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CHAPTER 1
Chapter Outline :
• Introduction
• Meaning of Business
• Business Objectives
• What is Business Environment ?
• Nature of Business Environment
• Components of Business Environment
• Determinant of Business Environment
• Review Questions
• References
Introduction :
o Meaning of Business
o Business objectives
o Meaning of Business Environment
o Nature of Business Environment
o Components of Business Environment
o Determinants of Business Environment
Meaning of Business
In general business refer to all activities that are being organized and carried on with an
important purpose, viz; earn profit by supplying goods and services to consumers to
satisfy their felt needs. For our purpose this concept of business is too general and thus
cannot be of great help in analyzing the role of environment in present day business
activity. We shall, therefore, define business in modern concept. Modern business covers
a complex field of industry and commerce which involve activities related to both
production and distribution. These activities on the one hand satisfy society’s needs and
desires and on the other hand brings profit to business firms. Business include activities
connected with production, trade, transport, finance, banking, insurance, advertising, and
certain other activities related to industry and commerce. For example a ball pen
necessitates a long chain of activities involved in bringing raw materials to the factory
and the end product from there to the market constitute a business.
Thus, we can say that *business firm or unit is an economic unit which is engaged in the
production or distribution or both the production and distribution of goods and services
for the purpose of earning profits.
Every business small or big in size have some objectives which it tires to fulfill while in
operation. The business unit seeks to achieve more than one objective which may vary
with the passage of time.
1. Maximum Profit : Making profit is the primary goal of any business enterprise.
All the efforts of a firm are directed towards the achievement of this object. A
firm can earn maximum profits at the point where Marginal Cost (MC) and
Marginal Revenue (MR) are equal. Marginal cost means the cost incurred on the
production of an additional unit of a commodity. Marginal Revenue is the
revenue received from the sale of such additional unit.
5. Achieve Financial Soundness: No business firm can continue for long time if it
is not financially sound. Banks and financial institutions stress upon financial
soundness of the firms to grant them any sort of financial assistance. Therefore,
every business firm takes due care and precaution in the use of funds of the firm.
8. Dominate the whole market: Some business firms have an object of dominating
the whole market. Such firms provide goods and services to consumers at the
lowest possible price. They provide best after-sale-services to the consumers.
Such firms also aim at selling product to the maximum number of customers so
that they can capture the market and establish their business empire.
This is the economic growth of the country beyond earning profit. It is an important
institution in society. Te role of business is crucial.
Technological factors – The pace of technological change had quickened. This has had a
huge impact not only on how firms produce products. The information technology
revaluation is also enabling much more rapid communication and making it possible for
many workers to do their job from home or while traveling.
The division of the factors affecting a firm into political, economic, social and
technological analysis and is widely used by business enterprise to audit their
environment and to help them establish a strategic approach to their business activities.
We must also be aware of the fact that the business environment is constantly changing.
To be successful, a business will need to adapt to these changes and, wherever possible,
take advantage of them. Ultimately, the better business manages understand the
environment in which they operate.
Risk and uncertainty – Business firm works under risk and uncertainty, risk depends
upon possibility and uncertainty is unmeasurable risk. Every business have profit risk,
investment risk and product risk. And every business works under demand uncertainty,
production uncertainty, profit uncertainty, price and cost uncertainty and also
environmental uncertainty.
Profit Maximisation – Profit is the main incentive, motivator, strong sustainer, objective
indicator. The main aim of business is profit maximization and cost minimization, price
is a growth of business.
Change – The business has invented the strategy of making changes in product quality,
design or packaging. This strategy of offering differentiated products has been found
quite effective to maintain its identity in the market. So according to time, changes must
be there. For example colour televisions have replaced black and white televisions.
I. Internal Environment
Business is normally under-taken for profit maximization. The internal factors are
generally regarded as controllable factors because the company has control over these
because the company has central over these factors; it can alter or modify such factors as
its personnel, physical facilities, organization and functional means, such as marketing
mix to suit the environment. The spirit of the internal environment of a firm is derived
from its mission that states as to why and for whom does it exist. This provides the basic
purpose of a firm’s existence and operations. Top management of the firm executes the
mission through a strategy which is based mission through a strategy which is based on
thorough planning in terms of clearly identified objectives to be achieved over a period of
time. The entire process takes place within the framework of a value system and
corporate culture and the persons occupying different line and staff positions here to fit
themselves into the value and culture framework. These factors establish the broad
internal environment within which different departments of the firm operate in an
interrelated manner.
The micro environment refers to such players whose decisions and action have a direct
bearing on the Company. Since modern business broadly has two aspects, viz.,
production and selling of goods, the micro environment of business can be divided
accordingly.
The most prominent performs in the micro environment are the following:
o Suppliers of inputs
o Workers and their unions
o Customers
o Market intermediaries
o Competitors
o Public
Input suppliers and workers together with their unions exercise influence on production-
customers, market intermediaries and competitors affect sales operations of the business
firm. The public may influence both production and sales.
A. Micro Environment
Macro Environment of a company refers to all those economic and non economic
factors which exercise their influence on the business activity in general and thus
determine opportunities that a company may have to promote its business.
The role of macro environment from the point view of the business may be both
positive and negative. This implies that the larger forces in the company’s environment to
not always provide wider space for business operations.
Macro environment of business can be broadly classified into economic environment and
non –economic environment. Since business is broadly divided on economic activity,
economic environment of business- both national and global of strategic importance. In
economic environment of the country, country’s economic system, macro-economic
scenario, phase of business cycle through which the economy is passing, organization of
the financial system and economic polices of the government are the most important
elements.
Economic system of the country determines the parameters of the business activity.
Macro-economic scenario refers to price situation, levels of saving and investment, fiscal,
monetary and balance of payments situations and overall growth activity. These factors
broadly determine the prospects of business activity. In a recessionary situation business
firms encounter steep fall in effective demand which inevitably leads to business slow
down. Developed financial system is now a precondition for efficient mobilization of
financial resources for business. Economic policies of the govt., particularly the
Industrial, trade, fiscal and monetary policies shape the opportunities for business.
However, at times, these policies are used by the governments to regulate the operations
of business firms.
Now because of liberalization from the point of view of the Company’s business, global
economic environment is as much important as the national economic environment. The
notable features of present day global environment are globalization, underdevelopment
of Russia and East Europe, recession in Japanese economy, slow recovery in the USA,
Regional Economic Groupings, protectionism, global slowdown and dominance of the
multinational corporations.
Business, despite the fact that it is an economic activity, is also influenced by its non-
economic environment political system, ideology of the government, legal framework,
social system, cultural values, demographic factors, level of technological development
and natural and physical environment of the country constitute non-economic
environment of business. In fact, all these non-economic elements are of great relevance
to present day business. These factors not only determine opportunities for business but
also, at times, have serious constraining effects.
Industrial Policy : Among various economic activities, industrial activity is more directly
related to business. In fact, the present day corporate business has grown as an extension
of industrial activity. Therefore, for analyzing economic environment of business,
industrial policy of the government has to be created examined.
The new Industrial Policy of 1991 has de-regulated the industrial economy in a
substantial manner. It has abolished all industrial licensing except for certain industries
related to strategic and social concerns. The number of industries reserved for the public
sector has been reduced to 3 which implies that the public sector’s role in future would be
very much diminished. On the recommendations of the Raghavan Committee the
government has decided to replace the MRTP Act by a new competition law. The new
industrial policy has also liberalized import of foreign capital and technology. In the case
of high investment priority industries, approval of foreign investment is automatic.
Guidelines have also been announced for the expeditious approval of foreign direct
investment in other industries.
Monetary Policy : By monetary policy we mean the regulation of the money supply and
the control of the cost and availability of credit by the central bank of the country through
the use of deliberate and discretionary action for achieving the objectives of general
economic policy.
1) Open market operations; 2) Bank rate policy; 3) Reserve requirement charges; and 4)
Selective credit controls
Fiscal Policy : This policy refers to the process of shaping taxation and public
expenditure in order to dampen the swings of the business cycle and the contribute to
rapid economic growth with high employment and stable prices. This policy when
mismanaged leads to fiscal imbalances which at times become unsustainable. At present
India’s fiscal situation is most unsatisfactory.
II Political Conditions
Firms will be directly affected by the actions of government and other political events.
The kind of political environment is conducive to business activity. Besides, the factor of
political stability is important. In Countries like Afganistan and Iraq, business activity
has suffered a lot due to political stability. Political system in India is far more stable
than in these countries. In India, due to criminalization of politics in certain states, the
business activity relatively unsafe in them.
III. Resources
Human resources refer collectively to the quantum and quality of the workforce and are
among the key determinants of economic growth. The number of people in the work
force directly depends on the population size and structure as well on the flows of
migration and immigration. The quality of human resources depends upon education,
training, skills, attitudes towards work, desire for self-improvement and even cultural
outlook and is reflected in its efficiency and productivity. Productivity of human
resources further depends upon the organizational culture and system, managerial
effectiveness, motivation and the overall work environment.
REVIEW QUESTIONS
References