Definitions of Business Environment
§ Business
Environment has been defined by Bayard O. Wheeler as “the total of all things
external to firms and industries which affect their organization and
operation”.
§ According
to Arthur M. Weimer, business environment encompasses the ‘climate’ or set of
conditions, economic, social, political or institutional in which business
operations are conducted.
Concept of Business Environment
A business firm is an
open system. It gets resources from the environment and supplies its goods and
services to the environment. There are different levels of environmental
forces. Some are close and internal forces whereas others are external forces.
External forces may be related to national level, regional level or
international level. These environmental forces provide opportunities or
threats to the business community. Every business organization tries to grasp
the available opportunities and face the threats that emerge from the business
environment. Business organizations cannot change the external environment but
they just react. They change their internal business components (internal
environment) to grasp the external opportunities and face the external
environmental threats. It is, therefore, very important to analyze business environment
to survive and to get success for a business in its industry. It is, therefore,
a vital role of managers to analyze business environment so that they could
pursue effective business strategy. A business firm gets human resources,
capital, technology, information, energy, and raw materials from society. It
follows government rules and regulations, social norms and cultural values,
regional treaty and global alignment, economic rules and tax policies of the
government. Thus, a business organization is a dynamic entity because it
operates in a dynamic business environment.
The business environment or the
external forces acting on the business consists of a large number of forces.
These are.
1. Demographic
2. Economic
3. Geographical
4. Ecological
5. Social
and Cultural
6. Political
& Legal
7. Technological
1. Demographic Factors:
Demography is a study of
human population with reference to its size, density, distribution and other
connected vital statistics. This information is very essential in modern days
for planning and development and also for framing laws relating to society and
business. 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. The business
units require customers for its survival and growth; naturally business can
thrive in populace regions, though now-a day’s transportation helps a lot in
bringing the commodities to the scarcely populated areas.
2. 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. For a business firm to survive and thrive, it
should have adequate demand for its products. At the same time, the firm has to
complete with the rival firm producing similar products or substitute products.
Economic forces affecting demand:
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 a) Total income earned out of the
employment of the individual b) The taxes of the government and c) The savings
of the individual.
An increase in tax will
reduce the demand for the commodity. The attitude of the individual towards
‘Saving’ will affect the demand. A change in ‘Price’ of the commodity will
affect the demand. Expectation of a further change in price or change in taxes
will also affect the demand.
§ 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.
3. 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).
4. Social and Cultural Environment:
Social and Cultural
attitudes of a region influence the business organizations of the region
influence the business organizations of the region in a verity of ways. The
business practices and the management technique of the organization should cope
with the social and cultural attitudes of the people.
The modern business is a
social system in itself, but it is also part of a larger social system
represented by society in general. Clearly, there should be some reciprocal
relationship between business and this larger society. To put it shortly, the
business should adopt itself to the social and cultural environment.
It is the class structure
of the society. It tells about the social roles and organizations and the
development of social institutions. The class-structure depend upon the
occupation of the people, their education, income level, social status, their
mobility, their attitude towards living, work and social relationship and above
all, their attitude towards business.
Every society develops
its own ‘culture’ which means how the members of that society behave and
interact with each other in society, as well as outside society. The term
culture includes values, norms, customs, ethics, goals and other accepted
behavior patterns.
5. Political and Legal Environment:
All
business firms are directly affected to a greater or lesser degree by the
government and its programmes. Political forces will decide the nature of
business, programmes and projects to be undertaken for the development of the
country. These political forces can be
classified as long term
forces, quick changes, cyclical changes and regional factors.
§ Long term forces denote the secular trends
in business activities due to the political conditions prevailing and the
adoption of a particular line of policy in business.
§ Quick Changes consist of sudden
political changes due to army coup or revolt or capturing of the government
machinery by the dissident group. The quick change may also be the result of
proclamation of ‘emergency’ or ‘Martial Law’ due to sudden outbreak of war with
a belligerent nation. In all these cases, the business manager has to take
quick decisions to adopt his business to the changed environment.
§ Cyclical Changes denote periodical
anticipated changes like ’General Election’ which may change the government and
consequent change in plans and programmes as well as priorities by the new
Government.
Regional Factors the
regional consideration may dominate the political scene. Development of
agricultural or development of an industrially backward region may draw the
attention of politicians and government. Consequently, special legislations or
policies will be framed to help the backward regions or sector. In such changes,
the business has to adopt itself by studying and estimating the risks and
dangers involved in taking decisions.
Legal Environment:
Business in a country can
be started and nurtured to grow into big business only within the legal system
of the country. In this connection, all countries of the word have a separate
set of laws for the control and direction of business. The business law of the
country is a complex system of regulations and intervention that form the legal
environment of the business. All business managers should have the knowledge of
business law for taking management decision.
6. Technological Environment
Technology means “the
systematic knowledge of the industrial arts”. ‘Technique’ denotes the method of
performance. These two are increasingly used in modern literature on industrial
production. The present age is the age of technology. Technology affects the
business in two ways.
§ Its
impact on the society and
§ Its
impact on business operation.
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