Business Environment

I.       Introduction:

Meaning of Business:

In the literal sense, live word business means what keeps one busy or occupied. But every engagement or occupation will not constitute Business strictly in conformity with the business terminology.

In economic sense, the word 'Business' means work, efforts and acts of people which are connected with the production of wealth.

Business means those human activities which-involve production or purchase of goods with the object of selling them at a profit. Business includes only those human activities which are directed towards earning money or creating profit.

Or

Business may be understood as the organized efforts of enterprises to supply consumers with goods and services for a profit, business is an important institution in the society.

A business is a legally recognized organization designed to provide goods or services, or both, to consumers, businesses and governmental entities.

Wheeler’s Definition

"Business like weather is with as every day. Buying and selling, hiring or firing, producing or financing, these are but a few of the many business activities which daily influence the lives of all of us directly or indirectly."

L M. Dicksee’s Definition

"Business refers to a form of activity pursued primarily with the object of earning profits for the benefit of those on whose behalf the activity is conducted."

Objectives of Business:

It is generally believed that a business has a single objective, that is, to make profit. But it cannot be the only objective of business. While pursuing the objective of earning profit, business units do keep the interest of their owners in view. However, any business unit cannot ignore the interests of its employees, customers, the community, as well as the interests of society as a whole. For instance, no business can prosper in the long run unless fair wages are paid to the employees and customer satisfaction is given due importance. Again a business unit can prosper only if it enjoys the support and goodwill of people in general. Business objectives also need to be aimed at contributing to national goals and aspirations as well as towards international well-being. Thus, the objectives of business may be classified as –

a. Economic Objectives

b. Social Objectives

Meaning of Environment:

Environment refers to the sum total of all the factors that have influence on the functioning of a system.

Meaning of Business Environment:

Business Environment refers to all external forces which have a bearing on the functioning of the business. It refers to those aspects of the surroundings of business enterprise and circumstance of business unit which affect or influence its activities and operations and decides its effectiveness.

Jauch S Defines

Business environment includes factors outside of the firm, which can lead to opportunities for or threats to the firm. Although there are many factors, the most important are the socio-economic, technological, supplier, competitors and government.

Business environment refers to ail those internal and external factors that have a bearing on the business.

II.    Scope of business environment

Business environment can be seen in a wide scope. It can be broadly classified into two main categories like:

A.    Internal Environment and

B.     External Environment

A.    Internal Environment:

The internal environment is influenced by the internal factors or controllable factors of an organization. Because the company has few controllable factors, which can influence its functioning and it can alter such factors to suit the environment.

Those factors include:

a.       Value system: The value system of the founders has important bearing on the choice of business, the mission and objectives of the organization, business policies and practices.

b.      Mission & objectives: The business domain of the company priorities, direction of development, business philosophy, business policy, etc.

c.       Management structure A nature:  The organization structure, the composition of the board of directors, extent of professionalization of management, etc.

d.      Internal power relationship: Factors like the amount of support the top management enjoys from different levels of employees, shareholders and hoard of directors have important influence on the decisions and their implementation.

e.       Human resources: The characteristics of the human resources like skill, quality, moral, commitment, attitude, etc of the employees, could contribute to the strength and weakness of an organization.

f.       Company image & brand equality; The image of the company matters while raising finance, forming joint ventures or other alliance, solvating marketing intermediaries, entering purchase or sale contracts, launching new products etc. Brand equity enjoyed by companies also plays an important role.

B.      External environment;

The external environment is influenced by the external, controllable or uncontrolled factors which can influence its functioning. These factors are outside the control of the business. The business can do little to change them.

Further the exernal environment of an business organization cal be classified as:

a)      Micro environment

b)      Macro environment

a)      Micro Environment: The micro environment consists of the company's immediate environment that affects the performance of the company.

Factors or elements in an organization's immediate area of operations that affect its performance and decision making freedom. These factors include competitors, customers, distribution channels, suppliers, and the general public.

Charles Hill & Gareth Jones’s Definition:     
"A company's micro environment consists of elements that directly affect the company such as competitors, customers and suppliers."

Ounnam A Pierce’s Definition:          
"The micro environment is the more specific and immediate environment in which an organization conducts its business."

It include                          

i.      SUPPLIERS: An important force in the micro environment of a company is the suppliers, that is who Supply the inputs like raw materials and components to the company. The importance of reliable source/sources of supply to the smooth functioning of the business is obvious.

ii.      CUSTOMERS: As it is often exhorted, the major task of a business is to create and sustain customers. A business exists only because of its customers. Monitoring the customer sensitivity is, therefore, a prerequisite for the business success.

iii.      COMPETITORS: A firm's competitors include not only the other firms which market the same or similar products but also all those who compete for the discretionary income of the consumers.

iv.      MARKETING INTERMEDIARIES: The immediate environment of a company may consist of a number of marketing intermediaries which are "firms that aid the company in promoting, selling and distributing its goods to final buyers."

v.      FINANCIERS; Another important micro environmental factors is the financiers of the company. Besides the financing capabilities, their policies and strategies, attitudes [including attitude towards risk], ability to provide, non-f inanciai assistance etc.

vi.     

PUBLICS; A company may encounter certain publics in its environment. "A public is any group that has an actuator potential interest in or impact on an organization’s ability to achieve its interests."

b)      Macro environment:; A business and its forces in its micro environment operate in a larger macro environment of forces that shape opportunities and pose threats to the business.

Major external and uncontrollable factors that influencing organization's decision making, and affect its performance and strategies. These factors include the economic, demographics, legal, political, and social conditions, technological changes, and natural forces.

Factors that influence a company's or product's development but that are outside of the company's control.   
For example, the macro environment could include competitors, changes in interest rates, changes in cultural tastes, or government regulations.

Hill & Jones’s Definition: "The macro environment consists of the broader economic, social, demographic, political, legal and technological setting within which the industry and company are placed."

It include

i.      ECONOMIC ENVIRONMENT; Economic environment refers to all those economic factors, which have effect on the functioning of a business unit. economic environment consists of economic factors that influence the business in a country. These factors include gross national product, corporate profits, inflation rate, employment, balance of payments, interest rates consumer income etc.

ii.      POLITICAL•,ENVIRONMENT; It comprises political stability and the policies of the government. Ideological inclination of political parties, personal interest on politicians, influence of party forums etc. create political environment. For example, Bangalore established itself as the most important IT centre of India mainly because of political support.

iii.      TECHNOLOGICAL ENVIRONMENT; It includes the level of technology available in a country. It also indicates the pace of research and development and progress made in introducing modern technology in production. Technology provides capital intensive but cost effective alternative to traditional labor intensive methods. In a competitive business environment technology is the key to development.

iv.      NATURAL ENVIRONMENT; The natural environment is the source of everything used by business that is every raw material, every energy source, every life-sustaining factor, even every waste disposal site.

v.      GLOBAL ENVIRONMENT; Businessmen are expanding their horizons and seeing beyond the physical boundaries of the country. Global environment refers to those global factors which are relevant to business, such as the WTO principles and agreements, other international conventions, agreements, declarations, protocols, etc.

vi.      SOCIO-CULTURAL ENVIRONMENT: Socio-cultural environment is very comprehensive because it may include the total social factors within which an organization operates. Culture consists of the cultivated behavior of individuals within a society. Socio-cultural factors include people's attitude to work and health, role of family, marriage, religion and education, ethical issues, social responsibility of business etc.

vii.      DEMOGRAPHIC ENVIRONMENT: Demographic factors include: a} Size, growth rate, age composition, sex composition etc. b} Family size c} Economic stratification of population d} Educational level e} Caste, religion etc.

All these demographic factors are relevant to business. These factors affect the demand for goods and services. Markets growing population and income are growth markets because a rapidly increasing population indicates a growing demand for many products.

Business Environment Analysis:

Environmental analysis is a systematic process that starts from identification of environmental factors, assessing their nature and impact, auditing them to find their impact to the business, and making various profiles for positioning. A common process of environmental analysis or scanning is discussed in the following section.

1. Scanning,

2. Monitoring,

3. Forecasting

4. Assessment,

1. Scanning: It involves general surveillance of all environmental factors and their interactions in order to

* Identify early signals of possible environmental change

* Detect environmental change already underway

2. Monitoring: It involves tracking the environmental trends, sequences of events, or streams of activities. It frequently involves following signals or indicators unearthed during environmental scanning.

3. Forecasting: Strategic decision-making requires a future orientation. Naturally, forecasting is an essential element in environmental analysis. Forecasting is concerned with developing plausible projections of the direction, scope, and intensity of environmental change.

4. Assessment: In assessment, the frame of reference moves from understanding the environment- the focus of scanning, monitoring and forecasting – to identify what the understanding means for the organization. Assessment, tries to answer questions such as what are the key issues presented by the environment, and what are the implications of such issues for the organization.

Objectives Of Environment Study

Environmental analysis has three basic objectives

a)      This study helps the firm in the development of broad strategies and long term policies of the firm.

b)      The study of business environment should help in developing action plans to deal with technological advancement.

c)      It should help the management in foreseeing the impact of socio-economic changes at the national and international level on the firm's stability.

d)     This study should help the management in analyzing the competitor's strategies and formulation of effective counter measures.

e)      This study should help the business to keep itself dynamic and innovative.

Benefits of Environmental analysis:

The benefits of environmental study are as follows:

* Development of broad strategies and long-term policies of the firm.

* Development of action plans to deal with technological advancements.

* To foresee the impact of socio-economic changes at the national and international levels on the firm’s stability.

* Analysis of competitor’s strategies and formulation of effective countermeasures.

* To keep oneself dynamic.

 

Limitations Of Environment Study

1. It does not foretell the future, nor does it eliminate uncertainty for any organisation.

2. It is not a sufficient guarantor of organizational effectiveness.

3. The potential of EA is often not realized because of how it is practiced

III. Significant for economic policies

The significance of business environment is that business decisions in general and strategies in particular are molded by the business environment-those external factors like the economic, political/regulatory, social/demographic, technological and natural factors which make up the opportunities for and threats to business and internal factors like the resources, capabilities and goodwill of the organization, internal power relationship etc. Which decide the strengths and weakness of the firm