Introduction
A business manager must
consider the economic environment when determining the price of a product, the
financial environment when determining the means of financing available to the
company, and the legal environment when developing organizational policies.
This unit provides an overview of the environment in which a business operates.
Concept
of Business
Let us first consider what a
business is. Any 'business organization is a part of the social and ecological
systems and is influenced by a variety of factors.
Let us examine three
fundamental propositions that are essential components of any business:
A
business is a type of economic activity: An economic activity is the
task of allocating resources to meet objectives. Consumption, production,
distribution, and exchange are all examples of economic activity. For example,
CG manufactures noodles, electronic devices, and so on, and you are the
consumer who consumes the products. Setting up the factory, purchasing inputs,
producing output, and distributing output through retailers are all part of the
process.
A business firm is a type of
economic unit that includes: An economic unit converts a flow of inputs, either
goods and services or a combination of both, into a flow of output. The size,
structure, location, and efficiency of the business firm under consideration
determine the nature of input requirements and the type of output flows.
Making
business decisions is an economic process: Business decision
making entails selecting one of several alternative courses of action, which is
the essence of all economic problems. Because resources are limited and have
multiple uses, the firm must consider the best way to allocate them. Decision
making is the process of selecting the best available alternative, regardless
of whether the decision variable is procurement or production, distribution or
sale, input or output. That is why it is a business venture.
Managers everywhere face a
variety of situations that necessitate decision-making ability. The nature of
most problems is making the best of limited resources. The following are the
most important decisions for a successful business:
1.
What business am I in?
2.
Who are my target customers?
3.
Where/When/ How to do the business?
4. Do
I expand?
5. If
yes, where and by how much?
All of these concerns stem from
a variety of factors collectively known as the business environment. The
effectiveness of the interaction between the business firm and its environment
determines the business's success or failure. A firm's basic job is to identify
the environment and formulate policies in accordance with the forces that
operate in the environment.
Levels of Business Environment
Managers must be capable of
dealing with the environment because the business firm adapts to it. Different
criteria can be applied to the business environment. We can discuss the past,
present, and future business environments based on time. Based on space, we can
consider the local, regional, national, and international business
environments. We can distinguish between the market and non-market environments
of business based on forces. The environment can also be evaluated
quantitatively or qualitatively based on data. We can also specify the economic
and non-economic environment of business based on economic or non-economic factors.
A
firm's survival and success are also determined by two sets of factors:
internal factors (the internal environment) and external factors (the external
environment). The external environment is divided into two parts: business
opportunities and business threats.
Internal and external factors
Internal factors are generally
regarded as controllable because the company has control over them and can
change or modify them to suit the environment.
External factors, on the other
hand, are beyond a company's control. External factors such as economic
factors, socio-cultural factors, government and legal factors, demographic and
geo-physical factors, and so on are generally regarded as uncontrollable.
Although the business
environment includes both the internal and external environments, many people
limit the term to the business's external environment.
Internal environment
Internally, an organization can
be thought of as a resource conversion machine that takes inputs (labor, money,
materials, and equipment) from the external environment, converts them into
useful products, goods, and services, and makes them available to customers as
outputs. If the organization is to survive and thrive, it must constantly
monitor and adapt to its surroundings. Environmental disruptions may portend
grave dangers or new opportunities. A successful organization will recognize,
assess, and respond to its environment's various opportunities and threats.
The internal environment
encompasses all of the factors that the organization has control over. These
factors are typically technological advancement, e-commerce, and business
expansion.
Here we will look at some of
the factors that make up the internal environment:
Value
System: The founders' value system influences the choice of
business, mission and objectives of the organization, business policies and practices.
Many businesses consider ethical standards when selecting suppliers,
distributors, and collaborators, among other things.
Vision,
Mission, and Objectives: The Company’s vision, mission, and
objectives guide its business philosophy, policy development direction,
priorities, and so on.
Management
Structure and Nature: Some management structures delay decision
making, while others allow for quick decision making. The organizational
structure, level of management professionalism, and other factors all have a
significant impact on business decisions.
Internal
Power Relationship: Within an organization, the relationship
between the Board of Directors and the Chief Executive Officer is frequently a
critical factor. The support that top management receives from various levels
of employees, shareholders, and so on has a significant impact on the decisions
that are made.
Human
Resources: This category includes human resource characteristics such
as skills, morale, commitment, attitude, and so on. People's initiative,
resistance, and involvement at various levels in an organization vary across organizations.
Company
Image and Brand Equity: A company's image or brand equity is very
important when trying to raise funds, form joint ventures, or enter into sales
or purchase contracts.
Miscellaneous
Factors: Physical assets and facilities such as technology, production
facilities, and so on are critical. R&D facilities typically determine how
prepared a company is to innovate and compete. Marketing Resources and
Financial Factors are also critical components of the internal business
environment.
External environment
An organization
operates within the larger framework of the external environment, which shapes
the organization's opportunities and poses threats. The external environment is
a collection of complex, rapidly changing, and significant institutions and
forces that influence an organization's ability to serve its customers. An organization
does not control external forces, but they can be influenced or affected by it.
Organizations must understand the environmental conditions because they
influence strategy decisions. The external environment has a significant impact
on marketing decisions. Successful organizations scan their external
environment in order to profitably respond to unmet needs and trends in their
target markets.
The
external environment includes factors such as social, legal, technological, and
political factors that are usually uncontrollable within the organization. The
external environment consists of both the micro and macro environments.
Individual suppliers, customers, competitors, and so on form the micro
environment. The microenvironment, on the other hand, is made up of natural,
technological, political, cultural, and demographic forces. Many times, if the
micro elements differ between firms, it has a significant impact on the firm's
success. If, on the other hand, two firms' environments are identical, the
difference lies in the relative effectiveness in dealing with the various
elements.
External Micro Environment
The
external microenvironment consists of forces that are part of a company's
marketing process but are not part of the company itself. The organization's
market, producer suppliers, and marketing intermediaries are examples of micro
environmental forces. While these are external forces, the organization has
more control over them than forces in the macro environment. Let us look at the
various External Factors that influence the business environment.
Suppliers:
Suppliers provide a company with inputs such as raw materials and components.
Suppliers are businesses and individuals who provide the resources required to
create goods and services. They are critical to a company's marketing success
and a vital link in its value delivery system. Uncertainty in supply would
imply uncertainty in production; thus, supplies are a critical component of the
environment. It is risky to rely on a single supplier because any problems with
him will have an impact on the performance of your own company. More issues may
arise if the resource to be supplied is naturally scarce. As a result, there is
no doubt that the role of suppliers is crucial in determining the nature of the
business environment.
Marketing intermediaries: Marketing intermediaries, like suppliers, are an important
part of the system that provide value to customers. Marketing intermediaries
are independent organizations that help products flow from the marketing organization
to its markets. They are the "companies that assist the company in
promoting, selling, and distributing goods to final buyers." They are
middlemen or agents, marketing research companies, media companies, and
consulting firms. In addition, financial intermediaries who insure business
risks are included. A distribution channel is made up of the intermediaries who
stand between an organization and its markets. Middlemen
are among them (wholesalers and retailers who buy and resell merchandise).
Physical distribution companies assist organizations in stocking and moving
products from their points of origin to their final destinations. Warehouses
store and protect goods before transporting them to their final destination.
Marketing service agencies, which include marketing research firms, advertising
agencies, and media firms, assist organizations in targeting and promoting
their products. Financial intermediaries, which include banks, credit unions,
and insurance companies, assist with finance transactions and insure against
risks. They all serve to connect the final customers to the company. These intermediaries'
performance and attitude have an impact on the business environment.
Customers:
Creating and retaining customers is yet another key to any organization's
success. Customer sensitivity must be monitored to ensure success. Customers'
needs are becoming more global as globalization and more effective advertising
become more prevalent, and markets become more open. As a result, companies
should consider not only the global needs of consumers, but also those
consumers who may be resistant to newer trends. Understanding customers is thus
an important aspect of the business environment.
Market:
Companies keep a close eye on their customer bases in order to adapt to
changing tastes and preferences. A market is made up of people or organizations
who have needs to be met, money to spend, and the willingness to spend it. Each
target market has unique requirements that must be met. It is critical for a
company to understand its customers, how to reach them, and when their needs
change in order to adjust its marketing efforts accordingly. All marketing
decisions in an organization are centered on the market.
Competitors: Understanding competitors, their moves, research focus,
and innovations is critical; otherwise, in this growing era of newer products,
the company could face a total wipe-out if it is unable to keep up in the race.
Financiers: The financiers' financing capabilities, policies,
strategies, and attitudes are all important factors in determining the internal
environment.
External Macro Environment
This
environment is made up of factors that interact with one another to create
forces that shape opportunities and pose threats to the company. The external microenvironment
includes all external institutions and forces that have an actual or potential interest
in or impact on the organization's ability to achieve its goals: competitive,
economic, technological, political, legal, demographic, cultural, and
ecosystem. Though uncontrollable, these forces necessitate a reaction in order
to maintain positive actions with the targeted markets. Instead of simply
watching and reacting to the forces in its marketing environment, an organization
with an environmental management perspective takes aggressive actions to
influence them.
The
economic environment consists of factors that influence consumer purchasing
power and spending patterns. Business cycles, inflation, unemployment, interest
rates, and income are all economic factors. Major economic variables changes
have a significant impact on the marketplace. For example, income influences
consumer spending, which influences organizational sales. According to Engel's
Laws, as income increases, the proportion of income spent on food decreases
while the proportion spent on housing remains constant.
Technological environment: This term refers to new technologies that create new
product and market opportunities. Technological advancements are the most
manageable and controllable force that marketer’s face. Organizations must be
aware of new technologies in order to capitalize on them and gain a competitive
advantage. Technology has a huge impact on people's lifestyles, purchasing
habits, and the economy. Technological advancements can create new industries,
drastically alter or destroy existing industries, and stimulate entirely new
markets. Because of the rapid pace at which technology evolves, organizations
must quickly adapt in terms of how they develop, price, distribute, and promote
their products.
Organizations
must operate within the framework of governmental regulations and legislation.
Subsidies, tariffs, import quotas, and industry deregulation are all part of
the government's relationship with organizations.
Political environment: It consists of governmental and special interest groups
that influence and limit the activities of various organizations and
individuals in a given society. Organizations hire lobbyists to influence
legislation and run advocacy advertisements to express their position on public
issues. Over the last three decades, special interest groups have grown in size
and power, putting additional constraints on marketers. Organizations are
expected to be ethical and responsible by the public. Green marketing, the use of recyclable or biodegradable
packing materials as part of a marketing strategy, is an example of a
marketer's response to special interests.
The
primary goals of business legislation are to protect companies from unfair
competition, consumers from unfair business practices, and society's interests
from unbridled business behavior. As organizations expand globally and face
governmental structures that differ greatly from those in their home countries,
the legal environment becomes more complicated.
Demographic Environment: It helps marketers identify current and potential
customers, where they are, and how many are likely to buy what the marketer is
selling. The study of human populations in terms of size, density, location,
age, gender, race, occupation, and other statistics is known as demography.
Changes in the demographic environment can present significant opportunities
and threats to the organization. Major demographic trends for marketers include
worldwide explosive population growth, a changing age, ethnic, and educational
mix; new types of households; and population geographical shifts.
Social/cultural environment: It is the most difficult and uncontrollable variable to
predict. Marketers must understand and respect the cultural values of the
environment in which they operate. The cultural environment consists of forces
that influence society's fundamental values, perceptions, preferences, and behaviors.
The values and beliefs of the United States include equality, achievement,
youth, and efficiency. Practicality, self-actualization, freedom,
humanitarianism, environmental mastery, patriotism, individualism, religious
and moral orientation, progress, materialism, social interaction, conformity,
courage, and acceptance of responsibility are all examples of positive traits.
Changes in the social/cultural environment influence customer behavior, which
in turn influences product sales. Individuals changing their views of
themselves, others, and the world around them are examples of cultural trends,
as is the movement toward self-fulfillment, instant gratification, and
secularism.
Ecosystem environment: It refers to natural systems and their resources that
marketers require as inputs or are affected by marketing activities. In recent
years, there has been an increase in green marketing and environmental concern
about the physical environment. Organizations can use renewable resources (such
as forests) and alternatives (such as solar and wind energy) to avoid raw
material shortages (such as oil and coal). Organizations can reduce their
energy consumption by increasing efficiency. Goodwill can be built by
voluntarily participating in natural resource pollution prevention activities.
Global Environment: The economic conditions in other countries may have an impact on the business. The term "global environment" refers to global factors that are important to business. Certain events, such as a rise in crude oil prices, can have a significant global impact that affects all nations. Uncertainties in the business environment are created by international political factors such as wars or political tensions.
