Business Environment : A Simple Guide

Concept of Environment

Environment literally means the surroundings, external objects, influences or circumstances under which someone or something exists. The environment of any organization is the aggregate of all conditions events and influences that surround and affect it.

Characteristics of Environment

1. Environment is Complex
2. Environment is Dynamic
3. Environment is Multifaceted
4. Environment has a far- reaching impact

What is Environmental Analysis or Business Environment?

Environmental analysis, also known as environmental scanning or appraisal, is the process through which an organization monitors and comprehends various environmental factors and determines the opportunities and threats that are provided by these factors. This type of analysis is relatively qualitative and involves the identifying, scanning, analyzing and forecasting of the environmental variables. Some frameworks of environmental analysis have received large amounts of attention in the world of business management literature, such as SWOT analysis and PESTEL analysis. 

According to Wheeler “Business Environment is the total of all things external to firms and individuals, which affect their organization and operations”.

It evaluates internal and external factors impacting an organization's performance, especially its marketing effort. 

1. Internal factors are referred to as the strengths and weaknesses of the organization. 
2. External factors are opportunities and threats presented by forces outside of the company. In general, this information is used by strategic planners in forecasting trends a year or more in advance. This method is distinct from surveillance, which focuses on a specific area or time. It helps the managers to decide the future path of the organization. Scanning must identify the threats and opportunities existing in the environment. While strategy formulation, an organization must take advantage of the opportunities and minimize the threats. A threat for one organization may be an opportunity for another.

Components of Business Environment

The business environment can be broadly divided into two groups 

A. Internal Environment

1. Management Philosophy - The management philosophy greatly influences the working of business firm. The management may adopt a traditional philosophy or a professional philosophy. Nowadays business firm need to adopt professional approach. A proper analysis of internal environment will reveal the weaknesses of the traditional approach and force the management to adopt a professional approach.
2. Mission and Objectives - It is always advisable to frame a mission statement and then to list out the various objectives. An analysis of internal environment will enable the firm to find out whether the objectives are in line with the mission statement and whether the objectives are accomplished or not.
3. Human Resources - The survival and success of the firm largely depends on the quality of human resources. An analysis of internal environment in respect of human resources would reveal the shortcomings of human resources and as such measures can be taken to correct such weaknesses.
4. Physical Resources - Physical resources include machines, equipment’s, building, furniture etc. A firm needs adequate and quality physical resources. An analysis of the internal environment may reveal the weaknesses of the physical resources and company can take appropriate measures to correct such weaknesses.
5. Financial Resources - A firm needs adequate working capital as well a fixed capital. There is a need to have proper management of working capital and fixed capital. An analysis of the internal environment will help to make optimum use of available funds as well as to raise additional funds.
6. Corporate Image - A firm should develop, maintain and enhance a good image in the minds of the employees, investors, customers and others. Poor corporate image is a weakness. An analysis of the internal environment enables the firm to build good public image.
7. Research and Development facilities - If the organization has adequate research and development facilities, it is in a position to innovate, introduce new products and services continuously. This enables the firm to remain ahead of the competition
8. Internal Relationship - There should be a proper flow of vertical and horizontal communication i.e., between superiors and subordinates and between colleagues at the same level. A free flow of ideas enables a healthy relationship between colleagues.

B. External Environment

External environment includes all those factors and forces which are external to the business organization. These include factors such as economic, socio cultural, legal, demographic etc. These factors are beyond the control the company.

1. Demographic Environment - Demographic environment studies human population with reference to its size, density, literacy rate, sex-ratio, age composition etc. These factors affect the demand for goods and services, quantity and quality of production, distribution etc. e.g., a rapidly growing population indicates growing demand for many products.
2. Natural Environment - Business firms use natural resources like water, land, iron, crude oil etc. All business units are directly or indirectly dependent upon natural environment. Business firms are responsible for ecological imbalance. So, they should take necessary measures to control pollution. Business operations have caused considerable changes in ecological balance and natural environment of the country. The applications of modern technology in industry leads to rapid economic growth at a huge social cost a measured by the deterioration of physical environment i.e., air pollution, water pollution, noise pollution etc. So, business enterprises have to calculate net social cost of its venture.
3. Economic Environment - A business firm closely interact with its economic environment. Economic environment is generally related to those external forces, which have direct economic effect upon business. Economic environment is a sum total of
• Economic conditions in the market
• Economic policies of the government
• Economic system of the country.
• Economic conditions - It includes nature of economy, the stage in economic development, national income, per capita income etc. These operate in the market and influence the demand and supply of goods and services.
• Economic policies - Economic policies mean policies formulated by the government to shape the economy of the country. These include monetary and fiscal policies, export-import policy, industrial policy, licensing policy, budgetary policy etc. The economic policies of the government affect the business. This impact may be positive or negative e.g., liberation of the economy has adversely affected the small-scale industry in India.
• Economic systems - Economic systems mean the classification of economies on the basis of role of the government in the functioning of the economy. Economic system can be classified as
• Capitalist Economy – There exists least government control in regulating the working of a market. E.g., U.S.A.
• Socialist Economy – The government has major control over all activities e.g., China.
• Mixed Economy – It combines the features of both capitalist and socialist economy where both private and public sector play an equally important role e.g., India.
4. Legal Environment / Regulatory Environment - Legal environment includes laws, which define and protect the fundamental rights individuals and organizations. It creates a framework of rules and regulations within which business units have to operate. Business firm must have up to date and complete knowledge of the laws governing production and distribution of goods and services. Some of the important laws are Indian Companies Act, 1956 The Consumer Protection Act, 1986 The MRTP Act, 1969. The Essential commodities Act, 1955. etc.
5. Political Environment - It refers to the influence exerted by 3 political institutions namely the legislature, the executive and the judiciary in developing and controlling business activities. Business decisions are greatly influenced by the developments in the political environment. A change in the government brings about a change in attitude, preference, objectives etc. Business firms need to keep a track of all political events, anticipate changes in government policies and frame production and marketing strategies accordingly.
6. Cultural Environment - Every society has a culture of its own. Culture includes knowledge, belief, art, morals, laws, customs and other capabilities and habits acquired by an individual as a member of society. Cultural values are passed on from one generation to another. Culture thus determines the types of goods and services a business should produce. Business should realize the cultural differences and bring out products accordingly.
7. Technological Environment - Technology is the systematic application of scientific or other organized knowledge to practical tasks. Technological advancement makes it possible to improve the quality of products, increase the output and decrease the cost of product. Technological changes are rapid and to keep pace with it, businessmen need to be alert and flexible in order to quickly incorporate them in their business organization so as to survive and succeed in the competitive business world.
8. International Environment - The international environment is an outcome of political and economic conditions in the international market. Business firms engaged in the foreign trade are more affected by the changes in the international environment factors like war, civil disturbances, political instability, changes in trade policies in other countries with which India has trading links do affect Indian exporters and importers. Therefore, business firms, which cater to foreign trade must constantly monitor implications of international environment on their business. The components of international environment are
• Import and Export policy of a country.
• Rules and regulations laid down by International Institutions like IMF, World Bank etc.
• the policies of trading blocs like SAARC, EEC, ASEAN etc.
• foreign exchange regulations like tariffs, quotas.
• Trade cycle like boom, recession at world level

Process of Environment Analysis

1. Identifying - To measure and improve the relative position of the business to the intrinsic environmental factors, one must first identify those factors that affect the business. This will need to be done at various internal levels, the company level, the regional level, the domestic level and the global level. While several frameworks exist as an aid to this step of identification (such as SWOT and PESTEL), they are merely tools that remind the identifier to consider certain types of factors. A good identification of environmental factors can be had as the result of a good brainstorming session with or without such frameworks. Those frameworks exist because of the ease of deployment and should be consulted, flexibly.
2. Scanning - This step in environmental analysis can be somewhat confusing. How does one scan for qualitative factors that have already been identified? Scanning, in the context of environmental analysis, refers to the process of distinguishing which of the identified factors have the most effect. Not all of the factors identified in the first step will carry the same weight, and the recognition of environmental factors most significant to the business will assist in rendering a course of improvement.
3. Analyzing - The next step in environmental analysis is to analyze the effect the relevant environmental variables have on different levels of the business, including the business at large. There is a plethora of tools available for this type of analysis, ranging from scenario building to benchmarking to the Delphi technique. Which every tool, or tools, chosen, the information will be collected and analysed in similar fashions. Brainstorming, reviewing historical data and polling department heads and managers serves to collect information that will be used for statistical analysis; types of analysis include mean, mode, correlation and regression, among others. The methods of statistical analysis chosen will vary based upon what is being analysed and the form held by the data itself. Some useful methods of analysis can be found in the techniques of company ratio analysis
4. Forecasting - Once the environmental variables have been identified, deemed significant and analysed, it becomes necessary to forecast the effect that said variables would have in the future. This is the primary function of the analysis of current and historical data. By looking at the trend each significant environmental variable is forecasted to take, a strategy report can be created, from which management can develop a business strategy in response

FAQs

What is Business environment?

Business Environment consists of all those forces both internal and external that affect the working of a business. It refers to the conditions, forces, events and situations within which business enterprises have to operate. Business and its environment are closely related and the effectiveness of interaction of the two determines the success or failure of a business.

While in external analysis, three correlated environments should be studied and analyzed?

1) Examining the industry environment needs an appraisal of the competitive structure of the organization’s industry, including the competitive position of a particular organization and its main rivals. Also, an assessment of the nature, stage, dynamics and history of the industry is essential. It also implies evaluating the effect of globalization on competition within the industry. 

2) Analyzing the national environment needs an appraisal of whether the national framework helps in achieving competitive advantage in the globalized environment. 

3) Analysis of macro-environment includes exploring macro-economic, social, government, legal, technological and international factors that may influence the environment. The analysis of organization’s external environment reveals opportunities and threats for an organization. 

Strategic managers must not only recognize the present state of the environment and their industry but also be able to predict its future positions.