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Features of Business Environment

  1. Business environment is the sum total of all factors external to the business firm and that greatly influences their functioning.
  2. It covers factors and forces like customers, competitors, suppliers, government, and the social, cultural, political, technological and legal conditions.
  3. The business environment is dynamic in nature that means, it keeps on changing.
  4. The changes in business environment are unpredictable. It is very difficult to predict the exact nature of future happenings and the changes in economic and social environment.
  5. Business Environment differs from place to place, region to region and country to country. Political conditions in India differ from those in Pakistan. Taste and values cherished by people in India and China vary considerably.

 

Importance of Business Environment

 

There is a close and continuous interaction between the business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively. As stated above, the business environment is multifaceted, complex, and dynamic in nature and has a far-reaching impact on the survival and growth of the business. To be more specific, proper understanding of the social, political, legal and economic environment helps the business in the following ways:

 

  1. Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It helps the business enterprises for meeting the challenges successfully.

 

  1. Giving Direction for Growth: The interaction with the environment leads to opening up new frontiers of growth for the business firms. It enables the business, to identify the areas for growth and expansion of their activities.

 

  1. Continuous Learning: Environmental analysis makes the task of managers easier in dealing with business challenges. The managers are motivated to continuously update their knowledge, understanding and skills to meet-the predicted changes in realm of business.

 

  1. Image Building: Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up Captive Power Plants (CPP) in their factories to meet their own requirement of power.

 

  1. Meeting Competition: It help the firms to analyse the competitors’ strategies and formulate their own strategies accordingly.

 

  1. Identifying Firm’s Strength and Weakness :  Business and Weakness: Business environment helps to identify the individual strength weaknesses in view of the technological and global developments.

 

Business environment is broadly divided into two types:

  1. Internal Environment and
  2. External environment

 

  1. i.                    Internal Environment :

It relates to those factors which are internal to the business and are controllable. The internal environment exercises a significant influence on the attitudes, behaviour and performance of people. Internal environment is influenced by the following factors:

 

  1. Goals and objectives of the organisation: The goals and the objectives set up the parameters within which the organisation decisions can be taken. They greatly influence an ability of an organisation to deal with its external environment. Financial and non­financial targets are determined by the goals.

 

  1. Corporate image: Every organisation enjoys an image among the employees. Some refer to their employers as progressive whereas others refer to them as Conservative. To make the business acceptable to the society, every business must try to improve its image. Objectives based on enlightened lines certainly help to improve corporate image.
  2. Research and development facilities: Research and development is the strength of the business. it helps the business to go ahead of the competitors by introducing new products and improving the existing ones.
  3. Efficient manpower: A successful business is known by its efficient manpower and not by the buildings and machines. Manpower makes or breaks a business. Due care should be taken to recruit result oriented employees.
  4. Business policies: The knowledge of internal environment and how it affects the functioning of the organisation is important to understand the use of business policies. Broadly, policies cover four functional areas viz. production, marketing, finance and HRD. Business policies provide the broad guidelines within which an organisation             has to work. Thus policies should be comprehensive.
  5. Strong financial base: Business organisations must try to attain strong financial base. This helps the business to fight uncertainty in the market. It can depend on internal financing when an external borrowing becomes costly.
  6. Cordial relations: Both the employers & employees should try to maintain cordial relations at the workplace. It is important to keep clear line of communication. Differences and conflicts can be settled across the table. Work environment should attract employees to their work.
  7. Value based management :  Traditional measures for performance measurement like a return on sales, a return investment or a return on net assets have become outdated. New measures like shareholders, views, employee morale and the work ethics which improve the employee satisfaction are considered more important. Value system is internal to business and differs from enterprise to enterprise.

 

ii. External Environment:

External environment relates to the factors which are external to the business organisation. It is divided into Micro Environment and Macro Environment.

 

MICRO ENVIRONMENT:

The micro environment consists of all the factors in the company’s immediate environment that affects the performance of the Company. These include the sup-pliers, marketing intermediaries, competitors, customers and the publics. The micro-environmental factors are more – intimately linked with the company than the macro factors. The micro- forces need not necessarily affect all the forms in a particular industry in the same way. Some of the micro factors may be particular to a firm. When competing firms in an industry have the same micro elements, the relative success of the firm depends inter alia, on their relative effectiveness in dealing with these elements. The following factors affect the micro environment:

 

Corporate Resources:

Corporate resources include employees, funds, materials, machinery and management. These resources are controllable. They can be used as per the guidelines provided by the business policies.

 

Customers:

The business exists only because of its customers. Monitoring the customers’ sensitivity is therefore a prerequisite for the success of a business- It is important to consider the customers’ likes, dislikes, needs, preferences, buying motives and expectations. A company may have different categories of customers like individuals, households, industries and other commercial establishments and government and other institutions. Higher customer patronage brings increased profit to the business.

 

Suppliers:

Supplier is an important force in the micro environment of the firm. Supplier, are those people who supply inputs like raw materials and components to the firm. The importance of reliable source of supply to the smooth functioning of the business cannot be overlooked. Uncertainty regarding the supply or the other supply constraints often compel companies to maintain high inventories leading to increased cost. It is always advisable to, negotiate with several suppliers and not allow a single supplier to enjoy monopoly power. The selection of suppliers is within the control of the management.

 

Competitors:

The role of competitors is beyond the control of the management. It is necessary to study the competitors’ policy on product, price, promotion, etc. When relevant information is collected about the competitors, it helps to strengthen business and also face the competition more effectively. The business can profit by exploiting the weaknesses of the competitors

 

Marketing intermediaries

The marketing intermediaries, include middlemen such as agents and merchants who help the company find – customer or close sales with them. Marketing intermediaries are a vital link between the company a the final consumers. A wrong choice of the link, may cost the company heavily. Goods requiring demonstrations find the services of middlemen unavoidable.

 

Society:

Business has to serve the society. Society consists of general public, media, government, financial institutions and organize group like trade unions, shareholders’ associations etc. Society, directly influences the decisions of business.

 

MACRO ENVIRONMENT

 

1. Economic Environment

The survival and success of each and every business enterprise depend fully on its economic environment. The main factors that affect the economic environment are:

(a) Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth.

(b) Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are:

(i)       Industrial policy

(ii)     Fiscal policy

(iii)    Monetary policy

(iv)   Foreign investment policy

(v)     Export –Import policy (Exim policy)

 

The government keeps on changing these policies from time to time in view of the developments taking place in the economic scenario, political expediency and the changing requirement. Every business firm has to function strictly within the policy framework and respond to the changes therein.

 

Important Economic Policies

  1. Industrial policy: The Industrial policy of the government covers all those principles, policies, rules, regulations and procedures, which direct and control the industrial enterprises of the country and shape the pattern of industrial development.
  2. Fiscal policy: It includes government policy in respect of public expenditure, taxation and debt.
  3. Monetary policy: It includes all those activities and interventions that aim at smooth supply of credit to the business and a boost to trade and industry.
  4. Foreign investment policy: This policy aims at regulating the inflow of foreign investment in various sectors for speeding up industrial development and take advantage of the modern technology.
  5. Export–Import policy (Exim policy) : It aims at increasing exports and bridge the gap between expert and import. Through this policy, the government announces various duties/levies. The focus now-a-days lies on removing barriers and controls and lowering the custom duties.

 

2.     Social and culture Environment

It refers to people’s attitude to work and wealth; role of family, marriage, religion and education; ethical issues and social responsiveness of business. The social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits, flower, etc. Due to increase in literacy rate the consumers are becoming more conscious of the quality of the products. Due to change in family composition, more nuclear families with single child concepts have come up. This increases the demand for the different types of household goods. It may be noted that the consumption patterns, the dressing and living styles of people belonging to different social structures and culture vary significantly.

 

3.         Political Environment

This includes the political system, the government policies and attitude towards the business community and the unionism. All these aspects have a bearing on the strategies adopted by the business firms. The stability of the government also influences business and related activities to a great extent. It sends a signal of strength, confidence to various interest groups and investors. Further, ideology of the political party also influences the business organisation and its operations. You may be aware that Coca-Cola, a cold drink widely used even now, had to wind up operations in India in late seventies. Again the trade union activities also influence the operation of business enterprises. Most of the labour unions in India are affiliated to various political parties. Strikes, lockouts and labour disputes etc. also adversely affect the business operations. However, with the competitive business environment, trade unions are now showing great maturity and started contributing positively to the success of the business organisation and its operations through workers participation in management.

 

4.         Legal Environment

This refers to set of laws, regulations, which influence the business organisations and their operations. Every business organisation has to obey, and work within, the framework of the law. The important legislations that concern the business enterprises include :

  1. Companies Act, 1956
  2. Foreign Exchange Management Act, 1999
  3. The Factories Act, 1948
  4. Industrial Disputes Act, 1972
  5. Payment of Gratuity Act, 1972
  6. Industries (Development and Regulation) Act, 1951
  7. Prevention of Food Adulteration Act, 1954
  8. Essential Commodities Act, 2002
  9. The Standards of Weights and Measures Act, 1956
  10. Monopolies and Restrictive Trade Practices Act, 1969
  11. Trade Marks Act, 1999
  12. Bureau of indian Standards Act, 1986
  13. Consumer Protection Act, 1986
  14. Environment Protection Act
  15. Competition Act, 2002
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