Note For Students

Concept of Business Environment

A business firm is an open system. It gets resources from the environment and supplies its goods and services to the environment. There are different levels of environmental forces. Some are close and internal forces whereas others are external forces. External forces may be related to national level, regional level or international level. These environmental forces provide opportunities or threats to the business community. Every business organization tries to grasp the available opportunities and face the threats that emerge from the business environment. Business organizations cannot change the external environment but they just react. They change their internal business components (internal environment) to grasp the external opportunities and face the external environmental threats. It is, therefore, very important to analyze business environment to survive and to get success for a business in its industry. It is, therefore, a vital role of managers to analyze business environment so that they could pursue effective business strategy. A business firm gets human resources, capital, technology, information, energy, and raw materials from society. It follows government rules and regulations, social norms and cultural values, regional treaty and global alignment, economic rules and tax policies of the government. Thus, a business organization is a dynamic entity because it operates in a dynamic business environment.

The economic environment of business is affected by internal and external factors. An internal factor that affects the business environment is the cost of labor, materials, processes and procedures. Internal factors can be improved through company projects. On the other hand, external factors can also affect a company's business environment and the business has less control over these factors. The primary influences on a business are: political, economical, social and technological.

1. Political

The political environment affects the economic environment of businesses. Legislators at the local, state and federal levels may provide incentives or tax breaks to companies or they can impose regulations that restrict business transactions. In the latter case, for example, if a political body states that a company must include a certain chemical in its product, the cost of the product differs. The company passes those costs on to the customer in the form of higher prices. The customer must determine whether he wants to purchase that product. If he does not purchase the product, then the company does not receive the revenue. If a large number of customers decide not to purchase the product, the company may need to layoff employees.

These political forces can be classified as long term forces, quick changes, cyclical changes and regional factors.

§  Long term forces denote the secular trends in business activities due to the political conditions prevailing and the adoption of a particular line of policy in business.

§  Quick Changes consist of sudden political changes due to army coup or revolt or capturing of the government machinery by the dissident group. The quick change may also be the result of proclamation of ‘emergency’ or ‘Martial Law’ due to sudden outbreak of war with a belligerent nation. In all these cases, the business manager has to take quick decisions to adopt his business to the changed environment.

§  Cyclical Changes denote periodical anticipated changes like ’General Election’ which may change the government and consequent change in plans and programmes as well as priorities by the new Government.

Regional Factors the regional consideration may dominate the political scene. Development of agricultural or development of an industrially backward region may draw the attention of politicians and government. Consequently, special legislations or policies will be framed to help the backward regions or sector. In such changes, the business has to adopt itself by studying and estimating the risks and dangers involved in taking decisions.

Issues

Most issues in the legal/political environment centre around the following:-

i) "Institutional environment" - made up of political, social and legal ground rules within which the global marketer must operate.

ii) Property rights - patents, trademarks.

iii) Taxation - what taxation schemes will be faced abroad?

iv) Recourse - possibility and length of action with the possibility of image damaging necessitating arbitration.

v) Movement of equity and expropriation threats - often necessitating protocols or the signing of trade frameworking agreements.

Legal Environment:

Business in a country can be started and nurtured to grow into big business only within the legal system of the country. In this connection, all countries of the word have a separate set of laws for the control and direction of business. The business law of the country is a complex system of regulations and intervention that form the legal environment of the business. All business managers should have the knowledge of business law for taking management decision.

2. Economic Factors:

The larger economic environment of a society is a factor that can affect a company's business environment. During a recession, consumers spend less on optional items such as cars and appliances. As a result, the business environment suffers. On the other hand, if the economic environment is one of prosperity, consumers are more likely to spend money, not just on necessities, but larger items as well.

Economic forces affecting demand:

For customers to buy the commodity of the firm, they should have the ability to buy and willingness to buy. The ability to buy a commodity depends on the income of the customer, to be very precise, the disposable income of the customer. Out of the total income, the individual has to pay taxes due to the government and the disposable income will be less if the taxes are high. Secondly, if the individual wants to save more, the amount for spending will be less. Thus, the ability to buy a commodity depends on the a) Total income earned out of the employment of the individual b) The taxes of the government and c) The savings of the individual.

An increase in tax will reduce the demand for the commodity. The attitude of the individual towards ‘Saving’ will affect the demand. A change in ‘Price’ of the commodity will affect the demand. Expectation of a further change in price or change in taxes will also affect the demand.

§  Competitive forces: The competitive tools are price cutting, advertisement, product differentiation, marketing strategies and consumer service.

§  Price cutting: Price cutting or price reduction is a method which has to be adopted very cautiously, as it may ultimately lead to price-war between firms competing, resulting in reduction of profits.

§  Advertisement: Advertisements in modern days have become a very powerful tool in persuading the consumers of a product to a particular brand. In monopolistic competition, a large share of the market is entrenched by firms making effective and aggressive advertisement.

§  Product differentiation: A firm tries to get competitive strength by differentiating its product from those of its rivals. By having special design, colour, packing and features, the firm tries to get competitive edges.

§  Marketing strategies and Consumer Service: Modern firm adopt various types of marketing strategies to create market for their products. Installment system, credit system, hire-purchase, etc., are the prominent ways by which firms try to cut through the poor segments of the society and convert them their customers. Besides customer service like, free door delivery, quick service, after sales service, guarantee from defects up to a certain period are adopted to have more and more demand for their commodities.

Economic factors affecting business

·         Business cycle of economy

·         Inflation rate

·         Interest rate of market

·         Unemployment rate

·         Disposable income

·         Taxes

·         Tariffs

3. Social and Cultural Environment

Social factors that affect the economic environment of a business are the cultural influences of the time. For example, a fashion designer that creates bell bottom, striped pants will not succeed in an environment where straight-leg, solid colored pants are desired. A social environment that tends to be more conservative will not support styles that appear to be trendy. The fashion designer's business will suffer if he does not change the clothing style. The same would apply to the manufacturers that produce and stores that sell these wares.

Social and Cultural attitudes of a region influence the business organizations of the region influence the business organizations of the region in a verity of ways. The business practices and the management technique of the organization should cope with the social and cultural attitudes of the people.

The modern business is a social system in itself, but it is also part of a larger social system represented by society in general. Clearly, there should be some reciprocal relationship between business and this larger society. To put it shortly, the business should adopt itself to the social and cultural environment.

It is the class structure of the society. It tells about the social roles and organizations and the development of social institutions. The class-structure depend upon the occupation of the people, their education, income level, social status, their mobility, their attitude towards living, work and social relationship and above all, their attitude towards business.

Every society develops its own ‘culture’ which means how the members of that society behave and interact with each other in society, as well as outside society. The term culture includes values, norms, customs, ethics, goals and other accepted behavior patterns.

4. Technological Environment

Innovation and technology affect business environments. As technology advances, a business is forced to keep pace. For example, when computers were first invented, they were the size of a room. Users were forced to employ punch cards to perform basic functions. Today, computers that are much more powerful can fit into the palm of a hand. Businesses that do not keep up with technology risk increased costs of production and higher prices. If the company's cost to produce a product or service outpaces competitors, the company may soon find itself out of business.

Technology can be defined as the method or technique for converting inputs to outputs in accomplishing a specific task. Thus, the terms 'method' and 'technique' refer not only to the knowledge but also to the skills and the means for accomplishing a task. Technological innovation, then, refers to the increase in knowledge, the improvement in skills, or the discovery of a new or improved means that extends people's ability to achieve a given task.

Technology can be classified in several ways. For example, blueprints, machinery, equipment and other capital goods are sometimes referred to as hard technology while soft technology includes management know-how, finance, marketing and administrative techniques. When a relatively primitive technology is used in the production process, the technology is usually referred to as labour-intensive. A highly advanced technology, on the other hand, is generally termed capital-intensive.

Changes in the technological environment have had some of the most dramatic effects on business. A company may be thoroughly committed to a particular type of technology, and may have made major investments in equipment and training only to see a new, more innovative and cost-effective technology emerge.

Technology is a critical factor in economic development. Because of the advances of international communication, the increasing economic interdependence of nations, and the serious scarcity of vital natural resources, the transfer of technology has become an important preoccupation of both industrialised and developing countries. For many industrialised countries, the changes in the technological environment over the last 30 years have been immense particularly in such areas as chemicals, drugs, and electronics. It is vital that organisations stay abreast of these changes - not only because this will allow them to incorporate new and innovative designs into their products, but also because it will give them a firmer base from which to anticipate and counteract competition from other organisations.

Technology transfer is a complex, time-consuming and costly process, and the successful implementation of such a process demands continuous communication and co-operation between the parties involved. Furthermore, technology transfer cannot be effective if it experiences conflict with the economic and social needs of the recipient country. The agricultural development of north-eastern Brazil, for example, was largely financed by international banks and financial organisations in the 1960's. Much of this region had been inhabited by Brazilian aborigines but it was owned by a small number of wealthy landowners. The introduction of large-scale mechanical agricultural technology in areas of the tropical rain forest of the Amazon has caused serious environmental damage such as erosion of tropical topsoil and the destruction of the natural environment of numerous birds and animals, and has displaced a large number of the local inhabitants of the forests.

Corporate social responsibility - What does it mean?

One of the most frequently asked questions at this site - and probably for all those individuals and organisations dealing with CSR issues is the obvious - just what does 'Corporate Social Responsibility' mean anyway? Is it a stalking horse for an anti-corporate agenda? Something which, like original sin, you can never escape? Or what?

Different organisations have framed different definitions - although there is considerable common ground between them. My own definition is that CSR is about how companies manage the business processes to produce an overall positive impact on society.

Companies need to answer to two aspects of their operations. 1. The quality of their management - both in terms of people and processes (the inner circle). 2. The nature of, and quantity of their impact on society in the various areas.

Outside stakeholders are taking an increasing interest in the activity of the company. Most look to the outer circle - what the company has actually done, good or bad, in terms of its products and services, in terms of its impact on the environment and on local communities, or in how it treats and develops its workforce. Out of the various stakeholders, it is financial analysts who are predominantly focused - as well as past financial performance - on quality of management as an indicator of likely future performance.

Business ethics

Ethics is a branch of social science. It deals with moral principles and social values. It helps us to classify, what is good and what is bad? It tells us to do good things and avoid doing bad things.So, ethics separate, good and bad, right and wrong, fair and unfair, moral and immoral and proper and improper human action.

Ethical questions range from practical, narrowly defined issues, such as a company's obligation to be honest with its customers, to broader social and philosophical questions, such as a company's responsibility to preserve the environment and protect employee rights. Many ethical conflicts develop from conflicts between the differing interests of company owners and their workers, customers, and surrounding community. Managers must balance the ideal against the practical—the need to produce a reasonable profit for the company's shareholders with honesty in business practices, safety in the workplace, and larger environmental and social issues. Ethical issues in business have become more complicated because of the global and diversified nature of many large corporations and because of the complexity of government regulations that define the limits of criminal behavior. For example, multinational corporations operate in countries where bribery, sexual harassment, racial discrimination, and lack of concern for the environment are neither illegal nor unethical or unusual. The company must decide whether to adhere to constant ethical principles or to adjust to the local rules to maximize profits. As the costs of corporate and white-collar crime can be high, both for society and individual businesses, many business and trade associations have established ethical codes for companies, managers, and employees.

Need or Importance of Business Ethics

These twelve points below discuss the need, importance of business ethics.

1.    Stop business malpractices: Some unscrupulous businessmen do  malpractices by indulging in unfair trade practices like black-marketing, artificial high pricing, adulteration, cheating in weights and measures, selling of duplicate and harmful products, hoarding, etc. These business malpractices are harmful to the consumers. Business ethics help to stop these business malpractices.

2.    Improve customers' confidence : Business ethics are needed to improve the customers' confidence about the quality, quantity, price, etc. of the products. The customers have more trust and confidence in the businessmen who follow ethical rules. They feel that such businessmen will not cheat them.

3.    Survival of business: Business ethics are mandatory for the survival of business. The businessmen who do not follow it will have short-term success, but they will fail in the long run. This is because they can cheat a consumer only once. After that, the consumer will not buy goods from that businessman. He will also tell others not to buy from that businessman. So this will defame his image and provoke a negative publicity. This will result in failure of the business. Therefore, if the businessmen do not follow ethical rules, he will fail in the market. So, it is always better to follow appropriate code of conduct to survive in the market.

4.    Safeguarding consumers' rights: The consumer has many rights such as right to health and safety, right to be informed, right to choose, right to be heard, right to redress, etc. But many businessmen do not respect and protect these rights. Business ethics are must to safeguard these rights of the consumers.

5.    Protecting employees and shareholders: Business ethics are required to protect the interest of employees, shareholders, competitors, dealers, suppliers, etc. It protects them from exploitation through unfair trade practices.

6.    Develops good relations: Business ethics are important to develop good and friendly relations between business and society. This will result in a regular supply of good quality goods and services at low prices to the society. It will also result in profits for the businesses thereby resulting in growth of economy.

7.    Creates good image: Business ethics create a good image for the business and businessmen. If the businessmen follow all ethical rules, then they will be fully accepted and not criticized by the society. The society will always support those businessmen who follow this necessary code of conduct.

8.    Smooth functioning: If the business follows all the business ethics, then the employees, shareholders, consumers, dealers and suppliers will all be happy. So they will give full cooperation to the business. This will result in smooth functioning of the business. So, the business will grow, expand and diversify easily and quickly. It will have more sales and more profits.

9.    Consumer movement: Business ethics are gaining importance because of the growth of the consumer movement. Today, the consumers are aware of their rights. Now they are more organized and hence cannot be cheated easily. They take actions against those businessmen who indulge in bad business practices. They boycott poor quality, harmful, high-priced and counterfeit (duplicate) goods. Therefore, the only way to survive in business is to be honest and fair.

10. Consumer satisfaction: Today, the consumer is the king of the market. Any business simply cannot survive without the consumers. Therefore, the main aim or objective of business is consumer satisfaction. If the consumer is not satisfied, then there will be no sales and thus no profits too. Consumer will be satisfied only if the business follows all the business ethics, and hence are highly needed.

11. Importance of labor: Labor, i.e. employees or workers play a very crucial role in the success of a business. Therefore, business must use business ethics while dealing with the employees. The business must give them proper wages and salaries and provide them with better working conditions. There must be good relations between employer and employees. The employees must also be given proper welfare facilities.

12. Healthy competition: The business must use business ethics while dealing with the competitors. They must have healthy competition with the competitors. They must not do cut-throat competition. Similarly, they must give equal opportunities to small-scale business. They must avoid monopoly. This is because a monopoly is harmful to the consumers.