An Overview Of Business Environment

BY GAZAL GANDHI ASSISTANT PROFESSOR MBA, RDIAS

Business environment includes the climate or set of conditions: economic, social, political or institutional which have a direct or indirect bearing on the functioning of business It signifies external forces, factors and institutions that are beyond the control of the business and they affect the functioning of a business enterprise.

Concept Of Business Environment

Business Environment means the aggregate of all the forces, factors and institutions which are external to and beyond the control of an individual business enterprise but which exercise a significant influence on the functioning and growth of individual enterprises.

Nature of Business Environment

Aggregative: totality of all the external forces
which influence the working and decision making of an enterprise.

Inter-related: various elements are closely

interdependent and any change in one element affects the other elements.

Relative: it differs from country to country and

even region to region.

Contd.
Inter-temporal: it changes over time, specially in long run, it changes certainly. Uncertain: business environment is volatile so it becomes very difficult to forecast. Contextual: business environment provides the macro framework within which the business firm (a micro unit) operates.

Significance of Business Environment

First mover advantage Early warning signal Customer focus Strategy formulation Change agent Public image

Continuous learning

Types of environment

Internal environment

External environment

Micro environment

Macro environment

ENVIRONMENT OF BUSINESS

The internal environment is the environment that has a direct impact on the business.

Important internal factors which have a bearing on the decisions of a business firm and which are generally controllable because the company has control over these factors.

Factors of Internal Environment

Factors
culture Mission & objectives Top management structure Power structure

Company image & brand equity

Human & other resources

Ranbaxys mission: to become a research based international pharmaceutical company- has driven it to enter the foreign markets and development. Thus the business domain of the company, priorities, direction of development, business philosophy, business policy etc,

are guided by the vision, mission

and objectives of the company.

Organizational structure, composition of board of directors, extent of professionalization of management sometime delay decision making while some others facilitate quick decision making. Board of directors is the highest decision making body and it overseas performance of the organization and so its quality is very important.

The share holding pattern can also have important managerial implications.

The amount of support the top management enjoys from different levels of employees, shareholders and board of directors have important influence on the decisions and their implementation. For example: relationship between the

members of the board of director and

between CEO.

The characteristics of human resources like skill, quality, morale, commitment, attitude etc. could contribute to the strength and weakness of an organization Ex: Some organizations find it difficult to carry out restructuring or modernization because of resistance by employees whereas they are smoothly done in some others.

While raising finance, forming joint ventures or other alliances, soliciting marketing intermediaries, entering purchase or sale contracts, launching new products etc. the image of the company matters the most.

 Micro environment consists of the factors in the companys immediate environment that affect the performance of the company. They are more intimately linked with the company. Macro environment consists of larger societal forces that affect all the factors in the companys micro environment.

Micro environment

Suppliers Customers Competitors Marketing intermediaries Financiers Public

Input suppliers Workers & their unions Public

BUSINESS

Customers Marketing intermediaries

Competitors

 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.

 Customers:
The major task of a business is to create and sustain customers. A business exists only because of its customers. The choice of customer segments should be made by considering a number of factors including the relative profitability, dependability, stability of demand, growth prospects and the extent of competition. The business firm should not be dependent on a single customer

 Competitors:
Competition not only include the other firms that produce same product but also those firms which compete for the income of the consumers the competition here among these products may be said as desire competition as the primary task here is to fulfill the desire of the customers.

 Marketing Intermediaries
The marketing intermediaries include middlemen such as agents and merchants that help the company find customers or close sales with them. The marketing intermediaries are vital links between the company and the final consumers .

 Financiers:
The financiers are also important factors of internal environment. Along with financing capabilities of the company their policies and strategies, attitudes towards risk , ability to provide non-financial assistance etc. are very important.

 Public : A public is any group that has an actual or potential interest in or impact on an organizations ability to achieve its interests. Ex-media, citizens, local public etc. NGOs have been protesting against child labour, cruelty against animals, environmental problems, deindustrialization resulting from imports etc.

Macro environment

Economic environment Political environment Technological environment Social environment Global environment

Macro environment

BUSINESS

Consists of larger societal forces that affect all the actors in companys macro environment-namely
the demographic, economic, natural, technological, political and cultural forces

Also known as Societal Environment The Societal Environment includes general forces that do not directly touch on short-run activities of the organization but that can, and often do, influence its longrun decisions.

Important factors are:

Economic conditions Economic policies Economic systems

Economic condition

The economic conditions of a country for example, the nature of the economy, the stage of development of the economy, economic resources, the level of income, the distribution of income and assets, etc.- are among the very important determinants of business strategies. In a developing country, the low income may be the reason for the very low demand for the

Economic policies

Economic System

Some types or categories of business are favourably affected by government policy, some adversely affected, while it is neutral to some others. E.g. a restrictive import policy may greatly help the import competing industries, while a liberalisation of the import policy may create difficulties for such industries The scope of the private business depends on the economic system. The freedom of the private enterprise is the greatest in the free market economy.

Trade Factors
Anything that effects imports and exports is a trade factor. A tariff is a tax on imports, this increases the cost of the goods brought by the importer. The tax goes to the Government. A tariff being introduced on imports will reduce supply. A quota is a limit on the amount that can be imported, this reduces supply

Trade Factors The exchange rate may also have an impact

on supply
The exchange rate is the value of one currency in relation to the currency of another country. Foreign Exchange rate changes will effect the price of exports and imports

World market prices will effect Domestic prices so an increase in the payout to Dairy Farmers will almost certainly lead to higher prices in NZ for dairy products.

Has close relationship with the economic system and economic policy. In many countries regulations to protect consumer interests have become stronger. Some governments specify certain standards for the products to be marketed in the country; some even prohibit the marketing of certain products. Promotional activities are subject to various types of controls. Eg: In India, Advertisement of alcoholic product is prohibited.

Political Factors
Any policy decision made by Government is a Political Factor e.g. the Government decides that alcohol is a demerit good (bad for you) and they will increases tax on it, this is a political decision. Subsidies are a payment given to firms by the government in order to encourage the production of a particular good or service.
Subsidies represent a decrease in costs by the producer so they will increase supply

Political Factors
Sales Taxes is a payment to the government for every unit consumed for a particular good the government may think is bad for society.
Taxes increase the costs to the producer so will result in a decrease of supply

Major factors are:

Strategy should be appropriate in the sociocultural environment.

Eg: nestle brews a very large variety of instant coffee to satisfy different national tastes

the buying and consumption habits of people, their language beliefs and values, customs and traditions, tastes and preferences, Education

Even when people of different cultures use the same product; the mod of consumption, conditions of use, purpose of use or the perceptions of the product attributes may vary so much so that the product attributes, method of presentation, positioning or method of promoting the product may have to be varied to suit the characteristics of different markets.
E.g.: Vicks Vaporub, the popular pain balm is used as mosquito repellent in some tropical countries

Language difference pose a serious problem.

e.g.
Preet-> Prestige for overseas market In Japanese, General Motors body by Fisher means Corpse by fisher

Colour

Blue: feminine and warm in Holland ; but masculine and cold in Sweden Green: favourite in Muslim world; but represents illness in Malaysia Red: popular in communist countries; but represents disaster in Africa White: death and mourning in China and Korea; but it expresses happiness in some countries. Also it is the

Factors: Size, growth rate, age composition, sex composition of population, family size, educational levels, economic stratification of the population, language, caste, religion, etc. E.g. Decline in birth rates in USA have affected the demand for baby products. So Johnson &Johnson repositioned their products like baby shampoo and baby oil, to the adult segment, particularly to females.

Geological and ecological factors, such as natural resources endowments, weather and climatic conditions, topographical factors, location aspects in the global context, port facilities etc., are relevant to business. Differences in geographical conditions between markets may some times call for changes in the marketing mix. Geographical and Ecological factors also influence the location of certain industries. E.g. industries with high material index tend to be located near the raw material sources. Topographical factors may affect the demand pattern E.g.. In hilly areas with difficult terrain, jeeps may be in a greater demand than cars. Ecological factors have recently assumed great importance. The depletion of natural resources, environmental pollution and the disturbance of ecological balance have caused great concern.

 There are two aspects of environmental Environmental Factors issues that may affect supply. 1. Factors that are beyond the control of the business
E.g. acts of nature (Flood, would decrease supply)

2. How a producer views the environment will effect there production decisions
e.g. if a producer wants to be environmentally friendly they may recycle all waste. This may be more costly and time consuming than just dumping it. This will mean they are less productive and less profitable at existing prices

Business prospects demands availability of certain physical facilities

differing technological environment of different markets may call for product modifications Technological developments may increase or decrease the demand for some existing products
E.g. Many appliances are designed for 110 V in USA. They should be converted for 240v in India E.g. voltage stabilizers help increase in sale of electrical appliances in markets characterised by frequent voltage fluctuations Introduction of TVs, Refrigerators, etc. with in-built stabilizers adversely affects the demand for voltage stabilizers.

E.g. demand for electrical appliances is affected by the extent of electrification and the reliability of power supply. Demand for LPG stoves depend on rate of growth of gas connections

Particularly important for the industries directly depending on imports or exports and import-competing industries Recession, economic boom, liberalization Major international developments have their spread effects on domestic business.

E.g. Oil price hikes increased the cost of production and the prices of certain products such as fertilizers , synthetic fibres. So usually, the demand for natural fibres and manures increased. Also demand for automobiles that economise energy consumption got increased.

The oil crisis also promoted some companies to resort to demarketing demarketing refers to the process of cutting consumer demand for a product back to the level that can be supplied by the firm. E.g. The Indian Oil Corporation have publicised tips on how to cut oil consumption

Legal Factors
Any law that a producer must comply with is a legal factor e.g. Health and Safety. Complying with these laws will often increase cost of production Some times the law may directly reduce supply e.g. hours that businesses can be open such at pubs

THANK YOU.