Business Environment
Business Environment
The term “environment” means
the totality of all the factors which are external to and beyond the control of
individual business enterprises and their managements. Andrew defines “the
environment of a company as the pattern of all external influences that affects
its life and development.” Environment furnishes the macro-context; the
business firm is the micro unit. The environmental factors are essentially the
“givens” within which firm and their management must operate. Katler Philip
says, “A company’s environment consists of factors and forces that are external
to the business management function of the firm and that impinge on the
management’s ability to develop and maintain successful transactions with its
customers.”
Business cannot be separated
from its surrounding environment. Everything that surrounds and affects
business inevitably becomes a part of its environment: the natural
surroundings, the history of these surroundings, the economic condition, the
political-legal system, cultural pattern, and society as a whole. A business
cannot and does not exist in a vacuum. Business is a part of the whole social
system. Economic system arises and modified, from time to time by various
factors such as:
·
The
laws of the land,
·
The
social customs, traditions, culture and the value system in the country,
·
The
decisions of the political leaders, parliament, judiciary,
·
The
set of belief and contractual agreements made by people in order to carry on
exchange
Business has to continuously adjust itself towards
surrounding environment. Thus it can be said not only man but business too is a
slave of his environment. The business environment is always changing,
constraining, and uncertain. The environmental factors have a profound impact
on business is clear from the fact that environmental analysis and diagnosis
are among the first step in the strategic management.
Meaning and Definition:
Environmental analysis is defined as the process by which
strategists monitor the economic, governmental, legal, market/competitive,
supplier/technological geographic and social settings to determine
opportunities and threat to their firms. According to William Glueck and
Jauch, “The environment includes factors outside the firm, which can lead
to opportunities for or threats to the firm. Although, there are many factors
the most important of these factors are socioeconomic, technological, supplier,
competitors and government.”
According to Richman and Copen, “Environmental factors or
constraints are largely, if not totally, external and beyond the control of
industrial enterprises and their managements. These are essentially the givens
within which firms and their managements must operate in a specific country and
they vary often greatly from country to country”. In the words of Arthur K.
Weimer, “Business environment encompasses the climate or set of
conditions-economic, social, political or institutional in which the business
operations are controlled.”
The renowned marketing scholar Philip Kotler explains
the organisations environment as “the set of interacting institutions and
forces that affects the organisation’s ability to serve its markets.”
The environment means the economic, social, technological,
legal, political, governmental, and other factors that provide an opportunity
or act as a threat for business firms. We can summarise the meaning of the
business environment in the following points:
·
The
surrounding conditions or forces of business are known as its environment.
·
The
social, political, or legal settings of the society mainly constitute the
business environment.
·
The
environment is dynamic and its changes influence the business decisions.
·
The
threats or challenges could be predicted from the study of the environment so
that the firm can be prepared to meet them.
The business firm operates with its environment from which
it receives the necessary “resources” and “opportunities” for its existence,
future growth, and survival. A business needs to organise factors of production
and these resources come from the environment.
The firm’s environment may be broadly
divided into two categories:
(i)
The internal environment: The
internal factors are generally regarded as controllable factors, because they
are within the control of the company; it can alter or modify such factors.
(ii)
The external factors: The external
factors on the other hand consist of those factors that are beyond the control
of a company. The external environmental factors such as the economic factors,
socio-cultural factors, government and legal factors demographic factors
cultural and many other such factors.
(iii)
As the environmental factors (External)
are beyond the control of a firm, the firm has to cooperate and adapt with its
environment i.e. its ability to properly adapt and adjust the environment and
take advantage of favourable external environment. Although it is easy to speak
of a firm’s environment but to understand and change those factors in favour of
the company is equally difficult. The figure below gives a visual impact of the
two constituents of the environment.
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Business and
Environment Interaction
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Environment Internal
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Company
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Environment External
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Mission and object ives
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Human Resources
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Brand Image
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Customers
Investors
Workers
Intermediaries
Competitors
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Macro
Environment
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Value
System
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Micro
Environment
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Demographic
Political and Legal
Technological
Economic
Socio-cultural
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Figure 2.1 Businesses and Environment Interaction
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Business and
Environment Interaction
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Internal Environment
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Company
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External Environment
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Mission and object ives
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Human Resources
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Brand Image
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Customers
Investors
Workers
Intermediaries
Competitors
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Macro
Environment
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Value
System
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Micro
Environment
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Demographic
Political and Legal
Technological
Economic
Socio-cultural
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Figure 2.1 Businesses and Environment Interaction
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Business and
Environment Interaction
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Internal Environment
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Company
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External Environment
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Mission and object ives
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Human Resources
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Brand Image
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Customers
Investors
Workers
Intermediaries
Competitors
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Macro
Environment
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Value
System
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Micro
Environment
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Demographic
Political and Legal
Technological
Economic
Socio-cultural
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Figure 2.1 Businesses and Environment Interaction
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Business and
Environment Interaction
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Internal Environment
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Company
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External Environment
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Mission and object ives
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Human Resources
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Brand Image
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Customers
Investors
Workers
Intermediaries
Competitors
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Macro
Environment
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Value
System
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Micro
Environment
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Demographic
Political and Legal
Technological
Economic
Socio-cultural
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Figure 2.1 Businesses and Environment Interaction
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Company
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The significance of the environmental factors can clearly be
understood from the following advantages:
1. Demand forecasting can be
done.
2. Product feature can be
identified
3. Brand positioning can be done
through pricing policy so that an edge may be achieved and market share can be
grabbed.
4. For the sales promotion
knowledge of the cultural environment is essential.
5. Meeting out the competition by
modification and improvement in the product.
6. Fulfilling the legal
requirement by the product by study of legal environment.
7. Planning the investment
decisions.
8. Economic conditions and the
cost estimates provide knowledge to determine the standard of living.
Thus, for the survival and
growth of business firms the study of business environment is essential.
Characteristics
of Business environment:
The nature of business and
environment is very complex. It will be easy to understand it if we study the
following characteristics:
1. Mutual
Interdependence:
Business and environment are interdependent and they influence each other.
Business may not ignore the environmental factors e.g. government policies,
socio-cultural values, industrial policy etc. are very important for success in
business.
2. Dynamic
in nature: The
entire structure of business is dynamic in nature and changes with time. No
business firm is completely static, like a building or a machine with
stationary framework and standard parts that may be replaced from the ready
stock. Instead competition, shift in demand and other such factors call for
continuous adaptation: and ambitions and drives executives within the company
keep it evolving. As changes are made in one part of a company, compensating
adjustments are needed in other parts. Thus, company is thought of as a dynamic
in nature.
3. Each
company has its own objectives: Company develops its character and an individual
personality of its own. This personality is shaped, not only by physical
resources and technology, or financial inputs but by its basic objectives. The
objectives may be set by its top management. These objectives are to be
achieved. The setting up of objectives is a part of initial planning phase.
4. Complex
in Nature: It
is very difficult for a company to pre-determine the external forces
influencing the company and the factors exercising pressure. As a result many
firms face hardships and problems.
5. Uncontrolled
factors: Some
of the factors of external environment are beyond the control of the company
e.g. fiscal policy, monetary policy, political structure, and social conditions
of a country. There are some other factors that are under the control of the
company e.g. labour conditions, consumer demand design habits, etc. These
controlled factors refer to the limitations of business.
6. Skill: Business should possess
skills to avoid external harmful effects of environment. Firms should possess
the adaptability their manager should have the ability to evaluate the
environment effect. Geographical constraints: Each business unit has a
geographical area of its functioning. This area may expand if the unit expands
its working and may contract or reduce. Few firms may opt local area; some may
go for a district, a state or nation-wide operation. Firm may still expand and
may opt to become a multinational firm.
7. Challenges: Every business unit faces some challenges to
fulfil its objectives and carry out productive process. Business has to take
the risks of production and if everything wallet may earn profit.
Need
or Importance of Studying Business environment:
The study of the firm’s business environment is
very important for more than one reason. It is very important to evaluate and
forecast the effects of changing environment for successful entrepreneur or
businessperson. The study of the business is essential for the following
reasons:
1.
Success in Business: Information about environment is necessary for the successful
conduct of business.
2.
Long Term Planning: For preparation of long term strategy the knowledge of
business environment is essential. The study of environment opens up fresh
avenues for the expansion of business. To prepare business action plan the
knowledge of environment is needed. The new schemes and ventures may be put
into action if social values, saving and investment habits, customs and
traditions.
3.
Dynamic: The knowledge of business environment keeps business person
dynamic in their approach which helps the firm to avoid ecological strains and
stresses and to maintain harmony with the environment.
4.
Safe from Competition: Business faces competition. Modern business
person has to counter the plans of their rival firms in order to survive in the
market.
5.
Innovations: Business in the present competitive environment requires
new products and designs. For this the study of environmental factors is
essentials.
6.
Avenues for profit: It is true that the consciousness towards environment
enhances the avenues for profit in business. The knowledge of government
policies export, import credit policy help in earning and maximising profit.
7.
Effective management: It is essential to manage business effectively.
This requires a comprehensive study of opportunities and threats. A successful
businessperson always takes advantage from favourable conditions and always
makes an attempt to mould conditions for the benefit of the company. The
success in business has no short cuts. The business decisions should be based
on environmental realities.
8.
Market Survey helps Business: It is essential for a successful businessperson
to gather all possible information, rival firms, their new products, and
designs well in advance. This not only helps the company to earn profits but
also helps in meeting the future threats. All these activities help in the
industrial development of a country.
Internal
Environment
There are number of factors
which influence the various strategies and decisions within the organization.
These factors are known as internal factors:
(a)
Human Resources: It involves the planning, acquisition, and development of human
resources necessary for organizational success. It points out that people are
valuable resources requiring careful attention and nurturing. Progressive and
successful organizations treat all employees as valuable human resources. The
organization’s strengths and weaknesses is also determined by the skill,
quality, morale, commitment and attitudes of the employees. Organizations face
difficulties while carrying out modernizations or restructuring process by the
resistance of employees. So, the issues related to morale and attitudes should
seriously be considered by the management. Moreover, global competitive
pressures have made the skilful management of human resources more important
than ever.
(b)
Company Image: One company issues shares and debentures to the public to raise money
and its instruments are oversubscribed while the other company seeks the help
of different intermediaries like underwriters to generate finance from the
public. This difference underlies the distinction between the images of the two
companies. The image of the company also matters in certain other decisions as
well like forming joint ventures, entering contracts with the other company or
launching of new products etc.
(c)
Management Structure: Business has reshaped itself into the formation of
company where it is run and controlled by the entrepreneurs who appoints
Directors to run the company. Therefore, the composition of board of directors
and nominees of different financial institutions could be very decisive in
several critical decisions. The extent of
Professionalization is also a
crucial factor while taking business decisions.
(d)
Physical Assets: Economies of scale, smooth supply of produced materials, and efficient
production capacity are some of the important factors of business which depends
upon the physical assets of an organization. These factors should always be
kept in mind by the managers because these play a vital role in determining the
competitive status of a firm or an organization.
(e) R
& D and Technological Capabilities: Technology is the application of organized
knowledge to help solve problems in our society. The organizations which are
using appropriate technologies enjoy a better competitive advantage than that
of their competitors. The organizations which do not possess strong Research
and Development departments always lag behind in innovations which seem to be a
prerequisite for success in business. Therefore, R & D and technological capabilities
of an organization determine a firm’s ability to innovate and compete.
(f)
Marketing Resources: The organizations which possess a strong base of marketing resources
like talented marketing men, strong brand image, smart sales persons,
identifiable products, wider and smooth distribution network and high quality
of different services, make an effortless inroads in the target market. The
companies which are having so strong basis can also enjoy the fruits of brand
extension, form extension and new product introduction etc. in the market.
(g) Financial Factors: The performance of the
organization is also affected by the certain financial factors like capital
structure, financial position etc. Certain strategies and decisions are
determined on the basis of such factors. The ultimate survival of organizations
in both the public and private sectors is dictated largely by how proficiently
available funds are managed. So, these were some of factors related to the
internal environment of an organization. These factors are generally regarded
as controllable factors because the organization commands control over these
factors and can modify or alter as per the requirement of the organization.
External
Environment
Companies
operate in the external environment that forces and shape opportunities as well
as threats. These forces are not controllable by the company. Only after the careful analysis of these
factors the business policy can be formulated. The external business
environment consists of macro environment and micro environment.
Environmental
components are multidimensional and often complex in nature. There is a close
relationship among various elements of business environment. It can be
classified on the basis of time such as past, present and future environment.
Similarly, on the basis of place it can be local, regional, or national
environment. On economic basis it is of two types; economic and non-economic
environment. The environment can also be classified into micro and macro
environment as shown in figure -1 and Figure-2.
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COMPETITIORS
Desire Generic Form
Brand
Competitors Competitors Competitors Competitors
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MICRO- ENVIRONMENT
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Suppliers
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Company
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Customers
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Financial Media
Public Public
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Govt.
Public
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Local Public
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General
Public
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Customer
Public
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Marketing Intermediary firms
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Figure:
2 The Micro Environment of Business
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MACRO- ENVIRONMENT
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Suppliers
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Natural Environment
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Customers
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Social Environment
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Company
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Political Environment
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Technological Environment
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Figure: 2 The Macro Environment of Business
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It is clear from the
study of Figure-1 and Figure-2 the micro as well as macro environment consists
of many factors interacting and influencing each other. Some of these factors
are beyond the control of the company. The penalty of ignoring environmental
factors is heavy. It not only reduces profit margins and retards further growth
of the company but it also arouses social hostility, which makes it
increasingly difficult for a company to function. We will now discuss these
factors in detail.
(a) Micro Environment of Business:
The Microenvironment
includes those factors, which are interacting with business frequently and are
seen around. These are very closely related to business. These are:
(i)
Suppliers: Suppliers provide resources needed by the company to
produce the particular goods and services. They also supply factors of
production including labour, equipments, and machineries. The growth and smooth
functioning of a company depends very much on supplier’s environment. The
management should constantly keep an eye on the changes in supply conditions.
Rising supply costs may face a price increase that may affect sales. Further
supply shocks may badly affect the production schedule and company may fail to
fulfil its promises to customers, exports etc. which might damage goodwill of
the company in future dealings.
(ii)
Company: The working in a company is divided into various
departments. All these departments and their activities are interlinked into a
chain. For smooth functioning, it is essential that all these work in perfect
harmony for accomplishing the objectives of the company.
(iii)Market: Intermediary Firms: These firms help the
company in marketing selling advertising etc.
its product to the final buyers. These are called intermediary firms as
they help the company as an intermediary. The company management has to keep
good relations with all these intermediaries for the successful operations of
business.
(iv)Customers: Company produces goods and services for the
customers. It is essential to gather information through market research about
the taste, habits, and desires of the customers. The final consumers are
classified in to households, firms, government, international buyers, and
retail stores.
(v)
Competitors: Every company faces a wide range of competitors, such as
desire competitors: i.e., is the immediate desire that the consumer might want
to satisfy; generic competitors: the different ways of satisfying desires; form
competitors; and brand competitors. These competitors are the available
alternatives in the market. If the company is unaware of their competitors,
they may pose a threat to the company’s business in future.
(vi)Public: Public is the interest group. A public can help
or hurt a company’s efforts to serve the market. “A public is any group that
has an actual or potential interest in or impact on an organisation’s ability
to achieve its objectives”. A company is surrounded by seven types of
public: a. Financial Public, b. Media Public, c. Government public, d. Local public, e. Customer groups or
consumer organisations, f. public, and g. Internal public
(vii)
Types of Ownership: Modern Businesses are conducted by the following types of
ownership: i) Sole Proprietorship, ii) Partnership, iii) Joint stock Companies
or Corporation, iv) Cooperative firms, and v) Trusteeship firms.
(viii)
These
above constituents of the micro environment of a firm or company operate in a
larger macro environment of forces. After discussing the components of micro
environment we shall now discuss the components of macro-environment.
(B)
Macro Environment of Business
The six basic macro environment of business are:
Natural Environment, Demographic Environment, Social and Cultural Environment,
Political Environment, Legal Environment, and Technological Environment. As
stated earlier macro factors are generally more uncontrollable than the micro
factors. It will be better to discuss these factors in detail:
(1)
Natural Environment: The
geographical and ecological factors, such as natural resource endowments,
weather, and climatic conditions, air, water, and all natural resources found
on the surface of the earth and in its bowels, topographical factors, location
aspects in global context, port facilities etc., are included in natural
environment and relevant to business. Much of the success of business in the
future will depend upon how it responds to differences in geographical
conditions. Geographical and ecological factors also influence the location of
certain industries. For example, industries, which require large quantities of
water, tend to be located near water bodies or rivers. Similarly, industries
with high material index finds place near the raw material sources. Climate and
weather conditions affect the location of certain industries. Topography
affects demand pattern. For example, in hilly areas with a difficult terrain
jeeps may be in greater demand than cars.
Ecological factors like depletion of natural
resources, pollution have caused great concern with rapid growth in population
and industrialisation, large quantities of water began to be needed for
domestic and industrial purposes, transportation, and production of energy and
power. The rapid growth of industries have disturbed the ecological balance and
polluted the environment. The government policies aimed at the preservation of
environmental pollution have resulted in additional responsibilities and
problems for business. Boulding says, “Planet earth was like a spaceship in
danger of running out of fuel if it failed to recycle its material.” The land
resource that is the total geographical area of India is 329 m. ha. of which 42
m. ha. (14%) of the total reporting area in India is classified as Barren Land
and area under non-agricultural uses.
Forests: Forests are important natural resource of
India. Forests play an important role in control floods; protect soil erosion
supply of timber, fuel, fodder and many more products. They are the natural
habitat for biodiversity and repository of genetic wealth. India has forests on
68 million hectares of land that is the 22 per cent of the total geographical
area. As per the Forest Policy of 1952, it should be 33 per cent of the land
resource. The Forest Policy declared in 1952 failed to save forests in India.
In the year 1988 government of India announced its new Forest Policy. The
important features of this policy are:
Role
of Tribal: The role of tribal in
protection, regeneration, and development of forests was recognised and
emphasised. The new policy enunciates that all agencies responsible for forest
management should cooperate and associate tribal people in conservation of
forest wealth.
Discouragement of Forest based
Industries: The new forest policy states that no forest-based enterprises
except at the village and cottage level will be set-up in future, unless it is
first cleared, after careful study of the availability of raw materials.
End the system of private
forest contractors: The new forest policy puts a ban on private forest
contractors and replaces the system by tribal cooperative institutions and
government corporations, and other such institutions.
Forest land not to be diverted
to non-forest uses: In this policy it was decided that the government will not
accept the land diversion for non-forest uses.
Participatory forests
management system: This new system involves rural people particularly women and
tribal community in the forest work.
Mineral Resource:
The development and management
of mineral resources play a major role in the industrial growth of a nation.
Coal, Iron, Mica, Copper, Lead, Zinc, manganese, Petroleum, Uranium, etc., are
the vital resources for the development of a country. Thorium and Uranium the
autonomic energy minerals are very important. The government of India passed an
amendment in the act with passing of new mines and minerals Act in 1994, which
opens the mining, sector for the FDI. The new policy also empowers states to
grant prospecting licenses /mines leases with prior approval of the central
government except in few cases. It also removes restrictions on equity holding
by foreign nationals in a mining company. The major objective of this amendment
was to minimise the adverse effects of mineral development on forests,
environment, and ecology through appropriate protective measures.
The main source of energy is
Coal and Oil. But oil has created serious threats for future growth. The need
of the time therefore is, that business person should be aware of the threats
and opportunities associated with the environment:
a.
shortages
of strategic resources;
b.
increased
cost of energy;
c.
increased
level of pollution; and
d.
government
intervention in natural resource management
Ecologist and environmentalists
believe that one of the principal reasons for the existence of the
environmental problems stems from too much emphasis on growth by-industrialised
nations. They claim that economic growth has been made possible only at the
expanse of environment. Fast growth has resulted in fantastic growth in
population and demands of the society. Increased production and
consumption had unscrupulously released
waste and pollutants in air, water, seas, rivers, lakes, etc. These
externalities were not the part of their cost structure and perhaps this was
due to the wrong emphasis on GNP as a measure of growth. Countries feel highly
satisfied if their GNP is increasing year after year. On this basis, they claim
that they are developing fast. Although economists like Samuelson has attempted
to give an alternative measure of growth namely, Net Economic Welfare (NEW) but
much has not been done in this direction. The growing consciousness and the
blame put on the activities of businesspersons led them to adopt new standards.
In some cases, government introduced fresh legislative measures penalty, fine,
and punishment for misuse of resources. Now, businesspersons are following the
new guidelines but there is a tendency to adopt short cuts and ignore environmental
measures.
(2)
Demographic Environment:
This is of vital importance to businessmen because the size
of the market depends upon the size of population. Business monitor is
population because business is people and they create markets. Business people
are keenly interested in the size and growth rate of population across the different regions, age distribution, educational levels, household
patterns, mixture of different racial groups and regional characteristics. Population
has many demographic dimensions such as; growth rate, age, sex, density,
educational qualification etc. India today possesses about 2.4% of the total
land area but she has to support about 17 percent of the world population. At
the beginning of twentieth century, India’s population was 236 million which increase to 1027 million in the year
2001. A study of the growth of India’s population reveals the following four
Phases:
1891-1921 Stagnant
1921-1951 Steady
1951-1981 Rapid Growth
1981-2001 High Growth with
definite sign of slowing down
A very significant phase of
India’s population lives below the poverty line. From business environment
point of view, their demand is insignificant. However, it has various other
implications. To solve the basic problems, the additional employment is to be
created; the additional houses to be built, social services like education and
health are to be created. This again has tremendous business opportunities. In
addition, a rapidly increasing population indicates growing demand for many
products. High population growth also indicates a growth in the labour supply
and availability of cheap labour. The availability of skilled and cheap labour force
encourages foreign investors towards India and China.
Another important aspect of
demographic studies these days is Human development Index (HDI). Economic
growth contributes most to poverty reduction when expands the employment,
productivity and wages of poor people and when public resources are channelled
to promoting human development. A virtuous cycle of economic growth and human
development can be witnessed if growth generates employment and income along
with health and happiness. Human Development Index measures the average
achievement in three basic dimensions of human development:
a.
Life
expectancy at Birth,
b.
Literacy
Ratio and enrolment Ratio in Schools
c.
Per-capita
Gross Domestic Product
A simple average of these three
indices gives HDI, UNDP has classified countries into three categories of High,
Medium, and Low range
The data collected for 177
countries placed India at number 138 in HDI in 1994, has improved its position
to 130 in 2016. This shift in HDI affects the business significantly. Similarly
sex distribution also affects occupational distribution. Gender Development
Index (GDI) measures inequalities on the basis of gender. In GDI three measures
are taken:
a.
Female
Life Expectancy
b.
Female
Adult Literacy and Gross Enrolment Ratio (GER)
c.
Female
per-capita income
GDI index will be lower than
HDI when Gender inequalities exist. India has been classified into countries
with High Gender Disparity. Businesspersons may therefore create more jobs for
women to fully utilised labour without sex discrimination.
(3) Economic Environment: Besides people, markets
require purchasing power and that depends upon current income, savings, prices,
debt and credit facilities etc. The economic environment affects the demand
structure of any industry or product. The following factors should
always be kept in mind by the business people to determine the success of the
business. Economic Environment is the most important
element of business environment.
There is a close relationship between a firm and the economic environment
around it. Economic environment plays a significant role in business and the
progress and growth of a country is dependent on economic environment. Economic
environment is multidimensional in nature and includes structure of the
economy. Economic conditions economic policies and the economic system are the
major external factors. The economic conditions are; nature of economy, stage
of economic development, economic resources, the level of income inflationary
pressures distribution of national income its composition, competition, saving,
investment and capital formation. Economic development affects directly the
business firms. The general conditions of economic environment govern the
firm’s ability to remain viable. In boom or prosperity there may be shortage of
resources and in depression many firms may find it difficult to survive. In
developing countries, the low income may be the reason for very low demand for
a product. Some factors such as prices and income are very crucial for sale of
the product. It is generally assumed that demand is income elastic. In a
country where investment and income are steadily rising business prospectus are
generally bright, and further investments are encouraged. During recent years
we have noticed a change in the behaviour of the investors. The investors feel
that developed countries are no longer attractive destinations for further
investment because their growth rate is quite low when compared with the growth
rates of China and India during 2002 -2008. Further these countries favour
foreign capital and have created special economic zones (SEZs) where government
grants special policy packages for export-oriented firms. The economic policy
of the government, needless to say, has very great impact on business. Government
declares industrial policy, monetary policy, fiscal policy, social welfare
policy for rapid growth of industries and equitable distribution of wealth.
(4)
Political-Legal Environment:
Economic environment within a
nation is closely linked with its political and legal systems. For example, the
Socialist countries had a Centrally Planned economic system. In most countries,
there are number of laws that regulate the conduct of a business. These laws
invariably are explicitly or implicitly build on ideologies and values, which
relate to both economic and social goals. Political-legal environment is the
background of laws and regulations within which business conducts its affairs.
This environment is made up of government agencies, laws and pressure groups that
influence and constrain various organisations and individualism society. This
environment provides opportunities, posses challenges and create problems for
businesspersons. For example, in many countries with a view to protect
consumers Consumer Protection Acts have been passed with stronger provisions.
Some governments specify certain standards for the product. Regulations to
protect the purity of environment and preserve the ecological balance have
assumed great importance in many countries. Government Acts are at three
levels: Local, State and the Centre and exert varying amounts of influence over
business. In many countries, rules and regulations change with the change in
government. Hence political and legal environment go together and it is difficult
to draw any demarcation line between them.
The Government plays at least
the following roles in business:
a.
Government
as a Regulator
b.
Government
as a Supplier
c.
Government
as a Competitor
d.
Government
as a Consumer
As a regulator, the government
performs both supportive and restrictive function, by enacting legislation to
regulate the conduct of business. There are a host of statutory control on
business in India. The main reasons for enforcing regulatory laws are:
a.
to
protect firms from each other from unfair trade practices, to protect consumers
from unfair trade practices, and
b.
to protect larger interest of society against unfair business behaviour.
Many countries regulate
business competition in the larger public interest. Government has enacted the
following laws to protect consumers, workers, shareholders, society, and
industry.
·
The
negotiable Instruments Act 1881
·
Workmen’s Competition Act 1923
·
The
Trade Union Act 1926
·
Sale
of Goods Act1930
·
The
Partnership Act1932
·
Industrial
Dispute Act 1947
·
Imports
exports Control Act 1947
·
Minimum
Wages Act 1948
·
The
Factories Act 1948
·
The
Employees State Insurance Act 1948
·
Industries
(development and Regulation) act 1951
·
Industrial
Licensing Act, 1951
·
Mines
Act 1952
·
The Forward
Contracts (Regulation) act1952
·
The
Employees Provident Fund Act 1952
·
Indian
Companies Act 1956
·
The
Securities Contracts Regulation Act 1957
·
The
Income Tax Act 1961
·
The
Bonus Act 1965
·
The
MRTP Act 1969The foreign exchange Regulator Act 1973
For
Consumers \
·
Dangerous
Drugs act 1930
·
Agricultural
Product Trademark and Grading Act 1937
·
Drugs
and cosmetics act 1940
·
Essential
commodities act 1955
·
Weight
and Measures Act 1958
·
Trade
and Merchandise Act 1958
·
Prevention
Food adulteration Act 1954
·
Consumer
Protection Act 1986
All these acts and many more
than listed above are in operation and it becomes difficult for the
businessperson to meet all these provisions. This makes the role of government
and regulator much more complex and challenging. The business major executive
needs a good working knowledge of major laws protecting competition, consumers,
and the larger interest of the society. Businessperson should also understand
the working of the political system because a political change means changes in
relationship between government and business. Some firms gain from the new
government while some others may suffer. There are two opinions whether or not
business should have relationship with politics. The traditional view was that
the businesspersons should not align
themselves with any political party. However, the modern view is that business
should actively participate and should affect policies in favour of business.
(5)
Social and Cultural Environments:
Business is an economic
activity and decision making by business firms is an economic process.
Nevertheless, it is also true there is an interaction between economic and
non-economic factors. We have already discussed that business environment is
quite complex with heterogeneous elements interacting with each other. Of all
the environments, Social and Cultural environment has the greatest impact.
Social environment may be described as the environment of the society as a
whole. Business must have a social purpose to enjoy social sanction. The host
of factors like social values, culture, beliefs, traditions and conventions,
social attitudes social institutions, class structure, pressure groups
altogether constitute social environment. There are three kinds of social
environments:
i.
changes
in our life styles and social values
ii.
major
social problems
iii.
growing
consumerism
Changes in our life style and
social values, such as attitude towards women employment- especially from house
wife to that of a working women; attitude towards education, skill, training
etc. emphasis on quality of goods than on quantity, preference for work or
leisure, change in taste, business ethics, business morality and organisational
culture come under this category.
Major social problems include
the externalities or social cost of business such as air, water, noise, atomic
pollution demand for safety, social welfare, child welfare, health care,
socially responsible marketing, frictional unemployment etc.
Growing consumerism indicating
consumer’s dissatisfaction on a larger scale with consumer awareness for unfair
trade practices is becoming increasingly important to the marketing decision
process.
The nature of social objectives
and priorities along with a set of social constraints give form and content to
several social movements. Business has attempted to fulfil its social role in
several ways, some accepted it voluntarily and some by compulsion through
legislation.
Cultural environment relates to
cultural forces. According to Taylor, “ That complex whole which includes
knowledge, belief, art, morels, law, custom, and other capabilities and habits
acquired by mass as member of society”. People grow-up under a particular
culture, in which a given society holds many beliefs and values. These have
high degree of persistence and are passed on from parents to children, and are
reinforced by society. These values are deep rooted. They change slowly. As is
said, “Traditions and values die hard.” For example, in India, the religious
traditions are deep rooted and every new act or work is undertaken only after
consulting priest or the astrologer and only after an offering to God has been
made. Successful businessperson will always show respect and belief in the
cultural environment and social value system of the area and the people.
(6) Technological Environment: Technology is a term that ignites passionate debates in many circles
these days. Technology has been instrumental for environmental destruction and cultural fragmentation. It has been the main cause to economic and social progress. Explosion
in information technology have made the position of some firms vulnerable. The
life cycle of the products has reduced and expectations of the consumers are becoming
higher and higher due to all these technological changes. But to cope up with
this kind of scenario, a continuous vigil of the happenings and adequate
investment on R & D department is to be earmarked by the marketer.
Marketers must also be aware of certain government regulations while developing
and launching new products with latest technological innovations.
Technological change is
fundamentally reshaping hoe companies and nations do business. The technique of
doing business has entirely changed after the internet access and mobile smart
phones. Information technology has reduced the world to an electronic village.
Technology includes inventions, innovations and affects the way the resources
of an economy are converted into outputs. Technology mainly influences the ways
of doing things that a man designs, produces and distributes or sells good and
services, managerial practices and organisational structure. The main factors
that affect competitiveness are:
a.
Domestic
economic strength: or overall macroeconomic environment
b.
Government-
the extent to which government policies promotes technologies for competitiveness.
c.
The
performance of capital markets and the quality of financial services.
d.
Infrastructure
the availability of best infrastructure affects technological growth.
e.
Availability
of scientific and technological work force i.e. the quality of human resources
available
In many industries, the
introduction of new technology has essential become a pre-condition for
remaining in business. The continuous introduction of technical innovations and
fast changing basic technology has increased the cost of new investment while
simultaneously reducing the expected life span of any innovation in production
of a new product.
Spectacular advances can easily
be witnessed in the field of technology. Many of today’s products were not available
even a decade ago. Markets are flooded with new products. Many multi-national
firms have channelled considerable resources into speeding up the innovations
with the idea of using rapid product change to keep their competitive
advantage. The combination of rising investment risks and shorter life span for
new products, have increased the risks of production. Businesspersons have to
keep themselves well informed and plan such strategies to meet the challenges
posed by the rapid changing technological environment.
The major technological changes
given by Koontz and O’Donnell in their book are as follows[1]:
(i)
Increased ability to master time and
distance for movement of freight and passengers, rail, roads, automobiles, and
trucks, airplanes space vehicles
(ii)
Increased ability to generate store,
transport and distribute energy, nuclear power and laser
(iii)
Increased
ability to design new materials and change the properties of others so that they better serve needs :
steel alloys, synthetic fibres plastic new drugs
(iv)
Mechanisation and automation of physical
processes
(v)
Mechanisation and automation of certain
mental processes: the computer
(vi)
Extension of Human ability to sense things
radar, microscope, etc
(vii)
Increased understanding of individual and
group behaviour and how to deal with it,
psychological bases of motivation group behaviour, patterns, improved
management techniques
(viii)
Increased
understanding of diseases and their treatment
Scientists are working for the
development of new technologies and spending enormous funds on R&D. The
revolutionary technological innovations and development during recent times
pose a major challenge for the third world countries. Major changes in
informatics, biotechnology, and materials are bringing about rapid
transformation in various industries with a rapid growth of informatics
involving close relationship between computer, telecommunication, and system
application. The area of new technical usage has emerged involving a variety of
microelectronics applications, these are being accompanied by bio-technological
developments in agricultural and health and use of new material such as
composites. These technological changes have brought about radical changes in
products and processes. It is essential that business firms utilise these
technologies to much greater extent than at present in most developing
countries. Some basic facts about technology should be kept in mind by all
business firms that: every new technology is a force for creative destruction.
The discovery of many new technologies creates long-term consequences that are
not always predictable. Technology is capital intensive and demand more and
more funds for R&D. Business firms should check harmful effects of
technology.
(7) International Environment:
The domestic environment of
every business firm in a country is also influenced by the relationships it has
with other countries in the form of membership of international organisations
such as IMF, World Bank, the “Bretton woods” institutions as are popularly
known, bilateral or multilateral trade agreements or strategic alliances, and
cultural ties. These relationships give rise to what is known s international
environment. Let us have a look at major treaties affecting international
environment.
Paris,
1818-19: A useful starting point
to survey such efforts is the Paris Peace Conference of 1818-19, which followed
World War- I Although its main purpose was to redraw political borders and
establish principles for avoiding a repeat of the War, establishing a framework
for restoring free trade and flow of capital was also on the agenda. These
initial efforts led to establishment of the League of Nations, but its power
was limited. The Failure may in a way responsible for unstable financial
relations among countries and economic depression[2].
London,
1933: Between the wars, the
most notable event was the World Monetary and Economic Conference held under
the auspicious of the League of Nations. As with the League of Nations, this
effort failed primarily because of a lack of support from the U.S. government.
Bretton
Woods, 1944: During World War II,
U.K. and U.S. Treasures initiated plans to overcome the weaknesses of the
piecemeal inter war approaches by establishing multilateral financial
institutions for the post war period. U.K. economist John Maynard Keynes and
Harry Dexter White of the United States prepared the first draft of the plans.
This became the basis for Bretton Woods Conference. United States along with
Delegations from 45 countries met in Bretton Woods in 1944. The planners of
Bretton Woods intended to create three multilateral institutions not two[3]. Established
in 1944 and named after the New Hampshire town where the agreements were drawn
up, the Bretton Woods system created an international basis for exchanging one
currency for another. It also led to the creation of the International Monetary
Fund (IMF) and the International Bank for Reconstruction and Development, now
known as the World Bank. The former was designed to monitor exchange rates and
lend reserve currencies to nations with trade deficits, the latter to provide
underdeveloped nations with needed capital. A proposed international trade
organisation proved to be too politically divisive, and so a decision on it was
postponed until after the war, with nearly fatal effect. As a fallback option,
a group of countries established the less potent General Agreement on Tariff and Trade (GATT) in
1948.It was not until 1994 that the World Trade Organisation came into being.
Following substantial pressures
on exchange rates in the 1960s and official termination of gold convertibility
of the U.S. dollar in 1971 it became apparent that a new monetary order was
needed. The major industrial countries agreed to create a Committee of 20, which later proposed that Goal of Exchange Rate
stability be abandoned. Thus, the era of fixed exchange rate ended.
The world experienced First Oil
Shock during 1973-74. The OECD
countries and IMF prepared a proposal to ease the BoP crisis of developing
countries. IMF established Oil facility that was borrowing from petroleum
exporting countries and lending on low conditionality terms to oil importing
countries both industrial and developing. The exchange rates instability during
first half of the 1980s led lenders to give a call for new Bretton woods.
The discussion above makes it
clear that international environment over past century evolved in response to
circumstances of the moment. The world leaders were however less interested in
long-term solutions. Each of the major attempts to revise the international
financial architecture came in response to a crisis. The international
environment never remains static and therefore no permanent institution can
avoid any crisis or provide off-hand solutions for future. The business firms
should keep a watch on the international environment closely. It should keep an
eye on the investment, saving, exchange rate, balance of payment export, import
and the inflation. Any neglect of these and other factors may endanger the very
survival of the business.
Interaction
between Environmental Factors
The economic and non-economic
factors of business environment exercise a strong influence with each other.
Business also has influences on these factors. Now, let us discuss haw
environmental factors interact with each other.
(1) Interaction between Natural Environment of
a country and Economic Environment of Business in that country: We have already discussed the state of
deteriorating natural or physical environment. The traditional view was that
natural environment has been a gift of nature available for human exploitation;
resources such as land, water, rainfall minerals were seen as gifts of nature.
These are to be used for betterment of human society. Now, we have seen too
much deterioration or depletion in the availability of natural resources and
the threats of over exploitation are known. A number of legislations have been
enacted in many countries to conserve natural resources and to conserve the
physical environment for future generations. The environmental legislation may
impose a constraint on the expansion of an existing business. On the other
hand, steps are being advocated for bringing about a balance between nature and
human activities. The expansion of plant, scale of output the organisation of
firms obviously important for economic development. Thus, in every
industrialised society business has social responsibility to conserve and save
resources for posterity. To the extent this social responsibility is not
discharged, laws relating to environmental protection will retard growth. It is
therefore need of the hour to meet environmental standards and grow safe.
(2)
Interaction between Historical Environment of business and Economic
Environment:
These two are interdependent.
The present (economic) environment of business can be treated as a legacy of
its past historical environment. Every business has a history, and every past
event has a lesson to teach. As a result, all present day problems can also be
handled in terms of experience. For example, the economic environment of
business in India is the outcome of the colonial rule, which it had for quite
long. The British Empire was interested in colonies so that it could easily get
required raw material for its industries and sale the finished products in
assured colonial markets. The colonies thus supplied raw material and consumed
the manufactured goods. History is storehouse of information and lessons; it
has guidelines for present economic decisions.
(3)
Interaction between social-cultural Environment and economic environment: The social attitude towards business and
management is a key factor that determines how many people will choose business
as an activity and to management as a career. If business has social reputation
as a respectable occupation, commerce and industry would develop rapidly and
professional managers will emerge to manage the modern business houses. On the
other hand, if there is conflict between labour and management, instead of
cooperation, a representative system is required to solve the industrial
unrest. Similarly, if the aim is to attain rapid growth the emphasis will be on
productivity growth and workers will be given more incentive to increase
productivity rather than profitability.
(4)
Interaction between Political-Legal Environment and Economic Environment: Political-Legal Environment and economic
environment have a direct relationship. In a situation of political stability
business will flourish and prosper and new enterprises w ill be forthcoming. In a stable
environment, business firms are willing to invest more and take more risks.
However, if there is political instability, business definitely suffers. In
uncertainty firms will not like to take-up new projects, money market
investments shrink, and profits dwindle. The political party in power decides
the pattern of economic legislation and state of economic environment decides
the continuity or discontinuity of a particular political rule. The political
ideology also changes with time for example during 1970s when congress party
was in power in centre they followed a path of socialism under the leadership
of Indira Gandhi . However, when in 1991 Narsinharao became the Prime Minister
they introduced liberalisation, privatisation, and globalisation and followed
the path of market economy. All the existing rules were changed accordingly
with the change in ideology of the party.
(5)
Educational- Cultural Environment:
The economic environment also interacts with cultural factors. In India,
traditions, customs, social values have largely moulded the attitudes and
beliefs of the people. Family traditions, which are mostly non-economic, play
an important part in shaping the institutions. Management is in the hands of
traditional heads of the family. The scenario is now changing with the spread
of education. People are receiving costly management education from business
schools of repute and this phenomenon is changing the traditional social values
and culture. Thus, the system of education may be responsible for the current
economic environment. The traditional thinking such as simple living and high
thinking is changing in favour of materialistic view of high consumption.
From the foregoing discussion, we have noted
that environment and business are inter-related. The environment is a complex
phenomenon. The term consists of several subsets e.g. economic, social,
cultural, political, legal, and technological. The business environment varies
from country to country and from time to time. The environment consists of all
economic institutions, the structure of economic system, government policies
and plans. Business is also influential in shaping the total environment in
which it works. Thus, there is a relationship of ‘give and take’ manner. To
conclude, we say business and environment are mutually dependent and that they
interact actively.
SUMMARY
Business environment can be classified into two major categories: the economic
environment and the non-economic environment. The economic environment consists
of factors like the fiscal policy, the monetary policy, the industrial policy,
the physical limits on output, the price and income equation, nature of the
economic system, the pace of the economic development, etc.
The non-economic environment refers to social, cultural and political, legal,
technological factors, etc. Despite this segregation, the economic environment has
economic implications.
Business environment refers
to all factors that have a direct or indirect bearing on the functioning of the
business. Every business firm encounters with a set of internet and external
factors. The internal environment consists of the factors which influence the various
strategies and decisions which happen within an organization’s boundaries.
These factors include human resources, company image, management structure,
physical assets, technological capabilities, marketing resources, and financial
factors. The external environment comprises of micro and macro environmental
factors.
Micro environments is just
and immediate environment of the firm which includes suppliers, consumers,
competitors, intermediaries and publics. These factors are generally regarded
as controllable factors because the organization commands control over these
factors and can modify or alter as per the requirements of the organization.
Macro environmental factors include demographic,
economic, political/legal, technological and social/cultural factors. In the
demographic environment, marketers must be aware of growth of population,
composition of age, educational levels and geographic shifts in population. In
the economic arena, they need to focus on per capita income, distribution of
income, saving pattern and credit availability etc. In the technological
factors, accelerating pace of technological changes, opportunities for
innovation and increased regulations of the government towards adopting
technology are the main concerns to be monitored. In the political/legal
factors, businessmen must work within the laws and regulations so as to protect
their as well as society’s interest. Finally, in the social/cultural environment,
marketers must understand the prevalent culture and its nature and must address
the needs of different subcultures within a society. A continuous and vibrant
monitoring of the environment is indispensable for business growth. The environment in which an organization exists
could be broadly divided into two parts: external and internal environment. We
began by aging an understanding of the concept of environment. This is done
through description of four important characteristics of the environment
leading its external and internal parts. We see how the external environment,
especially that part which is more relevant to an organization can be divided
into different components. For the purpose of understanding and analysis we
have discussed many components of the external environment - social, political,
economic, regulatory, market, supplier and technological. For each component we
have explained through appropriate illustrations, the type of factors and
influences which operate in that part of the environment.
Examination Questions:
1.
What do you mean by ‘Business
environment?’ Clearly explain the characteristics of business environment.
2.
Define Business Environment.
What is the need or importance of studying business environment?
3.
State the components of Micro and Macro Environment.
4.
Explain
in detail the present economic environment of business in India
5.
Write
a note on the Natural Environment in the country.
6.
Write
a short note on political and legal environment of business in India.
7.
Describe
the impact of environment on social and cultural values.
8.
What
is Cultural Environment? How does it affect business environment?
9.
Write
a note on the relationship between business and environment.
10.
“Firms which systematically
analyze and diagnose the environment are more effective than those which
don’t”. Elucidate.
11. Discuss how the demographic and
technological trend that could affect the future of the business.
12. Describe the various external factors that influence the business policy
of an organisation
13. Explain the various
internal factors that influence business policies.
******
[1]Koontz and
O’Donnell,(1970) “ Management: A System and Contingency Analysis of Managerial
Functions” p. 80
[3]ibid - pp45
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