Introduction to Business Studies

Business Environment

In the context of business the environment refers to the sum of internal and external forces operating on an organization. The managers must perforce recognize the elements, severity and impact of these forces on the organization. They must identify, evaluate and react to the forces triggered by the external environment.

More often than not, these forces are beyond the control of an organization and its managers. Accordingly, the factors of the environment will need to be considered as inputs in the planning and forecasting models developed by an organization.

An organization operates within the larger framework of the external environment that shapes opportunities and poses threats to the organization. The external environment is a set of complex, rapidly changing and significant interacting institutions and forces that affect the organization's ability to serve its customers. External forces are not controlled by an organization, but they may be influenced or affected by that organization. It is necessary for organizations to understand the environmental conditions because they interact with strategy decisions. The external environment has a major impact on the determination of marketing decisions. Successful organizations scan their external environment so that they can respond profitably to unmet needs and trends in the targeted markets.

The Organization as a System

Internally, an organization can be viewed as a resource conversion machine that takes inputs (labor, money, materials and equipment) from the external environment (i.e., the world outside the boundaries of the organization), converts them into useful products, goods, and services, and makes them available to customers as outputs. The organization must continuously monitor and adapt to the environment if it is to survive and prosper. Disturbances in the environment may spell profound threats or new opportunities. The successful organization will identify, appraise, and respond to the various opportunities and threats in its environment.

External Macro environment

External environment

The external macro environment consists of all the outside institutions and forces that have an actual or potential interest or impact on the organization's ability to achieve its objectives: competitive, economic, technological, political, legal, demographic, cultural, and ecosystem. Though noncontrollable, these forces require a response in order to keep positive actions with the targeted markets. An organization with an environmental management perspective takes aggressive actions to affect the forces in its marketing environment rather than simply watching and reacting to it.

1. Economic Environment

The economic environment consists of factors that affect consumer purchasing power and spending patterns. Economic factors include business cycles, inflation, unemployment, interest rates, and income. Changes in major economic variables have a significant impact on the marketplace. For example, income affects consumer spending which affects sales for organizations. According to Engel's Laws, as income rises, the percentage of income spent on food decreases, while the percentage spent on housing remains constant.

2. Technological Environment

The technological environment refers to new technologies, which create new product and market opportunities. Technological developments are the most manageable uncontrollable force faced by marketers. Organizations need to be aware of new technologies in order to turn these advances into opportunities and a competitive edge. Technology has a tremendous effect on life-styles, consumption patterns, and the economy. Advances in technology can start new industries, radically alter or destroy existing industries, and stimulate entirely separate markets. The rapid rate at which technology changes has forced organizations to quickly adapt in terms of how they develop, price, distribute, and promote their products.

3. Political and Legal Environment

Organizations must operate within a framework of governmental regulation and legislation. Government relationships with organizations encompass subsidies, tariffs, import quotas, and deregulation of industries.

The political environment includes governmental and special interest groups that influence and limit various organizations and individuals in a given society. Organizations hire lobbyists to influence legislation and run advocacy ads that state their point of view on public issues. Special interest groups have grown in number and power over the last three decades, putting more constraints on marketers. The public expects organizations to be ethical and responsible. An example of response by marketers to special interests is green marketing, the use of recyclable or biodegradable packing materials as part of marketing strategy. The major purposes of business legislation include protection of companies from unfair competition, protection of consumers from unfair business practices and protection of the interests of society from unbridled business behavior. The legal environment becomes more complicated as organizations expand globally and face governmental structures quite different from those within the United States.

4. Demographic Environment

Demographics tell marketers who current and potential customers are; where they are; and how many are likely to buy what the marketer is selling. Demography is the study of human populations in terms of size, density, location, age, sex, race, occupation, and other statistics. Changes in the demographic environment can result in significant opportunities and threats presenting themselves to the organization. Major trends for marketers in the demographic environment include worldwide explosive population growth; a changing age, ethnic and educational mix; new types of households; and geographical shifts in population.

5. Social / Cultural Environment

Social/cultural forces are the most difficult uncontrollable variables to predict. It is important for marketers to understand and appreciate the cultural values of the environment in which they operate. The cultural environment is made up of forces that affect society's basic values, perceptions, preferences, and behaviors. U.S. values and beliefs include equality, achievement, youthfulness, efficiency, practicality, self-actualization, freedom, humanitarianism, mastery over the environment, patriotism, individualism, religious and moral orientation, progress, materialism, social interaction, conformity, courage, and acceptance of responsibility. Changes in social/cultural environment affect customer behavior, which affects sales of products. Trends in the cultural environment include individuals changing their views of themselves, others, and the world around them and movement toward self-fulfillment, immediate gratification, and secularism.

6. Ecosystem Environment

The ecosystem refers to natural systems and its resources that are needed as inputs by marketers or that are affected by marketing activities. Green marketing or environmental concern about the physical environment has intensified in recent years. To avoid shortages in raw materials, organizations can use renewable resources (such as forests) and alternatives (such as solar and wind energy) for nonrenewable resources (such as oil and coal). Organizations can limit their energy usage by increasing efficiency. Goodwill can be built by voluntarily engaging in pollution prevention activities and natural resource.

External Micro environment

The external micro environment consists of forces that are part of an organization's marketing process but are external to the organization. These micro environmental forces include the organization's market, its producer-suppliers, and its marketing intermediaries. While these are external, the organization is capable of exerting more influence over these than forces in the macro environment.

1. The Market

Organizations closely monitor their customer markets in order to adjust to changing tastes and preferences. A market is people or organizations with wants to satisfy, money to spend, and the willingness to spend it. Each target market has distinct needs, which need to be monitored. It is imperative for an organization to know their customers, how to reach them and when customers' needs change in order to adjust its marketing efforts accordingly. The market is the focal point for all marketing decisions in an organization.

2. Suppliers

Suppliers are organizations and individuals that provide the resources needed to produce goods and services. They are critical to an organization's marketing success and an important link in its value delivery system.

3. Marketing Intermediaries

Like suppliers, marketing intermediaries are an important part of the system used to deliver value to customers. Marketing intermediaries are independent organizations that aid in the flow of products from the marketing organization to its markets. The intermediaries between an organization and its markets constitute a channel of distribution. These include middlemen (wholesalers and retailers who buy and resell merchandise). Physical distribution firms help the organization to stock and move products from their points of origin to their destinations. Warehouses store and protect the goods before they move to the next destination. Marketing service agencies help the organization target and promote its products and include marketing research firms, advertising agencies, and media firms. Financial intermediaries help finance transactions and insure against risks and include banks, credit unions, and insurance companies.

Importance of understanding the environment

The managers job cannot be accomplished in a vacuum within the organization. There are a number of factors both internal as well as external which jointly affect managerial decision-making. It is therefore very important for the manager to understand and evaluate the impact of the business environment due to the following reasons :

• a)Businesses may be doomed to be non starters due to restrictive business environment which may take the form of rigid government laws ( no polluting industry can ever be located in around 50 Km radius of the Taj) , state of competition ( Car manufacturing capacity presently in the country is far in excess of demand) etc.
• b)The present and future viability of an enterprise is impacted by the environment For example no TV manufacturer can be expected to survive by making only B&W television sets when consumer preference has clearly shifted to color television sets.
• c)The cost of capital and the cost of borrowing - two key financial drivers of any enterprise are impacted by the external environment . For example,the ability of a business to fund its expansion plan by raising money from the stock markets depends on the prevalent public mood towards investment in stock markets.
• d)The availability of all key inputs like skilled labor , trained managers , raw materials , electricity , transportation , fuel etc are a factor of the business environment.
• e)Increasing public awareness of the negative aspects of certain industries like hand woven carpets ( use of child labor ) , pesticides (damage to environment in the form of chemical residues in groundwater), plastic bags (choking of sewer lines) have resulted in the slow decline of some industries.
• f)Finally , the environment offers the opportunities for growth and profits . For example, when the insurance and aviation industry was thrown open to the private sector , the new entrant could easily build on the expectations of the public.

Changing profile of Indian economic environment

Policies between 1950-70 were implemented with a sincere belief in the efficacy of the socialist philosophy and political democracy. Heavy investment by government in Steel plants, atomic energy, hydroelectric power and irrigation projects laid the foundation of a strong industrial edifice.

The economy had stagnated since the late nineteenth century, and industrial development had been restrained to preserve the area as a market for British manufacturers. In fiscal year (FY) 1950, agriculture, forestry, and fishing accounted for 58.9 percent of the gross domestic product (GDP) and for a much larger proportion of employment. Manufacturing, which was dominated by the jute and cotton textile industries, accounted for only 10.3 percent of GDP at that time.

Beginning in the late 1970s, successive Indian governments sought to reduce state control of the economy. Progress toward that goal was slow but steady, and many analysts attributed the stronger growth of the 1980s to those efforts. In the late 1980s, however, India relied on foreign borrowing to finance development plans to a greater extent than before.

India embarked on a series of economic reforms in 1991 in reaction to a severe foreign exchange crisis. Those reforms have included liberalized foreign investment and exchange regimes, significant reductions in tariffs and other trade barriers, reform and modernization of the financial sector, and significant adjustments in government monetary and fiscal policies.

The reform process has had some very beneficial effects on the Indian economy, including higher growth rates, lower inflation, and significant increases in foreign investment. Foreign portfolio and direct investment flows have risen significantly since reforms began in 1991 and have contributed to healthy foreign currency reserves ($32 billion in February 2000) and a moderate current account deficit of about 1% (1998-99).

India's trade has increased significantly since reforms began in 1991, largely as a result of staged tariff reductions and elimination of non-tariff barriers. The outlook for further trade liberalization is mixed. The U.S. is India's largest trading partner; bilateral trade in 1998-99 was about $10.9 billion. Principal U.S. exports to India are aircraft and parts, advanced machinery, fertilizers, ferrous waste and scrap metal, and computer hardware. Major U.S. imports from India include textiles and ready-made garments, agricultural and related products, gems and jewelry, leather products, and chemicals.

Significant liberalization of its investment regime since 1991 has made India an attractive place for foreign direct and portfolio investment. The U.S. is India's largest investment partner, with total inflow of U.S. direct investment estimated at $2 billion (market value) in 1999. U.S. investors also have provided an estimated 11% of the $18 billion of foreign portfolio investment that has entered India since 1992. Automatic approvals are available for investments involving up to 100% foreign equity, depending on the kind of industry. Foreign investment is particularly sought after in power generation, telecommunications, ports, roads, petroleum exploration and processing, and mining.

See Also

• Your Article Library: Business Environment: Nature and Significances of Business Environment