6 Important factors of Business Environment and their Influence on Business

Factors of Business Environment and its Influence

Business Environment is not concerned with a single factor. It comprises of several factors and each factor influences the business firm in its own way. Some factors influence the performance of the firm directly while the influence of some other factors is only indirect. These factors provide opportunities, threats and challenges to the firm. Thus, environment is multi-dimensional and very complex in nature. At the same time, each factor should be studied individually.

Components of Business Environment

Components of Business Environment

Here we have discussed about 6 important factors that influence business environment in brief.

  1. Geographical and Ecological or Natural Factors.
  2. Demographic Factors.
  3. Economic Factors.
  4. Political and Legal Factors.
  5. Social and Cultural Factors.
  6. Physical and Technological Factors.

1. Geographical and Ecological or Natural Factors

Geographical conditions exert influence on the decisions as to the type of industries and business to be carried on in a region. This is because the people of a particular geographical region will have similar tastes, preferences and requirements.

Generally, goods, which are largely preferred by people in one region, may not be liked in another region. For instance, tastes, likes etc. as to consumption of goods in the people of South India may not be similar to that of in North India. Even in South India, people in different states may not have similar tastes, likes etc.

The geographical situation, the physical feature, the climate, rainfall, humidity, the vegetation etc. decide the type of living in a particular region. Hence those industries, which could cater to the needs of the people, could develop.

In India, cotton textile industries are located in Mumbai and Coimbatore regions due to favorable climate. Jute industry is located at Kolkatta due to the favorable geographical and climatic conditions to grow the raw material. The particular type of industry develops, only where its raw materials are available.

Ecological factors consist of natural resources like farmland, fisheries, forests, minerals like coal, metals, oils etc., energy, air and water. The supply of the resources is very much limited. A decade ago, we were all under an impression that natural resources like air and water are not exhaustible and their supply is unlimited. But now the situation is changed and we came to know that such resources are also very much limited in supply.

P.J. Deoras, well-known environmental specialist, in his article in “Economic Times”, says as follows.

Of the total amount of water on this earth, 93% is the oceans and it cannot be used for drinking, washing or agriculture. The remaining is in the Polar Regions, ice burgs and glaciers. We have only 0.052% of sweet water available to us in our rivers, lakes, crust of earth. In spite of this, we pollute and waste water”.

If this is the case of water, it is needless to highlight the importance of other scarce resources. The rate of economic growth in any country depends mainly upon the availability of the natural resources there. Hence the Governments all over the world prevent the businessmen and industrialists from recklessly exploiting the scarce resources for their immediate gains.

Further, more emphasis is being laid for the promotion of sanitation, health, forestry, soil conservation, housing etc. The Western countries have already recognized the menace of the environmental pollution. Now, the Third World countries are also increasingly realizing its importance. In India also, its importance is now well recognized by the Government.

Various legislative measures are also being taken to protect the ecological environment. All these factors directly limit the scope of performance of the business firms. They should look for the Government’s sanction at each stage.

We shall now briefly analyze how the ecological factors and the Government’s intervention influence business.

1. Supply of Natural Resources

The Government exercises tight control over the extraction and exploitation of certain natural resources, which are essential for industrial performance. In India, almost all the coal mines are nationalized and barring a few production of steel is also under state monopoly. O.N.G.C. enjoys a virtual monopoly over extraction of oil and mineral gas. Hence, most of the industrial units are at the mercy of the Government to get adequate and timely supply of these materials to carry on their production schedule.

2. Pollution Control Measures

Ecological environment can be defined as the complex aggregate of all external conditions, which affect the life, development and survival of all organisms. Any unfavorable alteration of this natural environment is called environmental pollution. Rapid industrialization has drastically damaged the quality of our natural environment.

The disposal of wastes, emission of gas from factory chimneys has also created severe problems of air and water pollution. The Government under the banner of rapid industrialization drive, had allowed industrialists to start new factories anywhere and everywhere in the country.

Though pollution control laws were there in the statute book, they were not enforced with any seriousness. Therefore, the industrial units cared very little about the pollution prevention norms prescribed, and polluted water and air recklessly.

The impact of the menace came into lime light only in 1984 when the Bhopal episode took 2,000 lives. Thereafter, the Government began to take serious steps to prevent this damage done to the ecological environment. Of the various measures the following are noteworthy.

1. Environment (Protection) Act

The Government passed the Environment (Protection) Act in 1986, which gives wide powers to the Government to take punitive action against erring industrialists. Even Government organizations and departments (Public Sector Units) are not exempted from the purview of the punishment.

2. Amendments to Air (Prevention and Control of Pollution) Act, 1981

The Government has introduced certain amendments in the Air (Prevention and Control of Pollution) Act in 1987 with a view to make the law more effective and severe.

3. Amendments to Water (Prevention and Control of Pollution) Act, 1974

The Government has also introduced certain amendments in the Water (Prevention and Control of Pollution) Act in 1988 to remove administrative and practical difficulties that emerged over the years after the enforcement of the Act.

4. Ministry of Environment

The then Prime Minister Mrs. Indira Gandhi appointed a High Power Committee to advise Government on this important issue. On the basis of the committee’s report, a separate Department for Environment was set up on 1st Nov 1980. In 1985, a new Ministry of Environment and Forestry was created. The department of environment serves as the main agency on behalf of the Government for planning, promotion and co-ordination of environmental programmes.

5. Pollution Control Boards

The Central Government has also constituted a Central Pollution Control Board. Several State Governments have also set up boards to monitor air pollution and make suitable recommendations to control it.

These measures have, in fact, tremendously increased the responsibility of the industrialists towards the society. They should strictly adhere to the conditions laid down by the Pollution Control Boards in matters of treatment and discharge of trade effluents and wastage. Since failure to make provision for such preventive means will entail punitive action, the industrialists should bear additional financial strains and liabilities.

2. Demographic Environment

Demographic environment includes a number of sub-factors viz., size, growth, age and sex compositions of the population, educational levels, languages, caste, religion etc. The impact of this demographic factor is more vital in India than any other country in the rest of the world. Indian population is highly heterogeneous with varied religions, languages, castes and creeds. Naturally their tastes, preferences, beliefs, temperaments are bound to differ. This fundamental difference gives rise to different demand patterns and calls for different marketing strategies.

Only because of the influence of this factor, most of the industrialists in India have limited their area of operations. Even big business houses have to remain confined within a limited area or region. This heterogeneous population not only poses a challenge to the marketing task of an enterprise But its impact can be felt on the production side also.

The labour force is also highly heterogeneous in many respects. This diversity is apparent even in small areas where the people are speaking the same language. Their castes and customs differ widely. Apart from these, their political loyalty also plays an important role in dividing them into various groups. All these factors make the personnel management a risky and difficult job.

3. Economic Environment

Economic environment consists of three important factors namely, economic systems, economic policies and economic conditions. The impact of this environment is much more direct and deliberate than other factors. These three elements of the economic environment should be analyzed individually as well as collectively as a whole.

1. Economic Systems

The scope of private sector depends mainly on the economic system of a country. Economic system can be classified into three broad categories viz.,

  1. Free Trade Economy or Capitalist Economy,
  2. Centrally Planned Economy or Communist Economy or Socialism, and
  3. Mixed Economy.

Capitalist economy is at one end and the communist economy is at the other end. In between these two-extreme situations are mixed economies. Within the mixed economic system itself there are wide variations. Mixed economy refers to a situation where public and private sectors co-exist.

India has a mixed economy with clear-cut Industrial Policy. Certain industries are exclusively reserved for the public sector, and private enterprises are not allowed to operate in those lines of business. Likewise, certain industries are exclusively reserved for small sector, and large industrial houses and monopoly houses are debarred from entering into such lines of business.

The Industrial Policy of India is an important consideration to our industrialists while starting their venture. The size of the industrial unit should be in accordance with the provisions and stipulations of the Policy.

2. Economic Policies

The economic policy of the Government has a very decisive impact on the business units. Even the very survival of the business firm depends on how the firm reacts and responds to the Government policies.

In India, industries have been divided into two broad categories namely,

  1. Priority Sector, and
  2. Non-priority Sector.

The priority industries shall get a number of incentives and other positive support from the Government as well as from other financial institutions. Such encouragements are denied to non-priority sectors. Hence, entrepreneurs shall naturally tempt to go for priority sector.

Likewise, export oriented units and industrial units started in backward areas can also enjoy a number of benefits. If a priority sector industry is started in a backward area, it can avail both the benefits available to priority sector as well as those meant for backward areas.

Moreover, industrial units started in developed areas particularly within the specified limits of Metropolitan cities are made subject to various difficulties and handicaps. Even banks are asked to ignore them while extending credit. The entrepreneur while promoting a new firm should give due consideration to all these factors.

3. Economic Condition

Another major general economic factor, which affects the prospects of the individual firm, is the size and the overall state of health of the national economy. Economic condition or the health of the national economy implies the consideration of many elements namely, the stage of development, economic resources, the level of income, the distribution of wealth and income etc.

In developed countries, the per capita income will be high and the size of the market will also be large. When the size of the market is large, large sale production shall also be there. But modern economists are of the view that developed countries are no longer worthwhile propositions for investments because developed economies have almost reached more or less a saturation level in certain spheres of their industrial activities.

On the other hand, they feel that in developing economies, investment and income levels are steadily and rapidly increasing and hence business prospects are bright and further investments are encouraged.

So far we have discussed the economic environment within a country only. But, in today’s world no country is isolated. Even dosed economies like U.S.S.R. and China opened their doors and have become subject to the influence of the outside world. The activities of most business firms are affected by international factors like the raise of inflation in different countries with which they trade. Similarly, the various trade barriers (including tariffs) created by different countries affect the domestic firms and their export efforts.

Today developed countries are seeking good avenues for investment in developing countries. Various multinational corporations came into being. Their influence over the performance of domestic firms is so vital. Foreign capital is now freely allowed in India. Further the Government is also very liberal in issuing license to consumer goods industries at the expense of the capital goods industry.

4. Political and Legal Environment

Economic environment within a country is closely linked with the political and legal environment there. Political and legal environment is the background of laws and regulation within which the business firms should conduct their affairs.

The doctrine of “Laizze-faire” has become an outdated or discarded principle and the Government all over the world regulate the business activities. Even in capitalist countries, the Government controls and influences the business policies in many ways.

The degree of control or direction of the Government may differ from country to country but its impact cannot be ruled out elsewhere. Particularly, after the Great Depression, State intervention in the economic life is clearly noticeable in all economies of the world.

In the Indian context, the Government’s role and influence on business policy are multifarious. In this environment, Government interacts with business at three levels — local, state and center and exerts varying amounts of influence over business. The Government plays a number of roles as it interacts with business. It is here that the Government acts as a regulator or controller, coordinator, caretaker and guardian, and supplier. Besides, it also acts as a competitor and as a customer.

As stated already, there are certain spheres in India where no private enterprise is allowed to operate. In addition, there is price and distribution control over a number of commodities. Administered prices are also there. Again certain sectors are identified for special encouragement and this discriminates against others.

There is also a comprehensive labour legislation, which force employers to pay minimum wages to workers in specific industries and statutory bonus payment is very liberal in approach. The control of big business is exercised through MRTP Act. The Foreign Exchange Management Act (FEMA) brings Foreign Companies and multinationals operating in India under control. Import and export activities are regulated and restricted by periodical Import and Export Policies announced by the Central Government.

The Government also acts as a supplier as well as a financier through its financial institutions, supplies natural resources needed by the firms etc. In addition to all such influences, there are public sector units to deal with various types of business and they directly compete with private business.

In India, Government is the largest employer and the public sector controls a major share of the corporate sector. The public sector is now mobilizing resources from the open market by issuing securities and bonds, and the nationalized banks are all extending their utmost support in this task.

Above all, tax laws and policies play a decisive role in business policy. Certain policies of the Government even expose the business community to a lot of tension and pressure. All these facts clearly reveal that Government has an upper hand in all the business policies in India.

5. Social and Cultural Environment

Of the various environments stated above, the social and cultural environment has the greatest impact on the policies and performance of all business firms. This environment poses a serious challenge to the business, and the business managers while formulating business strategies and policies should give due weight to this pivotal factor.

Social environment is concerned with the environment of society as a whole — of which every one involved. Cultural environment is an aggregate of all sub-cultures each with distinct concepts, beliefs and faith. The society as we all know is not static. We have a dynamic i.e. ever-changing society. New demands are created and old one lost in due course. The business enterprises should constantly watch the developments taking place and make necessary adjustments in their production and marketing plans and strategies to fulfill the new social demands.

Adjusting with the social and cultural development, of course, will enable the firm to reap a rich harvest. Profit is the ultimate object of all business endeavors. Besides, it is the indicator of the efficiency of the business firm. But now the situation is changing.

Businessmen should not act with profit motive only. They have several social responsibilities also. They should give due weightage to the long-term welfare of the consumers as well as the society. Bearing this point in mind most big companies now-a-days show less profit than that they should have normally earned, just to create a public image.

Some companies have also been asked to be socially responsive. In fact, a number of companies in our country are now spending money for society’s welfare. Some companies are liberally donating their funds to educational institutions and universities for construction of building, for teaching programmes, for scholarships and even offer “Chairs” for specializing subjects. Some big business houses run their own educational institutions.

6. Physical and Technological Environment

Physical factors mean and include geographical factors like weather, climatic conditions etc. These factors have a notable influence on business prospects. The availability of physical facilities limits the scope and prospects of business.

Technology refers to the knowledge of how to do things. The dominant features of technology have been made in the last three decades. Particularly for the last ten years, technology has worked wonders. Prof. Kahn and Wiener have called the new development in technology as “Innovation”, “Revolution” or “Break Through”. The technological development can contribute to the economic development.

Joseph Schumpter was the first economist who recognized the place of technology in the sphere of economic development. According to him, industrial growth depends upon technological innovations and the ability to translate technology into profits. Business becomes important at this point. It is the main institution that translates discoveries into application for public use.

The time lag between basic discoveries and the application of these discoveries to commercial products have considerably decreased now. In the past, it took a long time. Richard Eelles explains this point with a beautiful illustration. He says as follows.

It took more than a century of applied research and engineering in photography to develop the basic discovery into a saleable product. In the case of telephone, the time lag was over half-century; Radio took 35 years as contrasted to radar, which took 15 years. Television moved from research to the commercial stage within 2 years and atomic bomb in six.

From these observations, it has become clear that scientific discoveries as such of no use or have no meaning unless they are used for making new and useful goods and services for people. Any enterprise, which translates a new technology into useful product as soon as it is discovered, shall reap a rich harvest and the profit volume will be comparatively low in case of other firms, which succeed the pioneering enterprise.

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