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CHAPTER 4

ENVIRONMENTAL CONTEXT OF MANAGEENT


Unit Objectives:
After completion, students are expected to know the following:

Concept of Business Environment

Types of Business Environment


o Internal and External

Basic Components of Economic, Socio Cultural, Political, and Technological Environments

Social Responsibility of Business Concept and Approaches

Areas of Social Responsibility

Business Ethics Meaning and Significance

Emerging Business Environment In Nepal


OR,

1.

Concept and Meaning of Business Environment


1.1

2.

Features of Environment

Types of Business Environment


2.1

Internal Environment

2.2

External Environment

3.

Components of Political-Legal Environment

4.

Components of Economic Environment

5.

Components of Socio-Cultural Environment

6.

Components of Technological Environment

7.

Social Responsibility of Business

8.

9.

7.1

Concept of Social Responsibility

7.2

Approaches to Social Responsibility

7.3

Areas of Social Responsibility

Business Ethics
8.1

Meaning of Business Ethics

8.2

Significance of Business Ethics

Emerging Business Environment In Nepal

1. CONCEPT AND MEANING OF BUSINESS ENVIRONMENT


Business Environment
Business environment is a combination of the words business-environment. Business includes all activities
connected with production, trade, banking, insurance, finance, energy, advertising, packaging and numerous
other related activities.
Environment refers to all external forces, which have a bearing on the functioning of business. The environment
includes factors outside the firm which can lead to opportunities for or threats to the firm. Although there are
many factors, the most important of these factors 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 business firm operates. 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.
Definitions of Business Environment
According to Bayard O Wheeler, business environment refers to The total of all things external to firms 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 operations are conducted.
Thus, business environment encompasses all those factors (internal and external) that affect a companys
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.
1.1. FEATURES OF ENVIRONMENT
The main features of business environment are:
1. Complex:
It is very difficult to understand the impact of Business environment on the companies. Although it is easy to
scan the environment but it is very difficult to know how these changes will influence Business decisions.
Some-time change may be minor but it might have large impact. For example, a change in government policy
to increase the tax rate by 5% may affect the income of company by large amount.
2. Dynamic:
Business environment is highly flexible and keep changing. It is not static or rigid that is why it is essential to
monitor and scan the business environment continuously.
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3. Multi-faceted:
The environment is perceived differently by different perceivers or observers. For example, the same new
development like nuclear agreement between America and India, is perceived as opportunity by some
(Congress Party) while threat by others (Opposition Party).
OR,
Environmental changes are frequent but their shape and character depends on the knowledge & experience of
the observer. A particular change in the environment may be viewed differently by different businessmen. This
change is welcomed as an opportunity by some organizations while some others take it as a threat for their
survival.
5. Far-reaching impact:
Business enterprise operates within a given environment and gets affected by it. The growth and profitability of
business depends critically on environment. Thus, the environment has a far- reaching impact on business
organizations.
6. Uncertainty:
It is very difficult to predict the changes of Business Environment. As environment is changing very fast for
example in IT, fashion industry frequent and fast changes are taking place.
2. TYPES OF BUSINESS ENVIRONMENT
A business organization can not exist a vacuum. It needs living persons, natural resources and places and things
to exist. The sum of all these factors and forces is called the business environment.
Business environment is broadly categorized into two categories:
2.1
Internal Environment (Micro environment)
2.2
External Environment (Macro environment)
a)
Task Environment
b)
General Environment
2.1 Internal Environment (Micro Environment)
Internal environment refers to the factors 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. It provides strengths and weakness.
Important Internal Factors/Forces
The important internal factors are as follows
i) Organizational goals and policies: Goals are desired outcomes. They state end results. They can be
multiple as well as conflicting. They form a hierarchy. Organization activities must be conducted within
the framework of goals.
Policies are guidelines for organization to conduct any activities. Organization makes different policies
for different objectives.
ii) Culture
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It is widely acknowledged fact that any business organization is normally undertaken for profit
maximization. Nonetheless, persons holding top positions in certain modern corporate enterprises have
some values which influence their policies, norms, working language, systems, symbols practices and
overall internal environment. This may be refer as culture of the organization which is the collective
behavior of humans that are part of an organization. The extent to which the culture of the organization
is shared by all, leads to an important factor contributing to success.
iii)

Organizational resources
Resource availability sets a limit on organizational activities. They can be physical, human, financial,
information and technical. The recent developments in information technology have greatly facilitated
the activities of organization.

iv)

Organizational structure
It is the overall framework for organizational roles, rules, hierarchy, relations and authority. It is the
design of jobs and relationships. It is concerned with the division of activities (differentiation) and
coordination of efforts (integration). Organizations must function within the boundary of their structure.

2.2 External Environment (Macro Environment)


External environment refers to external aspects of the surroundings of business enterprise, which have influence
on the functioning of business. The environment that remains outside of the organization is known as external
environment. As the environment is outside, it is not under control of management. However, the external
environment affects the activities of the organization. External environment is classified into two types. They
are:
2.2.1 Specific/Task Environment
The specific or task environment consists of those factors that are outside the organization and do
not only affects the organization but are also affects by the organization. The task environment
consists of following elements.
a)

Customers
They are highly influential as they are the central point of every business. Success of business largely
depends on identifying he need, desire, tastes liking etc. of a customers.

b)

Suppliers
Business enterprises requires a number of suppliers, who supply raw materials and components to the
company. It is an important force of the micro environment of a company. Long lasting relationships
with suppliers are essential.

c)

Competitors
Activities of a business adjust according to the actions and reactions of a competitors. This factor should
be known to a company as the upcoming profit or revenue will only be driven when this factor is in
control.

d)

Pressure Groups
They are special interest groups. They are organized to use the political process to advance their position
on a particular issue. They force government to enact or withdraw laws to protect their interest.
Examples are consumer association, environmental groups, women groups etc.

e)

Financial Institutions
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Organizations depend on financial institutions for the supply of funds. They can be banks, insurance
companies and other capital market institutions. Effective working relationships with financial
institutions is important to facilitate fund mobilization.
f)

Government
Governments are the regulating body of business activities. Government forms rules and regulation.
Business activities must be performs according to the government. There is also certain impact of
business upon the government.

g)

Labour Unions
They represent the problems and feelings of their members to management. Organizations must manage
their labour relations effectively. They should cooperate with labour unions for collective bargaining.
Nepalese organizations need to deal with multiple labour unions affiliated to various political parties,

h)

Communication Media
It may be in print, visual, audio and others. Organization must deal effectively with media. Every action
of the organization is subject to media scrutiny. Public relations programmes are needed to promote and
protest the image of the organization.
2.2.2 General Environment
General Environment is the most important dimension of business environment as businessman
cannot influence or change the components of general environment rather he has to change his
plans and policies according to the changes taking place in general environment. It is also known
as macro environment. The elements of general environment are beyond the organizational control.
General environment consists of the following elements.

A.

Political and Legal Environment


The political and legal environment refers to government regulation and legal system for business. It is
influenced by legislative, executive and judiciary. These institutions formulate laws, implement the laws
and maintain justice. Political and legal environment consists of number of components based on which
business decisions are taken.
Political Environment
Legal Environment

1. Political Environment:
Political environment of business refers to the government actions which affect the operation of a business.
These actions may be on local, regional, national or international level. Managers pay close attention to the
political environment to measure how government actions will affect their company.
The political segment represents how organizations try to influence government and they understand the
influences of government actions on their strategic move. The basic components of political environment are:
i) Constitution: Constitution is the fundamental law of the country. It is the duty of every citizen to follow the
constitution.
ii) Political Philosophy (Ideology): It may be defined as a set of ideas, principles and philosophy. The main
political ideologies are:
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Democratic: Under democratic ideology, the power is vested on people. Fundamental rights are ensured.
The private sector is regarded as the indispensable part of development of the country.
Totalitarian: Under it, the power is centralized to the government that does not tolerate parties of
differing opinion. The private sector doesnt flourish under such ideology.
Mix: A mix of both is based on power sharing.
Political philosophies influence organization's activities. Democracy provides greater role to private sector.
Totalitarianism provides greater role to state. Mixed philosophies provide roles to both private sectors and state.
iii) Political Parties: Political parties are regarded as the pillars of democratic system. They try to win the
support of the people to elect their representatives and form legislation.
iv) Political Institution (Government and its Branches): It involves legislative, executive, judiciary and other
constitutional bodies.
Legislative (Parliament): It main responsibility is formulation and enactment of law. It also forms the
executive i.e. the government.
Executive (Government): It refers to the organ of the state that is responsible for the overall
administration of the nation. It is composed of the government and its organs as bureaucracy, army and
police.
Judiciary (Court of Law): It refers to the court of law. It is responsible for settling disputes and
interpreting the rules and laws if required. It has the right of judicial review under the constitution.
Other Constitutional Bodies: They involve the constitutional bodies created by law. Some of them are;
The Commission for the Investigation of Abuse of Authority, Office of the Auditor General, Federal
Public Service Commission, Election Commission and National Human Rights Commission:
2. Legal Environment:
The legal environment of a business is composed of the constitution, business related laws, courts and law
administration. The legislative framework of a country provides both opportunities and threats to the business.
The components of the legal environment are mentioned below:
i) Constitution: It is the fundamental law of a country.
ii) Business Law: They consist of an array of laws that regulate business activities.
iii) Courts of law: They are the institutions to define and solve legal disputes.
iv) Law administrators: They are the various law enforcement agencies, which ensure implementation of the
laws as well as judgments made by the courts of law.
OR,
Legal environment refers to all the legal surrounding that affects organization's activities. It consists of an array
of acts, rules, regulations, precedent, institutions and processes. It defines what organizations can be cannot do.
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Legal environment is concerned with.


Protecting the rights and interests of organizations, consumers, employees, and the society. Intellectual
property rights are also produced.
Providing grounds on which organizations activities can be carried out. It encourages of restrains
activities by providing facilities to law abiders. It gives punishments to low breakers.

Regulations activities through legal provisions relating to licencing, employment, monopoly, foreign
investment, foreign exchange, environment protection, consumer protection, product safety, industrial
location, imports, exports, pricing, and taxation etc.

Organization must ensure that their activities conform to the low of the land. They must comply with
legal provisions in force. Changes in law affect strategy.

The elements of legal environments that influence organization are:


i) Law: They consist of an array of lows enacted by the parliament. They also protect the rights and interests of
consumers labour, business, and society .They affects business organizations.
ii) Courts of Law: Courts are institutions established by law to solve legal disputes. Nepal has a three-tier court
system. The Supreme Court is at the national level and is the highest level of judiciary. The Courts of Appeal are
at the middle level. The 75 district courts are at district level.
iii) Law Administrators: Various law enforcement agencies ensure implementation of laws and the judgment
of the courts of law. Government agencies, lawyers, police and jail play important role in law administration.
B.
Economic Environment
The economic environment refers to the nature and direction of the economy in which a firm competes or may
compete. In general, firms seek to compete in relatively stable economy with strong growth potential.
The state of economic environment determines the general health and well being of an organization. The
components of economic environment are;
i) Economic System: It determines the degree of private participation in economy and role of market forces.
Three types of economic system are prevalent. They are;
Free market economy: It is based on private sector ownership of the factors of production.
Centrally planned economy: It is based on public ownership of all the factors of production.
Mixed system: It is based on co-existing both private and public sectors.
ii) Economic Policies: They are the economic guidelines of the government. They aim at development and
growth of different sectors of economy. Some of the important economic policies are;
Monetary policy: It deals with money supply, interest rates, credit availability and exchange rates.
Fiscal policy: It is related to taxation and government expenditure and regulates the level of aggregate
economic activity.
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Industrial policy: It is concerned with industrial licensing, location, incentives, facilities, foreign
investment, technology transfer, and nationalization of industries.
iii) Economic Conditions: They represent economic soundness of a country. They are represented by;
Gross domestic product (GDP): It is the broadest measure of a countrys economy. It represents the total
market value of all goods and services produced in a country during a given year.
Inflation: It represents changes in the level of retail prices for the basic consumer basket. Inflation is
tied directly to the purchasing power of a currency.
Employment indicators: They involve number of jobs created or destructed; percentages of active and
unemployed workforce. They indicate the economic health of a country.
Balance of payment: It represents the ratio between the amount of payments received from abroad and
the amount of payments going abroad.
Income distribution: It shows how a notions total GDP is distributed amongst its population.
Business Cycles: They affect the health of organization. They may be depression (contraction), recovery
(revival), prosperity and recession.
iv) Regional Economic Groups (Integration): Regional and global economic integration are also the
important components of economic environment. Economic integration facilitates removing or minimizing
tariffs and other restrictions on economy at international level. It promotes cooperation and free trade among the
countries. Economic integration has been promoted by SAARC, APEC, ASEAN, EU and the WTO.
C.
Socio-Cultural Environment
A business is a social system. It conducts its activities in the society. Socio-cultural environment is the sum of
all the cultural elements that affect the operation of a business directly or indirectly.
The norms, values, beliefs, attitudes, language, symbols, and behaviour which are learned and developed over
time collectively from culture. It is a complex phenomenon and transfers over generations. Some of the
important constituents of socio-cultural environment are mentioned below:
i) Demographics: Demography is the study of human population. It consists of composition of population
based on age, groups, male and female, urbanization, migration of people etc. it determines the market
segmentation of business. Therefore, it is essential for the managers to make detailed analysis of the
demographic structure of nation.
ii) Social Institutions: Social institution includes family, reference groups and social class.
Family: Family is the primary unit of society which involve members relation with other families.
Reference Groups: Reference group represents the prestigious individuals whose activities may bring
change in attitude and life style of people.
Social Class: Social class is the division of society on the basis like upper, middle and lower economic
group. The division of social institution changes attitudes and beliefs of people that affect business.

Attitudes: It is a positive or negative concept towards product, person, organization, and other
elements.
Beliefs: Beliefs are descriptive thoughts about something. They are based on knowledge,
experience and religion.
Religion: Religion reflects and shapes culture. It is shared beliefs, values and rituals.
Language: It is a medium of communication. It also reflects culture.
Education: It is a continuous process of learning. Education is very important for developing
and nurturing culture.
Family structure and social organizations: Social organizations are in the form of common
interest group and communities.
D.
Technological Environment
The technological segment of business environment includes the institutions and activities involved in creating
new knowledge and translating it into new products, processes, and materials. Technology has pervasive and
diversified scope. Hence, it affects many parts of a society. Given the rapid pace of technological change, it is
vital for firms to study the technological segment thoroughly. The importance is that early adopters of new
technology often achieve higher market shares and earn higher returns. The following are the important
elements of technological environment.
Level of technology: It may be manual, mechanized, automated, computerized and robotized technology.
Pace of change: It is the stage and speed of the technological change.
Technology transfer: It implies technology imported from foreign countries.
Research and development budget: It is the spending by the government or business organizations for
technological adaptation, up-gradation and development.