BUSINESS ENVIRONMENT

UNIT 1BUSINESS AS A SOCIAL SYSTEM

Business is an integral part of social system and it is influenced by
other elements of society which, in term, is affected by the business.
Today

the

wholesociety

is

business

environment.D a v i s

and

Blomstorm point out that in taking an ecological view

o f b u s i n e s s i n a s y s t e m s r e l a t i o n s h i p w i t h s o c i e t y ; t hr e e i d e a s
are

significant

i n addition

to

the

systems

idea.The

three

ideas

are:1 . V a l u e s 2 . V i a b i l i t y 3 . P u b l i c v i s i b i l i t y
1. VALUES:
Business like other social institutions, develops certain belief systems
andv a l u e s f o r w h i c h t h e y s t a n d , a n d t h e r e b e l i e f s a n d
v a l u e s a r e a s o u r c e o f institutional drive. These values drive from a
multitude source, such as the missionof business as a social institution, the
nation in which business is located, the typeof industry in which it is active and
the nature of employees. These values becomeguides for employees decisions
in the interface of business. Second, they becomestrong motivators for people in
a business.
2. VIABILITY
Davis and Blomstorms define viability as the drive to line and grow,
toaccomplish the potential not yet reached, and to achieve all that a living
system isc a p a b l e o f b e c o m i n g . I f a b u s i n e s s i s t o b e a v i a b l e ,
v i g o r o u s , i n s t i t u t i o n i n s o c i e t y, i t m u s t i n i t i a t e i t s s h a r e o f
f o r c e s i n i t s o w n e n v i r o n m e n t r a t h e r t h a n merely adjust to outside
forces. Every business needs a drive and spirit all its ownto make it as a positive
actor on the social stage rather than reactor or a reflector.
3. PUBLIC VISIBILITY

The term public visibility refers to the extent that organizations

activitiesare known to person outside the organization. Public
visibility is different fromidea of public image. The term public image refers
to what people think about anorganizations act, while are known. The
importance of public visibility is that it subjects business activities to
public examination, discussion and judgment.These are became business is
integral part of social system. It is a social organ to help accomplish the
social goals.
INTERNAL AND EXTERNAL ENVIRONMENT OF BUSINESS
[TYPESOF

ENVIRONEMTN]I . I N T E R N A L

ENVIRONMENT FACTORS
1.Value system
: Th e v a l u e s y s t e m s o f t h e f o u n d e r s a n d t h o s e a t t h e h e l m
o f a ffa i r s h a v e i m p o r t a n t b e a r i n g o n t h e c h o i c e o f b u s i n e s s , t h e
m i s s i o n a n d objectives of the organization, business policies and
practices. It is a widelyacknowledged fact that the extent to which the value
system is shared by all inorganization is an important factor contributing to
success.

2.Mission and Objectives

: Th e b u s i n e s s d o ma i n o f t h e c o mp a n y, p r i o r i t i e s , d i r e c t i o n o f
the

development,

business

philosophy

business

policy

etc

a r e guided by the mission and objective of the company.Example: Ranbaxys

thrust in to the foreign markets and developments have beendriven by its
mission to become a researcher based international pharmaceuticalcompany.

3.MANAGEMENT STRUCTURE AND NATURE

The organizational structure, the composition of board of directors, extento f
professionalization of management etc, are important factors
i n f l u e n c i n g business decisions. Some management structures and styles
delay decision makingwhile some other facilitate quick decision making.The
Board of Directors being the highest decision making body which setst h e
d i r e c t i o n f o r t h e d e v e l o p me n t o f t h e o r ga n i z a t i o n a n d w h i c h
o v e r s e e s t h e performance of organization, the quality of the Board is
a very critical factor for the development and performance of company.
4 . I N T E R N A L P O W E R R E L ATI O N
Factors like the amount of support the top management enjoys from
thed i f f e r e n t l e v e l s o f e m p l o y e e s , s h a r e h o l d e r s , a n d B o a r d
o f D i r e c t o r s h a v e important influence on the decision and their
implementation. The relationship between the members of the board and
between chief executive and the Board arealso critical factors.
5.HUMAN RESOURCES
T h e c h a r a c t e r i s t i c s o f t h e h u ma n r e s o u r c e s l i k e s k i l l , q u a l i t y,
m o r a l e , commitment, attitude etc., could contribute to the strength and
weakness of theorganization.

6 . C O M PAN Y I M A G E AN D B R A N D E Q U I T Y

The image of the company matters while raising finance, forming

jointventures or other alliances, soliciting marketing intermediaries, entering
purchaseon sale contracts, launching new products etc. Brand equity is
also relevant inseveral of these cases.

7.OTHER FACTORS
A)Research and development determine a companys ability to
innovate andcompete.B)Marketing quality of marketing men, brand
equity, distribution network have direct effect on marketing.
C)
FINANCE 0 financial policies; financial position and capital structure arealso
affecting business performances.D)Physical Assets production capacity,
technology, distribution logistics
EXTERNAL ENVIRONMENT FACTORS
It consists of 2 types.1 . M i c r o e n v i r o n m e n t 2 . M a c r o e n v i r o n m e n t
I. Micro Environment
The

micro

environment

is

also

known

as

the

task

e n v i r o n m e n t a n d operating environment became the micro environment

forces have a direct bearingon the operations of the firm.These include the
factors like
1. SUPPLIERS
An important force in the micro environment of a company is the suppliers,i . e .
those

who

components

supply

the

inputs

like
to

raw

materials

and
the

company.

The

importance

of

reliable

source

of

s u p p l y i s f o r t h e s m o o t h functioning of business.It is very risky to

depend on a single supplier became of skills, lock out or any other production
problem with that supplier may seriously affect the company.Hence multisource
of supply often helps reduce risks.

2. CUSTOMERS
A b u s i n e s s e x i s t o n l y b e c a me a n d i t s c u s t o m e r s . A c o m p a n y
m a y h a v e different categories of customers like individuals, households,
industries and other commercial establishment and govt. and other institution.
3. COMPETITORS
A firms competitors include not only other firms which market the
same p r o d u c t s

but

also

all

those

who

c o mp e t e

for

the

d i s c r e t i o n a r y i n c o m e o f t h e consumers.
4. MARKETING INTERMEDIARIES
T h e i m me d i a t e e n v i r o n me n t o f t h e c o m p a ny m a y c o n s i s t o f
n u m b e r o f marketing intermediaries which are firms that aid the
company in promoting,selling and distributing its goods to final buyers.T h e
m a r k e t i n g i n t e r m e d i a r i e s i n c l u d e s mi d d l e m e n s u c h a s a g e n t s
a n d merchants who help the company find customers or close sales with
them.
5. FINANCIERS
A n o t h e r i mp o r t a n t m i c r o e n v i r o n me n t a l f a c t o r i s t h e f i n a n c i e r
o f t h e company. Besides the financing capabilities, their policies and strategies,
attitudes,ability to provide non financial assistance etc are very important.

6. PUBLICS
A public is any group that has an actual or potential interest in an impacton an
organizations ability to achieve its interests. Media publics, citizen
action publics and local publics are some examples.

MACRO ENVIRONMENT
It is also called as general environment and remote environment. The
macroenvironment 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:

I. 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
andsoftware to solve problems and promote progress.
1. 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.
2. Customers Needs / Expectation
Tec h n o l o g i c a l o r i e n t a t i o n a n d R & D e ffe c t s o f a c o m p a n y m a y
a l s o b e influenced by the customer needs and expectation. In several cases the
customer a n d t h e s u p p l i e r h a v e a c o l l a b or a t i v e r e l a t i o n s h i p t o

d e v e l o p t h e pr o d u c t o r solutions. If the customers are highly demanding,

companies would be compelledto be innovative.
3. 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.

4. Suppliers offering
Many times technological changes are encouraged by the suppliers of
acompany, like a capital goods supplier etc.
5. Competitive dynamics
C o m p e t i t i o n c o mp e l s t h e a d o p t i o n o f t h e b e s t t e c h n o l o g y a n d
c o n s t a n t endeavor to innovate.
6. Substitutes
Emergence

of

new

substitutes

or

technological

improvements

or

substituteswhich alter technological change.

7. Social forces
Certain social forces like pretext against environment pollution or
other ecological problems demand for eco-friendly products.
8.Research organization
T h e t e c h n o l o g i c a l e n v i r o n me n t o f b u s i n e s s i s e nr i c h e d by
r e s e a r c h e d organizations which develops new technologies and provide other
technical inputs.
9.Govt. policy

T h e g o v t . c o n t r i b ut e s t o t h e d e v e l o p m e n t t o t h e t e c h n o l o g y by
i t s o w n direct involvement by establishing research organization and funding
R & D. Thegovt. may encourage private R & D by various incentives.

II. DEMOGRAPHIC ENVIRONMENT

The importance of demographic factors to business is clear from the factst h a t
Management is men & Market is people. i.e., Management
i n M e n , M a t e r i a l , M a c h i n e r y a n d M o n e y, a n d m a r k e t i s p e o p l e
i n t h e s e n s e t h a t t h e demand depends on the people and their
characteristics the number, incomelevels, tastes and preferences, beliefs,
attitudes and sentiments.I m p o r t a n t d e m o g r a p h i c b a s e s o f m a r k e t
s e g m e n t a t i o n i n c l u d e t h e following:
1.Agestructure
4.Family
7.Social

2 . G e n d e r

size

3.Income

5.Occupation

class

10.Nationality D e m o g r a p h i c

distribution

6.Education

8.Religion
factors

such

9 . R a c e
as

size

of

p o p u l a t i o n , g r o w t h r a t e , a g e composition, ethnic, density of

population, rural urban distribution, nature of family have very
significant implication for business.
III. ECONOMIC ENVIRONMENT
Business partners and strategies are influenced by
the

e c o n o m i c characteristics. The economic environment includes the

structure

and

nature

of

the

economy, the stage of development of economy, economic resources,

level of income, global economic linkages, economic policies etc.
1. Nature of the Economy

The general level of development of the economy has lot of implication

for business it has significant bearing on the nature and size demand, govt.
policiesaffecting business. The widely used method of classification of the
economies ison the basis of per capita income. Accordingly the low
income, middle and highincome economies.Low income economies are
economies with very low per capita income. High income economies are
economies with very rich income per capita. Middleincome economies are
sub divided into lower middle and upper middle income where income
per capita is neither very high nor low.
2. Structure of the economy
Factors such as contribution of different structure
l i k e p r i m a r y ( a g r i c u l t ur a l ) , s e c o n d a r y ( i n d u s t r i a l ) & t e r t i a r y
( s e c o n d a r y ) s e c t o r s , l a rge , medicine, small sectors to economy.
These factors and the nature of each sector have business implication.
For example, India is one of the largest producers of agricultural
products, because of the small and fragmented nature of land holdings,efficient
collection and processing of products become difficult. The land holding pattern
also makes productivity improvements difficult.
3. Economic policies
There are several economic policies which can have very great impact
on business. Important economic policies are
a) Industrial policy
It defines the scope and role of different sectors like private, public,
jointand cooperative. It may influence the location of industrial undertakings.
Choiceof technology, state of operation, product mixes etc.
b) Trade policy
It can affect the fortunes of firms. For example a policy of protecting
thehome industry may greatly help the import competing industries, while

liberationof the impart policy may create difficulties for such industries. This
mean the firmshould come up with quality, cost, and marketing and after sales
service etc.
c) Foreign exchange policy
Exchange rate policy and policy in respect of cross border movement
of capita are important for business.
d) Foreign investment and technology policy
Foreign investment and technology policy will increase
domesticcompetition at the same time it would benefit
m a n y d o m e s t i c f i r m s b y permitting global sourcing of capital
and technology, by increasing the quantity and quality of domestic supply
of many goods and services.
e) Fiscal policy
G o v t . s t r a t e g y i n r e s p e c t o f p u b l i c e x p e n d i t ur e a n d r e v e n u e c a n
h a v e significant impact on business. The pattern of public expenditure
may affect thedevelop of industries. Such as govt. often use tax
incentives

or

disincentives

toencourage

or

discourage

certain

activities. For ex: when industry suffers fromrecession, a reduction of

taxes like excise duty or sales tax may help improve thedemand.
f) Monetary policy
The central bank, by its policy towards the cost and availability of
credit,c a n

significantly

influence

savings,

investments

and

c o n s u m e r s p e n d i n g i n economy. For example 1% reduction in cash

reserve ratio will significantlyincrease loan able funds with commercial
banking systems.
IV. NATURAL ENVIRONMENT

The natural environment ultimately is the source and support of everythingused

by business every raw material, energy resource, life sustaining factor etc.The
natural environment determines what can be got done in a society andhow
institution can function. Resource availability is the fundamental factor is
thedevelopment of business in the society.Thus geographical and ecological
factors, such as natural endowments,weather and climatic conditions,
topographic factors, vocational aspects in theglobal context etc., are all
relevant to business.
1.Geographical factors
: d i ffe r e n c e s i n g e o g r a p h i c a l c o n d i t i o n b e t w e e n markets may
sometimes call for changes in the market mix. It influences the location
of some industries.E.g. Industries with material index tend to be located near the
raw materialsources
2. Climatic and weather conditions
: I t a ffe c t s t h e l o c a t i o n o f c e r t a i n industries like cotton textile industry.
Topographic factors may affect the demand pattern in some cases. E.g. in hilly
areas Jeeps are greater demand than cars.
Weather and climatic factors affect the demand of certain types of products.E.g.
in region where temperature is very high in summer, there is good demand
for desert coolers.Weather and climatic factors can affect the demand
pattern of clothing, building materials, food, medicines etc. further, weather
and climatic conditionsmay call for modification to the products, packaging
storage conditions etc.
3.

Ecological

factors:

It

assumes

great

importance,

the

d e p l e t i o n o f n a t u r a l resources, environmental pollution another disturbance

of the ecological balancehave carried great concern, govt. policies aimed
as preservation of environment purity and ecological balance, conservation

of non-replenish able resources haveresulted additional responsibilities and

problems for business.