Description
Internal and External Business Environment...
Objective :
After studying this lesson, you will be able to:
• explain the meaning of business environment;
• identify the features of business environment;
• describe the importance and types of business environment;
• describe the recent developments in Indian Economy that have greatly influenced the
working of business units in India;
• explain the concept of social responsibility of business;
• state the social responsibility of business towards different interest groups; and
1 MEANING OF BUSINESS ENVIRONMENT
As stated earlier, the success of every business depends on adapting itself to the environment
within which it functions. For example, when there is a change in the government polices,
the business has to make the necessary changes to adapt itself to the new policies. Similarly,
a change in the technology may render the existing products obsolete, as we have seen
that the introduction of computer has replaced the typewriters; the colour television has
made the black and white television out of fashion. Again a change in the fashion or
customers‘ taste may shift the demand in the market for a particular product, e.g., the
demand for jeans reduced the sale of other traditional wear. All these aspects are external
factors that are beyond the control of the business. So the business units must have to
adapt themselves to these changes in order to survive and succeed in business. Hence, it
is very necessary to have a clear understanding of the concept of business environment
and the nature of its various components.
The term ?business environment‘ connotes external forces, factors and institutions that are
beyond the control of the business and they affect the functioning of a business enterprise.
These include customers, competitors, suppliers, government, and the social, political,
legal and technological factors etc. While some of these factors or forces may have direct
influence over the business firm, others may operate indirectly. Thus, business environment
may be defined as the total surroundings, which have a direct or indirect bearing on the
functioning of business. It may also be defined as the set of external factors, such as
economic factors, social factors, political and legal factors, demographic factors, technical
factors etc., which are uncontrollable in nature and affects the business decisions of a firm.
Definitions of Business Environment
The term ?business environment‘ connotes external forces, factors and institutions that
are beyond the control of the business and they affect the functioning of a business
enterprise. These include customers, competitors, suppliers, government, and the social,
political, legal and technological factors etc. While some of these factors or forces may have
direct influence over the business firm, others may operate indirectly. Thus, business
environment may be defined as the total surroundings, which have a direct or indirect bearing
on the functioning of business. It may also be defined as the set of external factors, such
as economic factors, social factors, political and legal factors, demographic factors,
technical factors etc., which are uncontrollable in nature and affects the business decisions of
a firm.
? Business Environment has been defined by Bayard O. Wheeler as ?the total of all things
external to firms and industries which affect their organization and operation?.
? According to Arthur M. Weimer, business environment encompasses the ?climate‘ or set
of conditions, economic, social, political or institutional in which business operations are
conducted.
? According to 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 the sectors are socio-economic, technological, supplier,
competitors, and government.?
? According to Barry M. Richman and Melvgn Copen ?Environment consists of factors that
are largely if not totally, external and beyond the control of individual industrial
enterprise and their managements. These are essentially the ?givers‘ within which firms
and their management must operate in a specific country and they vary, often greatly,
from country to country?.
From the above definitions we can extract that business environment consists of factors that
are internal and external which poses threats to a firm or these provide opportunities for
exploitation.
Concept of Business Environment
A business firm is an open system. It gets resources from the environment and supplies its
goods and services to the environment. There are different levels of environmental forces.
Some are close and internal forces whereas others are external forces. External forces may be
related to national level, regional level or international level. These environmental forces
provide opportunities or threats to the business community. Every business organization tries
to grasp the available opportunities and face the threats that emerge from the business
environment. Business organizations cannot change the external environment but they just
react. They change their internal business components (internal environment) to grasp the
external opportunities and face the external environmental threats. It is, therefore, very
important to analyze business environment to survive and to get success for a business in its
industry. It is, therefore, a vital role of managers to analyze business environment so that they
could pursue effective business strategy. A business firm gets human resources, capital,
technology, information, energy, and raw materials from society. It follows government rules
and regulations, social norms and cultural values, regional treaty and global alignment,
economic rules and tax policies of the government. Thus, a business organization is a
dynamic entity because it operates in a dynamic business environment.
3.1.1 FEATURES OF BUSINESS ENVIRONMENT
On the basis of the above discussion the features of business environment can be
summarised as follows.
(a) Business environment is the sum total of all factors external to the business firm and
that greatly influence their functioning.
(b) It covers factors and forces like customers, competitors, suppliers, government, and
the social, cultural, political, technological and legal conditions.
(c) The business environment is dynamic in nature, that means, it keeps on changing.
(d) The changes in business environment are unpredictable. It is very difficult to predict
the exact nature of future happenings and the changes in economic and social
environment. .
(e) Business Environment differs from place to place, region to region and country to
country. Political conditions in India differ from those in Pakistan. Taste and values
cherished by people in India and China vary considerably.
3.1.2 IMPORTANCE OF BUSINESS ENVIRONMENT
There is a close and continuous interaction between the business and its environment. This
interaction helps in strengthening the business firm and using its resources more effectively.
As stated above, the business environment is multifaceted, complex, and dynamic in nature
and has a far-reaching impact on the survival and growth of the business. To be more
specific, proper understanding of the social, political, legal and economic environment
helps the business in the following ways:
(a) Determining Opportunities and Threats: The interaction between the business
and its environment would identify opportunities for and threats to the business. It
helps the business enterprises for meeting the challenges successfully.
(b) Giving Direction for Growth: The interaction with the environment leads to opening
up new frontiers of growth for the business firms. It enables the business to identify the
areas for growth and expansion of their activities.
(c) Continuous Learning: Environmental analysis makes the task of managers easier in
dealing with business challenges. The managers are motivated to continuously update
their knowledge, understanding and skills to meet the predicted changes in realm of
business.
(d) Image Building: Environmental understanding helps the business organisations in
improving their image by showing their sensitivity to the environment within which they
are working. For example, in view of the shortage of power, many companies have
set up Captive Power Plants (CPP) in their factories to meet their own requirement of
power.
(e) Meeting Competition: It helps the firms to analyse the competitors‘ strategies and
formulate their own strategies accordingly.
(f) Identifying Firm‘s Strength and Weakness: Business environment helps to identify
the individual strengths and weaknesses in view of the technological and global
developments.
TYPES OF BUSINESS ENVIRONMENT
Confining business environment to uncontrollable external factors, it may be classified as
(a) Economic environment; and (b) Non-economic environment. The economic environment
includes economic conditions, economic policies and economic system of the country.
Non-economic environment comprises social, political, legal, technological, demographic
and natural environment. All these have a bearing on the strategies adopted by the firms
and any change in these areas is likely to have a far-reaching impact on their operations.
Let us have a brief idea about each of these areas of business environment.
1 ECONOMIC ENVIRONMENT
The survival and success of each and every business enterprise depend fully on its economic
environment. The main factors that affect the economic environment are:
(a) Economic Conditions: The economic conditions of a nation refer to a set of economic
factors that have great influence on business organisations and their operations. These
include gross domestic product, per capita income, markets for goods and services,
availability of capital, foreign exchange reserve, growth of foreign trade, strength of
capital market etc. All these help in improving the pace of economic growth.
(b) Economic Policies: All business activities and operations are directly influenced by
the economic policies framed by the government from time to time. Some of the
important economic policies are:
(i) Industrial policy
(ii) Fiscal policy
(iii) Monetary policy
(iv) Foreign investment policy
(v) Export –Import policy (Exim policy)
The government keeps on changing these policies from time to time in view of the
developments taking place in the economic scenario, political expediency and the
changing requirement. Every business firm has to function strictly within the policy
framework and respond to the changes therein.
Important of Economic Policies
(i) Industrial policy: The Industrial policy of the government covers
all those principles, policies, rules, regulations and procedures,
which direct and control the industrial enterprises of the country
and shape the pattern of industrial development.
(ii) Fiscal policy: It includes government policy in respect of public
expenditure, taxation and public debt.
(iii) Monetary policy: It includes all those activities and interventions
that aim at smooth supply of credit to the business and a boost
to trade and industry.
(iv) Foreign investment policy: This policy aims at regulating the
inflow of foreign investment in various sectors for speeding up
industrial development and take advantage of the modern
technology.
(v) Export–Import policy (Exim policy): It aims at increasing exports
and bridge the gap between expert and import. Through this
policy, the government announces various duties/levies. The
focus now-a-days lies on removing barriers and controls and
lowering the custom duties.
(c) Economic System: The world economy is primarily governed by three types of
economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed
economy. India has adopted the mixed economy system which implies co-existence
of public sector and private sector.
NON-ECONOMIC ENVIRONMENT
The various elements of non-economic environment are as follow:
(a) Social Environment
The social environment of business includes social factors like customs, traditions, values,
beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a
society cherishes have a considerable influence on the functioning of business firms. For
example, during festive seasons there is an increase in the demand for new clothes, sweets,
fruits, flower, etc. Due to increase in literacy rate the consumers are becoming more
conscious of the quality of the products. Due to change in family composition, more nuclear
families with single child concepts have come up. This increases the demand for the different
types of household goods. It may be noted that the consumption patterns, the dressing
and living styles of people belonging to different social structures and culture vary
significantly
(b) Political Environment
This includes the political system, the government policies and attitude towards the business
community and the unionism. All these aspects have a bearing on the strategies adopted
by the business firms. The stability of the government also influences business and related
activities to a great extent. It sends a signal of strength, confidence to various interest
groups and investors. Further, ideology of the political party also influences the business
organisation and its operations. You may be aware that Coca-Cola, a cold drink widely
used even now, had to wind up operations in India in late seventies. Again the trade union
activities also influence the operation of business enterprises. Most of the labour unions in
India are affiliated to various political parties. Strikes, lockouts and labour disputes etc.
also adversely affect the business operations. However, with the competitive business
environment, trade unions are now showing great maturity and started contributing positively
to the success of the business organisation and its operations through workers participation
in management.
(c) Legal Environment
This refers to set of laws, regulations, which influence the business organisations and their
operations. Every business organisation has to obey, and work within the framework of
the law. The important legislations that concern the business enterprises include:
(i) Companies Act, 1956
(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954
(viii) Essential Commodities Act, 2002
(ix) The Standards of Weights and Measures Act, 1956
(x) Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade Marks Act, 1999
(xii) Bureau of Indian Standards Act, 1986
(xiii) Consumer Protection Act, 1986
(xiv) Environment Protection Act
(xv) Competition Act, 2002
Besides, the above legislations, the following are also form part of the legal environment of
business.
(i) Provisions of the Constitution: The provisions of the Articles of the Indian
Constitution, particularly directive principles, rights and duties of citizens, legislative
powers of the central and state government also influence the operation of business
enterprises.
(ii) Judicial Decisions: The judiciary has to ensure that the legislature and the government
function in the interest of the public and act within the boundaries of the constitution.
The various judgments given by the court in different matters relating to trade and
industry also influence the business activities.
(d) Technological Environment
Technological environment include the methods, techniques and approaches adopted for
production of goods and services and its distribution. The varying technological environments
of different countries affect the designing of products. For example, in USA and many
other countries electrical appliances are designed for 110 volts. But when these are made
for India, they have to be of 220 volts. In the modern competitive age, the pace of
technological changes is very fast. Hence, in order to survive and grow in the market, a
business has to adopt the technological changes from time to time. It may be noted that
scientific research for improvement and innovation in products and services is a regular
activity in most of the big industrial organisations. Now a days infact, no firm can afford to
persist with the outdated technologies.
(e) Demographic Environment
This refers to the size, density, distribution and growth rate of population. All these factors
have a direct bearing on the demand for various goods and services. For example a
country where population rate is high and children constitute a large section of population,
then there is more demand for baby products. Similarly the demand of the people of cities
and towns are different than the people of rural areas. The high rise of population indicates
the easy availability of labour. These encourage the business enterprises to use labour
intensive techniques of production. Moreover, availability of skill labour in certain areas
motivates the firms to set up their units in such area. For example, the business units from
America, Canada, Australia, Germany, UK, are coming to India due to easy availability of
skilled manpower. Thus, a firm that keeps a watch on the changes on the demographic
front and reads them accurately will find opportunities knocking at its doorsteps.
(f) Natural Environment
The natural environment includes geographical and ecological factors that influence the
business operations. These factors include the availability of natural resources, weather
and climatic condition, location aspect, topographical factors, etc. Business is greatly
influenced by the nature of natural environment. For example, sugar factories are set up
only at those places where sugarcane can be grown. It is always considered better to
establish manufacturing unit near the sources of input. Further, government‘s policies to
maintain ecological balance, conservation of natural resources etc
Factor effecting business environment
Business establishes, grows or operates and dies in environment. It exchanges resources environment.
It collects inputs i.e. Man money, materials, machines etc. And provides output i.e. Goods and
services in the environment. Environment means surrounding. Business environment defines as a
force that affects on organizational performance. It includes internal an eternal factors. It provides
opportunities and threats and it also see the streangs and weakness of the business
1. Internal environment
It is defined as all the forces or conditions that are available within an environment that affects on
organization and business. It is also known as controllable factors because business can control them.
It includes
1. Organisation Culture
Organisational culture is most important in recruiting and retaining volunteers. If the organisation
culture is generally negative, it becomes most difficult to interest people to offer themselves for
committee or other voluntary positions. Culture is a system of shared values and beliefs about what is
important, what behaviours are appropriate and how the people in the organisation relate to one
another.
Culture gives organisations a sense of direction. It is persuasive and tends to have an affect on
everyone in the organisation. A positive culture energises people and stimulates organisation growth
and development. A negative culture drains energy and causes organisations to 'implode'.
Level of Trust
Trust is a very important aspect of organisation culture. The level of trust within an organisation has
direct consequences on the recruitment and retention of volunteers.
Trust is about believing in the honesty and integrity of others. In an environment where there is trust,
people are generally satisfied that volunteers work for the good of the organisation as a whole, rather
than serving their own self-interest. In an environment of trust there is more likelihood of that the
membership will:
? Appreciate and respect volunteers
? Contribute time, effort, money and ideas to the organisation
? Respect decisions made by volunteers, even if made in error
In contrast, culture of mistrust leads to:
? People not volunteering for fear of being exploited
? People criticizing volunteers
? Unpleasantness and conflict between general membership and volunteers
? Loss of volunteers resulting in failure to achieve organisational goals
Strategies for improving trust
Good positive leadership is a main factor in developing organisation culture. Good leadership will
enable:
? Getting people together in planning meetings to work out their shared hopes for the
organisation.
? Coaching and mentoring volunteers to work together as a team and to support one
another.
? Organising social events for volunteers to develop friendships and bonding.
2. Human Resource
The knowledge, experience and capability of an organisation's workforce is a determining factor of
success. For this reason, organisations pay particular attention to the recruitment of staff and also to
engage in the training of staff and volunteers to build the organisation's capability. In pursuing both
recruitment and training strategies, an organisation is often limited by its financial strength.
Nevertheless, training of staff is an essential aspect of good business management, and even in
difficult financial circumstances is an achievable strategy
Internal policies and procedures impact HR activities. For example, if the company is committed to
promoting from within, HR must ensure employees receive appropriate training and development to
be ready for promotion when the time comes. HR should monitor the number of employees eligible
for retirement and ensure potential replacements or other staff members are trained to avoid a sudden
departure of business knowledge. If the company is unionized, HR must engage in collective
bargaining with the union on matters of representation. External influences, political factors and
organizational culture all influence the amount of grievances and complaints HR must respond to.
3. Organisation structure
An organisation's structure is the manner in which the workforce of the organisation is organised into
specific job roles and responsibilities to undertake work to accomplish the organisation's mission.
Another way of looking at organisation structure is to think about the total of work that is done by the
organisation and then to envisage that this work must be divided up among the workforce in some
manner. One common method by which the total of work is divided up is according to business
function. In a manufacturing company, for example, business functions might include Production,
Marketing, Sales, Administration, Maintenance, Human Resources, etc. Then people are employed at
various levels to ensure each function is carried out.
There are multiple ways an organisation can be structured to accomplish its mission. Factors to
consider in developing an organisation structure include: type of organisation (profit business or non-
profit organisation), scale of operations (large, medium or small), key business functions and
business philosophy.
It is located inside the organization. The arrangement of various facilities, pattern of relationships
among the various department, responsibility, authority and communication is the organization
structure. It also included specialization and span of control.
4. Management
The capability of the management team and the leadership styles employed by managers will also
have a major impact on the morale of staff (and volunteers in a non-profit organisation) and
organisation culture. More contemporary forms of management involve workers in decision making
processes and trusting that, although managers and workers have different viewpoints, they largely
benefit by working together to achieve the business objectives.
Teamwork
One way in which the social environment affects the workplace is in the way that it either inspires or
discourages employee cooperation. In businesses with a positive social environment where employees
get along and are generally positive in their relationship to one another, cooperation and teamwork are
more likely to exist than in a negative social environment. Negative social environments will
generally foster dissent and strife among workers and destroy the ability or willingness of employees
to work together.
Job Satisfaction
The social environment of the workplace can also have an effect on an employee's job satisfaction. In
businesses where employees experience a positive social environment, they are more likely to have a
greater sense of job satisfaction and enjoyment. In a job environment where negativity is the norm and
employees are constantly in conflict with one another, workers are more likely to dread work and not
have a positive assessment of their employer.
Leadership
A positive and nurturing social environment for workers is one that can engender positive change
within the workplace. It can also lead to the creation of leaders within the business itself. Businesses
that constantly emphasize positive reinforcement, self-improvement and education of employees are
likely to cultivate leaders from within the organization. Some may go on to pursue positions of
leadership within the company or industry, while others may simply assume a lesser leadership role
within their current occupation.
5. Shareholder
As organisations require investment to grow, they may decide to raise money by floating on the stock
market i.e. move from private to public ownership. The introduction of public shareholders brings
new pressures as public shareholders want a return from the money they have invested in the
company. Shareholder pressure to increase profits will affect organisational strategy. Relationships
with shareholders need to be managed carefully as rapid short term increases in profit could
detrimentally affect the long term success of the business.
Management deals with many shareholders. Shareholders have the right of ownership, power
of management and voting right. The actual management of organization is carried out by
elected representative of shareholders jointly known as boar of directors. Boards of directors
have the responsibility of overseeing the management of organization. It plays the major role
in formation of objectives, policies, strategies of the organization as well as their
implementation.
2. External environment factors
All the forces and condition that cannot be controlled by the business is called external environment. .
It is also known as uncontrollable factors because business can‘t control them. It is located outside the
business. It affects on organizational performance.
External environment factors
1. Political factors
All business firms are directly affected to a greater or lesser degree by the government and its
programmes. Political forces will decide the nature of business, programmes and projects to be
undertaken for the development of the country. , political factors include areas such as tax policy,
labour law, environmental law, trade restrictions, tariffs, and political stability. Political factors may
also include goods and services which the government wants to provide or be provided (merit goods)
and those that the government does not want to be provided (demerit goods or merit bads).
Furthermore, governments have great influence on the health, education, and infrastructure of a
nation.
These political forces can be classified as long term forces, quick changes, cyclical changes and
regional factors.
Long term forces denote the secular trends in business activities due to the political conditions
prevailing and the adoption of a particular line of policy in business.
Quick Changes consist of sudden political changes due to army coup or revolt or capturing of the
government machinery by the dissident group. The quick change may also be the result of
proclamation of ?emergency‘ or ?Martial Law‘ due to sudden outbreak of war with a belligerent
nation. In all these cases, the business manager has to take quick decisions to adopt his business to the
changed environment.
Cyclical Changes denote periodical anticipated changes like ‘General Election‘ which may change the
government and consequent change in plans and programmes as well as priorities by the new
Government.
Regional Factors the regional consideration may dominate the political scene. Development of
agricultural or development of an industrially backward region may draw the attention of politicians
and government. Consequently, special legislations or policies will be framed to help the backward
regions or sector. In such changes, the business has to adopt itself by studying and estimating the risks
and dangers involved in taking decisions.
2. Economic factors
The business enterprise is affected by various economic forces which cannot be controlled by the
business. These economic forces, can be divided into two categories, ie. Demand Force and
Competitive Force. For a business firm to survive and thrive, it should have adequate demand for its
products. At the same time, the firm has to complete with the rival firm producing similar products or
substitute products.
Economic forces affecting demand:
For customers to buy the commodity of the firm, they should have the ability to buy and willingness
to buy. The ability to buy a commodity depends on the income of the customer, to be very precise, the
disposable income of the customer. Out of the total income, the individual has to pay taxes due to the
government and the disposable income will be less if the taxes are high. Secondly, if the individual
wants to save more, the amount for spending will be less. Thus, the ability to buy a commodity
depends on the a) Total income earned out of the employment of the individual b) The taxes of the
government and c) The savings of the individual.
An increase in tax will reduce the demand for the commodity. The attitude of the individual towards
?Saving‘ will affect the demand. A change in ?Price‘ of the commodity will affect the demand.
Expectation of a further change in price or change in taxes will also affect the demand.
Competitive forces: The competitive tools are price cutting, advertisement, product differentiation,
marketing strategies and consumer service.
Price cutting: Price cutting or price reduction is a method which has to be adopted very cautiously, as
it may ultimately lead to price-war between firms competing, resulting in reduction of profits.
Advertisement: Advertisements in modern days have become a very powerful tool in persuading the
consumers of a product to a particular brand. In monopolistic competition, a large share of the market
is entrenched by firms making effective and aggressive advertisement.
Product differentiation: A firm tries to get competitive strength by differentiating its product from
those of its rivals. By having special design, colour, packing and features, the firm tries to get
competitive edges.
Marketing strategies and Consumer Service: Modern firm adopt various types of marketing
strategies to create market for their products. Installment system, credit system, hire-purchase, etc.,
are the prominent ways by which firms try to cut through the poor segments of the society and convert
them their customers. Besides customer service like, free door delivery, quick service, after sales
service, guarantee from defects up to a certain period are adopted to have more and more demand for
their commodities.
3. Social and Cultural factors
Social and Cultural attitudes of a region influence the business organizations of the region influence
the business organizations of the region in a verity of ways. The business practices and the
management technique of the organization should cope with the social and cultural attitudes of the
people.
The modern business is a social system in itself, but it is also part of a larger social system represented
by society in general. Clearly, there should be some reciprocal relationship between business and this
larger society. To put it shortly, the business should adopt itself to the social and cultural environment.
It is the class structure of the society. It tells about the social roles and organizations and the
development of social institutions. The class-structure depend upon the occupation of the people, their
education, income level, social status, their mobility, their attitude towards living, work and social
relationship and above all, their attitude towards business.
Every society develops its own ?culture‘ which means how the members of that society behave and
interact with each other in society, as well as outside society. The term culture includes values, norms,
customs, ethics, goals and other accepted behavior patterns.
4. Technological factors
It defines about the methods available for converting resources into product or services.
Technological factors include ecological and environmental aspects, such as R&D activity,
automation, technology incentives and the rate of technological change. They can determine barriers
to entry, minimum efficient production level and influence outsourcing decisions. Furthermore,
technological shifts can affect costs, quality, and lead to innovation. It transforms inputs into output.
Inputs means material, capital, man, machine. It affects on business. It helps to change the level of
job, skill, and product and so on. There can be innovation, development of scientific techniques which
encouraged mass production and distribution.
Technology means ?the systematic knowledge of the industrial arts?. ?Technique‘ denotes the method
of performance. These two are increasingly used in modern literature on industrial production. The
present age is the age of technology. Technology affects the business in two ways.
? Its impact on the society and
? Its impact on business operation.
5.Environmental factors
The location of an industrial enterprise is an important problem which its
promoters have to deal with. It is the responsibility of promoters to search out that location at which
the enterprise will have easy access to raw materials, labour, power, markets and certain services like
banking, transportation, communication, insurance and warehousing. As far as possible, the location
must be optimum so that the costs of production and distribution are the lowest. If the location of a
plant is not suitable, it may cause many types of problems. For instance, transportation cost may be
higher and right type of labour may not be available. It may also restrict the growth of the firm. The
problem of location is faced not only by new concerns but also by the running concerns which have
growth potentials. The growing concerns have to take decisions about location of their new plants and
sometimes, they are also faced with the problem of shifting the entire operations to a new place
because of limitations of existing location and accommodation. Therefore, the new concerns should
also take into consideration the growth factor and the possibility of changes in the environmental
conditions while selecting the location.
There are no hard and fast rules with regard to location of plant. In practice, a large
number of factors have to be considered while choosing a suitable location. Moreover, these factors
differ from situation to situation and from time to time. That is why different
economists have taken into consideration different factors to formulate their theories of
location to explain the mechanism of location of industries. The study of these theories will help in
determining the most suitable location of a new plant and also analyzing the tendency of certain
industries to locate in particular regions of the country. Factors Affecting Location: one of the
important problems of launching an industrial enterprise is the choice of suitable location which will
help in minimization of production
cost and maximization of profit
6. Legal factors
Legal factors include discrimination law, consumer law, antitrust law, employment law, and health
and safety law. These factors can affect how a company operates, its costs, and the demand for its
products. Business in a country can be started and nurtured to grow into big business only within the
legal system of the country. In this connection, all countries of the word have a separate set of laws
for the control and direction of business. The business law of the country is a complex system of
regulations and intervention that form the legal environment of the business. All business managers
should have the knowledge of business law for taking management decision.
Miscellaneous external factor
1. Media
Positive media attention can ?make? an organisation (or its products) and negative media attention
can ?break? an organisation. Organisations need to mange the media so that the media help promote
the positive things about the organisation and reduce the impact of a negative event on their
reputation. Some organisations will even employ public relations (PR) consultants to help them
manage a particular event or incident.
Consumer television programmes with a wide and more direct audience can also have a very powerful
impact on the success of an organisation. Some businesses recognise this and will change their
reaction when consumers mention that they are going to contact a consumer television programme or
the newspapers about the business.
2. Competitors
The name of the game in marketing is differentiation. Can the organisation offer benefits that
are better than those offered by competitors? Does the business have a unique selling point
(USP)? Competitor analysis and monitoring is crucial if an organisation is to maintain or
improve its position within the market. If a business is unaware of its competitor's activities
they will find it very difficult to ?beat? their competitors. The market can move very quickly
for example through a change in trading conditions, consumer behaviour or technological
developments. As a business it is important to examine competitors' responses to these
changes so that you can maximise the impact of your response. The strength of business
competition is a constantly changing factor in the external business environment. Not only
will competitors come and go, but they will also change marketing strategies, product lines
and prices. Often such changes are not heralded and business managers must be alert as to
what competitors are doing.
3. Suppliers
Suppliers provide businesses with the materials they need to carry out their business activities. A
supplier's behaviour will directly impact the business it supplies. For example if a supplier provides a
poor service this could increase timescales or product quality. An increase in raw material prices will
affect an organisation's marketing mix strategy and may even force price increases. Close supplier
relationships are an effective way to remain competitive and secure quality products
4. Demographic
There is constant change in the make-up of the population. Some of these changes include an
increasing proportion of elderly citizens, increasing number of two-income families, the age at which
people marry is increasing, increasing ethnic diversity, suburbs which were once dominated by young
families now have few. These demographic changes can have a significant effect locally. For
example, a sport club which once prospered can begin to decline as the local area has less and less
children.
Importance of Business Environment Concept
In business all the activities are being organized and also carried out by the people to satisfy the
needs of the consumers. So, it is an activity carried out by the people for the people which means
people occupy a central place around which all the activities revolve. It means business is people and
a human is always a dynamic entity who believes in change and it may be right to say that the only
certainty today is change. It poses a huge challenge for today’s and especially tomorrow’s
businessmen and managers to be aware of specific changes so as to keep themselves abreast with
the latest happenings in the field of business to maintain their survival and sustainability in the
market. Therefore, the study of business environment is of atmost importance for the managers and
practitioners.
3 RECENT DEVELOPMENTS IN INDIAN ECONOMY
The economic environment of business in India has been changing at a fast rate mainly due
to the changes in the economic policies of the government. At the time of independence,
the Indian economy was basically agrarian with a weak industrial base. To speed up the
industrial growth and solve various economic problems, the government took several steps
like state ownership on certain categories of industries, economic planning, reduced role
of private sector, etc. The Government adopted several control measures on the functioning
of private sector enterprises. All these efforts resulted a mixed response. There was growth
in net national product, per capita income and development of capital goods sector and
infrastructure. But rate of industrial growth was slow, inflation increased and government
faced a serious foreign exchange crisis during eighties. As a result, the government of India
introduced a radical change in economic policies in 1991. This policy abolished industrial
licensing in most of the cases, allowed private participation in most industries, disinvestment
was carried out in many public sector industrial enterprises and opened up the economy
considerably. Foreign Investment Promotion Board was set up to channelise foreign capital
investment in India. Let us discuss the developments under three heads, viz.,
(a)Liberalisation, (b) Privatisation, and (c) Globalisation.
(A) LIBERALISATION
Some major changes in the Indian business environment, especially after 1991, made the
domestic markets for many consumer and industrial products more competitive. For the first
time, several business firms that were well entrenched in their markets felt the heat of
competition. It was now essential for them to get closer to the customers to protect their
markets.Many of them, such as Onida, HMV, BPL and Titan who were selling their products
only through agents and middlemen, switched to a parallel channel of direct marketing by
opening several exclusive retail shops.The aim was to keep in direct touch with the customers
and provide certain services that were not being provided by the middlemen. Another
objective of opening exclusive showrooms was to build an up-market image of the company
by demonstrating the full range of products. The ambience and décor of the exclusive
showrooms also helped these firms in adding value to their brands. LML Vespa, Liberty
shoes, Bausch& Lomb eye care products and several others ventured into direct retailing
probably due to this reason alone.Service firms such as ITC Hotels and ANZ Grindlays Bank
found direct marketing very effective in retailing customers and weathering competition.
(B) Privatisation
Privatization can also be called denationalization or disinvestment. All three terms describe a
situation where a government decides to transfer control of a government, and thus public
owned, resource to the private business sector, either partially or totally. Sometimes, the
government continues to exert a certain amount of control over the industry or service, called
municipalization. For example the government may be able to limit prices and make certain
demands through contracts, but private companies perform the work for a municipalized
industry or service. The reverse process of privatization is called nationalization, when a
government takes control of an industry or service from the private sector.
There are many industries in the US that are either privatized or municipalized, and there are
arguments for and against nationalizing certain private industries, and privatizing others. For
example, considerable debate exists regarding the issue of privatization of the social
securitysystem. Supporters for this process contend that this would allow people to better
fund their retirement by giving them opportunities to invest in higher yield investments.
Opponents suggest that privatizing the system could be disastrous for those who don‘t make
wise investments. Theoretically, a person who invests poorly could end up with no retirement
income.
(C) Globalisation
A major environmental change that has taken place in the last fifteen years is the
globalization of business. The world has become a global village and business has become
global in character. Organizations are venturing beyond national boundaries in the pursuit of
business opportunities. Toyota Motor Corporation makes cars in USA and India, Mc
Donald's sells burgers in India and hamburgers in China, and Marks and Spencer's sells
products in India. Every other product sold by Wal-Mart stores Inc. is made in India. This is
the time when buildings are conceptualized in the US designed in India and built in China.
Very recently, Ford Motor Co. (Ford) announced its plans to invest $ 1 billion in products
and plants in the Asia-Pacific region in the next few years to maintain its presence in the fast-
growing markets.
Outsourcing has made India a Manufacturing hub, especially for the automobile sector; with
cheap labour providing one of the competitive advantages. Government policy reforms and
growth against an appreciating rupee have also facilitated this trend. Large numbers of
manufacturing assembly jobs that require low skills have moved from the US and Western
Europe to developing countries like China, Thailand, Malaysia, and India. India's
manufacturing and services companies invested $10 billion overseas in 2004. The top 15
Indian IT, software and related companies have invested mostly in developed countries. Like
the IT and automobile industries, domestic hospital chains from India, such as Apollo
Hospitals Group, Fortis Healthcare and Max Healthcare Institute Private Limited, also have
ambitious expansion plans in markets as far away as the US, UK, Mauritius, and South-East
Asia.
Multinational corporations require employees who can adapt to different cultures, customs,
social practices, values, economic and political systems and management approaches, who
can work with other employees from differing backgrounds. This has caused new challenges
for HR managers. The HRM function of a company must develop systems that will help
individuals from different cultural backgrounds to work together. Human resource managers
must ensure that employees with the requisite knowledge, skills, abilities, and cultural
adaptability are available so that they may be successful in global assignments.
Foreign investment is no longer something that flows only from a developed country to a
developing one. Indian companies are on an expansion drive. Indian business houses, like the
Tata Group and firms like Ranbaxy Laboratories Limited (Ranbaxy), Wipro Limited (Wipro),
Sun pharmaceutical Industries Limited, Crompton Greaves Limited, Asian Paints, and
Cognizant Technology Solutions, have struck merger and acquisition deals world wide to
become global players. Acquisitions by Indian companies have now become strategic in
nature, by which they have been able to take leadership positions in Asia.
Social Responsibility of Business Environment
ISP may appear to be a new concept in relation to CSP, but it is a concept as old as The
Golden Rule — Do unto others as you would have them do unto you. ISR expands on this by
promoting a proactive stance towards positively influencing and affecting the people and
environments outside your immediate circle. ISR is at the roots of CSR, because a corporate
comprises of individuals and hence determines the social responsibility culture it creates.
This is the intermingled relationship between CSR and ISR. Individuals are becoming more
socially responsible and, in response to this Corporations and Companies need to become
more socially responsible to meet consumer demand.
The International Organisation for Standardization (ISO) states: ?In the wake of increasing
globalisation, we have become increasingly conscious not only of what we buy, but also how
the goods and services we buy have been produced. Environmentally harmful production,
child labor, dangerous working environments and other inhumane conditions are examples of
issues being brought into the open. All companies and organisations aiming at long-term
profitability and credibility are starting to realise that they must act in accordance with norms
of right and wrong.?
Socially responsible individuals are demanding companies and organisations to become more
socially responsible.
How Does an Individual Become Socially Responsible?
The Workshop for Civic Initiatives Foundation (WCIF), Bulgaria, describes ISR in its
position statement on Social Responsibility as,
?The individual social responsibility includes the engagement of each person towards the
community where he lives, which can be expressed as an interest towards what‘s happening
in the community, as well as in the active participation in the solving of some of the local
problems. Under community we understand the village, the small town or the residential
complex in the big city, where lives every one of us. Each community lives its own life that
undergoes a process of development all the time. And everyone of us could take part in that
development in different ways, for example by taking part in cleaning of the street on which
he lives, by taking part in organization of an event, connected with the history of the town or
the village or by rendering social services to children without parents or elderly people. The
individual social responsibility also could be expressed in making donations for significant
for the society causes – social, cultural or ecological. There are many ways of donating, as for
example donating of goods or donating money through a bank account or online?
Social Responsibility can be ?negative,? in that it is a responsibility to refrain from acting
(resistance stance) or it can be ?positive,? meaning there is a responsibility to act (proactive
stance). Being socially responsible not only requires participating in socially responsible
activities like recycling, volunteering and mentoring, but to actually make it a lifestyle. Only
through a commitment to embrace and embed social responsibility into your personal value
and belief system can you truly become socially responsible in all you do.
doc_447970537.docx
Internal and External Business Environment...
Objective :
After studying this lesson, you will be able to:
• explain the meaning of business environment;
• identify the features of business environment;
• describe the importance and types of business environment;
• describe the recent developments in Indian Economy that have greatly influenced the
working of business units in India;
• explain the concept of social responsibility of business;
• state the social responsibility of business towards different interest groups; and
1 MEANING OF BUSINESS ENVIRONMENT
As stated earlier, the success of every business depends on adapting itself to the environment
within which it functions. For example, when there is a change in the government polices,
the business has to make the necessary changes to adapt itself to the new policies. Similarly,
a change in the technology may render the existing products obsolete, as we have seen
that the introduction of computer has replaced the typewriters; the colour television has
made the black and white television out of fashion. Again a change in the fashion or
customers‘ taste may shift the demand in the market for a particular product, e.g., the
demand for jeans reduced the sale of other traditional wear. All these aspects are external
factors that are beyond the control of the business. So the business units must have to
adapt themselves to these changes in order to survive and succeed in business. Hence, it
is very necessary to have a clear understanding of the concept of business environment
and the nature of its various components.
The term ?business environment‘ connotes external forces, factors and institutions that are
beyond the control of the business and they affect the functioning of a business enterprise.
These include customers, competitors, suppliers, government, and the social, political,
legal and technological factors etc. While some of these factors or forces may have direct
influence over the business firm, others may operate indirectly. Thus, business environment
may be defined as the total surroundings, which have a direct or indirect bearing on the
functioning of business. It may also be defined as the set of external factors, such as
economic factors, social factors, political and legal factors, demographic factors, technical
factors etc., which are uncontrollable in nature and affects the business decisions of a firm.
Definitions of Business Environment
The term ?business environment‘ connotes external forces, factors and institutions that
are beyond the control of the business and they affect the functioning of a business
enterprise. These include customers, competitors, suppliers, government, and the social,
political, legal and technological factors etc. While some of these factors or forces may have
direct influence over the business firm, others may operate indirectly. Thus, business
environment may be defined as the total surroundings, which have a direct or indirect bearing
on the functioning of business. It may also be defined as the set of external factors, such
as economic factors, social factors, political and legal factors, demographic factors,
technical factors etc., which are uncontrollable in nature and affects the business decisions of
a firm.
? Business Environment has been defined by Bayard O. Wheeler as ?the total of all things
external to firms and industries which affect their organization and operation?.
? According to Arthur M. Weimer, business environment encompasses the ?climate‘ or set
of conditions, economic, social, political or institutional in which business operations are
conducted.
? According to 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 the sectors are socio-economic, technological, supplier,
competitors, and government.?
? According to Barry M. Richman and Melvgn Copen ?Environment consists of factors that
are largely if not totally, external and beyond the control of individual industrial
enterprise and their managements. These are essentially the ?givers‘ within which firms
and their management must operate in a specific country and they vary, often greatly,
from country to country?.
From the above definitions we can extract that business environment consists of factors that
are internal and external which poses threats to a firm or these provide opportunities for
exploitation.
Concept of Business Environment
A business firm is an open system. It gets resources from the environment and supplies its
goods and services to the environment. There are different levels of environmental forces.
Some are close and internal forces whereas others are external forces. External forces may be
related to national level, regional level or international level. These environmental forces
provide opportunities or threats to the business community. Every business organization tries
to grasp the available opportunities and face the threats that emerge from the business
environment. Business organizations cannot change the external environment but they just
react. They change their internal business components (internal environment) to grasp the
external opportunities and face the external environmental threats. It is, therefore, very
important to analyze business environment to survive and to get success for a business in its
industry. It is, therefore, a vital role of managers to analyze business environment so that they
could pursue effective business strategy. A business firm gets human resources, capital,
technology, information, energy, and raw materials from society. It follows government rules
and regulations, social norms and cultural values, regional treaty and global alignment,
economic rules and tax policies of the government. Thus, a business organization is a
dynamic entity because it operates in a dynamic business environment.
3.1.1 FEATURES OF BUSINESS ENVIRONMENT
On the basis of the above discussion the features of business environment can be
summarised as follows.
(a) Business environment is the sum total of all factors external to the business firm and
that greatly influence their functioning.
(b) It covers factors and forces like customers, competitors, suppliers, government, and
the social, cultural, political, technological and legal conditions.
(c) The business environment is dynamic in nature, that means, it keeps on changing.
(d) The changes in business environment are unpredictable. It is very difficult to predict
the exact nature of future happenings and the changes in economic and social
environment. .
(e) Business Environment differs from place to place, region to region and country to
country. Political conditions in India differ from those in Pakistan. Taste and values
cherished by people in India and China vary considerably.
3.1.2 IMPORTANCE OF BUSINESS ENVIRONMENT
There is a close and continuous interaction between the business and its environment. This
interaction helps in strengthening the business firm and using its resources more effectively.
As stated above, the business environment is multifaceted, complex, and dynamic in nature
and has a far-reaching impact on the survival and growth of the business. To be more
specific, proper understanding of the social, political, legal and economic environment
helps the business in the following ways:
(a) Determining Opportunities and Threats: The interaction between the business
and its environment would identify opportunities for and threats to the business. It
helps the business enterprises for meeting the challenges successfully.
(b) Giving Direction for Growth: The interaction with the environment leads to opening
up new frontiers of growth for the business firms. It enables the business to identify the
areas for growth and expansion of their activities.
(c) Continuous Learning: Environmental analysis makes the task of managers easier in
dealing with business challenges. The managers are motivated to continuously update
their knowledge, understanding and skills to meet the predicted changes in realm of
business.
(d) Image Building: Environmental understanding helps the business organisations in
improving their image by showing their sensitivity to the environment within which they
are working. For example, in view of the shortage of power, many companies have
set up Captive Power Plants (CPP) in their factories to meet their own requirement of
power.
(e) Meeting Competition: It helps the firms to analyse the competitors‘ strategies and
formulate their own strategies accordingly.
(f) Identifying Firm‘s Strength and Weakness: Business environment helps to identify
the individual strengths and weaknesses in view of the technological and global
developments.
TYPES OF BUSINESS ENVIRONMENT
Confining business environment to uncontrollable external factors, it may be classified as
(a) Economic environment; and (b) Non-economic environment. The economic environment
includes economic conditions, economic policies and economic system of the country.
Non-economic environment comprises social, political, legal, technological, demographic
and natural environment. All these have a bearing on the strategies adopted by the firms
and any change in these areas is likely to have a far-reaching impact on their operations.
Let us have a brief idea about each of these areas of business environment.
1 ECONOMIC ENVIRONMENT
The survival and success of each and every business enterprise depend fully on its economic
environment. The main factors that affect the economic environment are:
(a) Economic Conditions: The economic conditions of a nation refer to a set of economic
factors that have great influence on business organisations and their operations. These
include gross domestic product, per capita income, markets for goods and services,
availability of capital, foreign exchange reserve, growth of foreign trade, strength of
capital market etc. All these help in improving the pace of economic growth.
(b) Economic Policies: All business activities and operations are directly influenced by
the economic policies framed by the government from time to time. Some of the
important economic policies are:
(i) Industrial policy
(ii) Fiscal policy
(iii) Monetary policy
(iv) Foreign investment policy
(v) Export –Import policy (Exim policy)
The government keeps on changing these policies from time to time in view of the
developments taking place in the economic scenario, political expediency and the
changing requirement. Every business firm has to function strictly within the policy
framework and respond to the changes therein.
Important of Economic Policies
(i) Industrial policy: The Industrial policy of the government covers
all those principles, policies, rules, regulations and procedures,
which direct and control the industrial enterprises of the country
and shape the pattern of industrial development.
(ii) Fiscal policy: It includes government policy in respect of public
expenditure, taxation and public debt.
(iii) Monetary policy: It includes all those activities and interventions
that aim at smooth supply of credit to the business and a boost
to trade and industry.
(iv) Foreign investment policy: This policy aims at regulating the
inflow of foreign investment in various sectors for speeding up
industrial development and take advantage of the modern
technology.
(v) Export–Import policy (Exim policy): It aims at increasing exports
and bridge the gap between expert and import. Through this
policy, the government announces various duties/levies. The
focus now-a-days lies on removing barriers and controls and
lowering the custom duties.
(c) Economic System: The world economy is primarily governed by three types of
economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed
economy. India has adopted the mixed economy system which implies co-existence
of public sector and private sector.
NON-ECONOMIC ENVIRONMENT
The various elements of non-economic environment are as follow:
(a) Social Environment
The social environment of business includes social factors like customs, traditions, values,
beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a
society cherishes have a considerable influence on the functioning of business firms. For
example, during festive seasons there is an increase in the demand for new clothes, sweets,
fruits, flower, etc. Due to increase in literacy rate the consumers are becoming more
conscious of the quality of the products. Due to change in family composition, more nuclear
families with single child concepts have come up. This increases the demand for the different
types of household goods. It may be noted that the consumption patterns, the dressing
and living styles of people belonging to different social structures and culture vary
significantly
(b) Political Environment
This includes the political system, the government policies and attitude towards the business
community and the unionism. All these aspects have a bearing on the strategies adopted
by the business firms. The stability of the government also influences business and related
activities to a great extent. It sends a signal of strength, confidence to various interest
groups and investors. Further, ideology of the political party also influences the business
organisation and its operations. You may be aware that Coca-Cola, a cold drink widely
used even now, had to wind up operations in India in late seventies. Again the trade union
activities also influence the operation of business enterprises. Most of the labour unions in
India are affiliated to various political parties. Strikes, lockouts and labour disputes etc.
also adversely affect the business operations. However, with the competitive business
environment, trade unions are now showing great maturity and started contributing positively
to the success of the business organisation and its operations through workers participation
in management.
(c) Legal Environment
This refers to set of laws, regulations, which influence the business organisations and their
operations. Every business organisation has to obey, and work within the framework of
the law. The important legislations that concern the business enterprises include:
(i) Companies Act, 1956
(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954
(viii) Essential Commodities Act, 2002
(ix) The Standards of Weights and Measures Act, 1956
(x) Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade Marks Act, 1999
(xii) Bureau of Indian Standards Act, 1986
(xiii) Consumer Protection Act, 1986
(xiv) Environment Protection Act
(xv) Competition Act, 2002
Besides, the above legislations, the following are also form part of the legal environment of
business.
(i) Provisions of the Constitution: The provisions of the Articles of the Indian
Constitution, particularly directive principles, rights and duties of citizens, legislative
powers of the central and state government also influence the operation of business
enterprises.
(ii) Judicial Decisions: The judiciary has to ensure that the legislature and the government
function in the interest of the public and act within the boundaries of the constitution.
The various judgments given by the court in different matters relating to trade and
industry also influence the business activities.
(d) Technological Environment
Technological environment include the methods, techniques and approaches adopted for
production of goods and services and its distribution. The varying technological environments
of different countries affect the designing of products. For example, in USA and many
other countries electrical appliances are designed for 110 volts. But when these are made
for India, they have to be of 220 volts. In the modern competitive age, the pace of
technological changes is very fast. Hence, in order to survive and grow in the market, a
business has to adopt the technological changes from time to time. It may be noted that
scientific research for improvement and innovation in products and services is a regular
activity in most of the big industrial organisations. Now a days infact, no firm can afford to
persist with the outdated technologies.
(e) Demographic Environment
This refers to the size, density, distribution and growth rate of population. All these factors
have a direct bearing on the demand for various goods and services. For example a
country where population rate is high and children constitute a large section of population,
then there is more demand for baby products. Similarly the demand of the people of cities
and towns are different than the people of rural areas. The high rise of population indicates
the easy availability of labour. These encourage the business enterprises to use labour
intensive techniques of production. Moreover, availability of skill labour in certain areas
motivates the firms to set up their units in such area. For example, the business units from
America, Canada, Australia, Germany, UK, are coming to India due to easy availability of
skilled manpower. Thus, a firm that keeps a watch on the changes on the demographic
front and reads them accurately will find opportunities knocking at its doorsteps.
(f) Natural Environment
The natural environment includes geographical and ecological factors that influence the
business operations. These factors include the availability of natural resources, weather
and climatic condition, location aspect, topographical factors, etc. Business is greatly
influenced by the nature of natural environment. For example, sugar factories are set up
only at those places where sugarcane can be grown. It is always considered better to
establish manufacturing unit near the sources of input. Further, government‘s policies to
maintain ecological balance, conservation of natural resources etc
Factor effecting business environment
Business establishes, grows or operates and dies in environment. It exchanges resources environment.
It collects inputs i.e. Man money, materials, machines etc. And provides output i.e. Goods and
services in the environment. Environment means surrounding. Business environment defines as a
force that affects on organizational performance. It includes internal an eternal factors. It provides
opportunities and threats and it also see the streangs and weakness of the business
1. Internal environment
It is defined as all the forces or conditions that are available within an environment that affects on
organization and business. It is also known as controllable factors because business can control them.
It includes
1. Organisation Culture
Organisational culture is most important in recruiting and retaining volunteers. If the organisation
culture is generally negative, it becomes most difficult to interest people to offer themselves for
committee or other voluntary positions. Culture is a system of shared values and beliefs about what is
important, what behaviours are appropriate and how the people in the organisation relate to one
another.
Culture gives organisations a sense of direction. It is persuasive and tends to have an affect on
everyone in the organisation. A positive culture energises people and stimulates organisation growth
and development. A negative culture drains energy and causes organisations to 'implode'.
Level of Trust
Trust is a very important aspect of organisation culture. The level of trust within an organisation has
direct consequences on the recruitment and retention of volunteers.
Trust is about believing in the honesty and integrity of others. In an environment where there is trust,
people are generally satisfied that volunteers work for the good of the organisation as a whole, rather
than serving their own self-interest. In an environment of trust there is more likelihood of that the
membership will:
? Appreciate and respect volunteers
? Contribute time, effort, money and ideas to the organisation
? Respect decisions made by volunteers, even if made in error
In contrast, culture of mistrust leads to:
? People not volunteering for fear of being exploited
? People criticizing volunteers
? Unpleasantness and conflict between general membership and volunteers
? Loss of volunteers resulting in failure to achieve organisational goals
Strategies for improving trust
Good positive leadership is a main factor in developing organisation culture. Good leadership will
enable:
? Getting people together in planning meetings to work out their shared hopes for the
organisation.
? Coaching and mentoring volunteers to work together as a team and to support one
another.
? Organising social events for volunteers to develop friendships and bonding.
2. Human Resource
The knowledge, experience and capability of an organisation's workforce is a determining factor of
success. For this reason, organisations pay particular attention to the recruitment of staff and also to
engage in the training of staff and volunteers to build the organisation's capability. In pursuing both
recruitment and training strategies, an organisation is often limited by its financial strength.
Nevertheless, training of staff is an essential aspect of good business management, and even in
difficult financial circumstances is an achievable strategy
Internal policies and procedures impact HR activities. For example, if the company is committed to
promoting from within, HR must ensure employees receive appropriate training and development to
be ready for promotion when the time comes. HR should monitor the number of employees eligible
for retirement and ensure potential replacements or other staff members are trained to avoid a sudden
departure of business knowledge. If the company is unionized, HR must engage in collective
bargaining with the union on matters of representation. External influences, political factors and
organizational culture all influence the amount of grievances and complaints HR must respond to.
3. Organisation structure
An organisation's structure is the manner in which the workforce of the organisation is organised into
specific job roles and responsibilities to undertake work to accomplish the organisation's mission.
Another way of looking at organisation structure is to think about the total of work that is done by the
organisation and then to envisage that this work must be divided up among the workforce in some
manner. One common method by which the total of work is divided up is according to business
function. In a manufacturing company, for example, business functions might include Production,
Marketing, Sales, Administration, Maintenance, Human Resources, etc. Then people are employed at
various levels to ensure each function is carried out.
There are multiple ways an organisation can be structured to accomplish its mission. Factors to
consider in developing an organisation structure include: type of organisation (profit business or non-
profit organisation), scale of operations (large, medium or small), key business functions and
business philosophy.
It is located inside the organization. The arrangement of various facilities, pattern of relationships
among the various department, responsibility, authority and communication is the organization
structure. It also included specialization and span of control.
4. Management
The capability of the management team and the leadership styles employed by managers will also
have a major impact on the morale of staff (and volunteers in a non-profit organisation) and
organisation culture. More contemporary forms of management involve workers in decision making
processes and trusting that, although managers and workers have different viewpoints, they largely
benefit by working together to achieve the business objectives.
Teamwork
One way in which the social environment affects the workplace is in the way that it either inspires or
discourages employee cooperation. In businesses with a positive social environment where employees
get along and are generally positive in their relationship to one another, cooperation and teamwork are
more likely to exist than in a negative social environment. Negative social environments will
generally foster dissent and strife among workers and destroy the ability or willingness of employees
to work together.
Job Satisfaction
The social environment of the workplace can also have an effect on an employee's job satisfaction. In
businesses where employees experience a positive social environment, they are more likely to have a
greater sense of job satisfaction and enjoyment. In a job environment where negativity is the norm and
employees are constantly in conflict with one another, workers are more likely to dread work and not
have a positive assessment of their employer.
Leadership
A positive and nurturing social environment for workers is one that can engender positive change
within the workplace. It can also lead to the creation of leaders within the business itself. Businesses
that constantly emphasize positive reinforcement, self-improvement and education of employees are
likely to cultivate leaders from within the organization. Some may go on to pursue positions of
leadership within the company or industry, while others may simply assume a lesser leadership role
within their current occupation.
5. Shareholder
As organisations require investment to grow, they may decide to raise money by floating on the stock
market i.e. move from private to public ownership. The introduction of public shareholders brings
new pressures as public shareholders want a return from the money they have invested in the
company. Shareholder pressure to increase profits will affect organisational strategy. Relationships
with shareholders need to be managed carefully as rapid short term increases in profit could
detrimentally affect the long term success of the business.
Management deals with many shareholders. Shareholders have the right of ownership, power
of management and voting right. The actual management of organization is carried out by
elected representative of shareholders jointly known as boar of directors. Boards of directors
have the responsibility of overseeing the management of organization. It plays the major role
in formation of objectives, policies, strategies of the organization as well as their
implementation.
2. External environment factors
All the forces and condition that cannot be controlled by the business is called external environment. .
It is also known as uncontrollable factors because business can‘t control them. It is located outside the
business. It affects on organizational performance.
External environment factors
1. Political factors
All business firms are directly affected to a greater or lesser degree by the government and its
programmes. Political forces will decide the nature of business, programmes and projects to be
undertaken for the development of the country. , political factors include areas such as tax policy,
labour law, environmental law, trade restrictions, tariffs, and political stability. Political factors may
also include goods and services which the government wants to provide or be provided (merit goods)
and those that the government does not want to be provided (demerit goods or merit bads).
Furthermore, governments have great influence on the health, education, and infrastructure of a
nation.
These political forces can be classified as long term forces, quick changes, cyclical changes and
regional factors.
Long term forces denote the secular trends in business activities due to the political conditions
prevailing and the adoption of a particular line of policy in business.
Quick Changes consist of sudden political changes due to army coup or revolt or capturing of the
government machinery by the dissident group. The quick change may also be the result of
proclamation of ?emergency‘ or ?Martial Law‘ due to sudden outbreak of war with a belligerent
nation. In all these cases, the business manager has to take quick decisions to adopt his business to the
changed environment.
Cyclical Changes denote periodical anticipated changes like ‘General Election‘ which may change the
government and consequent change in plans and programmes as well as priorities by the new
Government.
Regional Factors the regional consideration may dominate the political scene. Development of
agricultural or development of an industrially backward region may draw the attention of politicians
and government. Consequently, special legislations or policies will be framed to help the backward
regions or sector. In such changes, the business has to adopt itself by studying and estimating the risks
and dangers involved in taking decisions.
2. Economic factors
The business enterprise is affected by various economic forces which cannot be controlled by the
business. These economic forces, can be divided into two categories, ie. Demand Force and
Competitive Force. For a business firm to survive and thrive, it should have adequate demand for its
products. At the same time, the firm has to complete with the rival firm producing similar products or
substitute products.
Economic forces affecting demand:
For customers to buy the commodity of the firm, they should have the ability to buy and willingness
to buy. The ability to buy a commodity depends on the income of the customer, to be very precise, the
disposable income of the customer. Out of the total income, the individual has to pay taxes due to the
government and the disposable income will be less if the taxes are high. Secondly, if the individual
wants to save more, the amount for spending will be less. Thus, the ability to buy a commodity
depends on the a) Total income earned out of the employment of the individual b) The taxes of the
government and c) The savings of the individual.
An increase in tax will reduce the demand for the commodity. The attitude of the individual towards
?Saving‘ will affect the demand. A change in ?Price‘ of the commodity will affect the demand.
Expectation of a further change in price or change in taxes will also affect the demand.
Competitive forces: The competitive tools are price cutting, advertisement, product differentiation,
marketing strategies and consumer service.
Price cutting: Price cutting or price reduction is a method which has to be adopted very cautiously, as
it may ultimately lead to price-war between firms competing, resulting in reduction of profits.
Advertisement: Advertisements in modern days have become a very powerful tool in persuading the
consumers of a product to a particular brand. In monopolistic competition, a large share of the market
is entrenched by firms making effective and aggressive advertisement.
Product differentiation: A firm tries to get competitive strength by differentiating its product from
those of its rivals. By having special design, colour, packing and features, the firm tries to get
competitive edges.
Marketing strategies and Consumer Service: Modern firm adopt various types of marketing
strategies to create market for their products. Installment system, credit system, hire-purchase, etc.,
are the prominent ways by which firms try to cut through the poor segments of the society and convert
them their customers. Besides customer service like, free door delivery, quick service, after sales
service, guarantee from defects up to a certain period are adopted to have more and more demand for
their commodities.
3. Social and Cultural factors
Social and Cultural attitudes of a region influence the business organizations of the region influence
the business organizations of the region in a verity of ways. The business practices and the
management technique of the organization should cope with the social and cultural attitudes of the
people.
The modern business is a social system in itself, but it is also part of a larger social system represented
by society in general. Clearly, there should be some reciprocal relationship between business and this
larger society. To put it shortly, the business should adopt itself to the social and cultural environment.
It is the class structure of the society. It tells about the social roles and organizations and the
development of social institutions. The class-structure depend upon the occupation of the people, their
education, income level, social status, their mobility, their attitude towards living, work and social
relationship and above all, their attitude towards business.
Every society develops its own ?culture‘ which means how the members of that society behave and
interact with each other in society, as well as outside society. The term culture includes values, norms,
customs, ethics, goals and other accepted behavior patterns.
4. Technological factors
It defines about the methods available for converting resources into product or services.
Technological factors include ecological and environmental aspects, such as R&D activity,
automation, technology incentives and the rate of technological change. They can determine barriers
to entry, minimum efficient production level and influence outsourcing decisions. Furthermore,
technological shifts can affect costs, quality, and lead to innovation. It transforms inputs into output.
Inputs means material, capital, man, machine. It affects on business. It helps to change the level of
job, skill, and product and so on. There can be innovation, development of scientific techniques which
encouraged mass production and distribution.
Technology means ?the systematic knowledge of the industrial arts?. ?Technique‘ denotes the method
of performance. These two are increasingly used in modern literature on industrial production. The
present age is the age of technology. Technology affects the business in two ways.
? Its impact on the society and
? Its impact on business operation.
5.Environmental factors
The location of an industrial enterprise is an important problem which its
promoters have to deal with. It is the responsibility of promoters to search out that location at which
the enterprise will have easy access to raw materials, labour, power, markets and certain services like
banking, transportation, communication, insurance and warehousing. As far as possible, the location
must be optimum so that the costs of production and distribution are the lowest. If the location of a
plant is not suitable, it may cause many types of problems. For instance, transportation cost may be
higher and right type of labour may not be available. It may also restrict the growth of the firm. The
problem of location is faced not only by new concerns but also by the running concerns which have
growth potentials. The growing concerns have to take decisions about location of their new plants and
sometimes, they are also faced with the problem of shifting the entire operations to a new place
because of limitations of existing location and accommodation. Therefore, the new concerns should
also take into consideration the growth factor and the possibility of changes in the environmental
conditions while selecting the location.
There are no hard and fast rules with regard to location of plant. In practice, a large
number of factors have to be considered while choosing a suitable location. Moreover, these factors
differ from situation to situation and from time to time. That is why different
economists have taken into consideration different factors to formulate their theories of
location to explain the mechanism of location of industries. The study of these theories will help in
determining the most suitable location of a new plant and also analyzing the tendency of certain
industries to locate in particular regions of the country. Factors Affecting Location: one of the
important problems of launching an industrial enterprise is the choice of suitable location which will
help in minimization of production
cost and maximization of profit
6. Legal factors
Legal factors include discrimination law, consumer law, antitrust law, employment law, and health
and safety law. These factors can affect how a company operates, its costs, and the demand for its
products. Business in a country can be started and nurtured to grow into big business only within the
legal system of the country. In this connection, all countries of the word have a separate set of laws
for the control and direction of business. The business law of the country is a complex system of
regulations and intervention that form the legal environment of the business. All business managers
should have the knowledge of business law for taking management decision.
Miscellaneous external factor
1. Media
Positive media attention can ?make? an organisation (or its products) and negative media attention
can ?break? an organisation. Organisations need to mange the media so that the media help promote
the positive things about the organisation and reduce the impact of a negative event on their
reputation. Some organisations will even employ public relations (PR) consultants to help them
manage a particular event or incident.
Consumer television programmes with a wide and more direct audience can also have a very powerful
impact on the success of an organisation. Some businesses recognise this and will change their
reaction when consumers mention that they are going to contact a consumer television programme or
the newspapers about the business.
2. Competitors
The name of the game in marketing is differentiation. Can the organisation offer benefits that
are better than those offered by competitors? Does the business have a unique selling point
(USP)? Competitor analysis and monitoring is crucial if an organisation is to maintain or
improve its position within the market. If a business is unaware of its competitor's activities
they will find it very difficult to ?beat? their competitors. The market can move very quickly
for example through a change in trading conditions, consumer behaviour or technological
developments. As a business it is important to examine competitors' responses to these
changes so that you can maximise the impact of your response. The strength of business
competition is a constantly changing factor in the external business environment. Not only
will competitors come and go, but they will also change marketing strategies, product lines
and prices. Often such changes are not heralded and business managers must be alert as to
what competitors are doing.
3. Suppliers
Suppliers provide businesses with the materials they need to carry out their business activities. A
supplier's behaviour will directly impact the business it supplies. For example if a supplier provides a
poor service this could increase timescales or product quality. An increase in raw material prices will
affect an organisation's marketing mix strategy and may even force price increases. Close supplier
relationships are an effective way to remain competitive and secure quality products
4. Demographic
There is constant change in the make-up of the population. Some of these changes include an
increasing proportion of elderly citizens, increasing number of two-income families, the age at which
people marry is increasing, increasing ethnic diversity, suburbs which were once dominated by young
families now have few. These demographic changes can have a significant effect locally. For
example, a sport club which once prospered can begin to decline as the local area has less and less
children.
Importance of Business Environment Concept
In business all the activities are being organized and also carried out by the people to satisfy the
needs of the consumers. So, it is an activity carried out by the people for the people which means
people occupy a central place around which all the activities revolve. It means business is people and
a human is always a dynamic entity who believes in change and it may be right to say that the only
certainty today is change. It poses a huge challenge for today’s and especially tomorrow’s
businessmen and managers to be aware of specific changes so as to keep themselves abreast with
the latest happenings in the field of business to maintain their survival and sustainability in the
market. Therefore, the study of business environment is of atmost importance for the managers and
practitioners.
3 RECENT DEVELOPMENTS IN INDIAN ECONOMY
The economic environment of business in India has been changing at a fast rate mainly due
to the changes in the economic policies of the government. At the time of independence,
the Indian economy was basically agrarian with a weak industrial base. To speed up the
industrial growth and solve various economic problems, the government took several steps
like state ownership on certain categories of industries, economic planning, reduced role
of private sector, etc. The Government adopted several control measures on the functioning
of private sector enterprises. All these efforts resulted a mixed response. There was growth
in net national product, per capita income and development of capital goods sector and
infrastructure. But rate of industrial growth was slow, inflation increased and government
faced a serious foreign exchange crisis during eighties. As a result, the government of India
introduced a radical change in economic policies in 1991. This policy abolished industrial
licensing in most of the cases, allowed private participation in most industries, disinvestment
was carried out in many public sector industrial enterprises and opened up the economy
considerably. Foreign Investment Promotion Board was set up to channelise foreign capital
investment in India. Let us discuss the developments under three heads, viz.,
(a)Liberalisation, (b) Privatisation, and (c) Globalisation.
(A) LIBERALISATION
Some major changes in the Indian business environment, especially after 1991, made the
domestic markets for many consumer and industrial products more competitive. For the first
time, several business firms that were well entrenched in their markets felt the heat of
competition. It was now essential for them to get closer to the customers to protect their
markets.Many of them, such as Onida, HMV, BPL and Titan who were selling their products
only through agents and middlemen, switched to a parallel channel of direct marketing by
opening several exclusive retail shops.The aim was to keep in direct touch with the customers
and provide certain services that were not being provided by the middlemen. Another
objective of opening exclusive showrooms was to build an up-market image of the company
by demonstrating the full range of products. The ambience and décor of the exclusive
showrooms also helped these firms in adding value to their brands. LML Vespa, Liberty
shoes, Bausch& Lomb eye care products and several others ventured into direct retailing
probably due to this reason alone.Service firms such as ITC Hotels and ANZ Grindlays Bank
found direct marketing very effective in retailing customers and weathering competition.
(B) Privatisation
Privatization can also be called denationalization or disinvestment. All three terms describe a
situation where a government decides to transfer control of a government, and thus public
owned, resource to the private business sector, either partially or totally. Sometimes, the
government continues to exert a certain amount of control over the industry or service, called
municipalization. For example the government may be able to limit prices and make certain
demands through contracts, but private companies perform the work for a municipalized
industry or service. The reverse process of privatization is called nationalization, when a
government takes control of an industry or service from the private sector.
There are many industries in the US that are either privatized or municipalized, and there are
arguments for and against nationalizing certain private industries, and privatizing others. For
example, considerable debate exists regarding the issue of privatization of the social
securitysystem. Supporters for this process contend that this would allow people to better
fund their retirement by giving them opportunities to invest in higher yield investments.
Opponents suggest that privatizing the system could be disastrous for those who don‘t make
wise investments. Theoretically, a person who invests poorly could end up with no retirement
income.
(C) Globalisation
A major environmental change that has taken place in the last fifteen years is the
globalization of business. The world has become a global village and business has become
global in character. Organizations are venturing beyond national boundaries in the pursuit of
business opportunities. Toyota Motor Corporation makes cars in USA and India, Mc
Donald's sells burgers in India and hamburgers in China, and Marks and Spencer's sells
products in India. Every other product sold by Wal-Mart stores Inc. is made in India. This is
the time when buildings are conceptualized in the US designed in India and built in China.
Very recently, Ford Motor Co. (Ford) announced its plans to invest $ 1 billion in products
and plants in the Asia-Pacific region in the next few years to maintain its presence in the fast-
growing markets.
Outsourcing has made India a Manufacturing hub, especially for the automobile sector; with
cheap labour providing one of the competitive advantages. Government policy reforms and
growth against an appreciating rupee have also facilitated this trend. Large numbers of
manufacturing assembly jobs that require low skills have moved from the US and Western
Europe to developing countries like China, Thailand, Malaysia, and India. India's
manufacturing and services companies invested $10 billion overseas in 2004. The top 15
Indian IT, software and related companies have invested mostly in developed countries. Like
the IT and automobile industries, domestic hospital chains from India, such as Apollo
Hospitals Group, Fortis Healthcare and Max Healthcare Institute Private Limited, also have
ambitious expansion plans in markets as far away as the US, UK, Mauritius, and South-East
Asia.
Multinational corporations require employees who can adapt to different cultures, customs,
social practices, values, economic and political systems and management approaches, who
can work with other employees from differing backgrounds. This has caused new challenges
for HR managers. The HRM function of a company must develop systems that will help
individuals from different cultural backgrounds to work together. Human resource managers
must ensure that employees with the requisite knowledge, skills, abilities, and cultural
adaptability are available so that they may be successful in global assignments.
Foreign investment is no longer something that flows only from a developed country to a
developing one. Indian companies are on an expansion drive. Indian business houses, like the
Tata Group and firms like Ranbaxy Laboratories Limited (Ranbaxy), Wipro Limited (Wipro),
Sun pharmaceutical Industries Limited, Crompton Greaves Limited, Asian Paints, and
Cognizant Technology Solutions, have struck merger and acquisition deals world wide to
become global players. Acquisitions by Indian companies have now become strategic in
nature, by which they have been able to take leadership positions in Asia.
Social Responsibility of Business Environment
ISP may appear to be a new concept in relation to CSP, but it is a concept as old as The
Golden Rule — Do unto others as you would have them do unto you. ISR expands on this by
promoting a proactive stance towards positively influencing and affecting the people and
environments outside your immediate circle. ISR is at the roots of CSR, because a corporate
comprises of individuals and hence determines the social responsibility culture it creates.
This is the intermingled relationship between CSR and ISR. Individuals are becoming more
socially responsible and, in response to this Corporations and Companies need to become
more socially responsible to meet consumer demand.
The International Organisation for Standardization (ISO) states: ?In the wake of increasing
globalisation, we have become increasingly conscious not only of what we buy, but also how
the goods and services we buy have been produced. Environmentally harmful production,
child labor, dangerous working environments and other inhumane conditions are examples of
issues being brought into the open. All companies and organisations aiming at long-term
profitability and credibility are starting to realise that they must act in accordance with norms
of right and wrong.?
Socially responsible individuals are demanding companies and organisations to become more
socially responsible.
How Does an Individual Become Socially Responsible?
The Workshop for Civic Initiatives Foundation (WCIF), Bulgaria, describes ISR in its
position statement on Social Responsibility as,
?The individual social responsibility includes the engagement of each person towards the
community where he lives, which can be expressed as an interest towards what‘s happening
in the community, as well as in the active participation in the solving of some of the local
problems. Under community we understand the village, the small town or the residential
complex in the big city, where lives every one of us. Each community lives its own life that
undergoes a process of development all the time. And everyone of us could take part in that
development in different ways, for example by taking part in cleaning of the street on which
he lives, by taking part in organization of an event, connected with the history of the town or
the village or by rendering social services to children without parents or elderly people. The
individual social responsibility also could be expressed in making donations for significant
for the society causes – social, cultural or ecological. There are many ways of donating, as for
example donating of goods or donating money through a bank account or online?
Social Responsibility can be ?negative,? in that it is a responsibility to refrain from acting
(resistance stance) or it can be ?positive,? meaning there is a responsibility to act (proactive
stance). Being socially responsible not only requires participating in socially responsible
activities like recycling, volunteering and mentoring, but to actually make it a lifestyle. Only
through a commitment to embrace and embed social responsibility into your personal value
and belief system can you truly become socially responsible in all you do.
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