BUSNIESS ENVIRONMENT
A business can be established, but to successfully sustain a business, the business needs
resources like finance, for which it has to depend on financial institutions. Acceptance of social
norms, for which it has to depend on society. Proper market conditions, for which it has to
depend on the market. The sale of products/services, for which it has to depend on the
customers. The labour, for which it has to depend on society.
Then there are natural resources and raw material, for which it has to depend on Nature. Also,
the legal support of the government, for which it has to depend on the government. There are
many factors and dimensions that affect Business Environment. These factors are many
different components of a single concept called Business Environment. All business enterprises,
functions within an environment, called as the business environment. An individual business
firm survives and grows within the periphery of its environment. A firm is only a part of a big
environment, and so there are only a few factors which are under the control of the firm. So,
the firm has no other option, but to respond and adapt accordingly. If business persons possess
a good understanding of the business environment, they can easily recognise, analyse and react
to the forces that affect the firm.
These factors which business depends upon aren’t standstill, they are very dynamic and ever-
changing. For example, trends, the trend of fidget spinners gave the biggest big push the
silicone mold industry has ever received.
Meaning of Business Environment
The definition of Business Environment, “The sum total of all individuals, institutions and other
forces that are outside the control of a business enterprise but the business still depends upon
them as they affect the overall performance and sustainability of the business.”
The forces which constitute the business environment are its suppliers, competitors, consumer
groups, media, government, customers, economic conditions, market conditions, investors,
technologies, trends, and multiple other institutions working externally of a business constitute
its business environment. These forces influence the business even though they are outside the
business boundaries.
Definition of Business Environment is sum or collection of all internal and external factors such
as employees, customers needs and expectations, supply and demand, management, clients,
suppliers, owners, activities by government, innovation in technology, social trends, market
trends, economic changes, etc. These factors affect the function of the company and how a
company works directly or indirectly. Sum of these factors influences the companies or
business organisations environment and situation.
Business environment helps in identifying business opportunities, tapping useful resources,
assists in planning, and improves the overall performance, growth, and profitability of the
business. There are various types of Business Environment like Micro Environment and Macro
Environment.
Importance of Business Environment
On the basis of the foregoing discussion, it can be said that the Business Environment is the
most important aspect of any business. To be aware of the ongoing changes, not only helps the
business to adapt to these changes but also to use them as opportunities.
Business Environment presents threats as well as opportunities for any business. A good
business manager not only identifies and evaluates the environment but also reacts to these
external forces. The importance of the business environment can be neatly understood if we
consider the following facts:
1. Enables to Identify Business Opportunities
2. Helps in Tapping Useful Resources
Learn more about Micro Environment here.
3. Coping with Changes
4. Assistance in Planning
5. Helps in Improving Performance
Definition: Business Environment means a collection of all individuals, entities and other
factors, which may or may not be under the control of the organisation, but can affect its
performance, profitability, growth and even survival. Every business organisation operates in a
distinctive environment, as it cannot exist in isolation. Such an environment influence business
and also gets affected by its activities.
Salient Features of Business Environment
Dynamic: The environment in which the business operates changes continuously because there
is a wide variety of factors that exist in the environment, causing it to change its shape and
character.
Complex: There are many forces, events and conditions that constitute business environment,
arising from various sources. So, it is a bit difficult to understand the relative influence of a
particular factor, on the operation of the organisation.
Uncertain: Uncertainty is an inherent characteristic of business environment because no one
can predict what is going to happen in future.
Multi-faceted: A single change in the business environment, can be viewed differently by
different observers because their perceptions vary.
Far-reaching Impact: The survival, growth and profitability, of a business enterprise, depends
largely on the environment in which it exists. A small change in the environment has a far-
reaching impact on the organisation in different ways.
Relative: The notion of business environment is relative since it varies from one location to
another.
Components of Business Environment
The Business Environment is broadly classified, into two categories:
Internal Environment: The factors which exist within the organisation, imparting strength or
causing weakness to the organisation, comes under internal environment. It includes:
Value System
Vision and Mission
Objectives
Corporate Culture
Human Resources
Labor Union
External Environment: External Environment consists of those factors which provide
opportunity or pose threats to the business. It is further classified as:
Micro Environment: The immediate periphery of the business that has a continuous and direct
impact on it is called Micro Environment. It includes suppliers, customers, competitors, market,
intermediaries, etc. which are specific to the business.
Macro Environment: Macro Environment, is one such environment that influences the
functioning and performance of every business organisation, in general. It comprises of
demographic, socio-cultural, legal, political, technological, and global environment.
Dimensions of Business Environment
As we learned that there are various forces that affect the business environment like suppliers,
customers, investors, competitors, etc. Now let’s understand the general forces that affect and
shape the business environment. There are five general dimensions of the business
environment. We will study each one of them in some detail:
Economic Environment
The Rate of Inflation: The simplest way to understand inflation is to see it as rising prices. If the
economy is in the state of boom. Where business is flourishing and everyone is earning good
amount of money which results in the increase in purchasing power of the consumer. This
means that producer is able to sell his commodity at a high price in the market. Whereas, in a
state of depression in the economy, the purchasing and investing power of the customer falls
down. As the firm can’t influence the general factors of business environment, it has to change
itself in order to survive the change. And producer has to re-establish the prices of his
commodity for people to afford it.
Demand and Supply: When business identifies a profitable opportunity they are observing the
existence of a potential demand for the product. And businesses which can foresee potential
profits have an incentive to increase production. Demand and the supply of a commodity in the
market influence the business environment enormously. This factor is based on the demand of
a commodity in the market and the producer’s ability to produce it on time.
Economic Policies: Government seek out to control the business environment in order to meet
a range of objectives. These include stability and predictability, health and safety. Local, state
and national policies affect the planning and operations of business deeply. Economic policies
are drafted to direct the economic activities. They include import-export, employment, tax
structure, industry, public expenditure, public debt, foreign investment, etc.
Social Environment
Culture and Traditions: In India, culture and traditions influence a majority of business.
Traditions mean the social practices that have passed down from one generation to another.
For example, Diwali, Christmas and Eid. These festivals prove to be a profitable period for
electronics, sweets, greeting cards and restaurant businesses. The business should plan it’s
strategies according to the traditions and social practices of a country.
Social Trends: Social trends in a society are proportional to the demand for the product. The
example of the social trend is health and fitness. The products such as diet foods, diet drinks
and fitness centres have given a new face to the industry of health and fitness.
Values: Values can be called as the standard society keeps about itself. Such as freedom, social
justice and equal opportunities.
Legal Environment
The legal environment includes the laws passed by the government as well as the decisions
rendered by the various commissions and agencies at every level of the government. It’s
important that every business must function according to the law of the area in which it wishes
to operate.
Not obeying the rules can result in legal trouble for the business. In India, business firms are
required to have complete knowledge of acts like Companies Act 1956, Consumer Protection
Act 1986, Industrial Disputes Act 1947, and Competition Act 2002 and so on. For example, it is
mandatory for tobacco companies to print ‘smoking is harmful’ on its products.
Technological Environment
The primary forces that are responsible for the improvement in the scientific field and new
innovations being introduced in the market for improving the quality of goods and services and
techniques for operating business more efficiently are known as technological factors in the
business environment.
Just like two sides of the same coin, technological changes are threats to some organisations
and opportunities for other. The introduction of Television was a major blow to the industry of
Radio and Cinema industry. Mobile phones have snatched the market from Telephones.
These days, the online food delivery businesses are emerging in the market which is using
smartphone technology that is ‘Apps’ to order food online. This is a major change in the food
industry business and has affected the restaurant industry tremendously.
New innovations are occurring in medicine, telecommunications and biotechnology. Recent
advancement in the market of Autonomous cars i.e Driverless cars is proving to be a major
threat to the business of self-driving car industry.
Political Environment
This factor consists of external factors such as political stability and peace in the country. The
foresight of the ruling party and its perspective towards business. Needless to say, the political
environment is easily the most important dimension of the business environment.
As it decides what is the ideology of the party which is dominant in the country. For example,
after globalisation India let foreign companies enter Indian market for giving a boost to
different industries such as the food processing industry, the technological industry.
Businesses function with the nature and the framework of the political party. The components
of a political environment consist of the constitution of the country, political stability, political
ideology, political outlook on business sectors, the extent of government intervention and
degree of politicisation of business and economic issues.
Factors affecting companies
Economic Environment
Economic environment consists of three important factors namely, economic systems,
economic policies and economic conditions. The impact of this environment is much more
direct and deliberate than other factors. These three elements of the economic environment
should be analyzed individually as well as collectively as a whole.
1. Economic Systems
The scope of private sector depends mainly on the economic system of a country. Economic
system can be classified into three broad categories viz.,Free Trade Economy or Capitalist
Economy, Centrally Planned Economy or Communist Economy or Socialism, and Mixed
Economy.
Capitalist economy is at one end and the communist economy is at the other end. In between
these two-extreme situations are mixed economies. Within the mixed economic system itself
there are wide variations. Mixed economy refers to a situation where public and private sectors
co-exist.
India has a mixed economy with clear-cut Industrial Policy. Certain industries are exclusively
reserved for the public sector, and private enterprises are not allowed to operate in those lines
of business. Likewise, certain industries are exclusively reserved for small sector, and large
industrial houses and monopoly houses are debarred from entering into such lines of business.
The Industrial Policy of India is an important consideration to our industrialists while starting
their venture. The size of the industrial unit should be in accordance with the provisions and
stipulations of the Policy.
2. Economic Policies
The economic policy of the Government has a very decisive impact on the business units. Even
the very survival of the business firm depends on how the firm reacts and responds to the
Government policies.
In India, industries have been divided into two broad categories namely,
Priority Sector, and
Non-priority Sector.
3. Economic Condition
Another major general economic factor, which affects the prospects of the individual firm, is
the size and the overall state of health of the national economy. Economic condition or the
health of the national economy implies the consideration of many elements namely, the stage
of development, economic resources, the level of income, the distribution of wealth and
income etc.
In developed countries, the per capita income will be high and the size of the market will also
be large. When the size of the market is large, large sale production shall also be there. But
modern economists are of the view that developed countries are no longer worthwhile
propositions for investments because developed economies have almost reached more or less
a saturation level in certain spheres of their industrial activities.
On the other hand, they feel that in developing economies, investment and income levels are
steadily and rapidly increasing and hence business prospects are bright and further investments
are encouraged.
So far we have discussed the economic environment within a country only. But, in today’s
world no country is isolated. Even dosed economies like U.S.S.R. and China opened their doors
and have become subject to the influence of the outside world. The activities of most business
firms are affected by international factors like the raise of inflation in different countries with
which they trade. Similarly, the various trade barriers (including tariffs) created by different
countries affect the domestic firms and their export efforts.
4. Political and Legal Environment
Economic environment within a country is closely linked with the political and legal
environment there. Political and legal environment is the background of laws and regulation
within which the business firms should conduct their affairs.
The doctrine of “Laizze-faire” has become an outdated or discarded principle and the
Government all over the world regulate the business activities. Even in capitalist countries, the
Government controls and influences the business policies in many ways.
The degree of control or direction of the Government may differ from country to country but its
impact cannot be ruled out elsewhere. Particularly, after the Great Depression, State
intervention in the economic life is clearly noticeable in all economies of the world.
In the Indian context, the Government’s role and influence on business policy are multifarious.
In this environment, Government interacts with business at three levels — local, state and
center and exerts varying amounts of influence over business. The Government plays a number
of roles as it interacts with business. It is here that the Government acts as a regulator or
controller, coordinator, caretaker and guardian, and supplier. Besides, it also acts as a
competitor and as a customer.
There is also a comprehensive labour legislation, which force employers to pay minimum wages
to workers in specific industries and statutory bonus payment is very liberal in approach. The
control of big business is exercised through MRTP Act. The Foreign Exchange Management Act
(FEMA) brings Foreign Companies and multinationals operating in India under control. Import
and export activities are regulated and restricted by periodical Import and Export Policies
announced by the Central Government.
In India, Government is the largest employer and the public sector controls a major share of the
corporate sector. The public sector is now mobilizing resources from the open market by
issuing securities and bonds, and the nationalized banks are all extending their utmost support
in this task.
Above all, tax laws and policies play a decisive role in business policy. Certain policies of the
Government even expose the business community to a lot of tension and pressure. All these
facts clearly reveal that Government has an upper hand in all the business policies in India.
5. Social and Cultural Environment
Of the various environments stated above, the social and cultural environment has the greatest
impact on the policies and performance of all business firms. This environment poses a serious
challenge to the business, and the business managers while formulating business strategies and
policies should give due weight to this pivotal factor.
Social environment is concerned with the environment of society as a whole — of which every
one involved. Cultural environment is an aggregate of all sub-cultures each with distinct
concepts, beliefs and faith. The society as we all know is not static. We have a dynamic i.e. ever-
changing society. New demands are created and old one lost in due course. The business
enterprises should constantly watch the developments taking place and make necessary
adjustments in their production and marketing plans and strategies to fulfill the new social
demands.
Adjusting with the social and cultural development, of course, will enable the firm to reap a rich
harvest. Profit is the ultimate object of all business endeavors. Besides, it is the indicator of the
efficiency of the business firm. But now the situation is changing.
Businessmen should not act with profit motive only. They have several social responsibilities
also. They should give due weightage to the long-term welfare of the consumers as well as the
society. Bearing this point in mind most big companies now-a-days show less profit than that
they should have normally earned, just to create a public image.
Some companies have also been asked to be socially responsive. In fact, a number of
companies in our country are now spending money for society’s welfare. Some companies are
liberally donating their funds to educational institutions and universities for construction of
building, for teaching programmes, for scholarships and even offer “Chairs” for specializing
subjects. Some big business houses run their own educational institutions.
6. Physical and Technological Environment
Physical factors mean and include geographical factors like weather, climatic conditions etc.
These factors have a notable influence on business prospects. The availability of physical
facilities limits the scope and prospects of business.
Technology refers to the knowledge of how to do things. The dominant features of technology
have been made in the last three decades. Particularly for the last ten years, technology has
worked wonders. Prof. Kahn and Wiener have called the new development in technology as
“Innovation”, “Revolution” or “Break Through”. The technological development can contribute
to the economic development.
Joseph Schumpter was the first economist who recognized the place of technology in the
sphere of economic development. According to him, industrial growth depends upon
technological innovations and the ability to translate technology into profits. Business becomes
important at this point. It is the main institution that translates discoveries into application for
public use.
The time lag between basic discoveries and the application of these discoveries to commercial
products have considerably decreased now. In the past, it took a long time. Richard Eelles
explains this point with a beautiful illustration. He says as follows.
It took more than a century of applied research and engineering in photography to develop the
basic discovery into a saleable product. In the case of telephone, the time lag was over half-
century; Radio took 35 years as contrasted to radar, which took 15 years. Television moved
from research to the commercial stage within 2 years and atomic bomb in six.
From these observations, it has become clear that scientific discoveries as such of no use or
have no meaning unless they are used for making new and useful goods and services for
people. Any enterprise, which translates a new technology into useful product as soon as it is
discovered, shall reap a rich harvest and the profit volume will be comparatively low in case of
other firms, which succeed the pioneering enterprise.
