Business Environment

CHAPTER 1

INTRODUCTION TO BUSINESS ENVIRONMENT

Chapter Outline :

• Introduction • Meaning of Business • Business Objectives • What is Business Environment ? • Nature of Business Environment • Components of Business Environment • Determinant of Business Environment • Review Questions • References
Introduction :

Business environment is becoming highly complex, unstable and unpredictable in the globalised economy of today. The environment is the result of changing social and economic and political forces which creates challenges, opens up new opportunities and affects the strength and weaknesses of various business segment. Business contributes to economic growth, creates employment opportunities and provide all kinds of goods and services which we need for our consumption. Business operates in a risky atmosphere because of the profit motivation. 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; or contributing to the economic growth of the country; the role of business is crucial. The economic policies, political conditions, natural & human unsources and influence the business activity. In this chapter we will explain how environment influences business and for that chapter focus on the following points:

• Meaning of Business • Business objectives • Meaning of Business Environment • Nature of Business Environment • Components of Business Environment • Determinants of Business Environment

Meaning of Business

In general business refer to all activities that are being organized and carried on with an important purpose, viz; earn profit by supplying goods and services to consumers to satisfy their felt needs. For our purpose this concept of business is too general and thus cannot be of great help in analyzing the role of environment in present day business activity. We shall, therefore, define business in modern concept. Modern business covers a complex field of industry and commerce which involve activities related to both production and distribution. These activities on the one hand satisfy society’s needs and desires and on the other hand brings profit to business firms. Business include activities connected with production, trade, transport, finance, banking, insurance, advertising, and certain other activities related to industry and commerce. For example a ball pen necessitates a long chain of activities involved in bringing raw materials to the factory and the end product from there to the market constitute a business.

Thus, we can say that *business firm or unit is an economic unit which is engaged in the production or distribution or both the production and distribution of goods and services for the purpose of earning profits.

* A business firm is an economic unit which is engaged in the production or distribution or both the production and distribution or both the production and distribution of goods and services for the purpose of earning profits
BUSINESS OBJECTIVES OR GOALS

Every business small or big in size have some objectives which it tires to fulfill while in operation. The business unit seeks to achieve more than one objective which may vary with the passage of time.
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1. Maximum Profit : Making profit is the primary goal of any business enterprise. All the efforts of a firm are directed towards the achievement of this object. A firm can earn maximum profits at the point where Marginal Cost (MC) and Marginal Revenue (MR) are equal. Marginal cost means the cost incurred on the production of an additional unit of a commodity. Marginal Revenue is the revenue received from the sale of such additional unit.

2. Maximise total sales revenue : Second most important object of a firm is to obtain maximum sales revenue. The attainment of this object does not mean to have the maximum sale in terms of physical quantity but it means to obtain the maximum amount of revenue at the point when its marginal revenue is zero. No firm will take to increase its sales beyond this point, because beyond this point, the firm will be suffering a loss.

3. Minimum Cost : Another important object of a business firm is to minimize the cost of production of producing goods and services to that these goods and services may be provided to the consumers at minimum possible price. To attain this object, the business firm makes continuous use of various techniques of cost central.

4. Establish long-run survival: Long-run survival is a prime object of all the business firms. For this purpose, every firm makes best efforts to provide best quality of goods and services to its consumers at reasonable prices. Some business firms change their marketing strategies and marketing approach from time to time so that they may maintain the demand of their products in the market.

5. Achieve Financial Soundness: No business firm can continue for long time if it is not financially sound. Banks and financial institutions stress upon financial soundness of the firms to grant them any sort of financial assistance. Therefore, every business firm takes due care and precaution in the use of funds of the firm.

6. Achieve Economics self-sufficiency: A business firm cannot be successful in achieving its objects if it depends only upon external sources for the programme of expansion and diversification. A firm should be self-dependent in economic affairs. If complete self-dependence is not possible, dependence on external financial sources should be minimum, for this purpose, all the business firms try to re-invest major part of their profits in their business.

7. Maximum welfare and employees satisfaction – Some business firms aims at providing maximum facilities to their employees so that they may get maximum job satisfaction and thief efficiency and ability may be increased. Such firms spend huge amount on the welfare of their employees. The facilities of proper working conditions, canteen, education, training, incentive wage system, bonus etc., are provided to the employees. This is an important object and very helpful in the achievement of pre-determined objectives of the firm because if the employees of a firm are satisfied they will contribute their best efforts to achieve the objectives of the firm.

8. Dominate the whole market: Some business firms have an object of dominating the whole market. Such firms provide goods and services to consumers at the lowest possible price. They provide best after-sale-services to the consumers. Such firms also aim at selling product to the maximum number of customers so that they can capture the market and establish their business empire.

9. Service to society: Business is a part of society and has several obligations towards it. Some of them are :

• Providing employment • Offer of better quality of life • Contributing to the economic growth of the country

This is the economic growth of the country beyond earning profit. It is an important institution in society. Te role of business is crucial.

WHAT IS BUSINESS ENVIRONMENT ?

Business Environment is a relationship between a business’s actions and its environment. Environment is the surroundings of a business by which business influenced directly or indirectly. Where the political, economic, social and technological factors shopping a business environment are assessed by a business so as to devise future strategy.

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Political/legal factors – Business will be directly affected by the actions of government and other political events. These might be major events affecting the whole of the business community, such as a change of government. Similarly businesses will be affected by the legal framework in which they operate. Example include the laws preventing collusion between firms to keep prices up.

Economic factors – Economic factors which have an economic impact on business. Industrial production, agriculture, planning, basic economic philosophy, infrastructure, national income, per capital income, money supply, price level, population, savings, stages in the economic development and trade cycles are major factors which make up the total economic environment. There is close relationship between business and its economic environment.

Social/cultural factors – This aspect of the business environment concerns social attitudes and values. These includes attitudes towards working conditions and the length of the working day, equal opportunities for different groups of people, the nature and purity of products, the use and abuse of animals, role of family. The social/cultural environment is highly relevant for a business unit as the variety of goods it produces, the type of employees it gets and its obligation to society depend on the cultural atmosphere in which the firm operates.

Technological factors – The pace of technological change had quickened. This has had a huge impact not only on how firms produce products. The information technology revaluation is also enabling much more rapid communication and making it possible for many workers to do their job from home or while traveling.

The division of the factors affecting a firm into political, economic, social and technological analysis and is widely used by business enterprise to audit their environment and to help them establish a strategic approach to their business activities.

We must also be aware of the fact that the business environment is constantly changing. To be successful, a business will need to adapt to these changes and, wherever possible, take advantage of them. Ultimately, the better business manages understand the environment in which they operate.

NATURE OF BUSINESS ENVIRONMENT

Everyday a number of decisions re made by us as individual or entrepreneurs. But all decisions relate to Business nature.

Risk and uncertainty – Business firm works under risk and uncertainty, risk depends upon possibility and uncertainty is unmeasurable risk. Every business have profit risk, investment risk and product risk. And every business works under demand uncertainty, production uncertainty, profit uncertainty, price and cost uncertainty and also environmental uncertainty.

Profit Maximisation – Profit is the main incentive, motivator, strong sustainer, objective indicator. The main aim of business is profit maximization and cost minimization, price is a growth of business.

Competition – Today business nature is a became more competitive. Competition in price, good quality, satisfaction on consumer, first server in the market etc. competition in business protect to consumer. It provides best quality product at reasonable rate.

Technology oriented – The rapid technological change has become a pre-condition for the survival f a company. Presently, technology orientation is quite strong in electronics, telecommunications, pharmaceutical, fine chemical and processing industries. In fact, companies wanting to build their future now here no choice but to engage in research and development (R & D) function.

Change – The business has invented the strategy of making changes in product quality, design or packaging. This strategy of offering differentiated products has been found quite effective to maintain its identity in the market. So according to time, changes must be there. For example colour televisions have replaced black and white televisions.

COMPONENTS OF BUSINESS ENVIRONMENT

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I) Internal Environment

Business is normally under-taken for profit maximization. The internal factors are generally regarded as controllable factors because the company has control over these because the company has central 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 spirit of the internal environment of a firm is derived from its mission that states as to why and for whom does it exist. This provides the basic purpose of a firm’s existence and operations. Top management of the firm executes the mission through a strategy which is based mission through a strategy which is based on thorough planning in terms of clearly identified objectives to be achieved over a period of time. The entire process takes place within the framework of a value system and corporate culture and the persons occupying different line and staff positions here to fit themselves into the value and culture framework. These factors establish the broad internal environment within which different departments of the firm operate in an interrelated manner.

Determinants of internal environment

• Mission and vision of the organization • Management philosophy and strategy • Industrial relations • Corporate culture and values • Line and staff relations • Governance standards and codes • Quality central system • Team spirit among employees • Work culture and socio-economic background of employees • Job design and coordination • Quality of internal communication • Compensation system and career progression of employees • Central system of the organization

II) External Environment

External environment of business consist of institutions, organizations and forces operating outside the Company. All these individually as well as collectively exercise their influence on the latter. Broadly external environment of business may be classified into (A) Micro Environment and (B) Macro Environment.

The micro environment refers to such players whose decisions and action have a direct bearing on the Company. Since modern business broadly has two aspects, viz., production and selling of goods, the micro environment of business can be divided accordingly.

The most prominent performs in the micro environment are the following:

• Suppliers of inputs • Workers and their unions • Customers • Market intermediaries • Competitors • Public

Input suppliers and workers together with their unions exercise influence on production-customers, market intermediaries and competitors affect sales operations of the business firm. The public may influence both production and sales.

A. Micro Environment

From the point of view of a Company’s business operations micro environment has great relevance. Usually the players in micro environment do not affect all the companies in an industry in the same way. Their decisions and actions vis-à-vis individual company often differ in accordance with the size, capability and strategies of each Company. For example suppliers of inputs are normally more accommodating if the Company is large. However, they may not give the same concessions to relatively small companies.

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B. Macro Environment

Macro Environment of a company refers to all those economic and non economic factors which exercise their influence on the business activity in general and thus determine opportunities that a company may have to promote its business.

The role of macro environment from the point view of the business may be both positive and negative. This implies that the larger forces in the company’s environment to not always provide wider space for business operations.

Macro environment of business can be broadly classified into economic environment and non –economic environment. Since business is broadly divided on economic activity, economic environment of business- both national and global of strategic importance. In economic environment of the country, country’s economic system, macro-economic scenario, phase of business cycle through which the economy is passing, organization of the financial system and economic polices of the government are the most important elements.

Economic system of the country determines the parameters of the business activity. Macro-economic scenario refers to price situation, levels of saving and investment, fiscal, monetary and balance of payments situations and overall growth activity. These factors broadly determine the prospects of business activity. In a recessionary situation business firms encounter steep fall in effective demand which inevitably leads to business slow down. Developed financial system is now a precondition for efficient mobilization of financial resources for business. Economic policies of the govt., particularly the Industrial, trade, fiscal and monetary policies shape the opportunities for business. However, at times, these policies are used by the governments to regulate the operations of business firms.

Now because of liberalization from the point of view of the Company’s business, global economic environment is as much important as the national economic environment. The notable features of present day global environment are globalization, underdevelopment of Russia and East Europe, recession in Japanese economy, slow recovery in the USA, Regional Economic Groupings, protectionism, global slowdown and dominance of the multinational corporations.

Business, despite the fact that it is an economic activity, is also influenced by its non-economic environment political system, ideology of the government, legal framework, social system, cultural values, demographic factors, level of technological development and natural and physical environment of the country constitute non-economic environment of business. In fact, all these non-economic elements are of great relevance to present day business. These factors not only determine opportunities for business but also, at times, have serious constraining effects. [pic]

Macro Environment of Business

DETERMINANTS OF BUSINESS ENVIRONMENT

I. Economic policies : II. Political Conditions : III. Resources 1) Industrial Policy 1) Political Stability 1) Natural resources 2) Trade Policy 2) Corruption rule of law 2) Human resources 3) Monetary Policy and governance including 4) Fiscal Policy business law and regulations

I. ECONOMIC POLICIES :-

Industrial Policy : Among various economic activities, industrial activity is more directly related to business. In fact, the present day corporate business has grown as an extension of industrial activity. Therefore, for analyzing economic environment of business, industrial policy of the government has to be created examined.

The new Industrial Policy of 1991 has de-regulated the industrial economy in a substantial manner. It has abolished all industrial licensing except for certain industries related to strategic and social concerns. The number of industries reserved for the public sector has been reduced to 3 which implies that the public sector’s role in future would be very much diminished. On the recommendations of the Raghavan Committee the government has decided to replace the MRTP Act by a new competition law. The new industrial policy has also liberalized import of foreign capital and technology. In the case of high investment priority industries, approval of foreign investment is automatic. Guidelines have also been announced for the expeditious approval of foreign direct investment in other industries.

Trade Policy : Trade policy is an important factor in the economic environment of business. The basic objectives of trade policy are to promote exports, regulate imports, improve terms of trade, enhance export competitiveness and create conditions of export-led growth. Export promotion is generally attempted through international market research support, credit facilities, infrastructure facilities, fiscal concessions and incentives to exporters, information services, international trade fairs and exhibitions, import entitlements, foreign exchange facilities, transportation priorities and procedural simplification. Import regulation is monitored through a structure of tariff rates, quotas, anti-dumping and counter vailing duties and product quality and safety norms. The policy is substantially conditioned by WTO agreements and commitments and unilateral and multilateral trade relations.

Monetary Policy : By monetary policy we mean the regulation of the money supply and the control of the cost and availability of credit by the central bank of the country through the use of deliberate and discretionary action for achieving the objectives of general economic policy.

The main objectives of monetary policy are:

1. Maximum feasible output 2. High rate of economic growth 3. Fuller employment 4. Price stability 5. Greater equality in the distribution of income and wealth 6. Healthy balance of payments

Instruments of monetary policy are the following:

1) Open market operations; 2) Bank rate policy; 3) Reserve requirement charges; and 4) Selective credit controls

Fiscal Policy : This policy refers to the process of shaping taxation and public expenditure in order to dampen the swings of the business cycle and the contribute to rapid economic growth with high employment and stable prices. This policy when mismanaged leads to fiscal imbalances which at times become unsustainable. At present India’s fiscal situation is most unsatisfactory.

II Political Conditions

Firms will be directly affected by the actions of government and other political events. The kind of political environment is conducive to business activity. Besides, the factor of political stability is important. In Countries like Afganistan and Iraq, business activity has suffered a lot due to political stability. Political system in India is far more stable than in these countries. In India, due to criminalization of politics in certain states, the business activity relatively unsafe in them.

Production in a market economy take place in a wide variety of business organizations. However, the bulk of economic activity in the industrial sector takes place in corporations which are set up under the provisions of the Company Law. The Contract Act provides the rule for systematic exchange transactions. The country had legislations like the Monopolies and Restrictive Trade Practices Act (MRTP Act) and the Foreign Exchange Regulation Act (FERA). Both were restrictive in nature. The industries Act passed in 1951 aimed at both the development and regulation of industries in private sector. The SEBI Act now empowers SEBI to regulate the securities market. It is thus clear that even in a market economy like ours the modern corporate business is not entirely free. Its activities are governed by various legislations which may be either facilitatory or restrictive in their nature.

III. Resources

The framework of business environment of a country is set by the economic system, resource base and structural problems faced by it. The economic system is generally ordained by the constitution of the country or the deliberate choice of the successive governments. The geographical and natural resources are the gifts of nature.

Natural resources covering available land, forests, minerals, fuels, rivers and water bodies and environment quality are a major determinant of a country’s potential output. These are the gifts or endowments of nature. The availability of natural resources by itself does not guarantee growth; it is their utilization by other factors of production like labour and capital that leads to growth. Availability and use of natural resources has had a great impact on the growth of such countries as Canada, USA, Norway and Australia. Countries like Japan, which have deficient or little natural resources, have to spend heavily on the import of necessary raw materials or make foreign investment for their economic growth.

Human resources refer collectively to the quantum and quality of the workforce and are among the key determinants of economic growth. The number of people in the work force directly depends on the population size and structure as well on the flows of migration and immigration. The quality of human resources depends upon education, training, skills, attitudes towards work, desire for self-improvement and even cultural outlook and is reflected in its efficiency and productivity. Productivity of human resources further depends upon the organizational culture and system, managerial effectiveness, motivation and the overall work environment.

REVIEW QUESTIONS

1. What are business objectives? 2. “Profit making is the primary goal of any business enterprise”. Yes or No – Discuss 3. What is business environment? 4. Discuss the nature and dynamism of business environment 5. Explain Micro and Macro Environment. And discuss what are the factors included in both Environment 6. What are the economic policies which determine the business environment?

References

1. Arthur A. Thompson and A. J. Strickland, Strategic Management, Tata McGraw-Hill, 2003, P-34 2. The Economic Times, Nov 5, 2004 3. Samuelson, P. A. and William D. Nordhaus (1998), Economics, New Delhi: Tata McGraw-Hill 4. Carrol, Archine B. (1996), Business and society, Cincinnati, OH : South-Western College Publishing. 5. Francis Cherunilam, Global Economy and Business Environment, Himalaya Publishing House. 6. Government of India (2004), Economic Survey, 2003-2004 (New Delhi, Govt. of India)

References: 1. Arthur A. Thompson and A. J. Strickland, Strategic Management, Tata McGraw-Hill, 2003, P-34 2. The Economic Times, Nov 5, 2004 3. Samuelson, P. A. and William D. Nordhaus (1998), Economics, New Delhi: Tata McGraw-Hill 4. Carrol, Archine B. (1996), Business and society, Cincinnati, OH : South-Western College Publishing. 5. Francis Cherunilam, Global Economy and Business Environment, Himalaya Publishing House. 6. Government of India (2004), Economic Survey, 2003-2004 (New Delhi, Govt. of India)