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capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All
these help in improving the pace of economic growth.
(b) Economic Policies: All business activities and operations are directly influenced by the
economic policies framed by the government from time to time. Some of the important economic
policies are:
(i) Industrial policy
(ii) Fiscal policy
(iii) Monetary policy
(iv) Foreign investment policy
(v) Export Import policy (Exim policy)
The government keeps on changing these policies from time to time in view of the developments
taking place in the economic scenario, political expediency and the changing requirement. Every
business firm has to function strictly within the policy framework and respond to the changes
therein.
(c) Economic System: The world economy is primarily governed by three types of economic
systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. India has
adopted the mixed economy system which implies co-existence of public sector and private
sector.
NON-ECONOMIC ENVIRONMENT
The various elements of non-economic environment are as follow:
(A) SOCIAL ENVIRONMENT
The social environment of business includes social factors like customs, traditions, values,
beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a
society cherishes have a considerable influence on the functioning of business firms. For
example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits,
flower, etc. Due to increase in literacy rate the consumers are becoming more conscious of the
quality of the products. Due to change in family composition, more nuclear families with single
child concepts have come up. This increases the demand for the different types of household
goods. It may be noted that the consumption patterns, the dressing and living styles of people
belonging to different social structures and culture vary significantly.
operations. You may be aware that Coca-Cola, a cold drink widely used even now, had to wind
up operations in India in late seventies. Again the trade union activities also influence the
operation of business enterprises. Most of the labour unions in India are affiliated to various
political parties. Strikes, lockouts and labour disputes etc. also adversely affect the business
operations. However, with the competitive business environment, trade unions are now showing
great maturity and started contributing positively to the success of the business organisation and
its operations through workers participation in management.
(C) LEGAL ENVIRONMENT
This refers to set of laws, regulations, which influence the business organisations and their
operations. Every business organisation has to obey, and work within the framework of the law.
The important legislations that concern the business enterprises include:
(i) Companies Act, 1956
(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954
(viii) Essential Commodities Act, 2002
(ix) The Standards of Weights and Measures Act, 1956
(x) Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade Marks Act, 1999
(xii) Bureau of Indian Standards Act, 1986
(xiii) Consumer Protection Act, 1986
(xiv) Environment Protection Act
(xv) Competition Act, 2002
Besides, the above legislations, the following are also form part of the legal environment of
business.
(i) Provisions of the Constitution: The provisions of the Articles of the Indian Constitution,
particularly directive principles, rights and duties of citizens, legislative powers of the central
and state government also influence the operation of business enterprises.
(ii) Judicial Decisions: The judiciary has to ensure that the legislature and the government
function in the interest of the public and act within the boundaries of the constitution. The
various judgments given by the court in different matters relating to trade and industry also
influence the business activities.
(D) TECHNOLOGICAL ENVIRONMENT
Technological environment include the methods, techniques and approaches adopted for
production of goods and services and its distribution. The varying technological environments of
different countries affect the designing of products. For example, in USA and many other
countries electrical appliances are designed for 110 volts. But when these are made for India,
they have to be of 220 volts. In the modern competitive age, the pace of technological changes is
very fast. Hence, in order to survive and grow in the market, a business has to adopt the
technological changes from time to time. It may be noted that scientific research for
improvement and innovation in products and services is a regular activity in most of the big
industrial organisations. Now a days infact, no firm can afford to persist with the outdated
technologies.
participation in most industries, disinvestment was carried out in many public sector industrial
enterprises and opened up the economy considerably. Foreign Investment Promotion Board was
set up to channelize foreign capital investment in India. Let us discuss the developments under
three heads, viz., (a) Liberalisation, (b) Privatisation, and (c) Globalisation.
(A) LIBERALISATION
Liberalisation refers to the process of eliminating unnecessary controls and restrictions on
the smooth functioning of business enterprises. It includes:
(i) abolishing industrial licensing requirement in most of the industries;
(ii) freedom in deciding the scale of business activities;.
iii) freedom in fixing prices of goods and services;
(iv) simplifying the procedure for imports and exports;
(v) reduction in tax rates; and
(vi) simplified policies to attract foreign capital and technology to India.
Through this liberalisation process, Indian Economy has opened up and started interacting with
the world in a big way. This has resulted in easy entry of foreign business organisations in India.
This has further resulted in stiff competition and efficiency. Ultimately, liberalization has helped
us in achieving a high growth rate, easy availability of goods at competitive rates, a healthy and
flourishing stock market, high foreign exchange reserve, low inflation rate, strong rupee, good
industrial relations, etc
(B) PRIVATISATION
Privatisation refers to reducing the role of public sector by involving the private sectors in most
activities. Due to the policy reforms announced in 1991, the expansion of public sector has
literally come to a halt and the private sector registered fast growth in the postliberalised period.
The issues of privatisation include:
(i) reduction in the number of industries reserved for the public sector from 17 to 8 (reduced
further to 3 later on) and the introduction of selective competition in the reserved area;
(ii) disinvestment of shares of selected public sector industrial enterprises in order to raise
resources and to encourage wider participation of general public and workers in the ownership in
business;
(iii) improvement in performance through an MOU system by which managements are to be
granted greater autonomy but held accountable for specified results.
In India, as a result of these steps, the post liberalisation phase has witnessed a massive
expansion of the private sector business in India. You can have an idea of their expansion from
the fact that the total capital employed in top 500 private sector companies rose from Rs.
1,39,806 crores in 1992-93 to Rs. 2, 34, 751 crores in 1994-95 (an expansion of 68% in just two
years).
(C) GLOBALISATION
Globalisation means integrating the economy of a country with the world economy. This
implies free flow of goods and services, capital, technology and labour across national
boundaries. To achieve these objectives of globalisation, the government has adopted various
measures such as reduction in custom duties, removal of quantitative restrictions or quotas on
exports and imports, facilitating foreign investment and encouragement of foreign technology.
These measures are expected to achieve a higher rate of growth, enlargement of employment
potential, and reduction of regional disparities
Nature of Business
Business may be understood as the organized efforts of enterprise to supply consumers with
goods and services for a profit. Businesses vary in size, as measured by the number of employees
or by sales volume. But, all businesses share the same purpose: to earn profits.
The purpose of business goes beyond earning profit. There are:
It is an important institution in society.
Be it for the supply of goods and services.
Creation of job opportunities.
Offer of better quality of life.
Contributing to the economic growth of the country.
Hence, it is understood that the role of business is crucial. Society cannot do without
business. It needs no emphasis that business needs society as much
TYPES OF ENVIRONMENT
On the basis of the extent of intimacy with the firm, the environmental factors may be classified
in to different types or levels. As indicated BELOW, there are, broadly, two types of
environment, the internal environment, i.e., factors internal to the firm and external environment,
i.e., factors external to the firm which have relevance to it.
The internal factors are generally regarded as controllable factors because the company has
control over these factors; it can alter or modify such factors as its personnel, physical facilities,
organization and functional means, such as marketing mix, to suit the environment.
The external factors, on the other hand, are, by and large, beyond the control of a company. The
external or environmental factors such as the economic "factors, sociocultural factors,
government and legal factors, demographic factors, geo-physical factors etc; are, therefore,
generally regarded as uncontrollable factors.
It may, however, be noted that a firm may not sometimes have complete control over all the
internal factors. Also, it is some times possible to change certain external factors. Some of the
external factors have a direct and intimate impact on the firm (like the suppliers and distributors
of the firm). These factors are classified as micro environment, also known as task environment
and operating environment. There are other external factors which affect an industry very
generally (such as industrial policy demographic factors etc). They constitute what is called
macro environment, general environment or remote environment.
Although business environment consists of both the internal and external environments, many
people often confine the term to the external environment of business.
Internal Environment
The important internal factors which have a bearing on the strategy and other decisions
are outlined below.
Value System
The value system of the founders and those at the helm of affairs has important bearing on the
choice of business, the mission and objectives of the organization, business policies and
practices. It is a widely acknowledged fact that the extent to which the value system is shared by
all in the organization is an important factor contributing to success. The value system of JRD
Tata and the acceptance of it by others who matter were responsible for the voluntary
incorporation in the Articles of Association of TISCO its social and moral responsibilities to
consumers, employees, shareholders, society and the people.
After the EID Parry group was taken over by the Murugappa group, one of the most profitable
businesses (liquor) of the ailing Parry group was sold off as the liquor business did not fit into
the value system of the Murugappa group. The value system and ethical standards are also
among the factors evaluated by many companies in the selection of suppliers, distributors,
collaborators etc.
Suppliers
An important force, in the micro environment of a company is the suppliers, i.e., those who
supply the inputs like raw materials and components to the company. The importance of reliable
source/sources of supply to the smooth functioning of the business is obvious. Uncertainty
regarding the supply or other supply constraints often compels companies to maintain high
inventories causing cost increases. It had been pointed out that factories in India maintained
indigenous stocks of 3-4 months and imported stocks of 9 months as against an average of a few
hours to two weeks in Japan.4 The liberalization however, has caused a significant change in the
situation.
Because of the sensitivity of the supply, many companies give high importance to Vendor
development. Vertical integration where feasible, helps to solve the supply problem. For
example, Nirma has always been a believer of the logic'" that captive production plants for raw
materials is the best way to production costs in check and it has gone for a mammoth backward
integration. In many cases, however, outsourcing is more beneficial. It is very risky to depend on
a single supplier because a strike, lock out or any other production problem with that supplier
may seriously affect the company. Similarly, a change in the attitude or behavior of the supplier
may also affect the company. Hence, multiple sources of supply often help reduce such risks.
The supply management assumes more importance in a scarcity environment. "Company
purchasing agents are learning how to "wine and dine" suppliers to obtain favorable treatment
during periods of shortages. In other words, the purchasing department might have to "market
itself to suppliers." Recognizing the critical importance of the supply factor, companies all
around the world are increasingly resorting to partnering / relationship marketing.
Customers
As it is often exhorted, the major task of a business is to create and sustain customers. A business
exists only because, of its customers. Monitoring the customer sensitivity is, therefore, a
prerequisite for the business success. A company may have different categories of consumers like
individuals, households, industries and other commercial establishments, and government and
other institutions.
For example, the customers of a tyre company may include individual automobile' owners,
automobile manufacturers, public sector transport undertakings and other transport operators.
Depending on a single customer is often too risky because it may place the company in a poor
bargaining position, apart from he risks of losing business consequent to the winding up of
business by the customer or due to the customer's - switching over to the competitors of the
company.
With the growing globalization, the customer environment is increasingly becoming global. Not
only that the markets of other countries are becoming more open, the Indian market is becoming
more exposed to the global competition and the Indian customer is becoming more "global" in
his shopping.
Competitors
A firm's competitors include not only the other firms which market the same or similar products
but also all those who compete for thee discretionary income of the consumers. For example, the
competition for a company's televisions may come not only from other
T.V manufacturers but also from two-wheelers, refrigerators, cooking ranges, stereo sets and so
on and from Firms offering savings and investment schemes like banks, Unit Trust of India,
companies accepting public deposits or issuing shares or debentures etc. This competition among
these products may be described as desire competition as the primary task here is to influence the
basic desire of the consumer. Such desire competition is generally very high in countries
characterized by limited disposable incomes and many unsatisfied desires (and, of course, with
many alternatives for spending/investing the disposable income).
If the consumer decides to spend his discretionary income on recreation (or recreation cum
education) he will still be confronted with a number of alternatives to choose from like T.V.,
stereo, two-in-one, three-in-one etc. The competition among such alternatives which satisfy a
particular category of desire is called generic competition. If the consumer decides to go in for a
T.V., the next question is which form of the T.V black and white .or Colour with remote control
or without it etc. In other words, there is a product form competition. Finally, the consumer
encounters the brand competition i.e. the competition between the different brands of the same
product form. An implication of these different demands is that a marketer should strive to create
primary and selective demand for his products. Consequent to the liberalization, the competitive
environment in India has been undergoing a sea change. Many companies restructured their
business portfolio and strategies. In many industries where a seller's market existed a buyer's
market has emerged.
Marketing Intermediaries
The immediate environment of a company may consist of a number of marketing intermediaries
which are "firms that aid the company in promoting, selling and distributing its goods to final
buyers.
The marketing intermediaries include middlemen such as agents and merchants who "help the
company find customers or close sales with them", physical distribution firms which "assist the
company in stocking and moving goods from their origin to their destination such as warehouses
and transportation firms; marketing service agencies which "assist the company in targeting and
promoting its products to the right markets such as advertising agencies, marketing research
firms, media firms and consulting firms; and financial intermediaries which finance marketing
activities and insure business risks. Marketing intermediaries are vital links between the
company and the final consumers. A dislocation or disturbance of the link, or a wrong choice of
the link, may cost the company very heavily. Retail chemists and druggists in India once decided
to boycott the/products .of a leading company on some issue such as poor retail margin. This
move far collective boycott was, however, objected to by the MRTP Commission; but for this the
company would, perhaps, have been in trouble. Hindustan Lever too faced major challenge when
it faced a collective boycott in Kerala on the issue of trade margin.
Financiers
Another important micro environmental factor is the financiers of the company. Besides the
financing capabilities, their policies and strategies, attitudes (including attitude towards risk),
ability to provide non-financial assistance etc. are very important.
Publics
A company may encounter certain publics in its environment. A public is any group that has an
actual or potential interest in or impact on an organizations ability to achieve its interests. Media
publics, citizens action publics and local publics are some examples.
MACRO ENVIRONMENT
A company and the forces in its micro environment operate in a larger macro environment of
forces that shape opportunities and pose threats to the company. The macro forces are, generally,
more uncontrollable than the micro forces. When the macro environment is uncontrollable, the
success of a company depends on its adaptability to the environment. For example, if the cost of
the imported components increases substantially because of the depreciation of the domestic
currency, a solution may be their domestic manufacture.
Important macro environment factors include economic environment, political and regulatory
environment, social/cultural environment, demographic environment, technological environment,
natural environment, and global environment.
a) Technological Environment
Technology is understood as the systematic application of scientific or other organized
knowledge to practical tasks. Technology changes fast and to keep pace with it, businessmen
should be ever alert to adopt changed technology in their businesses.
b) Economic Environment
There is close relationship between business and its economic environment. Business obtains all
its needed inputs from the economic environment and it absorbs the output of business units.
c) Political Environment It refers to the influence exerted by the three political institutions viz.,
legislature executive and the judiciary in shaping, directing, developing and controlling business
activities. A stable and dynamic political environment is indispensable for business growth.
d) Natural Environment
Business, an economic pursuit of man, continues to be dictated by nature. To what
extend business depends on nature and what is the relationship between the two constitutes
an interesting study.