INTERRELATIONSHIP BETWEEN BUSINESS

AND ENVIRONMENT
Business and environment are like the two sides of the same coin i.e. one can’t
survive without the other. Business and environment are independent but
interdependent on each other for survival and growth. Environment supplies
resources to the business organizations for undertaking production activities. At the
same time, products manufactured are sold to the people who are the part of
demographic environment. Growth and profitability of business depend on the
environment under which business has to operate. Business will be successful
when it is adjusted as per the requirements of environmental forces. “To manage
business means to manage the environment around the business”. This suggests the
close relationships between business and its environment.

Interaction of Business and Economic Environment

 The business sector has economic relations with the government, capital
market, and household sector. These different sectors together influence the
trends and structure of the economy. Individually business firms can do little
to change their economic environment.

 But collectively business firms can do a lot to make economic environment

conducive to their activities. Now business firms organise the associations to
influence the policies of the government.

 In India, the Confederation of Indian Industry (CII), the Federation of Indian

Chamber of Commerce and Industry (FICCI) and the Associated Chambers
of Commerce and Industry of India (ASSOCHAM) are powerful
organisation of the business. They exercise considerable influence on the
government and thereby attempt to mould economic environment in their
favour.
Business and Economic Environment:

Business is influenced by the economic policies relating to taxation, money supply,

import - export etc. A change in economic policy has both positive and negative
effect of industry. A positive change in the policy provides opportunities for
growth and expansion. Business has limited scope to influence the economic
environment. However, the Joint efforts through trade association representation to
the government, there can be some positive changes in the economic policies
affecting the business activities.

Analysis of Economic Business Environment

 i) Trends in gross national product and real income growth.

 (ii) Pattern of income distribution.

 (iii) Variations in geographical income distribution and its trends.

 (iv) Expenditure patterns and trends.

 (v) Trends of consumer savings and how consumer like to hold their savings,
i.e., either in the form of bank account, investments in bonds and securities,
purchase of real estate, insurance policies or any other assets.

 (vi) Borrowing pattern, trends and governmental and legal restrictions.

 (vii) Major economic variables, e.g., cost of living, interest rates, repayment,
terms and disposable income.

Impact of Political & Legal Environment on

Business
The politico-legal environment of business depends on:
 (i) Legal rules of business-its formation and implementation, its efficiency
and effectiveness.

 (ii) Political stability-impact of factors like civil war, the declaration of

president’s rule and emergency, changes in the form and structure of
governmental administration.

 (iii) Flexibility and adaptability of Law-Constitutional amendments, their

urgency and frequency, velocity of public policies.

 (iv) Foreign Policy- alignment or non-alignment, tariffs, customs, and other

foreign trade related policies.

Legal Environment
 Legal systems play a significant role in business. Business law is the
complex system of regulation that forms the legal environment of business.
Knowledge of business law is necessary for many management decisions.
However the legal environment is becoming so complex that many laws are
only partially understood.

The legal environment is also referred to as public policy environment. The

vast governmental network of laws and regulations, policy decisions,
government bureaucracy, and the legislative processes have raised impact on
Business decisions.

It is well known that every country has a number of legal regulations to

ensure that the interests of business organizations do not run counter to

national interests. Right from the stage of incorporation of organizations,

their listing in stock exchange, redress of customer complaints, payment of

tax to government, manufacturing practices, human resources development

to pricing of products and services, a number of legal regulations have to

be fulfilled. For example, in usa and several western countries, consumer

protection is very active, that even a medical practitioner is subjected

to huge liabilities in times of deficiency in services. In India and other

countries, very rigorous legal provisions are in place to prevent hunting 8

of rare species. Hence, any organization, which manufactures products

based on such species, have to get legal sanctions. In case of failure to

honour cheques issued, organizations are now a days made to pay hefty

compensations. Hence, the deterrence in terms of legal provisions has

become the order of the day. All organizations have to first of all address

these provisions become coming in to steam.

Political and Government Environment:

  It refers to the influence exerted by the three political institutions viz.,
Legislature, executive and the judiciary in shaping, directing, developing
and controlling business activities. A stable and dynamic political
environment is indispensable for business growth.

 Under a democratic set up, the ideology of the ruling party influences
ownership, management and size of a business. The rightist inclination of
the ruling party will formulate liberal pro-business policies while its leftist
inclination will accept measures like nationalisation and expansion of the
public sector.

 Political stability of the country is another factor which affects business

activities. Business thrives where there is political stability. All business
firms are affected greater or lesser level by government programmes at
central, state or local bodies changes in such programmes are usually the
result of shifts in the political weather arising from changes in the attitudes,
preferences and objectives of voters and political leaders. Businessmen try to
anticipate changes in government policies or in the political forces at the
back of them so that they may be able to operate successfully.

Demographic Environment
Business and demographic environment :

Demographic environment factors such as age, sex, male, female, rural - urban
population, education etc. influence business decisions. The business firms can
take business decisions depending on demographic features of population. For
example, the income of the people in India is quite low. This affects the purchasing
power and has to be taken into account by the manufacturers while fixing the price
of their products. On the other hand, business organization also affect demographic
environment. For example, business organizations often undertake various
community welfare programmes like health camps, literacy drives etc. They thus
contribute towards upliftment of the people.
Demographic Environment :
This refers to the size and behaviour of the population in a country.

Suppose a country has a huge size of population, then, the country would

provide extensive business or marketing opportunities for all types of

business organizations. On the other hand, a country with low size of

population would force the business organizations to seek external market

for their products or services. Similarly, if the population in a country is

well - tuned to ‘use and throw concept’ [like most of the western countries]

then there would be limited scope for repair shops. The employment scope

in that segment would be almost nothing. But alternatively this would

give wide marketing opportunities for manufacturing organizations. On

the other hand, if the population is averse to ‘use and throw’ concept,

then the business opportunities would be limited for manufacturing

organizations. But the repair shops, self-employed technical persons and

spares manufacturers, would have roaring business. Hence, the size and

quality of population emerge as vital factors in a business environment.

Geographical And Ecological Environment

Geographical environment refers to climatic conditions and natural

resources, which determines the manufacturing scope and the nature of

the products that could be marketed. For example, a country like kenya

has to manufacture more of products based on forest resources, while the

gulf countries can produce only crude, japan can have business on fish,

fruits, etc., Countries in the tropical region would produce products from

largely available geographical resources in that region, organizations in

mediterranean countries have a different business scope, scandinavian

countries have scope in dairy products and so on. On the other hand, steps

towards balanced eco- system are taking place at an alarming rate in the

world today. Deforestation and hunting of rare species of animals for food

have been prohibited. Hence, while identifying the business opportunities,

business organizations have to be conscious of the limitations posed by the

geographical and ecological considerations.

Business and natural environment :

Natural Environment relates to natural resources like land, water, minerals, port
facilities, etc. Business firms are use natural resources like water, land, iron-ore,
crude oil, etc. In doing so, two things happen i.e. Erosion of natural resources and
pollution of resources. Business firms should understand these two effects and take
necessary measures to control erosion and pollution of natural resources

Business firms depend on natural environment for the supply of resources like raw
materials, water, etc. The natural environment also benefits from business. This is
because of developments in the field of technology; there is availability of
alternative sources of energy. Business firms have also come up with innovations
that can substitute natural resources or materials. Such technological developments
and innovations help to preserve and protect the environment

Social And Cultural 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. According to Geert hofstede, culture is “the collective

programming of the mind that distinguishes the members of one category

of people from those of another”.

Business and Technological environment :

Technological Environment :

Technological environment implies the level of technology available in a country.

Technology is the systematic application ofscientific or other organised knowledge
to practical tasks. Technological advancement make it possible to improve the
quality of products, increase the output and decrease the cost of the product.
Technological changes are rapid and to keep pace with it, businessmen need to be
alert and flexible in order to quickly incorporate them in their business
organizations.

Technological environment can influence business decisions. Development in the

field of technology can benefit the firms by way of improvement in quality and
quantity of goods. Business can also influence technological developments.
Business firms can invest a good amount in research and development to develop
new and better technology. Technological development may help firms to come up
with new and better type of goods at lower cost of production.

Business and international environment :

Business firms, especially those dealing in foreign trade are affected by
international environment. The international environment is affected by
international forums like WTO, trading block like NAFTA, ASEAN etc. Due to
globalization and liberalization business organization are forced to view business

issues from a global perceptive. Hence, business policies and practices may be
adjusted to survive in the global environment. Business organizations also have a
capacity to influence the international environment but to a limited extent. The
business community can influence their government to represent it effectively at
various international forums.

Business Environmental Factors & their Components

1. Political --- Political System, Political Institutions, Political Environment,
Political Ideologies Of Parties, Political Stability, Political Culture Etc.

2. Government ---System Of Government Distribution Of Environment,

Power Between National And Local Government, Culture Of Civil Servants,
Government Policy On Businesses, Etc.

3. Legal ----Business Related Laws Governing Environment Competition,

Consumer Protection, Contractual Obligations, Regulation Of Foreign
Participation, Respect For Judiciary Efficiency Of The Same, Etc.

4. Economic---- Size Of The Economy Composition Of The Environment,

Economy, Economic Health, Economic Policies – Fiscal Monetary And
Entrepreneurial Foreign Capital, Etc.

5. Technological------ Technological Orientations, Research Environment

Development, Technology Import And Absorption, Technological Obsolescence,
Etc.

6. Ecological----- Natural Resources And Reserves Need For Environment,

Protection Of Fragile Zones, Pollution Control Etc.
 7. Geographical -----The Geo-Peculiarities Of A Region Like Environment,
The Terrain Vegetation Cover Location Attitude, Rainfall, Climate Etc.

8. Cultural----- Cultural Life Of People Rites, Rituals, Environmental

Festivals, Heritage Invasion Of Alien Culture Business, Culture Roles, Etc.

9. Social -----Social Practices, Social Classification ,Environment Like Caste

Religion And Community, Social Institutions Like Family, Marriage, Etc.

10. Demographic------ Size Of Population Composition Of Environment,

Population, Family Size And Cycle Language Educational Attainments,

Entrepreneurial Talents, Etc.