BUSINESS AND ITS ENVIRONMENT :

1. NATURE AND SCOPE OF BUSINESS ENVIRONMENT

Definition of Business Environment:

Business environment consists all those factors that have a bearing on the business.

According to Aurther M. Weimer “ business environment encompasses the climate or set of conditions,

economic, social, political, or institutional in which business operations are conducted.”

According to Bayord O. Wheeler, business environment refers to the total of all things external to firms

and industries which affect their organisation and operation.”

Definition of Economic Environment of Business

An economic environment of business is a set of economic and non-economic conditions influencing

economic condition in which business operations are conducted.”

Since, business is an economic activity, the business firm is an economic unit and the business decision is

an economic process.

The economic environment of business is evaluating business policy, business strategies and business

tactics of any corporate entity in any national economy.

Nature of Business Environment:

Nature of business environment constitutes –

1. Business environment is the result of aggregate economic and non-economic factors.

2. It is interrelated to different factors of business environment.

3. It is uncertain atmosphere.

4. It is a relative concept vary between different economic system.

2. TYPES OF BUSINESS ENVIRONMENT – INTERNAL AND EXTERNAL.

Types/Classification of business environment –

Basis of Classification Types

Eco. Factors Economic and non-economic

Support Data and System

Space Local, regional, national and international

Time Present, past and future

Forces Market and non-market

Control Internal and External

We discuss about Internal and External Factors of Business which covers entire elements of any

business.

3. FACTORS OF BUSINESS ENVIRONMENT - INTERNAL AND EXTERNAL FACTORS;

ECONOMIC AND NON-ECONOMIC FACTORS.

A. Internal Factors of Business Environment:

Elements/factors of internal business environment refers to the factors existing within a business firm.

The internal factors considered controllable because the enterprise has control over these factors. For

examples, a company can modify it - organisation structure, policies and programmes, physical

expansion, and marketing mix to suit the changes in environment.

However, an enterprises may not sometimes have complete control over all the internal factors.

The main internal factors / forces influencing the business decisions are :

1. Culture

2. Mission and Objectives,

3. Top Management Structure,

4. Power Structure,

5. Company Image and Brand Equity,

6. Human and other Resource.

Culture :

The value, beliefs and attitude of the promoters and top management of the firm exercise a strong

influence on where the firm stands for, how it does things and what it considered important. When the

value, beliefs and attitude shared by all members, the organisation is likely to be more successful.

For examples –

1. Strong value, beliefs and attitude shared by all members of NTPC, SAIL, SBI, LIC, TISCO, WIPRO,

INFOSYS, TCS etc, these firms have remarkable success rate in all aspect of business including

profitability. Here members of firms comprises owner, investors, government, publics, bankers,

marketing intermediaries and general public.

2. Lower value, beliefs and attitude shared by all members of RIL, RCOM, HDFC, ICICI, Gammon etc.,

these firms have higher success rate in profitability and capital generation while lower success rate in

other aspects of business such as - equal distribution of dividend, national, social and environmental

responsibility.

3. Least value, beliefs and attitude shared by all members of Satyam, Lehman Brothers, and MSME

firms; these firms have least success rate in all aspects of business, irresponsible decisions, forgettable

performance, and non-recognizable activities.

Mission and Objectives:

The business philosophy and purpose of a firm guide its priorities business strategies, product scope and

development process.

For example- The mission and objectives of JRD Tata and G.D. Birla to make their group a “Ratna” in

the private sector and always ready to pledge the resource for the country and employee since

establishment. Other are- Bajaj, Kirloskar, Godrej and Mahindra.

The mission and objectives of Dhirubhai Ambani to make Reliance the largest industrial group.

The mission and objectives of MSME firm to earn maximum profit during its unpredictable existence

without any long term objectives.

Top Management Structure:

The structure and system of top management comprises owner and intellectual workforce which play

important role in business decision. But in normal cases the shareholding pattern of a company influence

the structure and system of management.

For Example – The owner of WIPRO, RIL, ADAG holds majority shares and pays important role in

business decision; while promoter of TISCO, L&T, ABG hold minority shares and take normal decision

with help of intellectual advise and investors choice. Thus, pattern of shareholding is one of the important

factors of management structure.

Power Structure:

In power structure within the organisation influences the business decisions, the power relationship

between board of directors and the CEO of the unit; and power structure between CEO and the

management personnel of functional area influences the business decisions of any organization.

Company Image and Brand Equity:

The image and brand equity plays an important role in internal business such as raising fund from

banking system or from the public, forming alliance with other firms, decentralization of sells market

(customers) and purchase market (suppliers) and expansion of business.

Human and Other Resource:

The competence, moral trait and motivation of employee plays a vital role in overall development of any

unit. For example - Tata could easily carryout a large scale modernization/expansion/shifting without any

problems while firm with same capacity facing many problems [ RIL (Mukesh) and Reliance Power

(Anil)].

The adequate tangible (economic resource) and intangible (goodwill) resources of a firm influence

success of that unit.

B. External Factors of Business Environment

External Environment consist forces and factors outside an enterprise. The external factors are beyond the

control of a firm.

A firm has almost zero control over national income, different economic, and other policies of

government. However, few powerful firm has capacity to change some external forces by wrong practice

of business theory.

For Examples - Increase of KG Basin Crude Oil Price from Bid Price i.e Rs. 2.32 to Rs. 4.34 per unit to

increase profits.

Currently, 2G Scam (31 + 38 firms under 2G Scam for 1.7 Lac crores) to increase business/service area/s

and increase of profits.

The external environment of business comprises - Micro business environment and Macro business

environment.

(i) Micro/Direct/Task/Operating Environment :

Micro environment refers to those individuals, groups and agencies with which the organizations comes

into direct and frequent contact in the course of its business operation/function.

The main micro environment forces influencing the business decisions are :-

Customers, Suppliers, Competitors, Marketing Intermediaries, Publics and Financiers.

1. Customers – the firm/person who purchase final goods and services for consumptions.

2. Suppliers - the firm/person who supply factors product and services for production / services.

3. Competitors – The firm/person engaged in the same activity directly or indirectly.

4. Marketing Intermediaries – Those firm/person provides / influences the business through their

network force. For example marketing & advertising firm.

5. Publics - Public includes all those groups who have an actual or potential interest in the firm. For

example – media group, NGO, Pollution Control Organisation etc, which have direct or indirect interest

in the firm on behalf of public or self-interest for dissemination of information of the firm.

6. Financiers : All persons have investment in the firm can influence the business process and decision.

For example ordinary shareholders or lending institution.

(ii) Macro / indirect / general / remote environment :

Macro environment refers to the indirect, general or remote environment within which a business firm

and its forces operates.

The macro environment factors are less controllable than the micro forces. For example increase in the

cost of crude oil.

The main macro environment forces influencing the business decisions are :

1. Political Environment and Legal Environment,

2. Economic and Financial Environment,

3. Social & Cultural Environment,

4. Natural Environment,

5. Technological Environment, and

5. Global Environment.

Political and legal Environment:

Political Environment comprises the elements related to government affairs. Such as – the constitutions,

political system, political stability, image of country and important decision makers, foreign policy,

economic and non-economic policies of government , policy for defiance and military system, etc.

Legal Environment comprises Legal System of country, law governing business, flexibility and

adaptability of law, relevance of business and economic laws.

Social and Cultural Environment :

Social and cultural environment refers to the characteristics of the society in which a business firm exist.

The factors are -

1. Demographic forces – demographic structure and characteristics, size of population, composition of

population and mobility of population.

2. Social institutions and groups.

3. Religion and Cast structure.

4. Educational System and literacy rate.

5. Social customs and values of customs.

6. Test and preference of people.

Economic and Financial Environment:

The economic and financial environment comprises –

1. Nature of economic system (capitalist, socialist or mixed).

Economic structure and system of country and different sectors.

2. Economic Policies (industrial, EXIM, Monetary, Fiscal, Investment and Disinvestment Policies etc.).

3. Economic Indicators (Macroeconomic indicators).

4. Financial Market (Money, Credit, Debt) and Institutions (CB &FI)

5. Status of product (consumable goods) and factor market (resources)

6. Economic Resource & Infrastructure.

Natural Environment:

Natural Environment constitutes –

1. Climatic conditions

2. Availability of natural resources,

3. Ecological system,

4. Pollution and other adverse externalities of society and nation.

Technological Environment:

The technological environment comprises –

1. Rate of changes in physical technology

2. New process and equipment

3. Research and Development System

4. Availability of technical intangible resource.

Global Environment :

Global Environment of Business constitutes international economic and non-economic relationship with

foreign countries (US or Japan or Pakistan etc.), international Organizations such as - IMF, IBRD, IDA,

IFC UNCTAD, WTO, ADB, G-8, G-15, G-20, G-77, OECD, EEC, NAFTA, SAFTA, OPEC, SAARC,

ASIAN etc.

4. FORCES SHAPING COMPETITIVE BUSINESS ENVIRONMENT – M.E. PORTER

CONCEPT OF COMPETITIVE BUSINESS ENVIRONMENT.

Forces Shaping Competitive Business Environment (M.E. Porter)

The competitive factors or forces which contribute to the business firm in their success or failure in

competitive business environment. According to Michael E. Porter, forces of competitive business

environment are -

1. Threat of new firm

2. Bargaining power of buyers.

3. Bargaining power of suppliers

4. Threat of substitute product.

5. Rivalry among existing firms.

1. Threat of new firm or threat of potential entrants:

Following are the common entry barrier for new entrants -

a. Economies of Scale – Economies of scale of existing firm create entry barrier for potential entrants.

b. Product Differentiation – existing product differentiation is restricting the arrival of new firm into the

industry.

c. Capital Requirement - high capital requirement is an entry barrier for smaller firms.

d. Cost Disadvantages Independent of size - the existing firm in an industry may enjoy certain cost

advantages which are not available to new entrants irrespective of their size or scale. Such advantages are

from technology, learning/ experience curve, favorable location and other factors of production.

e. Access to Distribution Channel or Monopoly Elements.

f. Government Policies – Government Policy, licensing norms and other regulatory procedure restrict the

entry of new firm in easy way.

2. Bargaining power of buyers:

In several industry buyers are potential competitors, they have different degree of bargaining capacity.

The buyer compete with the industry by forcing down prices, bargaining for high quality product and

service, more product and service, and playing competition against each other.

The volume of purchase, differentiation of product, importance of product, and profitability of buyer on

particular purchase are the factors of bargaining force from buyer side.

3. Bargaining power of suppliers:

The important determinants of supplier’s bargaining powers are-

a. when the group is dominated by a few firms.

b. when the product is unique or differentiated.

c. when there are lack of close substitute.

d. when buyer industry is less powerful than supplier industry.

e. when the product it supply is important for buying industry.

4. Threat of substitute product :

In industries, the firm faces competition from the supply of substitute goods such as - petrochemical

product is playing an increasing substitute of iron, aluminum, jute and cotton base product. That means,

petrochemical industry restrict the expansion of business and profit of related firm or substitute firm.

5. Rivalry among existing firms:

Rivalry among existing firms is the most visible form of competition. The competitive actions include

product improvements, new products, better customer service, changes in price, promotional measure and

other competitive factors.

The degree of rivalry among competitive firm depends on the following factors :-

a. Number of firms in the industry, their relative market share and their competitive strength.

b. Degree of differentiation in the products of rival firm in terms of product quality, price and services.

c. Cost advantages and disadvantages of rivalry firms in terms of fixed and storage cost.

d. State of sector growth - stagnant, slow, high or declining industry.

e. Strategic stake – when a number of firm have high stake in the industry, rivalry is greater or

competition is at high level.

f. Expected retaliation and corporate game (price game, profit game, quality game, competition game, and

so forth).

g. Switching Cost – switching cost is one of the most important among rival firm i.e. watching of

customers, suppliers behaviour; and movement of equipment, ancillary, employee from one firm to

rivalry firm.

h. Diverse competition among rivalry firm.

5. MACROECONOMIC FACTORS/VARIABLES INFLUENCING BUSINESS.

The major macro economic variables which have influence over the business entity are –

Production, national income, employment, investment, money supply, prices, business cycle, foreign

trade and balance of payment, foreign exchange, and fiscal policy.