Everything you need to know about the types of business environment.The success of a business is generally dependent on the business environment.
Even after a business is created, its entrepreneurs and managers must continually monitor the environment so that they can anticipate how the demand for its products or its cost of producing products may change.
In the managerial universe also, the environment plays an important role in strategy formulation as well as in its performance.
Depending on the type of business, it may interact with the environment by exchanging resources, get impacted by attributes of people, politics of the government, cross-border events, leading to linear momentum as well as angular momentum.
The types of business environment are:-
1. Economic Environment 2. Market Environment 3. Technological Environment 4. Socio-cultural Environment 5. Political Environment 6. Legal/Regulatory Environment 7. Suppliers’ Environment 8. International Environment 9. Demographic Environment
10. Natural Environment 11. Global Environment 12. Geographic Environment 13. Educational Environment 14. Historical Environment 15. Ethical Environment 16. Physical Environment 17. Technological Environment.
Types of Business Environment
Types of Business Environment – With Factors to be Analysed and Monitored
Business environment may be classified as:
1. Economic environment; and
2. Non-economic environment.
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 impact their operations.
Classification of Environmental Sectors:
The classification of the general environment into different sectors helps an organisation to cope up with its complexities, comprehends the different influence operating and relating the environmental changes to its strategic management process. Different bases of classification have been adopted by different authors, but the basis is not an important as the fact that all relevant factors in the environment have to be considered.
Depending upon a variety of factors such as the size of the organisation, level and scope of operations, geographical spread of markets, nature of products, type of technology used and managerial philosophy. The environment here has been classified into eight different sectors.
These sectors are:
1. Economic Environment
2. Market Environment
3. Technological Environment
4. Socio-cultural Environment
5. Political Environment
6. Legal/Regulatory Environment
7. Suppliers’ Environment
8. International Environment
9. Demographic Environment
10. Natural Environment
Type # 1. Economic Environment:
The economic environment consists of macro-level factors related to the means of production and distribution of wealth that have an impact on the business of the organisation. 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:
i. Economic Conditions:
The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations 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.
ii. 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:
a. Industrial policy
b. Fiscal policy
c. Monetary policy
d. Foreign investment policy
e. Export-Import policy (EXIM policy)
The government changes policies from time to time in view of the developments in the economic scenario, political expediency and the changing requirements. Every business firm has to function strictly within the policy framework and respond to the changes therein.
iii. Economic System:
The world economy is primarily governed by three types of economic systems, viz.-
a. Capitalist economy;
b. Socialist economy; and
c. Mixed economy.
India has adopted the mixed economy system which implies co-existence of public sector and private sector.
Some of the economic environment factors to be analysed are:
i. General economic conditions, economic conditions of different segments of population.
ii. Trends in income distribution and consumer spending patterns.
iii. Rate of growth of each sector of economy.
iv. Rate of inflation.
v. Behaviour of capital market.
vi. Interest rate/exchange rate/tax rate.
vii. Prices of materials/energy.
viii. Labour scene.
Changes in economic environment can have an obvious impact on business activity. For example, an increase in the interest rates translates into fewer sales of major home appliances. Higher increase in interest rates results in higher mortgage rates and higher cost of buying a house. Most of the household goods are bought when people shift their houses. Higher costs of buying the house eat into the budget in appliances.
Type # 2. Market Environment:
The market environment consists of the factors related to the groups and other organisation that compete with and have an impact on the organisation’s markets and business.
Some of the factors and influences operating in the market environment are as follows:
i. Demand Related Factors:
By monitoring the demand related factors of one’s industry a firm gather vital clues on consumption pattern, buying habits, invasion of substitute products, growth potential, attractiveness of the industry, expansion, divestment, etc. The aspects to be considered are: nature of demand, demand potential, current level of demand, changes in demand, consumption pattern, buying habits, etc.
ii. Consumer Related Factors:
Monitoring the customer’s taste may result in attractive business opportunities. Hence, customer analysis is very important during environmental survey.
The factors that have to be monitored in relation to the customers are:
a. Purchasing power
b. Buying motives, attitudes and habits
c. Lifestyle and needs
d. Brand awareness, brand loyalty and brand switching
e. Reasons/motives for customer’s patronage of specific brands
iii. Product Related Factors:
Such as image, features, utilities, functions, design, life cycle, price promotion, distribution, differentiation, and the availability of substitutes of product or services.
iv. Market Intermediary Related Factors:
Such as level and quality of customer service, middlemen, distribution channels, logistics, cost, delivery and financial intermediaries.
v. Competitor Related Factors:
Such as different types of competitors, entry and exit of major competitors, nature of competition and the relative strategic position of major competitors.
Type # 3. Technological Environment:
The technological environment consists of factors related to technology used in the production of goods and services that have an impact on the business of an organisation.
Technological factors to be considered are:
i. Source of technology like company, external and foreign sources, cost of technology acquisition, collaboration and transfer of technology.
ii. Technological development, rate of change of technology and research and development.
iii. Impact of technology on human beings, the man-machine system and the environmental effects of technology.
iv. Communication, infrastructure and managerial technology.
For a business firm, technology affects its final products by changing processes in raw material sourcing, production and distribution. Technology, when rightly used can bring about huge changes in the productivity of firms. Computer industry is one example where technology in the industry keeps pushing competition to the brink.
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 feature in most of the big industrial organisations. Nowadays in fact, no firm can afford to persist with the out-dated technologies.
Type # 4. Sociocultural Environment:
Sociocultural environment regulates the values, morals and customs of society.
Important factors to be considered are:
i. Demographic characteristics.
ii. Social concerns, social attitudes.
iii. Family structure and changes in it.
iv. Role of women in society, position of children and adolescents in family and society.
v. Educational level, awareness and consciousness of rights and work ethics of members of the society.
The social environment primarily affects the strategic management process within the organisation in the areas of mission and objective setting and decision related to products and markets. 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 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 the family composition, more nuclear families with single-child concept have come up. This increases the demand for different types of household goods. It may be noted that the consumption patterns, the dressing and living styles of people belonging to different social strata and culture vary significantly.
Type # 5. Political Environment:
Politico-legal forces allocate power and provide laws and regulations that may constrain or protect the business.
The factors to be considered are:
i. The political system and its features like nature of the political system, ideological forces of the political parties and sentries of power.
ii. The political structure, its goals and stability.
iii. Political process like party systems, elections, funding of elections and legislation in economic and industrial matters and regulations.
iv. Political philosophy, role of government in business and its policy approach towards economic and business development.
With the developments on the political front affecting the economy all the time, the economic environment often becomes a by-products of the political environment. Legislations regulating the business are the by-products to of the political configuration. In addition to government and legislative measures, media, social and religious organisations and lobbies of various kinds are also a part of the political environment. They collectively exercise a huge influence on the conduct of business in a country.
The political environment 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 organisation and its operations. The Coca-Cola, a cold drink widely used now, had to wind up its operations in India in late seventies. Again the trade union activities also influence the operation of business enterprises. Most of the labour unions in India are affiliated to various political parties. Strikes, lockouts and labour 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 organisation and its operations through workers participation in management.
Type # 6. Legal/Regulatory Environment:
Businesses have to operate within the framework of the prevailing legal environment. They have to understand the general legal aspects and those particular to the industry the company is in. Businesses have to understand the implications of such legislations and adapt themselves accordingly. This refers to set of laws, regulations, which influence the business organisations and their operations.
The important factors which affect legal/regulatory environment are:
i. The constitutional framework, directive principles, fundamental rights and divisions of legislative power between central and state governments.
ii. Policies related to licensing, monopolies, foreign investments and financing to industries.
iii. Policies related to distribution and pricing and their control.
iv. Policies related to imports and exports.
v. Other policies related to PSU, SSI, sick industries, and development of backward areas and control of environmental pollution.
The important legislations that concern the business enterprises in India 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 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 governments 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 courts in different matters relating to trade and industry also influence the business activities.
Type # 7. Suppliers Environment:
Suppliers constitute a major force, shaping competition in any industry with their own bargaining power. They influence the cost of the raw materials and other inputs of the firm. Suppliers adapt changes in their product, process and business practices, and can stay independent of the sourcing firm. Sometimes, suppliers themselves may go for forward integration and could become a real competitor.
Some important factors and influences in the supplier’s environment are as follows:
i. Cost, availability and continuity of supply of raw materials, sub-assemblies, parts and components
ii. Cost and availability of finance for implementing plans and projects
iii. Cost, reliability and availability of energy used in the production
iv. Cost, availability and dependability of human resources
v. Cost, availability and existence of means of supply of plants and machinery spare parts and after-sales service
vi. Infrastructure support and ease of availability of different factors of production, bargaining powers of suppliers, and existence of substitute.
The supplier environment occupies a dominant position in strategic formulation because of the fact that India is a developing country, having scarcity of capital and appropriate raw materials resources. Unlike some of the western nations and Japan, the reliability of supplies is very low, forcing companies to devote a lot of attention and energy in maintaining continuity of supply.
Type # 8. International Environment:
The international or global environment consists of all those factors that operate at the transnational, cross-cultural and cross-border levels which have an impact on the business of the organisation.
Some important factors and influences in the international or global environment are as follows:
i. Globalisation, its process content and direction,
ii. Global economic forces, organisation, blocks and forums
iii. Global trade and commerce, its process and trends
iv. Global financial system, sources of financing and accounting standards
v. Geopolitical situations, equations, alliances and strategic interests of nations
vi. Global demographic patterns and shifts
vii. Global human resources, availability and quality of skills and expertise, mobility of labourers and other skilled personnel
viii. Global information systems, communication network and media
ix. Global technological and quality systems and standards
x. Global market and competitiveness
xi. Global legal systems, adjudication and arbitration mechanism
xii. Globalisation of management and allied disciplines and diffusion of management techniques in industry
xiii. Resources and raw materials sectors.
The international environment was considered to be of low significance by Indian companies till 1990 but there has been a sea change in the strategic thinking and planning of these companies so as to align them with the emerging global economic order.
Evidence is found in global standards adopted by exporting companies, eagerness to adopt global practices, realisation of the impact the international environment likely to have on Indian business and industries. The industry federation such as CII have been drawing attention of the business towards the likely impact it will have on them.
Many Indian companies have set up special cells and appointed managers to assess the impact of international business on their business. The establishment of Word Trade Organisation (WTO) in Jan 1995 has provided the right impetus to Indian companies for international trade.
Many Indian companies have widened the scope of their business to include their international operations. Ranbaxy, Dr. Reddy Lab, Tata steel, Infosys’s, Reliance are some of the shining examples of success in international business.
Type # 9. Demographic Environment:
This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services. For example, a country where population rate is high and children constitute a large section of population, then there is more demand for baby products.
Similarly, the demand of the people of cities and towns are different form the people of rural areas. The high rise of population indicates the easy availability of labour. These encourage the business enterprises to use labour intensive techniques of production. Moreover, availability of skill labour in certain areas motivates the firms to set up their units in such area.
For example, the business units from America, Canada, Australia, Germany, UK, are coming to India due to easy availability of skilled manpower. Thus, a firm that keeps a watch on the changes on the demographic front and reads them accurately will find opportunities knocking at its doorsteps.
Type # 10. Natural Environment:
The natural environment includes geographical and ecological factors that influence 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.
Types of Business Environment – Economic, Political, Legal, Technological, Socio-Cultural, Geographic and International Environment
In analysis of general environmental, traditionally, PEST (political, economic, social, and technological) analysis has been used for analyzing environment at macro level which has important implications for analyzing industry-level environment. Political aspect of PEST also included legal environment. Afterwards, PESTEL (political, economic, social, technological, environmental—geographic, and legal) analysis emerged. However, with globalization of world economy, analysis of international environment has also become important.
Type # 1. Economic Environment:
Economic environment covers those factors which give shape and form to the development of economic activities.
It includes two broad aspects:
i. General economic conditions and
ii. Factor market or supplier component.
i. General Economic Conditions:
a. Economic system
b. National income and its distribution
c. Monetary policy
d. Fiscal policy
ii. Factor Market or Supplier Component:
a. Natural resources
b. Infrastructural facilities
c. Raw materials and supplies
d. Plant and equipment supplies
e. Financial facilities
f. Manpower and productivity
While analysing the economic environment, the organization intending to enter a particular business sector may ask the following questions:
a. Does the economic system allow to enter the business sector sought? Communist countries’ economic systems have lot of such barriers.
b. What is the stage of economic growth and what is the rate of growth? Is it maturing, declining, or at take-offstage?
c. What is the level of income—national and per capita? Does it offer market of large size?
d. What are the incidents of taxes, both direct and indirect, in general and on specific products?
e. What are the infrastructural facilities available and what are bottlenecks therein?
f. Are critical raw materials and components available and at what costs?
g. What are the sources of financial resources and what are their costs?
h. Is adequate manpower—managerial, technical, and workers—available and what are their salary and wage structures? What is the level of their productivity?
Type # 2. Political Environment:
Political environment consists of political system and its working.
It includes the following aspects:
i. Government system.
ii. Political stability.
iii. Political parties and their ideologies.
iv. Political interference in business operations.
v. Government policy towards business.
vi. Government policy towards global companies.
vii. Foreign policies like maintaining relationships with other countries, giving favoured status to specific countries in terms of business, etc.
viii. Behaviour of bureaucracy towards business like delays, red-tapism, etc.
In analysing political environment, an organization may put the following questions:
i. How does the political system influence the business?
ii. What are the approaches of the government towards business? Are they restrictive or facilitating?
iii. What are the facilities and incentives offered by the government?
iv. What are the legal restrictions in entering a particular industry segment either because of licensing requirement or it being reserved to a specific sector such as public sector or small-scale sector?
v. What are the restrictions in importing technology, capital goods, and raw materials?
vi. What are the restrictions in exporting products and services? What are the export obligations?
vii. What are the restrictions on pricing and distribution of goods?
Type # 3. Legal Environment:
Legal environment consists of those factors that set legal rules of game of business. These legal rules provide two types of conditions relevant to business- facilitating rules which encourage business operations like electronic filling of records, etc. and restrictive rules like strict adherence to a plethora of Acts related to business operations. Since emphasis of legal environment is more on restrictive rules; it is also called as regulatory environment.
Legal environment includes the following aspects:
i. Legal framework governing business operations at home – there are different types of legal provisions, known as commercial and industrial laws
ii. Legal provisions relating to getting specified clearances from government agencies
iii. Legal provisions regarding employing certain categories of employees based on castes or other factors; this is mostly applicable to public sector companies
iv. Legal provisions regarding doing foreign business.
In analyzing legal environment, the organization can ask the following questions:
i. What are the legal provisions in doing a business?
ii. What are the procedural formalities required in setting a new business?
iii. What are the legal requirements that the organization will have to comply on regular basis?
Type # 4. Technological Environment:
Technological environment is important for business as it affects the type of conversion process that it may adopt for its purpose. The technological environment refers to the sum total of knowledge providing ways to do things. It may include inventions and techniques which affect the ways of doing things, that is designing, producing, and distributing products.
A given technology affects an organization in the following ways:
i. It can change relative competitive cost position of the organization vis-à-vis its competitors.
ii. It can create new markets and new business segments.
iii. It can collapse or merge previously independent businesses by reducing or eliminating their segment cost barriers.
In analyzing technological environment, the organization may ask the following questions:
i. What is the level of technological development in the country as a whole and specific business sectors?
ii. What is the pace of technological changes and technological obsolescence?
iii. What are the sources from which technology can be acquired?
iv. What are the restrictions and facilities for technology transfer and time taken for absorption of technology?
Type # 5. Socio-Cultural Environment:
Socio-cultural environment consists of attitudes, beliefs, desires, expectations, education, and customs of the society at a given point of time. Thus, socio-cultural environment, in its broad sense, includes many aspects of the society and its various constituents.
From business organization’s point of view, it may include – i. expectations of the society from the business; ii. attitudes of society towards business and its management; iii. views towards achievement of work; iv. views towards authority structure, responsibility, and organizational positions, v. views towards customs, traditions, and conventions; vi. class structure and labour mobility; and vii. level of education.
The various elements of socio-cultural and cultural environment affect the working of the organizations mainly in three ways: organizational objective setting, organizational processes, and the products to be offered by the organization. Through these, they affect the total functioning of the organization.
In analysing socio-cultural environment, the organization can ask the following questions:
i. What are approaches of the society towards business in general and in specific areas?
ii. How do social, cultural, and religious factors affect acceptability, or otherwise, of product?
iii. What is the lifestyle of people and what products fit that lifestyle?
iv. What is the level of acceptance of, or resistance to, change?
v. What are the values attached to a particular product? Do people see possessive value or functional value in the product?
vi. Do people buy specific products for specific occasions necessitated by social and religious requirements?
vii. What is the propensity to consume and to save?
Type # 6. Geographic Environment:
Geographic environment is that part of the terrestrial natural environment which is directly connected with the life and production activity of society.
The geographic environment has four basic features:
i. Geographic environment is the terrestrial environment of human society.
ii. It is the natural environment of human society—that is, the complex of natural conditions that arise independently of human beings and that have preserved capacity for further self-evolution.
iii. It is the sphere of direct interaction between nature and society.
iv. With time, the geographic environment grows larger in scope and content, as human society exploits ever more terrestrial space and new aspects and components of nature to satisfy its needs.
Geographic environment has impact on organizations because various elements of the geographic environment form the techno genic environment of the society—for example, cities, factories, electric power stations, etc.—which coexist and closely interact with the geographic environment. As a result, any adverse change in geographic environment affects the techno genic environment adversely which is harmful to the organizations. However, organizations seldom analyze geographic environment in strategy formulation process.
Type # 7. International Environment:
International environment has important bearing on business operations. While economic liberalisation has presented some opportunities like increased business operations abroad, increased export and import, etc. it has generated certain threats because of large-scale entry of multinational corporations (MNCs) almost in every sector.
On these threats, N. R. Narayana Murthy, co-founder of Infosys Technologies, has a comment, “We are slowly realising the difficulty of scaling up businesses to take up global companies. It is difficult even to get enough good masons to build new facilities, forget managers.” Therefore, there is a need for analysing international environment.
International environment consists of all those factors—economic, political-legal, technological, and socio-cultural—which we have seen above. However, shape of such factors may be quite different from what is prevailing in India. From strategic management point of view, the analysis of international environment is required from two angles – i. to understand the implications of entry of MNCs in India and Indian export and import, and ii. to open operations abroad.
In analysing international environment, following questions may be asked:
i. What are the comparative cost advantages to MNCs through technological development and/or scale of operations?
ii. What are the attitudes of exporting nations and companies in the form of dumping and other means to take advantages over local companies?
iii. What is the degree of subsidies and incentives, both financial and non-financial, available to exporting companies?
iv. What are the tariff structures relevant to export from India?
v. What are the attitudes of people of importing countries about Indian goods/services?
Above factors are components of general environment. An organization is required to analyze its specific environment with which it is directly concerned. This environment is in the form of industry environment and defines competitive environment for organizations operating in the industry.
Types of Business Environment – With Examples of Impact
Type # 1. Political Environment:
It comprises political parties and their ideologies, type of government (single party or multi-party coalition), stability of government, government policy regarding international business and multinational corporations (MNCs), etc. All these factors influence investment in business activities and also the stability, growth and profitability of business.
For instance, the operations of an MNC, Coca Cola Company, were discontinued in India in the late 1970s because of the Government’s Policy of restricting the growth of multinational companies in the country. In 1989, the Government allowed another multinational company, Pepsico to enter the Indian market to give boost to the food processing industry. Later, the Industrial Policy, 1991, paved the way for entry of multinational corporations into India in a big way.
Stability of government of the country is also an important factor. Whenever there is political instability in the country, business is affected adversely. It happened in 1999, when Vajpayee Government at the Centre lost the majority support, the share prices at the stock market crashed immediately.
Several changes have occurred in the political environment in India. One party rule at the centre has given way to coalition government. Similarly, there are coalition governments in several states of Uttarakhand, Chattisgarh and Jharkhand have affected tourism, transport, and minor industries. Further, Constitution has been amended for the empowerment of Panchayati raj institutions. This will speed up the process of economic development and give a boost to small-scale and cottage industries in rural areas.
A few examples of impact of changes in political environment on the business are as follows:
i. There has been a demand for reservation of jobs for schedules castes and schedules tribes in the private enterprises.
ii. The Andhra Government took keen interest on boosting IT industries at Hyderabad, because of which the city is now also known as Cyberabad.
iii. Central government’s policy on economic liberalization has made it easier for companies to undertake expansion plans. They can also enter into foreign technology agreements.
Type # 2. Economic Environment:
Economic environment refers to the nature of economy (capitalist, socialist or mixed), economic policies of the government, markets for material, labour, capital, etc., business firms and institutions such as banks, insurance companies, transport companies, etc., and level of income of the people.
The economic environment is greatly influenced by the government through fiscal policies, economic controls, industrial policy and import-export policy. For instance, if the government announces a cut in the excise duty on refrigerators, the sales of business firms manufacturing refrigerators will go up. Similarly, if the government allows liberal finance to export-oriented units at concessional rates, such units will get a boost.
The economic environment of a firm also includes all markets in which it buys and sells, raises funds, gets labour, etc. The business is invariably influenced by the conditions of various markets. For instance, if there is uncertainty in the capital market, it will not be advisable to issue shares and debentures to the public because of risk of under subscription.
A few examples of impact of changes in economic environment on business are as follows:
i. Industrial policy reforms have removed licensing in case of many industries. Entrepreneurs are free to set up units in the liberalized industries. Further import of capital and technology has been made easier.
ii. Fiscal policy reforms have led to reduction in the rates of direct taxes and indirect taxes like excise duties and customs duties.
iii. Monetary policy reforms have reduced Statutory Liquidity Ratio (SLR) for banks and given them flexibility in fixing the interest rates of borrowing and lending.
iv. Banking sector reforms have led to lower rates of interest on borrowings by the industrial and commercial organisations.
v. Indian companies can raise funds in the foreign markets by issuing GDRs and ADRs.
vi. Private airlines have been allowed to run services on domestic and international routes.
Type # 3. Social Environment:
Social environment is shaped by social factors such as attitudes of people, cultural heritage, beliefs and customs of people, education system, consumers’ organisations, trade unions, and other non-government organisations. Sociological factors such as caste and occupational structure, view towards scientific methods, respect for seniority, etc., might have a far reaching impact on business.
For instance, over the recent years, there has been a demand for reservation for jobs for minorities in the government departments and also a demand for reservation of jobs for schedule castes and schedule tribes in the private sector. Similarly, there has been a demand to remove restrictions on the employment of women in factories during night shifts.
The nature of goods and services in demand depends upon people’s attitudes, customs, socio- cultural values, etc. In India, the attitudes of people have changed with respect to food and clothing as a result of industrialization, employment of women in factories and offices and increased level of education. This has resulted in the growth of food processing and garment manufacturing.
Sociocultural environment determines the code of conduct the business should follow. If a business follows unethical practices, various social groups and government will intervene to discipline it. For instance, if an industrial unit is indulging in adulteration, hoarding or black marketing, consumer forums and government agencies may resort to direct action against such industrial unit over the years, several social organisations have come up which have raised their, voice against air, water and noise pollution by the industries.
They have even approached the courts for shifting of polluting industrial units away from the populated areas. In Delhi, the polluting industries (of F category) have been closed by the orders of the Supreme Court. These orders were passed on the PIL (Public Interest Litigations) filed by the social organisations.
A few examples of impact of changes in social environment on business are as follows:
i. Consumers’ organisations keep a watch on the activities of business firms. In case of unfair practices, they file complaints in the consumer courts.
ii. There has been a movement for improving education facilities for girls. This would lead to increase in the demand for school dress, books, stationery, etc.
iii. Demand for consumer durables like T.V., fridge, etc., are on the rise.
Type # 4. Technological Environment:
Technological environment refers to the state of technology in the areas of manufacturing, mining, construction, materials handling, transportation, etc. and also information technology. Advancement in technology leads to greater productivity, higher quality and lower cost of production for the business. However, introduction of advanced technology requires higher capital investment- It may also lead to unemployment in some cases. That is why, labour unions often oppose the introduction of new technology.
Technological changes are taking place at a fast pace and are affecting investment decisions by the business firms. Automation and information technology have assumed new proportions. Introduction of automatic and semi-automatic machinery in industry would require higher capital investment. It would ultimately lead to savings in labour costs as there will be fall in the number of workers required.
So will be the impact of new information technology which has speeded up communication between business houses and customers. There is now increasing trend towards E- Commerce because of easier availability of internet technology throughout the world.
Type # 5. Legal-Regulatory Environment:
Legal-regulatory environment of business is determined by constitutional provisions, economic laws, commercial laws, industrial and labour laws, government regulations under various laws and court decisions. These help the government in the regulation of economic activities of the business enterprises. Since Indian economy is centrally planned and controlled, the business enterprises are required to operate within the framework of legal-regulatory environment.
The relationship between industry and the regulatory environment exists a two-way process. The government lays down the policies, procedures and rules according to which the business and industry function.
The association of business and industrial organisations such as Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industry (CII) also try to influence the government through lobbying, creating public awareness and opinion by issuing press advertisements to create a favourable government policy framework for the growth of business and industry.
The important components of the legal-regulatory environment include the following:
i. The Constitutional framework – Directive principles, fundamental right and division of legislative powers between central and state governments.
ii. Commercial and economic laws and government policies under the laws relating to licensing, monopolies, foreign investment, etc.
iii. Government policies related to imports and exports.
iv. Government policies related to small-scale industries, sick industries, consumer protection, control of environmental pollution, etc.
v. Government policies related to pricing and distribution of essential commodities.
vi. Court decisions for the protection of consumers, environment and ecological balance.
Types of Business Environment – Economic, Social, Technological, Political and Legal Environment
1. Economic Environment:
The sum total of all economic factors like rate of interest, inflation rate, change in the income of people, etc. Which directly or indirectly affect business firms is called economic environment. Economic environment offers opportunities to a firm or it may put constraints.
2. Social Environment:
It includes various social forces such as customs, beliefs, literacy rate, educational levels, lifestyle, values, etc. Changes in social environment affect an organisation in the long run.
Example:
Now a day’s people are paying more attention towards their health as a result of which demand for mineral water, diet coke etc has increased while demand of tobacco, fatty food products has decreased.
3. Technological Environment:
The dimension of business environment which includes new and advanced ways/techniques of production, distribution, promotion etc is called technological environment. A businessman must closely monitor the technological changes taking place in the industry as it helps in facing competition and improving quality of the product.
4. Political Environment:
The political parties, political stability, attitude of government towards business etc constitute the political environment of a business. Political stability builds confidence among business community while political instability and bad law & order situation, may bring uncertainly in business activities. Political environment has immediate and great impact on the business transactions, so the businessman must scan the environment carefully so that necessary changes can be made in the organisation as per requirements.
5. Legal Environment:
It constitutes the laws and legislation passed by the Government, administrative orders, court judgments & decisions of various commissions and agencies. Businessman had to act according to various legislations and so their knowledge is very necessary.
Types of Business Environment – Segmented into 4 Parts
The success of a business is generally dependent on the business environment. Even after a business is created, its entrepreneurs and managers must continually monitor the environment so that they can anticipate how the demand for its products or its cost of producing products may change.
The business environment can be segmented into the following parts:
1. Social environment
2. Industry environment
3. Economic environment
4. Global environment
Type # 1. Social Environment:
The social environment, which includes demographics and consumer preferences, represents the social tendencies to which a business is exposed. The demographics, or characteristics of the population, change over time. As the proportions of children, teenagers, middle-aged consumers, and senior citizens in a population change, so does the demand for a firm’s products.
Thus, the demand for the products produced by a specific business may increase or decrease in response to a change in demographics. For example, an increase in the elderly population has led to an increased demand for many prescription drugs.
Changes in consumer preferences over time can also affect the demand for the products produced. Tastes are highly influenced by technology. For example, the availability of pay-per-view television channels may cause some consumers to stop renting DVDs. The ability of consumers to download music may cause them to discontinue their purchases of CDs in retail stores.
As technology develops, demand for some products increases, while demand for other products decreases. Many businesses closely monitor changes in consumer preferences so that they can accommodate the changing needs of consumers and increase their profitability as a result.
Type # 2. Industry Environment:
The industry environment represents the conditions within the firm’s industry to which the firm is exposed. The conditions in each industry vary according to the demand and the competition. Firms benefit from being in an industry that experiences a high consumer demand for its products. For example, the demand for cell phones is very high.
However, industries that have a high demand for their products also tend to have substantial competition because many firms enter the industry. Intense competition is good for consumers because it forces firms to keep their prices relatively low in order to compete. For firms, however, competition may result in lower revenue and, therefore, lower profits.
Type # 3. Economic Environment:
Economic conditions have a strong impact on the performance of each business. When the economy is strong, employment is high, and compensation paid to employees is also high. Since people have relatively good income under these conditions, they purchase a large amount of products.
The firms that produce these products benefit from the large demand. They hire many employees to ensure that they can produce a sufficient amount of products to satisfy the demand. They can also afford to pay high wages to their employees.
When the economy is weak, firms tend to lay off some of their employees and cannot afford to pay high wages. Since people have relatively low income under these conditions, they purchase a relatively small amount of products. The firms that produce these products are adversely affected because they cannot sell all the products that they produce.
Consequently, they may need to lay off some employees. Under these circumstances, some firms fail, and all of their employees lose their jobs. The unemployment rate rises as a result.
Type # 4. Global Environment:
The global environment may affect all firms directly or indirectly. Some firms rely on foreign countries for some of their supplies or sell their products in various countries. They may even establish subsidiaries in foreign countries where they can produce products and sell them. Even if a firm is not planning to sell its products in foreign countries, it must be aware of the global environment because it may face foreign competition when it sells its products locally.
Furthermore, global economic conditions can affect local economic conditions. If economic conditions weaken in foreign countries, the foreign demand for U.S. products will decrease. Consequently, sales by U.S. firms will decrease, and this may result in some layoffs.
The general income level in the United States will decline, and U.S. consumers will have less money to spend. The demand for all products will decline, even those that are sold only in the United States. Thus, even firms that have no international business can be affected by the global environment.
Types of Business Environment – Economic and Non-Economic Environment
A brief-description of each type of environment follows:
1. Economic Environment:
A business organisation exists in three types of economic environment – first in the total economy; second, in a particular industry, and third, in a specific geography area. In each of these types of environment, the company will want to consider its position in relation to its competition and its customers or potential customers.
i. The Economy:
As regards the total economy, the enterprise will have to consider a broad range of business indicators, such as, industrial production, wholesale and consumer prices, nature and extent of employment and unemployment, average work week, and average earnings, personal incomes, sales and inventories, gross national product, disposition of personal income, and corporate profits.
Every enterprise, as a system, imports various things from the economic environment and exports a product or serviced it. Since the objective of business is essentially economic, an organisation must introduce a number of elements as inputs from the economic environment. For instance, every type of organisation must procure capital – machinery, buildings, inventories of goods, office equipment, tools of all kinds, and cash.
Another extremely important element of the input side of the economic environment is the availability, quality and price of labour of all kinds – skilled and unskilled, trained and untrained. Price level changes also affect the input side of the enterprise. Inflation, for example, not only upsets business but has highly disturbing influences on every kind of organisation. Again, productivity of labour and capital has considerable impact on enterprises.
Another major economic input is the availability of high-quality entrepreneurs and managers. This input is, of course, likely to have correlation with the social environment, particularly in the area of education, individual freedoms and cultural development. Furthermore, the nature of Government fiscal and tax policies affect the economic inputs, even though these are more correctly, aspects of political environment.
ii. Competition:
Competition is a major part of the enterprise’s environment. It is, therefore, important to find out- (a) in what position of the total market is each competitor a significant factor, and with what products? (b) What are his business policies – credit terms, delivery schedules, discount practices? (c) What is, his product line – is it a single product or a diversified line? (d) What is his financial structure? And so on.
iii. Customers:
On the output side of any business organisation, there are also important economic considerations in the environment, the most important of which are customers, both direct and indirect. Without customers a business could not exist. To succeed in capturing customers a business must try its best to know what people want and will buy. The frailties of consumer acceptance impose a constant challenge; because non-economic factors in the environment, such as, attitudes, desires, and expectations of people also, influence consumer behaviour.
2. Non-Economic Environment:
The non-economic environment that has direct impact on business organisations comprises socio-cultural, educational, legal, political, physical, historical and technological.
An over-view of these factors of non-economic environment follows:
i. Sociocultural:
Sociological factors give content and form to the system of values and culture. The culture prescribes and teaches what an individual learns and accepts. All language, customs, habits, values, and attitudes are culturally derived. In some ways, the culture overwhelms the individual. Therefore, the importance of understanding the role that sociocultural environment plays can never be underestimated. Every society depends on its culture to instill normative behaviour into the populace so that it can be maintained and survive.
Thus, the sociocultural environment that impacts on business is made up of the attitudes, desires, expectations, degrees of intelligence and education, beliefs, customs, of people in a given group or society. To these may be added ideologies and norms of the society, views on authority relationships, leadership patterns, interpersonal relationships and rationalism.
ii. Educational:
In this category may be listed the general literacy level of the population, the degree of specialisation in the education system, attitude towards education and acquisition of knowledge, the proportion of the people with a high level of professional and specialised training which may meet the requirements of industry. These and other factors constituting educational cultural environment exercise a strong influence on business activity and management skills.
iii. Political:
The political environment is primarily that complex of laws, regulations and Government agencies and their actions which affects all kinds of organisations. Furthermore, general political climate of society; the degree of concentration of political power and the political party system have major effect on business organisation.
iv. Legal:
The nature of legal system, jurisdictions of various government units and constitutional considerations impinge on business. Specific laws concerning formation, management, taxation and control of organisations have considerable impact on business.
v. Historical:
The historical background of the country also influences the current environment of business. Historical events and ideologies leave a strong impact on the current state of business. Societal change has occurred throughout human history, bringing about a differing set of values for the people growing up during different periods thus producing current environment.
vi. Ethical:
The ethical environment includes sets of generally accepted and practised standards of personal conduct. All over the world certain standards of personal conduct are recognised and accepted. Management ethics is a study of what is right and good in the moral decisions managers make. In relation to business, ethical environment is doing the right thing towards everyone and win public confidence.
vii. Physical:
Climate, terrain, resources, and population density are some of the variables in the physical environment, which affect human behaviour and even, in some cases, physical make up. There is some evidence that climate may affect behaviour. For example, the average level of achievement motivation is very high in societies that live in temperatures with a mean between 40 and 60°F. Resources, both natural and human-made have effect on behaviour.
Food, water, housing and medical care influence a person’s well-being. These resources, along with many others, are needed to sustain physical activity and life, itself. Population is another very important environmental factor, for population explosion inevitably contributes to the limited resources problem.
viii. Technological:
Technological environment has considerable impact on management and organisations. For our purpose, technology is defined as the mechanical techniques and abstract knowledge that are employed by humans to help attain organisational objectives. Therefore, the state of technology at any one time is an extremely important factor affecting the success of any business. It is a truism that any business that wishes to survive in a changing world must keep abreast of the technology applicable to its products and services and to its methods of operations.
In sum, it may be stated that the list of factors in non-economic environment is not exhaustive but is only illustrative. But what is important to note is that the environment is becoming more dynamic and uncertain. Each of the environmental factors involves and accelerating rate of change. For example technological conditions are changing rapidly; cultural and social changes are underway, and so on.
An important problem in the study of organisations and organisational changes is, that the environment in which organisations function is itself changing, and at an increasing rate as well as towards increasing complexity. There is “an increasing turbulence in modern societies and organisations are moving from ”placid” fields to “turbulent” fields – Consequently, organisations of the future will be even more subject to external forced and must be prepared to adapt.”