MCom I Semester Business Environment Meaning Features Classification Study Material Notes

MCom I Semester Business Environment Meaning Features Classification study Material Notes : Meaning of Business Environment Concept and Definition of Business Environments Features of Business Environment Importance of Business Environment  Classifications of Business Environments Components Related to Environments Business and Environments Productions Long Answer Questions Short Answer Questions Objectives Questions :

CTET Paper Level 2 Previous Year ( 2011 ) Model paper in Hindi

Business Environment : Meaning, Features and Classification

Each business organisation operates in its unique environment. Environment influences businesses and also gets influenced by it. No business can function free of interacting and influencing forces that are outside its periphery. The survival and success of a business firm depends on its innate strength-resources at its command including physical resources, financial resources, human resources, skill and organisation and its adaptability to the environment and extent to which the environment is favourable to the development of the organisation. Business activities are influenced by the economic, social and political environment. Consumers’ wants are satisfie! by the consumption of goods and services. The inputs in the form of human, physical, financial and other related resources are drawn from the environment. The business converts these resources through various processes into outputs of products and services. The latter are partly exchanged with the external groups, say customers. The exchange process brings in some surplus (or profits) to the business which could be stored and used for further development and growth. A business organisation receives inputs from the environment, transform them and returns output. The input-output exchange activity is a continuous process and calls for an active interaction with environment.

MEANING OF BUSINESS ENVIRONMENT

Business environment is made of two words, Business and Environment’. The term business’ refers to the state of being busy for an individual, group or society in economic activities. In Economics, business means those human activities which are performed for the production and distribution of goods and services. Thus, the term ‘business’ includes all the human activities which involve production or exchange of goods and services with the object of selling them at a profit.

Similarly, environment refers to the surroundings, external agents, influences or circumstances under which something exists. Business does not function in isolation or in vacuum. Businesses function within a whole gambit of relavant environment and have to negotiate their way through it.

Environment Meaning Features Classification

CONCEPT AND DEFINITION OF BUSINESS ENVIRONMENT

Business environment can be defined as the aggregate of all those factors, conditions, situations which directly affect the working of a business organisation.

Environment The term ‘business environment has been defined by the various authors as follows:

(1) According to William S. Lawrance, “The environment includes factors outside the firm which can lead to opportunities/or threats to the firm. Although there are many factors, the most important of these factors are socio-economic, technological, suppliers, competitors and government.”

(2) According to Prof. Weimer, “Business environment encompasses the climate or set of conditions-economic, social, political or institutional in which business operations are conducted.”

(3) Barry M. Richman and S Malvyn Copen opined, “Environmental factors or constraints are largely, if not in totality, external and beyond the control of individual industrial enterprises and their managements. These are essentially the ‘givers’ within which firms and their management must operate in a specific country and they vary, often greatly, from country to country.”

(4) Keith Devis opined, “Business environment is the aggregate of all conditions, events and influences that surround and affect it.”

Thus, it is clear from the above definitions that environmental forces have a direct impact on the firm and its activities. All managers must take into account the element and forces of their external environment. They must identify, evaluate and react to the forces external to the enterprise that may affect its operations.

Environment Meaning Features Classification

IMPORTANCE OF BUSINESS ENVIRONMENT

Business and its environment are closely interrelated and mutually interdependent, environment has bearing on business and business has a bearing on environment. In modern global period, where many internal and external factors determine business and on the other hand, importance of environment has increasing impact on business. In global economic scenario, some countries are economically strong while others are relatively backward. Economic backwardness of a country is indicated by symptoms of poverty, unemployment, illiteracy etc. Importance of environment in business sector may be explained as follows.

1 Helps in overall development: Environment helps in over all economic development of a business. A business acquires production, exchange and their allied services from the environment. Demand for goods, supply of raw materials, labour, transportation, infrastructural facilities etc. which are the indicators of overall development, are acquired by a business from the environment.

2. Importance of social change : The social and cultural environment keeps on continually changing. Therefore, the business enterprises also have to change and adjust in changing environment. This will help in identifying key issues, find ways of coping with complexity and also assist in managerial thinking to handle challenges.

3. Preparing long-term plans : Business enterprises depend on the environment for preparing long term future plans. The environment performs decisive role at the different level of strategy formulation. The vision of strategic planning starts from a situational analysis of the firm in the environmental context. Research and analysis help a business enterprise in formulation of longterm strategy.

4. Knowledge of market position : A business enterprise gets the information of changing market situation from the environment around it Information about customers’ taste, fashion, new entrants, change in production cost, sources and constraints of knowhow etc., are generated and anticipated from the environment. In fact, the environment provides the base for the formation of a business.

5. Importance of technical changes : Modern technique is the pivot of the progress of a business unit. The firm which quickly adopts latest technology has competitive advantage over others. E-commerce and e-banking are the results of the fastest technical changes in business.

6. Effect of Government Policy : The results of business are not determined by economic format only but they are also affected by the various government policies, government taxation policy, fiscal policy, export-import policy, industrial policy, monetary policy, licensing policy, etc. create the favourable environment for the progress of business in a country. The government policies are also modified to create favourable enviornment at the international level.

7. Struggle against problems : Just like human beings, business also does not function in isolation or in vacuum. Businesses function within a whole gambit of relevant environment and have to negotiate their way through it. The extent to which the business thrives depends on the manner in which it interacts with its environment. A business which continually remains passive to the relevant changes in the environment is destined to gradually fade away or go in oblivion. The business must continuously monitor and adopt to the environment if it is to survive and prosper. Disturbance in the environment may spell extreme threats or open up new opportunities for the firm,

8. Importance of international events: The international environment is very important for certain categories of business. It has been observed that major international developments have their effects spread on domestic business. Companies that seek new markets in foreign countries must do an environmental analysis, both internal and external. A good export market enables a firm to develop a more profitable mix and to consolidate its position in the domestic market. A company may be able to mitigate the effects of domestic recession by exporting goods.

Environmental analysis relates to identification and analysing environmental influences individually and collectively to face the future effects upon the society and business. The growth and innovations and philosophy of change should be viewed along with environmental effects.

Environment Meaning Features Classification

FEATURES OF BUSINESS ENVIRONMENT

Business environment is very complicated, dynamic and multi-dimensional and affects different business institutions in different ways. Business environment exhibits many characteristics. Some of the important characteristics of a business environment are described here:

1 The complexity of environmental factors: The environment consists of a number of factors, such as economic and political factors interacting among themselves. All these factors do not exist in isolation but are interacting with each other and create entirely new sets of influences. For example, the socialistic government will formulate socialistic economic policies which promote business units in the public sector. It will not affect the administrative system of the government.

2. Dynamism and uncertainty of nature : The environment is constantly changing in nature. Take the example of ‘car market’. As a result of liberalisation policy of 1991, many Indian and foreign companies launched a number of new models of cars. Therefore, Ambassador car of Hindustan Motors and Fiat car of Premier Company could not compete with them. It was the same time when market leadership of Maruti Industries was also shattered. As a result, Maruti launched new models by improving its process technology and strengthened its position in the market. On the other hand, many car compa. nies in international market such as Daewoo went through bad phase. It is clear from the aforesaid example that political, economic and technical environment which affect business undertakings constantly change.

3. Extensive impact of environment on business : Business environment affects the whole business widely, for example, economic depression, political instability, government laws and daily new changes in taxation and export-import policies affect the business units to more or less extent. Intensity of environmental factors differ between business units. Luxury goods producing industries such as car industries are badly affected by recession as their demand is more elastic. On the other hand, a company which depends on the export market to a considerable extent has also to face the impact of adverse developments in foreign markets.

4. Multi-dimensional environment : Many factors, forces and conditions have great impact on the business environment. The factors which affect it are political, economic, social, cultural, regulatory and technological factors and also include their sub-factors. The forces affecting business environment are-government, competition, foreign capital, technology, MNCs, oil cartels etc. similarly the conditions affecting business environment are boom or recession in world market, war or terrorism at international level etc.

5. Outside the control of businessman : However, since the individual organisations may not be able to put pressure on the environment, they often put pressure collectively, and various associations are generally formed to protect the interest of their members. For example, suggestions of the trade unions to the governments for the economic policies, formation by world wide cartel such as cartel of oil producing countries, etc. ooo

Environment Meaning Features Classification

CLASSIFICATION OF BUSINESS ENVIRONMENTOON

An organisation cannot ignore its business environment which is complex, dynamic, multifaceted and has a far reaching impact. The environment consists of a number of factors, conditions, and influences arising from different sources. Due to the many and varied influences operating simultaneously, there is dynamism in the environment causing it to continuously change its shape and character. Business environment is greatly influenced by the economic, geographical political, social, cultural, technical, legal and international factors. The environment in which an organisation exists can be broadly divided into two parts

6.Internal environment: Internal factors are those factors which a business has acquired or which can be acquired by a business aceording to its requirements and capabilities, internal factors determine the level of operation. Following factors are included in internal factors.

 (1) Financial Resources: The financial resources indicate to what extent the firm can make commitment to business activities? What should be the level

duction? It is directly influenced by the availability of funds, expenditure rol are of crucial importance in every organization, A business firm should try its best to make the maximum utilisation of its financial resources. If funds are not utilised economically and in profitable process are transferred to some other process. The loss of business from process can set off the profit of another process. It is, therefore, imperative for the success of any business that available resources should be best utilised.

(ii) Physical resources : Physical resources of a business comprise following assets such as plant machinery, land and building, raw materials etc. Regular supply of raw materials is necessary for smooth functioning of a business unit. Factory should be established at a place where physical resources are easily available.

(iii) Teehnical resources : The state of technology at any one time is an extremely important factor affecting the success of any business. Any business that wishes to survive in the ever changing would must keep abrest of technology applicable to its products and services and to its methods of operations. A business unit determines the level of technology for the operation of activities. Business firm can develop its own technology or it can acquire technology from the market.

(iv) Human resources: Human resource capabilities and organising factors are closely interrelated. Human resource helps the organisation to match its man power with skills necessary for achieving its objectives.

2. External Environment : External environment refers to external aspects of environment which have influence on the functioning of business. External environment is very crucial for the success of a business. The external environment consists of customers, competitors, government policies, society etc. Following factors are included in external environement.

(i) Customers : Demand for products and services has great impact on the reaction of the customers. Customers and business are interdependent. The aim of business is to create and retain customers. To succeed in capturing customers, a business must collect the information regarding demand for product, liking and disliking of customers, customers’ expectations from the product, their purchasing power. A business has to closely monitor and analyse changes in customers’ tastes and preferences and their buying habits, as the major task of a business is to create and retain customers, monitoring the customer’s sensitivity is a prerequisite for the business success.

(ii) Competitors : A firm’s competitors include the other firms which market the same or similar products and also those who compete for the discretionary income of the consumers. For the existence and survival, a business must be aware of strengths and weaknesses of the competitors. For example, the market strategy of competitor will provide guideline to another business unit in formulating its sale plans. A business undertaking should analyse the price determined by the competitors, conditions and rules of sale, after sale services before a formulating its policies.

(iii) Government : Business is directly guided and controlled by government policies. Government rules and regulations related with control and economic policies may determine the area in which private sector may enter. For the centralisation of industries in specific place and area, the government may provide tax concessions, economic assistance and financial incentives.

Publications Business Environment

(iv) Society: A business exists within a social system and gets facilities from it. They owe obligations for the society as a whole.It is the obligation of management to protect the interest of society. A business undertaking should produce goods and services according to the tastes and preferences of the customers. A business should function according to the expectations of the society.

Environment Meaning Features Classification


COMPONENTS RELATED TO ENVIRONMENT

The environement factors have a profound impact on business. Economic structure, social structure, political system, demand of consumers, state of technology, competition in market etc, are the basic components of environment. Some of the components of environment are as follows:

1Eeonomic environment: A business enterprise draws certain inputs for the production from the society and transmits them into the external environment as finished products. Following factors are included in economic environment :

(i) Suppliers of inputs: Every business enterprise draws physical, human and financial resources from the environment. The importance of reliable sources of supply are an important force in economic environment of a company necessary for the smooth functioning of the business.

A business enterprises requires regular supply of raw material. Raw materials should be available at proper price and should be of standard quality. Businesses rely on hundreds of suppliers to maintain their production. It is risky to depend on a single supplier because the exploitation policy and change in the attitude or behaviour of the supplier may affect the business. Multiple sources of supply reduce such risks.

Human resources, capabilities and organisational factors are closely interrelated. Together they constitute the corporate resources. The quality of management, techinical staff and other employees, union management relations, personnel policies and practices and similar factors are crucial determinants of organisational effectiveness.

The finance resources indicate to what extent firm can make commitments to implement a strategy. Planned acquisition and utilisation of funds, expenditure control and accounting information to the concerned managers as well as other parties are of crucial importance in every organisation.

Many companies give high importance to vendor development due to the sensitivity of supply. Vertical integration solves the supply problem.

(ii) Customer : A customer may be defined as a person who as a person has a favourable impression of the company and its products and services. A business enterprise owes a primary obligation to give a fair deal to customers. They should be charged a fair and reasonable price. The supply of goods and services should be of uniform standard and of reasonable quality.

The distribution of goods and services should be wide spread so that customers do not face any problem in procuring them. The business enterprise should not mislead the customers by false misleading and exaggerated advertisements.

2. Political environment: This is partly general to all similar enterprises and partly specific to an individual enterprise. It includes such factors as the general state of political development, the degree of politicalisation of business and economic issues and the level of political morality, the law and order situation. political stability, the political ideology and practices of ruling party, the usefulness of and efficiency of governmental agencies, the extent and nature of governmental intervention in the economy and industry, government and industry, government policies enactment and frame work in which the business enterprise has to function and labour and export and import policies), specific legal public attitude towards business in general and the enterprise in particular and so on.

The economic policy of the government has a great impact on business. A restrictive import policy or a policy for protecting the home industries may help the import competing industries, while a liberalisation of the import-policy may create difficulties for them, similarly, an industry that falls within the priority sector in terms of the government policy gets a number of incentives and other positive support from the government, whereas those industries which are regarded as inessential may have the odds against them.

An industry undertaking may take advantage of external economics by locating itself in a large city but the government may discourage location in such places and persuade industries to go to the backward areas.

3. Social Environment: This is too general an entity which influences almost all enterprises in a similar manner. It is a complex of factors such as social traditions, values and beliefs, standard levels of literacy and education, the ethical standards and state of society, the extent of social satisfaction, conflict and cohensiveness and so forth. From the business organisation’s point of view, it may include the following.

(i) Population trends : Population trends like the size, growth rate, age composition, sex composition etc. of the population, family size, economic satisfaction of the population, educational level, care, relation etc, are all relevant to business. The size of the population, population growth rate, age composition, life expectancy, family size, spatial dispersal, occupational status, employment pattern etc. affect the demand for goods and services.

Some of the demographic factors have great impact on the business. Factors such as general age profile, sex ratio, education growth rate affect the business in different magnitudes. India has relatively younger population as compared to some other countries. Change in income distribution are important because changes in the levels of individual and group purchasing power and discretionary income often result in changes in spending and saving patterns.

(ii) Individual needs: An individual works to satisfy his physical needs like food, cloth and shelter. But a person wants more than his personal needs. He wants more cooperation in work planning.

In traditional occupations, decision making is centralised at top level of management. In decision making process employees and workers should also be involved. It would check the mobility of labour.

(iii) Cultural factors : Cultural environment consists of factors related to human relationship and the impact of social attitudes and cultural values which has bearing on the business of the organisation. The beliefs, value and norms of a society determine how individuals and organisations should interrelated. The core beliefs of a particular society tend to be presistent. It is difficult for business to change because these core values, which become determinants of its functioning.

The cost of ignoring the customs, traditions, taboos, tastes and preferences etc. of people could be very high. The buying and consumption habits of the people their language, beliefs, and values, customs and traditions, tastes and preferences, education etc. affect business.

Political and legal environment is closely intertrwined with social and culTural environment because laws are passed as result of social pressures and problems. From business organisation’s point of view socio-cultural environ ment may include expectations of the society from business, attitude of society towards business and its management, view towards achievement of work, view towards structure, responsiblity and organisational positions,view towards customs, traditions and conventions, class structure and labour mobility and level of education.

4, Légal environment: In business, legal environment is the branch of political environment. The type of governent running a country is a powerful influence on business. Political and pressure groups influence and limit organizational growth. The business in our country is regulated by the following acts:

1 Contract Act.

2. The Companies Act.

3. Foreign Exchange Management Act.

4. Factories Act.

5. Industries Disputes Act.

6. Workers Compensations Act.

7. Industrial Development and Regulation Act.

8. Minimum Wages Act.

9. Essential Commodities Act.

10. Income Tax, Excise duties, Custom duties, Tariff, Sales tax, and other laws related to tax.

11. Employee’s Provident Fund Act.

12. Consumer Protection Act.

13. Employee’s State Insurance Act.

14. Environment Protection Act.

15. Sick Industrial Company Act.

Today many countries have laws to regulate competition and unfair trade practices. Elimination of unfair competition and dilution of monopoly power are the important objectives of these regulations. Such regulations brighten the prospect of small and new firms and increase the scope of some of the existing firms to venture into new areas and business.

Environment Meaning Features Classification

LEGAL ASPECTS OF BUSINESS ENVIRONMENT

The most important characteristics of business is that its human activities should be regulated by the laws of land. The illegal production and exchange of products cannot be a part of the business. For example, smuggling, sale of banned medicines and wine are not included in business. Therefore, a businessman should be a law abiding person. They should obey Sales Tax Act, Contract Act, Income Tax Act, Labour Act, etc.

LEGAL ASPECTS IN CHANNEL RELATIONS

In most part of the companies are authorised to selects their own channel, in fact, law are formulated to control the mutual relationship of companies. Following are the legal aspects :

1 Partial dealing : Some producers select the exclusive channel for distributing their products. They adopt specific method for sale, when they are unable to face sale competition, it is known as partial dealing.

2. Partial territories: Partial territories include territorial contracts Producer agrees that he will not sell the goods to other dealer of a particular area or buyer will purchase the goods from the appointed dealer of a particular area. It is legal.

3. Tying agreement: This group agreement is not illegal in U.S.A, this kind of agreement is against the law because it reduces the competition.

BUSINESS AND ENVIRONMENT PROTECTION

In a country, air, water and land are the main factors and components environemnt. The environment around us is provided by nature, the atmosphere, the earth, water, plants and animals. If we disturb the balances of any of these, the changes are bound to affect us in one or other ways, Pollution is the damage or change of natural environment of man. Rapid population growth and development of technolgoy out stripping our abilities to pressure the environment suitable for our healthy survival. Air, land and water are increasingly becoming more polluted and survival of all living things is threatened.

As civilisation grew and industries developed, the natural environment was affected adversely. The forests were cut down and they were converted into arable land. The wood was used for industral purposes. Mills and factories were set up. Different gases were used for economic development. Railways burn coal and produce gases. This disturbed the composition of the air. Pollution due to automobile exhaust and domestic fire wood poses an extremely dangerous situation. Poor road maintenance and exhaust emission contribute to high level of lead, sulphur-dioxide, nitrogen oxides, total oxidants and sulphides. The present industrial development has created many such factors that contribute to air pollution, water pollution, noise pollution etc. All the industrial waste is thrown into the river. Industrial affluents cause water pollution because of toxic materials which they introduce into river water.

Exposure to radiations cause death or genetic defects in human beings. These can lead to mutation in animals and plants.

Steps taken for control of pollution : Environment protection is the urgent need of every country. Government of India has taken following steps for control of pollution and protection of environment.

1 Pollution Control Board : Government of India established Pollution Control Board for assessment, monitoring and control of water, air and noise pollution.

2. Identifying polluting industries : Seventeen categories of heavily polluting industries have been identified namely-fertilizer, integrated iron and steel, pesticides, petrochemical, tanneries etc.

3. Identifying polluting area:Government of India has identified twenty four heavily pollulated areas.

4. Measures for preventing pollution and improving environment: Following measures are adopted to improve the environment

(i) lay down standards for discharge of environmental pollutants.

(ii) Central Government is empowered to.

(a) take all necessary measures for protecting quality of environment.

(b) plan and execute a nation-wide programme for prevention, control and

abatement of environment pollution.

(c) restricts industries without proper safeguards.

(d) lay down safeguards for prevention of industrial accidents.

(e) recognise the environmental laboratories.

It is clear from the above analysis that economic and non-economic factors of business affect environment. Other factors which influence environment indirectly are, positions of world peace, natural environment and calamities etc. This is universally accepted that if this trend continues unchecked, it will lead, to the annihilation of all life forms on this planet. Therefore, better understanding of the environment can only save the world from this men made havoc.

Environment Meaning Features Classification

EXERCISE QUESTIONS

Long Answer Questions

1 What do you understand by business environment? Throw light on the importance of business environment.

2. Define business environment and analyse its main components.

3. Describe the impact of economic and non-economic factors on business environment.

4. What do you mean by business environment ? Analyse the main features and importance of business environment.

5. What do you understand by business environment ? Explain internal and external factors of business environment.

Short Answer Questions

1 What do you understand by business environment?

2. Give any two definitions of business environment.

3. State any two points of importance of business environment.

4. Describe economic factors of business environment.

5. What is cultural environment?

6. ‘Social component is an important factor of environment.’ Explain.

7. Describe the legal factors of business environment.

8., State two features of business environment.

Objective Questions

Select the Correct Alternatives :

1 Economic factors of business environment are :

(a) Position of saving and investment.

(b) Economic policies

(c) Position of demand and supply.

(d) All of above.

2. In business environment, we study:

(a) Social environment.

(b) Cultural environment.

(c) Economic environment.

(d) Legal environment.

3. Non-economic factors are :

(a) Price level.

(b) Cultural environment.

(c) Legal environment.

(d) Level of income.

4. Economic environment is influenced by :

(a) Law and order.

(b) Domestic economic situation.

(c) Global economic position.

(d) All of above.

5. Economic environment is widespread and :

(a) complex

(b) easy

(c) big

(d) none of these.

(Ans. 1. (d), 2. (c), 3. (c), 4. (d), 5. (a).]

Environment Meaning Features Classification