CH-3 (BUSINESS ENVIRONMENT)

Business environment refers to the sum total of all factors (economic, social, political and technological etc.) which influence the business and over which business has no control. 

FEATURES/CHARACTERISTICS OF BUSINESS ENVIRONMENT

Totality to external forces: - Business environment is the aggregation of all those factors which are outside the business which are beyond control. It is the group of many such forces that is why, its nature is of Totality.

Specific and General forces:- The forces outside the business can be divided into 2 parts:-

• Specific: - They are the forces which affects the individual firm of the industry directly and immediately in day to day working. Eg. Customers, suppliers, competitors, investors etc.
• General: - They are the forces which affects all the firms of an industry equally. Eg. Social, political, legal and technological situations.

Inter relatedness: - The different external and internal factors of business environment are closely inter-related. For eg. Change in Govt. (political factors) leads to change in import-export policy (economical factors). Thus a change in one factor affects the other.

Dynamic nature: - The various factors such as economical changes, technological updation, political and social changes, competitors etc. make the business environment ever changing i.e. dynamic.

Uncertainty: - Business environment is largely uncertain as it is very difficult to predict future happenings, especially when such changes are taking place very frequently. For eg. Change in fashion or technology cannot be predicted with accuracy.

Complexity: - As the various conditions or forces affecting business are inter related. Individual forces affecting the business are easier to understand in parts but difficult to grasp their combined effort on business.

Relativity: - The factors which constitutes business environment differ from country to country, region to region and this makes business environment a relative concept. For eg. Political conditions in USA differ from those in Pakistan.

IMPORTANCE OF BUSINESS ENVIRONMENT

First mover advantage: - Business environment provides numerous opportunities for business success. A company which is more conscious about the changes taking place in the business environment is the first mover. It takes advantages of it by becoming first supplier. In other words a company which has the capacity to know the possibilities of the opportunities available can be the greatest beneficiary. For eg. Maruti Udyog became the leader in the small car segment.

Warning signals: - Besides opportunities, environment happens to be the source of many threats. Environmental awareness can help managers to identify various threats on time and serve as early warning signals. For eg. Entrance of multinational company with substitutes is a signal for domestic company. On the basis of this information, the domestic companies can prepare themselves by improving quality or cost reduction or aggressive advertisement etc.

Tapping useful resources: - Organisations receive various inputs like finance, material, money, manpower, machine, water, power etc. from the external environment. Every organisation is dependent on the external environment for sale of its goods and services to a wide range of customer. A study of business environment shows the needs of external environment which can be satisfied by supplying the required products i.e. satisfying the expectations and demands of general public.

Coping with rapid changes: - These days business is rapidly changing. Various factors connected with business such as competition, fashion, number of customers, technology, preferences are changing quickly. Changes do not affect business as much as the rapidity of changes. With the study of business environment one can easily cope up with the frequent changes of environment.

Assisting in planning and policy: - Since environment is a source of both opportunities and threats for a business enterprise, its understanding and analysis can be the basis for deciding the future course of action (planning) or training guidelines for decision making (policy). It helps in formulating future strategy for the business and in this way, anyone can defeat their competitors by formulating their plans.

Improves performance: - The future of an enterprise is closely related with the current market conditions. The business organisation which continuously monitors the business environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.

DIMENSIONS OF BUSINESS ENVIRONMENT

ECONOMIC ENVIRONMENT

• It consists of corporate profits, inflation rates, productivity, balance of payments, interest rates, gross national product etc.
• This environment is divided into economic system, economic policies and economic conditions.
• Economic system influences freedom and openness of business like Socialistic economy or Capitalistic economy or Mixed economy.
• Economic policies are laid down to direct the economic activities like Import-Export policy, Employment policy, Taxation policy etc.
• Economic conditions show the possibilities of economic development of a country like foreign capital, Supply of natural resources, rate of interest etc.

SOCIAL ENVIRONMENT

• It describes the characteristics of the society in which the organisation exists.
• Major elements of this environment are literacy rates, educational levels, values beliefs, traditions etc.
• For example, the celebration of festivals like Diwali, Eid etc. provides various opportunities for the business.
• In business terms, these values translate into freedom of choice in the market, business’s responsibility towards society and non discriminatory employment practices.

TECHNOLOGICAL ENVIRONMENT

• It includes new approaches for producing goods and services, new procedures as well as new equipment.
• Technological changes make available better methods of production which further makes to the optimum utilisation of resources.
• For example, it becomes a technological change for the automobile industry to produce vehicles which consume less petrol in view of ever increasing petrol prices.
• Therefore the companies should regular watch the technological changes so that they are able to exploit the business opportunities.

POLITICAL ENVIRONMENT

• It includes those elements which are related to the govt. affairs for eg. Type of govt. in existence, govt. attitude towards various industries, political stability etc.
• Political stability builds up confidence among business people to invest in the long term projects for the growth of the economy.
• For example, positive attitude of one political party towards business organisations leads to the rise in share prices if that party comes in power and vice-versa.
• Like even after opening up of our economy in 1991, foreign companies found it very difficult to cut through bureaucratic red-tapism to get permits or licences.

LEGAL ENVIRONMENT

• It includes of legislation that has been passed by the parliament and state legislatures.
• This component prescribes rules or laws that all members of business community must follow.
• Non compliance of any law or rules prescribed by the Govt. may lead the business enterprises into legal problems.
• These acts are mostly passed to regulate such business activities as sale purchase, industrial disputes, regulating partnership business or any other form of business, foreign exchange etc.
• For example, as per the order, cigarette companies must carry a statutory warning showing negative impact of it.

FEATURES OF NEW INDUSTRIAL POLICY 1991

• Reduced the number of compulsory licensing to 6 industries.
• Many public industries de-reserved.
• Disinvestment was carried out for many public sector enterprises.
• Foreign Direct Investment (FDI) was permitted even 100% in some cases.
• Foreign Investment Promotion Board (FIPB) was set up to promote foreign investments.
• Introduced LPG policy i.e. Liberalisation, Privatisation and Globalisation

LIBERALISATION	PRIVATISATION	GLOBALISATION
·         Abolished licence requirements ·         No quantitative restrictions ·         Easy movement of goods and services ·         Reduced tax rates ·         Simplified export-import procedures	·         Increased role of private sector ·         Disinvestment of public sector ·         Set up a Board of Industrial and Financial Reconstruction (BIFR) ·         Dilution of govt. stake below 51% to private sector	·         Integration of various economies ·         Easy flow of FDI ·      Simplified import- export procedures ·         Export promotion through rationalisation of tariff structure ·         Reduced custom or export duty.

IMPACT OF GOVT. POLICY CHANGES ON BUSINESS AND INDUSTRY

Increased competition: - with the changes in the rules of industrial licensing and entry of foreign firms, competitions have increased for Indian firms especially in service industries like telecommunications, airlines, banking etc.

More demanding customers: - Now with the availability of options customers have become more demanding as they are well informed about the products. Increased competition gives the customer wider choice in purchasing better quality of goods and services. 

Rapidly changing technological environment: - increased competition forces the firms to develop new ways to survive and grow in the market. The frequent changing environment creates tough challenge for the smaller firms. Therefore new technology makes it possible to improve machines, process, products and services. 

Necessity for change: - After 1991, the policies and practices are not much stable as before. The market forces have become more turbulent as a result of which the enterprises have to continuously modify their operations. 

Need for developing human resources: - Indian enterprises have suffered for long with inadequately trained personnel. The new market conditions require people with higher competence and greater commitment. 

Market orientation: - earlier firms used to produce first and go to the market later for sale, which means they had production oriented market. But now with the competition products or market is customer oriented i.e. firms have to study first analyse the market and produce goods accordingly. 

Loss of budgetary support to the public sector, the central govt’s budgetary support for financing the public sector outlays has declined over the years.

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