INTRODUCTION TO THE BUSINESS ENVIRONMENT
In modern times, where businesses are the central part of the economy, it is necessary to know their dependence and suitability. Business significant activity deals with the people and fulfils their needs and wants to earn a profit. For social welfare, these businesses cannot run or operate alone. Their activities are interlinked with the outside environment and surroundings, as the environment is the ultimate source that helps in the development process of the business. The success of every business intensively depends on the suitability of the domain. As the environment is the key to success, in the consciousness of business survival and growth, every organization has to adapt itself to the ‘Business Environment.’
After knowing about the business and its significant dependence on the surrounding environment, let’s discuss the term business environment.
BUSINESS ENVIRONMENT
Business environment refers to the total of all individuals, institutions, and other forces that belong outside the control of the business environment but that may directly affect the performance or operation of enterprises. All such external forces affect the business operation, and the firm must effectively cope with them for better survival growth and to get the optimum result of operations. Mainly, there are economic, social, political, technological, and other factors that operate outside a business firm.
There are generally two kinds of external forces categorized as follows:
SPECIFIC FORCE–Â These are the forces that directly and immediately affect the operation and performance of an enterprise in their daily or day-to-day working, like investors, customers, competitors, and suppliers. Suppose the customer’s taste changes, and now they prefer another brand instead of yours; that is what directly affects the enterprise by a massive decline in demand for the products or services. It leads to a decrease in sales, which ultimately affects the profit.
GENERAL FORCE–Â These are the forces that indirectly and after some time affect the operations and performance of enterprises, like social, political, legal, and technological conditions. Suppose the increase in taxes directly affects the price of goods and makes products expensive to buy, which an average customer would not be able to afford. That will cause a massive decline in demand for the development, and therefore, sales would turn down and ultimately affect the profit.Â
There are some examples of changing business environments as follows:
- There may be up-gradation in the technology that would make existing products need to be updated.
- There may be a change of fashion trend in the market which swift the customer demands.
- There may be the introduction of competition that diverts the customer’s preference or choices and reduces the firms’ profit margins.
- There may be increases in taxes, which make the product expensive, and the average customer would need more money to afford them.
As in the era of different and changing customer desires and wants, the business environment keeps changing, whether in terms of technological up-gradation, shifts in consumer preference or introduction of competition in the market, government taxation policy, or industrial policy renewal. Thus, the business environment is dynamic, so enterprises must be aware of these external forces and be engaged to adapt to the changing environment. Management is required to remain highly cautious, alert, and adaptable. The enterprises must set goals and formulate plans as per the changing business environment to succeed in the long run. The business environment is uncertain; therefore, the future cannot be predicted except by assuming the threats. Management must be strong enough to identify opportunities at the changing time to get the first-mover advantage. Generally, opportunities mean the positive change by external forces which help an organization to improve its performance. The external environment provides various opportunities for the organizations besides the harmful impact on their performance. In the environment change times, a company named Maruti Udyog became the leaders in the small car market because it first identified the need for the car at that time. Since its environment is a source of both opportunity and threats for an enterprise, understanding and analyzing them gives the base for planning and policy formulation to cope with such changes, which leads to improving the performance of enterprises.
Now, move further to know more about the dimensions of the business environment.
DIMENSIONS OF BUSINESS ENVIRONMENT
There are various dimension of the business environment in terms of the general environment categorized into five subheads: economic environment, social environment, technological environment, political environment, and legal environment. Let’s get detailed information about them:
1. ECONOMIC ENVIRONMENT
The economic environment refers to all those external forces that have a financial impact on business activities or performance. The economic climate means the mixture of all the economic factor, such as inflation, income, employment rate, etc., which affect consumers’ buying behaviour and thus impact businesses. The economic environment consist of economic factors that influence consumers’ buying ability and the marketable capability of enterprises. Economic factors can either serve as an opportunity or as a threat to a business enterprise.
There are various sources by which consumer and company behaviour changes. Let’s get detailed informationÂ
Increased demand for the product could result in additional profits, whereas a decrease in the product leads to heavy losses. Raising demands for development leads to increased sales, whereas the decline in the order of creation leads to a decrease in the deal, which ultimately affects the profit fluctuations.
The profit margin of the enterprise will be low if it has a small market size, which means the product market has low potential customers. As per the market size theory, if the product is affordable and useable, it will gain a higher profit margin. Otherwise, it will get a low profit margin like a medical company sells wheelchairs, etc. equipment. Only the injured or affected customers will buy them healthier and won’t need them, which leads to a low-profit margin.
The production of enterprises will close down if their suppliers unexpectedly stop providing supplies of raw materials needed to manufacture a product. In the same way, the increase in the price of stores by the suppliers will lead to a rise in the production cost and will increase the enterprise’s expenditure.
Income is the total earnings of the person. Income directly affects the buying ability of the consumer, which ultimately affects the enterprise’s sales of the product or profit. There stands a direct relationship between the buying capability of a person and his income. For example, people with low income are most likely to buy only goods and services necessary for living and spend little money on entertainment and luxurious items. A person with a low income will prefer to spend money on the essential things needed for living: a medium house, food, education, etc., rather than buying an expensive or luxurious car.
On the other hand, people with high incomes are most likely to spend more money on costly and luxury services and goods. They will spend more money on expensive goods and services, branded clothes, etc. They search for expensive, good quality, and branded goods. They prefer to eat at restaurants rather than at their homes. Consequently, it is right to say that the population’s high income raises the demand for high-priced products and branded companies, and low pay increases the need for primary and cheap products and companies.
The economy’s inflation rate affects the consumer’s ability to buy goods and services and business profit or sales. Like in the case of inflation in the economy, people prefer to spend their money on the necessary goods and services only and avoid spending on extraordinary goods and services. The inflation rate hurts organizations as it leads to demise in the demands, ultimately affecting their sales and profit. For example, people will avoid travelling abroad at the time of inflation in the tickets, and people will avoid going to restaurants. The inflation rate impacts the business which deals in or sells branded goods. As a result, inflation is unwanted by both consumers as well as enterprises.
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Increasing Interest Rates
The Increasing interest rates in the economy also impact businesses, mainly those who grant loans to people or institutions at some specific interest rate, such as banks and other financial institutions. For example, the people who take a home loan to purchase a house, increase the interest rate, will avoid the plan to take a home loan and will search for other substitutes. This leads to a decrease in the demands of such financial institutions, which ultimately affects their sales and profit. That’s how both businesses and customers are affected by these changes in the interest rate.
One another factor that impacts the economic environment is the unemployment level of the country or economy. The countries which have an unemployment level suffer from a weaker economic environment. If the people live unemployed for a more extended period, they will face problems such as lack of money. By which they would be unable to spend money on the goods and services. For example, if people do not buy, companies will not appoint people to engrave costs of production or expenses of the company. And if companies do not provide employment, the unemployment levels will increase, which will decrease their demands for the product and economic growth of the country. Thus, it is one of the essential responsibilities of the government to create jobs in the country to decrease the unemployment level in the country so that the country’s economic growth can be developed.
The introduction of a high taxation policy in the country could badly impact the economic environment. As the increase in taxes leads to a rise in the cost of production, businesses have to increase the prices of their products to cover the raised cost of production. Moreover, that’s how the customer becomes the ultimate cost bearer. In this sense, customers with less disposable income avoid or reduce buying the products as they can’t afford the prices of products. This reflects that not only the consumers but also businesses suffer from this impact on the economic environment.
Tariffs are those kinds of taxes that are imposed on imported goods. This means at the time of buying goods from the international market. Tariffs have a converse impact on the sales of goods rather than taxes. The low tariff rates of the country will force People to import more goods from foreign countries, and the local market will be swamped with cheap foreign products. It will impact the sale of local products of the nation as they will suffer from foreign competition. For that reason, high tariff rates are preferred; as a result, there will be less import of foreign product, and people will buy more local effects of their country and avoid buying expensive foreign products. This will not only facilitate businesses but also strengthen the country’s economy as the money will remain in the country, which leads to a better financial status of the country. High tariff rates also motivate entrepreneurs to start new businesses and sell products that are only offered in the foreign market and not in the country. By this, we can say that high tariff rates are suitable for the economic environment in this sense. It leads to the development of the country’s financial status.
One another factor, the cost of labour, badly impacts the economic environment of the business. The high cost of delivery means the work will be hired at high rates, which leads to a rise in the company’s cost of production. Through this, the prices of the product would fly at high speeds. This will make people avoid buying that product and start to search for cheaper alternatives to the product. This ultimately decreases the demand for development and leads to sales or profit reduction. That’s how the business will suffer from the negative impact of this increased cost of production.
The population factor has both good and bad impacts on the economic environment. Such as a high population means there are chances of getting skilled employees along with others. A high population results in intense competition, and people evenly get ready to work at lower wages, which results in business as they can employ more people to enhance their production. Nevertheless, a high population causes many other issues in the country—for example, unemployment and poverty lower per capita income. The income and capability of people reduce and, thus, their buying capacity, which impacts the economic environment. On the other side, underpopulation could be better. There will be a smaller number of consumers or population in the country, which leads to a decrease in the chances of getting skilled and unskilled employees. For that reason, it is essential to keep a balanced population in the country.
One another international market condition factor badly impacts the economic environment. For example, many businesses import and export goods from multinational enterprises or markets. The strain between two countries or the increased tariff rates increases the import cost. As a result, the cost of production also rises. Increased production cost leads to increases in the prices of products. When prices of products increase, people are likely to buy less, and through this, sales of the product get impacted or decline, which ultimately decreases the profit or earnings of the enterprises.
One more capital market factor impacts the economic environment. When the capital market or financial market is not good, people or enterprises rely more on natural and human resources for production. A healthy capital market result in lower dependence on foreign currency as they have their financial status better enough. The nation becomes self-sufficient, which results in a more developed country or economy.
In different countries, there are various economic laws, such as labour laws, competition laws, factory acts, commercial acts, industrial laws, company acts, etc., which impact the economic environment. Companies are required to set up their business within limits mentioned in the law, and violation of any rule can result in a penalty or the cancellation of a business license, which leads to a considerable investment loss for the investors. In accumulation to this, the government can introduce a new law that forces companies to modify their process or method of doing business, which badly impacts the business.
 Natural resources occupy a significant act in the business environment. Many business activities are reliant on natural resources. For example, fuel, water, resources, and weather reports like temperature, humidity, rainfall, etc., are the necessary natural resources that affect the manufacturing or production process. For example, the increase in the prices of vegetables and fruits would lead to raising the prices of food sold in hotels and shops.
2. SOCIAL ENVIRONMENT
The social environment refers to customs and traditions, value, culture, beliefs, norms, and ethics of the society or nation under which a business enterprise operates or functions. Here, these refer to the traditional practices that have lasted for decades or centuries. In the organization and business, there must be an understanding of the social environment as it helps determine the products and services standards of conduct that would be completely acceptable by the society because the product demand belongs to the society customers or people who are ultimately going to buy or use the product. And if the outcome does not favour society, then that’s where the product would suffer the profit by the massive decline in sales or no demand for the product.
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Social Cultural environment
The Social and cultural environment has an immense impact on the economic climate of business. People’s buying habits and choices are highly influenced by the culture they are born in and by the society in which they reside. Because of their beliefs and customs, only the individuals will adapt themselves, as they are part of it. Like, in the southern state of India, women preffered to wear traditional sarees, whereas western women preffered to buy Western clothes or dresses. Even the social-cultural environment impacts the manner in which products are fashioned. For example, a well-known American secondary company, PepsiCo, Frito, sells products like Lay’s, Fritos, Doritos, etc., and you get the difference in the flavour of their products from one country to another. In India, they offer spicy products, whereas, in America, the flavour of products is less spicy and as per preference and accordance to the taste of people living in that particular region. Such as Indians prefer more spicy food, whereas foreigners prefer less spicy food. That shows how the preference of customers from different religions deviates. Â
3. TECHNOLOGICAL ENVIRONMENT
The technological environment refers to the forces relating to scientific improvements and innovations that serve or give new ways or procedures to produce goods and services and new methods and techniques for operating a business. In today’s world, technology is changing faster with new and unique innovations to develop the country and reduce human needs. Now, companies are becoming more capital-intensive due to the high dependence on the machine. Changes in technology are more associated with better services to customers and cost reduction. This advanced technology produces new products and services with the latest production techniques and new ways of managing and controlling.
Innovation has both positive and negative impact on the technological environment. The invention produces risk to the previously established businesses. As many entrepreneurs come up with innovative business ideas, they give competitions to the already established businesses, which impact the sales of their products and ultimately results in reduced profit. On the other hand, if companies look to the lead and invest in research and development and develop innovative ideas to improve their products to fulfil the current requirements of customers, innovation also helps reduce production costs. For example, with the introduction of automation machines and gadgets, most of the work of production, which was earlier performed by labour, can now be performed by devices. This helps in lowering the labour wage expenses, which directly adds to profit. That shows how innovation helps reduce the cost of production and has negative impacts on businesses.
- Like earlier, black and white TV is now innovative as the colour and HD picture screen.
- Earlier manual photo-state machines are now innovated as electrostatic copies.
- An earlier visit to the reservation office is now innovated as the online booking of airline and railway tickets.Â
- Earlier button phones are now innovated as smartphones.
- Earlier regular watches are now innovated as smartwatches.
- Earlier, there were only computers, but because of innovation, laptops and tablets also existed.
- Earlier bulbs were innovated as LED lights.
4. POLITICAL ENVIRONMENT
The political environment refers to political conditions such as general stability and peace in the country and the specific attitude elected government representatives hold towards businesses. Generally, this factor shapes the environment within which the business organization operates or works. They formulate law and order. In the case of a stable government, it leads to motives. It encourages entrepreneurs or investors to invest and build up confidence in their rules or policies for businesses. At the same time, the unstable governments destroy the procedures and methods of conducting the companies, which shakes the spirit of the entrepreneurs and investors to invest in the business.Â
5. LEGAL ENVIRONMENT
The legal environment refers to the laws and various legislation and jurisdictions within which business transactions operate or take place. It mainly consists of the bill that the parliament and the court have passed or any state legislation. Generally, this legislation includes the rules, regulations, and laws that have to be followed by all the country’s organizations. And if any enterprises disagree with following the laws or disobeying the instructions made by the government, then it causes legal problems for the enterprises. Such laws made by the government are the Company Act, Factory Act, Trade Union Act, Consumer Protection Act, etc., which regulate enterprises. Apart from this, there are several other regulations like product standards, packaging, and promotion of the product. Â
Government policies also have an impact on the economic environment. Company might be required to change the production process according to the change in government policies. For example, companies are required to stop the production of certain drugs after the government banned them. In India, it’s mandatory to write the warning: “Tobacco is injurious to health” on the packet of tobacco products, etc.