Chapter 1: Business Environment
A business firm does not work in isolation. It buys materials from suppliers, sells to customers, borrows from banks, hires from the labour market, competes with rival firms and works within the laws of the country. Not one of these transactions is completed by the firm on its own. When the rupee weakens and the cost of an imported raw material rises, a manufacturer that had no part in the currency movement must still decide whether to raise its price, absorb the higher cost or source the material within the country. The force came from outside; the decision has to be taken inside. The sum of all such outside forces is the environment of business. Some of them touch a single firm directly, such as its customers, its suppliers and its competitors. Others are general conditions — economic, social, technological, political and legal — that shape every firm in the country at once, and that no single firm can control. This chapter explains what business environment means and what its main features are, why an understanding of it matters and how it is scanned, what the micro and macro dimensions consist of, and how S.W.O.T. analysis is used to read a firm and its surroundings together.
Figure
Fig. 1.0-1 — A City Business District At Work Photograph of a busy commercial street in an Indian city, with shoppers, a delivery vehicle, a bank branch and advertising hoardings visible in the same frame.
1.1 Concept And Features Of Business Environment
Every business enterprise is part of a wider society. It exists and functions in association with customers, suppliers, competitors, banks and financial institutions, government agencies, trade unions, the media and the local community. Each of these groups influences the working of the firm in one way or another, and together they make up the environment within which the firm has to complete its transactions.
No firm can produce, sell or collect payment entirely by itself. Materials have to be bought, buyers have to be found, funds have to be raised, rules have to be obeyed and rivals have to be reckoned with. Since every one of these depends on somebody outside the firm, the study of business begins with a study of what lies outside it.
1.1.1 Meaning Of Business Environment
The term business environment refers to the sum total of all the individuals, institutions, conditions and forces that lie outside a business enterprise but that may influence its functioning and performance. The forces are external in origin, but their effect is felt inside the firm, in its costs, its sales, its methods of working and its plans.
The definition is deliberately wide. It covers conditions such as the rate of inflation, events such as the entry of a new competitor, and influences such as a change in the tastes of buyers. What unites them is that each of them can alter the result of a transaction the firm is trying to complete, and none of them originates within the firm.
The Firm As An Open System
A business enterprise is an open system. It draws inputs from its environment in the form of materials, capital, labour, energy and information, converts them through a transformation process into goods and services, and sends those goods and services back to the environment. What the environment then does with them, through sales, complaints, orders and payments, returns to the firm as feedback and shapes its next round of decisions. This relationship is summarised in FC 1.1.
Flowchart
FC 1.1 — Business As An Open System Inputs drawn from the environment — materials, capital, labour, energy, information → transformation process within the firm → outputs of goods and services → supplied back to the environment → feedback in the form of sales, orders and complaints → adjustment of the next round of inputs
Because the system is open at both ends, the firm is exposed to its environment twice over — once when it obtains what it needs, and again when it disposes of what it has made. A disturbance at either end interrupts the transaction, which is why the environment cannot be treated as a background to business but has to be treated as part of it.
1.1.2 Features Of Business Environment
The environment of business has a definite character of its own, and each of its features explains something about the way it acts on a firm.
Totality of external forces — business environment is aggregative in nature, since it is the sum of all the factors and forces external to an enterprise. No single force is by itself the environment; the environment is the combined effect of all of them acting together.
General and specific forces — the environment contains both. General forces such as economic, social, political, legal and technological conditions act indirectly on all enterprises alike, while specific forces such as customers, competitors, suppliers and investors act directly on one particular enterprise. The distinction matters because a firm can usually negotiate with a specific force but can only adapt to a general one.
Interrelatedness — the different elements of the environment are closely connected, so a change in one works its way through the others. Growing awareness of health, a social change, raises the demand for nutritious foods and fitness services, and the new products that follow go on to alter the way people live.
Complexity — the environment consists of a large number of interrelated elements that keep changing at the same time. This makes it difficult to isolate the effect of any one of them, since a fall in the demand for a product may owe something to economic conditions, something to changing tastes and something to a new technology.
Dynamism — the environment is not static but keeps on changing. The entry of new competitors, the development of new technology and shifts in the preferences of consumers are all ordinary examples of environmental change.
Uncertainty — because change is frequent and rapid, future conditions cannot be predicted with confidence. This is most evident in fields such as technology and fashion, where the direction of change alters quickly and often.
Relativity — the environment is a relative concept, differing from one country to another and even from one region to another within the same country. A product that is in steady demand in one market may have almost no demand in another, because the conditions surrounding the two markets are not the same.
Multidimensional character — the environment has more than one dimension, principally the micro and the macro, and each of these dimensions has several components of its own. A single event may therefore reach a firm through more than one route.
Mutual dependence — the components of the environment are interdependent rather than separate. Economic forces act upon social and political forces and are in turn acted upon by them, so they cannot usefully be studied in isolation.
Diversity — the environment is multifaceted, being made up of forces of very different kinds. Legal rules, social attitudes and technical capability are not alike in nature, yet all of them belong to the same environment.
Non-controllable character — the forces that constitute the environment lie largely beyond the control of any single business organisation. A firm cannot fix the rate of inflation or the pace of technological change, so its realistic response is adaptation rather than control.
Taken together, these features explain why the environment is studied at all. It is wide, it is connected, it changes, it cannot be predicted with certainty and it cannot be controlled. A firm that accepts this has only one course open to it, which is to observe the environment closely and adjust itself to what it finds.
1.2 Importance Of Business Environment And Environmental Scanning
The environment gives a firm two things at once. It creates opportunities, through the opening of new markets, advances in technology and growth in population and incomes. It also imposes constraints, through shortages of critical materials, difficulties in obtaining labour and regulations that restrict what a firm may do. A transaction that the environment makes possible one year may be made unprofitable the next by a change the firm never asked for.
Firms that know their surroundings and are prepared to adjust to changes in them tend to succeed. Firms that fail to adjust are unlikely to survive in the long run. Enterprises that ignored the tightening of pollution control rules, for instance, later had to meet those requirements at far greater cost than if they had acted when the change was first visible.
Since the environment cannot be controlled, the practical question for management is not how to prevent change but how to notice it in time. That is the work of environmental scanning.
1.2.1 Environmental Scanning
Environmental scanning is the process by which an organisation keeps a continuous watch on the environment relevant to it, so as to identify the opportunities it can use and the threats it must guard against. It is not an occasional exercise carried out when trouble appears; it is a standing arrangement for gathering information about events, trends, issues and expectations that could affect the firm’s operations.
Scanning is selective. A firm watches the part of the environment that bears on its own transactions — its buyers, its suppliers, the rules that govern its products and the technology used in its industry — rather than every condition prevailing in the country. The information collected is then used in framing objectives, preparing plans and revising them when conditions change.
1.2.2 Benefits Of Understanding The Environment
Business environment has a considerable influence on the working and success of a firm, and the management of an enterprise is therefore expected to understand it, watch the changes taking place in it and act on them in good time. The direct benefits of doing so are set out below.
First mover advantage — awareness of the environment allows a firm to act on an opportunity while it is still open, instead of losing it to competitors. The firm that identifies an unmet need early enters the market first and establishes itself before rivals arrive.
Early warning signal — environmental awareness alerts a firm to an approaching threat or crisis, so that steps can be taken while there is still time to take them. A firm that sees a competitor preparing to enter its segment can strengthen its supply or its distribution before the entry actually occurs.
Customer focus — an understanding of the environment keeps management sensitive to the changing needs and expectations of consumers. Firms that noticed that many buyers wanted a product but could not pay for it in a large pack were able to redesign the pack rather than lose the customer.
Strategy formulation — environmental monitoring supplies the information on which planning and policy making rest. A decision to enter a new line of business or a new region can be founded on observed conditions instead of on guesswork.
Coping with change — business leaders are expected to deal with rapid change, and they can decide the direction and the pace of their own response only if they understand the forces producing the change. Firms operating in fast-moving markets have for this reason delegated more authority to lower levels, so that decisions are not delayed by procedure.
Public image — a firm that shows itself sensitive to its environment and responsive to public expectations improves the way it is regarded by customers, investors and the community. A good image, once established, makes it easier to raise funds, to obtain approvals and to introduce new products.
Continuous learning — environmental analysis serves as a broad and continuing education for executives, keeping them in touch with the changing scene so that they are not caught unaware. Managers who follow developments as they occur are able to react appropriately when a decision has finally to be taken.
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Fig. 1.2-1 — Sachet Strips At A Neighbourhood Store Photograph of a small Indian retail shop with strips of single-use sachets hanging above the counter alongside larger packs.
A firm cannot arrange for the environment to suit it. What it can do is watch the environment steadily, understand what the changes mean for its own transactions, and adjust its plans early enough for the adjustment to be worth making.
1.3 Micro Environment
Business environment has two main dimensions, the micro and the macro. The micro environment consists of those internal and external factors that exercise a direct influence on the working and performance of one particular business enterprise. Because these forces act on the firm immediately and by name, the micro environment is also called the direct action environment or the task environment.
The micro environment is not the same for every firm in an industry. One manufacturer may obtain its components from outside suppliers while another makes them in its own workshops, so the supplier environment of the two is entirely different. Even where competing firms face a similar micro environment, their results differ according to how effectively each of them handles those forces. The components of the micro environment are set out in FC 1.2.
Flowchart
FC 1.2 — Components Of Micro Environment Micro environment → Internal factors, External factors; Internal factors → corporate culture, mission and objectives, top management structure, power structure, company image and brand equity, human and other resources; External factors → customers, competitors, suppliers, marketing intermediaries, financiers, publics
1.3.1 Internal Factors
Internal factors are those existing within the business firm itself. They are treated as controllable, because the enterprise can alter them by its own decision — it can change its organisation structure, its policies and programmes, its personnel, its facilities and its marketing mix to suit the conditions it faces. Control is not always complete, since employees, unions and long-established practices resist sudden change, but the initiative in these matters rests with the firm.
The internal environment is important for a further reason. It is the source of the firm’s strengths and weaknesses — the capabilities it can use to gain an advantage over competitors, and the limitations that place it at a disadvantage. The main internal factors are as follows.
Corporate culture — the values, beliefs and attitudes of the founders and the top management decide what the company stands for, how it does things and what it treats as important. Where this value system is shared by all the members, the organisation acts consistently even when no instruction has been issued, and is generally more successful.
Mission and objectives — the philosophy and purpose of a company guide its priorities, its business strategies, the range of products and markets it will consider and the way it develops. A firm whose stated purpose is research-led growth will look for entirely different opportunities from one whose purpose is high-volume production at low cost.
Top management structure — the composition of the board of directors, the degree of professionalisation of management and the organisational structure of a company have an important bearing on its business decisions. The board sets the direction and monitors performance, and a sound structure allows decisions to be taken in time. The shareholding pattern also matters, since promoters holding a majority of the shares can act more freely than management in a widely held company.
Power structure — the internal power relationship between the board of directors and the chief executive, and the extent to which top management enjoys the support of shareholders and of employees at different levels, affects both decision-making and implementation. A decision carries only as far as the authority standing behind it.
Company image and brand equity — the standing of the company and of its brands plays a significant part in raising finance, forming alliances, choosing dealers and suppliers, launching new products and entering fresh markets. Outside parties deal more readily, and on better terms, with a firm whose name they trust.
Human and other resources — the competence, morale and motivation of employees decide whether a plan is actually carried out, which is why some firms complete a major modernisation smoothly while others meet sustained resistance. Financial position and capital structure, the distribution system, marketing competence, research and technological capability, plant and physical facilities are the other resources that together determine how competitive a company is.
1.3.2 External Factors
The external factors of the micro environment are the individuals, groups and agencies with which a particular firm comes into direct and frequent contact while carrying on its business. They lie outside the firm but within its immediate operating surroundings, and they are commonly described as stakeholders.
The main external factors of the micro environment are as follows.
Customers — the people who buy a firm’s products and services are its customers, and a business exists to create and satisfy them. Customers may be individuals, households, government departments or commercial establishments, and a firm chooses its target group on considerations such as profitability, dependability, degree of competition and prospects of growth. Dependence on a single group of customers is risky, since the loss of that group leaves the firm with nowhere to sell.
Competitors — a company faces both direct and indirect competition. Direct competitors are firms offering the same or similar products, while indirect competition comes from firms seeking the same discretionary spending of the buyer, as a cinema competes with other forms of paid entertainment. With liberalisation and the entry of multinational corporations, Indian firms now meet competition from domestic and foreign firms alike.
Suppliers — suppliers provide the raw materials and components on which production depends. A reliable source of supply allows a company to run uninterrupted and to hold smaller stocks, which reduces inventory carrying cost; suppliers also influence the quality and the cost of what is manufactured. Depending on a single supplier is hazardous, because a strike or breakdown at that supplier’s works halts the buyer’s production, and firms therefore develop several sources of supply.
Marketing intermediaries — agents, wholesalers and retailers form the link between the company and its customers, while transport undertakings and warehouses carry out the physical distribution of the goods. Advertising agencies, marketing research agencies and insurance companies are intermediaries of other kinds. A wide distribution network reaches buyers whom the firm could never have reached by itself.
Financiers — shareholders, banks, financial institutions and debenture holders supply the funds a company needs. Their financial capacity, their policies and their attitude towards risk decide how much can be raised and on what terms, so a firm cannot raise funds through shares if those who would subscribe are unwilling to accept the risk.
Publics — publics are the groups that have an actual or potential interest in the company, or that can influence its ability to achieve its objectives, such as media groups, environmentalists, non-government organisations and the local community. Their effect may be favourable, as when useful information about a firm is circulated, or adverse, as when a community concerned about public health compels a firm to install pollution control measures or to suspend its operations.
1.4 Macro Environment
The macro environment is the general or remote environment within which a business firm and the forces of its micro environment both operate. A company does not deal with the macro environment directly or regularly, as it deals with a customer or a supplier, and for that reason it is also known as the indirect action environment.
Although its influence is indirect, the macro environment decides the conditions under which every transaction in the economy has to be completed. Its forces create opportunities for a company and pose threats to it, and they are far less controllable than the micro forces. The success of an enterprise therefore depends on its ability to adapt to the macro environment: when the cost of an imported raw material rises sharply because the currency has weakened, the firm cannot alter the exchange rate, and its only choices are to absorb the cost, to raise its price or to obtain the material within the country. The components of the macro environment are set out in FC 1.3.
Flowchart
FC 1.3 — Components Of Macro Environment Macro environment → Economic, Social, Technological, Political, Legal; Economic → nature of the economic system, structure of the economy, capital market, economic policies, pace of growth, economic indices, industrial infrastructure, market conditions; Social → demographic trends, attitudes and customs, family structure and values, social concerns, education and awareness; Technological → state of science and technology, rate of technological change, research and development arrangements, manufacturing processes and equipment; Political → constitutional framework, political system and ideology, stability of government, political processes, foreign policy and international relations; Legal → constitutional rights and duties, laws governing business, flexibility of laws, judicial system
1.4.1 Economic Environment
The economic environment consists of the factors and forces concerning the means of production and the distribution of wealth. It includes all those forces of economic development that decide the size of the market a firm can sell in and the cost at which it can produce. Its main components are as follows.
Nature of the economic system — property rights, the ownership of the factors of production, the working of the price mechanism, the extent of economic planning and the role assigned to the public sector together decide how much scope private enterprise has.
Structure of the economy — the occupational distribution of labour, the composition of national output and trade, the pattern of capital investment and the balance between agriculture, industry and services determine where demand and supply are concentrated.
Organisation and development of the capital market — a well-developed capital market allows firms to raise long-term funds from the public, while an underdeveloped one leaves them dependent on borrowing.
Economic policies — industrial policy, monetary policy, fiscal policy and trade policy fix what a firm may produce, what it will pay for funds, what it will pay in taxes and what it may import or export.
Stage and pace of economic growth — a rapidly growing economy adds new buyers and new incomes each year, while a slow-growing one leaves firms competing for a market of much the same size.
Economic indices — gross national product, per capita income, the rate of savings and investment, the balance of payments position, the rate of inflation, interest rates and tax rates indicate the direction in which conditions are moving.
Industrial infrastructure — transportation, communication and power supply decide whether goods can be moved and produced at a reasonable cost.
Market conditions — the degree of competition prevailing in an industry determines how much freedom a firm has in setting its price.
The economic environment exercises a strong influence over business. A decline in interest rates reduces the cost of capital for industry and encourages investment, while a rise in the disposable income of households raises the demand for homes, vehicles and durable goods. Changes in economic policy have similarly led to the growth of whole categories of firms, such as venture capital funds, mutual funds and leasing companies.
1.4.3 Technological Environment
The technological environment refers to the state of science and technology in the country and to related matters such as the rate of technological change, the institutional arrangements for developing and applying new technology, and the manufacturing processes and equipment in use. Technology here means the systematic application of scientific and other organised knowledge to practical tasks.
The technological environment of a country depends on the spirit of invention and innovation among its people, the facilities available for research and development, the incentives offered for developing and applying new technology, the legal protection given to intellectual property rights and the access firms have to technology from abroad.
Its influence on industry and commerce is considerable, and it works in two directions. Advances in technology improve productivity and quality and reduce costs, which makes an industry more competitive. At the same time, advanced technology requires heavy capital investment and skilled manpower, and rapid change makes existing plant, machinery and skills obsolete before they are worn out. New technology also meets resistance, because it requires changes in organisation, in skills and in established working relationships. Whole trades have been displaced in this way, as the spread of digital devices displaced older mechanical products and reproduction technology displaced the market for carbon paper.
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Fig. 1.4-1 — Robotic Arms On An Assembly Line Photograph of robotic welding arms at work on vehicle bodies moving along an automated assembly line in a manufacturing plant.
1.4.4 Political Environment
The political environment consists of the forces concerning the management of public affairs and their impact on business. Its main components are as follows.
Constitutional framework — the basic law of the country fixes the powers of the state and the freedoms available to enterprise.
The political system — the nature and ideology of the system, the political parties and the centres of power decide the attitude taken towards private business.
Political structure — the division of authority between the centre and the states determines which government a firm must deal with on a given matter.
Political philosophy and stability of the government — a stable government whose intentions are known allows firms to plan for long periods, while frequent changes of policy discourage investment.
Political processes — the party system, elections and their funding influence the timing and the direction of policy decisions.
Degree of politicisation of economic and business issues — the extent to which commercial questions are decided on political grounds affects the certainty with which a firm can operate.
Foreign policy, defence policy and relations with other countries — these decide the terms on which trade and investment across borders may be carried on.
India is a democratic country in which the government plays an active part in business affairs, and political changes therefore exercise a significant influence on enterprise. Foreign companies have in the past withdrawn from a market when the policy on foreign shareholding was tightened and have returned when it was relaxed. In the same way, certain cities have attracted information technology firms in large numbers because the political climate there was supportive of the industry.
1.4.5 Legal Environment
Business has to function within the framework of the laws and regulations of the country, and the legal environment therefore exercises a direct and continuous influence on business activity. Its main components are as follows.
Rights and duties of citizens as laid down in the constitution — these set the outer limits within which any commercial activity may be carried on.
Laws concerning the promotion, operation and expansion of business — the statutes governing the formation of companies, the conduct of trade, the protection of consumers and the treatment of employees prescribe what a firm must do and must not do.
Flexibility and adaptability of laws — laws that can be amended as conditions change allow business to develop, while rigid rules hold it to methods that have been overtaken.
The judicial system and judicial decisions — the speed and the consistency with which disputes are settled decide how much confidence parties can place in their contracts.
Substantial changes in the laws governing business in India have altered the way firms operate. The removal of controls over foreign exchange and the liberalisation of foreign direct investment brought several multinational corporations into the country, and the deregulation of the capital markets produced a marked expansion of both the primary and the secondary market.
Micro And Macro Environment Compared
Both dimensions act on the same firm at the same time, but they act in different ways, and the response open to the firm is different in each case. The distinction is drawn out in Table 1.1.
1.5 S.W.O.T. Analysis
A firm now has two separate readings before it. From its internal environment it learns what it is capable of, and from its external environment it learns what conditions it will have to work in. Neither reading is of much use by itself: a capability that no market rewards earns nothing, and an opportunity that a firm is not equipped to take is of no value to that firm. Several techniques are used for analysing and diagnosing the environment, and the one prescribed here brings the two readings together.
S.W.O.T. analysis takes its name from the four elements it examines — strength, weakness, opportunity and threat. The first two are found by analysing the internal environment of the firm, and the last two by analysing the external environment.
The Four Elements
Strength — a strength is an inherent capability of a firm which it can use to gain a strategic advantage over its competitors. A country-wide distribution network, an experienced and motivated workforce or an established brand is a strength, because a rival cannot obtain the same thing merely by deciding to.
Weakness — a weakness is an inherent limitation or constraint of a firm which places it at a strategic disadvantage. Obsolete plant, a shortage of funds or inexperienced staff is a weakness, since it restricts what the firm can undertake however favourable conditions outside may be.
Opportunity — an opportunity is a favourable condition in the external environment which enables a firm to strengthen its position. Growing demand for a product, or the opening of a sector previously closed to private enterprise, is an opportunity, and it exists whether or not any particular firm chooses to act on it.
Threat — a threat is an unfavourable condition in the external environment which causes damage or risk to the position of a firm. The entry of large competitors, the arrival of a cheaper substitute or a restriction newly imposed by law is a threat, and it acts on the firm whether or not the firm has prepared for it.
The four elements are compared in Table 1.2.
How The Analysis Is Used
S.W.O.T. analysis is a systematic and logical approach to understanding the environment of a business organisation. It helps a firm to match its strengths and weaknesses, which show what it is able to do, against the opportunities and threats operating around it, which show what conditions will permit it to do. An effective strategy is one that enables the firm to take the opportunities available in the environment and to meet the threats to it with the help of its own strengths, while correcting the weaknesses that stand in the way.
Because the environment changes continuously, the analysis has to be repeated. A condition that was an opportunity when a plan was framed may have become a threat by the time the plan is carried out, and a strength that rested on a technology may cease to be a strength once that technology is generally available.
1.6 Summary
- Business environment means the sum total of all the individuals, institutions, conditions and forces that lie outside a business enterprise but may influence its functioning and performance.
- A business firm is an open system: it draws inputs from its environment, converts them through a transformation process into goods and services, returns those goods and services to the environment, and receives feedback that shapes its next round of decisions.
- The environment is marked by the totality of external forces, the presence of both general and specific forces, interrelatedness, complexity, dynamism, uncertainty, relativity, a multidimensional character, mutual dependence, diversity and a non-controllable character.
- Since the environment supplies both opportunities and constraints and cannot be controlled by a single firm, it has to be watched continuously. Environmental scanning is the process by which an organisation monitors its relevant environment in order to identify the opportunities and threats affecting its business.
- The direct benefits of understanding the environment are first mover advantage, an early warning signal, customer focus, a sound basis for strategy formulation, an ability to cope with change, a better public image and continuous learning for managers.
- Business environment has two dimensions, the micro and the macro.
- The micro environment, also called the direct action or task environment, exercises a direct influence on one particular firm and consists of:
- Internal factors — corporate culture, mission and objectives, top management structure, power structure, company image and brand equity, and human and other resources, which the firm can largely control and which are the source of its strengths and weaknesses.
- External factors, or stakeholders — customers, competitors, suppliers, marketing intermediaries, financiers and publics, with which the firm comes into direct and frequent contact.
- The macro environment, also called the indirect action environment, consists of general forces that affect all firms and lie largely beyond the control of any one of them:
- Economic environment — the nature of the economic system, the structure of the economy, the capital market, economic policies, the pace of growth, economic indices, industrial infrastructure and market conditions.
- Social environment — demographic trends, social attitudes and customs, family structure and values, social concerns, and education levels and awareness of rights.
- Technological environment — the state of science and technology, the rate of technological change and the institutional arrangements for research and development.
- Political environment — the constitutional framework, the political system and its ideology, the stability of the government, political processes, and foreign policy and international relations.
- Legal environment — constitutional rights and duties, the laws governing the promotion, operation and expansion of business, the flexibility of those laws and the judicial system.
- Micro forces act directly on the firm and can be dealt with and negotiated, while macro forces act indirectly on all firms alike and have to be adapted to.
- S.W.O.T. analysis examines together the two readings a firm obtains of its environment:
- Strength — an inherent capability, identified from the internal environment, that gives a strategic advantage.
- Weakness — an inherent limitation, identified from the internal environment, that causes a strategic disadvantage.
- Opportunity — a favourable condition in the external environment that enables the firm to strengthen its position.
- Threat — an unfavourable condition in the external environment that puts the firm’s position at risk.
- An effective strategy is one that uses the strengths of the firm to take the opportunities available in the environment and to meet the threats operating in it, while correcting the weaknesses that stand in the way.
The dimensions established in this chapter are condensed in FC 1.4.
Flowchart
FC 1.4 — Dimensions Of Business Environment Business environment → Micro environment, Macro environment; Micro environment → Internal factors, External factors; Internal factors → corporate culture, mission and objectives, top management structure, power structure, company image and brand equity, human and other resources; External factors → customers, competitors, suppliers, marketing intermediaries, financiers, publics; Macro environment → Economic, Social, Technological, Political, Legal
1.7 Points to Ponder
The environment is described as non-controllable, yet large firms advertise, form associations and place their views before the public and the government. How far can a firm shape parts of its own environment, and at what point does the description ‘non-controllable’ still hold?
Environmental scanning costs money and management time, and the future remains uncertain even after it has been carried out. Is continuous scanning worth its cost to a small firm working with limited resources, or is it a practice that only large enterprises can justify?
The arrival of a new technology may be a threat to one firm in an industry and an opportunity to another in the same industry. What decides which of the two it becomes?
Internal factors are treated as controllable because the firm can alter them by its own decision, yet corporate culture and long-established working habits often resist change for years. Is ‘controllable’ an accurate description of them?
A firm that acts early on an environmental change may secure a first mover advantage, or may commit resources to a change that never arrives. On what basis should a firm decide that a signal from the environment is strong enough to act upon?
1.8 Objective Questions
- A state government has announced that no industrial unit may discharge untreated water into the river running past it, and every unit in the district must now install a treatment plant. Identify the dimension of the macro environment at work. [1]
- Social environment
- Technological environment
- Legal environment
- Economic environment
- The tastes of consumers and the direction of technological change cannot be predicted with confidence, however carefully a firm studies them. Which feature of business environment does this illustrate? [1]
- Uncertainty
- Relativity
- Interrelatedness
- Totality of external forces
- Assertion (A): A firm can adapt to the macro environment but cannot control it. [1] Reason (R): The macro environment consists of general forces that act alike on all the enterprises in an economy.
- Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
- Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A).
- Assertion (A) is true but Reason (R) is false.
- Assertion (A) is false but Reason (R) is true.
- Fill in the blank: The environment that exercises a direct and immediate influence on the working of one particular business firm is known as the _____________ environment. [1]
- State whether the following statement is true or false: The composition of the board of directors of a company is an external factor of its micro environment. [1]
1.9 Check Your Concepts
- State the meaning of environmental scanning and mention one purpose it serves for a business firm. [2]
- Distinguish between micro environment and macro environment on any three bases. [3]
- Explain any three components of the social environment, and state for any one of them how it can alter the demand for a product. [3]
- Explain any four external factors of the micro environment, stating in each case how the factor reaches the firm. [4]
- Explain S.W.O.T. analysis. State which environment each of its four elements is identified from, give one example of each, and explain why a firm examines all four together rather than separately. [6]
1.10 Case-Based Questions
- Trishala Textiles Ltd. manufactures cotton furnishings and dyes its fabrics on machinery installed fifteen years ago. Its largest buyer has now asked the firm to certify that its dyeing effluent meets the standards laid down by law. In the same period, demand for cotton furnishings has been rising steadily in the towns the firm supplies, and a competitor has opened a plant nearby with newer dyeing equipment. The company’s own dyeing team is widely regarded in the trade as highly skilled.
- Identify any two dimensions of business environment at work in the above case and name one component of each. [2]
- State one strength, one weakness, one opportunity and one threat of Trishala Textiles Ltd. as they appear from the case. [4]
1.4.2 Social Environment
The social environment consists of the social and cultural forces within which business firms operate. It shapes what people want, what they consider acceptable and what they expect of a business. Its main components are as follows.
Demographic trends — the size and distribution of population, its age composition, the ratio of males to females, movement from rural to urban areas, the distribution of income and life expectancy together decide the size and character of the market.
Social attitudes, customs, traditions and lifestyles — habits of consumption, dress and celebration differ across communities and regions, so a product accepted in one market may find no place in another.
Family structure and values — the size of the household and the way decisions are taken within it affect what is purchased, in what quantity and by whom.
Social concerns — public feeling about pollution, corruption, the status of women and minorities and the role of the media influences what conduct a firm can afford to be seen adopting.
Education levels, awareness of rights and work ethics — a more literate and better-informed population buys more carefully, complains more readily and expects higher standards of quality and disclosure.
Social and cultural forces exercise a significant influence on business. Population and income levels affect the pattern of demand; growing awareness of health has raised the demand for nutritious foods, exercise equipment and fitness services; and rising literacy has made consumers more conscious of quality. Changes in habits and preferences have in the same way increased the demand for lifestyle products such as designer clothing and consumer electronics.