Business Environment An introduction Meaning of Business The
Business Environment –An introduction Meaning of Business: The word business in its literal sense means the state of being busy. It is associated with an activity that one can be busy about. But in economics sense, the word business means human activates which are performed with the objectives of earning profits. Human activity for earning profit may be in the form of production, extraction or purchase of goods for sale.
n Changing concept of business: Business and society are closely related to each other. Business influences the various aspects of society and the society in turn affects business. Although business activities also affect social outlook, values, attitudes, customs, way of thinking etc. Yet it is basically business that has to adapt itself to changing demands of society. It is for this reason that there has been change in the concept and objects of business. The concepts of business are as follows:
Old concept of Business: Business may be understood as the organized efforts of enterprises to supply consumers with goods and services to earn profit. Responsibilities of the business towards customers, society and employees were totally ignored. It was possible only because there was less competitions.
Modern Concept of Business: In modern times, the goal of profit maximization is achieved through customer satisfaction. In today’s competitive environments, survival of business unit is not possible without customer satisfaction. Economics function of business is to create market or finding out the favour of potential customers. Customer is regarded as foundation of business.
Characteristics of business 1. Exchange of goods and Services: Business is an economics activity which is concerned with exchanging goods and services to satisfy human wants. It means if an individual purchase a thing or services for his personal use, this activity will not be called business. For example, if a shopkeeper purchased some materials for his domestic use, this activity will not be called business, but if purchases the same material for selling, it will be a business activity. 2. Profit Motive: The prime consideration in any business is to earn profit which represents a fair return on capital employed and reasonable reward for risk taken.
3. Continuity in Dealing: One single transaction does not constitute business. The terms business refers to a series of dealing in regular sequence. 4. Entrepreneurship and Risk: Business operates in a changing internal ands external environment. This makes managerial decision making a task, the slightest error in correctly foreseeing these changes may expose it to risk. The society permits business to earn profit as a reward for bearing risk. Due to this risk, there is always uncertainly in earning profits.
5. Creating of utility: In order to make things more useful for society, their utility is enhanced by the efforts of businessman. From the economic point of view, utility is created in various ways, like the utility of place, form time. Place utility is created by carrying goods from the place of production to the place of consumption. Form utility is created by changing their forms. Time utility is created by storing the goods in godowns and cold storages so that these goods can be used even at that time when their production is not possible e. g. in case of seasonal products, time utility is created by storing them.
6. Customer satisfaction: The aim of business is profit earning but it is not possible without customer‘s satisfaction. Hence business men should make goods and services according to the taste of consumers. 7. Innovation and Research: Businessmen have to encourage innovations and research in their respective fields of activates. They have to be alert and cautious about the activities of rival organizations. Business has to face the challenges to changing business environment.
8. Human Activity: Business is a human activity because human resource alone is able to utilize available physical resources of a business like material, money, machinery. The success of business depends largely on optimum utilization of physical resources by its human resources. 9. Business is Social activity: Business cannot be done without society. It gets raw material, manpower, capital and other resources from society. It produces and distributes the goods which are used by society in exchange of some consideration.
Meaning of Business Environment Business environment refers to those aspects of the surrounding of business enterprises which have influence on the functioning of business. An organization can survive and grow when it continuously and quick adapts to changing environment. Business does not function in vacuum. It is affected by internal and external environment factors. These internal and external environment factors collectively constitute business environment. The internal factors are within the control of business, whereas external factors like economics environment, political environment, socio-cultural environment, technological environment, international environment are beyond the control of business. Similarly, competition is external factor which significantly affects the business but is beyond the control of business.
Business environment has two components: 1. Internal Environment 2. External Environment Internal Environment: internal environment includes factors of the business which can be controlled by business. If refers to environment within the organization. It includes objects of business, managerial policies, different department of the organization, management and employees of the organization, labour management relationship; brand image and corporate images, physical resources including infrastructure available with the business, vision and thinking of top management, research and commitment of human resources etc. internal environment includes 5 Ms. i. e. man, material, money, machinery, management available with business. The component of internal environment is largely within the control of business.
External Environment: External environment refers to external aspects of the surrounding of business enterprises which have influence on the functioning of business. The external aspects of the surrounding are by and large, beyond the control of business. External environment includes factors outside the firm which can provide opportunities or pose threats to the firm. The success of a business enterprise depends to a great extent on its awareness about its surrounding, environment and adaptability to changes in the environment. External Environment is of two types: 1. Micro/Operating Environment 2. Macro/General Environment
Micro/operating environment: The forces which are close to the company and affect its ability to work constitute micro environment. It consists of company’s immediate environment that affects the performance of company. It includes supplier, customers, market intermediates, competitors and public. These factors may affect different of the same industry in the different ways. Some of the micro factors may be same for different firms in an industry. While some of the micro factors may be particulars to one firm only.
1. Supplier : Every business requires a number of suppliers, who supply raw materials and components to the business to the company. The following points should be kept in mind regarding suppliers. a. Reliability: If our suppliers is realible, our business will run smoothly. If our supplier is not realible, we may not maintain which will increase our cost. b. Multiple Suppliers: it is very easy risky to depend on a single supplier because a strike, lockout or other peoblem with that supplier will seriously affect the business unit. Multiple source of supply will reduce such risk.
2. Customers: Customers Is the central point of any business. Success of a business organization depends upon indentifying custoners, their needs, tastes, liking, etc. and enhancing the level of customer satisfaction. Because of increase in comeptions, attracting and satisfying the customer has become more challenging. For attracting new customer, companies conduct customers researxh, design, product as epr needs and requirement of customers, spend heavily on advertisement, provide after sale service. Etc. Customers may be of different types: 1. Wholesale Customer 2. Retail customers 3. Industrial Customers 4. Government and other institution. 5. Foreign customers
1. 2. 3. 4. 5. 6. The business firm should make separate product of separate segment. Following can be basis of segmentation of customers: Income level of customers Quantity to be purchased by customers Tastes and performance of customers. Personality and lifestyle of customers. Geographical area of customers Education level of customers
3. Market Intermediates: Every business enterprises may be assisted my market intermediates which include agents, and broker who helps the company to find customers. It is a between company and final consumer. Market intermediates help the company to promote, sell and distribute its goods to final buyers/ market intermediates include the following:
1. Middlemen: It includes wholesaler, retailers, departmental stores etc. 2. Marketing Agencies: It included advertising agencies, consultancy firms, media firms, market research firm etc. 3. Financial Intermediates: It includes banks, insurance companies, financial institutional, money market and capital market. Etc 4. Physical intermediates: it includes warehouses, transport agencies etc.
4. Competitors: Business has to adjust its various activities according to action and reactions of competitors. Competitors mean other business units which are producing similar products or a very close substitute of our products. For example, a motorcycle manufacturer faces competitions of only from other brands of motorcycle but also from other types of two-wheelers, viz, scooters. Nowadays, competition has increased to a great extent. At present, no business unit enjoys monopoly in the market.
Public: “Public is any group that has actual or potential interest in the business. To achieve this interest, it has its impact on the business. “Public includes users and non-users of the product. Examples of public are: 1. Media Public: It includes all newspapers, magazines, journals which may publish favorable or adverse remarks about company. Both types of remarks in media have effects on the reputation of company. 2. Local Public: Local public refers to public living tin the area where business unit is set up. Environment pollution is an issue that is taken by local public. Actions of local public on this issue have forced some companies to suspend operations or to install pollution equipments. If local public goes against business unit it may force the business unit is to close its operations.
Macro Environment/General Environment: Macro environment means general environment. Macro forces are uncontrollable comparison to the micro forces of environment. The growth and survival of business depend upon its adaptability to macro environmental factors which included economic environment, political environment, socio -cultural environment, technology environment, natural environment, international environment. Demographic environment. These factors create opportunities and pose threats to the business.
Macro business environment includes the following: . 1. Economic Environment: Economic environment refers to those economic factor which have impact on the working of business viz. . , economic system, economic policy, nature of economy, trade cycle. , economic resources, level of income and wealth, stator provision, etc, . Economics environment of business is very complex in nature. It is very dynamic. It keeps on changing with change in government policies, change in political situation, etc. It mainly has three elements. These are economics conditions, economics policies and economics system. These are as follows: .
1. Economics Conditions: Economic conditions include; income level, distribution of income, demand supply trends and various phases of trade cycle. If boom conditions are prevailing in the economy, it positively affects demand market share. On the other hand, if economy is in depression, it will have negative affect on the business. Economic conditions also include size of market, prevailing price level in the economy, rate of capital formation, industrial growth. Etc. All these affect business in one way or the other.
2. Economics Policies: Economics policies are framed by government. These policies establish relationship between business and government. The effect of these policies may be favourable or unfavourable. These policies affect different business units in different ways. These policies may grant subsidy, tax-holiday, concession in excise duty, custom duty to one business and may increase duties, tax rates for other business. We have to frame our policies keeping in mind the prevailing economic policies, important economic policies are as follows; 1. Monetary policy 2. Fiscal Policy 3. Export-import policy 4. Foreign investment policy 5. Industrial Policy 6. Industrial Licensing Policy
Besides these policies, Government has framed legislation which regulator and control the business. The main legislation regulating the business are as follows: 1. Industrial Disputes Act, 1947 2. Factories Act, 1948 3. Industries Development and Regulation Act, 1951 4. Companies Act, 1956 and Companies Bill, 2009 5. Consumer protection Act, 1986 6. Depositions Act, 1996 7. Foreign Exchange management Act, 1999 8. Securities and Exchange Board of India Guidelines, 2000(SEBI guidelines) 9. Completions Act, 2002 10. Limited liability partnership Act, 2008 11. Banking Regulation Act, 1949 and Banking Law Amendment Bil, 2011
3. Economic System: In different countries, different economic systems prevail. Prevailing economic system and change in it affect the business enterprise to a large extent. The economic system of a country may be: Capitalism: Such, economy is dominated by private sector. Here, private sector has much important role in economic activates. It is also called open economy, e. g. economy of USA, UK. Socialism: Such economic are state owned economies. Government plays major role in economic development of such economies.
Mixed economy: in such, economies both private and public sector co-exists. Now a day there is a shift from socialism to capitalism as is taking place in the economy. This factor must be kept in mind while framing business polices. 4. Other Economics Factors: Economics environment also includes infrastructure facilities like roads, railways, other transport facilities, power, communication etc. It also includes banks, insurance companies, money markets, capital markets etc.
B. Political Environment: Political environment of the country affects different business units significantly. A stable and dynamic political environment is indispensable for business growth. Political environment mainly includes the following components: 1. Political ideology of government 2. Political stability in the country 3. Relations of our nation with other countries 4. Defence and military policy 5. Welfare activities of government 6. Centre-state relationship 7. Approach of opposition parties towards business.
C. Socio-cultural Environment: Business is an integral part of society and both influence each other. It is one of the importance non-economic external components of business environment. Socio-cultural environment refers to influence exercised by certain social and cultural factors which are beyond the control of business unit. Such factors include; attitude of people to work, family system, caste system, religion, education, languages, urbanization, customs and traditions, value system, business ethics, marriage, social trends, social responsibility of business, etc. Cultural shapes the through and behavioral pattern of members.
D. Technological Environment: Technology is the most dramatic force shaping the destiny of people all over the world. Some of the technological inventions are wonders, some are horrors and some have mixed reactions. Open heart surgery, kidney transplantation and birth control pills are wonder while hydrogen bombs and missiles have proved to be horrors. Technological changes bring about changes in products, services, life style and living conditions. Some new products in the field of electronics, telecommunication, transportation and information technology, have significantly affected the business.
E. Natural Environment: It includes geographical and ecological factors such as natural resources, weather and climatic conditions, port facilities, topographical factors such as soil, land forms sea, rivers, rainfall, environmental pollution etc. Climate and weather conditions affect the location of certain industries like textile industries in Maharashtra and Gujarat. Similarly geographical factor affect the location of certain industries, like iron and steel industry is located near raw material sources in Bihar and Odisha. Sugar industry has been set up in those where sugarcane is cultivated in abundance like in Uttar Pradesh. Fish industry has been set up near sea costs. Exports oriented industry tends to be located near ports, so that transportation cost can be minimized.
Weather and climate affect the demand pattern for clothing, building material, room-heaters, air conditioners, etc. For example, in hilly areas there is more demand for room heater and woolen cloth, while in plains there is more demand for airconditioners, coolers, etc. Ecology factor have also become significant in the study of business environment. Environment pollution in the form of air pollution and noise pollution have caused disturbances in ecological balance. Government has framed various acts for the control of environmental pollution and conserving non-replenishable resources. The business enterprises must keep in mind geographical factor, pollution factor and government enactment in this regard.
In brief it includes. 1. Climate 2. Availably of natural resources 3. Topographical factor (physical features of a place) 4. Pollution control 5. Location aspects 6. Port Facilities
F. Demographic Environment : Demographic environment is the study of features of population. It includes : a. Size of population and population growth b. Age composition c. Sex composition d. Education Level e. Family size and structure f. Urban-rural population
G. International Environment: International environment is very importance for certain types of business. It is particularly important for industries directly depending on imports or exports. A recession in foreign markets or protection policy by foreign nations may create difficulties for industries depending on exports. Liberalization of imports may help some industries but may adversely affect other industries e. g. the entry of multinationals such as LG, Samsung in electronic industry has adversely affected market share of domestic business firms like Videocon. Liberalised imports of capital goods, technology, raw material has increased the productivity and efficient of some domestic industrial units.
In short following factors of international environment affect business. 1. Globalisation 2. Global financial crisis 3. International agreements and declarations 4. International terrorism 5. Cultural exchange
Characteristic of Business Environment: The main characteristics of business Environment are as follows: 1. Complex in Nature : Environment is a combination of may factors like political, economic, legal, social, cultural, technology, etc. These factors affect the business in many ways. There fore, the influence that they exercise on business cannot be recognized independently.
2. Dynamic: It is obvious that Environment is a mixture of many factors and there are constant changes in some of them. It is only these changes on the factor of environment that make environment dynamic. The environment factors change with passage of time. 3. Business Environment Affects Different firms Differently: It is not necessary that any particular change in Environment should affect all business in a similar manner. One business may welcome a change in environment while some other business may feel adverse effect of same change.
4. Business Environment has both Short term and long term impact: Every change in environment has both short-term and long term impact on business. The changed environment affects the profitability, productivity and development of business in both short-tem and long term. 5. Unlimited effect of External environment Factors: External factor of business environment has both uncontrollable. These factors have very deep effect on business. Sometimes the effect of these factors is so deep that may take the business to closure e. g. decision of government to ban wine whisky will compel wine shops to wind up their business.
8. Includes both internal and External Environment: Business environment includes both internal and external environment. Internal environment means environment within the organization. This environment is within the control of business unit. External environment is outside the organization and this environment is outside the control of business unit.
Relationship between Business and Environment : Business and environment are closely related to each other. Environment may act either as a stimulant or a constraint for business. A business enterprise can expand itself as and when favourable changes take place in the environment. On the other hand, when the prevailing environment is unfavourable, the business may face challenges and problems. The relationship between and environment may be discussed as follows.
1. Mutually Related : There is correlation between business and its environment. Business is influenced by environment and it influences various aspects of environment. For example, when the industry faces recession, business may cut down the rate of production; when the competition is more, the business may decide to go for aggressive advertisement. So here environment is affecting business. In the same way, business enterprises in the form of group may exert pressure on the government to change its economics policies. So here business is affecting environment. Hence business and environment are mutually related and influence each other.
2. Environment Requires Business to be Dynamic: Because of changing environment business policies and strategies have to be dynamic. Many elements in the environment are constantly changing e. g. the economic, social, political, cultural, technological factors of environment never remain constant. These factors are flexible or dynamic, so business policies should be dynamic enough to adjust the changing environment.
3. Opportunities and threats: If the reveling environment is favourable for business growth and prosperity then business management feels happy and responds positively. For example, business is often encouraged to produce more when government gives subsidy or reduces tax burden. On the other hand, if business environment poses threat to the business, then it is unfavourable for Business, For example, when the government imposes high tax rates on profits, then it acts as hindrance in the growth.
4. Increase in Competition: Indian business markets have become extremely competitive. Both domestic as well as foreign competition has increased. As a result of free entry of multinational corporations, domestic business units are facing acute competition from foreign business units. Our business environment is changing with opening of big shopping malls and with entry of big retail chain stores. Small business units are facing tough competitions form large scale domestic and foreign enterprises. 5. Increase in foreign Investment: Foreign investment refers to investment by foreign investors in shares, debentures, bonds of the nation. With the liberal approach of Indian government towards foreign investment, its inflow has increased in recent years. There has been significant in both foreign direct investment and Portfolio investment.
6. Fast growth in Service Sector: In recent years, service sector is dominating and growing at a very fast rate. Presently, more than half of national income in contributed by services sector. This sector includes banking, insurance, communication, transportation, warehousing, tourism, health, education, Consultancy, business process outsourcing etc. Fast growth in service sector has improved the image of Indian economy in other nations also. 7. Increase in Foreign trade: In recent years, India’s foreign trade is growing at a very fast rate. As a member of world trade organization, India is committed to reducing tariff and non-tariff barberries to foreign trade.
8. Increasing Standard of Living: In India, Middle income group segment is increasing at a fast rate. Now, people living in rural areas also have become very conscious about their standard of living. It has led to increase in demand for consumer durable like television, refrigerator, air conditioner, computers, mobile phones, cars, etc. As a result many domestic and foreign business units are engaged in producing and trading these consumers durable. 9. Reduction in Foreign Debt: Foreign exchange reserves of our economy are increasing. Now our government does not raise fresh foreign loans. It is redeeming earlier loans.
10. Slowdown in the Indian Economy due to Global Recession and Eurozone debt crisis : In years 200809 and 2009 -10, growth in major advanced came down due to widespread financial crisis raising fears about stability of banks and financial institutions. The recent slowdown in the world economy is worst since the great depression of year 1929. This slowdown adversely affected India’s export sector, reduced inflow of foreign investment, weakened the employment prospects, adversely affected our capital market and resulted in reducing in domestic demand of both capital and consumer goods. All this adversely affected the business units.
But now global economy is slowly coming out of global recession and Indian economy to, is coming out of the effect of global recession. In 2010 -11, GDP growth of 8. 6 per cent in India has put the economy back to its prerecession high growth situation. In years 2011 -12 and 2012 -13, global economy was again in the grip of recession due to eurozone debt crisis. The growing debt of many Europian nations caused uncertainty among investors. The worst hit europian nations in the debt crisis were Greece, Portugal, Spain, Ireland Italy. In 2012 -13, GDP growth rate in India came down to 5 percent. In India, GDP growth projection for 2013 -14 is also 6. 4 percent.
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