Business environment consists of all those factors that have a bearing on the business, such as the strengths, weaknesses, internal power relations and orientations of the organization; government policies and regulations; nature of the economy and economic conditions; socio-cultural factors; demographic trends; natural factors; and, global trends and cross-border developments.
Business Environment Interrelationship
Any meaningful organization has certain mission, objectives and goals and a strategy to achieve them. Business environment has a bearing on the shaping of all these integral and interrelated elements. It is, therefore, only very appropriate that formulation of strategy is sometimes defined as establishing a proper firm environment fit. Indeed, the mission /objectives/goals themselves should be based on an assessment of the external environment and the organizational factors (i.e. the internal environment ). A SWOT analysis (analysis of the strength and weaknesses of the organization and opportunities and threats in the environment), therefore is one of the first steps in the strategic management process. Business dynamics , to a large extent , is a dependent factor - it depends on , inter alia, the environmental dynamics . hence , the importance of environmental analysis .
The external environment has , broadly , two components , i.e., business oppourtinities and threats to business . similarly , the organizational environment has two components : strengths and weaknesses of the organization .thus , strategy formulation is properly pitting th organizational factors (internal environment ) against the opportunities and threats in the external environment . In other words , business decisions are conditioned by two broad sets of factors , i.e., the internal environment and the external environment.
A SWOT analysis therefore is one of the first steps in strategic management process . business dynamics, to a large extent , is a dependent factor - it depends on , inter alia , the environmental dynamics. Hence, there is a importance of environmental analysis .
Types of environment
On the basis of the extent of intimacy with the firm , the environmental factors may be classified in to different types or levels . as indicated above , there are , broadly two types of environment , the internal environment , i.e., factors internal to the firm and external environment , i.e., factors external to the firm which have relevance to it .
The internal factors are generally regarded as controllable factors because the company has a control over these factors ; it can alter or modify such factors as its personnel , physical facilities , organization and functional means , such as marketing mix , to suit the environment .
The external factors , on the other hand , are , by and large , beyond the control of a company. The external or environmental factors such as the economic factors , socio-cultural factors , government and legal factors , demographic factors , geo-physical factors etc., are , therefore, generally regarded as uncontrollable factors .
It may , however , be noted that a firm may not sometimes have complete control over all the internal factors . also , it is some times possible to change certain external factors.
Some of the external factors have a direct and intimate impact on the firm ( like the suppliers and distributors of the firm ) . these factors are classified as micro environment , also known as task environment and operating environment . there are other external factors which affect an industry very generally ( such as industrial policy , demographic factors , etc . ). They constitute what is called macro environment , general environment or remote environment .
Dimock observes : " the two most powerful institutions in society today are business and government ; where they meet on common ground-amicably or otherwise together they determine public policy , both foreign and domestic , for a nation '
The political environment includes factors such as the characteristics and policies of the political parties , the nature of constitution and government system and the government environment encompassing the economic and business policies and regulations . these factors may vary very considerably between different nations , between different provinces of the same nation and also over time.
The major economic policy decisions often have political underpinnings. The adoption, in the early 1950's of the principle of socialist pattern of society as the socio-economic philosophy by the congress party, which ruled India until 1995 except for a brief period (1977-1980), was mainly responsible for the public sector dominated development strategy followed in india until the early 1990's. It is indeed the dramatic changes in the political environment in the erstwhile USSR and the East European countries that gave rise to drastic changes in their economic policies in the late 1980's. And these developments have encouraged a revolutionary change in India's economic policies in 1991.
Peter Drucker in the Management Challenges for the 21st century observes : "Even within transactional economic units , national politics still over rule economic rationality despite the European economic community, for instance, it has proven all but politically impossible to close a totally redundant plant in Belgium and shift the work to a French plant of the same country only 30 miles away, but on the other side of a national border."
Many political decisions have serious economic and business implications. The economic policy of ruling party is very important. In the past communists and other leftists favored state capitalism and were against private capital, particularly foreign. Important economic policies such as industrial policy, policy towards foreign capital and technology, fiscal policy and foreign trade policy are often political decisions.
Business is an economic activity. But to be effective, business mangers, must also take into consideration the non-economic environment of business. One should give importance to politico-legal environment of business.
The Government is a political institution, but it also serves a social purpose, it formulates and executes social policies , it provides the means of maximizing social benefits and minimizing social costs. In other words, the Government itself has a social value and culture.
In the modern world, business of any type any structure and any size is often affected by Government polices, programmes and legislations. The Government has its own form, structure, style and ideology or outlook. Business has to organize its activity, and the businessmen have to define their respective business strategy and business tactics depending upon the nature of the Government at work . In other words, business policy decisions are designed according to the Government's overall policy and environment of the system. The ideology or philosophy or outlook of the government of every country enacts and executes a set of policies and programmes. few of the policies are being executed through legislations. The politico-legal environment constitutes the legislations and enactments, rules and regulations, systems and procedures, policies and plans, statements and announcements, directives and guidelines by the Government . To become a successful manger, one should take into consideration the political environment of business, and then capitalize on the opportunity available in Business environment. The political environment of business consists of several critical elements, e.g., the nature and form of government, the ideology of the ruling party, the strength of the opposition, the role and responsibility of the bureaucracy, political stability, the effectiveness of the Government, its plans and programmes, the socio-economic legislations, and politico-legal institutions, etc.
The political environment of business contains a number of critical elements:
The Form Of Government
Gone are the days of Laissez fare, government intervention to some extent in business activity every where in the world is a rule rather than an exception. So, the form and structure of the Government is a very crucial and decisive factor for the business sector. Following examples may be cited to illustrate this point. As it is said that in democracy such as in India , we have "government of the people, by the people and for the people". People's participation is so important that even at the enterprise level, we seek workers' participation in management, i.e., industrial democracy . Under a federal form of government, we tend to confine the authority of the Central Government with respect to the functional autonomy of the State Governments and, due to this, we allow both Central as well as State level public enterprises. In the same way, the principle of democratic decentralization, authorize even the local Government to collect some business taxes and spend money on local activities. Thus, the system of government and the structure of administration affects business. And in order to secure maximum favor from the existing Government, businessmen also create their own lobby and this factor partly decides whether the Government adopts pro business or anti business measures.
For example , as India is a democratic country (or people's government) , to help medium and small scale entrepreneurs , it has been undertaking several steps like setting up of banks and financial institutions; formulating various policies and schemes, etc. All such measures are specifically focused towards the promotion and development of medium and small scale entrepreneurs. The government (central and state ) has been taking active steps to promote entrepreneurship in various industry and service sectors. It has declared several policies and also implementing schemes and programmes to enhance the global competitiveness of small enterprises across the country.
The Ideology Of The Ruling Party
In a democratic set up, like in India, the ideology of the ruling party influences ownership , management structure and size of business. rightist inclination of a ruling party may formulate liberal pro-business policies, whereas a leftist bias of a ruling party will develop measures like nationalization and excessive centralization. So the ideology or outlook of the ruling party may help or hurt the core of business activity.
Earlier, our government favored progressive income taxes and opposed unregulated business and finance. In recent years they followed centrist economic and social democratic agenda. But , today our ruling party focuses on neo-liberal policies which includes social liberalism secularism and free enterprise system with government regulations.
Under the regime of Mr. P. V. Narasimham Rao and then finance minister Dr. Manmohan Singh, significant economic reforms were initiated and more stress was given on "efficiency" rather than "equity" considerations. This affected the work ethos in the day to day operations of
In 1991 congress with its alliance introduced New Economic Policy in which they welcome the idea of privatization , which was discontinued by the BJP government under the leadership of then prime minister Shri Atal Bihari Vajpayee . In 2004, again the privatization came into existence with the emergence of congress party.
The Strength Of Opposition
In a democracy opposition plays as vital role as the government. a government to work in a proper way and according to the will of the people, equally strong and sensible opposition is requisition. an opposition like this leads to the success of democracy like in England which the oldest democracy of the word. Usually , there is one strong political party is opposition which is the strength of democracy in that country.
Under the two-party system, the party which gets an absolute majority forms the Government. Under the multi-party system, the party which gets a relative majority forms the Government with the collaboration or support of some other political parties. Others which do not command majority form the Opposition. The strength of the Opposition very often depends on whether or not the Opposition parties are united or divided. They may be ideological differences between parties but the Opposition must act as a whole, and the parties must rise above their ideological differences and should judge every move of the ruling party critically.
in India there are a number of opposition parties. The effective working of opposition in democracy is very important. The opposition fastens the growth of the county and slow down its growth by untimely agitations. For example, the violent agitations in Gujarat, Bihar, Assam and Punjab resulted in great loss of life and propensity and failed entirely to gain their objectives which affects the working of business entities. So if the Opposition is fair, firm and consistent, it can make constructive criticism of Government polices affecting business. As a result, the Government cannot afford to act irresponsibly with regard to the business sector in the economy.
Recently also, the Government's policy of foreign direct investment (FDI) in retail is wrongly criticized due to political reasons by opposition. Such kind of destructive approach is against the national interest. So in a democracy, an effective Opposition is as crucial as Government to protect, promote and regulate business in the best interest of society.
Role And Responsibility Of Bureaucracy
In any country , Government works through the bureaucracy. In a democratic set up, different parties may be voted in or out of the Government as and when elections are held. Even if the same party rules, thee is no guarantee that the same person will hold charge of a Ministry. Ministers change from time to time, but Government administration must continue without any break. This is where the bureaucracy comes in. bureaucracy is the permanent machinery of the Government, it is meant to keep the flow in Government operations in relation to both business and non-business sectors. In a system where the Government controls and regulates the business extensively, the bureaucracy is very powerful in enforcing Government rules and regulations, systems and procedures, licenses and restrictions. So the Businessmen, should, tend to oblige the bureaucracy in a number of ways. Role of bureaucracy in a country like India which is a developing country are:
Formulation of Policy is the crucial function of political leaders or members. But the executives also have to play a vital role in it. They advise the ministers in policy making . Political leaders or members being amateurs cannot understand the technical complexities of laws and policies and hence depend upon the expert advice of professional civil executives.
Policy Implementation -
This is the most essential and fundamental function of civil servants. They formulate and execute laws and policies to attain the goals of welfare state that is social equity, economic development, growth and so on
This is a quasi legislative function performed by the civil executives. Due to unavailability of time, pressure of work and increased complexities of legislation the legislative makes laws in raw form and delegate its power to the civil executives to make the full fledge bill . so in this sense civil executive makes bills ,rules and regulations, but within the boundary of the parent law that is enacted by the legislature. Delegated legislation is also known as executive legislation or subordinate legislation.
This is a quasi judicial function performed by the civil executives. The civil executives settle disputes between the citizens and the state. There are Administrative Tribunals with judges who solves this dispute among citizens and the state. Examples of some of the tribunals in India are : the Income Tax Appellate Tribunal, Industrial Tribunals, Rent Tribunals and Railway Rates Tribunals. These tribunal functions beyond the ordinary court system.
In addition to the above, the civil executives also performs the following functions-Administrative planning, administration of public enterprises ,handling financial operations etc.
When the Government introduced liberalization in 1991 i.e., relaxation of rules and regulations, streamlining of systems and procedures, control turns out to be redundant and meaningless. At that time the bureaucracy finds that it is going to loose its age old role and responsibility of enforcing controls, as the same has happened with economic reforms. Powerlessness is a terrible situation for the bureaucracy. So they opposed towards liberalization. The bureaucracy enjoys
imposition and execution of controls and regulations and the subject of controls and regulations had profound implications for business. For example, professional management of quite a few of our public enterprises has become a perpetual tussle between bureaucrats and technocrats.
Business and economic policies are statutorily enforced through laws. Various socio-economic legislations are subject to business operation which constitutes the legal environment. In today's scenario there are so many laws that are prevailing which can affects the business operations and it is required by the modern businessmen to have a basic knowledge regarding law and he needs legal advice constantly. Today business is more a kind of a "legal contract" rather than a "social contract". Business laws are numerous in number and various in form. The laws are enacted to protect the business interests of various groups in society. The laws are needed to protect consumers, workers, mangers, owners, shareholders and society at large.
There are many business legislations such as MRTP,FERA, IDRA etc. The order is maintained in the industrial economy through the above said legislations . Industrial order and harmony is essential for survival and expansion of business. Laws are not only meant to protect the business but sometimes it also creates the business. for example in Tax laws , more the number of operations of business ,the more the complications of tax laws the more will be the business of tax consultants. Thus economic legislations and business environment are interdependent on each other.
Last but not the least, the legal institutions also plays a crucial role as a part of the noneconomic
environment of business. The organs of the Government effects functioning of the legislative, executive and judicial business environment directly and indirectly in all manners.
The above said organs run through organizations and institutions. The judiciary
functions through organizations and institutions. For example, in India the judiciary runs through the Supreme Court, the High Courts and the lower courts. Unless these courts function
efficiently, adjudication of business matters, will be at stake.
For example , unless the police department acts with vigilance, the economic offences in a country will increase. The successful operation of business depends upon cooperation and coordination between number of Government departments like DGTD, DGS & D BPE, etc. Sometimes, business suffers because of inter-ministerial or inter-departmental conflict. To avoid this kind of conflict, very often coordinating cells are created. Efficient working of the cells will helps in running business prosperously without constraints, otherwise, red-tapism, procedural delay, excessive centralization, lack of dedication and absence of departmental coordination will frustrate business activity.