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.
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Read more: http://www.ehow.com/list_7399326_factors-affecting-economic-environment-business.html#ixzz2x38l8wPt
The business environment or the
external forces acting on the business consists of a large number of forces.
These
are.
1. Demographic
2. Economic
3. Geographical
4. Ecological
5. Social
and Cultural
6. Political
& Legal
7. Technological
1. Demographic Factors:
Demography
is a study of human population with reference to its size, density,
distribution and other connected vital statistics. This information is very
essential in modern days for planning and development and also for framing laws
relating to society and business. The density of population, the extent of
their standard of living, the level of their education and the nature of their
occupation etc., greatly influence the type of business the entrepreneurs could
undertake. The business units require customers for its survival and growth;
naturally business can thrive in populace regions, though now-a day’s
transportation helps a lot in bringing the commodities to the scarcely
populated areas.
2. Economic Factors:
The
business enterprise is affected by various economic forces which cannot be
controlled by the business. These economic forces, can be divided into two
categories, ie. Demand Force and Competitive Force. For a business firm to
survive and thrive, it should have adequate demand for its products. At the
same time, the firm has to complete with the rival firm producing similar
products or substitute products.
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.
3. Geographical and Ecological Environment:
§ Geographical conditions,
to a greater extent, influence the type of industries and business in a region.
Generally, the people of a particular geographical region will have similar tastes,
preferences and requirements. The geographical situation, the physical feature,
the climate, rainfall, humidity, the vegetation, etc., decide the type of
living in a particular region and only those industries which could cater to
the needs of the people, could develop. In other words, geographical conditions
exert profound influence on the location of the business.
§ Ecological is a study “dealing with
the interaction of living organism with each other and with their non-living
environment”. It is a science telling about the relationship of all living
beings. (ie., human beings, animals, plants) with non- living beings (air,
water, soil represented by atmosphere, rivers, lakes, mountains and land).
4. Social and Cultural Environment:
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.
5. Political and Legal Environment:
All
business firms are directly affected to a greater or lesser degree by the
government and its programmes. Political forces will decide the nature of
business, programmes and projects to be undertaken for the development of the
country. 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.
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.
6. Technological Environment
Technology
means “the systematic knowledge of the industrial arts”. ‘Technique’ denotes
the method of performance. These two are increasingly used in modern literature
on industrial production. The present age is the age of technology. Technology
affects the business in two ways.
§ Its
impact on the society and
§ Its
impact on business operation.
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