Business Environment

Nature, Composition and Scope of Business Environment 

What is a Business Environment? Environment by definition is something external to an individual or an organisation. Therefore, Business environment refers to all external factors which have a direct or indirect bearing on the activities of a business.


Some experts have used the term business environment in a broader sense-in terms of internal and external environment of business. External environment can be subdivided into micro and macro environment.

While certain aspects of both internal and external environment pose a threat to business, other aspects provide opportunities for business growth.

Internal Environment 

The Organisation s value system, goals and objectives, management structure, relationship among the various constituents, physical assets, technological capabilities and human, financial and marketing resources make the internal environment of business.

All these individually as well as collectively exercise their influence on the latter. . external environment of business may be classified into micro and macro environment. organisations and forces operating outside the company.External Environment   Consists of institutions. Broadly.

the micro environ.Micro Environment   Refers to such players whose decisions and actions have a direct bearing on the company. can be divided accordingly. Since modern business broadly has two aspects-production and selling of goods. .

Usually the players in the micro environment do not affect all the co.  From the point of view of a company s business operations. micro environment has great relevance.s in an industry in the same way. and actions vis-àvis individual company often differ in accordance with the size. Their decisions. . capability and strategies of each company.

Suppliers of inputs are normally more accomodating if the company is large. a competitor does not mind starting a price war if the rival company is small but he will be reluctant to do so if the rival firm is large and capable of retaliating. However they may not give the same concessions to relatively small co. Likewise.  For eg. .s.

market intermediaries and competitors affect sales operations of the business firm. . exercising influence on production are input suppliers and workers together with their unions. Customers. The most prominent performers in the micro environ. The public may influence both production and sales.

Macro Environment   Comprises large societal and physical forces which affect the company and also the players in the company s micro environment. It refers to all those economic and noneconomic factors which exercise their influence on the business activity in general and thus determine opportunities that a company may have to promote its business. .

. This implies that the larger forces in the co.  The role of macro environment from the point of view of the business may be positive and negative.s environment do not always provide wider space for business operations. They often put restraints on the business activities of the firm.

fiscal. levels of saving and investment. These factors broadly determine the prospects of business activity. Macroeconomic scenario refers to price situation. . monetary and balance of payments situations and overall growth activity.

. have serious constraining effects. These factors not only determine opportunities for business but also at times.

Since business is basically an economic activity. . economic environ.of business-both national and global. Macro environment is broadly classified into economic environment and noneconomic of strategic importance.

phase of business cycle through which the economy is passing. In the economic environ. . the country s economic system. of the country. are the most important elements. macroeconomic scenario. organisation of the financial system and economic policies of the govt.

freedom of contract and competition. with limited govt.   Economic systems of USA. . Capitalism in the broad sense. France and the UK are capitalistic. Japan. Economic systems of the former Soviet Union and China are Socialist. intervention in economic affairs. Germany. is a system of private property in both producer and consumer goods.

 Socialism is a system of complete collectivisation of the means of production. . there are no private profits. but incomes may differ according to individual skills and amount of work done. also personal property for consumption purposes is allowed.

 To a great extent. . the economic system of a country determines its economic environment.

the crash of Japanese economy. deep economic crisis in East and South-East Asia. economic slowdown in the USA. global economic environment is as much important as the national economic environment. underdevelopment of Russia and East Europe. s business. .  Now because of liberalisation. from the point of view of the co. The notable features of present day global environment are globalisation.

protectionism. global recession and dominance of the multinational corporations. . Regional Economic groupings.

The political system. and natural and physical environment of the country constitute non economic environment of business. social system. level of technological development. is also influenced by its non-economic environment. demographic factors. . despite the fact that it is an economic activity. cultural values.  Business .. legal framework. ideology of the govt.

. countries may follow. Rapid economic and political changes Lot of uncertainty about macro economic variables and policy measures which diff.The Global Environment    Radical changes in the business environment world over during 1990s.

   Unipolar world-politically. economically in which USA has a dominant position Recession haunting both developed and underdeveloped economies The Japanese economy which was the 2nd largest in the world is now in deep financial crisis .

developed countries making regional economic arrangements.   market economy in Russia -disastrous for the people of the country. resorting to protectionism Onslaught of finance. capital and multinationals posing a threat to countries like India .

. Crisis in the world economy is probably the severest since the Great Depression of the early 1930s.

. lasting from the end of 1929 until the early 1940s. Great Depression in the United States. worst and longest economic collapse in the history of the modern industrial world.

the depression spread to most of the world s industrial countries. Beginning in the United States. which in the 20th century had become economically dependent on one another. .

and many depended on charity to survive. severe rise in unemployment. The Great Depression saw rapid declines in the production and sale of goods and a sudden. Businesses and banks closed their doors. homes. people lost their jobs. and savings. .

 In 1933. more than 15 million Americans one-quarter of the nation s workforce were unemployed. . at the worst point in the depression.

     The depression was caused by a number of serious weaknesses in the economy: Uneven income distribution Americans spent more than they earned farmers faced low prices and heavy debt The lingering effects of World War I (19141918) caused economic problems .

which ruined thousands of investors and destroyed confidence in the economy .S. stock market crash of 1929 . the disastrous U.

the depression ended in the United States only when massive spending for World War II began. . Continuing throughout the 1930s.

USA established supremacy over the world economy.The Unipolar world    Collapse of Eastern Europe in 1989 and the USSR in 1991 marked the end of a bi-polar world-demise of socialism. Japan -2nd largest economy by end of 1980s but couldn t challenge political and economic moves of USA .

Italy. UK etc. Nuclear tests by India invited the wrath of USA-slapped sanctions on the country-cut off all aid except humanitarian assistance-1998 . France .  Western European countries could match collectively but not individuallyGermany.

 USA threatened South Korea of a trade war unless it agrees to import more American cars. .

euro . the European Economic and Monetary Union launched a single European currency.-powerful and integrated bloc of European capital capable of challenging USA. 1999. . Jan. 1st.

.Globalisation   Marked acceleration in international economic integration since 1950 termed Globalisation . It simply implies the expansion of economic activities across political boundaries of the nation states.

Top 200 global corporations control 28% of world s economic activity. .   Between early 1970s and late 1990s.1 billion dollars surpasses the combined economies of 182 countries. share of world trade in the world GDP rose from one-eighth to one-fifth. Their combined sales of 7.

Economic crisis in East and south-East Asia    East Europe and Russia abandoned socialism. GDP falling at the rate of 10% per annum or even more. Laissez faire model not appropriate for restructuring industrial Russia under . Industrial production decreased in Russia @ 11% per annum. opted for capitalism 1990s-reform measures failed miserably.

. competitive conditions of technologically advanced contemporary capitalism.

Hongkong-high rates of economic growth rate till 1990 from 1970. Reasons: Massive short term borrowings from foreign banks . Thailand.Korea.Economic crisis in East and south-East Asia    S. Indonesia. Malaysia. Singapore.-collapsed in 1997-98.

 Borrowed short term externally and lent long-term domestically-mismatch in banks portfolio. .

LAFTA: Latin American Free Trade Association. SAFTA: South Asia Free Trade Agreement . Result: Various organisations formed:EU: European Union. NAFTA: North American Free Trade Agreement. EFTA: European Free Trade Association.Regional Economic Groupings   Countries all over the world became aware about their interdependence and about the importance of cooperating with each other.

certification requirements. industrialised countries of the west increasingly resorting to protectionism to avoid competition from newly industrialising countries in domestic markets by creating non-tariff barriers.Protectionism  Since mid 1970s.-standards. . or anti-dumping duties. testing.

S. economy should still manage to advance at a 1% to 2% clip in 2008. . the U.Status in 2008  Despite a still-slumping housing market. an escalating credit crunch and spiraling inflationary pressures.

S. U. . economy will likely dodge the recession that some observers have feared.

. economy a thing of the past. The emergence of a growing middle class in such key markets as China. India and Eastern Europe will make global dependence on the U.S.

 With tens of millions of newly minted consumers ready to spend in China. downturn. that country could easily weather a U.S. .

 The United States is experiencing its worst housing recession in more than 15 years. .

housing market that began roughly in 2001. . It reached its peak in 2005 and then plateaued. the BosWash megalopolis. and started deflating in 2006 and accelerated since. especially in populous areas such as California.S. Michigan. the suburbs of Chicago in the Midwest. and the Southwest markets. New York. The United States housing bubble is the economic bubble in many parts of the U. Florida.

 A housing bubble is an economic bubble that occurs in local or global real estate markets. . price-torent ratios. It is characterized by rapid increases in the valuations of real property until unsustainable levels are reached relative to incomes. and other economic indicators of affordability.

was caused by historically-low interest rates.S. The housing bubble in the U. and a mania for purchasing houses. . lax lending standards. .

4% Japan:2% . World Bank and the Organisation for Economic Cooperation And Development (OECD). 2006: World economy: 4.9% (2007)estimated to go down to 4.Growth rates of different economies     According to IMF.1% in 2008 US : 3.

Growth rate:2.    EU economy has become less dependent on the US.8%-highest since the beginning of the 21st century. Developing countries:7% Developing Asian economies continued to lead the world: more than 8% .

4% Russia: 7% . more than 8% over the last 2 yrs. GDP=US$780 billion.5% China followed by India-reached the highest growth rate since economic reforms began in 1990s.     Chinese :highest growth rate:10. African economies: 5.

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