Unit 1 Business and its environment Meaning of business: Business activities are those activities that are undertaken

to create some form of wealth. They undertake manufacturing and marketing of goods and services desired by the people and make profit out of that. Definition: Prof. Ownes defines Business as An enterprise engaged in the production and distribution of goods for sale in a market or rendering of services for a price. Characteristics of modern business: Over the years, business has undergone radical changes and therefore, modern business in nature is quite different from what was a few decades ago. Modern business has the following characteristics. 1. Change: If there is any word to describe modern business in the best possible way, it is change. This means that modern business is dynamic. Theodore Levitt rightly remarks thus, Todays growth product may be tomorrows earthen pot. A modern business firm must always be vigilant and must be ready for any change. Larger size: Modern business is large in size. Manual labour is being gradually replaced machines in the manufactur4ing process. Mass production has been possible because of the use of machines and motive power. Mass marketing activities are being stepped up to match the massive production. New channels of distributions, super-markets, discount houses, trade fairs etc. have sprung up to meet the challenges of mass production. Oligopolistic character: Modern business is mostly oligopolistic in its nature. It is characterized by a small number of big firms producing and selling a homogeneous or a differentiated product. Oligopolistic business comes into existence by collusion between firms. Collusion is of two types;
Page 1

2.

3.

AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL

4.

5.

6.

7.

Cartel is a type of combination of firms constituted with the objective of limiting or minimizing competition and maximizing profits. Price leadership is said to exist in oligopoly where price is determined by one firm in the industry and this price is accepted by all the other firms in that industry and where the products of these firms are close, though not perfect, substitutes. Globalization: Modern business is becoming increasingly global or international. Liberalization, technological changes and galling trade barriers have rapidly changed the business landscape. Production centers by many big business houses are being set up in different countries and products are being sold through a global net-work. Technology orientation: This characteristic feature of modern business emanates from the expectations of the consumers from the modern business. People always wish to consume more and more of new products and not more of the same products. At the same time, they expect lot of improvement in the quality of the products and fall in their cost. Obviously, modern business can very easily accomplish this, provided it pays due attention to sophistication of technology. Government control: Government control of business is quite common in every country in the name of economic development of the county. In order to reduce inequalities of income and wealth, to prevent concentration of economic power and to realize several socio-economic objectives, the government of the country imposes restrictions and levies taxes on domestic industries. Diversification: Today, most of the corporate enterprises do not confine their activities to production of one or two products. There are mainly three types of diversification. Concentric diversification refers to the process of adding new but related products or services to their existing ones. Horizontal diversification refers to adding new unrelated products or services to the existing ones.
Page 2

AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL

8.

Conglomerate diversification refers to adding new and unrelated products or services. Competition: The business houses have been making efforts to work out strategies to eliminate inefficiency, reduce costs, improve the quality of products and increase the production. There has been keen competition between sellers of the same products or its close substitutes.

Concept and nature of business environment What is Business environment? Business environment consists of all those aspects of the surroundings of a business enterprise which affect or influence its operations and decisions and which determine its effectiveness. In the words of Andrews, Business environment of a company refers to the pattern of all external influences that affect its life and development. The survival and success of a business enterprise depend on its innate strength such as the resources, available at its command, which include physical resources, financial resources, human resources, skill and organization and on its ability or adaptability to the environment. It is always changing and hence it is uncertain. Business environment is the sum of all the factors outside the control of the management of the business firm. These factors carry with them both opportunities and threats or risks or uncertainties which can make or mar the future prospects of the business. Components of business environment Environment of a business can be basically classified into internal and external. (A) Internal Environment: This environment consists of those factors which are inside the business and hence they are regarded as controllable factors as the firm has control over these factors. Internal environment has following components:
AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL Page 3

1)

2)

3)

4)

5)

6)

Organization structure: Size of the organization plays a vital role in internal environment. Bigger the size of organization more organized and systematic should be its structure. The overall picture of organization should be clear. There should be free flow of communication to exchange order, ideas, doubts, plans etc. that will increase strength of organization. Value system: Organizations should be based on values like fair practices, honesty, transparency responsibility towards society customers, employees, nature etc. this will increase creditability and goodwill of the organization. Vision, Mission and Objectives: Vision refers to the broad horizon, larger goals, ambitions, desires etc. which the organization would like to achieve over the period of time. Mission expresses how the vision is going to be realized. Objectives are more specific. Objectives state nature of business, business targets like profits, sales, market share etc, which the firm wants to achieve. Human resources: Real strength of any organization is its human capital or employees. Success of any organization depends on contributions made by its workers. Committed, skillful, quality workforce is the asset of any organization. Firm must have Human Resource Management (HRM) policies that develop dynamic people. Financial Resources: Finance is the life blood of any organization. Firm must have adequate capital of its own, on the strength of its networth. Firm must have proper financial planning that helps to make adequate profits. It must help to maximize wealth of equity holders in the form growth, expansion and innovation. Capital whether own or borrowed must be economically used without allowing for wastage. Marketing factors: Purpose of any business is to satisfy customers by creating goods desired by people. Profitability of the business is also dependent on that. Goods and services must reach the hands of customers then only, customers wants are satisfied and firms profits are realized. Business must have effective marketing strategy to develop goods desired by people
Page 4

AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL

and deliver those goods through intermediaries and distribution channel. 7) Research and development (R&D): R&D activities help an organization to continuously innovate itself. New products, marketing strategies can be developed through R&D. people always expects new things, wants and desires of people always keep on changing. 8) Physical assets: Quality of the product and productivity of the business depends on infrastructure and technology. Firms which install modern plant and machinery, use quality raw material, design ergonomic working conditions provide adequate3 facilities like canteen crche, air conditioners etc. can help for increase in quality and speed of work, decrease in cost. These facilities will make the organization and workers competitive. (B) External environment: External environment factors are the factors which influence business activities from outside. They are beyond the control of the business firms. Broadly, the external environment may be classified into two categories: I) Micro environment: This consists of such factors or players in the business firms immediate environment that affects the performance of bearing on the firm, and not universally applicable to all firms. The important components in the micro environment are as follows: 1. Customers: Firms which can create and sustain the customers are successful organizations. Profitability of the firm is dependent on the customers support and loyalty. Firm must have confidence of the customers, which is possible when the business manufactures the product that are to the expectation of customers. 2. Workers and union: Business environment of an organization is dependent on relation between the workers and management. Cordial relation between them will ensure industrial peace and functioning of the organization will be smooth. 3. Marketing intermediaries: Business must study the network of distributors; select those intermediaries who can push the
AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL Page 5

4.

5.

6.

1.

2.

product into the market aggressively. Business must also consider the incentives that are to be offered to these intermediaries i.e. commission, gifts etc. Suppliers: Firm must maintain adequate stock or raw material that ensures smooth production process and also minimizes cost of inventory. This depends on firms relationship with suppliers of raw materials. Business must have good relationship and regular contract with supplier. It must study the environment of suppliers and select those suppliers who can assure regular, timely supply of quality raw material. Competitors: Business must scan the environment of competition to know the strategies adopted by each competitor. This will help the business to form counter strategy to popularize its product and business. Competition is both an opportunity and a threat. Publics: Publics are the different group of people who take interest in the happenings of society; they protect the common interest of people and society. Business to successful must study the role of publics in society. It must ensure that the business practices do not harm the interest of society. Studying the environment of publics helps a business to decide its objectives. II) Macro Environment: The macro environmental factors consists of those external factors which affect the industry very generally; namelyDemographic forces: Demography is the study of human population in terms of size, density, location, age, sex, occupation etc. which are related to customers forming market where people will to spend their money to satisfy their demand. Demographic changes are very helpful to the marketers in forming market segmentation, demand forecasting, measuring market potential and developing premises for marketing plans and policies. Economics forces: There are two elements in a market one is the people and the other one is the purchasi9ng power of the people and their willingness to spend. High economic growth and prosperity assure a higher level of employment and income
Page 6

AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL

3.

4.

5.

6.

7.

leading to marketing boom in many industries. On the other hand, recession and depression cause decline in production, employment power of the people and thereby lead to a fall in demand and depression in the market conditions. Marketing mix should be properly formulated on the basis of important economic indices. Physical forces: Business is the villain who creates eco9logical imbalance by exploiting the nature for its business purpose. Extraction of raw materials, cutting of the forest, release of industrial waste, air pollution etc. are creating ecological imbalance. Business must study ecological environment and it must select those business activities that have minimum pollution effect. It must ensure that environmental damage is minimum. Political environment: Business to be profitable must watch political development. It must study the manifestos, philosophies, election promises and policies of dominant political parties. Because if one party is in favour in freedom of business, than the other party will be in opposition for that. Legal forces: Activities of business are regulated by various laws. Provisions of these laws dictate the method, procedure and formalities to be completed before commencing any business. Business must study the legal environment prevailing in the society. This will help setup legally viable business and follow the procedures that are prescribed by laws. Socio-Cultural forces: Every society has its own unique culture. Culture can be defined as living styles and habits of people. Rituals, customs, traditions, festivals, family life, dress code, food habits etc. are all part of cultural system. Cultural practices will have strong influence on the business. The product manufactured by a firm, its method of advertising etc. must match the cultural norms determined by the society. Science and Technological forces: Science and technology helps to innovate new product, new method of production and distribution that reduces cost, increase in speed and provide more comfort and convenience. Businesses in developed
Page 7

AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL

countries have achieved tremendous growth due to application of science and technology to business. This has forced the business houses of developing countries to adopt latest technology and be competitive. Major players in environment: Economic growth of society depends on prevailing business environment. Environment of business is determined by the role played by major players like 1> Customers: Firms which can create and sustain the customers are successful organizations. Profitability of the firm is dependent on the customers support and loyalty. Firm must have confidence of the customers, which is possible when the business manufactures the product that are to the expectation of customers.

2>

3>

4>

Workers and Union: Business environment of an organization is dependent on relation between the workers and management. Cordial relation between them will ensure industrial peace and functioning of the organization will be smooth. Government and Political Parties: Business to be profitable must watch political development. It must study the manifestos, philosophies, election promises and policies of dominant political parties. Because if one party is in favour in freedom of business, than the other party will be in opposition for that. Suppliers: Firm must maintain adequate stock or raw material that ensures smooth production process and also minimizes cost of inventory. This depends on firms relationship with suppliers of raw materials. Business must have good relationship and regular contract with supplier. It must study the environment of suppliers and select those suppliers who can assure regular, timely supply of quality raw material.

AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL

Page 8

5>

Intermediaries: Business must study the network of distributors; select those intermediaries who can push the product into the market aggressively. Business must also consider the incentives that are to be offered to these intermediaries i.e. commission, gifts etc. 6> Publics: Publics are the different group of people who take interest in the happenings of society; they protect the common interest of people and society. Business to successful must study the role of publics in society. It must ensure that the business practices do not harm the interest of society. Studying the environment of publics helps a business to decide its objectives. 7> Competitors: Business must scan the environment of competition to know the strategies adopted by each competitor. This will help the business to form counter strategy to popularize its product and business. Competition is both an opportunity and a threat. 8> Other Entities: The general environment of business of a particular locality helps for growth of business. Concentration of variety of business units offers the advantage of using common facilities and infrastructure. Such entities can jointly fight to avail better infrastructure and other facilities. 9> Trade association: Trade associations are organizations formed by business communication to protect and further their business interest. People who are doing business will become members or such associations. They regularly meet to discuss common problems faced by them. They make common representation to Government t get necessary facilities. 10> Financial institutions: Business continuously needs finance to meet its current and fixed assets. Existence of FIs (Financial Institutions) like Banks, Mutual Funds, Stock Exchanges etc. can help the business to meet out there financial needs. Linkage between Business and Environment Environment consists of natural and social elements. Natural factors of environment are gift of nature; social factors of environmental are creation of human beings. They are created out of
AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL Page 9

natural elements. There is close link between natural and social elements of environment. Business as an organ of environment is dependent on the other factors of environment. It makes use of land, water, air, minerals, oil etc. that are gift of nature. For other things it depends on other factors of social environment. E.g. Banks and FIs for finance, license for Government, Market to sell its products etc. There is close relationship between these institutions. Business is dependent on various factors of natural and social environment. Firms which have linkage between its internal environment with the external environment can know the changes that are taking place in external environment and accordingly plan their activities. It provides necessary inputs to develop strategies and take correct decisions. Impact of business environment on Business Decisions: Success of any business depends on its quality of decision. The decision should be taken after careful analysis of environment factors. Impact of environment analysis on business decisions are as follows: 1. Systematic and scientific decision making process: Environment analysis is undertaken is four stages like scanning, monitoring, forecasting and assessment. During these stages the relevant micro and macro factors are observed and monitored. This makes decision-making process more systematic and scientific. To develop broad strategies and long term plans: Decisions can be classified into routine and strategic. Strategic decisions are important decisions that are not taken frequently. E.g. expansion, diversification etc. Environmental analysis helps to build broad strategies and long term plans. SWOT analysis: Every business will have its strengths, weakness, opportunities and threats. Every firm has to consolidate its strengths minimize its weakness, which and be done by evaluating and analyzing its internal environment. Business
Page 10

2.

3.

AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL

4.

5.

6.

7.

has to grab the opportunities and reduce the threats, which can be done by analyzing and evaluating the factors of external environment. Environment analysis will have great impact on the firms progress as it helps to undertake SWOT analysis. Dynamic organization: The environment factors are dynamic. They always keep on changing. Business, which is dependent on these factors must also keep on changing. Business has to regularly monitor the environmental change, analyze the consequences of these changes on the business. This helps to take correct decisions and business policies can be in tune with environmental trends. Dynamic objectives: Objectives cannot remain static firms have to keep on changing objectives with changing times and environment. Environment analysis has great impact in formulating dynamic objectives. Firms can revise existing objectives based on analysis of emerging environment. Competitiveness: Environment analysis helps to make SWOT analysis of its own business and that of competing firms. Based on such analysis it can develop counter strategies to win over the competition. Stability and growth of business: Business has to survive in the long run. It has to regularly make profits and must go on expanding its business. Achieving stable results and continuous growth depends on correlation of business with environment. Environment study will have impact on business to define its objectives.

Process of environment analysis for business decisions: Environment analysis is undertaken before taking business decisions. Analysis of environment is undertaken in four stages. a) Scanning: This is the first stage in environment analysis. Politic, economic, social, cultural, financial, happenings are observed. Information relating to economic and non-economic factors is regularly scanned and necessary information is collected.

AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL

Page 11

b)

c)

d)

Monitoring: Economic and non-economic events and factors that have an influence are identified and they are monitored regularly. The trend and direction in which these factors moving are regularly monitored. Relevant factors are observed continuously and the information is recorded. Forecasting: Based on scanning and monitoring forecasts are prepared. Forecasting means anticipating or expecting the happenings in future. The direction in which environment factors are going to move are forecast on the basis of scanning and monitoring of these factors. Assessment: It is the critical study of forecast prepared and its impact on business. Assessment is made to know why the factors are going to change and how they are going to affect business and what kind of preparation and planning firm has to make to effectively manage the changes.

THE END
AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL Page 12