Understanding
the environment within which the business has to operate is very important for
running a business unit successfully at any place. Because, the environmental factors
influence almost every aspect of business, be it its nature, its location, the
prices of products, the distribution system, or the personnel policies. Hence
it is important to learn about the various components of the business
environment, which consists of the economic aspect, the socio-cultural aspects,
the political framework, the legal aspects and the technological aspects etc.
In this chapter, we shall learn about the concept of business environment, its
nature and significance and the various components of the environment.
In
addition, we shall also acquaint ourselves with the concept of social
responsibility of business and business ethics.
OBJECTIVES
•
explain the meaning of business environment;
•
identify the features of business environment;
•
describe the importance and types of business environment;
•
describe the recent developments in Indian Economy that have greatly influenced
the working of business units in India;
•
explain the concept of social responsibility of business;
•
state the social responsibility of business towards different interest groups;
and
•
explain the concept of business ethics.
MEANING OF BUSINESS ENVIRONMENT
As
stated earlier, the success of every business depends on adapting itself to the
environment within which it functions. For example, when there is a change in the
government polices,Senior Secondary.
Business
around us the business has to make the necessary changes to adapt itself to the
new policies. Similarly, a change in the technology may render the existing
products obsolete, as we have seen that the introduction of computer has
replaced the typewriters; the colour television has made the black and white
television out of fashion. Again a change in the fashion or customers’ taste
may shift the demand in the market for a particular product, e.g., the demand
for jeans reduced the sale of other traditional wear. All these aspects are
external factors that are beyond the control of the business. So the business
units must have to adapt themselves to these changes in order to survive and
succeed in business. Hence, it is very necessary to have a clear understanding
of the concept of business environment and the nature of its various
components.
The
term ‘business environment’ connotes external forces, factors and institutions
that are beyond the control of the business and they affect the functioning of
a business enterprise.
These
include customers, competitors, suppliers, government, and the social,
political, legal and technological factors etc.
While some of these factors or forces may have direct influence over the
business firm, others may operate indirectly. Thus, business environment may be
defined as the total surroundings, which have a direct or indirect bearing on
the functioning of business. It may also be defined as the set of external
factors, such as economic factors, social factors, political and legal factors,
demographic factors, technical factors etc., which are uncontrollable in nature
and affects the business decisions of a firm.
FEATURES
OF BUSINESS ENVIRONMENT
On
the basis of the above discussion the features of business environment can be summarised
as follows.
(a)
Business environment is the sum total of all factors external to the business
firm and that greatly influence their functioning.
(b)
It covers factors and forces like customers, competitors, suppliers,
government, and the social, cultural, political, technological and legal
conditions.
(c)
The business environment is dynamic in nature, that means, it keeps on
changing.
(d)
The changes in business environment are unpredictable. It is very difficult to
predict the exact nature of future happenings and the changes in economic and
social environment. .
(e)
Business Environment differs from place to place, region to region and country
to country. Political conditions in India differ from those in USA. Taste and
values cherished by people in India and
China vary considerably.
IMPORTANCE
OF BUSINESS ENVIRONMENT
There
is a close and continuous interaction between the business and its environment.
This interaction helps in strengthening the business firm and using its
resources more effectively.
As
stated above, the business environment is multifaceted, complex, and dynamic in
nature and has a far-reaching impact on the survival and growth of the
business. To be more specific, proper understanding of the social, political,
legal and economic environment helps the business in the following ways:
(a) Determining
Opportunities and Threats: The interaction between the
business and its environment would identify opportunities for and threats to
the business. It helps the business enterprises for meeting the challenges
successfully.
(b) Giving Direction for
Growth: The interaction with the environment leads
to opening up new frontiers of growth for the business firms. It enables the
business to identify the areas for growth and expansion of their activities.
(c) Continuous Learning:
Environmental analysis makes the task of managers easier in dealing with
business challenges. The managers are motivated to continuously update their
knowledge, understanding and skills to meet the predicted changes in realm of business.
(d) Image Building:
Environmental understanding helps the business organisations in improving their
image by showing their sensitivity to the environment within which they are
working. For example, in view of the shortage of power, many companies have set
up Captive Power Plants (CPP) in their factories to meet their own requirement
of power.
(e) Meeting Competition:
It helps the firms to analyse the competitors’ strategies and formulate their
own strategies accordingly.
(f)
Identifying Firm’s Strength and Weakness: Business environment helps to
identify the individual strengths and weaknesses in view of the technological
and global developments.
TYPES OF BUSINESS
ENVIRONMENT
Confining
business environment to uncontrollable external factors, it may be classified
as (a) Economic environment; and (b) Non-economic environment. The economic
environment includes economic conditions, economic policies and economic system
of the country.
Non-economic
environment comprises social, political, legal, technological, demographic and
natural environment. All these have a bearing on the strategies adopted by the
firms and any change in these areas is likely to have a far-reaching impact on
their operations.
Let
us have a brief idea about each of these areas of business environment.
ECONOMIC ENVIRONMENT
The
survival and success of each and every business enterprise depend fully on its
economic environment. The main factors that affect the economic environment
are:
(a) Economic Conditions:
The economic conditions of a nation refer to a set of economic factors that
have great influence on business organisations and their operations. These include
gross domestic product, per capita income, markets for goods and services, availability
of capital, foreign exchange reserve, growth of foreign trade, strength of capital
market etc. All these help in improving the pace of economic growth.
(b) Economic Policies:
All business activities and operations are directly influenced by the economic
policies framed by the government from time to time. Some of the important
economic policies are:
(i)
Industrial policy
(ii)
Fiscal policy
(iii)
Monetary policy
(iv)
Foreign investment policy
(v)
Export –Import policy (Exim policy)
(c) Economic System: The
world economy is primarily governed by three types of economic systems, viz.,
(i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed
economy.
India has adopted the mixed economy system which implies co-existence
of
public sector and private sector.
NON-ECONOMIC
ENVIRONMENT
The
various elements of non-economic environment are as follow:
(a) Social Environment :
The
social environment of business includes social factors like customs,
traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The
social structure and the values that a society cherishes have a considerable
influence on the functioning of business firms. For example, during festive
seasons there is an increase in the demand for new clothes, sweets, fruits,
flower, etc. Due to increase in literacy rate the consumers are becoming more conscious
of the quality of the products. Due to change in family composition, more
nuclear families with single child concepts have come up. This increases the
demand for the different types of household goods. It may be noted that the
consumption patterns, the dressing and living styles of people belonging to
different social structures and culture vary significantly.
•
Capitalist Economy: Emphasis on private ownership.
•
Socialist Economy: Resources are owned and managed by the state.
•
Mixed Economy: Co-existence of public and private sectors.Senior Secondary
(b) Political Environment
This
includes the political system, the government policies and attitude towards the
business community and the unionism. All these aspects have a bearing on the
strategies adopted by the business firms. The stability of the government also
influences business and related activities to a great extent. It sends a signal
of strength, confidence to various interest groups and investors. Further,
ideology of the political party also influences the business organisation and
its operations. You may be aware that
Coca-Cola, a cold drink widely used even now, had to wind up operations in
India in late seventies. Again the trade
union activities also influence the operation of business enterprises. Most of
the labour unions in India are affiliated to various political parties.
Strikes, lockouts and labour disputes etc. also adversely affect the business
operations. However, with the
competitive business environment, trade unions are now showing great maturity
and started contributing positively to the success of the business organisation
and its operations through workers participation in management.
(c) Legal Environment:
This
refers to set of laws, regulations, which influence the business organisations
and their operations. Every business
organisation has to obey, and work within the framework of the law.
(d)
Technological Environment
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 affect the designing of products. For example, in USA and
many other
countries electrical appliances are designed for 110 volts. But when these are
made for
India, they have to be of 220 volts. In the modern competitive age, the pace of technological
changes is very fast. Hence, in order to survive and grow in the market, a business
has to adopt the technological changes from time to time. It may be noted that scientific
research for improvement and innovation in products and services is a regular activity
in most of the big industrial organisations. Now a days infact, no firm can
afford to persist
with the outdated technologies.
(e)
Demographic Environment
This
refers to the size, density, distribution and growth rate of population. All
these factors have
a direct bearing on the demand for various goods and services. For example a country
where population rate is high and children constitute a large section of
population, then
there is more demand for baby products. Similarly the demand of the people of
cities and
towns are different than the people of rural areas. The high rise of population
indicates the
easy availability of labour. These encourage the business enterprises to use
labour intensive
techniques of production. Moreover, availability of skill labour in certain
areas motivates
the firms to set up their units in such area. For example, the business units
from America,
Canada, Australia, Germany, UK, are coming to India due to easy availability ofskilled
manpower. Thus, a firm that keeps a watch on the changes on the demographic front
and reads them accurately will find opportunities knocking at its doorsteps.
(f)
Natural Environment
The
natural environment includes geographical and ecological factors that influence
the business
operations. These factors include the availability of natural resources,
weather and
climatic condition, location aspect, topographical factors, etc. Business is
greatly influenced
by the nature of natural environment.
For example, sugar factories are set up only
at those places where sugarcane can be grown. It is always considered better to establish
manufacturing unit near the sources of input. Further, government’s policies to maintain
ecological balance, conservation of natural resources etc. put additional responsibility
on the business sector.Senior Secondary
Read More:
Factor affect business environment
Corporate Social Responsibility
