Everything you need to know about the business environment. Business environment means the factors/activities those surround/encircle the business. In other words, business environment means the factors that affect or influence the business.
Business Environment refers to all those external forces, such as economic, social, political, regulatory, technological, natural and competitive factors which affects the business.
According to Arthur W. Weimer- “The business environment is the climate or set of conditions; economic, social, political or institutional in which business activities are conducted.”
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1. Introduction to Business Environment 2. Meaning and Definitions of Business Environment 3. Concept 4. Features 5. Importance
6. Vision, Mission and Goals of Business Environment 7. Influence of Business Environment on Business 8. Dimensions 9. Types 10. Problems.
What is Business Environment: Meaning, Concept, Features, Importance, Factors, Types, Problems and Other Details
Contents:
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- Introduction to Business Environment
- Meaning and Definitions of Business Environment
- Concept of Business Environment
- Features of Business Environment
- Importance of Business Environment
- Vision, Mission and Goals of Business Environment
- Factors Affecting Business Environment
- Influence of Business Environment on Business
- Types of Business Environment
- Problems of Business Environment
Business Environment – Introduction
Business includes all such activities which are organised and operated to provide goods and services to the society for profit earning. According to L. R. Dicksee, “A business is a form of activities pursued primarily with the object of earning profit for the benefit of those on whose behalf the business activities are conducted”. Thus, business involves production and/or exchange of goods and services to earn profit or in a broader sense, to earn a living.
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Here, it is important to note that profit is not the sole objective of the business. Therefore, business may have other objectives like promotion of welfare of the workers and the general public. Business achieves its objectives by producing and distributing goods and services which can satisfy human wants.
Environment refers to the surroundings and circumstances which influence an organisation or a person. Thus, an environment refers to the sum total of all factors – economic, political, business, social, legal and technological – which extend to and beyond the control of an individual or organisation operates. Business environment refers to those aspects of the surroundings of business enterprise which affect or influence its operations and determine its effectiveness.
Business and its environment are closely inter-related and mutually inter-dependent. Environment has a bearing on business and business has a bearing on environment. In the present-day business-oriented society, business has influenced environmental conditions probably as much as, or even more than environmental forces have shaped businesses. The environment within which business operates influences its entire structure and component parts. The business environment is the sum total of all things external to the firms which affect these firms.
The business environment is ever changing, dynamic and uncertain in nature. It is because of this that it is said that the business environment is the sum of all the factors outside the control of management of a company, the factors which are constantly changing and they carry with them both opportunities and risks or uncertainties which can, make or mar the future of business.
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Since the business environment is always capable of producing major shocks and surprises, the success of a business enterprise depends on its alertness and adaptability to changes in the environment. Though a business enterprise too, if it has the ability, can change the environment but to a very limited extent.
Therefore the basic task for the organization is to analyse the environment in which it operates, and to formulate its policies accordingly.
Business Environment – Meaning and Definitions: Provided by Eminent Authors Like Prof. Keith Davis, Philip Kotler, Prof. Gerald Bell, B. O. Wheeler and a Few Others
Environment means surrounding. Business environment means the factors/activities those surround/encircle the business. In other words, business environment means the factors that affect or influence the business.
Factors which affect the business include Social and Cultural factors (S), Technological factors (T), Economic factors (E), Political/Government factors (P), International factors (I) and Natural factors (N). (STEPIN)
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William F. Glueck defined the term environmental analysis as, “the process by which strategists monitor the economic, governmental/legal, market/competitive, supplier/technological, geographic and social settings to determine opportunities and threats to their firms.”
“Environmental diagnosis consists of managerial decisions made by analysing the significance of data (opportunities and threats) of the environmental analysis.”
Business Environment refers to all those external forces, such as economic, social, political, regulatory, technological, natural and competitive factors which affects the business.
Prof. Keith Davis defines business environment as the aggregate of all conditions, events, and influence that surround and affect it.
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According to Philip Kotler, A Company’s environment consists of factors and forces that are external to the business management function of the firm and that impinge on the management’s ability to develop and maintain successful transactions with its customers.
Andrews also defines the environment of a company as the pattern of all external influences that affect its life and development.
Prof. Gerald Bell defined business environment in more elaborative way. According to him, “an organisation’s external environment consists of those things outside an organization such as customers, competitors, government, supplies, financial firms and labour pools that are relevant to an organisation’s operations.”
On the basis of above definitions, it can be stated that business environment defines the external perspectives of a business firm and these perspectives or factors decide the firm’s behaviour and performance. However, it is for the management to assess the impact of these perspectives or variables and adopt them in their strategies.
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According to Davis, Keith- “Environment of the business means the aggregate of all conditions, events and influences that surround and affect it”
According to B. O. Wheeler- “Business Environment is the total of all – things external and internal to firms and individuals, which affect their organization and operations”.
According to Arthur W. Weimer- “The business environment is the climate or set of conditions; economic, social, political or institutional in which business activities are conducted.”
According to William F. Glueck and Lawrence R. 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 factors are socio — economic, technological, suppliers, competitors and Government.”
Business Environment – Concept
A business organisation does not exist in a vacuum. It exists in a world of concrete places and things, natural resources, important abstractions, and living persons. The sum of all these factors and forces is called the organisation’s environment. In fact, environment is a supra system of which organisations are subsystems, each having identifiable boundaries that separate a business organisation from its environment, which is external and beyond the control of the organisation. A business organisation receives inputs from the environment, transforms them, and returns outputs.
Environmental forces have a direct impact on the way the organisation structures its activities. It is usually necessary to establish functional departments within the organisation to deal with environmental inputs and outputs. For example, purchasing activity receives materials inputs; personnel departments recruit and select employees; market research sections obtain information from the environment. On the output side, sales departments perform the major function of distribution.
Public relations department is concerned with providing informational outputs to the environment that will enhance the reputation and prestige of the organisation. It is important, therefore, that all managers must take into account the element and forces of their external environment. They must identify, evaluate and react to the forces external to the enterprise that may affect its operations.
External environment may be classified in various ways, such as- local, national and international, or past, present and future or economic and non-economic. We are concerned with economic and non-economic environments and will confine our discussion to these environments. The determinants of economic environment are fiscal policy, monetary policy, industrial policy, physical controls of prices, incomes, the nature of economic system-capitalist, socialist, communist or mixed as in India – the tempo of economic development, the national economic plan, competition and customers.
Non-economic environment refers to social, political, legal, educational, cultural, physical and technological factors affecting business operation. It should be noted at the very outset that, although the economic and non-economic environments comprise different factors, there is an interaction between them. The economic environment has non-economic implications and the non-economic environment is affected by the economic environment.
Business Environment – 8 Significant Features: Specific and General Forces, Dynamic Nature, Complex in Nature, Affects Different Firms Differently and a Few Others
The business environment influences significant operations of a business.
Features of business environment are as follows:
Feature # 1. Specific and General Forces:
Business environment consists of specific forces like suppliers, customers, competitors, financiers, etc., which directly and separately influence the operations of business in an industry. General forces are overall social, environmental, economic, political, etc., encompassing individuals, institutions, societal norms or changes that affect business operations in a particular industry indirectly and / or equally.
Feature # 2. Dynamic Nature:
Business environment is very flexible and keeps changing as there are multiple factors in action at any given time. It is not static and cannot be monitored or predicted. Business policies and objectives need to accordingly adapt to the dynamic nature of the business environment.
Feature # 3. Complex in Nature:
Business environment is a combination of multiple factors (micro or macro level) which affects businesses differently. These factors consist of number of events, conditions and influences arising from different sources leading to a complex environment. Interactions between these factors can create new sets of influences and conditions making it difficult to determine which factor led to a particular situation or set of situations. For example, the outbreak of diseases or epidemics like Ebola, Swine flu, etc., can create a complex environment for pharmaceutical and healthcare industries who seek feasible solutions to contain and eradicate such diseases.
Feature # 4. Affects Different Firms Differently:
A particular change does not necessarily affect all businesses in the same manner. One business may embrace a change while another business may experience adverse effects. For example- growth in e-commerce retailing through mobile applications and internet on phones can positively affect online retail websites like Myntra, Flipkart, etc. but may negatively affect large retail stores.
Feature # 5. Short-Term and Long-Term Impact:
Every change in the business environment has a short-term and a long-term impact on businesses. In the short-term, businesses can experience increase in profits or productivity while in the long-term they can experience goodwill and reputation.
Feature # 6. Unlimited Effect:
Business environment can have unlimited effect on businesses. For example, the discovery of the steam engine during the industrial revolution has had an unlimited effect on most large businesses around the globe that largely depend upon mechanisation and automation.
Feature # 7. Uncertainty:
Business environment is characterised with uncertainty as it is very difficult to predict possible changes, mainly when changes are taking place too frequently. For example, changes in IT industry or fashion industry lead to uncertainty among businesses in those industries.
Feature # 8. Inter-Related and Interdependent Components:
All factors and forces in the internal and external environment are inter-related and interdependent to each other. For example, a (macroeconomic) increase in money supply can lead to inflation or high prices which in turn affect the prices of raw materials, labour, etc., thereby increasing costs of production for a business.
Business Environment – Importance
The external forces directly impact the working of a business therefore an efficient management analyses all the external factors to identify opportunities and threats affecting their business. A good understanding of external environment helps managers to bring in appropriate changes in their organisational policies and integrate their activities to achieve the organisational goals.
Let us now understand how the understanding, evaluating and reacting to external forces benefits a business organisation:
1. It enables the firm to identify opportunities and getting the first mover advantage:
The positive external trends and changes provide ‘Opportunities’ to a business organisation to improve its performance. A clear and timely identification of external changes facilitates a business organisation to become the ‘first mover’ and strengthen their position in the industry.
Example –
i. Samsung identified the popularity and scope of smartphones and rode on the popular and advanced Google developed Android, whereas Nokia failed to identify this scope and continued to use its Symbian OS. As a result Nokia’s market share fell from 55% to 27.7% in 2014.
ii. Volvo has capitalised well on its early mover advantage in the luxury bus segment in India. At present it has nearly 74% market share.
2. It helps the firm to identify threats and early warning signals:
Adverse changes in the external forces act as ‘threats’ to the business which hinders its performance. Early identification of threats act as a warning signal and helps managers to prepare strategies to convert threats into opportunities.
i. Political instability in Ukraine kept the investors away from investing in the country.
ii. If a competitor is planning to import the latest technology products at cheaper rates then it is a warning signal to existing enterprises to update their product and if they do not act on time they might lose their customers.
3. It helps in tapping useful resources:
For successful start and continued growth, every business is dependent on external forces for organising resources essential to carry out business activities. All the specific and general forces of the environment are the source to provide all the inputs like finance, machines, raw materials, power and water, labour, etc. On the other hand, business supplies the environment with its outputs such as goods and services for customers, payment of taxes to government, return on financial investment to investors etc.
Since the activities of business are highly dependent on the environment, it is important that business prepares its policies, strategies with a clear understanding of what external forces have to offer, and what do they expect from the business.
Example – Government announced reduction in custom duty if goods were imported from Korea. This will attract the Importers to start importing goods from Korea as it will cost lesser.
4. It helps in coping with rapid changes:
In today’s competitive world, the business environment is extremely dynamic. The ever-changing market conditions, ever-rising expectations of consumers, innovations and technological developments in production processes require managers to understand the changes at the same pace as the changes take place. They need to develop strategies not only to cope with the changes but also to use them as their strength to improve their market share.
Example – Every day there is a new model of car being launched with additional features of safety or different technology to attract customers. This stands true for mobile phones as well.
5. It helps in planning and policy formulation:
A clear understanding and analysis of business environment helps business to formulate its future plans and strategies to cope with all the external changes.
Example – If a country is going through a political change, business enterprises can analyse the beliefs or values of possible new leaders and prepare themselves for the change.
6. It helps in improving performance:
A business, which is dynamic and adapts changes, is able to meet the market demands and give their competitors an edge whereas a business enterprise, which continues to follow traditional methods of business and offers the same products, may not be able to succeed for long. Thus, the continuous monitoring of the business environment and adopting suitable business practices help business enterprises not only to improve their present performance but also continue to succeed in the market for a longer period.
Example- Enterprises who adopt new technology to produce products with newer features and better quality are able to increase their sales volume.
Business Environment – Vision, Mission and Goals
Business environment affects and determines the success of a business organisation. So its vision, mission and values are to be formulated keeping in mind the implications of environmental challenges. Business organisations work in complex and dynamic Environment. So, they are required to define their mission and goals in clear terms. By defining the business mission and goals, they may be able to cope with environmental changes.
Business Vision:
A vision delineates dreams of the management for the business, providing a macro view of the “where we are going” and a convincing rationale for why this makes good business sense for the business organisation.
Thus, vision points an organisation in a specific direction, charts a strategic path for it to follow in preparing for the future; and moulds organizational identity. It also communicates management’s aspirations to different stakeholders and helps the organisation to achieve its objectives. A vision is generally used as a guide to implement the strategy. Vision provides a clue about the feelings, beliefs, emotions and pictures of management.
Visions constitute the following:
(i) Coming up with a mission statement that defines what business the company is presently in and conveys the essence of “Who we are and where we are now?”
(ii) Using the mission statement as basis for deciding on a long term course making choices about “What we are going?”
(iii) Communicating the strategic vision in clear, exciting terms that arouse organisation wide commitment.
The process and outcomes of visioning is to develop an effective strategy to deal with the environmental factors. The management of the firm should try to inculcate the operation of the firm with the market demand to make the firm highly competitive and viable with the growth and profits meant for stakeholders.
Business Mission:
The mission is generally described as the scope of operation of the firm. It indicates about the organization what it is why it exists and the unique contribution it can make. Business is supposed to formulate or to review its mission, the basic purpose for and driving force behind the organization’s existence. Thus, it is generally defined in terms of the organization’s philosophy, self-concept, public image, location, and technology, concern for survival, customer targets and products.
It has been rightly stated that ‘the mission incorporates top management’s vision, a vivid picture of where the organization should be in the future, what it would be and whom it will serve. The mission communicates a compelling vision of the organization’s long term future state, helping managers, inspire employees and enlist their enthusiastic support toward fulfilling the aspirations described in the vision.
Thus, every organization should have a mission which will define its purpose and answers the question – what is our reason for being in business? It will also enable the management to identify the scope of its products or services carefully.
Mission Statement:
It states the organization’s underlying purpose and unique scope of operations that distinguishes it from similar types of organizations. With the help of mission statement management can easily articulate what the organization stands for and where it should be going.
In practice, it should contain following statements:
(a) The basic product or service to be offered, the primary markets or customer groups to be served and the technology to be used in production or delivery;
(b) The fundamental concern for survival through sustained growth and profitability;
(c) The managerial philosophy (company philosophy) in terms of basic beliefs, value, aspirations and philosophical priorities (what the company stands for);
(d) The public image to be sought; and
(e) The self-concept that people affiliated should have of the firm, which may include management style and work ethic.
Business Goals:
There are two measuring criteria for performance of a business firm. These are criteria of effectiveness and criteria of efficiency Effectiveness describes the ability to do the right thing. But efficiency indicates the ability to do things right. In this back drop, Organizations must formulate their goals for assessing their performance in proper perspective.
Goals specify exactly where the organization wants to go and what must be achieved thus allowing managers to develop the plans that will translate the mission into reality. Goals help the executives to guide and execute the planning process for better results.
Goals formulation is necessary due to following reasons:
(i) Goals provide a sense of direction.
(ii) Goals focus on organizational efforts.
(iii) Goals guide plans and decisions.
(iv) Goals help in evaluation process.
Level of Goals:
There are three specific levels of goals in a particular organization.
These are as follows:
1. Strategic Goals:
Top management formulates the strategic goals and they generally define the targets for the organization’s overall results. Actually, they are formal statement of the organization’s major intended achievements. In this context, there are eight areas that affect performance and survival of a business organization. These areas as recommended by Peter Drucker, are marketing, innovation, human resources, financial resources, physical resources, productivity, social responsibility and profitability.
2. Tactical Goals:
These goals are generally formulated by the top and middle management. Basically they are the targets for future results to be achieved by specific decisions for functional units of the organization. These goals are also termed as business level goals setting process each unit is expected to be instrumental in supporting the strategic goals of the organization.
3. Operational Goals:
These goals are generally formulated by middle and lower management. In most of the cases specific targets are set for results to be achieved by departments and individuals within the framework of functional units or the business divisions. That is why these goals are treated as functional level goals. They are most concentrated on short term results generally required to fulfill tactical and strategic goals.
Characteristics of Effective Goals:
Effective goals should have following features:
(i) Goals should be interesting and challenging and may be able to motivate managers to achieve better results.
(ii) Goals should be realistic and attainable within the framework of available resources.
(iii) Goals should be specific in nature. They should also be easily quantifiable and measurable. It will enable the management to understand exactly what is expected and exactly how progress will be evaluated.
(iv) Goals should have explicit provision for time factor-when results are to be achieved. It will encourage coordination in organizational activities to achieve results during the appropriate period.
(v) Goals should be relevant to the mission and appropriate to the management responsibility and skills.
Goals and Objectives:
Generally, goals and objectives are the same and are interchangeable to each-others. But, sometimes analyst demarcates a line of difference between the two. “Goals are aimed at the broad purpose and mission of the organisation while objectives guide the activities of groups and members toward the overall goals. Some analysts also argue that goals are close-ended attributes which are precise and expressed in specific terms. But objectives on the other hand are open ended attributes that denote the future states or outcomes.”
Thus above viewpoints indicate a minor difference and for all practical purpose goals and objectives both go together and they are treated as the same.
Business Environment – Influence on Business
Let us understand business environment and its influences on business:
Surrounding of any living creature is known as environment such as – friends, family, peers and neighbours. Environment also includes man-made structure such as – buildings, roads, hospitals and schools, etc. Similar to living creature every business is also surrounded by an environment such as – technology, competition, economic conditions, supply and demand, etc.
Environmental is combinations of various factors which are largely not under control of business. Business continuously interact with these factors understand the threats and explore the opportunities from these surrounding factors. In general, we can say business takes some inputs from environment and after the processing of these inputs, provides the outputs to environment.
The types of inputs from environment and outputs to environment depend upon business to business. For example, a cement company shall have different types of inputs and outputs than a steel company.
A successful business interacts with environment and increases its growth i.e., an environment influences the business growth therefore, it is necessary that business should be able to handle these influences successfully.
Environment Influences on Business:
Environment contains components like demand of products, supply of raw material, competitions and government rules on taxes etc. These components influence or affect a business for its day-to-day activities and long-term profit and growth. Therefore, understanding influences of environment such as – demand, supply, technology and competition, etc on business is very important for growth and continuity of business
Problem in Understanding the Business Environment:
It is not easy to understand the environment influences, because –
1. Environment encapsulates many hidden aspects such as – technology changes which make it difficult to understand.
2. Changes in environment are uncertain such as changes in demand and supply are difficult to measure correctly. For example, it is difficult for a company like TATA STEEL to predict accurately the demand for steel and supply of raw materials etc.
Framework to Understand the Environmental Influences:
Here framework means the steps required to understand the environmental influences. In spite of problems in understanding the environment, organization cannot ignore it and they need to create a framework to deal with such environment.
In general a framework consists the following:
1. First organization should take initial view on environment in terms of; how uncertain it is? How complex it is?
2. Second audit the impact of these environment factors such as – demand and supply etc on organization, in terms of continuity, growth and profit, etc., and accordingly should deal with those factors first which may impact maximum the organization
3. Final step is to focus on competition factor of environment because this is the factor for which organization should have a special strategy and focus to deal with.
Business Environment – 7 Important Types: Micro, Macro, Economic, Social, Technological, Political and Legal Environment
Every organization’s environment can be divided into two categories:
Type # 1. Micro Environment:
The immediate environment with which organization interacts for its day-to-day operations is known as Micro Environment. Every organization in particular industry will have its own internal environment and this environment primarily affects the working of a particular firm.
The Micro Environment deals with followings:
a. Employees
b. Customers
c. Suppliers
d. Local communities in which organization or firm operates
e. Direct competitors etc.
The Micro Environment influences organization day-to-day working.
Type # 2. Macro Environment:
The Macro Environment covers the broader areas or issues with which organization deals for its long-term working. This environment primarily affects the working of all the firms in particular industry. For example, economic conditions of a country or a state will affect all the firms in that country or state.
The Macro Environment deals with the following:
a. Government
b. Economic Conditions
c. Legal setup
d. Political setup
e. Technological changes
f. Global Environment
g. Demography
h. Social and Cultural issues
The Macro Environment influences organization long-term working. The Macro Environment plays a very important role in strategic planning for organization growth.
Type # 3. Economic Environment:
Economic environment includes those factors which give shape and form to the development of economic activities.
Components of economic environment are as follows:
i. Existing economic system in terms of relative role of public sector and private sector.
ii. Rate of economic growth in terms increase in gross national product and per capita income.
iii. Rates of savings and investments.
iv. Volume of imports and exports.
v. Balance of payments and foreign exchange reserve.
vi. Trends of agricultural and industrial production.
vii. Monetary policy.
viii.Budgetary policy (rates of taxes, government spending, and public debts — internal and external).
ix. Infrastructure.
x. Natural resources.
Type # 4. Social Environment:
Social environment consists of attitudes, beliefs, expectations, education, and customs of the society at a given point of time.
Components of social environment are as follows:
i. Growth rate and composition of population.
ii. Type of family structures.
iii. Level of education.
iv. Concern for quality of life.
v. Lifestyles, consumer preferences, and attitudes towards product innovation.
vi. Expectations from business and its workforce.
vii. Attitudes towards different occupations.
viii.Social customs and norms of behavior.
Type # 5. Technological Environment:
Technological environment refers to the state of technology used in different organizations.
Components of technological environment are as follows:
i. Level of technological development as a whole and in specific sectors.
ii. Degree of technological changes.
iii. Extent of use of particular advances like internet, electronic business, etc.
iv. Sources of technology acquisition.
Type # 6. Political Environment:
Political environment refers to political system and its working at a given point of time.
Components of political environment are as follows:
i. Constitution of the country.
ii. Political parties and their ideologies.
iii. Level of political morality.
iv. Nature and profile of political leaders and thinking of political personalities.
v. Political stability.
vi. Nature and extent of government intervention in business.
vii. Behaviour of bureaucracy towards business like red-tapism, delay, etc.
Type # 7. Legal Environment:
Legal environment consists of legal rules and regulations which affects working of organizations.
Components of legal environment are as follows:
i. Legal framework governing organizational functioning
ii. Court decisions concerned with the above aspects.
Business Environment – 7 Major Problems
There are several problems as arising in business environment situations.
Some of the problems are briefly stating here:
(i) There is lack of proper education and literacy for the awareness about environmental protection,
(ii) In our social structure, there are unjustified economic inequalities in context of property, occupation, income and profession,
(iii) In industrial scenario, the employers are not paying proper attention towards the workers’ welfare facilities,
(iv) The rules, regulations and different norms concerning of environmental protection are not properly applicable and followed by our citizens,
(v) A major part of business houses are not paying their attention to follow the ethical norms and behaviour towards developing the environmental control,
(vi) We are not paying our full attention to follow the methods and techniques for pollution control,
(vii) We are not paying attention towards proper allocation and utilisation of available resources.