Business Environment and International Business : The Basics of Business Environment: The Commerce subject detailed notes with practice tests are very useful for Assistant Professor / UGC NET / JRF and other competitive exams preparation.
Both business and society are interdependent, both need each other. Business, as an economic activity satisfies the needs and wants of the society in a profitable manner.
The Basics of Business Environment
Businesses manufacture and supply goods, they may create services and so on in a competitive environment. Modern business is dynamic and getting more complex, so companies spend money on research and development to stay ahead in a competitive environment. They create job opportunities, offer better quality of life, and thus contribute to the economic growth of the country.
Business has now been converted from a producer-driven activity to a consumer centred phenomenon. Margaret Thatcher, as PM of Britain in 1980s, started free market policies to promote the business; these policies were known as ‘Thatcherism’.
According to Bayord O. Wheeler, business environment refers to “the total of all things external to firms and industries which affect their organization and operation”.
In the words of Arthur M. Weimer, “Business environment encompasses the climate or set of conditions, economic, social, political, or institutional in which business operations are conducted”.
Management Guru, Peter Drucker, in his work ‘The Age of Discontinuity’ in 1969, focuses with great clarity and perception on the forces of change that are transforming the economic landscape and creating tomorrow’s society. Drucker discerns four major areas of discontinuity underlying contemporary social and cultural reality.
These are:
1. The explosion of new technologies resulting in major new industries.
2. Global economy.
3. A pluralistic society with drastic political, philosophical, and spiritual challenges.
4. The new universe of knowledge based on mass education and its implications in work, leisure, and leadership.
Features of Business Environment
1. The business environment is aggregative of many factors. The value system of society, government rules and regulations, monetary policies of central bank, institutional set up of nation, ideological beliefs of the economic system, the policies towards foreign investment, etc., all constitute the business environment.
2. Some of the environmental factors are totally static, some are relatively static and some are very dynamic. Some of these factors can be conceptualized and quantified, while other can be only referred to in qualitative terms.
3. Business environment keeps changing in terms of technological improvement, shifts in consumer preferences or new competition in the market.
4. The environmental factors vary from one country to another and from one region to another in a country.
5. There are temporal patterns of business environment–past, present and future environment. For example, Indian economy of tomorrow will be influenced by what the state of the economy is at present and what it was in the past.
6. The business environment may be classified into market environment and non-market forces. The market environment is influenced by product demand, supply, number of firms and resulting price competition or non-price competition. The non-market environmental forces are Government laws, culture, history, traditions to name a few.
7. Environment may be classified as economic and non-economic. Economic environment is shaped by factors such as fiscal policy, monetary policy, industrial policy, economic system, economic growth rate, etc., to name a few. Non-economic environment refers to social, political, legal, educational and cultural factors that affect business operations.
8. Business environment factors are mostly considered to be external, thus beyond the control of individual industrial enterprises and their managements. Business environment may pose threats to a firm or offer immense opportunities for potential market exploitation. The success of every business organization depends on adapting itself to the changing environment.
For example, when there is a change in government policies, business has to make the necessary changes to adapt it to the new policies.
We need to look at following features also that don’t seem to be favourable for business environment.
1. Uncertainty: Business environment is highly uncertain, largely volatile, it is very difficult to predict future events.
2. Relativity: Business environment is not standardized, rather it is a relative concept as it varies from one nation to another, and from one region to another.
3. Multi-faceted: The same changes in business environment may be perceived differently by different individuals. For example, increase in crude oil prices may be good for petroleum industry as it may increase refinery margins but may spell doom for automobile industry.
4. Forces: Business environment is aggregation of all forces—internal as well external.
Specific and general forces of business environment:
(a) Specific Forces: The examples are investors, customers, competitors and suppliers that affect individual enterprises directly and immediately in routine operations of business.
(b) General Forces: The examples are social, political, legal and technological conditions that have impact on all business enterprises and thus may affect an individual firm only indirectly.
5. Risk: For simple purpose, we are discussing the following types of risks.
(a) Systematic Risk: This type of risk is also called ‘market risk’ or ‘undiversifiable risk’. It is actually the uncertainty inherent to the entire market segment. This risk is the result of external and uncontrollable variables, which are not industry or security specific.
They affect all types of securities in the market. The prime examples are inflation interest rate changes, recessions and wars, etc. Systematic risk underlies all other investment risks. The Great Recession in 1929 / 30 and Financial crisis in USA 2008 affected the whole world. The recent Russia-Ukraine war crisis has caused inflationary conditions throughout the world – be it USA, Europe, India or China.
(b) Unsystematic Risk: It emerges out of controlled and known variables those are specific to an industry or share or debenture or any other such security. Some business firms may fail despite good systematic risk or vice versa.
Systematic risk cannot be eliminated by diversification of portfolio, whereas the diversification proves helpful in mitigating unsystematic risk.
Total Risk = Systematic risk + Unsystematic risk
Importance of Business Environment
To be specific, proper understanding of various aspects of business environment—such as political, social, legal and economic—helps the business in the following manner:
1. Early or First Mover Advantage: This competitive advantage is acquired by the company by entering first into the market. This helps in getting superior brand recognition and customer loyalty. The company gets time to perfect its product or service.
2. Identification of Threats: They are part of SWOT analysis that stands for Strengths, Weaknesses, Opportunities and Threats. Identification of threats is external in nature and helps in better strategic business planning.
3. Coping with the Dynamic Environment and Improving Performance: They help better in staying ahead in competition.
4. Giving Direction for Growth: Such an interaction with the environment opens up new frontiers of growth and expansion for the firms.
5. Image Building: Environmental understanding helps the business organizations in improving their image by showing their sensitivity to the environment within which they are working.
6. Continuous Learning: Environmental analysis helps the managers. They are motivated to continuously update their knowledge, understanding, and skills to meet the predicted changes in the realms of business. This helps in creating and developing ‘learning organizations’.
Michael Porter’s Five Forces Model
Strategic management and business environment are closely related. Porter Five Forces Model helps us in defining our competition and improving our potential profit.
1. Supplier Power: The ability of suppliers to drive up the prices of your inputs.
2. Buyer Power: The strength of your customers to drive down your prices.
3. Competitive Rivalry: The strength of competition in the industry.
4. The Threat of Substitution: The extent to which different products and services can be used in place of our own.
5. The Threat of New Entry: The ease with which new competitors can enter the market if they see that we are making good profits (and then drive our prices down).
Vision and Mission Statements
Vision and Mission Statements may be combined to provide a statement of the purpose, goals and values of the company. They are used interchangeably as well.
Vision Statement: A vision statement describes the desired future position, ultimate goal and future dream of an organization. It is the optimum version of the business. This may be timeless or even impossible to achieve. It should keep your business reaching for new heights.
For example, for Disney, the vision is “to make people happy”.
Mission Statement: Where the vision is your ultimate goal, the mission is how do we get there. Mission explains why a business exists.
It can be crafted in the following steps:
1. What does a company do?
2. Who does it do that for?
3. Where does it exist?
4. How does it do it?
5. Why does a company do that?
For Facebook, mission is ‘to give people the power to share and make the world more open and connected’. While for Google it is ‘to organize the world’s information and make it universally accessible and useful’.
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