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Relationship between Business and Environment

The term Business Environment is composed of two words ‘Business’ and ‘Environment’. In simple terms, the state
in which a person remains busy is known as Business. The word Business in its economic sense means human
activities like production, extraction or purchase or sales of goods that are performed for earning profits.

On the other hand, the word ‘Environment’ refers to the aspects of surroundings. Therefore, Business Environment
may be defined as a set of conditions – Social, Legal, Economical, Political or Institutional that are uncontrollable in
nature and affects the functioning of organization which can have either positive or negative impact on the business.1

. Business Environment has two components:


1. Internal Environment
2. External Environment

Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually within the
control of business.Business can make changes in these factors according to the change in the functioning of
enterprise. The internal environment of the company includes the factors which are within the company and directly
affects the different operations carried out in a business. Those are under the control of company like product
Organizational culture, Leadership, Manufacturing (quality).The internal factors are:

A.VALUE SYSTEM : It implies the culture and norms of the business. In other words, it means the regulatory
framework of a business and every member of the organization has to act within the limits of this framework.
B. MISSIONS AND OBJECTIVES : Different priorities, policies and philosophies of a business is guided by the
mission and objectives of a business.
C. FINANCIAL FACTORS : Financial factors like financial policies, financial position and capital structure also
affects a business performance and its strategies.
D. INTERNAL RELATIONSHIP : Factors like the amount of support the top management enjoys from its
shareholders, employees and the board of directors also affects the smooth functioning of a business.

External Environment: Those factors which are beyond the control of business enterprise are included in external
environment. These factors are: Government and Legal factors, Geo-Physical Factors, Political Factors, Socio-
Cultural Factors, Demo-Graphical factors etc. It is of two Types:
1. Micro/Operating Environment
2. Macro/General Environment

Micro/Operating Environment: The environment which is close to business and affects its capacity to work is
known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors
and Public.

(1) Suppliers: – They are the persons who supply raw material and required components to the company. They must
be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier.

(2) Customers: - Customers are regarded as the king of the market. Success of every business depends upon the level
of their customer’s satisfaction. Types of Customers: (i) Wholesalers (ii) Retailers (iii) Industries
(iv) Government and Other Institutions (v) Foreigners

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(3) Market Intermediaries: - They work as a link between business and final consumers. Marketing intermediaries
aid the company in promoting, selling and distribution of the goods and services to its final users. Therefore,
marketing intermediaries are vital link between the business and the consumers. Types:-
(i) Middleman (ii) Marketing Agencies (iii) Financial Intermediaries (iv) Physical Intermediaries

(4) Competitors: - Every move of the competitors affects the business. Business has to adjust itself according to the
strategies of the Competitors.In order to survive in the competition one has to keep a close look in the market and
formulate its policies and strategies as such to face the competition.

(5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media and local public.
They may be the users or non-users of the product.

Macro/General Environment: – It includes factors that create opportunities and threats to business units. Following
are the elements of Macro Environment:

(1) Economic Environment: - It is very complex and dynamic in nature that keeps on changing with the change in
policies or political situations. It has three elements:
(i) Economic Conditions of Public
(ii) Economic Policies of the country
(iii)Economic System
(iv) Other Economic Factors: – Infrastructural Facilities, Banking, Insurance companies, money markets, capital
markets etc.Economic factors includes economic conditions and economic policies that together constitutes the
economic environment. These include interest rates, taxation changes, economic growth rate, inflation and exchange
rates, restrictive trade practices etc. which have a considerable impact on the business. For example:
•higher interest rates may deter investment because it costs more to borrow
•a strong currency may make exporting more difficult because it may raise the price in terms of foreign currency
•inflation may provoke higher wage demands from employees and raise costs
•higher national income growth may boost demand for a firm's products

(2) Non-Economic Environment: - Following are included in non-economic environment:-


(i) Political Environment: - It affects different business units extensively. Components:
(a) Political Belief of Government (b) Political Strength of the Country (c) Relation with other countries
(d) Defense and Military Policies (e) Centre State Relationship in the Country
(f) Thinking Opposition Parties towards Business Unit.

Political factors. These refer to government policy such as the degree of intervention in the economy. What goods and
services does a government want to provide? To what extent does it believe in subsidising firms? What are its
priorities in terms of business support? Political decisions can impact on many vital areas for business such as the
education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the
road and rail system.The political factors are related to the management of public affairsAnd their impact on the
business. It is important to have a political stability to maintain stability in the trade.

(ii) Socio-Cultural Environment: - Influence exercised by social and cultural factors, not within the control of
business, is known as Socio-Cultural Environment. These factors include: attitude of people to work, family system,
caste system, religion, education, marriage etc. Social factors includes the society as a whole alongside its preferences
and priorities like the buying and consumption pattern, beliefs of people their purchasing power, educational

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background etcChanges in social trends can impact on the demand for a firm's products and the availability and
willingness of individuals to work. In the UK, for example, the population has been ageing. This has increased the
costs for firms who are committed to pension payments for their employees because their staff are living longer. It
also means some firms such as Asda have started to recruit older employees to tap into this growing labour pool. The
ageing population also has impact on demand: For example, demand for sheltered accommodation and medicines has
increased whereas demand for toys is falling.

(iii) Technological Environment: - A systematic application of scientific knowledge to practical task is known as
technology. Everyday there has been vast changes in products, services, lifestyles and living conditions, these
changes must be analysed by every business unit and should adapt these changes. Latest technologies helps in
improving the marketablity of the product plus makes it more consumer friendly. Therefore, it is important for a
business to keep a pace with the changing technologies in order to survive in the long run.

New technologies create new products and new processes. MP3 players, computer games, online gambling and high
definition TVs are all new markets created by technological advances. Online shopping, bar coding and computer
aided design are all improvements to the way we do business as a result of better technology. Technology can reduce
costs, improve quality and lead to innovation. These developments can benefit consumers as well as the organisations
providing the products.

(iv) Natural Environment: - It includes natural resources, weather, climatic conditions, port facilities, topographical
factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the
location for their business.

(v) Demographic Environment :- It is a study of perspective of population i.e. its size, standard of living, growth
rate, age-sex composition, family size, income level (upper level, middle level and lower level), education level etc.
Every business unit must see these features of population and recongnise their various need and produce accordingly.

(vi) International Environment: - It is particularly important for industries directly depending on import or exports.
The factors that affect the business are: Globalisation, Liberalisation, foreign business policies, cultural exchange.

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