CHAPTER 1- BUSINESS ENVIRONMENT

Learning Objectives:

 After studying this chapter, you should understand:

1.    Concept of Business Environment.
2. Importance of Busniness Environment
3. Dimensions of Business Environment- Elements of Business Environment
4. Micro Environment
5. Macro Environment
6. SWOT Analysis

Concept of Business Environment

Business environment refers to sum total of all individuals, institutions and forces that lie outside a business enterprise but may influence its functioning and performance.

Business environment is a combination of internal and external factors that influence a company’s operations. The business can include factors such as ; clients, suppliers; its competition and owners; improvements in technology; Government laws and activities; and market, social and economic trends etc.

  Main Features;

                       The main features of business environment are:

1. All the external forces:

Business Environment includes all the forces, institutions and factors which directly or indirectly affect the Business Organizations.

2. Specific and general forces:

Business environment includes specific forces such as investors, customers, competitors and suppliers etc. which influence specific enterprise directly. General forces are Social, Legal, Technological, Political, etc. which affect the Business indirectly.

3. Inter-relation:

All the forces and factors of Business Environment are inter-related to each other. For example with inclination of youth towards western culture, the demand for fast food is increasing.

4. Uncertainty:

It is very difficult to predict the changes of Business Environment. As environment is changing very fast for example in IT, fashion industry frequent and fast changes are taking place.

5. Dynamic:

Business environment is highly flexible and keep changing. It is not static or rigid that is why it is essential to monitor and scan the business environment continuously. Shift in tastes and preferences, development of new technology, completion, are examples of dynamic nature of business inv.

6. Complex:

It is very difficult to understand the impact of Business environment on the companies. Although it is easy to scan the environment but it is very difficult to know how these changes will influence Business decisions. Some-time change may be minor but it might have large impact. For example, a change in government policy to increase the tax rate by 5% may affect the income of company by large amount. Similarly other social, economic, political technological factors may also have a deep effect on the company operations and profits.

7. Relativity:

The impact of Business environment may differ from company to company or country to country. For example, when consumer organisation CES published the report of finding pesticides in cold drinks, resulted in decrease in sale of cold drinks, on the other hand it increased the sale of juice and other drinks.

 Importance of Business Environment:

1. First Mover Advantage:
2. Early Warning Signal
3. Customer Focus:
4. Strategy Formulation:
5. Coping with Change:
6. Public Image:
7. Continuous Learning

 DIMENSIONS OF BUSINESS ENVIRONMENT:

Broadly business environment is classified into  Two categories as shown below

a) External Environment
b Internal Environment

 

Micro Environment : It consists of those factors that affect the decision making and performance of a particular company.
Micro Environment may be classified into two broad categories
1. Micro Internal Environment
2. Micro External Environment
1. Micro Internal Environment
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2.  Micro External Business Environment
  Those External micro environment consists of those external forces which affect an organisation directly and are relevant for decision-making. Every organisation tries to formulate its strategies based on the nature and behaviour of such factors.
Factors of external micro environment are as follows:

1. Competitors:

The competitive environment consists of certain basic things which every firm has to take note of. No company, howsoever large it may be, enjoys monopoly. In the original business world a company encounters various forms of competition. The most common competition which a company’s product now faces is from differentiated products of other companies.

For example, in the Colour Television Market, Philips TV faces competition from other companies like Samsung, LG, Sony and others. This type of competition is called brand competition. It is found in all durable product markets.

The consumer wants to purchase a two-wheeler, the next question in his mind is with gear or without gear, 100 cc or more than that, self starter or kick starter, etc. This type is otherwise known as ‘Product form competition’.

2. Customers:

According to Peter. F. Drucker, “There is only one valid definition of business purpose, that is to create a customer.” The business enterprises aim to earn profit through serving the customer demand. It now thinks more in terms of profitable sale rather than more sales volume for its sake. Today marketing of a firm begins and also ends with the customers.

Now a days, a business firm to be successful, must find customers for its products. This is the reason the customers thus constitute the most important element in the micro environment of business. Products sales depend mainly on the degree of consumer satisfaction.

In fact, this is a reason that gives more importance to customer satisfaction surveys. Now every business firm set-up systems to regularly watch customer attitude and customer satisfaction, because today it is universally accepted that the satisfaction of customers is the base for company’s success. Normally the customers are not in a same group, they are individuals, business enterprises, institutions and government.

From the company’s point of view it is always better to have customer from various groups and legions for that easily sustains demand for the company’s product.

3. Suppliers:

Regarding the suppliers, the organisation can think of availing the required material or labour according to its manufacturing programme. It can adopt such a purchase policy which gives bargaining power to the organisation.

According to Michael Porter, “the relationship between suppliers and the firm epitomises a power equation between them. This equation is based on the industry conditions and the extent to which each of them is dependent on the other.”

Suppliers are either individuals or business houses. They combined together; provide resources that are needed by the company. Now the company necessarily should go for developing specifications, searching for potential suppliers, identifying and analysing the suppliers and thereafter choose those suppliers who offer best mix of quality, delivery reliability, credit, warranties and obviously low cost.

The development in the supplier’s environment has a substantial impact on the operations of the company. In recent trends companies can lower their supply cost and increase their product quality.

4. Public:

Literally word ‘public’ refers to people in general. According to Philip Kotler, “A public is any group that has an actual or potential interest in or impact on a company’s ability to achieve its objectives.” The environmentalists, consumer protection groups, media persons and local people are some of the well-known examples of publics.

The company has a duty to satisfy the people at large along with competitors and the consumers. It is an exercise which has a larger impact on the well-being of the company for tomorrow s stay and growth. Create goodwill among public, help to get a favourable response for a company. Kotler in this regard has viewed that.

“Companies must put their primary energy into effectively managing their relationships with their customers, distributors and suppliers. Their overall success will be affected by how other publics in the society view their activity. Companies would be wise to spend time monitoring all their public understanding their needs and opinions and dealing with then constructively.”

In the modern business public have assumed important role and their presence in the micro environment of business.

5. Marketing Intermediaries:

Market intermediaries are either individuals or business houses who come to the aid of the company in promoting, selling and distributing the goods to the ultimate consumers. They are Middlemen (wholesalers, retailers and agents), distributing agencies, market service agencies and financial institutions. Most of the companies find, it is too difficult to reach the consumers. In such a cases the agents and distribution firms help to reach the product to the consumer.

Any type of intermediary the company must take into active consideration, the following aspects:

(i) The company has also to constantly review the performance of both middlemen and others helping its efforts periodically. If necessary, it may take recourse to replacement of those who no longer perform at the expected level.

(ii) Middlemen come into being to help overcome the discrepancies in quantities place, time, assortment and possession that would otherwise exist in a given condition.

(iii) It is advantageous and also efficient to work through the established Marketing channels instead of creating one and thus going for experiments.

(iv) The manufacturer has to decide the most cost-effective method of intermediaries to reach the product to consumer that will help to increase the profit.

         B- Macro Level External Business Environment

       External Environment influences the actions and behavior of all business enterprises. External             environment consists of various factors and forces that are beyond the control of the organization.  These are also called indirect factors.

Macro Business Environment is of the following types:

1. Economic Environment:

Economic environment refers to the economic factors and forces that affect the functioning of the business enterprise. The factors that affect the economic environment are :-

i)                    Economic policies:           The economic policies of the Government (Such as monetary policy, fiscal policy, foreign policy, taxation policy, industry policy, licensing policy, labour policy etc) have far reaching effects on the performance of all business enterprises. A particular policy can create either an opportunity or a threat to the business enterprise. e.g the liberal policy of the government relating to the entry of Multinational corporation in India may be a threat to small scale industries.

ii)                  Economic Conditions:- The economic conditions of a country ( such as availability of various resources, per-capita income, distribution pattern of income, prices of goods and services, rate of inflation, present state of economic cycle, rate of capital formation, rate and growth of GNP< conditions of capital market and stock market etc.) can also influence the policies of all business enterprises. The stage and rate of economic development determine the size of domestic market affecting the business.

iii)                Economic Systems:  The economic system prevailing in the country (such as Capitalistic or socialistic or mixed economic system) affects all business enterprises to a great extent. Economic system determines extent of control of the Government over the activities of business enterprises.

The general economic systems are changing rapidly. Governments are trying to introduce liberalization globalization of business. WTO has been playing a significant role.  Thus new dimension of economy will boost up new avenues for business enterprises.

2. Social and Cultural  Environment:  

       There are many social and cultural factors like- social values and beliefs of people, traditions , 

      customs and conventions, family structures, literacy level and education, work culture, awareness       of rights, changing life styles, society’s expectation from business etc. effect strategies of all       business concerns. For example, celebration of Diwali, Id, Christmas, Guru Parv etc in India provides significant opportunities for greetings cards and gift manufacturing companies, sweets and confectionery producers, tailoring outlets and many related business.

Similarly demand for branded consumer items is increasing rapidly among middle and upper-middle class of people. People have become more conscious of quality and safety of products. Society has become more environment and health conscious.

Culture heritage of a particular region determines the types of products to  be produced and services to be rendered. Life styles and needs of people are fast changing with the change in culture and social environment. Business enterprises should understand cultural preferences and produce goods and services accordingly. Modern life style has increased the demand for fast food industry, automatic electric appliance and other life style products. Growing awareness about health has lead to demand for health foods, gyms and exercise equipments, yoga and other slimming centers.

3. Technological Environment:

    It includes forces relating to scientific improvements and innovations which provide new ways of producing goods and services and new methods and techniques of operating a business.

   For example, recent technological, advancement in computers and electronic have modified the ways in  which companies advertise their products.

•    Internet has provided new opportunities and challenges to every business.
•    Retailers have direct link with suppliers who replenish their stocks when needed.
•    Airlines, railways and other modes of transport offer online services to people for booking and checking seat availability. Banking transactions can be executed with a click of the mouse.
•   Advancement in the field of Engineering products and methods of production has made it possible to undertake production on a largest possible scale..
•   Invention of smart phones has changed the way businessmen use their mobile phone for communication and excess their business links.
•   Similarly modern transport system, automatic machines, extensive research for new sources of energy (Atomic and Solar), bio technology, improved production processes, collaboration and transfer of technology between etc can have direct imp0act on the working of modern business enterprises.

Prosperity of business depends upon the availability of technical environment and sufficient number of skilled technicians, engineers, etc. The survival and success of business in the long run also depends upon its ability to adapt to changes in external technical environment.

Software industry, electronic goods industries, power and energy industry etc. are more vulnerable to technology changes. Executives of these industries should be more alert while framing their business strategies.

4. Political Environment:      
   

Political factors have enormous influence on the decisions of the business enterprise.  The political system prevailing in a country provides a framework within which business enterprises operate. The political factors include:

·        Stable political system – most essential for smooth functioning of all business enterprises.

·         The philosophy of all ruling party, strength of the opposition party and intentions and ideology of the ruling party etc. – exert vital influence on the policies of business enterprises.

·         Political instability – due to terrorism, civil war, declaration of President Rule etc can create adverse impact on the economic prosperity of business enterprises.

·         Apprehension of political instability- discourage investors to invest

·         Center – Stare relation has a vast impact on the growth and development of business enterprises.

·         Extent of Government intervention in the affairs of business – effect the functioning of business enterprise.

·         Coalition Government is the recent trend- it has led to the instability in the political environment. Many Govt. programmes of liberalization, globalization, disinvestment of public sectors etc. could not be followed in line with international trends.

Therefore, political stability regime is the basic for the success and growth of business enterprise.

5. Legal Environment:  

Various legislations like Indian Companies Act, 1956; Income Tax Act, 1961; MRTP Act, 1969; etc., are enacted by the Government to regulate and control the activities of business enterprises. As a result, the policies of the government are having a direct influence on the strategic decisions of all business enterprises.

Factors and forces that form the legal environment include:

·               a. Business Laws ( Contract Act, Sale of Goods Act, Negotiable Instrument Act, Partnership Act, etc)

·               b.Corporate and Economic Laws ( Companies Act, Patent Act, Trademark Act, Essential Commodities Act, Consumer Protection Act, MRTP Act FEM Act, etc)

·               c. Industrial and Labour Laws ( Factories Act, Industrial Disputes Act, Gratuity Act, Payment of Bonus Act, Provident Funds Act, Trade Unions Act, Industrial Development and Regulations Act, etc.)

·             d.Taxation Laws – ( Income Tax Act, Sales Tax Act, Customs Act, Values Added Tax Act etc)

·            e.Pollution Control Laws (Air Pollution control Act, Environment Protection Act, etc.)

These laws are amended from time to time ensure their relevance with the changing times. Sometimes, government the amendments may create new business opportunities for some business enterprises and threats to others. Often government provides subsidies and incentives to small industries to help them withstand competition from large industries.  

SWOT Analysis: