The Concept of Business Environment, Significance and Nature

Meaning of Business EnvironmentEnvironment of Business means the External forces influencing the business Decisions.

They can be forces of Economic, Social, Political and Technological forces. These factor are outside the control of the business. The business can do little to change them.

Business Environment

Business Environment

Political Environment

Legal Factor

Social Environment

Political Environment

Technological factor

Economic Factor

Demographic Factor

External Forces of Business Environment

• Micro environment Suppliers Customer Marketing

Intermediaries Financiers Public

• Macro Environment Economic Geographical Ecological Social and Cultural Political & Legal Technological Demographic

External Environment

DemographicsDemographics

SocialChangeSocial

Change

EconomicConditionsEconomicConditions

Political & Legal FactorsPolitical &

Legal Factors

TechnologyTechnology

CompetitionCompetition

EnvironmentalScanning

Target Market

ProductDistributionPromotion

Price

ProductDistributionPromotion

Price

External Environment is not controllable

Ever-ChangingMarketplace

Economic Factors:• The business enterprise is affected by various economic forces which cannot

be controlled by the business.

These economic forces, can be divided into two categories, ie. Demand Force and

Competitive Force

Economic Conditions• For customers to buy the commodity of the firm, they should have the

ability to buy and willingness to buy. The ability to buy a commodity depends on the income of the customer, to be very precise,

• the disposable income of the customer. Out of the total income, the individual has to pay taxes due to the government and the disposable income will be less if the taxes are high.

• Secondly, if the individual wants to save more, the amount for spending will be less. Thus, the ability to buy a commodity depends on the

Total income earned out of the employment of the individual The taxes of the government and The savings of the individual.

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• Competitive forces: The competitive tools are price cutting, advertisement, product differentiation, marketing strategies and consumer service.

• Price cutting: Price cutting or price reduction is a method which has to be adopted very cautiously, as it may ultimately lead to price-war between firms competing, resulting in reduction of profits.

• Advertisement: Advertisements in modern days have become a very powerful tool in persuading the consumers of a product to a particular brand. In monopolistic competition, a large share of the market is entrenched by firms making effective and aggressive advertisement.

• Product differentiation: A firm tries to get competitive strength by differentiating its product from those of its rivals. By having special design, colour, packing and features, the firm tries to get competitive edges.

• Marketing strategies and Consumer Service: Modern firm adopt various types of marketing strategies to create market for their products. Installment system, credit system, hire-purchase, etc., are the prominent ways by which firms try to cut through the poor segments of the society and convert them their customers. Besides customer service like, free door delivery, quick service, after sales service, guarantee from defects up to a certain period are adopted to have more and more demand for their commodities.

Economic Policy

Industrial PolicyFiscal PolicyMonetary PolicyForeign Investment PolicyEXIM Policy

Economic System

Capitalist EconomySocialist EconomyMixed Economy

Demographic Factor

• Demography is a study of human population with reference to its size, density, distribution and other connected vital statistics.

• The density of population, the extent of their standard of living, the level of their education and the nature of their occupation etc., greatly influence the type of business the entrepreneurs could undertake

Geographical and Ecological Environment:

• Geographical conditions, to a greater extent, influence the type of industries and business in a region. Generally, the people of a particular geographical region will have similar tastes, preferences and requirements. The geographical situation, the physical feature, the climate, rainfall, humidity, the vegetation, etc., decide the type of living in a particular region and only those industries which could cater to the needs of the people, could develop. In other words, geographical conditions exert profound influence on the location of the business.

• Ecological is a study “dealing with the interaction of living organism with each other and with their non-living environment”. It is a science telling about the relationship of all living beings. (ie., human beings, animals, plants) with non- living beings (air, water, soil represented by atmosphere, rivers, lakes, mountains and land).

Legal Environment• This refers to set of law, regulations, which influence the business organizations and their

operations. Every Business organization has to obey and work within the framework of the law. the important legislation that concern the business enterprise include

Companies Act 1965 FEMA 1999 The Factories Act 1948 Industrial Disputes Act 1972 Payment of Gratuity Act 1972 Industries Development and Regulation Act 1951 Essential Commodities Act 2002 The Standard of weight and measurement Act 1956 Monopolies and Restrictive Trade Practices Act ( MRTP)1969 Trade Mark Act (1999) Bureau of Indian Standard Act 1986 Consumer Protection Act 1986 Environmental protection Act Competition Act 2002

Political Factor

• The political Environment of a country is influenced by the political organizations such as philosophy of political parties, ideology of government or party in power, nature and extent of bureaucracy influences of primary groups etc. the political environment of the country influences the business to a great extent.

Technological Factors

• 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 affects the designing of product

Features of Business Environment Totally of External Forces:

Business Environment is the sum total of all things external to Business firm and as such is aggregative in nature.

Specific and General Forces:

Business Environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and suppliers) affects individual enterprise directly and immediately in their day-t0—day working. General forces (Such as Social, Political, legal and technological conditions) have impact on all business enterprises and thus may affect an individual firm only indirectly

Dynamic Nature:

Business Environment is dynamic in that it keeps on changing whether in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market.

Uncertainty:

Business Environment is largely uncertain as it is very difficult to predict future happening , especially when environment changes are taking place too frequently as in the case of information technology or fashion industry

Relativity:Business environment is a relative concept since it differs from country to country and even region to region. Political condition in the USA, for instance, differ from those in china or Pakistan. Similar, demand for sarees may be fairly high in India whereas it may be almost non-existent in France .

Importance of Business Environment

Determining opportunity and Threats Giving Direction for growth Continuous Learning Image Building Meeting competition Identify Firm’s Strength and Weakness Improving Performance

Determining opportunity and Threats:

The interaction between the business and it environment would identify opportunities for and threads to the business. Its helps the business enterprises for meeting the challenges successfully.

Giving Direction for growth:The interaction with the environment leads to opening up new frontiers of growth for the business firm. It enables the business to identify the areas for growth and expansion of their activities.

Continuous Learning:Environmental analysis makes the task of managers easier in dealing with business challenges. The managers motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business.

Image Building:Environmental understanding helps the business organization in improving their image by showing their sensitivity to the environment within which they are working.

Meeting competition:Its helps the firm to analyze the competitors’ strategies and formulate their own strategic accordingly.

Identify Firm’s Strength and Weakness:Business environment helps to identify the individuals strengths and weakness in view of the technological and global development.

Improving Performance:

The enterprise that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period

Types of Environment

• On the basis of the extent of intimacy with the firm, the environmental factors may be classified into different types

1-Internal Environment

2-External Environment

1-Internal Environment

The internal environment is the environment that has a direct impact on the business. Here there are some internal factors which are generally controllable because the company has control over these factor. The important internal factors which have a bearing on the strategy and other decisions of the internal organization are discussed

Internal Environment

Value System

Internal Power Relationship Miscellaneous

Factors

Company Image and Brand Equity

Management structure and nature

Mission and Vision and Objectives

Human Resources

Miscellaneous factors

Financial factor

Research and Development

Physically assets and facilities

Marketing Resources

Internal EnvironmentValue System:

The Value system of the founders and those at the helm of affairs has important bearing on the choice of business, the mission and objectives of the organization, business policies and practices.

Mission , Vision and ObjectivesVision means the ability to think about the future with imagination and wisdom. Vision is an important factors in achieving the objectives of the organization. The mission is the medium through which the objectives are achieved

Management Structure and nature

The structure of the organization also influence the business decisions. The organizational structure like the composition of board of directors, Influences the decisions of Business as they are internal factors.

Internal Power RelationshipThe relationship among the three levels of the organization also influences on the business. The mutual co-ordination among those three is a an important need for a business.

• Human Resources:

The human resource is the important factor for any organization as it contributes to the strength and weakness of any organization. The human resources in any organization must have characteristics like….

1-Skills

2-Quality

3-High moral

4-Commitment towards the work

5- Attitude etc.

Company image and Brand Equity

The image of the company in the outside market has the impact on the internal environment of the company. Its helps the

1- Raising the finance

2-Making Joint ventures

3- Other alliances

4-Expansion and Acquisitions

5-Entering sale and purchase

6-Launching new products

7- Brand equity also help in the company

•

Miscellaneous

Physical assets and facilities: facilities like production capacity, technology ar5e among the factors which influence the competitiveness of the firm. The proper working of the assets is indeed for free flow of the working of the company.

Research and Development: though R &D department is basically done external environment but it has a direct impact on the organization. This aspect mainly determine the company’s ability to innovate and compete

Marketing Resources:

Resources like the organization for marketing, quality of the marketing men, brand equity and distribution network have direct bearing on marketing efficiency of the company.

Financial Factors:

Factors like financial policies: financial positions and capital structure are also important internal environment affecting business performance strategies and decisions

External Environment: Its refers to the environment that has an indirect influence on the business. The factors

are uncontrollable by the business. There are two types of external environment

Micro-EnvironmentThe micro environment is also known as the task environment and operating environment because the micro- environment forces have a direct bearing on the operations of the firm

a. Suppliers

b. Customer

c. Marketing Intermediaries

d. Financiers

e. Public

Macro-Environmenta. Economic Environment

b. Social Environment

c. Political Environment

d. Legal Environment

e. Technical Environment