Business Environment

What is business environment?Business environment includes the ‘climate’ or

set of conditions, economic, social, political or institutional which have a direct or indirect

bearing on the functioning of business

It signifies external forces, factors and institutions that are beyond the control of the business and they affect the functioning of a

business enterprise.

Thus it is the set of external factors, such as economic factors, social factors, political and legal factors,

demographic factors, technical factors etc., which are

uncontrollable in nature and affects the business decisions of

a firm.

BUSINESS DECISIONS

Economic factors

Social factors

Technological factors

Demographic factors

Legal factors

Political factors

Features of business environmenta.Business environment is the sum total of

all factors internal & external to the business firm that greatly influence their functioning

b.It covers factors and forces like customers, competitors, suppliers, government, and the social, cultural, political, technological and legal conditions.

Continued…

c. The changes in business environment are unpredictable.

d. Business Environment differs from place to place, region to region and country to country. Ex: Political conditions in India differ from those in Pakistan. Taste and values cherished by people in India and China vary considerably.

Importance of business environment

Business environment is complicated and active in nature and has a far-reaching impact on the survival and growth of the business.

a. Determining Opportunities and Threatsb. Giving Direction for Growthc. Continuous Learningd. Image Building

Continued…

e. Meeting Competition

f. Identifying Firm’s Strength and Weakness: Business environment helps to identify

Types of environment

Internal environment External environment

Micro environment Macro environment

ENVIRONMENT OF BUSINESS

Internal environment

Important internal factors which have a bearing on the decisions of a business firm are:

1. Value system2. Vision, mission and objectives3. Management structure and nature4. Internal power relationship5. Human resources6. Company image

Value system

The value system of the founders and those at the top has important bearing on the choice of business, the mission and objectives of the organization, business policies and practices and is an important factor contributing to success.

Vision, Mission & ObjectiveRanbaxy’s mission: “to become a research based international pharmaceutical company”-has driven it to enter the foreign markets and development.

Thus the business domain of the company, priorities, direction of development, business philosophy, business policy etc, are guided by the vision, mission and objectives of the company.

Management structure & natureOrganizational structure, composition of board of directors, extent of professionalisation of management sometime delay decision making while some others facilitate quick decision making.

Board of directors is the highest decision making body and it overseas performance of the organization and so its quality is very important.

The share holding pattern can also have important managerial implications.

Internal Power Relationship

The amount of support the top management enjoys from different levels of employees, shareholders and board of directors have important influence on the decisions and their implementation.

For example: relationship between the members of the board of director and between CEO.

Human resourcesThe characteristics of human resources like skill, quality, morale, commitment, attitude etc. could contribute to the strength and weakness of an organization

Ex: Some organizations find it difficult to carry out restructuring or modernization because of resistance by employees whereas they are smoothly done in some others.

Company Image

While raising finance, forming joint ventures or other alliances, soliciting marketing intermediaries, entering purchase or sale contracts, launching new products etc. the image of the company matters the most.

Miscellaneous factors• Physical assets and facilities like production

capacity, technology and efficiency of the productive apparatus, distribution logistics etc., affect competitiveness of a firm.

• R&D, technological capabilities determine a company’s ability to innovate and compete.

• Marketing resources like quality of marketing men, distribution network etc. are important for brand extension, new product introduction etc.

Continued….

• Financial factors and policies, financial position, capital structure affect business performances, strategies and decisions.

Continued….

7. Miscellaneous factors

• Physical assets and facilities • R & D and technological capabilities• Marketing resources• Financial factors

External environment

• Micro environment consists of the actors in the company’s immediate environment that affect the performance of the company. They are more intimately linked with the company.

• Macro environment consists of larger societal forces that affect all the actors in the company’s micro environment.

Micro environment

• Suppliers• Customers• Competitors• Marketing intermediaries• Financiers• Public

• Suppliers: It has been observed that India maintained indigenous stocks of 3-4 months and imported stock of 9 months as against an average of a few hours to two weeks in Japan.

• Steps taken:1. Vendor development2. Backward integration3. Removal of dependence on single

supplier4. Move towards relationship marketing

Customers: In choosing the customer segments a company should consider factors like;

1. relative profitability 2. dependability3. stability of demand4. growth prospects 5. extent of competition.The business firm should not be dependent on a

single customer

With globalization Indians have become more exposed to global competition.

• Competitors: An implication of customer demand is that a marketer should strive to create primary and selective demand for its products.

• However many companies have restructured their business portfolio and strategies.

• Seller’s market existed buyer’s market has emerged.

• Firms that aid a company in promoting, selling and distributing its goods to final portfolio constitute the marketing intermediaries.

• It includes agents, merchants who help the company find customers or close sales with the.

• Choice of wrong marketing intermediary may land up the business in heavy losses.

• Financiers: Their policies, strategies, attitudes, ability to provide non-financial assistance are much more important than the financing capabilities.

• Public : A public is any group that has an actual or potential interest in or impact on an organization’s ability to achieve its interests. Ex-media, citizens, local public etc.

• Companies affected by leading daily which tries to bring down share prices of the company.

• NGOs have been protesting against child labour, cruelty against animals, environmental problems, deindustrialization resulting from imports etc.

• However some of publics are opportunities for the business when they can be used to disseminate useful information.

• Thus a company should have good relation with local publics so that they can work for mutual benefit.

Input suppliers

Workers & their unions

Public

Competitors

Marketing intermediaries

Customers

BUSINESS

Micro environment Micro environment

Macro environment

• Economic environment• Political environment• Regulatory environment• Demographic environment• Technological environment• Natural environment• Global environment

Economic environment• Business is dependent on economic

environment for inputs.

• Business is dependent on economic environment for selling its finished goods.

• Economists are supplying macro economic forecasts to various industrial establishments.

Political environment• It includes factors such as characteristics

and policies of the political parties, nature of Constitution and government system relating to business policies and regulations.

• Important economic policies such as industrial policy, policy towards foreign capital and technology, fiscal policy and foreign trade policy are often political decisions.

Continued….• The government expenditure forms a

substantial percentage of GDP in the developed and developing countries.

• Government normally plays four important roles in an economy in relation to business

1. Regulatory role2. Promotional role3. Entrepreneurial role4. Planning role

Regulatory environment

• Government regulation of business may cover1. Entry into business2. Reservation of industries to small scale, co-

operative sectors, licensing system3. Ceilings on profit margins, dividend4. Restriction on intra-corporate investments

• Government regulation may be broadly divided into direct controls and indirect controls.

• Indirect controls-fiscal policy, monetary incentives/disincentives.(eg-high import duty)

• Direct control-can be applied selectively from firm to firm and industry to industry

Demographic environment• Demographic bases of market segmentation

include:1. Age structure2. Gender3. Income distribution4. Family size5. Occupation6. Education7. Social class8. Religion9. Race10. Nationality

Technological environment• Technology is one of the important

determinants of global competitiveness.• The type of technology in use, level of

technological developments, speed with which new technologies are adopted and diffused, appropriate technologies are important for business.

• Innovations may help companies to increase market share, capture new markets, create new market segments, industries and markets.

Natural environment• Environment is the source and support of

everything used by businesses.

• The geographical and ecological factors such as natural resource endowments, weather and climatic conditions, topographical factors, locational aspects in the global context, port facilities etc. are all relevant to business.

Continued….• Geographical factors influence1. Location of certain industries2. Choice of technology3. Demand pattern

• Depletion of natural resources, environmental pollution and disturbance of the ecological balance have caused great concern.

Global environment• The global environment refers to those factors

which are relevant to business such as:

• WTO principles and agreements

• International conventions

• Treaties, agreements, declarations, protocols, economic

• Sentiments in other countries, hike in crude oil prices etc.

• Ex-Indian pharmaceutical company is affected by WTO’s acceptance of product patents.

• Import and investment liberalizations mandated by WTO has changed competitive environment in India.

• War or political tensions globally , uncertainties, strained political relations between nations etc. affect business.

• Developments in information and communication technologies have significant implication for business.

BUSINESS

ECONOMIC ENVIRONMENT

NATIONAL GLOBAL

Political

Dem

ogra

phic

Technological

Natural

Macro environment

NON-ECONOMIC ENVIRONMENT

Chapter 2

Business Ethics and Social Responsibility

Learning Goals

Explain the concepts of business ethics and social responsibility.

Describe the factors that influence business ethics.

List the stages in the development of ethical standards.

Identify common ethical dilemmas in the workplace.

Discuss how organizations shape ethical behavior.

Describe how businesses’ social responsibility is measured.

Summarize the responsibilities of business to the general public, customers, and employees.

Explain why investors are concerned with business ethics and social responsibility.

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Concern for Ethical and Societal Issues

Business Ethics The standards of conduct and moral values governing actions and decisions in the work environment.

– Social responsibility.– Balance between what’s right and what’s profitable.– Often no clear-cut choices.– Often shaped by the organization’s ethical climate.

Sarbanes-Oxley Act 2002 law that added oversight for the nation’s major companies and a special oversight board to regulate public accounting firms that audit the financial records of these corporations.

• High profile investigations and arrests in headlines.

• Vast majority of businesses ethical.

• New corporate officers charged with deterring wrongdoing and ensuring ethical standards.

The ContemporaryEthical Environment

Johnson & Johnson Website

• Individuals can make the difference in ethical expectations and behavior

– Putting own interest ahead of the organization

– Lying to employee

– Misrepresenting hours

– Safety violations

– Internet Abuse

• Technology is expanding unethical behavior

Individuals MakeA Difference

Development of Individual Ethics

Situation in which a business decision may be influenced for personal gain.

Telling the truth and adhering to deeply felt ethical principles in business decisions.

Businesspeople expect employees to be loyal and truthful, but ethical conflicts may arise.

Employee’s disclosure of illegal, immoral, or unethical practices in the organization.

On-the-Job EthicalDilemmas

How Organizations Shape Ethical

Conduct

Code of Conduct Formal statement that

defines how the organization expects

and requires employees to resolve

ethical questions.

Ethical Awareness

Codes of conduct cannot detail a solution

for every ethical situation, so

corporations provide training in ethical

reasoning.

Ethical Education

Helping employees recognize and reason

through ethical problems and turning

them into ethical actions.

Ethical Action

Executives must demonstrate ethical

behavior in their actions.

Ethical Leadership

Social Responsibility • Management’s consideration of profit, consumer

satisfaction, and societal well-being of equal value in evaluating the firm’s performance.

• Contributions to the overall economy, job opportunities, and charitable contributions and service.

• Organizations measure through social audits.

Acting Responsibly to

Satisfy Society

Areas of Responsibility

• Public Health Issues. What to do about inherently dangerous products such as alcohol, tobacco, vaccines, and steroids.

• Protecting the Environment. Using resources efficiently, minimizing pollution.

• Recycling. Reprocessing used materials for reuse.

• Developing the Quality of the Workforce. Enhancing quality of the overall workforce through education and diversity initiatives.

• Corporate Philanthropy. Cash contributions, donations of equipment and products, and supporting the volunteer efforts of company employees.

Responsibilities to the General Public

• The Right to Be Safe. Safe operation of products, avoiding product liability.

• The Right to Be Informed. Avoiding false or misleading advertising and providing effective customer service.

• The Right to Choose. Ability of consumers to choose the products and services they want.

• The Right to Be Heard. Ability of consumers to express legitimate complaints to the appropriate parties.

Responsibilities to Customers

• Workplace Safety. Monitored by Occupational Safety and Health Administration.

• Quality-of-Life Issues. Balancing work and family through flexible work schedules, subsidized child care, and regulation such as the Family and Medical Leave Act of 1993.

• Ensuring Equal Opportunity on the Job. Providing equal opportunities to all employees without discrimination; many aspects regulated by law.

• Age Discrimination. Age Discrimination in Employment Act of 1968 protects workers age 40 or older.

• Sexual Harassment and Sexism. Avoiding unwelcome actions of a sexual nature; equal pay for equal work without regard to gender.

Responsibilities to Employees

• Obligation to make profits for shareholders.

• Expectation of ethical and moral behavior.

• Investors protected by regulation by the Securities and Exchange Commission and state regulations.

Responsibilities to Investors