Question:

Evaluate the effect of social, legal, economic, political and technological

on the natural environment of business.
Answer :
Natural environment of Business
Environment means the surroundings, external objects, influences or circumstances
under which someone or something exists. The environment of any organization is
the aggregate of all conditions, events & influences that surround & affect it.

Understanding the environment within which the business has to operate is very
important for running a business unit successfully at any place. Because, the
environmental factors influence almost every aspect of business, be it its nature,
its location, the prices of products, the distribution system, or the personnel
policies. Hence it is important to learn about the various components of the
business environment, which consists of the economic aspect, the socio-cultural
aspects, the political framework, the legal aspects and the technological aspects
etc. In this chapter, we shall learn about the concept of business environment,
its nature and significance and the various components of the environment. In
addition, we shall also acquaint ourselves with the concept of social
responsibility of business and business ethics.

OBJECTIVES
After studying this lesson, you will be able to:
explain the meaning of business environment;
identify the features of business environment;
describe the importance and types of business environment;
describe the recent developments in Indian Economy that have greatly
influenced the working of business units in India;
explain the concept of social responsibility of business;
state the social responsibility of business towards different interest groups;
and
explain the concept of business ethics.

As stated earlier, the success of every business depends on adapting itself to the
environment within which it functions. For example, when there is a change in the
government polices, the business has to make the necessary changes to adapt it
self to the new policies. Similarly, a change in the technology may render the
existing products obsolete, as we have seen that the introduction of computer has
replaced the typewriters; the color television has made the black and white
television out of fashion. Again a change in the fashion or customers’ taste may
shift the demand in the market for a particular product, e.g., the demand for
jeans reduced the sale of other traditional wear. All these aspects are external
factors that are beyond the control of the business. So the business units must
have to adapt themselves to these changes in order to survive and succeed in
business. Hence, it is very necessary to have a clear understanding of the concept
of business environment and the nature of its various components.

The term ‘business environment’ connotes external forces, factors and institutions
that are beyond the control of the business and they affect the functioning of a
business enterprise. These include customers, competitors, suppliers, government,
and the social, political, legal and technological factors etc. While some of
these factors or forces may have direct influence over the business firm, others
may operate indirectly. Thus, business environment
may be defined as the total surroundings, which have a direct or indirect bearing
on the functioning of business. It may also be defined as the set of external
factors, such as economic factors, social factors, political and legal factors,
demographic factors, technical factors etc., which are uncontrollable in nature
and affects the business decisions of a firm.

The natural environment includes geographical and ecological factors that

influence the business operations. These factors include the availability of
natural resources, weather and climatic condition, location aspect, topographical
factors, etc. Business is greatly influenced by the nature of natural environment.
For example, sugar factories are set up only at those places where sugarcane can
be grown. It is always considered better to establish manufacturing unit near the
sources of input. Further, government’s policies to maintain ecological balance,
conservation of natural resources etc. put additional responsibility on the
business sector.
The natural environment is usually excluded from most stakeholder models as
organizations do not realize the impact that business has on environment and vice
versa. Treating environment as a stakeholder involves three problems-conceptual,
ethical and market.
The natural environment involves all the natural resources, such as raw materials
or energy sources, needed by or affected by marketers and marketing activities.

It supports infrastructure the large scale public systems, services, and

facilities of a country or region that are necessary for economic activity,
including power and water supplies, public transportation, telecommunications,
roads, and schools.
Challenges facing the world today
It is the common understanding of natural environment that underlies
environmentalism a broad political, social, and philosophical movement that
advocates various actions and policies in the interest of protecting what nature
remains in the natural environment, or restoring or expanding the role of nature
in this environment.
Goals commonly expressed by environmentalists include reduction and clean up of
man made pollution, with future goals of zero pollution; reducing societal
consumption of nonrenewable fuels; development of alternative, green, low carbon
or renewable energy sources; conservation and sustainable use of scarce resources
such as water, land, and air; protection of representative or unique or pristine
ecosystems; preservation and expansion of threatened or endangered species or
ecosystems from extinction; the establishment of nature and biosphere reserves
under various types of protection; and, most generally, the protection of
biodiversity and ecosystems upon which all human and other life on earth depends.
More recently, there has been a strong concern about climate change such as global
warming caused by anthropogenic releases of greenhouse gases, most notably carbon
dioxide, and their interactions with humans and the natural environment. Efforts
here have focused on the mitigation of greenhouse gases that are causing climatic
changes (e.g. through the Climate Change Convention and the Kyoto Protocol), and
on developing adaptive strategies to assist species, ecosystems, humans, regions
and nations in adjusting to the Effects of global warming.
Energy
Energy is the basis of industrial civilization; without energy, modern life would
cease to exist. In the industrialized world the development of energy resources
has become essential for agriculture, transportation, waste collection,
information technology, communications that have become prerequisites of a
developed society. The increasing use of energy since the Industrial Revolution
has also brought with it a number of serious problems, some of which, such as
global warming, present potentially grave risks to the world.
Sources of energy
There are two main types of sources of energy, that is:
Renewable utilizes natural resources such as sunlight, wind, tides and geothermal
heat, which are naturally replenished. Renewable energy technologies range from
solar power, wind power, and hydroelectricity to biomass and bio fuels for
transportation.
Non Renewable is a blanket term for sources of energy that rely on consumable
materials. Non-renewable energy sources come out of the ground as solids, liquids,
and gases, they are non renewable because they cannot be replenished back once
extracted.
Energy sources that are almost always classified as non renewable:
Fossil fuels, Coal, Petroleum, Natural gas.
Macro environment
It is totality of national and international institutional forces acting upon
societies and organizations; dynamics of environmental interaction on a global
scale. Universe of sociological elements that affect a company's ability to serve
its customers or sell its goods and services. There are six major macro
environment forces: social, demographic, economic, natural, political, and
technological.

Micro environment
These elements close to a company that impact the company's ability to serve its
customers. There are six components of the microenvironment: the company's
internal environment, composed of the management personnel and including the
finance, purchasing, manufacturing, research and development, and marketing
departments; the company's suppliers, who provide the goods and services necessary
for the production of the company's products; the marketing intermediaries,
composed of all the individuals or companies who help in the promotion, selling,
and distribution of the company's products; the customers, consisting of the five
types of markets in which the company may sell its products (consumer, industrial,
reseller, government, and international markets); the company's competitors; and
the company's various publics, which can be any individual or group that can
affect the company's ability to achieve its objectives, such as citizen action
groups, the media, or the government.

Environment factors or constraints are largely, if not totally, external and

beyond the control of individual industrial enterprises & their managements. These
are essentially the ‘givers’ within which the firms & their managements must
operate in a specific country & they vary often greatly from country to country.
Richman & Copen…………
Effects :
Social environment
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.
The social environment includes institutions and other forces that affect the
basic values, behaviors, and preferences of the society-all of which have an
effect on consumer marketing decisions.

A firm wanting to market its product in various regions with diversified cultures
will have to carefully study the existing consumption pattern & scope for creating
demand for new products & will have to adjust their marketing communication to
cultural characteristics.

If the society is multi- cultural, then the firm can not meet the demands of
different groups with a uniform product. To be successful in a multi cultural
society, the firm will have to carefully study the consumption behavior of
different groups.

Themselves
Identify with brands for self expression
Organizations
Trend of decline in trust and loyalty to companies
Society
Patriotism on the rise
Nature
“lifestyles of health and sustainability” (LOHAS) consumer segment
Universe
Includes religion and spirituality
Legal Environment
This refers to set of laws, regulations, which influence the business
organizations and their operations. Every business organization has to obey, and
work within the framework of the law. The important legislations that concern the
business enterprises include:

(i) Companies Act, 1956

(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954
(viii) Essential Commodities Act, 2002
(ix) The Standards of Weights and Measures Act, 1956
(x) Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade Marks Act, 1999
(xii) Bureau of Indian Standards Act, 1986
(xiii) Consumer Protection Act, 1986
(xiv) Environment Protection Act
(xv) Competition Act, 2002

Besides, the above legislations, the following are also form part of the legal
environment of business.

(i) Provisions of the Constitution: The provisions of the Articles of the Indian
Constitution, particularly directive principles, rights and duties of citizens,
legislative powers of the central and state government also influence the
operation of business enterprises.

(ii) Judicial Decisions: The judiciary has to ensure that the legislature and the
government function in the interest of the public and act within the boundaries of
the constitution. The various judgments given by the court in different matters
relating to trade and industry also influence the business activities.

Body of legal rules governing interaction between sovereign states (Public

International Law) and the rights and duties of the citizens of sovereign states
towards the citizens of other sovereign states (Private International Law). Since
there has never been a law-making body for international law, it has been built up
piecemeal through accords, agreements, charters, compromises, conventions,
memorandums, protocols, treaties, tribunals, understandings, etc.
Economic Environment
The economic environment includes economic conditions, economic policies and
economic system of the country. Non-economic environment comprises social,
political, legal, technological, demographic and natural environment. All these
have a bearing on the strategies adopted by the firms and any change in these
areas is likely to have a far-reaching impact on their operations.

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 organizations 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

(i) 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.

(ii) Fiscal policy: It includes government policy in respect of public

expenditure, taxation and public debt.

(iii) 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.

(iv) 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.

(v) 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.

(c) Economic System: The world economy is primarily governed by three types of
economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii)
Mixed economy.
India has adopted the mixed economy system which implies co-existence
of public sector and private sector.
There are two areas of research that are emblematic of the discipline: The attempt
to understand the causes and consequences of short run fluctuations in national
income (the business cycle cycle) the fluctuations of economic activity. The cycle
involves shifts over time between periods of relatively rapid growth of output
(recovery and prosperity), and periods of relative stagnation or decline
(contraction or recession) and the attempt to understand the determinants of long
run economic growth (increases in national income). Macroeconomic models and their
forecasts are used by both governments and large corporations to assist in the
development and evaluation of economic policy and business strategy.
Macroeconomic Policies
In order to try to avoid major economic shocks, such as great depression,
governments make adjustments through policy changes which they hope will succeed
in stabilizing the economy. Governments believe that the success of these
adjustments is necessary to maintain stability and continue growth. This economic
management is achieved through two types of strategies.
Fiscal Policy
Government's revenue (taxation) and spending policy designed to
(1) counter economic cycles in order to achieve lower unemployment,
(2) achieve low or no inflation, and
(3) achieve sustained but controllable economic growth.
In a recession, governments stimulate the economy with deficit spending
(expenditure exceeds revenue). During period of expansion, they restrain a fast-
growing economy with higher taxes and aim for a surplus (revenue exceeds
expenditure). Fiscal policies are based on the concepts of the UK economist John
Maynard Keynes (1883-1946), and work independent of monetary policy which tries to
achieve the same objectives by controlling the money supply.
Fiscal policy is described as being neutral, expansionary, or contractionary. An
expansionary fiscal policy occurs when the government lowers taxes and/or
increases spending; thus expanding output (national income). An increase in
government spending or a cut in taxes shifts the aggregate demand curve to the
right. An expansionary fiscal policy will expand the economy's growth. A
contractionary fiscal policy occurs when the government raises taxes and/or lowers
spending; thus lowering output (national income). A decrease in government
purchases or an increase in taxes shifts the aggregate demand curve to the left. A
contractionary fiscal policy will constrict the economy's overall growth.
Economic effects of fiscal policy
Fiscal policy is used by governments to influence the level of aggregate demand in
the economy, in an effort to achieve economic objectives of price stability
stability, full employment and economic growth.
Monetary Policy
Economic strategy chosen by a government in deciding expansion or contraction in
the country's money money-supply supply. Applied usually through the central bank,
a monetary policy employs three major tools:
(1) buying or selling national debt,
(2) changing credit restrictions, and
(3) changing the interest rates by changing reserve requirements.
Monetary policy plays the dominant role in control of the aggregate demand and, by
extension, of inflation in an economy. Also called monetary regime.
Monetary policy is generally referred to as either being an expansionary policy,
or a contractionary policy, where an expansionary policy increases the total
supply of money in the economy, and a contractionary policy decreases the total
money supply.
Expansionary policy is traditionally used to combat unemployment in a recession by
lowering interest rates, while contractionary policy has the goal of raising
interest rates to combat inflation (or cool an otherwise overheated economy).
Monetary policy should be contrasted with fiscal policy, which refers to
government borrowing, spending and taxation.
Monetary policy rests on the relationship between the rates of interest in an
economy, that is the price at which money can be borrowed, and the total supply of
money. Monetary policy uses a variety of tools to control one or both of these, to
influence outcomes like economic growth, inflation, exchange rates with other
currencies and unemployment. Where currency is under a monopoly of issuance, or
where there is a regulated system of issuing currency through banks which are tied
to a central bank, the monetary authority has the ability to alter the money
supply and thus influence the interest rate (in order to achieve policy goals).
A policy is referred to as contractionary if it reduces the size of the money
supply or raises the interest rate. An expansionary policy increases the size of
the money supply, or decreases the interest rate. Further monetary policies are
described as accommodative if the interest rate set by the central monetary
authority is intended to spur economic growth, neutral if it is intended to
neither spur growth nor combat inflation, or tight if intended to reduce
inflation.
There are several monetary policy tools available to achieve these ends. Within
almost all modern nations, special institutions (such as the Bank of England, the
European Central Bank or the Federal Reserve System in the United States) exist
which have the task of executing the monetary policy independently of the
executive. In general, these institutions are called central banks and often have
other responsibilities such as supervising the smooth operation of the financial
system.
It must now take into account such diverse factors as:
I) short term interest rates;
II) long term interest rates;
III) velocity of money through the economy;
Risks in international trade
The risks that exist in international trade can be divided into two major groups:
Economic risks
. Risk of insolvency of the buyer,
.Risk of protracted default - the failure of the buyer to pay the amount due
within six months after the due date
. Risk of non acceptance
. Surrendering economic sovereignty
Political risks
. Risk of cancellation or non renewal of export or import licences
. War risks
. Risk of expropriation or confiscation of the importer's company
. Risk of the imposition of an import ban after the shipment of the goods
. Transfer risk - imposition of exchange controls by the importer's country or
foreign currency shortages
. Surrendering political sovereignty
Exchange rates
Price for which the currency of a country can be exchanged for another country's
currency.
Factors that influence exchange rate include
(1) interest rates,
(2) inflation rate,
(3) trade balance,
(4) political stability,
(5) internal harmony,
(6) high degree of transparency in the conduct of leaders and administrators,
(7) general state of economy, and
(8) quality of governance.
In finance, the exchange rate (also known as the foreign foreign-exchange rate
rate, forex rate or FX rate rate) between two currencies specifies how much one
currency is worth in terms of the other.
The foreign exchange market is one of the largest markets in the world. By some
estimates, about 2 trillion USD worth of currency changes hands every day. The
spot exchange rate refers to the current exchange rate.
The forward exchange rate refers to an exchange rate that is quoted and traded
today but for delivery and payment on a specific future date.
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 organization 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 labor
unions in India are affiliated to various political parties. Strikes, lockouts and
labor 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 organization
and its operations through workers participation in management.

The political environment includes all laws, government agencies, and lobbying
groups that influence or restrict individuals or organizations in the society. The
technological environment consists of those forces that affect the technology and
which can create new products, new markets, and new marketing opportunities.

Legislation affecting businesses worldwide has increased

Laws protect companies, consumers and the interests of society
Increased emphasis on socially responsible actions
Administrative Accountability
Internal rules and norms as well as some independent commission are mechanisms to
hold civil servant within the administration of government accountable. Within
department or ministry, firstly, behavior is bounded by rules and regulations;
secondly, civil servants are subordinates in a hierarchy and accountable to the
superiors. Nonetheless, there are independent "watchdog" units to scrutinize and
hold departments accountable; legitimacy of these commissions is built upon their
independency, as it avoids any conflicts of interest. Apart from internal checks,
some of "watchdog" units accept complaints from citizens, bridging government and
society to hold civil servants accountable to citizens, but not merely
governmental departments.
Foreign policy
A country's foreign policy is a set of goals that seeks to outline how that
particular country will interact with other countries of the world and, to a
lesser extent, non-state actors. Foreign policies generally are designed to help
protect a country's national interests, national security, ideological goals, and
economic prosperity. This can occur as a result of peaceful cooperation with other
nations, or through aggression, war, and exploitation. It may be assumed that
foreign policy is as ancient as the human society itself. The twentieth century
saw a rapid rise in the importance of foreign policy, with virtually every nation
in the world now being able to interact with one another in some diplomatic form.
Nominally, creating foreign policy is usually the job of the head of government
and the foreign minister (or equivalent). In some countries the legislature also
has considerable oversight. As an exception, in France, Finland and in America, it
is the head of state who is responsible for foreign policy, while the head of
government mainly deals with internal policy.
In fact, foreign policy is a product of pressure from various groups and classes,
political as well as economic. In many countries, foreign policy ranks high on the
list of factors that influence public opinion.
Technological Environment
Technological environment include the methods, techniques and approaches adopted
for production of goods and services and its distribution. The varying
technological environments of different countries affect the designing of
products. For example, in USA and many other countries electrical appliances are
designed for 110 volts. But when these are made for India, they have to be of 220
volts. In the modern competitive age, the pace of technological changes is very
fast. Hence, in order to survive and grow in the market, a business has to adopt
the technological changes from time to time. It may be noted that scientific
research for improvement and innovation in products and services is a regular
activity in most of the big industrial organizations. Now a days infect, no firm
can afford to persist with the outdated technologies.
Technological Environment refers to body of skills, knowledge & procedures for
making, using & doing useful things Positive effects of technology:
• Increased productivity
• Spread effects
• Production of new & better goods of standardized quality with more efficient
use of raw materials
• Basis for fast growing urban & industrial system
It is about application of tools, methods and techniques to improve production and
processes. Nothing is as obvious as technology, whether in households or
Businesses. The intensity and type of technology use varies depending on the type
of economic activities an enterprise is involved in.
There will be no point of analyzing every single technology available in all
industries and their applications as I will need to write volumes and volumes of
books to cover this one subject.
The most important concept for an enterprise to monitor is:
Technology life cycle cycles.
For any product or technology there is a finite life, it may be measured in
decades or even centuries but eventually it gets old and something comes along to
replace it. It is obvious with some of today's computer and communication
technologies this life cycle is very short and may be measured in months rather
than years.

Abernathy and Utterback took this idea - and the experience of many different
sectors and showed that there are different phases in the technology life cycle.
Stages in the innovation life cycle

Character Characteristics Fluid pattern Transition phase Specific phase

Competitive emphasis placed on Functional product performance Product
variation Cost reduction
Innovation stimulated by Information on user needs, technical inputs
Opportunities created by expanding internal technical capability Pressure to
reduce cost, improve quality
Predominant type of innovation Frequent major changes in product Major
process innovation required by rising volume Incremental product and process
innovation
Product line Diverse often include custom designs Include at least one
stable or dominant design Mostly undifferentiated standard products
Production processes Flexible and inefficient - aim is to experiment and make
frequent changes Becoming more rigid and defined Efficient, often capital
intensive and relatively rigid
In the early days of a new technology
In the early days of a new technology there is enormous potential for application.
No one knows quite what to do with it and they may try things which turn out to be
impossible. This phase is characterized by lots of experimenting around the
technology and its applications. People take risks because the stakes are low no
one knows quite what the future will hold, and the markets for the new
applications don't exist they are just made up of people who are interested in the
new thing.
But gradually these experiments begin to converge around what they call a
'dominant design' something which begins to set up the rules of the game. This can
apply to products or processes; in both cases the key characteristics become
stabilized and experimentation moves to getting the bugs out and refining the
dominant design.
For example, in the chemical industry we have moved from making soda ash (an
essential ingredient in making soap, glass and a host of other products) from the
earliest days where it was produced by burning vegetable matter through to a
sophisticated chemical reaction which was carried out on a batch process (the
Leblanc process) to the current generation of continuous processes which use
electrolytic techniques and which originated in Belgium where they were developed
by the Solvay brothers. Moving to the Leblanc process or the Solvay process did
not happen overnight; it took decades of work to refine and improve the process,
and to fully understand the chemistry and engineering required to get consistent
high quality and output.
In product terms the original design for a camera is something which goes back to
the early 19th century and as a visit to any Science Museum will show involved all
sorts of ingenious solutions. The dominant design gradually emerged with an
architecture which we would recognise shutter and lens arrangement, focusing
principles, back plate for film or plates, etc.
But this design was then modified still further for example, with different
lenses, motorized drives, flash technology and, in the case of George Eastman's
work, to creating a simple and relatively 'idiot-proof' model camera (the Box
Brownie) which opened up photography to a mass market. Innovation doesn't stop at
the dominant design but it moves from being big steps and radical experimentation
to focusing more on improvement and refinement.
As the technology matures still further so this incremental innovation becomes
more significant and emphasis shifts to factors like cost which means efforts
within the industries which grow up around these product areas tend to focus
increasingly on rationalization, on scale economies and on process innovation to
drive out cost and improve productivity.
------ Pranjala
Mishra
Roll No.
D-43