UNDERSTANDING BUSINESS ENVIRONMENT

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 your 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 post, 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.

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 policies, 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.

If you must be relevant in any field  you choose to go into, you simply must be read to stay up to date.

The term ‘business environment’ connotes external forces, factors and institutions that are

beyond the control of your business entity 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 your 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 Pakistan. 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.

1 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)

The government keeps on changing these policies from time to time in view of the

developments taking place in the economic scenario, political expediency and the

changing requirement. Every business firm has to function strictly within the policy

framework and respond to the changes therein.

(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.

2 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.

(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. The important legislations that concern the business enterprises include:

(i) Provisions of the Constitution: The provisions of the Articles of the Indian

Constitution, particularly directive principles, rights and duties of citizens, legislative

powers of the central and state government also influence the operation of business

enterprises.

(ii) Judicial Decisions: The judiciary has to ensure that the legislature and the government

function in the interest of the public and act within the boundaries of the constitution.

The various judgments given by the court in different matters relating to trade and

industry also influence the business activities.

(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 going to India due to easy availability of

skilled 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.

SOCIAL RESPONSIBILITY OF BUSINESS

Every business enterprise is an integral part of the society. It uses the scarce resources of

the society to continue and grow. Hence, it is important that no activity of business is

injurious to the long run interests of the society. However, it is observed that, in practice,

there are a few socially undesirable aspects of business such as, polluting the environment,

non-payment of taxes, manufacturing and selling adulterated products, giving misleading

advertisement and so on. This has resulted in the development of the concept of social

responsibility of business whereby the owners and managers of business are made conscious

about the responsibilities of their business towards the community and its customers, workers

etc.

1 MEANING OF SOCIAL RESPONSIBILITY

Social responsibility of business refers to the obligation of business enterprises to adopt

policies and plans of actions that are desirable in terms of the expectation, values and

interest of the society. It ensures that the interests of different groups of the public are not

adversely affected by the decisions and policies of the business.

2 SOCIAL RESPONSIBILITIES TOWARDS DIFFERENT GROUPS

It needs to be noted that the responsibilities of those who manage the business cannot be

limited to the owners. They have to take into account the expectations of other stakeholders

like the workers, the consumers, the government and the community and public at large.

Let us now look at the responsibilities of the business towards all these groups.

(a) Responsibility towards the shareholders or owners: The shareholders or owners

are those who invest their money in the business. They should be provided with a fair

return on their investment. You know that in case of companies it takes the form

to be continued…