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natural & human unsources and influence the business activity.Introduction To Business Environment Chapter Outline : • • • • • • • • • Introduction Meaning of Business Business Objectives What is Business Environment ? Nature of Business Environment Components of Business Environment Determinant of Business Environment Review Questions References Introduction : Business environment is becoming highly complex. unstable and unpredictable in the globalised economy of today. the role of business is crucial. offer of better quality of life. or contributing to the economic growth of the country. Be it for the supply of goods and services. In this chapter we will explain how environment influences business and for that chapter focus on the following points: o o o o o o Meaning of Business Business objectives Meaning of Business Environment Nature of Business Environment Components of Business Environment Determinants of Business Environment . The environment is the result of changing social and economic and political forces which creates challenges. creation of job opportunities. political conditions. creates employment opportunities and provide all kinds of goods and services which we need for our consumption. opens up new opportunities and affects the strength and weaknesses of various business segment. Business contributes to economic growth. The economic policies. Business operates in a risky atmosphere because of the profit motivation. It is an important institution in society.
Marginal cost means the cost incurred on the production of an additional unit of a commodity. finance. and certain other activities related to industry and commerce. Modern business covers a complex field of industry and commerce which involve activities related to both production and distribution. insurance. Business include activities connected with production. For example a ball pen necessitates a long chain of activities involved in bringing raw materials to the factory and the end product from there to the market constitute a business. No firm will take to increase its sales beyond this point. therefore. advertising. . Thus. Marginal Revenue is the revenue received from the sale of such additional unit. transport. earn profit by supplying goods and services to consumers to satisfy their felt needs. We shall. because beyond this point. Maximize total sales revenue : Second most important object of a firm is to obtain maximum sales revenue. For our purpose this concept of business is too general and thus cannot be of great help in analyzing the role of environment in present day business activity. 2. These activities on the one hand satisfy society’s needs and desires and on the other hand brings profit to business firms. we can say that *business firm or unit is an economic unit which is engaged in the production or distribution or both the production and distribution of goods and services for the purpose of earning profits.Meaning of Business In general business refer to all activities that are being organized and carried on with an important purpose. The business unit seeks to achieve more than one objective which may vary with the passage of time. trade. * A business firm is an economic unit which is engaged in the production or distribution or both the production and distribution or both the production and distribution of goods and services for the purpose of earning profits Business Objectives or Goals Every business small or big in size have some objectives which it tires to fulfill while in operation. A firm can earn maximum profits at the point where Marginal Cost (MC) and Marginal Revenue (MR) are equal. viz. All the efforts of a firm are directed towards the achievement of this object. define business in modern concept. banking. Maximum Profit : Making profit is the primary goal of any business enterprise. the firm will be suffering a loss. The attainment of this object does not mean to have the maximum sale in terms of physical quantity but it means to obtain the maximum amount of revenue at the point when its marginal revenue is zero. 1.
Minimum Cost : Another important object of a business firm is to minimize the cost of production of producing goods and services to that these goods and services may be provided to the consumers at minimum possible price. 5. Establish long-run survival: Long-run survival is a prime object of all the business firms. bonus etc. This is an important object and very helpful in the achievement of pre-determined objectives of the firm because if the employees of a firm are satisfied they will contribute their best efforts to achieve the objectives of the firm. 7. Such firms also aim at selling product to the maximum number of customers so that they can capture the market and establish their business empire. A firm should be self-dependent in economic affairs. the business firm makes continuous use of various techniques of cost central. all the business firms try to re-invest major part of their profits in their business. Therefore. dependence on external financial sources should be minimum. every business firm takes due care and precaution in the use of funds of the firm. Maximum welfare and employees satisfaction – Some business firms aims at providing maximum facilities to their employees so that they may get maximum job satisfaction and thief efficiency and ability may be increased. canteen. Achieve Financial Soundness: No business firm can continue for long time if it is not financially sound. Some business firms change their marketing strategies and marketing approach from time to time so that they may maintain the demand of their products in the market. If complete self-dependence is not possible. 6. Such firms spend huge amount on the welfare of their employees. for this purpose. Banks and financial institutions stress upon financial soundness of the firms to grant them any sort of financial assistance. every firm makes best efforts to provide best quality of goods and services to its consumers at reasonable prices. incentive wage system. . are provided to the employees. The facilities of proper working conditions. Achieve Economics self-sufficiency: A business firm cannot be successful in achieving its objects if it depends only upon external sources for the programme of expansion and diversification. training. They provide best after-sale-services to the consumers. 4.. education. Such firms provide goods and services to consumers at the lowest possible price. For this purpose. 8. Dominate the whole market: Some business firms have an object of dominating the whole market. To attain this object.3.
Political/legal factors – Business will be directly affected by the actions of government and other political events. social and technological factors shopping a business environment are assessed by a business so as to devise future strategy. Environment is the surroundings of a business by which business influenced directly or indirectly. These might be major events affecting the whole of the business community. . such as a change of government. Service to society: Business is a part of society and has several obligations towards it. What is Business Environment ? Business Environment is a relationship between a business’s actions and its environment. It is an important institution in society. Similarly businesses will be affected by the legal framework in which they operate. Where the political. Some of them are : o o o Providing employment Offer of better quality of life Contributing to the economic growth of the country This is the economic growth of the country beyond earning profit.9. Te role of business is crucial. Example include the laws preventing collusion between firms to keep prices up. economic.
money supply. These includes attitudes towards working conditions and the length of the working day. There is close relationship between business and its economic environment. a business will need to adapt to these changes and. objective indicator. planning. To be successful. The information technology revaluation is also enabling much more rapid communication and making it possible for many workers to do their job from home or while traveling. Ultimately. profit uncertainty. agriculture. motivator. But all decisions relate to Business nature. economic. wherever possible. Profit Maximizations – Profit is the main incentive. price level. We must also be aware of the fact that the business environment is constantly changing. basic economic philosophy. Risk and uncertainty – Business firm works under risk and uncertainty. Every business have profit risk. risk depends upon possibility and uncertainty is unmeasurable risk. take advantage of them. savings. stages in the economic development and trade cycles are major factors which make up the total economic environment. social and technological analysis and is widely used by business enterprise to audit their environment and to help them establish a strategic approach to their business activities. price and cost uncertainty and also environmental uncertainty. Nature of Business Environment Everyday a number of decisions re made by us as individual or entrepreneurs.Economic factors – Economic factors which have an economic impact on business. Social/cultural factors – This aspect of the business environment concerns social attitudes and values. The division of the factors affecting a firm into political. The social/cultural environment is highly relevant for a business unit as the variety of goods it produces. . Industrial production. population. infrastructure. And every business works under demand uncertainty. Technological factors – The pace of technological change had quickened. production uncertainty. per capital income. strong sustainer. the use and abuse of animals. role of family. The main aim of business is profit maximization and cost minimization. the better business manages understand the environment in which they operate. price is a growth of business. the type of employees it gets and its obligation to society depend on the cultural atmosphere in which the firm operates. national income. investment risk and product risk. the nature and purity of products. equal opportunities for different groups of people. This has had a huge impact not only on how firms produce products.
good quality. pharmaceutical. Change – The business has invented the strategy of making changes in product quality. The spirit of the internal environment of a firm is derived from its mission that states as to why and for whom does it exist. For example colour televisions have replaced black and white televisions. companies wanting to build their future now here no choice but to engage in research and development (R & D) function. it can alter or modify such factors as its personnel. changes must be there. fine chemical and processing industries. So according to time. . technology orientation is quite strong in electronics. This provides the basic purpose of a firm’s existence and operations. The internal factors are generally regarded as controllable factors because the company has control over these because the company has central over these factors. Top management of the firm executes the mission through a strategy which is based mission through a strategy which is based on thorough planning in terms of clearly identified objectives to be achieved over a period of time.Competition – Today business nature is a became more competitive. Components Of Business Environment Internal Environment Business is normally under-taken for profit maximization. satisfaction on consumer. physical facilities. Presently. Technology oriented – The rapid technological change has become a pre-condition for the survival f a company. This strategy of offering differentiated products has been found quite effective to maintain its identity in the market. It provides best quality product at reasonable rate. The entire process takes place within the framework of a value system and corporate culture and the persons occupying different line and staff positions here to fit themselves into the value and culture framework. In fact. organization and functional means. such as marketing mix to suit the environment. competition in business protect to consumer. telecommunications. design or packaging. Competition in price. first server in the market etc. These factors establish the broad internal environment within which different departments of the firm operate in an interrelated manner.
Broadly external environment of business may be classified into (A) Micro Environment and (B) Macro Environment. Since modern business broadly has two aspects. viz.Determinants of internal environment • • • • • • • • • • • • • Mission and vision of the organization Management philosophy and strategy Industrial relations Corporate culture and values Line and staff relations Governance standards and codes Quality central system Team spirit among employees Work culture and socio-economic background of employees Job design and coordination Quality of internal communication Compensation system and career progression of employees Central system of the organization External Environment External environment of business consist of institutions. The public may influence both production and sales. . market intermediaries and competitors affect sales operations of the business firm.. The most prominent performs in the micro environment are the following: o o o o o o Suppliers of inputs Workers and their unions Customers Market intermediaries Competitors Public Input suppliers and workers together with their unions exercise influence on productioncustomers. organizations and forces operating outside the Company. the micro environment of business can be divided accordingly. production and selling of goods. All these individually as well as collectively exercise their influence on the latter. The micro environment refers to such players whose decisions and action have a direct bearing on the Company.
they may not give the same concessions to relatively small companies. . Their decisions and actions vis-à-vis individual company often differ in accordance with the size. For example suppliers of inputs are normally more accommodating if the Company is large.Micro Environment From the point of view of a Company’s business operations micro environment has great relevance. However. capability and strategies of each Company. This implies that the larger forces in the company’s environment to not always provide wider space for business operations. Macro Environment Macro Environment of a company refers to all those economic and non economic factors which exercise their influence on the business activity in general and thus determine opportunities that a company may have to promote its business. Usually the players in micro environment do not affect all the companies in an industry in the same way. The role of macro environment from the point view of the business may be both positive and negative.
despite the fact that it is an economic activity. Macro-economic scenario refers to price situation. level of technological development and natural and physical environment of the country constitute non-economic environment of business. organization of the financial system and economic polices of the government are the most important elements. recession in Japanese economy. Economic policies of the govt. protectionism. these policies are used by the governments to regulate the operations of business firms. have serious constraining effects. all these non-economic elements are of great relevance to present day business. monetary and balance of payments situations and overall growth activity. levels of saving and investment. ideology of the government. . demographic factors. at times. fiscal and monetary policies shape the opportunities for business. social system. fiscal. country’s economic system. Business. global economic environment is as much important as the national economic environment. These factors broadly determine the prospects of business activity. at times. However. underdevelopment of Russia and East Europe. is also influenced by its noneconomic environment political system. cultural values. In a recessionary situation business firms encounter steep fall in effective demand which inevitably leads to business slow down.. In economic environment of the country. global slowdown and dominance of the multinational corporations. legal framework. Now because of liberalization from the point of view of the Company’s business. Developed financial system is now a precondition for efficient mobilization of financial resources for business. Regional Economic Groupings. phase of business cycle through which the economy is passing. trade. macro-economic scenario.both national and global of strategic importance. Economic system of the country determines the parameters of the business activity. Since business is broadly divided on economic activity. The notable features of present day global environment are globalization. In fact.Macro environment of business can be broadly classified into economic environment and non –economic environment. economic environment of business. These factors not only determine opportunities for business but also. particularly the Industrial. slow recovery in the USA.
In the case of high investment priority industries. On the recommendations of the Raghavan Committee the government has decided to replace the MRTP Act by a new competition law. for analyzing economic environment of business. It has abolished all industrial licensing except for certain industries related to strategic and social concerns. The number of industries reserved for the public sector has been reduced to 3 which implies that the public sector’s role in future would be very much diminished. In fact. approval of foreign investment is automatic.Macro Environment of Business Determinants Of Business Environment • Economic policies : Political Conditions : Resources • Industrial Policy: Political Stability :Natural resources • Trade Policy: Corruption rule of law :Human resources • Monetary Policy and governance including :Fiscal Policy-business law and regulations Economics Policies :Industrial Policy : Among various economic activities. The new Industrial Policy of 1991 has de-regulated the industrial economy in a substantial manner. The new industrial policy has also liberalized import of foreign capital and technology. Therefore. the present day corporate business has grown as an extension of industrial activity. industrial policy of the government has to be created examined. . industrial activity is more directly related to business. Guidelines have also been announced for the expeditious approval of foreign direct investment in other industries.
due to criminalization of politics in certain states. In India. The kind of political environment is conducive to business activity. Monetary Policy : By monetary policy we mean the regulation of the money supply and the control of the cost and availability of credit by the central bank of the country through the use of deliberate and discretionary action for achieving the objectives of general economic policy. infrastructure facilities. The main objectives of monetary policy are: 1. Political system in India is far more stable than in these countries. 3) Reserve requirement charges. This policy when mismanaged leads to fiscal imbalances which at times become unsustainable. Greater equality in the distribution of income and wealth 6. Besides. information services. quotas. business activity has suffered a lot due to political stability. Healthy balance of payments Instruments of monetary policy are the following: 1) Open market operations. and 4) Selective credit controls Fiscal Policy : This policy refers to the process of shaping taxation and public expenditure in order to dampen the swings of the business cycle and the contribute to rapid economic growth with high employment and stable prices. Political Conditions Firms will be directly affected by the actions of government and other political events. The policy is substantially conditioned by WTO agreements and commitments and unilateral and multilateral trade relations. In Countries like Afghanistan and Iraq. . The basic objectives of trade policy are to promote exports. Fuller employment 4. enhance export competitiveness and create conditions of exportled growth. fiscal concessions and incentives to exporters. regulate imports. anti-dumping and counter vailing duties and product quality and safety norms. transportation priorities and procedural simplification.Trade Policy : Trade policy is an important factor in the economic environment of business. credit facilities. the factor of political stability is important. High rate of economic growth 3. Price stability 5. Maximum feasible output 2. foreign exchange facilities. 2) Bank rate policy. Import regulation is monitored through a structure of tariff rates. improve terms of trade. the business activity relatively unsafe in them. Export promotion is generally attempted through international market research support. At present India’s fiscal situation is most unsatisfactory. import entitlements. international trade fairs and exhibitions.
Countries like Japan. What are business objectives? 2. skills. Discuss the nature and dynamism of business environment 5. training. rivers and water bodies and environment quality are a major determinant of a country’s potential output. The Contract Act provides the rule for systematic exchange transactions. Explain Micro and Macro Environment. The industries Act passed in 1951 aimed at both the development and regulation of industries in private sector. Its activities are governed by various legislations which may be either facilitatory or restrictive in their nature. The geographical and natural resources are the gifts of nature. Norway and Australia. And discuss what are the factors included in both Environment 6. Availability and use of natural resources has had a great impact on the growth of such countries as Canada. attitudes towards work. desire for self-improvement and even cultural outlook and is reflected in its efficiency and productivity. The SEBI Act now empowers SEBI to regulate the securities market. What is business environment? 4.Production in a market economy take place in a wide variety of business organizations. the bulk of economic activity in the industrial sector takes place in corporations which are set up under the provisions of the Company Law. However. have to spend heavily on the import of necessary raw materials or make foreign investment for their economic growth. Resources The framework of business environment of a country is set by the economic system. “Profit making is the primary goal of any business enterprise”. Productivity of human resources further depends upon the organizational culture and system. It is thus clear that even in a market economy like ours the modern corporate business is not entirely free. Yes or NoDiscuss 3. fuels. The country had legislations like the Monopolies and Restrictive Trade Practices Act (MRTP Act) and the Foreign Exchange Regulation Act (FERA). resource base and structural problems faced by it. forests. Review Questions 1. Natural resources covering available land. What are the economic policies which determine the business environment? . The availability of natural resources by itself does not guarantee growth. USA. The number of people in the work force directly depends on the population size and structure as well on the flows of migration and immigration. The quality of human resources depends upon education. minerals. it is their utilization by other factors of production like labor and capital that leads to growth. The economic system is generally ordained by the constitution of the country or the deliberate choice of the successive governments. which have deficient or little natural resources. Human resources refer collectively to the quantum and quality of the workforce and are among the key determinants of economic growth. motivation and the overall work environment. These are the gifts or endowments of nature. managerial effectiveness. Both were restrictive in nature.
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