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Understanding the environment within which the business has to operate is very
important for running a business unit successfully at any place. Because, the
environmental factors influence almost every aspect of business, be it its nature,
its location, the prices of products, the distribution system, or the personnel
policies. Hence it is important to learn about the various components of the
business environment, which consists of the economic aspect, the socio-cultural
aspects, the political framework, the legal aspects and the technological aspects
etc. In this chapter, we shall learn about the concept of business environment,
its nature and significance and the various components of the environment. In
addition, we shall also acquaint ourselves with the concept of social
responsibility of business and business ethics.
OBJECTIVES
After studying this lesson, you will be able to:
explain the meaning of business environment;
identify the features of business environment;
describe the importance and types of business environment;
describe the recent developments in Indian Economy that have greatly
influenced the working of business units in India;
explain the concept of social responsibility of business;
state the social responsibility of business towards different interest groups;
and
explain the concept of business ethics.
As stated earlier, the success of every business depends on adapting itself to the
environment within which it functions. For example, when there is a change in the
government polices, the business has to make the necessary changes to adapt it
self to the new policies. Similarly, a change in the technology may render the
existing products obsolete, as we have seen that the introduction of computer has
replaced the typewriters; the color television has made the black and white
television out of fashion. Again a change in the fashion or customers’ taste may
shift the demand in the market for a particular product, e.g., the demand for
jeans reduced the sale of other traditional wear. All these aspects are external
factors that are beyond the control of the business. So the business units must
have to adapt themselves to these changes in order to survive and succeed in
business. Hence, it is very necessary to have a clear understanding of the concept
of business environment and the nature of its various components.
The term ‘business environment’ connotes external forces, factors and institutions
that are beyond the control of the business and they affect the functioning of a
business enterprise. These include customers, competitors, suppliers, government,
and the social, political, legal and technological factors etc. While some of
these factors or forces may have direct influence over the business firm, others
may operate indirectly. Thus, business environment
may be defined as the total surroundings, which have a direct or indirect bearing
on the functioning of business. It may also be defined as the set of external
factors, such as economic factors, social factors, political and legal factors,
demographic factors, technical factors etc., which are uncontrollable in nature
and affects the business decisions of a firm.
Micro environment
These elements close to a company that impact the company's ability to serve its
customers. There are six components of the microenvironment: the company's
internal environment, composed of the management personnel and including the
finance, purchasing, manufacturing, research and development, and marketing
departments; the company's suppliers, who provide the goods and services necessary
for the production of the company's products; the marketing intermediaries,
composed of all the individuals or companies who help in the promotion, selling,
and distribution of the company's products; the customers, consisting of the five
types of markets in which the company may sell its products (consumer, industrial,
reseller, government, and international markets); the company's competitors; and
the company's various publics, which can be any individual or group that can
affect the company's ability to achieve its objectives, such as citizen action
groups, the media, or the government.
A firm wanting to market its product in various regions with diversified cultures
will have to carefully study the existing consumption pattern & scope for creating
demand for new products & will have to adjust their marketing communication to
cultural characteristics.
If the society is multi- cultural, then the firm can not meet the demands of
different groups with a uniform product. To be successful in a multi cultural
society, the firm will have to carefully study the consumption behavior of
different groups.
Themselves
Identify with brands for self expression
Organizations
Trend of decline in trust and loyalty to companies
Society
Patriotism on the rise
Nature
“lifestyles of health and sustainability” (LOHAS) consumer segment
Universe
Includes religion and spirituality
Legal Environment
This refers to set of laws, regulations, which influence the business
organizations and their operations. Every business organization has to obey, and
work within the framework of the law. The important legislations that concern the
business enterprises include:
Besides, the above legislations, the following are also form part of the legal
environment of business.
(i) Provisions of the Constitution: The provisions of the Articles of the Indian
Constitution, particularly directive principles, rights and duties of citizens,
legislative powers of the central and state government also influence the
operation of business enterprises.
(ii) Judicial Decisions: The judiciary has to ensure that the legislature and the
government function in the interest of the public and act within the boundaries of
the constitution. The various judgments given by the court in different matters
relating to trade and industry also influence the business activities.
The survival and success of each and every business enterprise depend fully on its
economic environment. The main factors that affect the economic environment are:
(b) Economic Policies: All business activities and operations are directly
influenced by the economic policies framed by the government from time to time.
Some of the important economic policies are:
The government keeps on changing these policies from time to time in view of the
developments taking place in the economic scenario, political expediency and the
changing requirement. Every business firm has to function strictly within the
policy framework and respond to the changes therein.
(c) Economic System: The world economy is primarily governed by three types of
economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii)
Mixed economy.
India has adopted the mixed economy system which implies co-existence
of public sector and private sector.
There are two areas of research that are emblematic of the discipline: The attempt
to understand the causes and consequences of short run fluctuations in national
income (the business cycle cycle) the fluctuations of economic activity. The cycle
involves shifts over time between periods of relatively rapid growth of output
(recovery and prosperity), and periods of relative stagnation or decline
(contraction or recession) and the attempt to understand the determinants of long
run economic growth (increases in national income). Macroeconomic models and their
forecasts are used by both governments and large corporations to assist in the
development and evaluation of economic policy and business strategy.
Macroeconomic Policies
In order to try to avoid major economic shocks, such as great depression,
governments make adjustments through policy changes which they hope will succeed
in stabilizing the economy. Governments believe that the success of these
adjustments is necessary to maintain stability and continue growth. This economic
management is achieved through two types of strategies.
Fiscal Policy
Government's revenue (taxation) and spending policy designed to
(1) counter economic cycles in order to achieve lower unemployment,
(2) achieve low or no inflation, and
(3) achieve sustained but controllable economic growth.
In a recession, governments stimulate the economy with deficit spending
(expenditure exceeds revenue). During period of expansion, they restrain a fast-
growing economy with higher taxes and aim for a surplus (revenue exceeds
expenditure). Fiscal policies are based on the concepts of the UK economist John
Maynard Keynes (1883-1946), and work independent of monetary policy which tries to
achieve the same objectives by controlling the money supply.
Fiscal policy is described as being neutral, expansionary, or contractionary. An
expansionary fiscal policy occurs when the government lowers taxes and/or
increases spending; thus expanding output (national income). An increase in
government spending or a cut in taxes shifts the aggregate demand curve to the
right. An expansionary fiscal policy will expand the economy's growth. A
contractionary fiscal policy occurs when the government raises taxes and/or lowers
spending; thus lowering output (national income). A decrease in government
purchases or an increase in taxes shifts the aggregate demand curve to the left. A
contractionary fiscal policy will constrict the economy's overall growth.
Economic effects of fiscal policy
Fiscal policy is used by governments to influence the level of aggregate demand in
the economy, in an effort to achieve economic objectives of price stability
stability, full employment and economic growth.
Monetary Policy
Economic strategy chosen by a government in deciding expansion or contraction in
the country's money money-supply supply. Applied usually through the central bank,
a monetary policy employs three major tools:
(1) buying or selling national debt,
(2) changing credit restrictions, and
(3) changing the interest rates by changing reserve requirements.
Monetary policy plays the dominant role in control of the aggregate demand and, by
extension, of inflation in an economy. Also called monetary regime.
Monetary policy is generally referred to as either being an expansionary policy,
or a contractionary policy, where an expansionary policy increases the total
supply of money in the economy, and a contractionary policy decreases the total
money supply.
Expansionary policy is traditionally used to combat unemployment in a recession by
lowering interest rates, while contractionary policy has the goal of raising
interest rates to combat inflation (or cool an otherwise overheated economy).
Monetary policy should be contrasted with fiscal policy, which refers to
government borrowing, spending and taxation.
Monetary policy rests on the relationship between the rates of interest in an
economy, that is the price at which money can be borrowed, and the total supply of
money. Monetary policy uses a variety of tools to control one or both of these, to
influence outcomes like economic growth, inflation, exchange rates with other
currencies and unemployment. Where currency is under a monopoly of issuance, or
where there is a regulated system of issuing currency through banks which are tied
to a central bank, the monetary authority has the ability to alter the money
supply and thus influence the interest rate (in order to achieve policy goals).
A policy is referred to as contractionary if it reduces the size of the money
supply or raises the interest rate. An expansionary policy increases the size of
the money supply, or decreases the interest rate. Further monetary policies are
described as accommodative if the interest rate set by the central monetary
authority is intended to spur economic growth, neutral if it is intended to
neither spur growth nor combat inflation, or tight if intended to reduce
inflation.
There are several monetary policy tools available to achieve these ends. Within
almost all modern nations, special institutions (such as the Bank of England, the
European Central Bank or the Federal Reserve System in the United States) exist
which have the task of executing the monetary policy independently of the
executive. In general, these institutions are called central banks and often have
other responsibilities such as supervising the smooth operation of the financial
system.
It must now take into account such diverse factors as:
I) short term interest rates;
II) long term interest rates;
III) velocity of money through the economy;
Risks in international trade
The risks that exist in international trade can be divided into two major groups:
Economic risks
. Risk of insolvency of the buyer,
.Risk of protracted default - the failure of the buyer to pay the amount due
within six months after the due date
. Risk of non acceptance
. Surrendering economic sovereignty
Political risks
. Risk of cancellation or non renewal of export or import licences
. War risks
. Risk of expropriation or confiscation of the importer's company
. Risk of the imposition of an import ban after the shipment of the goods
. Transfer risk - imposition of exchange controls by the importer's country or
foreign currency shortages
. Surrendering political sovereignty
Exchange rates
Price for which the currency of a country can be exchanged for another country's
currency.
Factors that influence exchange rate include
(1) interest rates,
(2) inflation rate,
(3) trade balance,
(4) political stability,
(5) internal harmony,
(6) high degree of transparency in the conduct of leaders and administrators,
(7) general state of economy, and
(8) quality of governance.
In finance, the exchange rate (also known as the foreign foreign-exchange rate
rate, forex rate or FX rate rate) between two currencies specifies how much one
currency is worth in terms of the other.
The foreign exchange market is one of the largest markets in the world. By some
estimates, about 2 trillion USD worth of currency changes hands every day. The
spot exchange rate refers to the current exchange rate.
The forward exchange rate refers to an exchange rate that is quoted and traded
today but for delivery and payment on a specific future date.
Political Environment
This includes the political system, the government policies and attitude towards
the business community and the unionism. All these aspects have a bearing on the
strategies adopted by the business firms. The stability of the government also
influences business and related activities to a great extent. It sends a signal of
strength, confidence to various interest groups and investors. Further, ideology
of the political party also influences the business organization and its
operations. You may be aware that Coca-Cola, a cold drink widely used even now,
had to wind up operations in India in late seventies. Again the trade union
activities also influence the operation of business enterprises. Most of the labor
unions in India are affiliated to various political parties. Strikes, lockouts and
labor disputes etc. also adversely affect the business operations. However, with
the competitive business environment, trade unions are now showing great maturity
and started contributing positively to the success of the business organization
and its operations through workers participation in management.
The political environment includes all laws, government agencies, and lobbying
groups that influence or restrict individuals or organizations in the society. The
technological environment consists of those forces that affect the technology and
which can create new products, new markets, and new marketing opportunities.
Abernathy and Utterback took this idea - and the experience of many different
sectors and showed that there are different phases in the technology life cycle.
Stages in the innovation life cycle