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Business Environment Argumentative

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  • Category: Economics

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After discussing the meaning of business environment, now we will discuss the various components of business environment. The various components of business environment are- [pic]External environment consists of those factors that affect a business enterprise from outside. External environment includes shareholders, competitors, customers, society, government laws and regulations, policies and technology. External environment is generally classified into micro environment and macro environment. The micro environment consists of factors in the company’s immediate environment that affects the performance of the company. These include the suppliers, marketing intermediaries, competitors, customers and the public. On the other hand, macro external environment includes larger factors such as economic, demographic, technological, political, natural and cultural factors. We will explain below micro and macro types of external environment of business. Different players in the micro environment normally do not affect all the companies of a particular industry in a similar way. However, sometimes micro environment of the various firms of an industry remains almost same.

External Micro-Environment
Micro environment includes those players whose decisions and actions have a direct impact on the company. Production and selling of commodities are the two important aspects of modern business. Accordingly, the micro environment of business can be divided. The various constituents of micro environment are as under:

Suppliers:- An important factor in the external micro environment of a firm is the supplier of its inputs such as raw materials and components. Normally, most firms do not depend on a single supplier of inputs. To reduce risk and uncertainty business firms prefer to keep multiple suppliers of inputs.

Customers: The people who buy and use a firm’s product and services are an important part of external micro environment. Since sales of a product or service is critical for a firm’s survival and growth, it is necessary to keep the customers satisfied. A concern for customers’ satisfaction is essential for the success of a business firms. Besides, a business firm has to compete with rival firms to attract customers and thereby increase the demand and market for its product.

Marketing intermediaries: In the firm’s external micro environment, marketing intermediaries play an essential role of selling and distributing its products to the final customers. Marketing provides an important link between a business firm and its ultimate customers. Competitors: Different firms in an industry compete with each other for sale of their products. This competition may be on the basis of pricing of their products and also non- price competition through competitive advertising such as sponsoring some events to promote the sale of different varieties and models of their products.

As a consequence of liberalization and globalization of the Indian economy since the adoption of economic reforms there has been a significant increase in the competitive environment of business firms. Now, Indian firms have to compete not only with each other but also with foreign firms whose products can be imported. In America, American firms faced a lot of competition from the Japanese firms producing electronic goods and automobiles. Publics: Finally, publics are an important force in external micro environment. Environmentalists, media groups, women’s associations, consumer protection groups, local groups, Citizens Association are some important examples of publics which have an important bearing on the business decisions of the firm. The existence of various types of publics influences the working of business firms and compels them to be socially responsible. External Macro Environment

Apart from micro environment, business firms face large external environmental forces. An important fact about external macro environmental forces is that they are uncontrollable by the management. Because of the uncontrollable nature of macro forces a firm has to adjust or adapt it to these external forces. These factors are: Economic Environment: Economic environment includes all those forces which have an economic impact on business. Accordingly, total economic environment consists of agriculture, industrial production, infrastructure, and planning, basic economic philosophy, stages of economic development, trade cycles, national income, per capita income, savings, money supply, price level and population. Business and economic environment is closely related. Business usually collects all its required inputs from the economic environment available and also absorbs the output of business units.

Political-legal Environment: Business firms are closely related to the government. The political- legal environment includes the activities of three political institutions, namely, legislature, executive and judiciary which usually play a useful role in shaping, directing, developing and controlling business activities. The legislature takes decisions on a particular course of action, the executive implements those decisions through government agencies and the judiciary serves as a watch-dog for ensuring public interest in all the activities of legislature and executive. In order to attain a meaningful business growth, a stable and dynamic political-legal environment is very important.

Technological Environment: Technological environment is exercising considerable influence on business. Technology implies systematic application of scientific or other organized knowledge to practical tasks or activities. Business makes it possible for technology to reach the people in proper format. As technology is changing fast, businessmen should keep a close look on those technological changes for its adaptation in their business activities.

Global or International Environment: Global environment plays an important role in shaping business activity. With the liberalization and globalization of the economy, business environment of an economy has become totally different wherein it has to bear all shocks and benefits arising out of global environment.

Socio-cultural Environment: Social and cultural environment also influences the business environment indirectly. These includes people’s attitude to work and wealth, ethical issues, role of family, marriage, religion and education and also social responsiveness of business. The social and cultural environment also influences the demand for a variety of goods and the type of employees the industry require. Moreover, the obligation of business to society also depends on the cultural milieu in which the firm is operating.

Demographic Environment: The demographic environment includes the size and growth of population, life expectancy of the people, rural-urban distribution of population, the technological skills and educational levels of labor force. All these demographic features have an important bearing on the functioning of business firms. The labor force in the country is always changing. This will cause changes in the work force of a firm. The business firms have to adjust to the requirement of their employees. They have to provide child care services, labor welfare programmes etc. The demographic environment affects both the supply and demand sides of business organizations. The technological and educational skills of the workers of a firm are determined by the human resources available in the economy which are part of the demographic environment. The size of the population and its rural- urban distribution determine the demand for the products of industrial firms. The growth rate and the age composition of the population determine the demand pattern of goods. If the child population is high then the demand for baby foods and baby clothes will be high. On the other hand, if the life expectancy of the people is high then the demand for goods will be those that will cater to the tastes and needs of elderly people. The demographic environment is also important for business firms as it determines the choice of technology by them.

Natural Environment: Natural environment influences business in diverse ways. Business in modern times is dictated by nature. The natural environment is the ultimate source of many inputs such as raw materials and energy, which firms use in their productive activity. In fact, the availability of natural resources in the region or country is the basic factor in determining business activity in it. The natural environment which includes geographical and ecological factors such as minerals and oil reserves, water and forest resources, weather and climatic conditions are all highly significant for various business activities. For example, steel producing industries are set up near the coalmines to save cost of transporting coal to distant locations. The natural environment also affects the demand for goods. For example, in places where temperatures are high, the demand for coolers and air conditioners are high. Similarly, weather and climatic conditions influence the demand pattern for clothing, building materials for housing etc. Natural calamities like floods, droughts, earthquake etc. are devastating for business activities.

Ecological Environment: Due to the efforts of environmentalists and international organizations such as the World Bank the people have now become conscious of the adverse effects of depletion of exhaustible natural resources and pollution of environment by business activity. Accordingly, laws have been passed for conservation of natural resources and prevention of environment pollution. These laws have imposed additional responsibilities and costs for business firms. But it is socially desirable that these costs are borne by business firms if we want sustainable economic growth and also healthy environment for human beings.

Internal Environment
The factors in internal environment of business are to a certain extent controllable because the firm can change or modify these factors to improve its efficiency. However, the firm may not be able to change all the factors. The various internal factors are:

Value system: The value system of an organization means the ethical beliefs that guide the organization in achieving its mission and objectives. It is a widely acknowledged fact that the extent to which the value system is shared by all in the organization is an important factor contributing to its success.

Mission and objectives: The business domain of the company, direction of development, business philosophy, business policy etc are guided by the mission and objectives of the company. The objective of all firms is assumed to be maximization of profit. Mission is defined as the overall purpose or reason for its existence which guides and influences its business decision and economic activities.

Organization structure: The organizational structure, the composition of the board of directors, the professionalism of management etc are important factors influencing business decisions. The nature of the organizational structure has a significant influence over the decision making process in an organization. An efficient working of a business organization requires that the organization structure should be conducive for quick decision-making.

Corporate culture: Corporate culture is an important factor for determining the internal environment of any company. In a closed and threatening type of corporate culture the business decisions are taken by top level managers while the middle level and lower level managers have no say in business decision-making. This leads to lack of trust and confidence among subordinate officials of the company and secrecy pervades throughout the organization. This results in a sense of alienation among the lower level managers and workers of the company. In an open and participating culture, business decisions are taken by the lower level managers and top management has a high degree of confidence in the subordinates. In this type of culture, participation of workers in managerial tasks is encouraged. Development of work culture and the growing involvement of the workers or employees in company affairs and the sympathetic attitude of the management towards its employees are all equally responsible for maintaining a healthy internal environment in the business.

Quality of human resources: Quality of employees that is of human resources of a firm is an important factor of internal environment of a firm. The characteristics of the human resources like skill, quality, capabilities, attitude and commitment of its employees etc could contribute to the strength and weaknesses of an organization. Some organizations find it difficult to carry out restructuring or modernization plans because of resistance by its employees. Due to the importance of human resources for the success of the company, now-a-days there are special courses for managers so as to be able to select and manage efficiently the human resources of a company.

Labor unions: Labor unions collectively bargains with the managers for better wages and better working conditions of the different categories of workers. For the smooth working of business firm good relations between management and labor unions is required.

Physical resources and technological capabilities: Physical resources such as, plant and equipment and technological capabilities of a firm determine its competitive strength which is an important factor for determining its efficiency and unit cost of production. Research and development capabilities of a company determine its ability to introduce innovations which enhances productivity of workers. It is, however, important to note that the rapid technological growth and the growth of information technology in recent years have increased the relative importance of intellectual capital and human resources as compared to physical resources of a company. The growth of Bill Gates’ Microsoft Company and Murthy’s Infosys technologies is mostly due to the quality of human resources and intellectual capital than to any superior physical resources.

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