CS Foundation Business Environment Notes
→ Business may be defined as the organised effort by individuals to produce goods and services, to sell these goods and services in a market place and to reap some reward for this effort. Business term can be understood as an enterprise doing work with a motive to earn profit. Besides this business can also be termed as a change, a change to adapt itself to survive in the market. A business environment is always changing because of change in government policies, change in technology, etc. which force the business to adapt itself to these changes.
Business environment encompasses all those factors that affect a company’s operations and includes customers, competitors, stakeholders, suppliers, industry trends, regulations, other government activities, social and economic factors and technological developments. Besides earning profit, business has some other benefits also like:
- It provides employment.
- It is responsible for the supply of goods and services.
- It contributes to the economic growth of the country.
- It is an important institution in the society.
→ Characteristics of business environment:
1. Environment is Complex:
Business environment principally consists of a number of factors, events conditions.
These are influenced to different departmental source in the organisation. All these factors have to be considered as environment analysis is complex and rigid and totally very difficult.
2. Environment is Multi-faceted:
Business environment is changing frequently. Strategic observer can shape and observe different character of this changing environment. Strategic observer may find some changes as an opportunity and some as a threat.
3. Environment has a far reaching impact:
Environment impact is essential ingredients for strategist to study changes and take appropriate decisions at appropriate time. If strategically neglect to take appropriate decisions at the right time which create impact to organisation then it may affect the organisation in a negative way.
4. Environment is Dynamic
Business and company environment is constantly changing in different nature. Micro and macro-environment factors are influenced to business. It impact to change on the business conditions. Dynamic environment is flexible and dynamic nature in company. A company drafts its short-term and long-term objective taking care of the dynamic nature of business environment.
→ Importance of business environment:
As a business environment is uncertain and dynamic, an enterprise has to keep itself fit to survive in this environment. An enterprise has to constantly keep an eye on this changing environment. Various threats to the enterprise in the business environment are:-
- To keep a look on the potential threats to the business. It has to constantly monitor the rivals and formulate strategies to cope up with the competition.
- To a business should look for the first mover advantage thus if any enterprise is the first to do any business than it gets an advantage in the market as there is no competition.
- As the business environment is dynamic, an enterprise should develop a course of action to meet this changing environment.
- An enterprise has to continuously monitor the environment so that with the change the performance can be improved.
→ Vision and Mission Statement
Every enterprise has to have a vision and mission for its progress. By vision, we mean an enterprise wants to be. Thus it is the future of an enterprise and mission is to reach that vision. Vision is actually the future goal of the enterprise and for achieving that goal some measurements are to be followed by company. These measurements are the mission of the enterprise. Elements of Mission and Vision Statements are often combined to provide a statement of the company’s purpose, goals and values. However, sometimes the two terms are used interchangeably.
There are many other reasons to develop vision and mission statements as well. For example, having clear and compelling vision statements can:
- Draw people to common work
- Give hope for a better future
- Inspire community members to realize their dreams through positive, effective action
- Provide a basis for developing the other aspects of your action planning process: your mission, objectives, strategies and action plans
laving a clear mission, the statement can:-
- Convert the broad dreams of your vision into more specific, action-oriented terms
- Explain your goals to interested parties in a clear and concise manner
- Enhance your organization’s image as being competent and professional
→ Types of Business Environment
Mainly, there are two types of business environment:
A. Internal
B. External
A. Internal Environment
An organization’s internal environment is composed of the elements within the organization, including current employees, management and especially corporate culture, which defines employee behaviour. Internal environment consists of factors that are in the control of the business. It includes 6 Ms i.e:
- Man
- Money
- Machinery
- Marketing
- Management structure
- Miscellaneous factors
1. Man (Human Resources):
This factor is the most important and basic factor in an enterprise. The quality of the people working in an enterprise affect the organisation’s ability to achieve its goal. A dedicated, skilled, initiative, high morale staff is an asset to the enterprise.
2. Money:
This is required by an enterprise for starting the business and for its day-to-day operation. This money comes either in the form of share capital, loans from banks and Financial Institutions and the unorganised capital market.
3. Machinery:
Company invests money in fixed assets like machines, etc. so as to get a positive return over cost in future. Machine are the basic tools to produce goods or services. Selection of an appropriate and efficient machine not fijily increases efficiency but also saves time and increases revenue.
4. Marketing:
Marketing involves all the factors that affect the decision-making component of the management which includes quality of marketing men, distribution network. Management has to take decisions for how the company’s products or services are to be marketed so as to get maximum benefit and for achieving the target some of the internal factors like men, distribution policy, etc. are some of the internal factors to be checked upon.
5. Management structure:
Business is greatly influenced by the management of the business. Board of directors take the decisions for a business organisation, thus the way management thinks and take decisions greatly influence the business as a whole. Management develops different strategies for the working of an organisation. Management guides and inspire internal operations to ensure a competitive position in the market place.
6. Miscellaneous factors:
Besides the above mentioned factors there are other internal factors that affect the business. These are
→ Research and Development:
Research and Development mainly tells the company’s ability to survive or prosper in the changing business environment. Although they are mostly outsourced from external environment but it has direct impact on the decision-making of the organisation. Technology gives the new way of doing work. It includes new designs, inventions etc. Adaptability and innovation are crucial to gaining market share and staying profitable in fluctuating economic climates.
→ Value system of the organization:
By value system, we mean what is the policy of the organization regarding the right and wrong. It is the business ethics that the organization follows which defines the organization’s policy about right and wrong. Internal factors like organizational structure and the corporate culture decides the motivation of the employee with the company.
→ Company image:
A good company image help company to raise finance, making joint venture, making purchases, etc.
→ Competitive advantage:
Analyzing the competition is an internal business part of the company. Management of the company has to continuously and closely monitor its competitors as it directly affects the business.
→ Analyzing involves:
- Identifying who is the competitor
- Strengths and weaknesses of the competitors
- Internal environment of the competitor
- Strategies to meet out the competition
B. External Environment
An organization is continuously being affected by the external forces that surround it. All these forces that are outside the business enterprise but have an effect on the organization are constitute external environment. External environment of an organization includes a variety of factors, whose existence, influence its behaviour and performance. The action of these factors may be direct (for example, the actions of competitors) or indirect (for example, changes in business climate) and external environmental analysis is done in two different contexts:
- Micro-Environment
- Macro-Environment
(1) Micro-Environment:
The micro-environment, as the name suggests, is the immediate environment that impacts a business. These factors are more linked with the company. The micro-environment can generally be considered the local environment where the business operates and the business owner is likely to be somewhat aware of the impacts that they are faced with. Although these factors lie outside the company but they do not affect all the companies of a particular industry in a similar fashion. It may affect one company more than the other in the same industry. As they have direct impact on the organization it is also known as Operating environment or Task environment.
Some of the Micro-environment are:
(a) Employees
(b) Customers
(c) Shareholders
(d) Suppliers
(e) Media .
(f) Competitors
(a) Employees: Employees are those people that are employed to work for an organisation. Employees are an important because they drive value through customer satisfaction. They are the backbone of the organization. If the employees are not motivated and are not dedicated to work then it is a setback for an organization. These are the people who execute the plans drafted by management thus they play an important role in the success of organization.
(b) Customers: Customers are vital to our business because without paying customers, we have no business. The desire and need of a customer are primary to an organization. Every organization has to work according to customer orientation. All the business-strategies are to be made as per customers satisfaction.
(c) Shareholders: Shareholders are those members of the micro-environment that have a direct influence on your
business although they are not generally paying customers. Shareholder is an individual who invests his money in the organization. They own shares in the organisation which gives them the right to vote. Thus in a way working of the company is controlled by shareholders. A company has to have a close and strong relation with shareholders as they are not just the people who controls the working of a company but also the investors of the company.
(d) Suppliers: Suppliers are those companies that supply your business with goods and services to which you add value through transformation. Thus if the services or goods supplied by supplier are of inferior quality then it greatly affects the business. Today suppliers are a vital part of the supply chain, which sees valued-added at all stages from conception to consumption.
(e) Media: A positive image of an organisation is good for the success of an organization. Organizations need to have a positive media image. For this purpose, image organizations do employ public relation officers that continuously monitor the media and develop close contacts with them. These public relation officers develop strategies for media support.
(f) Competitors: Competitors are the people who compete for your customers. A business has to have a unique selling point. To overcome competition it has to project itself something different which makes it special. On some occasions you might collaborate with a competitor these are examples of alliances and joint ventures.
(2) Macro-environment
The macro-environment includes those things that may impact 1 businesses but which are outside of their control. It is the larger, external environment within which businesses operate from an industry or economic standpoint. It is also known as General or Remote environment.
Macro-environment study the overall issues of firms and broader dimensions.
It is mainly concerned with major issues.
‘STEEP’ explains the five areas of interest for macro-environment, these are:
- S – Socio Cultural and Demographics
- T – Technological
- E – Economic conditions
- E – Ecology and Physical Environment
- P – Political and Legal
It is a part of the external analysis when conducting a strategic analysis or doing market research and gives a certain overview of the different macro-environmental factors that the company has to take into consideration.
(a) Socio Cultural and Demographic factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company’s products and how that company operates. For example, an ageing population may imply a smaller and less-willing workforce (thus increasing the cost of labour). Furthermore, companies may change various management strategies to adapt to these social trends (such as recruiting older workers).
(b) Technological factors such as R and D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality and lead to innovation.
(c) Economic factors: The economic environment constitutes to economic conditions, economic policies and the
economic system that is important to external factors of business. The economic factors affects a business in terms of taxation, government spending, general demand, interest rates, exchange rates and global economic factors. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm’s cost of capital and, therefore, to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy.
(d) Environmental factors include weather, climate and climate change, which may especially affect industries such as tourism, farming and insurance. Furthermore, growing awareness to climate change is affecting how companies operate and the products they offer – it is both creating new markets and diminishing or destroying existing ones.
(e) Political factors show how changes in government policy might affect the business. Political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs and political stability. Political factors may also include goods and services which the government wants to provide or be provided (merit goods) and those that the government does not want to be provided.
→ Global Development and Business Environment
Indian economy has been changing due to changing policies of Government as well as due to global integration. At the time of independence we had agrarian economy. Most of the economy was dependent on agriculture. Later on, policies were changed and emphasis was laid on industries. In 1991 licensing requirement for most of the industries were removed and private participation was welcomed. To channel foreign investment a board named ‘Foreign Investment Promotion Board’ was established. Thus, we can see Indian economy has been changing with time.
Its development can be divided into three heads for understanding
- Liberalisation
- Privatisation
- Globalisation
(1) Liberalisation:
Liberalisation can be termed as removal of controls. It is actually elimination of unnecessary controls and restrictions on the business organization. Characteristic features of Liberalisation are:
- Abolishing industrial licensing
- Reduction of tax rates
- Freedom in fixing of price of goods and services
- Simplifying the procedure of export and import
- Simple policies to enhance the investment from foreign companies
- Development of stiff competition
- Low inflation rate
(2) Privatisation:
The transfer of ownership, property or business from the Government to the private sector is termed privatisation. The government ceases to be the owner of the entity. Privatisation is considered to bring more efficiency and objectivity to the company. Characteristic features of Privatisation are:
- Partial or complete removal of control of state on any industry
- Opening up of an industrial sector for private entities which earlier was completely reserved for public sector
- To improve the performance of PSU’s
- To remove administrative burden on state
- To encourage private sector investment from both domestic as well as foreign sources
- Sale of equity for divestiture or privatization of ownership
- Denationalization or reprivatisation of a sector –
- Privatization of management
- Franchising certain services
- Formal liquidation (closure of an enterprise and selling its assets)
- Informal liquidation (retaining the legal status even though suspending some of its operations)
- In order to raise resources selling shares of some public enterprises
- Improvement in performance by MOU system which involves greater autonomy to management along with accountability.
(3) Globalization:
The tendency of investment funds and businesses to move beyond domestic and national markets to other markets around the globe, thereby increasing the interconnectedness of different markets. Globalization has had the effect of markedly increasing not only international trade, but also cultural exchange.
Reasons for Globalization:
- Domestic markets are not enough and other markets are required for the progress of industry
- World is shrinking because of the development of the transportation, communication, technological changes, etc.
- An organization named WTO (World Trade Organization) was established for the development of cross-border trade
- For the development of business a new technology is needed which could be taken from overseas
- To cut down the manufacturing cost, industries may set up manufacturing units overseas where manufacturing cost is favourable
- To set up a business in a place which is politically more stable
- Adverse business environment in home country pushes the companies to look for global market
- Most companies move their headquarters to overseas to avoid their respective home countries’ high taxes and other costs associated in business operation in those countries.