Business environment is combination of the words Business and environment. Business includes all activities connected with production, trade, banking, insurance, finance, energy, advertising, packaging and numerous other related activities.
Environment refer to all external factors, which have a bearing on the function of business. The environment includes factor outside the firm which can lead to opportunities for or threats to the firm. Although there are many factors, the most important of these factor are socio-economic, technological, supplier, competitors and government.
Business is a very complex process. It does not operate in a vacuum. Environment is the macro setup within which. The term ‘business environment’ denotes the total surrounding, having various opportunities and constraints for business and have direct or indirect bearing on its functioning or in other words it can be stated that it refers to the aggregate of all forces and institutions which are external to business and beyond the control of management.
According to Bayard O Wheeler, Business environment refer to “The total of all things external to firm and industries, which affect their organisation and operation”.
Keith Davis, Defines business environment in his famous book “The challenges of Business” as “Business environment is the aggregate of all conditions, events and influences that surround and affect it”.
According to Arthur M Weimer, “Business environment encompasses the climate or set of conditions, economic, social, political or institutional in which business operation are conducted”.
Thus business environment encompasses all those factors (internal and external) that affect a company’s operations and include strengths, weaknesses, internal power relationships, orientations of the organisation, nature of economy and economic conditions, social cultural factors, demographic trends, natural factors, global trends and cross-border development, clients and suppliers, technological developments, laws and government activities.
Business Environment is broadly categorised into two categories.
Internal Environment and External Environment
Internal Environment refer to the factor internal to the firm i.e. factors existing within a business firm. These factors are generally controllable because the company has control over them and determine the potential of a company to meet the environment challenges
Followings are Important Internal Factors
(i) Culture: Culture is the values of the persons holding top positions. These values influence the overall environment in term of policies, norms, working langage, systems and symbols practices. In other word the culture may be refer as the collective behaviour of the human that are part of the organisation. The proper culture of the organisation is one of the major cause of success of any organisation.
(ii) Vision, Mission and Objective: Vision, Mission and Objective of the organisaiton inspire all person of the organisation to make the their effort in certain common direction. Based on the vision, mission and objective, the organisation decide their priorities, philosophy, policies etc. e.g. Ranbaxy enter into the internal market due to it’s mission mission ‘To become a research based international pharmaceutical company’.
(iii) Top Management Structure: Strategic decision comes from the top level management and so it is critical for the development and success of the organisation.
The top level management or board of director in case of company may be professionally managed or family controlled. The management may be influenced by the nominee of the financial institutions having large holdings in company. All these comes under the internal environment and have great impact.
(iv) Power Structure: Power distribution among the board of directors and senior executive officer play very important role in the decision making process of the organisation.
(v) Human Resources: Quality of the human resources largely affect the competence and ability to compete in the market. It determine the motivational level, attitude and commitment among the employee. These resources are the determining factor of the organisation success.
(vi) Physical Resources and the Technology: Production capacity, technology, R&D work distribution logistics etc are the factors that influence the functioning and competitiveness of the firm.
(vii) Company Image and Brand Equity: The image and the brand equity of the company matter a lot in raising finance, forming joint venture and other alliance, choosing dealers and suppliers etc.
Micro environment or external environment are those external factors which affect the organisation and its factors. The external environment affects the different organisation in different manner.
(i) Suppliers: A business organisation need different suppliers to run the business. Suppliers are the organisation who supplies the raw materials and component to the organisation and are important factor as an external environment.
(ii) Customers: Customers are the most important external factor that influence the business. A successful businesses are always able to identify the need, desire, tastes, liking etc. of the customer.
(iIi) Market Intermediaries: Most of the time business has to depend on the market intermediaries to find the customers and it work as a linkage between company and customers. Market intermediaries includes agents, broker, wholesaler etc.
(iv) Competitors: A business or organisation has to adjust their activities according to the competitor strength and behavior. There is several decision that is taken by the organisation based on the competitor action and reaction.
(v) Public: A group of people with actual or potential interest in the business has great impact.The growth of these group will affect the working of the company as well as new company will motivate to start its functioning to serve the interest of the particular growing group of people.
Major external and uncontrollable environmental factor that influence the the organisation decision making comes under the Macro Environment. Due the uncontrollable nature of the Macro Environment, organisation success depends on the adaptability to the Environment.
(i) Economic Environment: The factor like interest rate, inflation rate, employment, gross national product, corporate profit, balance of payments, consumer income etc. are the economic environment under which a business organization has to work. The organisation do not have any control over these factors. Organisation have to adjust themselves based on the effects of these factors to survive.
(ii) Political Environment: Political Environment includes political system, political stability and government policy. Economic and political system effects each other. Like political ideology decide the economic system (Capitalist or Socialist). Due to change in economic condition government may take the decision of privatisation.
(iii) Social and Cultural Environment: Value, belief, customs, culture and attitudes of the people in the society form the Socio-Cultural environment. It also include and affected by the demographic feature mobility of population and lifestyle of the people in society. It is very important for the organisation to observe the direction in which the society is moving and frame the advanced policy according to the changing social set-up.
(iv) Technological Environment: Available technology in the country and its use plays important role in the development in the organisation. Business or organisation now a days depends a lot on technology.
(v) Legal Environment: Legal requirement impact the organisation and its functioning in a great way. There are various aspect of legal environment under which an organisation has to work. Tax law, banking law, consumer protection law, Law related to international trade, export and import are some example that form the legal environment of a region or country.
Apart from these the efficiency, effectiveness and coverage of legal system determine adequacy, cost and speed of economic justice and these factors are of great importance. In India Company Act 2013, Indian Contract Act 1872. Standard of Weight and Measurement Act 1069 are some example through which business activities are controlled.
Natural Environment: Business use number of resources that comes from the natural environment. For example availability of the raw material, agricultural products and the source of energy depends on the natural environment. Nature has two great impact on the business one is resource as raw material and energy and the second is climate desister that cause the damage in process of production.
Financial Environment: Financial Environment has great impact on the procurement and arrangement of fund for the business organisation. It include share market, bond market, forex market, real estate market, financial and banking institution and its various services.
Global Environment: Now the business expand and the companies are doing its business n more than one country. In these senario the rule and regulation of WTO, WB, IMF, G20, SAARC and other international bodies are very important. A business organisation working globally has to understand the impact of these organisation on its activities.
Business environment is closely related to its business. There is mutual interaction between business and its environment. The business receive input from the environment in various form and gives back to output the environment. The inputs are raw materials, services, information, technology, working condition, human resources and gives output in form of goods and services. If these output are satisfactory to the environment, the business continue to run and interact with environment. Otherwise business has to close or change its working to adjust with the environment.
A business organization has to care for its stake holders like shareholders, borrowers, customers, worker suppliers etc. The business environment offer opportunities and threats to the organization to which organization has to respond positively.
In following ways the organization interact with its environment
1. Economic condition influenced the business environment. For instance during the recession business reduced its production and wait for the favorable condition to utilized its heaped inventories. On the other hand in case of monopoly or oligopoly business may create fake scarcity of goods gain certain advantage. In this way both business and its environment affect each other.
2. When the interest rate is increased by the financial institution, the firm may shift to the alternative source of fund, for example internal source of bank loan. This may force the financial institution to reduce the interest rate.
3. Worker, supplier, loan provider and shareholders all are interested in better return. However the interest of the interest of the shareholders are conflicting with the other. Therefore the organization has to reconcile the interest of the various groups. If the organization is able to satisfy all the various groups then it affect the organization in positive way.
4. Transfer of the information between environment and organization is another example of interaction between them. Organizations get information of the consumer interest, technological development, government policy, competitor’s information form the environment on the other it also provides information of its own organisation in form of vision, mission, objective and financial position.
5. Business has to analyze its strength and weakness to respond to the opportunities and threat. It is also called SWOT analysis. It help the organisation to integrate the internal and external environment in better way.
Therefore an organisation and its environment have continuous interaction with each other and both effects each other. It can be shown through a diagram.
The continuous interaction between them leads to the new expectation from each other.
Study of business environment to achieve the good result is called ‘Environment Scanning’. Business environment must be scanned to understand the resent development that will affect the organization in achieving its objectives. Therefore environmental scanning is acquiring and application of information about event, designs, trends, and connection within an organization’s internal and external.
According to Stephen Robbins, “Environment scanning entails scrutinizing the environment to identify action by competitors, government, union and the like that might impinge on the organization’s operations.” Environment Scanning is a corporate planning that comes under the strategic management. According to Chandler “The determination of the basic long-term goals and objective of an enterprise and the adoption of course of action and allocation of resources necessary to carry out these goals.” Therefore strategic management or business policy is the means to achieve the organizational purpose and environment scanning is one of the tool for it.
In strategic management environment is being scanned to know the opportunities and threat and to evaluate strength and weakness. The purpose of scanning is to fight the threat and to achieve the objective of the organization.
To assess the complexity of the current business environment, the management of the organization do industry analysis. This analysis is conducted by the owner to meet their specific need. It help them to understand what is going on in an industry. For example demand supply figures, amount of competition within the industry, state of competition of the industry with new evolving industries, upcoming scenarios of the industry considering technological changes, credit system within the industry, and the impact of external factors on the industry.
The industry analysis helps the entrepreneur to identify the opportunity and threat. The key of success of ever changing business environment to understand the difference between yourself and your competitor to utilize this information to set the best strategy to get the best advantage.
There is following three commonly used industry analysis
I. Porter’s 5 Forces
II. PEST Analysis
III. SWOT Analysis
I. Porter’s 5 Forces: is developed by Michael Porter in 1980. He discussed this analysis in his book “Competitive Strategy: Techniques for Analyzing Industries and Competitors.”
Following five are discussed in this analysis
a. Ease of entry: This specifies the comfort with which a new firms can come in the market of a particular industry. If it is to enter in a particular industry then companies face the continuous risk of new competitors. On the other hand if the entry in the business not easy then companies have certain set of competitors.
b. Power of suppliers: It refer the bargaining power of suppliers. If in the industry small number of suppliers are less, then the supplier enjoy a substantial amount of bargaining power. It affect small businesses since it directly impacts the quality and the price of the final product.
c. Power of buyers: On the other hand when the bargaining power lies with the customers. If consumers/buyers enjoy market power, they are in a position to negotiate lower prices, better quality or additional services and discounts. This is the case in an industry with more competitors but a single buyer constituting a large share of the industry’s sales.
d. Availability of substitutes: The industry is always competing with another industry in producing a similar substitute product. Hence, all firms in an industry have potential competitors from other industries. This takes a toll on their profitability because they are unable to charge exorbitant prices. Substitutes can take two forms – products with the same function/quality but lesser price or products of the same price but of better quality or providing more utility.
e. Competitors: The number of participants in the industry and their respective market shares are a direct representation of the competitiveness of the industry. These are directly affected by all the factors mentioned above. Lack of differentiation in products tends to add to the intensity of competition. High exit costs like high fixed assets, government restrictions, labor unions, etc. also make the competitors fight the battle a little harder.
PEST Analysis: PEST Analysis stands for Political, Economic, Social and Technological. PEST analysis is a useful framework for analyzing the external environment.
To use PEST as a form of industry analysis, an analyst will analyze each of the 4 components of the model. These components include:
Political factors that impact an industry include specific policies and regulations related to things like taxes, environmental regulation, tariffs, trade policies, labor laws, ease of doing business, and the overall political stability.
The economic forces that have an impact include inflation, exchange rates (FX), interest rates, GDP growth rates, conditions in the capital markets (ability to access capital) etc.
The social impact on an industry refers to trends among people and includes things such as population growth, demographics (age, gender, etc), and trends in behavior such as health, fashion, and social movements.
The technological aspect of PEST analysis incorporates factors such as advancements and developments that change that way business operates and the ways which people live their lives (i.e. advent of the internet).
I. SWOT Analysis: SWOT Analysis stands for Strengths, Weaknesses, Opportunities, and Threats. It can be a great way of summarizing various industry analysis methods and determining their implications for the business in question.