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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.
Business environment may be defined as the total surroundings, which have a direct or indirect bearing on the functioning of business.
Business environment may also be defined as the set of external forces, such as economic factors, social factors, political and legal factors, demographic factors, technological factors, etc., which are uncontrollable in nature and affects the business decisions of a firm.
Environment of a business means the external forces influencing the business decisions. They can be forces of economic, social, political and technological factors. These factors are outside the control of the business. The business can do little to change them.
Business environment refers to the influences and pressures exerted by external forces on the business.
Business environment may be defined as a set of conditions- social, legal, economical, political or institutional, that are uncontrollable in nature and affects the functioning of the organisation. Business environment has two components.
It includes 5 Ms i.e. man, material, money, machinery and management, usually within the control of the business. Business can make changes in these factors according to the change in the functioning of the enterprise.
Those factors which are beyond the control of business enterprise are included in external environment. These factors are: Government and legal factors, Geo-Physical factors, Political factors, Socio-Cultural factors, Demo-Graphical factors.
Characteristics of Business Environment.
Business environment is compound in nature.
Business environment is constantly changing process.
Business environment is different for different business units.
It has both long-term and short-term impact.
Unlimited influence of external environment factors.
It is very uncertain.
It includes both internal and external environment.
Importance of business environment.
There is a close and continuous interaction between a business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively. The business environment is multifaceted, complex, and dynamic in nature and has a far-reaching impact on the survival and growth of the business. To be more specific, proper understanding of the social, political, legal, and economic environment helps the business in the following ways:
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 in 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.
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.
Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up Captive Power Plants (CPP) in their factories to meet their own requirement of power.
It helps the firms to analyse the competitors’ strategies and formulate their own strategies accordingly.
Identifying Firms’ Strengths and weaknesses.
Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments.
There exist two types of external environment and they are:
Micro Environment and
Micro environment is the environment which is close to business and affects its capacity to work. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public.
They are the persons who supply raw material and required components to the company. They must be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier.
Customers are regarded as the king of the market. Success of every business depends upon the level of their customers’ satisfaction. The types of customers are:
Government and other institutions
They work as a link between business and final customers. The types of market intermediaries are:
Every move of the competitors affects the business. Business has to adjust itself according to the strategies of the competitors.
Any group who has actual interest in business enterprise is term as public e.g. media and local public. They may be the users or non-users of the products.
Mega environment is usually referred to as the macro environment. It refers to the conditions that exist in the economy as a whole, rather than in a particular sector or region. In general the macro environment will include trends in gross domestic product (GDP), inflation, employment, spending, and monetary and fiscal policy. The macro environment is closely linked to the general business cycle, as opposed to the performance of an individual business sector
The macro environment in which a company or sector operates will influence its performance, and the amount of the influence will depend on how much of the company’s business is dependent on the health of the overall economy. Cyclical industries, for example, are heavily influenced by the macro environment, while consumer staples are less so.
Components of mega environment.
Confining business environment to uncontrollable external factors, it may be classified as
(a) Economic environment; and
(b) Non-economic environment.
The economic environment includes economic conditions, economic policies and economic system of the country.
Non-economic environment comprises social, political, legal, technological, demographic and natural environment. All these have a bearing on the strategies adopted by the firms and any change in these areas is likely to have a far-reaching impact on their operations.
Let us have a brief idea about each of these areas of business environment.
The survival and success of each and every business enterprise depend fully on its economic environment. The main factors that affect the economic environment are:
The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth.
(b) Economic Policies:
All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are:
(i) Industrial policy
(ii) Fiscal policy
(iii) Monetary policy
(iv) Foreign investment policy
(v) Export -Import policy
The government keeps on changing these policies from time to time in view of the developments taking place in the economic scenario, political expediency and the changing requirement. Every business firm has to function strictly within the policy framework and respond to the changes therein.
Important Economic Policies
The Industrial policy of the government covers all those principles, policies, rules, regulations and procedures, which direct and control the industrial enterprises of the country and shape the pattern of industrial development.
It includes government policy in respect of public expenditure, taxation and public debt.
It includes all those activities and interventions that aim at smooth supply of credit to the business and a boost to trade and industry.
Foreign investment policy:
This policy aims at regulating the inflow of foreign investment in various sectors for speeding up industrial development and take advantage of the modern technology.
Export-Import policy :
It aims at increasing exports and bridging the gap between export and import. Through this policy, the government announces various duties/levies. The focus nowadays lies on removing barriers and controls and lowering the custom duties.
(c) Economic System:
The world economy is primarily governed by three types of economic systems:
Socialist economy; and
) Mixed economy.
India has adopted the mixed economy system which implies co-existence of public sector and private sector.
The social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits, flower, etc. Due to increase in literacy rate the consumers are becoming more conscious of the quality of the products. Due to change in family composition, more nuclear families with single child concepts have come up. This increases the demand for the different types of household goods. It may be noted that the consumption patterns, the dressing and living styles of people belonging to different social structures and culture vary significantly.
This includes the political system, the government policies and attitude towards the business community and the unionism. All these aspects have a bearing on the strategies adopted by the business firms. The stability of the government also influences business and related activities to a great extent. It sends a signal of strength, confidence to various interest groups and investors. Further, ideology of the political party also influences the business organisation and its operations.
You may be aware that Coca-Cola, a cold drink widely used even now, had to wind up operations in India in late seventies. Again the trade union activities also influence the operation of business enterprises. Most of the labour unions in India are affiliated to various political parties. Strikes, lockouts and labour disputes etc. also adversely affect the business operations. However, with the competitive business environment, trade unions are now showing great maturity and started contributing positively to the success of the business organisation and its operations through workers participation in management.
This refers to set of laws, regulations, which influence the business organisations and their operations. Every business organisation has to obey, and work within the framework of the law.
The important legislations that concern the business enterprises include:
(i) Companies Act, 1956
(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954
(viii) Essential Commodities Act, 2002
(ix) The Standards of Weights and Measures Act, 1956
(x) Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade Marks Act, 1999
(xii) Bureau of Indian Standards Act, 1986
(xiii) Consumer Protection Act, 1986
(xiv) Environment Protection Act
(xv) Competition Act, 2002
Besides, the above legislations, the following are also form part of the legal environment of business.
(i) Provisions of the Constitution:
The provisions of the Articles of the Indian Constitution, particularly directive principles, rights and duties of citizens, legislative Constitution, particularly directive principles, rights and duties of citizens, legislative powers of the central and state government also influence the operation of business enterprises.
(ii) Judicial Decisions:
The judiciary has to ensure that the legislature and the government function in the interest of the public and act within the boundaries of the constitution. The various judgments given by the court in different matters relating to trade and industry also influence the business activities.
Technological environment include the methods, techniques and approaches adopted for production of goods and services and its distribution. The varying technological environments of different countries affect the designing of products. For example, in USA and many other countries electrical appliances are designed for 110 volts. But when these are made for India, they have to be of 220 volts. In the modern competitive age, the pace of technological changes is very fast.
Hence, in order to survive and grow in the market, a business has to adopt the technological changes from time to time. It may be noted that scientific research for improvement and innovation in products and services is a regular activity in most of the big industrial organisations. Nowadays in fact, no firm can afford to persist with the outdated technologies.
This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services. For example a country where population rate is high and children constitute a large section of population, then there is more demand for baby products.
Similarly the demand of the people of cities and towns are different than the people of rural areas. The high rise of population indicates the easy availability of labour. These encourage the business enterprises to use labour intensive techniques of production. Moreover, availability of skill labour in certain areas motivates the firms to set up their units in such area. For example, the business units from America, Canada, Australia, Germany, UK, are coming to India due to easy availability of skilled manpower. Thus, a firm that keeps a watch on the changes on the demographic front and reads them accurately will find opportunities knocking at its doorsteps.
The natural environment includes geographical and ecological factors that influence the business operations. These factors include the availability of natural resources, weather and climatic condition, location aspect, topographical factors, etc. Business is greatly influenced by the nature of natural environment. For example, sugar factories are set up only at those places where sugarcane can be grown. It is always considered better to establish manufacturing unit near the sources of input. Further, government’s policies to maintain ecological balance, conservation of natural resources etc. put additional responsibility on the business sector.
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