Nature and Structure of Business Environment

Contents

A.Introduction, Definition and NatureThe International Environment

A.Macro EnvironmentDomestic macro Environment

C. Micro EnvironmentExternal Public Relation EnvironmentInternal Environment

D. Significance of Business Environment

Environment

• The term environment refers to the totality of all the factors which are external to and beyond the control of individual business enterprises and their management.

Continued…………

• It differs not only over space but also over time within a country.

• Future environment is the product of past and present environments.

• It can be classified into economic and non economic factors.

Business Environment

• Business Environment is the resultant of a number of interacting and constantly changing social and economic forces that affect a business either internally or externally.

• Thus, it is necessary for every business to comprehend the nature and structure of business environment and factors causing change in it.

• Business Environment for a firm is a multi layered structure, where some layers are favorable and some are adverse.

Definition

According to Arthur M. Weimer, “Business Environment is the climate or set of

conditions- Economic, Social, political or Institutional in which business operations are conducted”.

Nature of Business Environment

InterdependentDynamicUncertainUnlimited effect of uncontrollable factorsKeep a regular vigil on changing environment

Different layers of Business Environment

Public Relation Environment

Domestic macro Environment

International Environment

Macro Environment –International Environment

• Most volatile and DynamicChange in Exchange RateState of world Economy (Ex . Recession)Interdependence between National and

International Economic PoliciesInternational Economic laws

Continued……….

• Major Events affecting International Environment in the past years:

o Formation of WTO in 1995 and ratification of the earlier agreements on trade and related issues. (removal of import restrictions)

o Emergence of European Union and intro of Euro as common currency

o Increase in number of free trade areas (NAFTA).o Presence of MNCs the world over.

Risks involved in International Environment

• Political Risk: emanating from Political instability, changes in government, possibility of confiscation (elimination, subtraction), nationalization.

• Country Risk: It is basically concerned with the performance of an economy. e.g. changes in competitive environment, Fiscal deficit and internal debt growth etc.

• Cultural Risk: affecting consumer attitude towards foreign goods and changes in fashions, tastes and preferences.

Macro Environment –Domestic Macro Environment

Domestic Macro Environment

Non Economic EnvironmentEconomic Environment

Economic System

Growth and Distribution

Macro Economic Stability

Economic policy

Competitive Environment

Political

Legal

Cultural

Demographic

Domestic Macro Environment-Economic Environment

– 1.)Economic SystemEconomic System is a way in which a society is organized to

decide 3 basic questions-What to produce and in what quantities?How to produce?For whom to produce?

It provides the framework in which an economy operates.

It reflects the economic thinking of a country.

Continued……………Major Economic Systems:

• Capitalist economic system• A system which encourages private enterprises, free play of

market forces.

• The factors of production are privately owned and production occurs at the initiative of the private enterprise

• Government plays little role in economic decision making.

• Ex. USA, Canada, Australia and almost all Developed countries.

Continued…………………

• Socialist Market Economy-– Productive resources are organized, owned and manage by

govt. but resource allocation, production and distribution decisions are based on the principle of Market.

– Govt. control and ownership.

– Emphasis on equality of income.

– Ex. China

Continued………………………………..

• Mixed Economy-– None of the two elements (Market and Government) has

dominating presence.

– Co – existence of both the public and private sectors.

– Freedom of selection of profession, employment and trade.

– Ex. India and most other developing Countries

– Role of Government is both regulatory and developmental.

Domestic Macro Environment-Economic Environment2.)Growth and Distribution Environment

• Economic Growth refers to increase in real out put over a period of time (usually a year).

• Measures of real output-GDP, NDP, NY, Disposable Income

GDP C+I+G+(X-M)

NDP GDP- Depreciation

NY NDP- Net Indirect Taxes

DY NY- Direct taxes

Domestic Macro Environment-Economic Environment

3.)Macro Economic Stability• Stability of Price level

• Exchange Rate

• Money Supply

• Aggregate Demand

• Balance of Payment

• Employment Rate

All these variables are interdependent and interactive and one variable has the potential to upset the other.

Domestic Macro Environment-Economic Environment-

4.)Economic Policy

• It refers to govt. policy towards economy as a whole.

• Basic objective-maintain growth, economic stability, increase employment, stabilize BOP, correct regional imbalance, make economy more competitive.

• The effect of these policies may be favorable for some categories of business or unfavorable for some other categories of business. e.g. incentives and subsidies.

Continued……………………

• Components of Economic Policy–Monetary Policy• It refers to all actions of central bank which affects

directly or indirectly supply of money, rate of interest and Banking system.

• Affect cost and availability of credit.

– Fiscal Policy• Concerned with the use of taxes and government

expenditure.

Continued………………………

• Components of Economic Policy– Industrial Policy• promotes industrialization

• Correcting regional balances

• Developing sectoral linkages

• Promoting Export, Import Substitution.

• Affect cost and availability of credit.

– Trade Policy• Improve terms of trade

• Enhance export competitiveness

Domestic Macro Environment-Economic Environment-

5.)Competitive Environment• State of competition spells out – freedom of entry and exit in the market

– Price

– Scale of output

• Decides on Competitive strategies.– Trust- Cartel Formation-mutual business

– Predatory Pricing-Charging less prices initially so that others move out of the market. Once Monopoly or Oligopoly is attained, raise the prices

– Price Discrimination

Domestic Macro Environment-Non Economic Environment

• 1.) Political Environment – Whenever there is a change in the political scenerio of a country there will be a change in economic policies. E.g international political relations (war)

• 2.) Legal Environment - Provides a sense of security and safety, code of conduct, leave away black marketing, tax evasion, gray markets, insider trading etc. Ex. Consumer Protection Act, Patent (manufacturing goods/processes), Copyright.

Continued……………………..

• 3.) Cultural Environment- – Culture is a set of socially accepted and shared traditional

beliefs, values and customs.

– Plays important role in after sale services, Industrial relations, customer relationship and overall HRM

– e.g. wedding dress, burger etc.

• 4.) Demographic– Population density, gender ratio (male-female ratio), Age,

Composition, life expectancy.

– Helps in market segmentation and Product Positioning

Micro Environment

• Public Relations Environment

• Internal Environment

Micro Environment-Public Relations Environment

Continued……………………..

• Suppliers - provides inputs on regular basis, ensure reasonable price, appropriate quality, fairness in dealing, rational delivery terms and Timely schedules. All these add to the firm’s competitiveness in the market.

• Customers- Organization exists for the customer and all activities must be customer focused. Firms should focus on Customer Relationship Management.

Continued……………………..

• Distribution Channel Members- they are the link between firms and customers. The channel member must thoroughly understand the product’s competitive advantage and values and conveys the right message down the channel up to the customer.

• Rivals- Firm competes with its rivals on price, quality, packaging, delivery, after sale services etc.

Continued……………………..

• Other entities- Local Population Groups, Human Right Activists, Anti-Pollution campaigners, consumer protection groups, Government etc. All these helps firm gain better image in society.

Micro Environment-Internal Environment

• Mission and Vision

• Management Philosophy and strategy

• Industrial relations

• Corporate culture and values

• Quality control system

• Job design and coordination

• Compensation system and career progression of employees

• Team spirit among employees

Significance of Studying Business Environment

• For Incorporating Dynamic behaviour

• To have complete knowledge of Internal Environment

• To understand international events

• To face business problems and challenges

• Keeps a Vigilance regarding dangers

• For Scientific and Industrial advantage

• For Overall success of business

Conclusion

Careful Monitoring and Analysis of Business Environment helps a firm to do effective business planning and decision making.

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