Business environment

Introduction:
The business environment is the aggregate of all conditions, events, and
influences that surround and affect a business firm. Business environment
generally refers to the external factors affecting, either positively or
negatively, the operation of a firm. The most important external factors
include economic, legal, political, social and technological factors. The
business environment can include factors such as: clients and suppliers
its competition and owners; improvements in technology; laws and governm
ent activities; and market, social and economic trends

Nature of Business Environment

System Approach
In original business is a system by which it produces
goods and services for the satisfaction of wants by using
several inputs such
as
raw
material
capital labor etc
from
the
environment

Social
approach

In this approach business

towards several categories of
stockholders employees government etc

responsibility

should fulfill its responsibility

the society such as consumers

Creative approach
As per this approach business gives shape to the environment by facing the
challenges and availing the opportunities in time the business brings about
changes in the society by giving attention to the needs of the people

Classification of Business environment

There are two types of environmental factors: internal

environmental
factors and external
environmental
factors.

Internal Environment
Internal environmental factors are events that occur
within an organization. Generally speaking, internal
environmental factors are easier to control than external
environmental factors. Some examples of internal environmental
factors are as follows:

Management changes

Employee morale

Culture changes

Financial changes

External environmental
External environmental factors are events that take place
outside of the organization and are harder to predict and
control. External environmental factors can be more
dangerous for an organization given the fact they are
unpredictable, hard to prepare for, and often bewildering.
Some examples of external environmental factors are noted
below:

Changes to the economy

Threats from competition

Political factors

Government regulations

The industry itself

Main Factors
The main factor that affects most business is the degree of competition
how fiercely other businesses compete with the products that another
business makes. The other factors that can affect the business are:

Social environment:
How consumers, households and communities behave and their
beliefs. For instance, changes in attitude towards health, or a greater
number of pensioners in a population.

Some Aspects of Social Environment:

Quality of life

Importance or place of women in workforce

Birth and Death rates

Attitude of customers towards innovation, life style etc.

Education and literacy rates

Consumption habits

Population

Tradition, customs and habits of people

Legal Environment
The way in which legislation in society affects the business E.g.
changes in employment laws on working hours.

Some Aspects of Political Environment:

Present political system

Constitution of the country

Profile of political leaders

Government intervention in business

Foreign policy of government

Values and ideology of political parties

Economic environment
How the economy affects a business in terms of taxation, government
spending, general demand, interest rates, exchange rates and European and
global economic factors.

Some Aspects of Economic Environment:

Role of Private and Public sector

Rate of growth of GDP, GNP, and Per Capita Income

Rate of Saving and Investment

Balance of Trade

Balance of Payment 6. Transport and Communication System

Money Supply in the Economy

International Debt

Political environment
How changes in government policy might affect the business e.g. a
decision to subsidise building new houses in an area could be good for
a local brick works.

Some Aspects of Political Environment:

Present political system

Constitution of the country

Profile of political leaders

Government intervention in business

Foreign policy of government

Values and ideology of political parties

Technological environment
How the rapid pace of change in production processes and product
innovation affect a business.

Some Aspects of Technological Environment:

Various Innovations and Inventions.

Scientific Improvements.

Developments in IT sector

Import and Export of Technology.

Technological Advances in Computers.

Ethical ENVIRONMENT
What is regarded as morally right or wrong for a business to do. For instance
should it trade with countries which have a poor record on human rights.

MACRO ENVIRONMENT
It is also called as general environment and remote
environment.
The
microenvironment
is
generally
uncontrollable than micro environment, the success of the
company depends on its adaptability to the
environment the important macro environment
factors as follows:

TECHNOLOGICAL ENVIRONMENT
Technology is one of the important determinants of success of a firm aswell
as economic and social development of nation. It includes both hardware and
software to solve problems and promote progress

Innovative drive of company

The term innovation means introduction of new product, the use of
newmethod of production. The technical, industrial and commercial steps
which leadsto marketing of new products and to commercial use of new
technical process andequipment.

Customers Needs / Expectation

Technological orientation and R&D effects of a company may also
beinfluenced by the customer needs and expectation. In several cases the
customer and the supplier have a collaborative relationship to develop the
product or solutions. If the customers are highly demanding, companies
would be compelledto be innovative.

Demand conditions
The size of demand influences the choice of the technology . The size of
demand influences the choice of the technological scale. Fast growing trend
of demand would encourage development of technology of large scale.

Suppliers offering
Many times technological changes are encouraged by the suppliers of
acompany, like a capital goods supplier etc

Govt. policy
The govt. contributes to the development to the technology by its own direct
involvement by establishing research organization and funding R & D. The
govt. may encourage private R & D by various incentives.

Micro
Micro environment means that environment which includes those factors
with which business is closely related. These factors influence every
industrial unit differently. These factors are as under Customers, Suppliers,
Competitor, Public, and Marketing Intermediaries.

Customers:
Customers of an industrial unit can be of different types. They include
household, government, industry, commercial enterprises, etc. The
number of different types of customers highly influences a firm. For
example, suppose a firm supplies goods only to the government. It
means that firm has only one customer. If because of some reason
their relations get soured, the supply of goods will stop and in that
case the closure of that firm is certain.

Suppliers:
Like the customers, the suppliers also influence business. If a business
has only one supplier and he gets annoyed because of some reason,
the supply of goods can be stopped and the very existence of the
business can be threatened or endangered. Hence, efforts should be
made to have various suppliers.

Competitors:
The competing firms can influence business in a number of ways. They
can do so by bringing new and cheap products in the market, by
launching some sale promotion scheme or other similar methods.

Public:
Public has different constituents like the local public, press or media,
etc. The attitude or behaviour of these constituents can affect business
units. For example, the local population can oppose some established
firm whose business is excessively noisy.
Similarly, if the media gives some favourable report about a particular
company the price of its share can register an increase on this count.

Marketing Intermediaries:
The marketing intermediaries play a significant role in developing any
business unit. They are those persons who reduce the distance
between the producers and agents.For example, a company sells its
goods with the help of agents and if because of some reason all the
agents get annoyed with the company and refuse to sell its goods,
there can be a crisis for the company.

IMPORTANT ETHICAL PRINCIPLES THAT A BUSINESSSHOULD

FOLLOW:

Do not deceive or cheat customers by selling substandard or defective

products by under measurements or by any other means.

Do not resort to hoarding, black marketing or profiteering.

Do not destroy or distort competition

Ensure sincerity and accuracy in advertising, labeling and packaging.

Do not tarnish the image of competitors by unfair practices.

Make accurate business records available to all authorized persons.

Pay taxes and discharge other obligation promptly

Do not farm cartel agreements, even informal, to control production, price

to the common detriment.

Refrain from secret kickbacks on payoffs to customers, suppliers,

administrators, politicians etc.

Ensure payment of fair wages to and fair treatment of employees

Benefits of a Good Business Environment

Some of the benefits of good business environment are as follows

Enables the Firm to Identify Opportunities and Getting First Mover

Advantage:
Helpful in Tapping and Assembling Resources:
Help to Adjust and Adapt with the Rapid Changes:
Assisting in Planning and Policy Making Improvement in Performance
Helps the Firm to Identify the Threats and Early Warning Signal:

Pakistan is ranked 128th out of the 189 countries surveyed for the latest
World Banks Doing Business annual report, a drop of 18 places from last
year.
According to the Index of Economic Freedom Pakistan's economic freedom
score improved in the last period reflecting improvements in six of the 10
components of economic freedom. Pakistan scores above the world average
in business freedom, fiscal freedom and government size. Pakistan's ranking
improved in the World Bank Group's Regulatory Quality and Control
of Corruption indicator and ICRG's Political. Risk rating. At the same time, the
Country Credit ranking dropped 49 spots. The number of procedures, time
and cost required to start a business have all been reduced resulting in
Pakistan jumping 17 spots in the Starting a Business indicator. Thanks to an
e-services project and the introduction of digital signatures, new companies
can register and file tax returns online. Still, Pakistan slipped 17 spots in the
Paying Taxes indicator.

When it comes to providing an enabling environment for businesses, Pakistan

always ranks at the bottom. The latest survey of global business
environment reveals that Pakistan has dropped two notches since last year.
Given that the Sharif government is seen business friendly, the decline in
Pakistan's ranking is rather troubling.
The Economist Intelligence Unit (EIU) recently released its business
environment rankings for 2014. Singapore retained its top spot as the most
business-friendly economy. Pakistan, on the other hand, was ranked 74 out of
the 82 countries. Those ranked lower than Pakistan were countries with
grave socio-political unrest and a collapse of market economy resulting from
the State's undue interference in commerce.

Problems faced by Business in Pakistan:

High Tax rates (17% GST)

Power Shortages (electricity and Gas): leads to high cost
High levels of import dampening the domestic industries: imported goods
are more preferred than local products
Law and order situations :political unrest investors are reluctant to make
investments
Increased level of competition by giving license to high number of
multinationals: high level of MNCs in Pakistan
Terrorism in the country
High rate of inflation rate: People purchasing is power is decreasing with
the time

Business Opportunities

Cheap labor: High level of un employment labor is quite cheap in the

country so more and more business set up in the country
Cost of Setting Business is Low : Low cost of setting there are not much
requirements for setting up business
Many business ideas are still UN explored: a lot of ideas are still
unexplored in the country like Pakistan for example: solar power, hybrid
technology.
Transportation is quite easy within the country: there is not much extreme
weather. Easy transportation by road or by water.
Low level of state interference: Government does not interfere much in
the business. A complete freedom business has.
Export of products: Pakistan made trading across borders easier by
introducing a fully automated, computerized system (the Web-Based One
Customs system) for the submission and processing of export and import
documents

What Investors Say:

Nestle Pakistan Managing Director James Donald said that the company had
consistently doubled its turnover every three years during the two decades
of its operations in Pakistan. He said he was bowled over by the work ethic
of Pakistanis. Ive been with Nestle for 40 years. But nowhere have I
witnessed such a strong work ethic.

What should be done?

Adequate measures for managing power shortages

Control of inflation making proper fiscal policies and monetary policies
Decrease in tax rates.
Restriction on import products to improve domestic industries
Subsidies important industries