Feature # 8. Inter-Related and Interdependent Components:
All factors and forces in the internal and external environment are inter-related and interdependent to each other. For example, a (macroeconomic) increase in money supply can lead to inflation or high prices which in turn affect the prices of raw materials, labour, etc., thereby increasing costs of production for a business.
Business Environment – 9 Important Factors: Changes in Growth Rate, Changing Consumer Attitudes and Tastes and a Few Others
Business environmental factors are broadly divided into internal environmental factors and external environmental factors. Internal environmental factors influence/affect the business from within.
They include – human resource management, trade unions, organisation structure, financial management, marketing management and production management, management/leadership style, etc.
External environmental factors are further divided into micro external factors and macro external environmental factors. Micro external environmental factors include: competitors, customers, market intermediaries, and suppliers of raw materials, bankers and other suppliers of finance, shareholders, and other stakeholders of the business firm.
External macro environmental factors include- social and cultural factors, technological factors, economic factors, political and governmental factors, international factors and natural factors. Environmental protection received greater attention in order to protect the lives of the people, animals, and plants to maintain ecological balance.
The analysis of internal environmental factors indicates the strengths and weaknesses of the business firm, while the analysis of micro external and macro external environmental factors indicates the opportunities provided by the environment to the business. The strengths, weaknesses, opportunities and threats (SWOT) analyses help to formulate strategies for the business firm.
Business environment is very dynamic. Many elements in the environment undergo frequent and substantial changes. Technological changes are frequent. Tasts and preferences of the people change. Competitive situation changes. Demographic factors also change. It is basically through planning function that the management of company takes stock of the changing environment.
It anticipates, meets and adapts creatively to ever-changing as well as fastly changing environment. An innovative and effective management meets the challenge posed by the ever-changing environment by formulating new strategies through creating new products, new customers, new markets, new technology, new diversification, etc. It has to find out its new roles so as to combat the environmental changes.
It has become all the more important because the rate of environmental changes in has become all the more important because the rate of environmental changes in future will be much higher than has even been in the past. The top management of a firm will have to anticipate and make long-term forecasts in respect of economic, political, socio-cultural, technological, and demographic and such other changes, and only then formulate its long-term plans and strategies.
The business environment of an economy is dynamic in nature and changes from time to time. Understanding the existing business environment and estimating the future changes in the business environment is a difficult task.
In order to understand the changing business environment, the following factors determining business environment in an economy have to be studied clearly:
The growth rate of an economy determines the changes in business environment. Higher the growth rate, higher will be the national income of the country and higher will be the demand for products if savings remain constant.
Business environment changes as per the changes in the growth. In addition to economy’s growth rate, sectorial performances (i.e., performance of agricultural sector, industrial sector, infrastructure and services sector) also have an impact on the business environment.
Changes in consumer attitude, tastes and preferences are responsible for bringing slow changes in the business environment. Product design, delivery and other associated services to be offered to customers are decided by taking into consideration consumer attitude, tastes and preferences.
Customer focus is very essential to achieve success in the competitive scenario. Professionally managed firms keep track on the changing consumer, attitudes, tastes and preferences in order to offer products accordingly. The factors influencing consumer attitude, tastes and preferences are education, changing life style, seasonal variations, age etc.
Changes in consumer attitude, tastes and preferences bring changes in the product design, packaging and delivery patterns and this in turn bring changes in the quality of business environment.
The market structures vary from product to product and from one industry to another industry. This variation depends upon the level of competition in the market. The various factors determining market structure are, free entry and exit, total number of sellers and total number of buyers in the market, market information to people involved in marketing etc. Thus, all the variation in market structure and competition bring changes in the business environment.
Foreign imports and foreign direct investments determine business environment of an economy. Today, due to globalization and liberalization, many countries today are inviting foreign imports and making efforts to increase their exports to other countries. Foreign imports not only increases competition in the domestic market but also provides a chance to domestic companies to learn about new technologies and innovation, Foreign Direct Investment (FDI) allow foreign companies to invest in the domestic country. New management philosophies, new culture, work ethics and performance standards follow foreign investments.
Government is one of the factors determining the business environment of an economy. Changes in government policies such as fiscal policy, monetary policy, public debt policy etc., hold a drastic impact on the business environment.
Future estimations and speculation gained importance due to changing business environment. Depending upon the past changes and present conditions, future changes are estimated in the form of variables like inflation rate, interest rate, rate of exchange, taxes, advertising expenditure, sectorial contributions, market demand and government borrowings. All these variables help in understanding the existing economic behaviour which brings changes in the current business environment.
If actual performance is less than the planned performance, corrective actions are taken. For example, government undertakes fiscal corrections and central bank do monetary corrections. Corrective actions are one of the control mechanisms as incorrect actions may not lead to the attainment of the policy objectives.
Higher the linkage between the international economies or global interdependence, higher will be the chances of getting influenced by each other. In case of global interdependence, one economy facing problems such as inflation, unemployment, poverty and stagnation will be transferred to other dependent economies. Unemployment, poverty, stagnation and inflation problems determine the business environment of an economy.
Apart from the factors mentioned above, there are some non-economic factors which determine business environment, but for companies such factors are uncontrollable factors. Some of the non-economic factors are social and cultural factors, political and legal factors, natural calamities and so on.
Business Environment – Top 2 Types: Micro Environment and Macro Environment
1. Micro environment/task environment/operating environment.
2. Macro environment/ general environment/ remote environment.
Although business environment consists of both the internal and external environment, many people often confined the term to the external environment of business.
It includes all these factors in the immediate environment of a business enterprise that affects its ability to serve its customers. There is no doubt that the ability of a business enterprise depends to a very great extent on the following factors which together are the main constituents of the micro environment of a business enterprise.
A brief description of such constituents is as follows:
(i) Way of working of the enterprise,
(ii) Clients or Customers,
(iii) Business enterprise philosophy,
(vi) Marketing channel, and
(i) Way of Working of the Enterprise:
The functioning of a business enterprise is divided into various functional areas like production, finance, personnel marketing etc. All these functional departments work in unison with each other. How effectively they co-operate with each other in order to accomplish objectives of the business enterprise, will determine the efficiency of the business enterprise.
(ii) Clients or Customers:
As a major task of a business is to create and sustain customers, monitoring the customers sensitively is a prerequisite for the business success. A company may have different categories of consumers like individuals, households, industries, and other institutions. For example the customers of an automobile manufactures, public sector transports undertakings and other transports operators.
A single customer may place the company in a poor bargaining position; part from the risks of losing business consequent to the winding up of business by the customer or due to the customers switching over the competitors of the company. Therefore, the choice of the customer segments should be made by considering a numbers of factors including the relative profitability dependability, stability of demand, growth prospects and the extent of competition.
(iii) Business Enterprise Philosophy:
The philosophy of the business enterprises itself affects the working of the enterprise. Suppose the philosophy of the enterprise is to keep the interest of the customer over and above anything. In such a case all major activities of the enterprise will aim at serving the customer as best as possible.
Suppliers are those who supply the inputs like raw materials and components to the company. The importance of reliable source of supply are an important force in the micro environment of a company necessary for the smooth functioning of the business. Uncertainty regarding the supply and other supply constraints often compel companies in maintaining high inventories causing cost increases.
In a scarcity environment, As Kotler points out “Company purchasing agents are learning how to ‘wine and dine’ suppliers to obtain favourable treatment during periods of shortages. In other words, the purchasing department might have to market itself to suppliers.”
(v) Type of Ownership:
Whether the business enterprise is a sole proprietorship or Partnership or a joint stock company, also affects the working of a business enterprise because each type of ownership has its own advantages and disadvantages.
All public are not threats to business while some of the actions of the publics may cause. Some companies are seriously affected by such publics. For example, one of the leading companies in India was frequently under attack by the media public particularly by a leading daily which was allegedly bent upon bringing down the shares prices of the company by tarnishing its image. Environmental pollution is an issue often taken up by this issue have caused some companies to suspend operations and take pollution abatement measures.
(vii) Marketing Channel:
The main environment of a company also consists of a number of marketing channel such as – firms that aid the company in promoting. Selling and distributing its goods to final buyers. Marketing channel are vital links between the company and the final consumers.
In a healthy business environment, the competitors have to face the following challenges:
(a) Desire competition.
(b) Product form competition.
(c) Brand competition.
(a) Desire Companies – A firm’s competitors include the other firms which market the same or similar products and also all those who compete for the discretionary income of the consumers. For example, the competition for a Television company may come not only from other T.V. manufactures but also from two wheelers, refrigerators, cooking ranges, stereo sets and so on and from firms offering savings and investments schemes like banks, Unit trust of India, companies accepting public deposits or issuing shares or debentures etc.
Competition among these products may be described as desire competition as desire competition as the primary task here is to influence the basic desire of the consumer. Desire competition is very high in countries characterised by limited disposable incomes and many unsatisfied desires and with many alternatives for spending/investing the disposable income.
(b) Products Form Competition – If the consumer decides to go in for a T.V., he has to choose a particular form of the T.V.- Black and White or colour with remote control or without etc. Thus, there is a product form competition.
(c) Brand Competition – The consumer also encounters the brand competition i.e., the competition between the different brands of the same product form.
By implication of these different demands, the marketer should strive to create primary and selective demand for his products.
The constituents of the macro environment of business are usually uncontrollable and need proper Monitoring and adaptation on the part of a business enterprise.
The macro environment factors and their impact can be understood by the following:
(i) Demographic Environment.
(ii) Economic Environment.
(iii) Physical or Ecological Environment.
(iv) Political and Legal Environment.
(v) International Environment.
(vi) Technological Environment.
(i) Demographic Environment:
Market means people with money and inclination to spend their money to satisfy their demand. A business unit is directly interested in demography i.e., the study of population. Demographic analysis deals with quantitative elements of consumers such as age, sex, education, income. Occupation social class life cycle of consumers etc. Demographic analysis is employed in the market segmentation and formulation of marketing mix for each segment or sub-division of the entire market.
(ii) Economic Environment:
Economic environment refers to all forces which have an economic impact on business. Industrial production, agriculture, planning, basic economic philosophy, infrastructure, national income, per capita income, money supply, price level, population, savings, stages in the economic development and trade cycles are major factors which make up the total economic environment. There is close relationship between business and its economic environment. Businesses obtain all its needed inputs from the economic environment and it absorbs the output of business units.
(iii) Political and Legal Conditions:
Political environment refers to the influence exerted by the three political institutions, viz., legislature, executive and the judiciary in shaping, directing, developing and controlling business activities. The legislature decides on a particular course of action; the executive, also called the government, implements whatever was decided by the Parliament and the judiciary functions as the watchdog in order to ensure that both the legislatures and the executive functions as then watchdog in order to ensure that both the legislature and the executive function in public interest and within the boundaries of the Constitution. A stable and dynamic political environment is indispensable for business growth.
(iv) Physical or Ecological Environment:
In the wider concept of marketing ecological environment has assured a unique importance in production and marketing in modem economies. Environmental experts are vigorously advocating the preservation and survival of our entire ecological system. It is said that pollution is an evitable by product of high consumption economic system prevalent in the advanced countries.
The marketing system of an enterprise has now to satisfy not only the buyers of its products (consumers/users) but also social wants which may be diversely affected by its activities and then only it is entitled to achieve its profit objective. In future, business executives will have to pay due attention to the quality of our life and our environment.
(v) Science and Technology:
Technological environment exercises considerable influence on business.
Technology is understood as the systematic application of scientific or other organised knowledge to practical tasks. It is through business that technology reaches people. Technology in their businesses. The phenomenal development of science and technology has completely transformed life and living conditions in developed and developing countries.
Strongest technological developments are occurring in transportation energy, life extension research, raw materials, instrumentation automation, computer system, electric cars. Exerography and electronics. Electronic industry is the best example of exploiting new marketing opportunities.
Computer and aeroplanes are entirely new industries. Digital watches are killing the marketing prospects of traditional watches. Photocopying hurts the carbon paper business. Artificial fibre cloth has almost killed the pure cotton textile industries in many countries. Television has adversely affected radio and cinema industries.
(vi) International Environment:
International environment mainly affects those industries which are directly dependent on imports or exports. International environment is concerned with foreign policy, Dependence policy, Foreign exchange policy, International treaties, International trade agreements, foreign economic recession, protection policy in foreign countries etc.
For example, the great depression in the United States caused shocks waves in a number of other countries. Besides, the international environment keeps on changing and so will have to be done by a business enterprises having interaction with it. These days, multinational corporations have affected business in different ways in different countries.
(vii) Socio-Cultural Environment:
Social and cultural environment refers to the influence exercised by certain factors which are beyond the company’s gate. Such factors include people’s attitude to work and wealth; role of family, marriage, religion and education; ethical issues and social responsiveness of business. Social and cultural environment is highly relevant for a business unit as the variety of goods it produces, the type of employees it gets and its obligation to society depend on the cultural milieu in which the firm operates.
Business Environment – 19 Main Approaches: Education and Literacy, Group Dynamics and Movements, Social Values and Attitudes and a Few Others
Within business and society, there are several environmental factors which directly or indirectly affects the human life and its allied activities. Here, it is most appropriate and needful to formulate the ethical platform by which the environmental problems and challenges may be solved with some amicable ways and means. There are several value based approaches to be based on ethical norms and values as desired by society.
These approaches might be contributed towards their most signifying role and are summarised here:
Approach # 1. Education and Literacy:
Education and literacy are important ingredients of sociological environment. The business houses may create and develop the attitudes and awareness about mass literacy programmes in society. They can organise and manage the wide literacy programmes, skill development programmes, education on ethics, management education, training for employees, inventory management and develop the learning attitudes on business and organisation culture.
Within the business and society there are several groups which have been formed at different platforms. The groups may be consumers’ association, professional groups, management associations, merchant associations and trade unionism etc. These groups may be developed by interactive movements for the awareness, perceptions and acceptableness of ethical norms and values in business and society.
Social values and attitudes also play a major role towards the upliftment of the society. The customs, traditions and concepts are no longer rigid, but flexible. Here, the business houses may create and develop the sociological environment to emphasise more and more on social values and attitudes by means of interactive programmes.
In our society there are several individual and groups that have been significantly weakened by corruption. The favoritism, nepotism and black money are many forms of corruptions. The attitudes and habits of corruption may be discouraged by way of healthy awareness, social belongingness and responsiveness in our society.
For the well-being of society, there is a need to higher economic growth, better spread of infrastructure, job opportunities, better skill development and industrial diversification. It is required to establish and develop the small industrial units, solar energy plants, agro based units and infrastructural facilities in context of environmental upgradations in society.
With the growing trends of business, the expansion of market and its opportunities may also be developed. It is most required to make new technological process, better quality, service network, cost reductions, effective resource utilisation, more consumerism and direct marketing etc. These translates into greater values for consumers.
There are several social problems in our society. Some of them are old customs, traditions, dowry system, women exploitation, child marriages, growing unemployment and poverty, poor housing and sanitation, urban congestion, pollution and increasing incidents of anti-social activities.
In business scenario we may adopt the social consciousness, social reforms, literary programmes, adult education and most appropriate the social cost benefit analysis, for the sake of social interest.
Different laws, rules and legal aspects have a profound impact on decisions concerning the multi-various operations in business as it touches the very existence and legality of business firms. The law and legal provisions must be followed to control over the unethical, unfair and anti-social transactions.
The efficiency and efficacy of legal provisions determine adequacy, promptness, economic justice and as such, these factors are of great importance for the growth of business.
The missions and objectives of any business unit is to formulate and determine the value based orientation in different segment. The business determine the norms, by-lays and code of conducts to be based on values and ethical behaviour. It is a widely accepted fact that the extent to which the value system is shared by all in the organisation is an important factor contributing to success.
There are different views, ideology-concepts and basic approaches in context of ‘work’ and ‘society’ as followed by the owners, investors, suppliers, distributors, employees, creditors, customers and government. The ideologies may be refined and changed with the changing situation and may be innovative towards developing the value based culture and practices particularly at work and society.
Leadership is the quality of behaviour and to guide the people to move some desired goals. In order to make some useful practices through leadership styles for betterment in organisation, the methods and devices like unity of command, informal relations, democratic styles, confidence, enthusiasm, team spirit, high morale, sociability and self-motivation may be followed.
Organisation development is a planned process to improve organisational effectiveness and performance. In order to overcome the challenges as arising out of environmental threats, the systems and methods of organisation development may be the interaction between individual and group, group dynamism, self-discipline, self-control, dedication, informal relation, fair and sound communication, sensitivity training, consultation services, job enlargement and team formation etc.
In any organisation, culture is a social phenomenon and has an inculcated values. The working environment of business must be based on humanitarian ground and the values for good human relations are needful. The working environment should be based on the feelings of employees by ethical soundness, purity, devotion, coordination, non-jealous, non-violence and responsiveness etc.
Within the environmental situation, it is the foremost responsibility of business to make most appropriate and better utilisation of resources. By way of utilitarian and ethical approaches, the available resources must be utilised in proper ways for the well-being of society.
A business organisation basically exists for the customer and all its activities have to be customer- focused. The business have to follow some ethical norms and value-oriented behaviour with their customers. Business seek to build and maintain good customer relation by maximising consumer satisfaction and consumer care services.
Within the purview of business environment, every person is required to perform his task with most and acceptable manner. Every task and assignment as performing by an individual or a group must be followed by the three basic and important phases like process of the task, practice of the task and progress of the task. Besides, the better and efficient performance, more or less, depends on the mental preparedness and abilities of our manpower in any organisation.
Within the dynamic environmental scenario, there are several changes in business segments. The environmental changes may be favourable, unfavourable, internal, external, visible, non-visible, short term and long term etc. Any how they must be in favour of the people and society.
The process of management of change is to be followed by knowing the causes of change, factors for changes, formation of plans, analyse the resistance, overcoming resistance, implementing the change and fruitful results from the changes etc.
In order to make proper environmental protection, it is needful to adopt different methods and techniques for control over the pollution in society. The air, water and noise pollutions can easily be controlled by ways of operations, technical and somehow by the ethical responsiveness with the society.
In order to create and develop the social well-being in our society, it is the responsibility of business to protect the human right. Ethically the businessmen provide fair wages to their employees on justified ground. They may also provide the norms and regulations as per the Acts and rules. They may protect the child labour system and women workers in respect of their working hours, heavy and hazardous task.
As such, business and environment are correlated and dependable with each other. There are several complex, dynamic and unpredictable forces arising within both the components which duly affects the society. The important causes are responsible to analyse the business environmental situations.
It has also emphasise that the ethical attitudes and behaviour may be the foremost means to contribute a perspective platform to protect and overcome the environmental challenges and forces in society. Moreover, the impact of socio-cultural values towards the well-being of society are also described here.
In order to make some environmental protection and pollution control, there is a need to analyse the measures and techniques to be based on ethical norms.
The measures are education and literacy, group dynamics and movements, social values and attitudes, discourage the corruption, opportunities for growth, expanding markets, eradicate the social problems, proper implementation of laws and legal aspects, value system, philosophy and concepts, managerial leadership, organisational development, work culture, utilisation of resources, customisation, work perfections, management of change, pollution control and protection of human rights. These approaches are providing the balancing form between business and environment.
Business Environment – Importance: Determine Strategies and Policies, Ensure Optimum Utilisation of Resources and a Few Others
It is important for a business to be aware of its surrounding environment, which allows them to adapt to changing times and adopt business practices enabling them to sustain in the long-run.
It thus becomes important for a business to study the environment in order to:
1. Determine Strategies and Policies:
The study of the environment helps a business to develop broad strategies and long-term policies. Strategies and policies are methods, plans, rules and guidelines chosen that lead to a desired future or goals of the organisation. The study of business environment provides relevant information by which relevant strategies and policies can be formulated by a business. For example- ITC Ltd., which started off as a tobacco company, identified potential growth in packaged foods industry led them to becoming one of the largest packaged food manufacturers in the country with established brands like Sunfeast (biscuits), Aashirvad (Flour), etc.
2. Ensure Optimum Utilisation of Resources:
A thorough understanding of internal and external environment will enable a business to optimally utilise resources. For example, a rise in oil prices (leading to inflation) will provide the basis for a business to allocate relevant financial, human and physical resources for a business to run continuously.
3. Analyse Competitor’s Strategies:
The business environment continuously keeps collecting and displaying strategies adopted by competitors. Accordingly, businesses can formulate effective counter-plans to face them. Continuing previous example on ITC, if their competitors like Parle reduce the prices of biscuits, ITC can leverage on their extensive rural linkages, infrastructure and distribution network to be able to reduce prices of biscuits without hurting their bottom-line.
4. Maintain Business Dynamism and Innovation:
A business can become alert and dynamic by being aware of changes in their surroundings. They can expand their businesses when market is favourable and/or prepare themselves if there are any possible unfavourable conditions. For example, a possible rise in interest rates can lead businesses to stall or divert their expansion plans to another region/country with favourable market conditions.
5. Determine Strengths and Weaknesses:
Awareness on business environment can assist in identifying the strengths or weaknesses or positive or negative aspects which are generally in direct control of the business or the decision-maker. These aspects can be weighed and compared to determine their performance vis-a-vis their competitive standing in the market.
Accordingly, this knowledge and awareness of businesses can allow other businesses to compare, improve or strategise in accordance to their strengths and weaknesses. For example, the strength of a company (like Titan) has a reputation for innovation but its weakness could possibly be large inventories.
6. Identify Opportunities and Threats:
Awareness on business environment can enable a business to identify possible opportunities or suitable circumstances for a business to improve or change their internal environment. Alternatively, businesses can also identify potential threats that could negatively affect the operations of a business.
For example- Titan Company identified a favourable opportunity to venture into producing / selling premium watches at relatively lower prices in India than their foreign counterparts. Their foreign counterparts like Omega watches can manage costs of production by outsourcing production of premium watches to China (though quality may be questionable), which could possibly pose as a threat for Titan’s costs of operations.
7. Foresee the Impact of Socio-Cultural Factors:
With knowledge on socio-cultural factors like religion, caste, value system, education, family size, urbanisation, etc., businesses can make timely changes in their policies and strategies and accordingly adjust their product/service design. For example- US-based sports nutrition company, Gatorade produce and sell their sports drink in packaged bottles. When Gatorade entered India in 2004 they realised the dynamic nature of Indian customers who preferred no hassle of storage and less weight products. Gatorade introduced a ready-to- mix powder in sachets for Indian athletes that can be easily mixed into 500 ml water bottles.
8. Continuous Learning:
Awareness and knowledge of the business environment ensures continuous learning for a business. As the environment is dynamic, a business always experiences different situations, opportunities, threats, etc. Business environment guides a business with changes in social, economic, political or psychological changes to which it should accordingly, learn, improve and/or adapt in the long-run.
Business Environment – Political and Legal Environment
The direction and stability of political factors are a major consideration for managers on formulating company strategy. Political factors define the legal and regulatory parameters within which firms must operate. Political factors encompass actions by local, national administrators and political parties, and by international bodies. These affect the stability of an industry’s environment. Political factors either may limit or benefit the firms they influence.
Some important aspects of political environment in relation to strategic management are described below:
i. Setting the Rules:
Governments set the rules for business in areas such as regulation of financial markets, privatization, government spending, multinational agreements, employment law, government stability, global competition, taxation, economic cooperation, market mechanism, and others.
ii. Putting Constraints:
Political constraints are placed on firms through fair-trade decisions, antitrust laws, tax programmes, minimum wage legislation, population and pricing policies, administrative jawboning, and many other actions aimed at protecting employees, consumers, the general public, and the environment.
iii. Political Actions:
Some political actions are designed to benefit and protect firms. Such actions include patent laws, government subsidies, and product research grants. Often, different stakeholders take different sides on important issues that affect business operations. They then work to influence legislators to vote for the position that they favour.
iv. Government Policy:
The political factor deals with the effects of government policy. Inasmuch as government policy is worked out through legislation, it encompasses all legal elements of this analysis. This includes items such as government stability, taxation policy, competition policy, price policy, global completion policy, etc.
v. Political Uncertainty:
The political stability of a country is an important issue when considering investment decisions. Uncertainty makes it more difficult for managers to develop strategies, so that most organisations find life easier within a stable political system. Wars, revolutions, and governments that change frequently or are unable to assert their authority can disrupt individual markets or whole industrial sectors.
vi. Direct Political Intervention:
There may also be direct political intervention in the operation of industries and markets for example through:
a. The use of subsidies or nationalization —to encourage certain industries or to rescue major firms from bankruptcy;
b. The building of infrastructure — such as ports, roads, railways, telecommunications links, and of training and education systems that give firms a source of skilled labour.
Political factors often impose costs upon organisations. Apart from the various taxes that firms have to pay, costs are incurred in abiding by government policies.
viii. Government Protection:
Governments often try to protect firms in their countries from foreign competition through tariffs and import restrictions, and to encourage their development through cheap loans and large government contracts. These policies can sometimes help domestic producers establish themselves but, in the long term, they risk breeding firms that are made complacent by the easy profits from their home markets. Such organisations are often unable to compete with efficient foreign competitors.
ix. Impact on Governmental Functions:
Political activity also has a significant impact on two governmental functions that influence the remote environment of firms – the supplier function and the customer function.
Organisations also have to adjust their products and ways of operating to the different regulatory and legislative frameworks that govern each of the product areas and countries in which they are active. Global firms must pay considerable attention to legal considerations and ensure that their strategies comply with legal requirements.
The various factors and impact of legal environment is described under the following headings:
i. Legal Framework:
The legal framework of a country influences firm strategy through its laws regarding such areas as mergers, acquisitions, capital movements, industry regulations and employment conditions. Legal frameworks differ across countries.
ii. Regulations and Controls:
Every country has regulatory framework that includes some agencies, organisations, and commissions. They are powerful actors that have to be considered when establishing strategy. Regulations and controls may be exercised with regard to monopoly trading, minimum wages, prices, health or unemployment insurance, pollution, unfair trade practices, conduct of business, social responsibility of the firm, competition, quality or materials of the product.
iii. Professional Bodies:
Many professional bodies also have a major impact on strategic behaviour of firms. For example, international accounting bodies are attempting to get firms to record all financial assets and liabilities at their current market value rather than at their historical cost, since financial markets are now more volatile.