Everything you need to know about the types of business environment. The term ‘environment’ connotes external forces, factors and institutions that affect a business enterprise.
It means the external conditions or forces within which a business firm operates. It includes all factors which are external to and beyond the control of individual business enterprises and their managements.
Thus, business environment may be defined as all those conditions and forces external to a business unit under which it operates.
Some of the types of business environment are:-
1. Economic Environment 2. Social Environment 3. Politico-Legal Environment 4. Technological Environment 5. Competitive or Market Environment 6. Global Environment 7. Political Environment
8. Socio-Economic Environment 9. Natural Environment 10. Socio-Cultural Environment 11. Educational and Cultural Environment 12. International Environment 13. Task Environment.
Additionally, learn about the business environmental factors:- 1. External Environmental Factors and 2. Internal Environmental Factors.
Types of Business Environment: Economic Environment, Social Environment, Politico-Legal Environment and a Few Others
Types of Business Environment – Economic Environment, Social Environment, Politico-Legal Environment, Technological Environment and Competitive Environment
Organisations are open systems. They exchange resources with the external environment and depend on it for their survival. They draw inputs such as raw materials, capital, labour, energy and information from the external environment. The inputs are transformed into products and services and are supplied as outputs to the external environment.
The term ‘environment’ connotes external forces, factors and institutions that affect a business enterprise. It means the external conditions or forces within which a business firm operates. It includes all factors which are external to and beyond the control of individual business enterprises and their managements. Thus, business environment may be defined as all those conditions and forces external to a business unit under which it operates.
These forces include customers, creditors, competitors, suppliers, government, socio-cultural organisations, political parties, international organisations, etc. Some of these factors may have direct influence over the business firm while others may operate indirectly.
Type # 1. Economic Environment:
The broad national economic environment is set by the nature of economic system embodying the nature of property rights, ownership of means of production, production relations, role of planning, functioning of price mechanism, etc. Judged from these angles, the economic system of a country may be characterised as capitalist (free enterprise), socialist, communist, or mixed.
The structural anatomy comprises the structure of national output, the occupational distribution of labour force employed, the capital formation, the trade composition, etc. These factors highlight the structural equilibrium (balance) or disequilibrium (imbalance) between different sectors like agriculture, industry, services, etc. The national economy functions through the interaction of different sectors. The business sector enters into transactions with all other sectors; these transactions define the economic environment of business.
The economic environment of business has reference to the macro-economic system, structure, sectors, policies, rules and regulations, planning, resource availability and exploitation, level of development, etc. Various laws enacted by the government to regulate the business also form part of the economic environment of business.
The government influences the economic environment of business through economic planning, fiscal policies and budgets, monetary policies, industrial regulations, business laws, controls on prices and wages, and commercial policies affecting export and import. For instance, if the government announces a cut in the excise duty on refrigerators, the sales of business firms manufacturing refrigerators will go up.
Similarly, if the government allows liberal finance to export- oriented units on concessional rates, such units will get a boost.
The economic environment of a firm includes all markets in which it buys and sells, raises funds, gets labour, etc. The business is invariably influenced by the conditions of various markets. For instance, if there is uncertainty in the capital market, it will not be advisable to issue shares and debentures to the public because of risk of under-subscription.
Type # 2. Social Environment:
It provides the system of values for the society which in turn affects the functioning of the business. Sociological factors include – caste structure, mobility of labour, customs and conventions, cultural heritage, view towards scientific methods, respect for seniority, etc. All these have a bearing on business. For instance, the nature of goods and services in demand depends upon people’s attitudes, customs, socio-cultural values, etc.
In India, the attitudes of people have changed with respect to food and clothing as a result of industrialisation, employment of women in factories and offices and increased level of education. This has resulted in the growth and food processing and garment manufacturing units.
Social environment determines the code of conduct the business should follow. If a business follows unethical practices, various social groups and government will intervene to discipline it. For instance, if an industrial unit is not paying fair wages to workers, trade unions and government will intervene. If it is indulging in adulteration, hoarding or black marketing, there are consumer forums and several government agencies to take action against it.
Type # 3. Politico-Legal Environment:
It provides the legal framework within which the business is to function. The viability of business depends upon the ability with which it can meet the challenges arising out of the politico-legal environment. The politico-legal environment of a country is influenced by political organisation, political stability. Government’s intervention in business, constitutional provisions affecting business, foreign policy, etc. All these factors have a bearing on business.
For instance, bottling and sale of Coca Cola was discontinued in India in the late seventies because of the government policy of restricting the growth of multinational companies in the country. In 1989, the government allowed another multi-national company, Pepsi Cola, to enter the Indian market to give boost to the food processing industry. Again in 1991, the government revised its Industrial Policy which liberalised licensing, imports and exports and inflow of foreign capital and technology into the country. This has created new challenges and opportunities for the Indian business.
Stability of the government is also an important factor from the point of view of growth of business. Businessmen prefer to start new units in those states where there is political stability and where rule of law prevails.
Legal environment determined by various laws and court decisions also put pressure on the business and managers. For instance, in 1992, Supreme Court ordered the closure of several industrial units as they were polluting the Holy Ganga. In August 1993, the Supreme Court passed an order for the closure of iron foundries around the famous Taj Mahal because air pollution caused by them had an adverse impact on the beauty of Taj Mahal.
Type # 4. Technological Environment:
In any country, the state of technology plays an important role in determining the type and quality of goods and services to be produced and the type of plant and equipment to be used. In the modern world, the pace of technological changes is very fast. Technological environment influences business organisations in terms of investment in technology, consistent application of technology and the effects of technology on markets. Therefore, every big organisation has to be actively engaged in technological forecasting. Advancements in automation and information technology will create challenging situations for the organisations in the future.
Type # 5. Competitive or Market Environment:
The competitive forces have an important influence on the survival and growth of any business.
The nature and degree of competition in an industry hinge on the following forces:
(a) Threat of new entrants – If the demand of an industry is increasing and it is more profitable than other industries, new units will be attracted to the industry. The new units will compete for raw materials, capital and market share.
(b) Bargaining power of customers – If the customers constitute a powerful group, they would have greater bargaining power in price negotiations. They will ensure lower prices which means lesser profits for the business.
(c) Bargaining power of suppliers – If the suppliers are united and powerful, they can increase the price of materials and also insist on cash payment. This might pose a great challenge for the firm.
(d) Availability of substitutes – If cheaper substitutes are available, the business firm will be left with lower demand and lower profits. For instance, jute industry has been outstripped by petro-chemical based products and packaging materials.
(e) Jockeying for market share – The individual units within an industry might compete with each other for attaining the commanding position. They may use tactics like price competition, introduction of new features and promotional activities to increase their share in the market.
Assessing the Impact of Environment:
The environmental forces play a significant role in the formulation of a strategy. But the relative importance of these forces is likely to vary from firm to firm. For instance, for a firm, technological environment may be most important while for the other economic environment may be the most important. The degree of importance given to various environmental factors is influenced by – (i) managerial philosophy, (ii) age of the organisation, (iii) nature of business, (iv) size of business and (v) geographic dimension.
Information for environmental scanning comes from several sources. These include – (a) verbal information from customers, wholesalers, retailers, distributors, consultants, etc. (b) records of companies; (c) publications of government, financial institutions and international organisations; (d) formal studies conducted by the strategic planners.
The data so obtained is processed and analysed with the help of quantitative techniques such as time series analysis and operations research and qualitative techniques such as delphi method and panel consensus. These will help in making forecasts about economic, social, political, legal and market forces.
Types of Business Environment – Global Environment, Technological Environment, Economic Environment, Political Environment and a Few Others
Internationalization or globalization of business has become a subject of very serious discussion in the national economic policies and corporate boardroom. International trade is growing faster than world output and international investment is growing much faster than global trade.
Nature of Globalization:
Globalization means several things to several people. For some it is a new paradigm-a set of fresh belief, working methods and economic, political and socio-cultural realities in which the assumptions are no longer valid. For developing countries, it means integration with world economy.
In simple economic terms, globalization refers to the process of integration of world into one huge market. Such unification calls for removal of all trade barriers among countries. Hence, globalization aims at removing isolations of different economies.
Globalization is a new phenomenon to India. We were for long time content in serving internal market which has been vast. Domestic production was insufficient to feed the vast market. We were compelled to import in order to supplement domestic production. We were also exporting to other countries, but our exports were composed of traditional commodities and the direction was mainly erstwhile communist block.
Globalization did hardly exist during past five decades. There are other reasons too, which made us within the country’s boundaries. For a long time, we did not have industries of the number and magnitude to think of globalization. Vibrant economy filled with robust industries is a prerequisite for internalization. Secondly, for the past five decades, we followed an economic policy which did not encourage competitive spirit among our industrialists. In the name of self-reliance, import substitution, swadeshi and economic sovereignty, we encouraged domestic industries to prosper, however, inefficient they were.
We gave them licenses, fixed quotas, imposed tariffs and offered subsidies generously. We put several restrictions on foreign companies desiring to enter Indian soil. This continued till 1990. In 1991, the new industrial policy paved the way for globalization in our economy. The number of global companies entered in India was 164 on 31st December 1991.
Major Indian industries also set their subsidiaries abroad. The major Indian players in global arena are Ranbaxy, Essar Gujarat, Arvind Mills, Ballarpur Industries, UB, Reddy’s lab and Aditya Birla Group. The process rate increased in late 90s and is now at its youth.
The World Trade Organization was established on 1st Jan. 1995. Governments had concluded the Uruguay Round Negotiations on 15th December 1993 and Ministers had given their political backing to the results by signing the final act at a meeting in Marrakesh, Morocco in April 1994.
The ‘Marrakesh Declaration’ of 15th April 1994, affirmed that the results of the Uruguay Round World “Strengthen the world economy and income growth throughout the world”. The WTO is the embodiment of the Uruguay Round results and the successor to the General Agreement on Tariffs and Trade.
India is a founder member of both GATT (1947) and its successor organization, the WTO. By virtue of its WTO membership, India automatically avails of most favoured nation and national treatment from all WTO members for its exports and its participation in this increasingly rule- based system which is aimed towards ensuring more stability and predictability in the governance of international trade. WTO-related issues of current importance in India relate mainly to rights and obligations emanating from these agreements.
The most important issues are:
(a) Quantitative Restrictions (QRs)
(c) Geographical indications
(f) Market access
(g) Implementation issues
(h) Trade and investment policy
Quantitative Restrictions (QRs):
QRs on imports maintained on Balance of Payments (BOP) grounds were notified to WTO in 1997 for 2714 tariff lines at the eight-digit level. In view of the improvement in our BOP, the Committee on BOP Restriction had asked India for a phase out plan for these QRs. Based on presentations before this Committee and subsequent consultations with our main trading partners, an agreement was reached with those countries, except USA to phase out the QRs over a period of six years beginning 1997.
The US preferred a dispute under the WTO’s Dispute Settlement Mechanism. Pursuant to the report of the Panel and the Appellate body, India and the USA have agreed to a bilateral settlement for determination of a reasonable period of time up to April 1, 2001, within which India has to implement the rulings and recommendations of the Dispute Settlement Body to remove the existing QRs in a phased manner. As on date, the numbers of tariff lines on which QRs exist have come down to 1429 at the eight-digit level.
Trade Related Intellectual Property Rights (TRIPS):
The Agreement sets out the minimum standards of protection to be adopted by the Parties, in respect of:
(a) Copyrights and related rights;
(c) Geographical indications;
(d) Industrial designs;
(f) Lay out designs of integrated circuits; and
(g) Protection of undisclosed information (trade secrets) arid the enforcement of these.
A transition period of five years is available to all developing countries to give effect to the provisions of the TRIPS Agreement. Countries that do not provide product patent in certain areas can delay the provisions of product patents for another five years. However, they have to provide exclusive marketing rights for products which obtain patents after 1.1.1995. As per our obligations under the WTO Agreement, the Patents (Amendments) Act, 1999 was passed in March 1999 to provide for exclusive marketing rights.
The basic obligation in the area of patents is that inventions in all fields of technology, whether products or processes, shall be patentable if they meet the three tests of being novel, involving an inventive step and being capable of industrial application. In addition to the general security exemption which applies to the entire TRIPS Agreement, exclusion from patentability are permissible for inventions whose commercial exploitation is necessary to protect public order or morality, human, animal, plant life or health; or to avoid serious prejudice to the environment.
Diagnostic, therapeutic and surgical methods for the treatment of humans or animals and plants and animals other than microorganism may also be excluded from patentability. The patent term provided for in the TRIPS Agreement is 20 years. A Bill to make these and other changes was introduced in Parliament and has been referred to as Joint Select Committee of the Houses.
In respect of plant varieties, there is an obligation to provide for protection by patents or by an effective sui generis or by any combination thereof. The Agreement does not spell out the elements of a sui generis system and it is left to each Government to determine the elements which could be deemed to be providing effective protection.
A decision has been taken to put in place a sui generis system as it is perceived to be in our national interest. A legislation to this effect tabled in the Parliament by the Ministry of Agriculture has been referred to as Joint Parliamentary Committee.
Lay-Out Designs of Integrated Circuits:
India is a signatory to the international agreement (the Washington Treaty) administered by the WIPO. The main obligations of the Washington Treaty are also incorporated in the TRIPS Agreement with some enhancement and cover the protection of intellectual property in respect of lay-out designs that are original in the sense of being the result of their creator’s own intellectual efforts.
The obligations include national treatment to foreign right holders and a term of protection of 10 years. A legislation giving protection to lay-out designs was introduced in the Rajya Sabha on 20 December, 1999 by the Department of Electronics.
Copyright and Related Rights:
In the area of copyright and related rights, i.e., rights of performers, producers of phonograms and broadcasting organizations, the Agreement requires compliance with the provisions of the Berne Convention. Computer programs are to be protected as literary works. The term of protection for copyrights and rights of performers and producers of phonograms is to be no less than 50 years. In case of broadcasting organizations, however, the term of protection is to be at least 20 years.
India is a signatory to the Berne Convention. The Copyright Act, 1957 as amended in 1994 takes care of our own concerns and meets with the requirements of the TRIPS Agreement except in the case of terms of protection of performers’ rights. A Bill to increase this term to 50 years was passed by Parliament in December, 1999.
India’s trademarks law, The Trade and Merchandise Marks Act (TMMA), 1958 is in its essential features, in accordance with international law. A Bill to amend the TMMA was introduced in Parliament in 1993 so as to provide for protection to service marks also. The Bill could not be passed and subsequently lapsed. A Bill in this regard, however, was passed by Parliament in December, 1999 which, inter alia, provides for protection to service marks.
The Agreement contains a general obligation that parties shall provide the legal means for interested parties to prevent the use of any means in the designation or presentation of a good that indicates or suggests that the good in question originates in a geographical area other than the true place of origin of the good.
In India, we do not so far have any specific law on geographical indications. Case law, however, enables legal action for protection of geographical indications. It was decided to enact a new law on the subject to take advantage of the provisions of the TRIPS Agreement. A Bill in this regard was passed by the Parliament in December, 1999.
Obligations envisaged in respect of industrial designs are that independently created designs that are new or original shall be protected. There in an option to exclude from protection, designs dictated by technical or functional considerations, as against aesthetic consideration which constitutes the coverage of industrial designs.
Our law, the Designs Act, 1911 is a very old enactment and needs updating. The Department of Industrial Development prepared a Bill in this regard, which was passed by the Rajya Sabha in December, 1999 and will now have to be passed by the Lok Sabha.
Trade Related Investment Measures (TRIMS):
Under the TRIMS Agreement, developing countries have a transition period of 5 years up to 31 December, 1999 during which they can continue to maintain measures inconsistent with the Agreement provided these are duly notified. We notified two Trims, viz., that relating to local content requirements in the production of certain pharmaceutical products and dividend balancing requirement in the case of investment in 22 categories of consumer items.
In view of the inconclusiveness of the Seattle Ministerial Conference, where no final decision on the request of developing countries for extension of transition period for elimination of the notified TRIMS was taken, it needs to be seen what final decision is taken by the General Council on this issue.
India’s commitments to reduce tariffs to the bound levels by March 1, 2000 exist in respect of non-agricultural and non-textile items and necessary action will be taken to fulfil these obligations.
Among all the segments of environment, technological environment exerts considerable influence on business. Thus, this section requires more devotion. J.K. Galbraith defines technology as a systematic application of scientific or other organized knowledge to practical tasks. During the last 150 years, technology has developed beyond anybody’s comprehensions.
Year 1983 was particularly considered by scientists as the year of scientific success. In this year scientists put a billion dollars technology into space, produced the world’s first test-tube triplets and obtained evidence of another solar system. A major breakthrough was achieved in the field of genetic technology is to cure dwarfism. Technology, thus, is the most dramatic force shaping the destiny of people and business all over the world.
Status of Technology in India:
India, like any other third world country, attended political independence after prolonged colonial rule and exploitation. The country entered the modern world in a state of economic backwardness and poverty of a large section of people. It is obvious that technology must attend to the basic problems of food, clothing, health and housing of people. At the same time, rapid industrial development through latest technology is necessary to catch up with advanced countries.
With these objectives in mind, Government of India set-up series of R & D establishments, space research centre, medical research centres, agricultural research establishments, oil explorations centres, power development projects and the council of scientific and industrial research. Besides, several universities and institutes have been set-up to provide higher education in science, technology and management.
As on today there are 4700 intermediate/junior colleges, 144 universities, and 44 deemed universities in the country. Also there are more than 500 science and technological institutions, and 1080 in house research and development laboratories. There is also the Department of Science and Technology, an administrative wing of Government, to coordinate the activities of all research and technical activities in the country.
Economic environment refers to all those economic factors which have a bearing on the functioning of a business unit. Business depends on the economic environment for all the needed inputs. It also depends on the economic environment to sell the finished goods. Naturally, the dependence of business on the economic environment is total and it is not surprising because, as it is rightly said, business is one unit of the total economy.
It is difficult to be precise about the factors which constitute the economic environment of a country. But still there are some factors which have considerable influence.
These factors are:
(a) Growth strategy
(b) Economic system
(c) Economic planning
(g) Financial and fiscal sector
(h) Removal of regional imbalances
(i) Price and distribution control
(j) Economic reforms
Out of the above said factors, two are of prime importance:
(i) Economic system
(i) Economic System:
The scope of a private business and the extent of government regulation of economic activities depend to a very large extent on the nature of economic system, which is an important part of business environment. Broadly the economic system is divided into three groups.
The system of capitalism stresses the philosophy of individualism believing in private ownership of all agents of production, in private sharing of distribution processes that determine the functions rewards of each participants, and in individual expression of consumer choice through a free marketplace. In its political manifestation, capitalism may fall in a range between extreme individualisms and anarchism (no government) and the acceptance of some state sanctions.
Two types of capitalism may be distinguished, viz.:
(i) The old, laissez-faire capitalism, where government intervention in the economy is absent or negligible; and
(ii) The modern, regulated or mixed capitalism, where there is a substantial amount of government intervention.
Under socialism, the tools of production are to be organized, managed and owned by the government, with the benefits occurring to the public. A strong public sector, agrarian reforms, controls over private wealth and investment and national self- reliance are the other planks of socialism.
Socialism does not involve an equal division of existing wealth among the people, but advocates the egalitarian principle. It believes in providing employment to all and emphasizes suitable rewards to the efforts put in by every worker. Also called Fabian socialism, this philosophy is followed in our country and other social democratic countries in the world.
Communism goes further to abolish all private property and property rights to income. The state would own and direct all instruments of production. Sharing in the distributive process would have no relationship to private property since this right would not exist. Alternatively called marxism, communism was followed in Russia, China and East European Countries.
(ii) Industry System:
In the mid-1960s, India had a better industrial base and possessed more prerequisites for industrial growth than South Korea, Malaysia, Taiwan, Thailand and Indonesia. Since then, the country has succeeded in creating a virtually autarkic economy where all outputs and factors were subject to rigid price and quantity controls; where investment was strictly rationed; where there were multiple barriers to entry, investment, foreign trade, and competition, and where the objective of the financial system was to supply subsidized development funds irrespective of returns. Consequently, all the countries have overtaken India and are far ahead in industrial growth.
The various administrative controls are industrial licensing, industrial policies and asset classification of monopolies, product reservation for small-scale sector, Foreign Exchange Management Act (FEMA), tariffs and quotas, the mini plant fetish, labour market rigidities, development finance and indulge now availability and essentiality.
These are explained as follows:
(a) Industrial Policy:
Industrial policy is an important document which lays a wide canvas and sets a tone for implementing promotional and regulatory roles of the government. The term “industrial policy” refers to government’s policy towards industries—their establishment, functioning, growth and management.
The policy indicates the respective areas of the large, medium and small-scale sector. It also spells out government’s policy towards foreign capital, labour, tariff and other related aspect. Naturally, the industrial development of a country is shaped, guided, fostered, regulated and controlled by its industrial policy.
Industrial policy is probably the most important document which indicates the relationship between the government and the business. But, it has no legal sanction and as such its violation cannot be challenged in a court as is possible in the case of Fundamental Rights guaranteed by the constitution.
This policy was announced on 30th April 1956. The resolution of 1956 made the industrial policy. More socialist oriented and widened the scope of public sector. The resolution classified industries into three categories, having regard to the role which the state would play in each of them.
(i) The first category contained industries “the future development of which will be the exclusive responsibility of the state”. Industries in this category were listed in Schedule A of the resolution. Schedule A contained 17 industries. These included railways and air transport, arms and ammunitions, and atomic energy, which were to be developed as Central Government monopolies.
In the remaining industries in Schedule A, the expansion of the existing privately-owned units, or the possibility of the state securing the cooperation of private enterprise in the establishment of new units where the national interest so required, was not produced. However, it was made clear that “whenever cooperation with private enterprise is necessary, the state will ensure, either through majority participation in the capital or otherwise, that it has the requisite powers to guide the policy and control the operations of the undertaking.
(ii) In the second category were included industries which will be progressively state-owned and in which the state will, therefore, generally take the initiative in establishing new undertakings, but in which private enterprise will also be expected to supplement the efforts of state.
The industries included in the second category were listed in Schedule B of the resolution. It contained 12 industries like machine tools, fibre-alloys and tools, drugs, fertilizers, synthetic rubber, carbonization of coal, chemical pulp, road transport and sea transport and aluminium and other non-ferrous metals not included in Schedule A.
(iii) The rest of industries were thrown open to the private sector but this did not prevent the state from starting any new undertaking. State will facilitate and encourage the development of these industries in the private sector by providing infrastructural facilities.
Ours is one of the few countries in the world where an entrepreneur is required to obtain an industrial licence from the government before venturing into a new business.
A “licence” is a written permission issued by the Central Government to an industrial undertaking stating such details as the location, the article to be manufactured, production capacity and other relevant particulars. It is also subjected to a validity period within which the licensed capacity should be implemented.
The principal objective of the Foreign Exchange Management Act (FEMA) is to prevent the outflow of Indian currency and to see that the foreign exchange legitimately due to India should be received.
In detail, the objectives of the Act are as follows:
(i) To regulate certain payments.
(ii) To regulate dealings in foreign exchange and securities.
(iii) To regulate the transactions indirectly affecting foreign exchange.
(iv) To regulate import and export of currency and bullion.
(vi) To regulate holding of immovable property outside India.
(vii) To regulate employment of foreign nationals.
(viii) To regulate acquisition, holding, etc. of immovable property in India,
(ix) To regulate foreign companies.
The Act applies to the whole of India and applies to all citizens of India outside India and to branches and agencies outside India of companies or bodies corporate registered in India.
The influence of political environment of business is enormous. The political system prevailing in a country decides, promotes, fosters, encourages, shelters, directs and controls the business activities of that countries. A political system which is stable, honest, efficient and dynamic and which ensures political participation of the people, and assures personal security to the citizens, is primary factor for growth of any business.
Two basic political philosophies are in existence all over the world, viz., democracy and totalitarianism. In its pure sense, democracy refers to a political arrangement in which supreme power is vested in the people. Democracy may manifest itself in any of two fundamental manners. If each individual is given the right to rule and vote on every matter, the result is pure democracy which is not, however, workable in a complex society with a large constituency. Hence, the republican forms of organization follow whereby the public, in a democratic manner, elect their representatives who do ruling.
In totalitarianism, also called authoritarianism, individual freedom is completely subordinated to the power of authority of the state and concentrated in the hands of one person or in a small group which is not constitutionally accountable to the people. Societies ruled by a pressure clique-political, economy or military-or by a dictator plus most oligarchies and monarchies belong to this category. The doctrine of fascism and erstwhile Russian Communism Russian Communism are example of totalitarianism.
India is a democratic country.
Our political system comprises three vital institutions:
2. Executive or government
Out of three, legislature is most powerful political institution vested with such powers as policy-making, law-makings, budget approving, executive control and acting as mirror of public opinion. The influence of legislature on business is considerable. It decides such vital aspects as the type of business activities, the country should have, who should own them, what should be their size of operation, what should happen to their earnings and other related factors.
2. Government as Executive:
Also called the ‘state’ the term government refers to “the centre of political authority having the power to govern those it serves”. For business consideration, we should know what government’s responsibilities to business are.
Specifically, government’s responsibilities towards business are as follows:
(a) Establishment and enforcement of law
(b) Maintenance of order
(c) Money and credit
(d) Orderly growth
(g) Assistance to small industries
(h) Transfer of technology
(i) Tariffs and quotas
The third political institution is judiciary. Judiciary determines the manner in which the work of executives has been fulfilled. It settles the relationship between private citizens, on one hand, and between citizens and the government upon the other.
The power of the judiciary is of dual type:
The authority of the courts to settle legal disputes.
Judicial review—The authority of the courts to rule on the constitutionality of legislation.
Social and cultural environment refers to the influence exercised by certain social factors which are “beyond the company’s gate”. All such factors come under one head that is culture.
In its narrow sense culture is understood to refer to such activities as dance, drama, music and festivals. In its true sense culture is understood as that complex whole which includes knowledge, belief, art, morals, law, customs and other capabilities and habits acquired by individual as a member of a society.
The culture has two main characteristics:
(i) Shared value
(ii) Passage of time
Culture of a society is shared by its members. Cultural those are passed from one generation to other generation. It is not confined to one particular period of time.
The interface between business and culture can be summarized as follows:
(a) Culture creates people.
(b) Culture determines goods and services.
(c) It defines people’s attitude to business and to work.
(d) Explains the spirit of collectivism and individualism.
(e) Defines whether people are ambitions or complacent.
(j) Time dimension
(k) Cultural resources.
All the above said factors influence the business in one or other way. Hence, it is important to understand all these factors for a successful business.
Equally significant, but sadly ignored, are the factors like climate, minerals, soil, landform, rivers and oceans, coastlines, natural resources, flora and fauna, etc. Which have considerable influence on the functioning of a business? It is the natural environment which decides the resources for any business. Manufacturing, which is one of the aspects of business, depends on physical environment for inputs like raw material, labour of various skills, water, fuel, etc.
Trade between two regions of a nation or between two nations is the result of geographic factors. Because of natural factors, certain areas are more suitable for production of certain goods and other areas are in need of such goods. Transportation and communication, the main prop of business, depend to a larger extent on geographic factors. Uneven landforms, desserts, oceans, forest, rivers, etc. are barriers to develop this vital infrastructure.
Some businesses like mining of coal and ores, drilling of oil and most important agriculture which depends most on nature. Thus, the impact of natural environment cannot be ignored moreover it should be given top priority for any successful business.
Types of Business Environment – Business Environmental Factors: External Environmental Factors and Internal Environmental Factors
On the basis of study of views of various authors on business environment, it is said that there are two different types of environment and many factors under each type of environment. The two types of environment are discussed on the basis of factors, viz., internal and external factors. These factors create the conditions in which the business or an organisation performs.
The internal factors are generally regarded as controllable factors because the company has control over these factors. It can modify these factors as its personnel, physical facilities; organisation, etc., can suit the external environment. The external factors on the other hand are, by and large, beyond the control of a company.
The external factors such as – economic, social, cultural, governmental, legal and demographic factors are generally regarded as uncontrollable factors. As the environmental external factors are beyond the control of the firm, its success will depend to a very large extent on its adaptability to the environment. The controllable factors will be adjusted to do the business in the uncontrollable factors.
There are two types of environmental factors:
1. External Environmental Factors.
2. Internal Environmental Factors.
These two types of factors are explained here in detail:
Type # 1. External Environment:
It includes all the forces having direct impact on working of Human Resources Department (HRD). Such forces include social, economic, cultural, political, legal, technological, religious, and psychological factors affecting the functions and working of HRD.
Analysis of the above mentioned forces would reveal ways of dealing with day-to-day problems affecting industrial environment as discussed below:
(a) Social environment differs from industry-to-industry on the basis of the past tradition, values, ethics, morals cherished by executives and decision makers of the organisation.
(b) Economic environment refers to financial decision pertaining to strategic planning for production, marketing, sales, purchase and policy for dealing with government, customers, competitors, etc. Financial matters are based on the objectives of the organisation, but implementation of decision depends upon human resource planning, recruitment procedure, training and development of people selected and working in the organisation.
A socio-economic condition of modern workers is far better than their predecessors. Organised and unorganised workers’ social and economic status has improved. Modern methods of production, level of skill development, education, standard of living and working has improved.
Report of the National Commission on Labour, 1969 stated long back that industrial employment is not restricted to economically and socially backward classes. Dignity of work has been realized.
(c) With the impact of globalisation and rationalisation, new avenues of employment are opened. Information technology and modern methods of communication have opened varied opportunities and jobs. Workers’ involvement in the process of managerial decisions, participative and selective methods of recruitment, selection, training and development has increased the role of workers in managerial practices.
(d) Role of union and union leaders has changed. Modern leader is trained, educated and production-oriented. Consultative and distributive process of collective bargaining has taken up momentum. World is becoming smaller. Cosmopolitan atmosphere is existing in industrial organisations. Multinational companies are employing workers from different corners of the country.
(e) Cultural forces bring people together from varied backgrounds. Social customs of different countries are followed in cosmopolitan organisations. Japanese work culture is appreciated by different nations. Different types of traditional art and design from different nations are accepted Technological upgrading has not only improved work culture but has also changed the attitude of workers.
(f) Political and legal environment is changing fast. Industrial development and open market competition, global values, qualitative production bring economic returns to the country and no political party or system can ignore industrial growth and production. Big industrial organisations also play significant role in the development of nation and thereby help political parties in reaching towards their objectives.
Legal environment is changing fast. Environment and pollution Act is implemented. Safety devices, training for use of safety measures and compensation mechanism are voluntarily accepted by modern industries.
(g) Economically and socially weaker sections are protected by law. Reservation of posts in industries for physically handicapped is introduced. Multinational companies are demanding parity in legal protection. Advanced technology is available to any company belonging to any country. Students desiring to upgrade their knowledge and technology can avail such knowledge and skill. They can avail educational opportunities from advanced countries.
(h) Religious values are used for establishing good industrial and human relations ‘Yoga’, ‘Aerobics’ and various tension and stress releasing practices are introduced in industries. People belonging to different religions, caste and culture are accepting each other’s religions, values and feelings human being is respected, his psychological feelings are honoured.
Industrial environment, work culture, methods and means of production are made suitable to human needs. Working hours are relaxed. Rest pauses are introduced. Recreation and pleasure have their own place in industrial atmosphere.
(i) Workers’ living conditions are made more comfortable. Temperature, humidity, noise, etc., are controlled to make man more comfortable. Along with medical aid, psychologist, psychotherapist and psychiatrist are consulted to make executives, managers and workers relieved from stress and strain of modern methods of production.
Environment within the industry also plays significant role in building human resources in an industry.
There are number of factors affecting inter-personal relationships in industrial environment:
(a) Union plays a prominent role. Union is an association of likeminded people, formed in order to protect the interest of members belonging to the organisation. As recruitment is done in consultation with union leaders, voluntary retirement is also done in consultation with union leaders. Negotiations, wage agreements, collective bargaining, etc., are major functions of unions in industrial environment.
(b) Culture of organisation, its values, objectives and goals sometimes lead to conflicting atmosphere. Conflicting personal and organisational values, traditional and modern values, ethos, right and duties, discipline and discipline practices, authority and accountability, leadership, subordinates perception of role of a leader, leadership styles, delegation of authority, participative and distributive process of production, etc., sometimes create conflicting atmosphere in the organisation as personal values come in conflict with organisational objectives of growth, production, quantity of production vs. maintenance of quality.
(c) Fast changing technology, changed attitude of workers and managements, broad-minded, outlook, effective and fast means of communication require pro-active and sometimes re-active attitude towards industrial environment. Industrial environment can be seen in totality but contradiction, alienation and change are also counter-currents affecting HRD even today struggle exists between those who own and/or control production and those who sell their labour for wages.
The politico- economic structure of the work organisation, the drive towards profit generation, the hierarchy of control, division of work, the dehumanizing structure of work processes, exploitative management practices and procedures, the manipulation of worker behaviour in organisations and other factors combine to form the basis of worker experience of alienation. Concept of alienation was developed by Durkheim, Karl Marx and Max Weber (alienation of white collar employees and managers).
Alienation has entered into different stages of human relations in industrial atmosphere. It affects the relationship of man and his work, to the thing he consumes, to his fellowmen and to himself. For Marx, work is the central reference point in dealing with human beings. Through work, man reproduces himself not only intellectually, but actively in what he makes.
‘Marx’s view of man; the worker was rooted in humanist Western philosophical tradition. Man is by nature creator — what contributes to the alienation of labour. Labour is external to workers, i.e., it does not belong to his intrinsic nature. He does not affirm to himself but denies himself. He feels at home when he is not working. His labour is not voluntary but forced one.
A work organisation consisting of individuals is not a collection of isolated individuals, but is a human community with social background. If human beings are ignored, alienation develops for the fulfillment of goals of the organisation. The idea of meaninglessness is the second major concept of alienation.
The working class has little or no access to information related to vital organisational issues. Along with meaninglessness, powerlessness is also a feeling where proactive attitude is required to tackle feelings of workers before they lose interest in work.
(d) Social norms regulating individual conduct are breaking down or are not as effective as rules that regulating human behaviour in the organisation. A reactive approach is required to amend human behaviour or modify action regulating human behaviour in the industry.
(e) Individuals the organisation prefers to behave the way in which they think to be as a right approach. They may not subscribe to conscious or unconscious protest. Against the organisational goals, it may not be possible for them socially approved norms may not be practical.
(f) Isolation or cultural values conflict is another process where reactivity is of primacies importance. The intellectuals sometimes assign low reward value to goals or belief that are typically highly valued in the given society, e.g., right to strike is a socially approved method for procuring one’s demand but as Mahatma Gandhi had rightly proclaimed it is the last weapon to be used only when all the other means of resolving disputes are exhausted.
(g) Last but not the least self-estrangement usage, aloofness from one’s own self, or loss of pride in work requires proactive approach. As an environment which does not provide support or does not satisfy basic human, social and psychological needs becomes a barrier in itself towards productive efficiency of workers, pro-active as well as re-active approach is required to handle such a conflicting environment.
Alienation and authoritarianism, alienation and personal bias, and alienation and socio-economic status require pro-active approach to safeguard work environment.
(h) Values – The values system of the founders or management will have important bearing on the working of the organisation, mission and objectives. This will have effects on the internal environment of the organisation.
(i) Image – The image of the company matters while raising finance, forming joint ventures or other alliances, making sales contracts, launching of new products, etc. These contribute in shaping internal environment.
(j) Rules – Rules are framed to carry-out the work of the organisation. Rules framed by management have an effect on employees’ union, etc., and ultimately affects internal environment.
Types of Business Environment – Socio-Cultural Environment, Economic Environment, Educational and Cultural Environment, Politico-Legal Environment and a Few Others
The socio-cultural environment includes mobility of labour, customs and convention, caste structure, cultural heritage, respect for elders, ethics and values, view towards scientific methods, and deference for seniority. All these conjointly determine the choice of the people, which in turn would govern the goods or services, and product range of the business houses.
Thus, the business venture and the kind of people working in the organization depend on the environment. Socio-cultural environment contributes to work ethics and work culture too.
Work ethics, as defined by the Webster International Dictionary, is a discipline that deals with moral duty and obligation. It is a group of moral principles or a set of values. It is a principle of conduct governing an individual or a profession. It is a standard of behaviour for social and professional well-being. In short, ethics can be defined as a science of moral principles and rules of conduct.
Culture is the integrated pattern of human behaviour that includes thought, speech, action and artifacts, and depends on man’s capacity for learning and transmitting knowledge to the succeeding generation (Webster Dictionary). A business is affected by the prevailing culture. In the organizational context, Marvin Bower, former managing director of Mckinsey and Company, defines culture as ‘the way we do things around here.’
Therefore, the way we carry out our multifarious activities in the business organization indicates our work culture. The work culture depends on the ethical values and beliefs of the management and the employees. These values and beliefs guide their activities and behaviour patterns in the business organization. Values such as responsibility, fairness, justice, integrity, commitment, and patriotism are universal and eternal.
The need for the values is time-tested and will exist forever. These values have the same meaning in any country, developed or undeveloped, such as America, India, Africa, and so on. Environment, experience, and education are the three factors that determine our attitudes towards the values.
Socio-cultural environments are usually seen to be changing frequently. To cope with the changes, a business house needs to follow a guiding principle that balances adaptation, and change its organizational culture to design the HR function accordingly in an organization.
The business sector shares economic relations with the government, the capital market, the household sector, and the foreign sector. The different sectors conjointly influence the trends and structure of the economy and the business as well. The form and functioning of the economy varies from one country to another. In a democratic setup, people exercise an influence, either directly or indirectly.
Some critical elements of this environment are the economic system, nature, anatomy, and functioning of the economy, economic planning, programmes, policy statements, proposals, controls, regulations, legislations, trends, structure, problems, and prospects. Obviously, economic environment influences both business management and the HRM initiatives that are required. Managers need to be aware of the economic factors and analyse them to drive the business in the right direction.
All the factors in an environment impact each other. The sociological environment affects and gets affected by the economic environment of business. Added to this, the educational- cultural, politico-legal, and historical environments are closely knit with the economic environment. Moreover, the educational environment greatly impacts a business. The rate of return approach of HR planning supports this view as the approach treats education as a contributor to productivity.
The status of economic development of a place is a determinant of the choice of the system of education. For example, only a few high income countries can afford to impart expensive higher education and fundamental researches in science and technology. Again, the system of education may be responsible for a given economic environment.
Vocational courses and training elevate the economic status of a country. Business houses acquire human resources, particularly from academia through campus interviews, and these resources are capable of directly contributing to their organizations.
The interdependence between educational and economic factors at the corporate level takes the form of a vicious circle. For example, a low-profit business concern may not find the resources required for finance management training or management development programmes, though it may feel the utmost need for the training and programme. As a result, there would be a shortage of highly qualified and trained management personnel in the business concern. Subsequently, lack of competent managers may lead to business inefficiency.
The form and structure of the economy is also conditioned by the socio-political arrangements; the two environments are intertwined and interlocked. In a parliamentary setup, most decisions are formulated, processed, and finalized by the cabinet ministers.
Under a presidential form of government, the President acts as the real manager of the state—it is he/she who takes the decisions. Political organizations, political stability, and strengths of the political parties lead to the political-economy. In case of political instability, business uncertainties develop and multiply, and businessmen may opt for initiating new business ventures.
A business operates under external forces in the environment. A series of political legislations such as the Monopolistic and Trade Practices Act (MRTP), Foreign Exchange Regulation Act (FERA), General Agreement on Tariffs and Trade (GATT), import policy, foreign exchange policy, and Urban Land Ceiling Act, may be necessary to cope with the economic environment.
The various acts represent the politico-economic characteristics of a country. The government’s intervention in business must be taken into account for its smooth running. The role of the World Trade Organization (WTO), the World Bank, and the business policies of other countries contribute to the international economic environment and impact the businesses operating in a country.
In the changing politico-legal environment, the guiding principle, continuous review and self-renewal, is an indispensable requirement for sustenance and growth. Hence, it is important for the HR manager to keep a check and be ready with a plan to tackle all the possibilities that might come his/her way.
Over the past few decades, science and technology have been advancing at a fast pace. The quality of goods depends on the plant and equipment, state of the technology employed to produce those, and the skill of the people. Computer numerical control (CNC), dual numerical control (DNC), horizontal machining centre (HMC), vertical numerical centre (VMC), and flexible manufacturing system (FMS) are some of the state-of-the-art technologies being used today.
These machines are precise in nature and are hence capable of manufacturing components with a high degree of accuracy. Moreover, these machines produce results faster as the cycle time is much lesser than in conventional machines. It is also important to keep in mind that the choice of technology depends on its availability and affordability by the business organization.
Advancements in automation and information technology has created challenging situations for the organizations. Large organizations are engaged in technological forecasting. During periods of such technological innovations, organizations need to consider the role of HRM.
This is because, technological up-gradation leads to developing a workforce that is able to work on the computer-enabled machines, managing changes, carrying out attitude surveys to assess the effect of the upgraded technology, etc. It is in these areas that HRM interventions become inescapable.
There are a number of forces in the international environment, which may have either favourable or unfavourable effects on a business. Following the GATT in 1993, liberalization of industrial licensing by developing countries and reduction of economic barriers has brought significant changes in business scenario.
The multilateral trade among the nations has also improved. If a country is disintegrated, then the exporters to that country are negatively affected. In the early 1990s, the disintegration of the USSR had adversely affected exporters in those countries.
Several multinational corporations have entered India with their expertise—know-how, values, and cultures. The inflow of expertise and know-how have contributed to the Indian business organizations and economy. Further, the presence of many players in one domain of business has forced organizations to be competitive.
People need to be trained to understand the forces favourable to the business organization, and derive the best possible benefits from them. The most crucial need is that of recognizing the forces that may produce unfavourable effects to the business, identifying the tactical moves, converting threats into opportunities, and implementing the remedial measures when HR development and management manifest their importance.
Globalization is another term used when one talks about the international environment. It refers to the tendency of firms to expand their business territory, extend their sales, ownership, and / or manufacturing into new zones abroad. For instance, in the automotive industry, Mercedes Benz has established its market share all over the world.
Similarly, Sony, Apple, Nike, etc., have markets around the world. Infosys, TCS, and Wipro, are some Indian software companies serving customers around the world by developing software codes and providing support services.
Following globalization, business houses now operate in a global village. Globalization has brought in both benefits and threats. The benefits are that products of better quality are made available to consumers at comparatively lower costs. Globalization has posed the threat of investing more on labour and employees who are feeling increasingly insecure about their jobs.
This applies to various products from computers to cars. In the post-globalization environment, the texture of the workforce has changed in India as well as in many other countries.
The task environment typically includes the industry to which an organization belongs, its competitors, customers of the products or services, techniques of production, suppliers of all types of inputs, stock market, raw materials, market sectors, and also the human resources and international sectors. An organization interacts directly with the task environment.
Any change in the task environment produces a direct impact on an organizations structure and its goals. It mainly impacts the suppliers, employees and customers, regulating bodies and agencies, and business associates.
Suppliers include providers of capital such as shareholders, debenture holders, banks, and financial institutions. Providers of materials in any form are also suppliers. Suppliers of capital look for return on investments. Suppliers of material require timely payments. Both these tasks are vital for an organization.
Suppliers are a critical part of the task environment because organizations must have a continuous source of resources in order to serve their customers. Organizations need to maintain a healthy relationship with the suppliers using HRM tools and techniques.
Employees are included in the payroll of the organization. Some employees may be members of trade unions, associations, collective bargaining forums, works committee, joint consultative machinery, etc. Employees need a work environment conducive for efficient working.
Customers include distributors, dealers, retailers, and consumers. Customer satisfaction is the ultimate aim of all business activities. The level of satisfaction of the end-user or the consumer must be measured through market surveys. Business houses operate under the regulations of designated agencies.
Competitors’ policies and practices directly influence a business unit. For example, the reduction of price of a product by one competitor produces a threat to another organization manufacturing the same product. Similarly, improvement in quality features of a product or set of similar products compels a competitor to give attention to quality improvement. Both the actions are directed to protect declining sales.
By collaborating with a business associate, one can gain the advantage of knowing the other’s tools, techniques, technology, best practices, and can benchmark the other. In case of shortage of capital, financial or non-financial, one can easily borrow from the other.
Finding the collaborating partner needs knowledge about that company, and skills of assessing their strengths and weaknesses. After collaboration, the firms are better prepared to face potential and strong competitors as they possess a combined strength.