We live in a dynamic environment that changes all the time. Businesses must understand the changes in the environment and how these changes affect their performance.

The process of thinking strategically requires that managers understand how the structure and competitive dynamics of their industry affect the performance and profitability of their companies. Armed with an appreciation of the forces in their industry that give rise to opportunities and threats, managers should be able to make better strategic decisions. 

“Business environment is an aggregate of all conditions, events and influences that surround and affect it. It is broad and ever changing as its separate elements interact. A single firm’s environment is narrow in scope than the total environment of business. It is complicated and continuously changing.” —Professor Keith Davis.

Learn about:- 1. Meaning of Business Environment 2. Definition of Business Environment 3. Concept 4. Scope 5. Factors 6. Need 7. Features 8. Components 9. Dimensions 10. Globalisation 11. Significance 12. Opportunities and Challenges.

Business Environment: Meaning, Definition, Concept, Components, Significance, Scope, Factors, Features, Dimensions and More…

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Contents:

  1. Meaning of Business Environment
  2. Definition of Business Environment
  3. Concept of Business Environment
  4. Scope of Business Environment
  5. Factors of Business Environment
  6. Need of Business Environment
  7. Features of Business Environment
  8. Components of Business Environment
  9. Dimensions of Business Environment
  10. Globalisation of Business Environment
  11. Significance of Business Environment
  12. Opportunities and Challenges of Business Environment

Business Environment Meaning

No business can exist in a vacuum. The rapidly changing business environment might shorten the life of a given strategy. The external changes might influence the activities and quality of decisions of both the firm and its competitors. George Salk says, “If you’re not faster than your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal.”

Hence, as Kenich Ohmae says that “environmental analysis is the critical starting point of strategic thinking.” Charles Darwin has said, “It is not the strongest of the species that survive nor the most intelligent, but the one most responsive to change.”

We live in a dynamic environment that changes all the time. Businesses must understand the changes in the environment and how these changes affect their performance. The process of thinking strategically requires that managers understand how the structure and competitive dynamics of their industry affect the performance and profitability of their companies. Armed with an appreciation of the forces in their industry that give rise to opportunities and threats, managers should be able to make better strategic decisions.

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Successful managers must recognize opportunities and threats in their firm’s external environment. Regardless of the industry, the external environment is critical to a firm’s survival and success. A host of external factors influence a firm’s choice of direction and action.

Business and its Environment:

A business depends on certain internal and external factors. These factors are treated as given and business enterprise is expected to operate under a particular set of environmental system. These factors are generally uncontrollable and beyond the control of business enter­prises. But progress, success and survival largely depend upon their capacity and ability to adapt successfully to environmental changes available in surroundings of a business.

In its operational behaviour, an organization interacts with the various forces in its environ­ment. It may be in terms of receiving inputs, returning outputs and using feedback to modify inputs and the transformation process. Moreover, the organization does not operate in a vacuum but must interact with its environment in order to function. However, level of interaction may differ from organization to organization and the impact can vary overtime.

Thus, business organizations deal with the environment by undertaking following transactions:

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(i) They Receive Inputs- The manufacturer receives raw materials, a stock broker receives the latest financial information and a local authority receives data on housing needs.

(ii) They Transform Inputs- The Manufacturer produces the goods from the raw materials the stock broker interprets the information and the local authority produces housing plans.

(iii) They Produce Outputs- The manufacture sell products, the stock broker advice and the local builds houses.

Business Environment Definition

“It is set of those inputs to an organisation which are under the control of other organisations or interest groups or are influenced by interaction of several groups, such as economy” —Professor Paire and Anderson

“Environment consists of all external and internal influence the complex interaction of the market, production and finance, the three basic components of our business world.” —Mr. J.A. King and Mr. C.J. Duggan

“Business environment is an aggregate of all conditions, events and influences that surround and affect it. It is broad and ever changing as its separate elements interact. A single firm’s environment is narrow in scope than the total environment of business. It is complicated and continuously changing.” —Professor Keith Davis

“An organisation’s external environment consists of those things outside an organisation such as customers, government units, suppliers, financial firms and labour pools that are relevant to an organisation’s operations.” —Professor Gerald Bell

“Every organisation exists in an environment that extends beyond its formal boundaries. This external environment represents a set of conditions, circumstances and influences that surround and affect the functioning of an organization. Environment is made up of many different individuals (for example—customers, members of other organisation, local citizens, organisation of suppliers, civil groups, labour unions and government bodies—regulatory agencies, legislators, local officials). It includes those people who are capable of influencing an organisation and its management system, as well as those who might be affected by the organisation’s actions.” —Professors Randall B. Dunham and John. L. Pierce

In a nutshell business environment is the sum total of all the external factors beyond control of business that influence the business in a number of ways. In other words, it consists of two layers of macro level namely general and industry environments. The following picture makes it amply clear. Thus, the business environment is divided into general environment and industry environment.

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‘General environment’ refers to the general and overall environment within which firms operate. The experts like Charles W.L. Hill and Gaseth R. Jones call it is a ‘macro’ environment. Others like Mr. Elbing and others like to call it as the indirect action environment.

The macro- environment consists of the broader economic, social, demographic, political, legal and technological framework within which the industry and company are placed. It is called as ‘indirect action’ environment. The forces do not have any immediate direct effect on the operations but they have influence.

On the other hand, “industry environment” or “direct action environment” or “tasks environment” or “micro environment” or “operating environment” is by Charles W.L. Hill and Gareth. R. Jones, Elbing, Paire and Anderson—Randall B. Dunham and Jon. L. Pierre-II, Philip Kotler, and John A. Pearce II and Richard B. Robinson …, respectively.

A company’s industry environment consists of elements that directly affect the company such as competitors, customers and suppliers. The forces of industry environment directly affect and are affected by the organisation’s operations. In other words, the task environment is the more specific and immediate environment in which an organisation conducts its business.

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It implies that the strategists or makers of decision should design those strategies that are matching to the needs of external environment. It is a question of adjusting the organisation to these forces so that the firm is in a position to have increased share in market, profitability and other goals and objectives by utilising its internal strengths and weaknesses.

Concept of Business Environment

Managers must have a deep understanding and appreciation of the environment in which they and their organisations function. The environment of business is the ‘aggregate of conditions, events and influences that surround and affect it’ (Davis).

Since the organisation is part of a broader social system, it has to work within the framework provided by the society and its innumerable constituents.

For the sake of simplicity the environmental forces could be classified into two categories:

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1. Internal environment and

2. External environment.

1. Internal Environment:

The internal environment consists of conditions and forces within an organisation that affect the organisation’s management. Aspects of the internal environment include the organisation’s mission, cor­porate culture, owners and the board of directors, employees, other units of the organisation and unions.

2. External Environment:

The external environment consists of those fac­tors that affect a firm from outside its organisational boundaries. Of course, the boundary that separates the organisation from its external environment is always not clear and precise. For example, shareholders are part of the organisation, but in another sense, they are part of its environment.

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Which part of environment is more important?

While analyzing the total (macro] environment, it is more effective to deal with the external forces first and then the internal, although some opine that the reverse order is better. For example, analysis of the internal environment might reveal a cash surplus, and top management might then decide to search the external environment for an investment opportunity, such as an acquisition.

Even here, examining external environment is essential to find whether the timing is right for an acquisition or any other use of cash. While deciding the internal-external order of analysis, one should not lose sight of aspects that work well in one set of conditions and change colour in another set of circumstances.

In actual practice, since both external and internal forces interact and impact organisational survival and growth, managers would do well to examine both sets of factors at the same time. The external environment reveals opportunities and threats and the internal environment uncovers strengths and weaknesses.

Literally, environment refers the surroundings external objects or circumstances in which someone or something exists. Here someone or something can be an individual, or a group of people, or an organisation. The performance of an individual or an organisation depends on the environment- The environment comprises forces which are outside or external to the business and forces that are internal to it.

Scope of Business Environment

Organizational environment deals with different forces which have a direct bearing on per­formance of the business organization. In this process, we generally include specific environ­ment and general environment, controllable environment and uncontrollable environment, micro environment and macro environment.

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The organization environment helps or affects the management to achieve its organizational objectives. The organization environment consists of all the factors that influence the organi­zation. Moreover, organizations take inputs like raw materials, capital, labour and energy from the environment, transform them into products or services and send them back as outputs to the environment.

Generally, organization environment is composed of two type’s environment: internal environ­ment and external environment internal environment includes all those forces, which are inside the organization and have capacity to influence the organization and its performances.

Internal environment factors are those factors, which are within an organization and impart strengths or cause weaknesses in management process. These forces are owners and share­holders, the governing board, employees, organization, culture, etc.

External environment incorporates all the factors which are outside the organization and influence the ability to achieve organizational goals. It is generally defined as all factors out­side the organization and that are relevant to its operation. It means external factors affect the organization in outer context.

Thus, the external factors are outside the organization and provide opportunities or pose threats to the organization. In this direction, there are two ap­proaches viz., direct and indirect action elements. Direct action elements are those elements which directly affect the business operation from its outer world viz., customers, suppliers, government, competitors, financial intermediaries, labour unions, media and special interest groups.

Some authors treated these factors as part of the task environment or operating envi­ronment. On the other hand, indirect action elements are the factors which affect the climate in which an organization’s activities take place but do not effect the organization directly.

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These elements are political variables, economic variables, social variables, technological vari­ables and international variables. Characterization of environmental factors as direct action elements or indirect action elements is generally governed by the prevailing situations. Indi­rect action elements have the potential to become direct action elements if situation warrants. Actually, some elements may have different relationships with different organizations.

The specific environment is the part of the environment that is directly relevant to the achieve­ment of an organization’s goals. It includes different stakeholders like suppliers, customers, competitors, and marketing intermediaries. Specific environment is individualistic in approach and treats each organization in different way. So it has unique characteristics and changes with conditions prevailing in surroundings.

General environment is the portion of external environment that contains the external forces that have a more general influence on the organization. It encompasses conditions that they affect the organization but whose relevance is not clear and predictable.

Thus, general envi­ronment incorporates everything outside the organization viz., economic policy, political con­ditions, socio-cultural influences, technological conditions and globalization issues. The gen­eral assumptions about the business organization sure that they are neither self-sufficient nor self-contained. Actually they exchange resources with and are dependent on the environment.

Another version of environment is in terms of controllable environment and uncontrollable environment. Controllable environment includes all those factors which are governed by the organizational control process. Generally, internal factors are treated as controllable factors as an organization has control over these factors. Organization has full freedom to shape or adjust the situation as per its requirements.

These factors are owners and shareholders, board of directors/management, employees etc. But uncontrollable factors are external factors and beyond the control of organizations. It is for the organization to redefine its operational strate­gies and adjust with them within the framework of uncontrollable factors.

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Thus, on the basis of above analysis, we can say that business environment is nothing but an external environment of the organization in which it is expected to achieve its goals and ob­jectives. In practice, business environment is composed of micro environment and macro environment.

Micro environment is concerned with immediate environment of business organisation. Macro environment deals with external environment in which business organisation operates.

Actually, there is a direct relationship between the organization’s performance and its sur­roundings. Micro and macro environment both have a positive or negative impact on the working of business organization. However, management of the business organization is re­quired to maintain an effective adjustment for achieving organizations goals and missions.

Business Environment – 5 Main Needs

It is essential for a business enterprises to keep itself informed about its surrounding environment because:

1. If a business enterprise is aware of the fact that environment is getting hostile, it individually or along with other business enterprises can make efforts to make the environment hospitable according to the requirements of business.

2. The information about changes taking place in the environment enables a business enterprise to adjust itself accordingly.

3. Due to its knowledge about the changes in the environment, a business enterprise remains alert and dynamic.

4. The success of a business enterprise depends to a great extent on its awareness about its surroundings environment.

5. A business enterprise can expand itself as and when favourable changes take place in the environment. Therefore a disregard for environmental changes proves very costly.

7 Major Factors influencing Business – Demographic, Economic, Social, Political, Technological, Global and Natural

Environment includes such factors as socio-economic, technological, supplier, competitor and the government. While all there are highly relevant, there are two more factors which are not included in the definition and which exercise considerable influence on business performance. They are physical or natural environment, and international environment.

Including these two, the total factors which influence the business are:

1. Demographic factors,

2. Economic factors,

3. Social factors,

4. Political factors,

5. Technological factors,

6. Global factors, and

7. Natural factors.

A brief discussion of, which is in order.

Factor # 1. Demographic:

Demographic factors are commonly used to differentiate groups of present or potential customers. These factors are easily understandable and quantifiable and therefore easy to use in strategy formulation. Demographic factors include age, sex, family size; family life cycle, education, occupation, income, religion, race, and nationality. These are the root for many changes in society. Demographic factors influence (affect) all industries either positively or negatively.

i. Age:

Aging product needs and interest obtain vary with consume age – for example, children between 2 years, with more proportion in total population has positive effect on the producers of diapers, whereas when the people above 60 years age are high percentage it has positive impact on the health care industry.

ii. Sex:

Gender has always been a distinguishing segment variable. In sex ratio if female ratio is height then it has positive impact on cosmetics products and products used by ladies, whereas men saving tools and preparation.

iii. Family Size and Family Life Cycle:

Customers act and purchase differently as they pass through lifecycle. Young singles’ prefers to buy ready to eat foods, readymade cloths, personal care products and entertainment products. Thus, all the companies that are producing those types of products have positive effect.

Young married couple with one or two children, saves, money invests in financial and insurance products. Middle aged married couple prefers leisure products and home improvement items. In aging older married and older unmarried spends money on health care products, vocation, and gifts for younger relatives.

iv. Education, Occupation and Income:

Generally there is positive relation among education and occupation and income. There is because effect relationship among these factors people who are well educated would get high paying jobs and vice versa. Educated people with good income source spend money on products home appliances (PC, Laptop, Refrigerator, Micro oven, Air Cooler, Air Conditioner) automobiles, financial products, health care products, ready to eat foods, readymade garments, high definition cells, star hotels and internet. All the manufacturers of these products have positive impact on the business.

Factor # 2. Economic:

Business depends on the economic environment for all the required inputs and also to sell the finished goods. Dependence of business on economic environment is not surprising because, as it is rightly said, business is one unit of the total economy. Economic factors decide the nature and direction of the economy in which a firm operates. Strategic decisions are influenced by economic factors, therefore managers must monitor economic environment continuously.

It is very difficult to be precise about the factors which constitute the economic environment of a country. At the same time, it is equally difficult to draw the lines of distinction between the political environment and the economic environment and the technological environment.

The following are the factors constituting the economic environment of business:

i. Economic systems

ii. Industry

iii. Infrastructure

iv. Removal of Regional imbalances

v. Economic reforms

vi. Per Capital and national income

vii. Economic planning

viii. Agriculture

ix. Financial and fiscal sectors

x. Price and distribution controls

xi. Human resources

The above list is a mixture of macro and micro economic factors.

The major factors of economic environment are- interest rates, unemployment rate; consumer price index’ Trends in GDP; wage and price controls; availability of credit; disposable income and so on.

Factor # 3. Social and Cultural:

The social factors that affect a firm’s business include: values, beliefs, attitudes, opinion, and life styles. These are developed from culture, ecological, demographic, religious, education and ethnic conditions. Socio-cultural trends are shaping the way people live, work, produce and consume. The change in socio-cultural environment creates a different type of consumers and consequently the need for different products and different services. In the changing socio-cultural environment firms need to use different strategies.

For example, changes in life style create demand for fashionable items like jeans pants, cell phones, clubs, amusement parks and the like. Similarly, with the increase in percentage of working women demand for ready to eat foods is increasing. Greater concern for health and fitness has created demand for physical fitness equipment and health foods.

Entry of large number of women into workforce, changes life styles, shift in age distribution of population, increased average age life, pace of urbanisation, health consciousness and the like are the changes which have bearing on strategy formulation. Therefore there is a need to monitor the socio-cultural changes for taking better strategic decision. Take ITC when it understood that people are slowly avoiding cigarette, it has slowly moved from manufacturing tobacco to manufacturing food products.

Factor # 4. Political:

The influence of political environment on business is enormous. The political system prevailing in a country decides, promotes, fosters, encourages, shelters, directs and controls the business activities of that country. Stable, honest, efficient and dynamic political system ensures political participation of people, and assures personal security to the citizens. It is a primary factor for economic development. Political system comprises three vital institutions, viz., legislative, executive or government and judiciary.

Legislature, also called the parliament, is the decision making body. Executive also called the government implements and enforces whatever has been decided by parliament. Judiciary monitors the actions of both parliament and executive. Judiciary intervenes whenever the other two work against public interest or trespass constitutional guarantees.

The direction and stability of political factors are major considerations for strategic manager in formulating strategy. Political factors define the legal and regulatory parameters in which an organisation operates. Fair-trade decisions, antitrust laws, tax policies, minimum wage legislation, pollution control policies, pricing policies and many other actions are placed in front of firms with the aim of protecting consumers, employees, the general public, and the environment.

These factors reduce potential profits of firms. However, some political actions (subsidy, patent laws, and product research grants) are designed to benefit and protect companies. So, political system either may limit or benefit the firms. The ban on the entry of Philip Morris to Indian market for example, has saved ITC from a potential competitor’s threat. Similarly, the liberalisation policy pursued by the government has hit many local businesses because of the entry of MNCs.

Factor # 5. Technological:

Among all the segments of the external environment, technological environment exerts considerable influence on business. During the last 150 years, technology has developed substantially. Since technology enable them to conquer distances; control birth rate; save lives, generate preserve and distribute energy; discover new raw materials and substitutes to existing ones and so on. The impact of technological developments on strategy not only fast but also far reaching.

Development of technology can reduce or increase opportunities for a firm. It can reduce opportunities when a firm is not able to see the technological changes taking place in industry. For example take Dynora, EC TV Companies which are closed. Creative technological adoptions can suggest new opportunities for new products, or improvements in existing products, improving service quality, reducing manufacturing cost and deliver products to end users.

Take technology how helped cell phone manufacturing companies (New product, and improvements in existing products, and providing telecommunication services). Today, you are proudly saying to your friend that you have a 100 gm. weight cell phone set with multiple attributes it is just because of technology. Therefore technological developments can have a sudden and dramatic effect on an organisation’s environment.

Examples of technological advancements are internet technology, CAD/CAM, DNC, CNC, Flexible (lean) manufacturing, research in artificial and exotic materials and so on. Thus, firms particularly those in turbulent growth industries must strive to understand both the existing and probable future technological advances that can affect their products and services. Strategists need to monitor the technological advancements taking place around and formulate strategies to suit the changes.

Factor # 6. Ecological (Natural):

Ecology refers to the relationship between human and nature and among elements of nature themselves. Human beings, air soil, land forms, flora and fauna, rivers, oceans and mountains must exist together in harmony. But the harmony is disrupted by industrial establishments. The effluents they discharge, the noise they generate, the smoke they eject, and their massive utilisation of resources cause disruption of ecology.

Business is not the only villain. These are other pollutants as well. Fire, rains, agricultural activities, floods, earthquakes, and volcanoes do cause environmental degradation. The human beings themselves are the highest pollutants.

Since business establishments are highly visible they are made scapegoats for whatever happens to ecology. However, strategists need to consider ecological considerations while formulating strategies. If they do not do so voluntarily there are mandatory provisions passed by the government.

Factor # 7. Global/International:

There is an increasing trend for companies to expand their operations and reach beyond boundaries of their “home” country. Globalisation of business provides opportunities to access larger potential market and factors of production. At the company level, globalisation means two things- one, the company commits itself heavily with several manufacturing locations around the world and offers products in several diversified industries. Second, ability to compete in domestic market with foreign competitors. However, globalisation of business involves many risks like political, social and economic.

Foreign exchange rate, international tax policies, increasing global trade; trading blocs (NAFTA; EU, ASEAN WTO), are the prime global factors that affect business. For example, Toyota has a good supply chain. In 1995, Toyota produced about two-thirds of all its cars in Japan; the remaining one-third was produced in its affiliates spread over 25 countries in America, Europe and Asia. Furthermore, the company exported 38 per cent of its domestic production to foreign markets.

Aside from this flow of capital, goods and know-how between Japan and overseas affiliates, Toyota also engaged considerable intra-firm flows among the affiliates. For example, within South East Asian regional network, it exported diesel engines from Thailand, transmissions from the Philippines, steering gears from Malaysia and engines from Indonesia.

4 Main Features of Business Environment – Environment is Dynamic, Environment is Multi-Dimensional, Environment is Complex and Environment Affects Organization

Business environment contains many features.

These features are as follows:

Feature # 1. Environment is Dynamic:

Environmental change is concerned with the degree to which an organisation’s environment is dynamic and ever-changing. Change in environment occurs in areas like product, market, law or technology. However, some environmental factors such as technological and competitive environmental factors such as technologi­cal and competitive environments are changing faster than the political environment.

Thus, the rate of change in the environment may be faster in some industries and slow in other industries. There are some industries like Information Technology, Automobile, Chemicals where rate of change in technological and competitive environment is quite high than the rate of change available in machinery like capital goods industries.

Feature # 2. Environment is Multi-Dimensional:

Environment has multi-facet character. Generally, perception of observer determines the shape and character of the environment. Since, environment is ever-changing process; a particular change in development may be regarded by different observers in different perspectives.

Change in environment may be treated as an opportunity or threat by the affected parties. For example, globalization may be regarded as an opportunity by the consumers as they are expecting cheap and quality products from producers. But for indigenous producers, globalization is a threat from foreign competitors.

Feature # 3. Environment is Complex:

It refers to the number of elements in the organizational environment and the organisation’s knowledge of these elements and their impacts. Basically, environment is composed of different factors, events, conditions and influences originating from different perspectives.

But it is for the organization to respond to these perspectives in proper way otherwise its survival and growth will be affected. Micro dimension of complex environment is quite easily understandable but they are difficult to grasp in its macro-frame work. Dynamic nature of environment also made predictabil­ity of these variables quite difficult.

Feature # 4. Environment Affects Organization:

The forces constituting the environment are outside the organization’s boundaries and therefore beyond the control of management. These forces like social, political, economic, technology, competition etc. can have a major effect on the organization’s ability to achieve its goals.

These forces also tend to restrict and define the organization’s activities but also have an impact on its behaviour. Survival, growth and viability of an organization are governed by the environment in which it exists and operates. So any change in environment has an impact on the operational behaviour of organization.

Top 2 Components of Business Environment – External and Internal Environment

The environment of organization can be divided into two parts:

1. External Environment

2. Internal Environment

The external environment can further be divided into two parts:

i. General (which does not affect much to organization working directly like law and order, politics, culture etc., ), and

ii. Relevant (which may affect organization working directly like economic conditions and globalization etc.)

The external environment also known as Macro Economic environment includes those factors which are not in much control of organization.

The internal environment is known as Micro Economic environment includes those factors which are in some control of organization.

An external environment provides the opportunities and threats, and the internal environment needs the understanding of the strengths and weaknesses for the existence, growth and profitability of any organization.

A systematic approach to understand the total environment is known as SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis.

Business firms undertake SWOT analysis to understand the external and internal environment. SWOT analysis helps to understand organization’s existing strengths and weaknesses and accordingly organization analyze the opportunities and threats in the environment so that an effective strategy can be formulated.

3 Important Dimensions of Business Environment – Capacity, Volatility and Complexity

Singh and Chhabra (2005) have mentioned about three dimensions of environ­ment:

i. Capacity,

ii. Volatility, and

iii. Complexity.

Dimension # 1. Capacity:

Business environments are changing, and organizations need to survive and grow in changing environments. Capacity refers to the extent to which an organization can support. It needs to have a reserve of raw materials to keep the wheel of production revolving in times of scarcity. However, overstocking of raw material blocks money, and also increases the carrying cost. Therefore, an organization has to strike a balance. The stock should neither be abundant nor scarce.

Dimension # 2. Volatility:

In a volatile business environment, the extent of change is never predictable. An organization needs to watch the speed and direction of the environmental change. Many organizations have perished due to their inabilities to watch these changes. If the change is insignificant, the environment may be said to be static; but if the change is sudden, as in the case of the government imposing a policy without prior warning, then that is an unpredictable change. From the standpoint of volatility, the dimension may range from stable to dynamic.

Dimension # 3. Complexity:

The number of forces may be few or many and they may be favourable or unfavourable to the business. The complexity is more if the number of unfavourable or unbalancing forces is more and vice versa.

After duly taking into consideration the dimensions of the environment, an organization is required to reassess its capacity to grow to meet the market demands. The organization must watch the speed and direction of change using HR development and management initiatives to prevent its disappear­ance. Finally, the complexity dimension demands scanning and predicting the environment to initiate proactive steps.

Singh and Chhabra (2005) also mention the classification of environment as explained by Emery and Trist. Each type of the environment needs different HRM practices that are specific to the organi­zation to be effective.

Impact of Globalisation on Business Environment

At present the business environment is undergoing drastic changes because the nature of environment is such that it is uncontrollable. We are moving towards globalisation due to liberalisation of government policies, privatization, foreign direct investment, joint ventures and technology development and other decisions. Change is a natural phenomenon in business environment. It is likely to taken place.

It may be at different paces. Sometime die changes taken place fast and sometime slow depending upon the prevalent situation. It is likely to take place in every sphere of our life and there is no exception. In this world nothing is permanent except change. It is sure the changes would take place. It can be said in this world nothing is permanent.

Due to changes the situation is uncertain and risky. The business environment is changing rapidly due to different changes in different areas. The factors affecting the business are social, cultural, economic, legal, political, technological and competition. These have gone under rapid changes.

Due to the changes across the world markets, there is free movement of men, machines, money and materials. The world markets are shrinking day-by-day. “Globalisation” is always a popular word in news and TV. It has also become a key thought for economic theory and practice, and entered academic argues. But what people say by “globalisation” is often confusing and contradictory.

Here are some explored important themes in the theory and experience of globalisation. “Globalisation” is commonly used as a “shortcut” of describing the trend and connectedness of production, communication and technologies across the world. In general, “globalisation” is also used by some people to refer to the efforts of the International Monetary Fund (IMF), the World Bank and others to create a free global market for goods and services.

Globalisation in the sense of connectivity in economic and cultural life across the world has been going for centuries. With increased economic “interconnection”, deep-seated political changes, business of MNCs and global brands we are moving towards a global village market.

The experts have given their opinion on this and called it globalisation. ICFAI Centre for Management Research defined “the global business environment as the environment in different sovereign countries, with factors exogenous to the home environment of the organisation, influencing decision making on resource use and capabilities.” This includes the social, political, economic, regulatory, tax, cultural, legal, and technological environments.

Anthony Giddens (1994) has described globalisation as – “the intensification of worldwide social relations which connect distant locations in such a way that local happenings are shaped by events occurring many miles away and vice versa”. This involves a change in the way we understand geography and experience localness. As well as offering chances it brings with considerable risks connected, for example, to technological change. Globalisation, thus, has powerful economic, political, cultural and social dimensions.

Manuel Castells (1996):

“The Rise of the Networked Society” has argued persuasively that in the last twenty years or so of the twentieth century, a new economy emerged around the world. He characterises it as a new brand of capitalism that has three fundamental features – Productivity and competitiveness are, by and large, a function of knowledge generation and information processing; firms and territories are organized in networks of production, management and distribution; the core economic activities are global — that is, they have the capacity to work as a unit in real time, or chosen time, on a planetary scale.

The last decades of the twentieth century are characterized by increasing globalisation, manifested in the rapid growth of world trade, foreign direct investment, and cross-border financial flows discussed by Lee (1996) – “Globalisation and Employment – Is Anxiety Justified”.

The tools that facilitated this growth were international transportation, technology, and telecommunications that became cheapo, quicker, and of higher quality. “How Trade Hurt Unskilled Workers” and now the internet. However, the movement among nation-states to liberalize their trade policies — removing trade barriers and focusing on exports — also contributed to globalisation, a prime example of how government matters in the business sector. Globalisation was also influenced by international organisations like the World Bank, the IMF, and the WTO, devoted to increasing trade and development.

Sunkel, Carlsson and Scholte (1995):

“Globalisation in World Society” through the process of globalisation, the assumption is that more nations are depending on worldwide conditions in terms of communication, the international financial system, and trade. Therefore the world scenario is more integrated in international economic.

Effects and influences from these “integration aspects” can be studied from two major perspectives – (a) countries’ external level — or systemic approach, and (b) domestic or internal conditions within nations — sub-systemic approach.

The IMF describes globalisation as – “the growing economic inter-dependence of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology”. Another generally accepted definition of globalisation is “the expansion of markets and the reduction of impediments to the free exchange of goods, services, and assets”.

Seholte (2000):

“Globalisation. A critical introduction” is especially concerned with when he talks of globalisation. Not everything is global, of course. Most employment, for example, is local or regional- but “strategically crucial activities and economic factors are networked around a globalised system of inputs and outputs”.

“Market-driven Politics. Neoliberal democracy and the public interest” comments, “to survive in office they must increasingly ‘manage’ national politics in such a ways as to adapt them to the pressures of trans­national market forces”. In other words, the impact of globalisation is less about the direct way in which specific policy choices are made, as the shaping and reshaping of social relations within all countries.

Economist E. Amartya Sen (2002), “How to judge globalisation”, has argued that the inequity in the overall balance of institutional arrangements — which produces very unequal sharing of the benefits of globalisation. While the reach and power of multinationals appears to have grown significantly.

Significance of Business Environment (With Examples)

A study of business environment is highly significant for management for the following reasons:

(i) Smooth functioning of business cycle depends on availability of inputs and disposal of output. Business enterprises obtain inputs like raw-materials, machines, technology, manpower etc. from the society (which is part of business environment); and dispose of output i.e., finished goods to society. Hence, business managements must study business environmental factors so as to be aware of changes in input supplies, changes in social factors like consumers, competitors etc., for ensure smooth functioning of business cycle.

(ii) A study of business environment is essential to take full advantage of opportunities for gain hidden in the business environment.

Some examples of opportunities for gain might be:

a. Export concessions offered by the government.

b. Rising demand for many products (due to expanding markets)

c. Availability of skilled man-power (clue to rising levels of education in society).

d. Availability of latest technology.

(iii) Legal – regulatory factors are an important dimension of business environment. By studying business environment intelligently, management can avoid legal consequences which many arise due to non- adherence to legal provisions applicable to the business enterprise. It is better to swim with the current than against it.

(iv) By studying business environmental factors (particularly competitive and technological); management can ensure better competitiveness and higher profitability for the business enterprise.

(v) A study of business environment is a great aid in ensuring survival and growth of the business enterprise amidst volatile and turbulent environmental factors (Volatile and turbulent factors are those which are re likely to change suddenly and easily becoming dangerous). For ensuring survival and growth under the circumstances management can do better planning; introduce organisational flexibilities; come out with innovations; resort total joint ventures and merges or follow a policy of systematic adaptation (These concepts are explained in the next sub-title i.e., managerial response to changes in business environment).

(vi) By studying business environment, management can plan to better meet social responsibilities and add to the prestige and goodwill of the business enterprise.

(vii) By studying social-religious-cultural factors; business management can capitalise on (i.e., to take advantage of) changing social values like emerging fashions, craze for a higher standard of living (creating demand for new types of luxurious goods/services) etc.

Business Environment – Opportunities and Challenges of Globalisation

Globalisation presents opportunities to increase prosperity and ensure better jobs. For consumers, it brings a wider product range to choose from and lower prices. For firms, it brings opportunities for higher efficiency gains and productivity growth. Growth has been strong in the United States, China, and most emerging market and developing countries. Recent news from Japan has also been encouraging.

But globalisation also poses challenges. The global economy is at a cross-road. The impact of the financial crisis around the world has taken many people by surprise, and the full extent of the macroeconomic impact is not yet known. The most immediate challenge facing the global economy is the marked slowdown in the US and European economies mainly.

With increasing global competition, it has become difficult for organisations to start, survive, grow, stabilize and excel their performance in business. They are under tremendous pressure to improve their performance quantitatively and qualitatively with cost-effectiveness. The business environment is rapidly changing. It has become necessity to keep pace with the changing environment otherwise they will be thrown out of business by market forces.

In the modern times, management has grown very complex and it has acquired new dimensions. The new challenges are faced by the management. The challenges faced by business organisations are how to improve profitability, tune products and services as per changing need of customers and organisational development to stay in competitive race of business.

Figaredo, Rodrigo de Rato (2005):

“Challenges and Perspectives of the Global Economy” stated that in contrast, the performance of Europe continues to disappoint, with political developments there adding even more uncertainty. Consistent with this pattern, global current account imbalances have also widened Along with opportunities the threats are fluctuating prices of crude oil, gold, foreign currency and high inflation across the world.

These have created panic across the world. The biggest challenge facing the institutions in international governance is to reverse the trends of growing inequality that characterize the current processes of economic globalisation, inequality both between different countries and within them. The global economy faces problems associated with the regulation of financial markets, yet it is not possible to stop the project of a democratic and equitable world order in erratic world markets.

The challenge facing civil society is the diversity of the socio-cultural challenges of a globalised economy, it is necessary to develop skills to manage this diversity to handle uncertainty and identity. The operation of the uncertainty can be anything from an integrated approach to a coordination standpoint, although both approaches have a common need for principles based on statutory criteria to avoid conflict.

Therefore, economic and cultural differences are representative of major global cities. People increasingly experience greater cultural differences due to globalisation, and fragmentation creates challenges of identity, insecurity, anxiety, and uncertainty.

The pace, magnitude and direction of change caused by globalisation will continue to progress rapidly through technology transfer. It will join societies and cultures, change community values, and widen the gap between the rich and the poor. But it will also create opportunities and challenges for companies and organisations.

Managing the changes of dynamic management requires an ongoing process of adjustment of different segments of social reproduction according to Dowbor and Ladislau (2001) – “Decentralization and governance”.

Champlin and Olson, (1999):

“The impact of globalisation on US labour markets” in their work described that proponents viewed globalisation as an opportunity for economic growth while opponents perceive it as a threat to economic prosperity, political sovereignty, and cultural integrity. In developed countries the primary concern is the threat to unskilled workers and contracting industries; developing countries worry more about political sovereignty and losing control of their economies.

Ram Kumar B. (2012) pointed out that “the modern organisation management constantly is facing challenges in dealing with different situations due to diversity in organisations. Almost all big organisations across the world are facing the challenges of diversity. Indian organisations are no exception to this. In India, and foreign countries majority of mergers and acquisitions, foreign direct investments, joint ventures, etc., that have taken place involving multinational companies.

In developed and developing countries there is drastic growth in percentage of working women. Further, cultural elements like language, religion, age, education also have added to the diversity in organisations worldwide. It is important for management to understand how these elements or dimensions affect thinking, attitude, performance, motivation, commitment, success, and interactions with others. The organisational barriers faced in this way should be examined, found and remedial action should be initiated promptly.”

To carry the business effectively it was required by the organisation to work according to the changing environment or surrender to the changes. Those who have changed the strategy to do the business as per the changes have achieved success in the business and are leader in the business and earning a huge profit every year.

In the present situation social set up, economy and its development, government policies, technology, education of the people and level of competition have undergone drastic changes. It is needed to match the internal factors with the changing external factors so business can be carried effectively and efficiently.

To tackle this situation the different experts suggested different activities and management has recognized the development of competency of people, coordination between people at different levels, minimizing production cost and improving productivity. The priority in personnel management has changed vastly.

Now the tasks of framing rules, regulations and standing orders have been changed to promote the motivation generating factors and minimize the de-motivating factors for maximum capacity utilization. All these activities were clubbed together under umbrella of Human Resource Development.

To deal in the global situation, the experts suggested that the strategy is to be prepared to achieve the objectives of the organisation. The opinions of some of them are mentioned here. Glueck defined strategy as a “unified, comprehensive and integrated plan relating the strategic advantages of the firm to the challenges of the environment.

It is designed to ensure that the basic objectives of the enterprise are achieved.” Strategic management is further defined as – “that set of decisions and actions which lead to the development of an effective strategy to help achieve corporate objectives”.

Alfred Chandler described strategic management in his book “Strategy and Structure”, “as the determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and allocation of resources necessary to carry-out these goals”.

Frank Paine and William Naumes discussed in their literature ‘Organisation Strategy and Policy (1982)’, “the strategic management involves in decision making and the activities in an organisation which have wide ramification, have a long time perspective and use critical resources towards perceived opportunities or threats in a changing environment”.

As the Strategic International Human Resource Management’s (SIHRM) and International Human Resource Management (IHRM) model suggests, MNCs tend to adopt approaches that could reflect their overall international orientation, strategy and structure when dealing with global diversity management.

This is supported by research of Egan and Bendick (2003) – “Workforce diversity initiatives of US multinational corporations in Europe” where they find that both global and multi-domestic strategies have been effectively applied, despite acknowledging that most of the surveyed MNCs in fact adopted a strongly multi-domestic approach to diversity management.