BUSINESS ENVIRONMENT

Business doesnt function in vaccum. Organisation can grow and survive when it adapts to changing environment. Rapid changes are involved due to coming up of new ideas, new technology, political changes and economic changes.

 Business environment is aggregate of all the functions, events that affects the business. Surroundings of business enterprise which have influence on the functioning of business.

Internal environment
REFERS TO INTERNAL FACTORS WITHIN THE ORGANISATION INCLUDES 5 M S (men, machine, material, management, money) ALL FACTORS ARE CONTROLLABLE IN NATURE

Components of Internal Environment

External Environment
Surroundings of business enterprise which have influence on the functioning of the business. Business Environment may be defined as a set of external factors such as economic factors, socio-cultural factors, government and legal factors, demographic factors which are uncontrollable in nature and which affect the business decisions of a firm or industry.

External Environment
External aspects of surroundings of business enterprise External Factors are Uncontrollable in nature Success of business lies in their awareness and adaptability Like socio-cultural factors, government and legal factors, demographic factors etc

Types of External Environment

Two types:A. Micro Environment. B. Macro Environment.

Micro Environment
Also known as Operating Environment / Task environment of business. It consists of company s immediate environment that affects the performance of the company. These includes customers, suppliers, market intermediaries, competitors and public. Definition by Philip Kotler

1. Suppliers
Suppliers are persons who supply raw materials and components to business. If supplier is reliable, business will run smoothly & it will have to stock less which will decrease it s inventory cost. Business must depend upon multiple suppliers which would reduce it s risk of non-supply by one supplier on time.

2. Customers
Central point of any business. Customers are of different types such as retail customers, industrial customers, govt. institutions. Success of business depends upon identifying customers needs, likings and enhancing customer satisfaction. Business houses should conduct consumer research and design the product as per the needs of consumers.

3.Market Intermediaries
Link b/w company and final consumer. Help the company to promote, sell and distribute the product to final consumers. Includes :A. Middlemen like wholesalers, retailers. B. Marketing Agencies- like advertising agencies, media firms, market research firms. C. Financial Intermediaries- like banks, insurance companies. D. Physical Intermediaries- like warehouses, transport agencies.

4. Competitors
Business has to adjust its various activities according to actions and reactions of competitors. Business has to analyze the strategies of competitors and make counter strategies. Business need to identify the weaknesses of it s competitors and use such weaknesses to strengthen its own business.

5. Public
It is any group which has actual or potential interest in the business. It includes:A. Media public- newspapers, magazines which publishes remarks about the company. B. Local public- people living in the area where business is set-up.

Macro Environment
General environment of the business. Macro forces are uncontrollable in nature. Growth and survival of the business depend upon adaptability to macro economic factors. Includes political environment, economic environment, technological environment, socio-cultural environment, demographic environment and international environment.

Definition of Macro Environment

Macro environment includes forces that create opportunities and pose threat to business units. It includes economic, demographic, natural, technological, political and cultural environments. By Philip Kotler

1. Economic Environment
It includes the economic factors which have impact on the working of the business. Complex and Dynamic in nature. This environment changes with changes in govt. policies and political situations. It includes 3 elementsA. Economic conditions. B. Economic policies. C. Economic system.

Economic conditions
Includes income level, distribution of income, demand and supply trends , trade cycles and industrial growth. For example - Improvement in economic conditions will improve quality of life of the people and increase the purchasing power. For example - If economy is in boom, it positively affects demand and market share.

Economic policies
Economic policies are framed by the govt. These policies establish the relationship b/w business and govt. Various economic policies includes- Monetary policy, Fiscal policy, Industrial policy, ExportImport policy. These policies may grant tax holidays, provide subsidies, custom duty or increase the same for business houses.

Economic system
Economic system of the country may be1. Capitalism dominated by private sector. 2. Socialism the govt. plays important role in economic development of such economies. 3. Mixed- both public and private sector coexist.

2. Political Environment
It includes the following components:A. Political stability in the country. B. Political Ideology of the country. C. Welfare activities of the govt. D. Relation of the govt. with other countries. E. Centre State Relationship.

3. Socio-cultural Environment
It includes social and cultural factors such as:a) Caste system. b) Family system. c) Religion. d) Education. e) Marriage. f) Habits and preferences. g) Urbanization. h) Customs and traditions. i) Social responsibility of business.

4. Technological Environment
Technology is dynamic. Fast changes in technology render plants and products obsolete quickly. Success of business depends upon innovation and research. Their should be rapid technology upgradation on the part of businesses.

5. Demographic Environment
It is the study of features of population Important demographic factors are:a. b. c. d. e. f. g. Population size and growth rate Age composition Gender composition Income-level Education level Family size Urban Rural population

6. International Environment
This type of environment is important for the industries depending upon imports and exports. Factors of International Environment are:a. b. c. d. Globalization Liberalization Global Financial Crisis International Terrorism

7. Natural Environment
It includes geographical and ecological factors such as: Natural resources Weather and climatic conditions Port facilities Topographical factors such as soil, sea, rivers, rainfall Environmental pollution Natural calamities

SIGNIFICANCE / NEED OF STUDY OF BUSINESS ENVIRONMENT

1. To frame policies- business makes its policies keeping in view the demands of changing environment. 2. To ensure optimum utilization of resources- without thorough understanding of internal and external environment , financial resources, human resources and physical resources cannot be utilized in an optimum manner. 3. To analyze Competitors Strategies and Formulate counter measuresby analysing business environment, we can come to know about the competitors strategies and can form counter strategies to tackle them.

 4. To keep business dynamic and innovativeAwareness of environmental changes makes the business managers more alert and dynamic . They can expand the business as and when favorable changes are taking place in the environment; and if any unfavorable changes are taking place, they can prepare themselves for facing these unfavorable changes with well planned strategies.

 5. To provide input for decision makingDecision making means to select an alternative among the various alternatives available and by analyzing the various alternatives , the best alternative is selected. Study of business environment and its components provide such information to the decision-maker.

6. To Find out the strengths of the business The strength of the business refers to the capacity by which an organization can gain advantage over its competitors. Environmental Analysis helps the business organization to find out its strengths. After finding out the strengths , the business units can make policies and strategies to expand the business and take advantage over competitors.

7. To find out the weaknesses of business Weaknesses refers to limitations of the firm. It results in significant disadvantages in relation to the competitors. Environmental Analysis helps to overcome such weaknesses and the business units can make effective plans to overcome such weaknesses.

 8. To find out opportunities available to business Availability of an opportunity is the favorable condition for the business. Environmental Analysis helps us to know such opportunities , so that we can formulate timely action plan to take full advantage of such opportunities.

9. To find out Threats posed to business: Threat is unfavorable situation in the business. It creates risk for the organization. Risk can be the technological changes, political changes, economic changes etc. After analyzing such risks with the help of environmental analysis, the business units can make effective plans to manage such risks.

10. To understand Market Conditions The business has to sell the products in the market. Various components of market like consumer, competitor, supplier, change in demand and supply of products etc. affects the business. For this purpose study of business environment is done.

Characteristics of Business Environment

1. Business Environment is complexEnvironment is combination of many factors like political, legal, social, technological etc. these factors affect the business in many ways. 2. Business Environment is DynamicThe business environment is mixture of many factors and there are changes in them. These changes in factors of environment makes the business dynamic.

3. Business Environment affects different firms DifferentlyIt is not necessary that any particular change in the environment should affect all the business in similar manner. One business may welcome the change in the environment , while some other business may have adverse effect on change.

4. Business Environment has both Long-Term and Short-Term ImpactEvery change in environment has both long term and short term impact on business. The changes environment affects the profitability, productivity and development of business both in short term and long term.

5. Unlimited Effect of External FactorsExternal factors of business environment are uncontrollable. These factors have very deep effect on business. Sometimes the effect of these factors is so deep that it may take the business to closure. For Example- decision of the govt. to ban whisky will compel whisky selling shops to wind their business.

6. Business Environment is Uncertain- coz there can be sudden change at any time. 7. Includes both internal and external environment

RELATIONSHIP B/W BUSINESS AND ENVIRONMENT

1. Mutually Related There is correlation between the business and environment. For Example- when the industry faces recession, business will cut down its rate of production. 2. Dynamic The elements in the environment are constantly changing e.g. technological, sociocultural, economic factors of the environment never remain constant. These factors are dynamic, so business policies should be dynamic enough to adjust the changing environment.

3. Opportunities and Threats If the prevailing environment is favorable for the business growth and prosperity, then business management will respond positively. For Example- when govt. imposes high taxes, it will hinder growth. When govt. grants various subsidies or reduces tax-burden on business then business houses are encouraged to produce more.

SCANNING THE BUSINESS ENVIRONMENT

Meaning of Scanning the Business Environment

It is the process by which organizations monitor their relevant environment to identify the opportunities available and threats affecting their business. It is the process by which the managers monitor the economic, technological, legal, social and cultural factors to determine the threats to the enterprise and opportunities available to the organization.

 Environmental Analysis or Scanning consists of identifying and analyzing environmental influences individually and collectively to determine their potential affects on the organization and the consequent problems and opportunities.

Environmental Analysis consists of: Tracing the source of any opportunity and threat ; To break the whole into parts ; So as to examine its nature and relationship. It is from such analysis the managers can make decisions on whether to react, to ignore, or try to influence or anticipate future opportunities or threats discovered.

 The companies must be sensitive to general and specific environmental factors. This will help them to alter in advance the changes requires in the organization set-up or product line. Mismatch b/w firm and environment is the major cause of corporate decline. Thus, it is important not only to understand the nature of environment and its dynamism but also to be aware of those environmental variables to which the firm is more sensitive.

Characteristics of Environmental Scanning

1. Continuous process : 2. Exploratory Process : - the emphasis is given on choosing the alternatives available for future and these alternatives are analyzed to draw useful conclusions. 3. Holistic Exercise : - It comprises the total view of environment rather than piecemeal view. The corporate radar must scan the whole circumference of environment in order to minimize the chances of uncertainty.

Approaches to Environmental Scanning

 Systematic Approach:- information related to environmental scanning such as related to markets and customers, changes in legislation etc. are collected continuously and systematically to monitor changes in the environment of the business. Ad hoc Approach: - organization conducts special surveys and studies to deal with specific environmental issues from time to time. Such studies are conducted when organization undertakes special projects or devise new strategies.

 Processed-form Approach: - an organization uses information in a processed form, available from different sources both inside and outside the organization. For Example:- when the organization uses information supplied by govt. agencies and private institutions, it uses secondary sources of data and the information is available in processed form.

Factors To Be Considered For Environmental Scanning

1. Events: The important and specific occurrences in different environmental sectors. 2. Trends: It means the specified direction, course of action or general tendency along which events took place. 3. Issues : They are the current concern or outcome that arises in response to events and trends. 4. Expectations: It is demand or anticipation of interested groups in relation to the issues.