Everything you need to know about Business Environment. ‘Environment’ refers to all external forces which have a bearing on the functioning of the business.
Business Environment: Meaning, Objectives, Importance and Factors
- Meaning of Business Environment
- Objectives and Uses of the Study of Business Environment
- Importance of the Study of Business Environment
- Factors Influencing Business Environment
- Factors Influencing Economic Environment in Business
- Techniques for Business Environment Analysis
- Limitations of Business Environment Analysis
# 1. Meaning of Business Environment:
A business organization does not exist in a vacuum. It exists in a world of concrete places and things, natural resources, important abstractions and living persons. The sum of all these factors and forces is called the business environment. Although business environment constitutes both internal and external factors, yet external factors are included and studied under its purview because external factors are beyond the control of the firm whereas internal factors are controllable in nature.
‘Environment’ refers to all external forces which have a bearing on the functioning of the business. It refers to those aspects of the surroundings of business enterprise and circumstances of business unit which affect or influence its activities and operations and decides its effectiveness.
Business environment may be defined as the set of external factors such as the economic factors, socio-cultural factors, government and legal factors, demographic factors and geophysical factors, which are uncontrollable in nature and affects the business decisions of a firm or company. The environment of the business is always changing and uncertain.
A few important definitions of business environment are as follows:
“An organization’s external environment consists of those things outside an organization such as customers, competitors, government units, suppliers, financial firms and labour pools that are relevant to an organization’s operations.” —Gerald Bell
“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 interaction of several groups, such as the economy.” —Faire and Anderson
“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 are socio-economic, technological, supplier, competitors and government.” —William F. Glueck and Lawrence R. Jauch
“Environmental factors or constraints are largely if not totally, external and beyond the control of individual industrial enterprises and their managements. These are essentially the givers within which firms and their managements must operate in a specific country and they vary, often greatly, from country to country.” —Richman and Copen
“Every organization exists in an environment that extends beyond its formal boundaries. This external environment represents a set of conditions, circumstances and influences that surround and affect the functioning of the organization. This environment is made up of many different individuals (e.g. customers, local citizens etc.). Organizations (e.g. suppliers, labour unions) and government bodies (e.g. regulatory agencies, legislators) includes those people who are capable of influencing an organization and its management system as well as those who might be affected by the organization’s actions.”—Dunham and Fierce
# 2. Objectives and Uses of the Study of Business Environment:
Environmental analysis has three basic objectives:
(i) The analysis should provide an understanding of current and potential changes taking place in an environment. One must be aware of the existing environment, but one must also have a long term perspective.
(ii) The study of environment should provide inputs for strategic decision making.
(iii) The environmental analysis should provide a rich source of ideas and understanding of the context within which a firm operates. It should bring fresh view-points into the organization.
The benefits of environmental study may be specified as follows:
(i) This study helps the firm in the development of broad strategies and long term policies of the firm.
(ii) The study of business environment should help in developing action plans to deal with technological advancement.
(iii) It should help the management in foreseeing the impact of socio-economic changes at the national and international level on the firm’s stability.
(iv) This study should help the management in analysing the competitor’s strategies and formulation of effective counter measures.
(v) This study should help the business to keep itself dynamic and innovative.
# 3. Importance of the Study of Business Environment:
A very important question is why we have to study “Business Environment”.
The importance of the study is due to the following:
1. The study of business environment helps an organization in developing its broad strategies and long term policies.
2. With the help of this study, an organization can come to know about and analyse its competitor’s strategies. On the basis of these the organization can formulate its own counter strategies.
3. Environment is dynamic in nature and in every changing i.e., knowledge of the changing environment will keep the organization dynamic in its approach.
4. The study of environment enables the organization to foresee the impact of socio-economic changes at the national and international level on its stability.
5. The business managers will be able to adjust themselves to the prevailing conditions and influence the environment as far as possible to make it congenial for the business.
# 4. Factors Influencing Business Environment:
Basically there are two sets of factors which influence the business policy of an enterprise. These are external factors and internal factors. The term business environment, generally, refers to external environment and includes factors which are outside the control of the enterprise. Some of the external factors have a direct and intimate impact on the business enterprise. These factors are classified as micro environment. There are other external factors which affect an industry. They constitute what is called the Macro Environment.
The environment of business is always changing and it is uncertain.
The business environment can be divided into two ways:
(A) The micro environment of business and
(B) The macro environment of business
A. The Micro Environment of Business:
The micro environment consists of the forces in the company’s immediate environment that affects the performance of the company. These forces are more closely linked with the business than the macro factors. The micro factors may affect different firms in a particular industry in different ways. Some of the micro factors may be particular to one firm only. When competing firms in an industry have same micro factors, the relative success of the firms will depend upon, how effectively they deal with these elements.
“A company’s micro environment consists of elements that directly affect the company such as competitors, customers and suppliers.” —Charles Hill and Gareth Jones
“The micro or task environment is the more specific and immediate environment in which an organization conducts its business.” —Dunham and Pierce
“The micro environment consists of the actors in the company’s immediate environment that affects the performance of the company. These include the suppliers, marketing intermediaries, competitors, customers and the public.” —Philip Kotler
The micro environment factors are discussed in detail as follows:
Suppliers are the important force in the task environment of a business. Suppliers are the persons who supply the inputs like raw materials and components to the business.
(i) For the smooth functioning of the business it is very important to have a reliable source of supply.
(ii) Uncertainty regarding the supply or other supply problems will compel the companies to maintain high inventories which will cause increase in costs.
Why Multiple Sources of Supply?
(i) It is very risky to depend on a single supplier because a strike, lock out or any other production problem with that supplier may seriously affect the company.
(ii) A change in the attitude or behaviour of the supplier may also affect the company.
Multiple sources of supply often help to reduce such risks. Because of the importance of this factor, many companies give high importance to vendor development.
On the micro environment of business, customers have direct impact.
A company may have different categories of customers viz.:
(i) Industrial Customers
(ii) Retailers Customers
(iii) Wholesalers Customers
(iv) Government Bodies Customers
(v) Foreign Customers etc.
To succeed in capturing customers, a business must try its best to know what people want and will buy. The consumer acceptance imposes a constant challenge because non-economic factors in the environment such as attitudes, desires and expectations of people also influence consumer behaviour.
The choice of customer segments should be made by considering the following factors:
(i) Relative profitability
(iii) Stability of demand
(iv) Growth prospects
(v) Extent of competition
In big organizations where hundreds of workers are employed, the labour force is organised in the form of trade unions. The trade unions interact with the management for higher wages and bonus, better working conditions etc. They pressurise the management for the fulfillment of their demands and even resort to go slow tactics strikes, gherao.
4. Business Associates:
The existence of business allies offer strength to an organization. It is easier to borrow capital from the business associates during the period of emergency. Similarly, arrangements with business associates could be entered into for the supply of raw materials or for the role of finished products.
Competitors play a vital role in running the business enterprise. Business has to adjust its various business activities according to the behaviour of the competitors.
There are various types of competitions:
i. Desire Competition:
Such competition is generally found in the countries characterised by limited disposable income and many unsatisfied desires of the customers. Under this type of competition the primary task is to influence the basic desire of the customer. A firm’s competitors include not only the other firms which produce the same or similar products but all those who compete for the discretionary income of the consumer.
Every consumer has a limited income and he can’t fulfill all his desires with this income. Either he can buy a T.V. or a refrigerator or a washing machine or he can invest his money in the various investment schemes. The competition among these desires is termed as desire competition.
ii. Generic Competition:
The competition among alternatives which satisfy a particular category of desire is called generic competition. For example, if particular person wants to invest his money, he has got various alternatives. He can invest his money with the Unit Trust of India, with the post office, with the banks or he can purchase the shares or debentures of a company. In this case, the competition among various investment schemes is called Generic Competition.
iii. Product form Competition:
In this type of competition, the consumer has to choose between different forms of the product. For example, if the consumer decides to go in for a washing machine, the next question is, which form of the washing machine—semi automatic or fully automatic, front loading or top loading etc.
iv. Brand Competition:
Finally the consumer encounters the brand competition i.e. the competition between different brands of the same product. For example, if the consumer decides to buy a fully automatic washing machine, the next question will be which brand – IFB or Videocon or Godrej or Whirlpool etc.
Taking into consideration these different factors every marketer should strive to create primary and relative demand for his product.
6. Regulating Agencies:
The regulators include government departments and other organizations which monitor the activities of business. The examples are income tax department, other revenue departments and quality control departments etc. Besides these professional bodies such as Institute of Chartered Accountant of India, may also prescribe certain standards and practices for the business in their respective areas.
B. The Macro Environment of Business:
A business and its forces in its micro environment operate in a larger macro environment of forces that shape opportunities and pose threats to the business. The macro environment of business includes activities which are uncontrollable and need proper nourishment and attention on the part of a business enterprise. It refers to the general and overall environment within which an environment entity operates.
“The macro environment consists of the broader economic, social, demographic, political, legal and technological setting within which the industry and the company are placed.” —Hill and Jones
“Macro environment is the indirect action environment as it may not have an immediate direct effect on the operations but nevertheless have influence.” —Elbing
The important macro environmental factors are explained as follows:
1. Economic Environment:
Economic environment of business has reference to the broad characteristics of the economic system in which the business operates. The present day economic environment of business is a complex one. The business sector has economic relations with the government, capital market, household sector and global sector. These sectors together influence the trends and structure of the economy. The form and functioning of the economy vary widely. The design and structure of any economic system is conditioned by the socio-political arrangements.
“Improvements in the national business environment and company upgrading are inextricably intertwined. A national business environment with improving infrastructure and more advance to institutions foster more sophisticated strategies by companies.” —Michael Porter
The survival and success of a business enterprise is finally decided by the economic environment and various market conditions.
The importance external factors that affect the economic environment of a business are as follows:
1. Economic Conditions:
The general economic conditions prevailing in the country viz. national income, per capita income, economic resources, distribution of income and assets, economic development etc. are important determinants of the business strategies. Business cycles and economic growth of the economy are important factors defining the economic environment. The stage of economic development decides the size of the local or domestic market and its dynamism affects the business. In economies where the income of the people is rising, business prospects will be brighter and investment will get automatic attraction. Recently growing income of middle class in India has encouraged foreign investors to invest in India.
(ii) Economic System:
The economic system operating in the country also affects the business enterprise to a very great extent. The economic system of a country may be capitalist, socialist, communist or mixed. In capitalistic system free play of market mechanism takes place, whereas in state controlled economies, there are restrictions on the private sector role. With the collapse of communist Soviet Union, multinational corporations are searching their markets in East European Countries.
(iii) Economic Policies:
The Government decides the economic environment of business through the following:
(b) Industrial regulations
(c) Economic planning
(d) Import & Export regulations
(e) Business laws
(f) Industrial policy
(g) Controls on prices and wages
(h) Trade and transport policies
(i) The size of the national income
(j) Demand & Supply of various goods etc.
Various laws framed by the central government, state government and local bodies to regulate the business also form part of the economic environment of business.
Some of the important acts include:
(a) Factories Act, 1948
(b) Industrial Disputes Act, 1947
(c) Foreign Exchange St Regulation Act, 1947
(d) Imports and Exports (Control) Act, 1947
(e) Companies Act, 1956
(f) Industries (Development and regulation) Act, 1951 and many others Acts.
With the new economic policies of liberalisation and globalisation, the era of protection and preferential treatment is giving way to competition and cost consciousness.
(iv) Economic Growth:
The stage of economic growth of the economy has direct impact on the business strategies. Increased economic growth rate and increase in consumption expenditure, lowers the general pressure within an industry and offers more opportunities than threats. Reverse conditions will lead to competitive pressure and threat to profitability.
(v) Interest Rates:
The rate of interest affects the demand for the products in the economy, particularly when general goods are to be purchased through borrowed finance. Low interest rates provide opportunities to the industries to expand whereas rising interest rates pose a threat to these institutions. Moreover, lower rates can enable the companies to adopt ambitious strategies with borrowed funds.
(vi) Currency Exchange Rates:
Current exchange rates have direct impact on the business environment. When the rupee was devalued in 1991, it was to make Indian products cheaper in the world market and consequently boost India’s exports. That was a great opportunity for Indian exporters.
2. Political and Government Environment:
Political environment refers to the influence exerted by the three political institutions:
The legislature decides on a particular course of action. Government is the executive and its job is to implement whatever was decided by parliament. The judiciary has to ensure that both the legislature and executive function in public interest and within the boundaries of constitution.
Legal and political environment provides a framework within which the business is to function and its existence depends on the success with which it can face the various challenges constructed out of political and legal framework.
The political legal environment of a business depends on:
(i) Legal rules of the game of business its formulation and implementation, its efficiency and effectiveness.
(ii) Defence and military policy impact of defence policy on industrial enterprise in terms of trading with potential enemies, purchasing policies, strategic industrial development etc.
(iii) Political stability impact of factors like civil war, the declaration of President’s rule and emergency, changes in the form and structure of government administration.
(iv) Political organization ideology of the ruling government, philosophy of the political parties, degree and extent of the bureaucratic delays, red tapism, the influence of premier groups, the question of donation by business houses to political parties.
(v) Flexibility and adaptability of law constitutional amendments, their urgency and frequency, velocity of public policies.
(vi) Foreign policy alignment or non-alignment, tariffs, customer’s union’s etc. image of the country and its leaders.
The political and legal environment has profound impact on the business strategy and government laws and legal framework present a challenge to the business.
3. Socio-Cultural Environment:
Socio-cultural environment is very comprehensive because it may include the total social factors within which an organization operates Culture consists of the cultivated behaviour of individuals within a society. Socio-cultural factors include-people’s attitude to work and health, role of family, marriage, religion and education, ethical issues, social responsibility of business etc.
Social class and caste of a person goes a long way in deciding the business activities in relation to its production and marketing activities. Traditions, customs and social attitudes have changed the attitudes and beliefs of the persons which have their effect on organizational environment. From the marketing point of view both the caste and class structure are relevant because both of these influence purchasing pattern.
From business point of view, socio-cultural environment may include expectations of the society from business, attitudes of society towards business and its management, views towards achievement of work, views towards structure, responsibility and organizational positions, views towards customs, traditional and ^conventions, class structure and labour mobility and level of education.
4. Natural Environment:
In natural environment we include geographical and ecological factors. Both these factors are relevant to business.
These factors include the following:
(i) Natural resources endowments
(ii) Weather & climate conditions
(iii) Topographical factors
(iv) Location aspects
(v) Port facilities etc.
Almost every aspect of business depends upon natural environment.
(i) Manufacturing depends on physical inputs
(ii) Mining and drilling depend on natural deposits
(iii) Agriculture depends on nature
(iv) Trade between two regions depends on geographical factors
(v) Transport and communication depend on geographical factors
(vi) Difference in geographical conditions between markets may sometimes call for changes in the marketing mix.
(vii) Geographical and ecological factors influence the location of certain industries.
(viii) Topographical factors may affect the demand pattern e.g. in hilly areas with a difficult terrain, Maruti Gypsy may be in greater demand than a Maruti car.
Ecological factors have recently assumed great importance. Government policies aimed at the preservation of environmental purity and ecological balance, conservation of non-replenishable resources etc. have resulted in additional responsibilities and problems for business and some of these will increase the cost of production and marketing.
5. Demographic Environment:
Demographic factors include:
(i) Size, growth rate, age composition, sex composition etc. of population
(ii) Family size
(iii) Economic stratification of population
(iv) Educational level
(v) Caste, religion etc.
All these demographic factors are relevant to business. These factors affect the demand for goods and services. Markets with growing population and income are growth markets because a rapidly increasing population indicates a growing demand for many products.
High population growth rate indicates an enormous increase in labour supply. Cheap labour and growing markets have encouraged many multinationals to invest in developing countries.
If labour is easily mobile between different occupations and regions, its supply will be relatively smooth and this will affect the wage rate.
Personnel management will become a very complex task if labour is highly heterogeneous in respect of language, caste and religion etc.
Population with varied tastes, preferences, beliefs, temperaments etc. gives rise to differing demand patterns and calls for different marketing strategies.
6. Technological Environment:
In order to survive in today’s competitive world, a business has to adopt technological changes from time to time. Constant innovation is essential because the purpose of every business is to create a customer, and therefore every business enterprise has two basic functions i.e. (a) Marketing and (b) Innovation.
In technological environment, the product or service remains the same but the method of performing the function is always new. Technological environment also includes research base of decisions. Research identifies the consumer needs and provides information for target setting and programming the complete marketing effort.
One of the ways in which product innovation may be stimulated is by the establishment of research and development department in the enterprise. The research and development are now directed into computer, sales energy, material science & laser technology.
The fast changes in technology also create problems for enterprises as these render plants and products obsolete quickly. Product market technology matrix has a much shorter life today than in the past. A firm which is unable to cope with the technological changes may not survive.
7. International Environment:
Another environmental factor which is fast emerging as the force to reckon with is the international environment.
Implications of global or international environment are as follows:
(i) Due to liberalisation, Indian companies are forced to view business issues from the global perspective.
(ii) Safe and protected markets are no longer there. World is becoming small in size due to advanced means of transport and communication facilities.
(iii) Learning of foreign languages is a must for every business manager.
(iv) Acquiring familiarity with foreign currencies is also a must.
(v) Facing political and legal uncertainties is inevitable.
(vi) To survive amidst intense competition every businessman should try to adapt his products to different customer needs and tastes.
(vii) Mobilisation of resources, particularly financial is an essential starting point in the process of international environment. In order to mobilise public savings many Indian Companies are issuing new share capital in the international market.
Term Paper # 5. Factors Influencing Economic Environment in Business:
Economic environment influences the business to a great extent. It refers to all those economic factors which affect the functioning of a business unit. Dependence of business on economic environment is total i.e. for input and also to sell the finished goods. Trained economists supplying the macro economic forecasts and research are found in major companies in manufacturing, commerce and finance which prove the importance of economic environment in business.
The following factors constitute economic environment of business:
(a) Economic system
(b) Economic planning
(f) Financial Se fiscal sectors
(g) Removal of regional imbalances
(h) Price & distribution controls
(i) Economic reforms
(j) Human resource and
(k) Per capita income and national income.
Economic System of Market Economy:
The economic system in a country decides the development prospects to a great extent. Government regulation of economic activities depends to a very large extent on the nature of the economic system. We face no difficulty in making economic progress if a country could have a laissez faire economy. The economic environment of business is determined according to the economic system obtained with in a country.
The economic activities are mainly framed with a purpose of earning, spending and savings. An economy can be explained in terms of the system of production, consumption, selling and exchange transactions. Production of goods is very important to the description of an economy. Without production in a country, system cannot be worked out and other activities are also crucial i. e. consumption, selling and exchange transactions.
In economic system market economy, economic growth is a must. Economic growth is everybody’s concern and it may be defined as a rate of expansion in a country.
The changing approaches to the study of economic growth indicate that conceptual base of development has been evolving after the onset of the industrial revolution. This conceptual evolution born out of environmental changes has been co-extensive with the tempo of economic development in society. Unless people save and invest, productive activity cannot be started. It is here that the economic growth in a country plays a very important role. In the initial stages of economic development the task of identifying people to save and of collecting these savings, especially in villages and semi-urban sectors of the economy.
There are three important types of economic system viz.:
(iii) Mixed Economy
# 6. Techniques for Business Environment Analysis:
Techniques for business environment analysis refer to the methods of gathering the relevant information for appraising the environment.
William F. Glueck mentions the following techniques:
(i) Verbal and Written information
(ii) Search and Scanning
(iv) Forecasting and formal studies.
# 7. Limitations of Business Environment Analysis:
Just like any other analysis, business environment analysis also has certain limitations, which are as follows:
1. Unexpected and Unanticipated Events:
Environmental analysis can neither foretell the future nor can it eliminate uncertainty for the organisation. Business enterprises sometime confront events which are unexpected or events which could not be anticipated during analysis. Environmental study should however try to reduce the frequency and extent of surprises that may confront a company.
2. Not a Sufficient Guarantor.
Environmental analysis in itself is not a sufficient guarantor of organisational effectiveness. It is only one of the inputs in the strategy development and testing.
3. Uncritical Faith:
Sometimes the businessmen put blind and uncritical faith in the data without verifying its accuracy. But this is not a drawback of the analysis but of the way it is practised.
4. Too Much Information:
Too much information is collected through environmental scanning. When there is overloading of information, one is likely to get confused and lost.
5. Overcautious Approach:
Success lies in adventure. It excludes those who hesitate to step forward. Environmental analysis often makes an individual too cautious in his approach and he is likely to be overtaken by events.