THE NATURE AND STRUCTURE OF BUSINESS ENVIRONMENT

Chapter

1 The Nature and

Structure of
Business
Environment Copyright © 2004, Suresh Bedi

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 THE NATURE AND STRUCTURE OF BUSINESS ENVIRONMENT

Introduction
Business environment is the resultant of a number of interacting and constantly changing
social and economic forces It creates challenges, opens up new opportunities and affects
the strengths and weaknesses of various business segments.

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The International Environment

The international environment is basically determined by the growth of the world
economy, distribution of world GDP, economic relations and interdependence between
nations and international economic policies of major industrial market economies.
The risk and uncertainty content of the international environment is generally higher as
compared to the domestic environment.
The perceived risk of operating in this environment is basically three-fold:
 Political risk,
 Country risk
 Cultural risk

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Domestic Macroeconomic Environment

It is circumscribed by the economic system under which an economy functions. It
describes the level of prosperity indicated by the level and growth of income and wealth
of the society

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Economic System
An economic system is a way in which a society is organized to decide the following three
basic questions of any economic organisation:
 What products should be produced and in what quantities?
 How should the products be produced?; and
 For whom should the products be produced?
Major economic systems the world over can be broadly classified as follows:
Market Economy an economic system in which the basic economic questions are left to the
market mechanisms for solutions.
Command Economy where most of the productive assets are owned and operated by the
government.

Contd…

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Mixed Economy where ‘market’ and ‘command’ none of the two elements has
dominating presence. Most of the developing economies like India are mixed
economies with public sector and private sector playing important roles together.

Socialist Market Economy where productive resources are owned by the state but the
resource allocation, production and distribution decisions are based on the principle of
the market.

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Growth and Distribution of Environment

Economic growth refers to the process of increase in real output over a period of
time There are three basic measures of a country’s real output :-
Gross Domestic Product (GDP)
Net domestic product (NDP)
Gross National Product (GNP)

Contd…

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 Macroeconomic Stability important conditions for the growth of business.

 Economic Policy
 Monetary Policy
 Fiscal Policy
 Industrial Policy
 Trade Policy
 Competitive Environment

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Non-Economic Environment
The constituents of the non-economic environment.
Political Environment Political factors, including international political relations,
matter a lot particularly for large multinational firms and export firms operating in a
country.
Legal Environment
Legal system of a country establishes codes and procedures for various types and
aspects of business and deals with deviations or infringement law like bribery, product
counterfeiting, gray markets, black markets, consumer deception and tax evasion.

Cont…

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Cultural Environment
Culture has a profound impact on the language, literature and communication
process within a society and business firms have to adjust their marketing
communication to the cultural characteristics.

Demographic Environment
Demographic characteristics of a country like size, growth rate of population,
population density, sex ratio, fertility and mortality rates, age composition, life
expectancy have an important influence on business environment.

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Sectoral Environment
The business conditions in a particular industrial or service sector are determined by
the nature and level of demand, tax structure, state of competition, technological and
supply factors and government policy relating to that sector.

Public Relations Environment

Every organisation depends upon, and is in relationship with, a number of outside
groups, organisations and individuals.

• Suppliers
• Customers
• Distribution Channel Members
• Rivals
• Other Entities

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Internal Environment
The internal environment is critically dependent on line and staff relations, industrial
relations, job design and coordination, team spirit, quality of internal communication,
work and productivity standards, compensation systems and employee motivation.

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