CH.1 Business Environment Flashcards
Business environment meaning and definition
The term ‘business environment’ refers to the sum total of all individuals, institutions and other forces that lie outsides a business enterprise but may influence its functioning and performance.
According to Keith Davis, “Business environment is the aggregate of all conditions events and influences that surround and effect the business organisation”.
The main features of business environment are:
a) Totality of external forces - Business environment is aggregative in nature because it is the sum total of all the factors of a business enterprise.
b) General and Specific forces - General forces such as economic, social, political and legal conditions which indirectly affect the business whereas specific forces such as investors ,customers and competitors directly influence the business enterprise.
c) Interrelatedness - Different elements of a business environment are closely interrelated. Eg. growing awareness for health care has led to increase in the demand for health foods and health resorts.
d) Complexity - Business environment is complex because it consists of several interrelated elements which keep on changing. Eg. It is difficult to know the impact of economic, social and other forces on changes in demand etc.
e) Dynamic - Business environment is not static. Entry of new competitors in the market, development of new technology etc. are examples of environmental changes.
f) Uncertainty - Business environment is largely uncertain because it is very difficult to predict future events particularly changes in technology and fashion which occur fast and frequently.
g) Relativity - Business environment is a relative concept as it differs from country to country and even region to region. For example, demand for sarees is quite high in India and almost non-existent in Japan.
h) Multidimensional - Business environment has several dimensions such as micro and macro.
i) Mutual dependence - Different components of business environment are interdependent. Eg. economic forces affect non-economic forces.
j) Diversity - Business environment is diverse in nature.
k) Non-controllable - The factors and forces that constitute business environment are largely beyond the control of a single business organisation.
Business Environment Relationship diagram and explanation.
A business enterprise is an open system. It continuously interacts with its environment. It takes inputs ( such as raw materials, capital, labour, energy and so on) from its environment, transforms them into goods and services and sends them back to the environment.
Importance of business environment
It is very important for business firms to understand their environment and changes occurring in it. Business enterprises which know their environment and are ready to adapt to environmental changes would be successful. However, firms which fail to adapt to their environment are unlikely to survive in the long run. Eg. some Indian firms suffered considerably because they failed to appreciate the tightening regulations against environmental pollution.
Environmental forces create opportunities for expansion and growth through opening of new markets, increase in population and incomes etc. Eg. the growing demand for cars has led to tremendous increase in the sales of both Indian and foreign car firms.
Environmental forces may act as constraints such as shortage of critical raw materials, labour supply etc. Eg. growing competition from multinational firms forced many small firms in India to sell out.
It is essential to forecast environmental conditions before establishing objectives and formulating strategic plans. Eg. a firm manufacturing baby food must take into account the decline in birth rate while formulating production and sales plans.
Appropriate and timely steps must be taken to face the environmental changes.
Environmental scanning meaning
Knowledge of environmental changes is very helpful in the formulation of business plans. A business firm can obtain this knowledge through environmental scanning. Environmental scanning is the process by which organisations monitor their relevant environment to identify opportunities and threats affecting their business.
Direct advantages of understanding the environment
i) First Mover Advantage - Awareness of environment helps an enterprise to take advantage of early opportunities instead of losing them to competitors. Eg. Maruti Udyog became the leader in small car market because it was then first to recognise the need for a small car on account of rising petroleum prices and a large middle class in India.
ii) Early warning signal - Environmental awareness serves as an early warning signal. It makes a firm aware of the impending threat or crisis so that the firm can take timely actions to minimise the adverse effects, if any. Eg. when new firms entered in the mid-segment cars (threat), Maruti Udyog increased the production of its Esteem threefold.
iii) Customer Focus - Environmental understanding makes the management sensitive to the changing needs and expectations of consumers. Eg. Hindustan Lever launched small sachets of shampoos and other products realising the wishes of customers.
iv) Strategy formulation - Environmental monitoring provides relevant information about the business environment and is the basis of planning and policy making. Eg. ITC realised that there is a vast scope for growth in the travel and tourism industry in India. With the help of this knowledge, ITC planned new hotels both in India and abroad.
v) Coping with Change - Business leaders are expected to cope with rapid changes in the environment . The leaders need to understand the aspirations of the people and other environmental forces through environmental scanning.
vi) Public change - A business firm can improve its image by showing that it is sensitive to its environment and responsive to the aspirations of the public. Leading firms like Reliance Industries, ICICI Bank have built good image by being sensitive and responsive to environmental forces.
v) Continuous Learning - Environmental analysis serves as a broad based and ongoing education for business executives. With the help of environmental learning managers can react in an appropriate manner and thereby increase the success of their organisations.
Dimensions of business environment
There are two main dimensions of business environment: i) Micro ii) Macro
Micro environment meaning
It refers to all those internal and external factors which exercise a direct influence on the working and performance of an individual business organisation.
Micro environment is also called Direct Section Environment or Task Environment.
Internal environment meaning
It refers to all the factors existing within a business firm. They are considered as controllable since the enterprise has control over them. For example, a company can modify or alter its organisational structure, polices, programmes, personnel etc.
A strength is an inherent capability of an enterprise which can be used to gain strategic advantage over its competitors.
A weakness is an inherent limitation or constraint of an enterprise which creates strategic disadvantage.
Micro environment internal factors
a) Corporate Culture - The values, beliefs and attitudes of the founders and the top management of a company determines what the company stands for and what it considers as important. For example, the strong culture of Tata Steel (formerly TISCO) has contributed to its success.
b) Mission and objectives - The business philosophy and purpose of a company guide its priorities, business strategies, product market scope and development process. Eg. the mission of Dhirubhai Ambani, to make Reliance the biggest group in the private sector, prompted him to launch world-scale plants in petrochemicals and other industries.
c) Top Management Structure - The board of directors set the direction and monitor the performance of the company. If the board of directors of a company are well qualified and organised, then they would beable to outperform companies who lack such board of directors.
For example, some companies are closely held, like Wipro, whose promoters hold majority of the shares.
d) Power structure - The internal power structure relationship between the board of directors and the chief executive is an important factor.
e) Company image and brand equity - The image and brand equity of a company help in raising finance, choosing dealers or suppliers and entering foreign markets.
f) Human and other resources - The morale and motivation of the employees plays a vital role in the success of the firm. Eg. Tata steel can carry out a large-scale modernisation and restructuring.
External environment meaning
External factors refer to those individual and groups or agencies with which a business organisation comes into direct and frequent contact with during the course of its functioning.
These individuals and groups are called stakeholders.
Micro Environment external factors
a) Customers - The people who purchase goods and services from a firm are termed as customers. A business exists to create and satisfy its customers. There are many different types of customers such as individuals, institutions and government departments. The firm may select a target customer group based on factors such as elasticity of demand etc.
b) Competitors - A company may face both direct and indirect competition. Direct competition refers to other firms which offer the same or similar products. Eg. Sony TV faces direct competition from other firms like Samsung and LG. Indirect competition refers to other firms which are competing for discretionary income. Eg, a cinema house faces indirect competition from other firms marketing entertainment.
c) Suppliers - Suppliers refer to those people who supply raw materials to the company. Reliable sources of supply enable a company to carry out un-interrupted operations. Suppliers influence the quality levels of the goods and the cost of manufacturing. It is very risky to depend on a single supplier.
d) Marketing Intermediaries (Middlemen) - Marketing intermediaries help a company with the promotion, sale and distribution of the goods to the consumers. Eg. agencies, wholesalers and retailers serve as a link between the company and its consumers. Advertising agencies and insurance companies are an example of other types of marketing intermediaries.
e) Financiers - Shareholders, financial institutions, debenture holders and banks provide finance to the company. Eg. a company cannot raise funds through shares if the financiers are not risky.
f) Publics - These include those groups who have an actual interest in the company or influence the company’s ability to achieve its objectives. Publics can either have a positive or negative impact on a business enterprise. Eg. media groups, environmentalists and non-government organisations (NGOs).
Macro environment meaning
It is the general environment in which the business firm and the environmental forces in its micro environment operate in. It is also called Indirect Action Environment.
Components of Macro Environment
The components are:
1) Economic environment
2) Social environment
3) Legal environment
4) Technological environment
5) Political environment
Economic environment + Components
It contains all the factors of economic development which influence the product market scope of the business.
Components:
a) The nature of the economic system of the country
b) Structural anatomy of the economy
c) Organisation and development of the capital market
d) Economic policies - industrial policy, monetary policy and fiscal policy
e) Stage and pace of economic growth of the country
