Business cannot function in isolation or in a vacuum. Its environment has, more or less, a direct bearing on its success or otherwise. Business is a part of the total environment in which we live, being influenced by it, while being a force in influencing it. Social, political, scientific and technological and economic systems make up the external environment which has a tremendous impact on the development and growth of business. The environment of business comprises several segments which may be classified as under;
(i) Social environment:
Comprising customers and employees as well as social institutions which obtain benefit from business or provide benefit to it.
(ii) Economic environment:
The economic environment encompasses the whole economy, the various economic institutions, including the competing business enterprise with which business has to deal. The economic environment is set by the type of national economic system including the nature of property rights, ownerships of means of production, production relations, role of planning, functions of price mechanism, etc.
The government influences the economic environment of business through economic planning, monetary policies, fiscal policies and budgets, 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 motor vehicles, the sales of business firms manufacturing motor vehicles, the sales of business firms manufacturing motor vehicles will go up. Similarly, if the government exempts export units from income-tax, such business units will get a boost.
The economic environment of business also 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 go in for a public issue because of the risk of poor response.
(iii) Politico-legal environment:
The politico-legal environment of business comprises political and legal institutions of the country including the government and the legislature which regulate business activity, and draws upon the resources of business in the form of taxes, donations, etc.
The politico-legal environment provides the legal framework within which business is to function. Business is influenced by political organizations, political stability, government‘s intervention in business, constitutional provisions affecting business, foreign policy, etc.
As a result of the government’s policy of restricting the growth of multinational corporations (MNCs) in the country, pursued in the late seventies, the bottling and sale of Coca Cola was discontinued in India. However, in 1989, the government allowed another, MNC 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 liberalized licensing, imports and exports and inflow of foreign capital and technology into the country. The trend towards globalisation and singing of GATT agreement in 1993 posed new challenges and created new vistas of growth for the Indian business.
Stability of the government is also and important factor from the point of view of growth of business. Business persons prefer to start new units in those areas where there is political stability and where rule of law prevails. Legal environment determined by various laws and court decisions also put pressure on business.
For instance, several tanneries in Kanpur were ordered to be closed down by the Supreme Court, as they were polluting the Holy Ganges. Also, the Supreme Court passed on order for the closure of iron foundaries around the famous Taj Mahal because air pollution caused by them had an adverse impact on the beauty of Taj Mahal.
(iv) Technological environment:
Technological environment of business comprises the know-how and production and management technology available to business at any point or during a particular period of time. 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.
Nowadays, the pace of technological change is very fast. Technological environment influences business firms in terms of investment on technology, consistent application of technology and the effects of technology on markets. Therefore, every business organization has to be actively technology will create challenging situations for business firms in the not too distant future.
(v) International environment:
The forces in the international environment may have adverse or favorable impact on business. For example, the disintegration of USSR caused great miseries for Indian exporters in the early nineties. Not only their investment was blocked, further exporters were also hindered. This compelled the Indian business persons to explore new export markets.
Because of liberalisation of industrial licensing by developing nations and reduction of economic barriers between nations as a result of GATT agreement, 1993, several changes seem to be imminent in the near future. Multilateral trading among the nations will increase.
The role of WTO, IMF, WB and other international institutions will change and new economic order will take place leading to globalisation of economies. The entry of MNCs into a country is not only associated with the inflow of technical know-how and capital, but it may also pose threat to the home industries. The units having collaboration with the multinationals may stand to gain, but others may have to face competition in the domestic market.