Notes - Business Environment

9. Business Environment

9.1   Meaning of Business Environment

The term business environment means the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance. It is the aggregate of all condition, events and influences that surround and effect the business organisation.

It consists of social, political, economic, legal and technological factors such as change in taxation, fashion, taste of consumers, increased competition etc, which affect the working of a business significantly.

9.1.1 Importance of Business Environment

Understanding business environment is important because:

• It helps a firm in getting first mover advantage by identifying opportunities.
• It gives early warming signals by identifying various threats.
• It increases efficiency and performance.
• It guides in formulation of policies and strategies.
• It helps to cope up with rapid change.
• It helps in tapping useful resources.
• Customer orientation.
• Boosting company’s image.

9.1.2 Dimensions of Business Environment

There are broadly two types of business environment, i.e. factors internal to the firm known as internal environment and factors external to the firm known as external environment. Again the forces specifically influencing a particular firm, form part of micro environment. Whereas, factors affecting an industry as a whole, constitute, what is called macro environment or general environment.

Micro Environment

It refers to sum total of those internal and external forces which exert direct influence on a specific/individual enterprise. It is also known as the task environment.

The two main factors of micro environment are as follows:

(i) Internal Factors of Micro Environment

These factors exist within the business firm and therefore, considered controllable and measurable. They comprise of the following factors:

(a)  Top Management and Organisation Structure: The composition of the Board of Directors, the organisational structure, extent of professionalism of management, etc are important factors influencing business decisions.

(b) Organisation’s Culture: The characteristics of the organisation which influence human behaviour, affect the strengths and weaknesses of the firm. Some of these are individual autonomy, reward orientation, consideration to employees, motivation, risk taking, etc.

(c) Physical Resources: Factors like production capacity, technology and efficiency of the productive apparatus, distribution logistics, etc influence the competitiveness of a firm.

(d) Vision, Mission and Objectives: The business domain of the company, direction of development, business philosophy, priorities, etc are guided by the vision, mission and objectives of the company.

(ii) External Factors of Micro Environment

The factors which influence an individual enterprise are the individuals, groups and agencies which are constantly interacting with the enterprise form part of the external factors of micro environment. These factors are as follows:

(a)  Customers: Customers have the most direct microeconomic impact on the business.

      Organisations survive on the basis of meeting ‘customers’ needs and wants’ and providing benefit to their customers. Knowing your ideal customers and developing and presenting effective strategies for building a customer base, is essential. A customer may be an individual or household, an organisation, institution, government agency, etc.

(b) Competitor’s: Competitors’ analysis and monitoring is crucial, if an organisation is to maintain or improve its position within the market. The competition may be in direct or indirect form. Direct competition is for firms, producing same products or services, e.g. two companies manufacturing mobile sets or two restaurants offering fast food.

      Indirect competition may be faced when the different alternatives are offered to satisfy the same customer need. e.g. to satisfy the need of hunger, a person may choose to eat pizza, go to an Indian cuisine restaurant or take a ready to serve pack from a store and take it home to cook. All three products are different but they compete indirectly to satisfy the same need.

(c)  Suppliers:  Suppliers provide business the raw materials that they need to carry out their business activities. Suppliers influence the cost of production as raw material cost and inventory carrying cost both are dependent on suppliers. It is necessary to have close suppliers relationship and to have more than one vendor for regular supply of raw materials.

(d) Financiers: Shareholders, investors, creditors, debentureholders and financial institutions are the providers of funds for the company’s start up and growth. Various factors like interest rates, terms of loans, financial policies of financiers affect the enterprise’s financial soundness.  

(e) Market Intermediaries: Organisations typically rely on banks, venture capitalists and other sources to finance operations of wholesalers and retailers, transportation companies to distribute goods and advertising, market research firms and public relation firms to market their products. The strategy is to focus on each intermediary as they can potentially increase or decrease customer satisfaction.

(f)   Public: A company may encounter certain public in its environment. ‘A public is any group that has an actual or potential interest in or impact an organisation’s ability to achieve its interests.’ Media public, citizen action public and local public are some examples, e.g. one of the leading company was frequently under the attack of media public, bringing down the share price of the company.

Macro Environment

The macro environment is the subset of a general forces which may affect all business enterprises. They are indirect and generally uncontrollable and non-measurable. It consists of the following:

(a)  Economic Environment: It consists of economic factors that influence the business in a country. These factors include Gross National Product, corporate profits, inflation rate, employment opportunities, Balance of Payment (BoP), interest rates, consumer income, etc. Economic environment in a country has strong influence on the business in that country.

(b)  Social Environment: It describes the characteristic of the society in which the organisation exists. Literacy rate, customs, value beliefs, life style, demographic features and mobility of population are the parts of the social environment changes in social characters. The trend of change can be predicted well in advance. It is important for managers to notice the direction in which the society is moving and formulate progressive policies according to the changing social scenario.

(c)  Political Environment: It is the outcome of a combination of various ideologies advocated by different political parties. Every political party has a different attitude towards business community. A live example of this can be seen during elections, when there is fluctuation in the share market.

(d)  Legal Environment: It consists of legislation that is passed by the parliament and state legislatures. This component sets the framework of law within which the business is free to operate. Example of such legislation specifically aims at business operations which include the Trade Mark Act, 1969, Essential Commodities Act, 1955, Standards of Weights and Measures Act, 1969 and Consumer Protection Act, 1986.

(e) Technological Environment: Technological dimension covers the nature of technology available and used by an economy or industry in general. It also includes development in technology which are likely to take place.

9.2 Changing Business Environment

Business environment is continuously changing. Change a technology, income etc. are the factors of changing business environment. New inventions, new government are policies also the reason of changing environment.

Important changes can be realised by government’s LPG Policy.

The New Economic Policy, implemented in 1991, included a number of reforms categorised as

• Liberalisation
• Privatisation
• Globalisation

• The first letters of these terms make it known as LPG policy.

9.2.1 Liberalisation

Liberalisation means freedom of business and industry from the unnecessary controls and restrictions of the government, particularly licensing and quotas.

The reforms introduced under liberalisation were

• Abolishing licensing in most of the industries.
• Freedom in deciding the scale of business.
• Freedom in deciding prices of goods and services.
• Reduction in tax rates and unnecessary controls.
• Dereservation of public sector enterprises.
• Simplifying procedures for export and import.
• Automatic permission was granted for technology agreements with foreign companies.
• Removal of restrictions on the movement of goods and services.

9.2.2 Privatisation

• Privatisation is the process of reducing the role of public sector in the economic activities of a country. It involves induction of private ownership, private management and control in public sector through disinvestment.
• Disinvestment refers to the process of sale of public sector enterprises to the private sector, or dilution of government ownership beyond 51% in public enterprises it consists of
• Transfer of government ownership to private sector.
• Transfer of control and management of public sector undertaking to private sector.
• Dilution of government equity in public enterprises.
• The government further decided to refer the loss-making and sick enterprises to the Board of Industrial and Financial Reconstruction (BIFR).

9.2.3 Globalisation

• Globalisation means integrating the economy of a country with the world’s economy. It treats the entire world as one market.
• It is a process of increasing economic integration and growing economic interdependence between countries in the world economy.
• The reforms introduced under globalisation were
• Abolition of licensing of imports.
• Removal of tariff restrictions and quantitative restrictions.
• The share of foreign equity participation was increased.
• Foreign Investment Promotion Board (FIPB) was set up to promote foreign investment in India.

Impact of LPG

The policy of liberalisation, privatisation and globalisation of the government has made a significant impact on the working of enterprises in business and industry. They have become more customer focused and have adopted measures to improve customer relationship and satisfaction.

Following are some of the challenges faced by the business and industries

1. Increasing Competition
2. Wider Demand
3. Rapidly Changing Technological Environment
4. Necessity for Change
5. Need for Developing Human Resource
6. Market Orientation
7. Loss of Budgetary Support to the Public Sector

9.3 Business a Futuristic Vision

This is an approach toward the business processing and its operation by taking the cognisance of future course of action. Earlier the business was based on traditional modal of operation which involves the study of past as well as present business trend of the organisation. Traditional modal make the strategy for business, through the analysis of current data and market trend of the organization concern.

• The current business modal are not static but dynamic in nature which adjust itself with the current market trend.

For instance, the rise of social media platform pushed a more robust and dynamic market which give power to demand driven approach to citizen.

• Moreover globalisation has linked the every business activity to the international level which force the business to take the planning according to emerging global trend. Therefore, it become imperative for the business to do certain action for the survival of it.

1. Challenge Assumption: Challenging the assumption will provide a platform to test the current and future course of action in a business. This action will give a path to hold the varieties of future view and the validity of the market. We should challenge those key assumption until you are absolutely certain that it will hold true for a variety of future course.

2. Different Strategy: Business need to formulate numerous possible pathways, this might include a more traditional approach coupled with the scenario of boom and bane period. All the strategy must be based on current trends for industry and wider environment. Be sure to forecast multiple possible outcome and branch the possibility for each.

3. Environment Sustainability: Business need to constantly scan the boarder environment to recognise emerging trends that will informed the future. This will include trends directly effecting your industry and more importantly the things that are happening outside of business environment. Business sustainability and environment sustainability should go hand-in-hand.