Introduction of Business Environment
The business environment literally means all those aspects that have a bearing on the business. In other words, the factors or elements that affect business decisions, plans, and operations. The factors or elements may be internal and external.
The business environment plays a key role in shaping the strategies and decisions of a firm, as the opportunities and threats mainly come from the external environment, which includes external factors like economic, political, international, technological, and social. In the same way, strength and weakness come from the internal environment, which includes internal factors like managerial capabilities, efficiency in utilization of resources, organizational structure, etc.
Important Definitions:
According to Keith Davis, “Business environment is an aggregate of all conditions, events, and influences that surround and affect the business.”
Bayord O. Wheeler defines business environment as the total of all the things, external to a business firm, which affect the organization and its operations.”.
According to William Gluck and Jauch, “Environment contains the external factors that create opportunities and threats to the business. This includes socio-economic conditions, technology and political conditions.”
Characteristics of the business environment
The characteristics of the business environment are as follows:
- The environment is complex: it is complex because it continues to reveal countless challenges like technological disruptions, global competition, leadership change, shifting of economic, social, and regulatory conditions, etc.
- The environment is uncertain: the factors of the business environment keep on evolving rapidly, so it is difficult to predict what will happen in the business environment because the factors always change.
- The environment is dynamic. Both the internal and external environments of business are dynamic due to the following:
- Customer’s preferences [taste, fashion, choice].
- Entry of new competitors in the market.
- New resources.
- New marketing channels & new policies.
- Changing demography.
- Trends and technology.
- Interrelatedness: Factors of the business environment are correlated. Changes is one factor of business environment can affect other factors. For example, suppose there are changes in the import-export policy with the coming of a new government. Here are political and economic changes, respectively. Thus, a change in one factor affects the other factor.
- Relativity: the business environment is connected with the local conditions, and this is the reason why the business environment happens to be different in various nations and even in the same countries in different places.
- Internal and External: The business environment includes both internal and external factors.
Significance/Importance of Business Environment
- It helps in identifying opportunities and making first-mover advantages:- The environment provides various opportunities, and it is necessary to identify the opportunities to improve the performance of a business. Early identification gives an opportunity to an enterprise to be the first to identify opportunity instead of losing them to competitors.
- Example: ‘Airtel’ identified the need for fast internet and took first-mover advantage by providing 4G speed to its users, followed by Vodafone and Idea.
- It Helps the Firm Identify Threats and Early Warning Signals: The business environment helps in understanding the threats that are likely to happen in the future. Environmental awareness can help managers identify various threats on time and serve as an early warning signal.
- Example, Patanjali products have become a warning signal to the rest of the FMCG
- Chinese mobile phones have become a threat for Indian mobile phone manufacturers.
- It Helps in Assisting in Planning and Policy Formulation: Awareness of the business environment helps in planning and policy formulation.
- It Helps in Coping With Rapid Changes: It helps in coping with the changes like less brand loyalty, divisions of markets, changes in fashions, more demanding customers, and global competition.
- It helps in utilizing useful resources: the environment provides various resources like men, material, money, machines, power, water, etc.
- It helps in growth and Performance: With the help of environmental analysis, enterprises can monitor and adopt the suitable practices that help in the growth and better performance of business.
Components of Business Environment
The business environment has two components, i.e., the internal environment and the external environment.
Internal Environment
Internal Environment: refers to the environment within the organization. The internal strength represents its internal environment. It consists of internal factors of the business that can be controllable to a certain extent because the company can modify or change these factors to improve its efficiency.
The internal environment includes the 5 M’s, i.e., men, material, machine, money, and management.
However, the firm may not be able to transform all the factors. The various internal factors are:
- Value System: The value system of an organization means ethical beliefs that guide the organization in achieving its mission and objectives. It also determines its behavior towards employees, customers, and society at large.
- The value system of a business organization makes an important contribution to its success and its prestige in the world of business.
- Infosys Technologies, which won the first national corporate governance award in 1999, attributes its success to its high-value system, which guides its corporate culture.
- Mission and Objectives: The business domain of the company, direction of development, business philosophy, etc., are guided by the mission and objective of the company.
- The objective of all firms is assumed to be maximization of profit.
- Mission is defined as the overall purpose or reason for its existence, which guides and influences its business decisions and economic activities.
- Organization Structure: The organizational structure, the composition of the board of directors, the professionalism of management, etc., are important factors influencing business decisions.
- Corporate culture: Corporate culture and style of functioning of top managers is an important factor for determining the internal environment of a company.
Internal Environment…………………………………….
5. Human resources: The quality of employees that is of human resources of a firm is an important factor of the internal environment of a firm. The characteristics of the human resources, like skill, quality, capabilities, attitude and commitment of its employees, etc., could contribute to the strengths and weaknesses of an organization.
6. Labour Unions: Labor unions collectively bargain with the managers for better wages and better working conditions for the different categories of workers, etc. For the smooth working of a business firm, good relations between management and labor unions are required.
7. Miscellaneous Factors:
Physical resources and technological capabilities: Physical resources, such as plant and equipment, and technological capabilities of a firm determine its competitive strength, which is an important factor for determining its efficiency and unit cost of production.
R&D Capabilities: Research and development capabilities determine its ability to introduce innovations that enhance the productivity of workers.
External Environment
The external environment consists of all those factors that affect a business enterprise from outside its boundaries. These factors are uncontrollable, and firms have to adapt to the components of this environment. These factors provide opportunities or pose threats to the firm.
The External environment can be classified into Micro environment and Macro environment.
Micro Environment:
The micro environment of a company consists of elements that directly affect the company. It includes suppliers, customers, market intermediaries, competitors, the public, etc.
- Suppliers: Suppliers are those from whom a company buys raw materials; if the supplier is reliable, then business will run smoothly. Due to a lack of reliable suppliers, high inventories have to be maintained.
- Customers: The customer is the king of the market, and the success of a business depends upon customers. If a product is manufactured according to the taste and needs of customers, then the company achieves success. To attract new customers, companies conduct consumer research, provide after-sale services, etc.
- Market Intermediaries: market intermediaries assist to deliver the goods and services from producers to end users. They act as a link between company and consumer. Examples of market intermediaries are wholesalers, dealers, retailers, agents, marketing services agencies, and physical distribution companies.
- Competitors: Competitors are those who produce similar or identical products or very close substitutes for products.
- Publics: The public as a group has potential interest in businesses that also affect businesses.
- Media: media also affect the business and its reputation. It includes newspapers, magazines, journals, etc.
Macro Environment
The macro environment means the general environment of the business. These factors are uncontrollable and create opportunities and threats to the business.
It includes:
Economic Environment: It includes all those factors that have an economic impact on business. Accordingly, the total economic environment consist of agriculture, industrial production, infrastructure and planning, basic economy philosophy, stages of economic development, trade cycles, national income, per capita income, savings, money supply, price level, fiscal and monetary policies and population.
Important economic factors are:
Degree of Economic Development: factors like nature and size of demand , government policies affecting business etc. derive from the level of economic development off the nation. Economies can be classified as low income, middle income and high income countries based on degree of development.
Structure of the Economy: The structure of the economy encompasses factors such as contribution of different sectors like primary, secondary and territory.
Economic Policies: Economic policies like industrial policy, trade policy, monetary policy, fiscal policy, fiscal policy and foreign investment and technology policy etc. can exert high influence on business operations
Economic Conditions: economic conditions refer to the state of the economy in a country.
Political Environment: Three political institutions namely, legislature, executive and judiciary which play a useful role in shaping directing, developing and controlling business activities.
Increase or decrease in tax level in one of the important factor in political environment and decision related to this will affect the business. In addition to government interferences, a shift in interest rate can have an effect on the demand patterns of the company. major political factors that affect business are:
- Corruption level.
- Tariffs.
- Trade control.
- Competition regulation.
- Tax policy.
- Government involvement in trade unions.
- Import restrictions
- Intellectual property law.
- Consumer protection
- E-commerce, health and safety law, freedom of the press, bureaucracy etc.
Legal Environment: This includes a set of laws and regulations that influence the business and their operation. Business law relates to the standard of products, packaging protection of the environment and ecological balance, and the ban on advertisement of (alcohol & medicines) advertisement of certain products with statutory warning (cigarettes), etc. Laws also exist to prevent restrictive trade practices & monopolies.
The important legislations are as follows:
Essential Commodities Act, 2002
Companies Act, 2013
The Factories Act, 1948.
Foreign Exchange Management Act, 1999.
Industrial Disputes Act, 1972.
Payment of Gratuity Act, 1972.
Prevention of Food Adulteration Act, 1954.
Industrial (Development and Regulation) Act, 1951.
In addition to the above, stipulations of the constitution and judicial decisions are also part of the legal environment.
Social Environment: The social environment consists of social values, concern for social problems like the protection of the environment against pollution, providing employment opportunities, and health care for the aged and old ones; consumerism to satisfy human wants. In short, the social factors include customs, traditions, beliefs, poverty, literacy, life expectancy rate, etc.
Natural Environment: It refers to geographical and ecological factors that are uncontrollable for the business enterprise. It includes natural resources, weather, climate conditions, weather conditions, rainfall, etc. These affect the location of certain industries to a certain extent.
Demographic Environment: This environment also affects the business from outside, and this differs from country to country and from place to place. Demographic factors include size of population and population growth, age composition, size of family, sex composition, area (urban & rural), education level, etc.
Technological Environment: Technology implies systematic application of scientific or other organized knowledge to practical tasks or activities. It includes innovation too.
Global Environment: It is important for the business industries that deal with imports and exports. Ups and downs in foreign markets may create hindrances for some industries that depend on exports. Liberalization also affects industries.
Cultural Environment: It represents values & beliefs, norms & ethics of the society. The purchasing habits, capacities to buy, preferences, and many other factors are based on the cultural environment.