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.
Characteristics of the business environment:
(1) Totality of External Forces:
Business environment is the sum totals of all those factors/forces which are available outside the business and over which the business has no control. It is the group of many such forces that is why, its nature is of totality.
(2) Specific and General Forces:
The forces present outside the business can be divided into two parts – specific and general.
These forces affect the firms of an industry separately, e.g., customers, suppliers, competitive firms, investors, etc.
These forces affect all the firms of an industry equally, e.g., social, political, legal and technical situations.
The different factors of business environment are co-related. For example, let us suppose that there is a change in the import-export policy with the coming of a new government.
In this case, the coming of new government to power and change in the import-export policy are political and economic changes respectively. Thus, a change in one factor affects the other factor.
(4) Dynamic Nature:
As is clear that environment is a mixture of many factors and changes in some or the other factors continue to take place. Therefore, it is said that business environment is dynamic.
Nothing can be said with any amount of certainty about the factors of the business environment because they continue to change quickly. The professional people who determine the business strategy take into consideration the likely changes beforehand.
But this is a risky job. For example, technical changes are very rapid. Nobody can anticipate the possibility of these swift technical changes. Anything can happen, anytime. The same is the situation of fashion.
Environment comprises of many factors. All these factors are related to each other. Therefore, their individual effect on the business cannot be recognised. This is perhaps the reason which makes it difficult for the business to face them.
Business environment is related to the local conditions and this is the reason as to why the business environment happens to be different in different countries and different even in the same country at different places.
Identifies Business Opportunities and Threats
Business environment helps business in identification of various opportunities and threats. When business is able to detect market opportunities timely, they can easily take advantages of such opportunity at earliest. They can earn maximum returns by availing such opportunity before the competitors. By proper interaction between business and its environment all threats can be easily detected. It will enable business in taking corrective measures timely.
Helps in Planning and Policy Formulation
Proper understanding of business environment helps in formulating better policies and strategies. It conveys all current information regarding market conditions to business. All opportunities and threats are scanned through the study of the business environment. Businessmen are properly aware of environment and thereby take all decisions according to it. Their entire plan can be changed effectively and efficiently through environmental awareness.
Provides Useful Resources
Business depends on the environment in which they operate for several resources. Business environment supplies several inputs like raw materials, capital and labour which are used by the business for its operations. These inputs are converted into goods and services for satisfying the needs of the market. Without proper supply of inputs, business cannot continue its operations. It is fully dependent upon environment for taking inputs and delivering the required goods or services.
Business environment has an effective role in accelerating the overall performance of business organisations. Through continuous environmental awareness, managers update their knowledge and skills. Environmental study serves as the medium of educating management. Monitoring of environment provides qualitative information which helps in developing strategic thinking. It enables managers to adopt suitable management practices to control and improve the performance of business.
Helps in Coping with Rapid Changes
Factors which constitute business environment are dynamic in nature. They keep on changing continuously from time to time. These changes include changes in customer’s preferences, fashion, technology, economic conditions etc.
Proper understanding of the business environment helps business in detecting all these frequently occuring changes easily. It enables them in dealing with these changes efficiently by taking appropriate actions at right time. Managers through continuous monitoring of environment are sensitive to such changes and respond effectively.
Enhances Business Image
Business through proper understanding of its environment are able to improve its public image. They are more responsive and sensitive to the environmental needs through proper knowledge of business environment. Study of environment provides them information for making realistic plans and implementing them effectively. Businesses are able to provide better service and serve the interest of entire society. People are happy with the business and develop confidence towards it. This enables in developing a better image in market.
Assist in Facing Competition
Business environment communicates all details about competitors in market to business. Awareness regarding the actions and strategies of competitors is crucial for every business for meeting competition effectively. It helps business in formulating plans and policies in accordance with the competitor’s actions. Businesses are able to face challenges and competition in market through systematic planning in an efficient way.
Significance/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 the 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 a business environment is relative since it varies from one location to another.
The business environment is always changing and is uncertain. It is because of this that it is said that the business environment is the sum of all the factors outside the control of management of a company the factors which are constantly changing and they carry with them both opportunities and risks or uncertainties which can make or mar the future of business.
(i) Economical Environment:
Economic Environment consists of Gross Domestic Product, Income level at national level and per capita level, Profit earning rate, Productivity and Employment rate, Industrial, monetary and fiscal policy of the government etc.
The economic environment factors have immediate and direct impact on the businessman so businessmen must scan the economic environment and take timely actions to deal with these environments. Economic environment may put constraints and may offer opportunities to the businessman. After the new economic policy of 1991, lots of opportunities are offered to businessmen. The common factors which have influenced the Indian economic environment are
(a) Banking sector reform has led to many attractive schemes of deposits and lending money. The Banks are offering loans at very nominal rate of interest and with minimum formalities to be completed.
(b) Recent changes in economic and fiscal policy of country have encouraged NRIs and foreign investors to invest in Indian companies.
(c) Lots of economic reforms are taking place in leasing and financing institutions. The private sector is allowed to enter in financial institutions; as a result customers are gaining.
Some Aspects of Economic Environment:
- Role of Private and Public sector
- Rate of growth of GDP, GNP, and Per Capita Income
- Rate of Saving and Investment
- Balance of Trade
- Balance of Payment
- Transport and Communication System
- Money Supply in the Economy
- International Debt
(ii) Social Environment:
Social Environment consists of the customs and traditions of the society in which business is existing. It includes the standard of living, taste, preferences and education level of the people living in the society where business exists.
The businessman cannot overlook the components of social environment as these components may not have immediate impact on the business but in the long run the social environment has great impact on the business.
For example, when the Pepsi Cola Company used the slogan of “Come Alive” in their advertisement then the people of a particular region misinterpreted the word “Come Alive” as they assumed it means Coming out of Graves. So, they condemned the use of the product and there was no demand of Pepsi Cola in that region. So, the company had to change its advertisement slogan as it cannot survive in market by ignoring the sentiments of the people.
In India also, there are many Social reforms taking place and the common factors of Indian Social Environment are:
(a) Demand for reservation in jobs for minority and women
(b) Demand for equal status of women by paying equal wages for male and female workers
(c) Demand for automatic machines and luxury items in middle class families
(d) The social movements to improve the education level of girl child.
(e) Health and Fitness trend has become popular.
Some Aspects of Social Environment:
- Quality of life
- Importance or place of women in workforce
- Birth and Death rates
- Attitude of customers towards innovation, life style etc.
- Education and literacy rates
- Consumption habits
- Tradition, customs and habits of people
(iii) Political Environment:
Political environment constitutes all the factors related to government affairs such as type of government in power, attitude of government towards different groups of societies, policy changes implemented by different governments etc. The political environment has immediate and great impact on the business transactions so businessman must scan this environment very carefully.
The businessman has to make changes in his organisation according to the changing factor of political environment. For example, in 1977 when Janata Government came in power they made the policy of sending back all the foreign companies. As a result the Coca Cola Company had to close its business and leave the country.
The common factors and forces which have influenced the Indian political environment are:
(a) The government in Hyderabad is taking keen interest in boosting I.T. industry, as a result the state is more commonly known as Cyber bad instead of Hyderabad.
(b) After the economic policy of liberalisation and globalisation, the foreign companies got easy entry in India. As a result, the Coca Cola which was sent back in 1977 came back to India. Along with Coca Cola, Pepsi Cola and many other foreign companies are establishing their business in India.
Some Aspects of Political Environment:
- Present political system
- Constitution of the country
- Profile of political leaders
- Government intervention in business
- Foreign policy of government
- Values and ideology of political parties
(iv) Legal Environment:
Legal environment constitutes the laws and various legislations passed in the parliament. The businessman cannot overlook the legislations because he has to perform his business transactions within the framework of legal environment.
The common legislation passed which has affected the business transactions are Trade Mark Act, Essential Commodity Act, Weights and Measures Act, etc. Most of the time legal environments put constraints on the businessman but sometimes they provide opportunities also. The common instances of Indian legal environment which have influenced business transactions recently are:
- Deregulation of capital market has made it easy for businessman to collect capital from primary market.
- Removal of control from the foreign exchange and liberalisation in investment is encouraging foreign investors and NRIs to invest in Indian capital market.
- Advertisement of alcoholic product is prohibited.
- Compulsory to give statutory warning in Tobacco production.
- Delicencing policy of industries.
Some Aspects of Legal Environment:
- Various laws and legislative acts.
- Legal policies related to licensing.
- Legal policies related to foreign trade.
- Statutory warnings essential to be printed on label.
- Foreign Exchange Regulation and Management Act.
- Laws to keep a check on Advertisements.
(v) Technological Environment:
Technological environment refers to changes taking place in the method of production, use of new equipment and machineries to improve, the quality of product. The businessman must closely monitor the technological changes taking place in his industry because he will have to implement these changes to remain in the competitive market.
Technological changes always bring quality improvement and more benefits for customers. The recent technological changes of Indian market are:
- Digital watches have killed the prospects and the business of traditional watches.
- Color T.V. technology has closed the business of black and white T.V.
- Artificial fabric has taken the market of traditional cotton and silk fabrics.
- Photo copier and Xerox machines have led to the closure of carbon paper business.
- Shift in Demand from vacuum tubes to transistors.
- Shift from steam locomotives its diesel and electric engine.
- From typewriter to World Processors.
Some Aspects of Technological Environment:
- Various Innovations and Inventions.
- Scientific Improvements.
- Developments in IT sector
- Import and Export of Technology.
- Technological Advances in Computers.