Business environment refers to the factors external to a business enterprise which influence its operations and determine its effectiveness. Business environment may be healthy or unhealthy. Healthy business environment means the conditions are favourable to the growth of business whereas unhealthy environment implies conditions hostile or unfavourable to business operations. Business and its environment interact with each other. Economic system and other conditions in the environment determine the success of business enterprises. The firm and its management have to adjust to the conditions prevalent around it. However, business enterprises try to influence and shape the environment. Successful working of business concerns improves the economic and social conditions in the country.
No business concern can ignore the environment around it except at its own peril. “The penalty of environ mental disregard is heavy. It not only reduces profit margins and makes opportunities for expansion slip, but it also arouses social hostility and makes social environment growingly inhospitable to business operations.”
A study of business environment offers the following benefits:
1) It provides information about environment which is essential for successful operation of business firms.
2) It opens up fresh avenues for the expansion of new entrepreneurial operations. The entrepreneurs may come forward with new ideas and with new ventures when they find environment suitable to their enterprises.
3) Knowledge about changing environment enables businessmen to adopt a dynamic approach and maintain harmony of business operations with the environment.
4) By studying the environment entrepreneurs can make it hospitable to the growth of business and thereby earn popular support.
Thus, the entrepreneur should continuously study the nature of environment and its influence on business. However, mere study is not enough. Attempts must be made to influence the environment in order to make it congenial and favorable to entrepreneurial activities. The most successful entrepreneur is one who not only adjusts to the environment but also modifies the environment to suit his requirements through the direct and indirect influences he can exercise over the system.
Phases of Business Environment
Business environment may be classified into two broad categories; namely external; and internal environment
A) External Environment
It is the environment which is external to the business and hardly to influence independently. The following are the components of external environment:
i) Economic Environment
Economic environment is of multidimensional nature. It consists of the structure of the economy, the industrial, agricultural, trade and transport policies of the country, the growth and pattern of national income and its distribution, the conditions prevailing in industrial, agricultural and other sectors, the position relating to balance of trade and balance of payments, and other miscellaneous conditions of the economy. There is a close relationship between a business firm and the economic environment around it. The success of a business enterprise depends considerably upon the State and growth of the economy.
ii) Legal Environment
Business must function within the framework of legal structure. Therefore, an adequate knowledge of laws and rules is necessary for efficient managerial performance. When new laws are made and controls exercised through legal enactments, the first reaction of the business community is to oppose them and disobey them. Management should try to understand what should be the right laws and strictly obey them when so made. In addition, it can influence the government to change and improve the law and make it useful to the business community.
There are several business laws in our country. A working knowledge of these laws is very helpful for the entrepreneur. Such knowledge will keep them away from innocent breaches and resultant penalties. Some laws differ from region to region and amendments arc made from time to time. Therefore, the entrepreneur must always keep in touch with those who know the latest position in law. In addition, an entrepreneur should:
- Read the books that enlighten on the legal side of business
- cConsult government agencies concerned with the implementation of business laws.
- Retain labor law consultants.
iii) Political Environment
In a democratic country, politics cannot be ignored. Managers and entrepreneurs should understand the working of the political system. Such understanding and concern for national problems will help them in the long run in discharging their responsibilities to the satisfaction of the public.
Public opinion is very important and today's public opinion becomes tomorrow's legislation. Businessmen should, therefore, learn to take public opinion into account in the decision-making process. If business does not learn how to deal adequately with public opinion, it will face a disaster. This does not mean that business should surrender itself to public opinion. Rather, it implies intelligent response in order to change wherever necessary and a constructive approach to problems.
iv) Socio-Cultural Environment
It consist the social and cultural norms of a society in a given period of time. The variables that are appraised are values, beliefs, norms, fashions and fads of a particular society. It can help in understanding the level of rigidity/flexibility of a given society towards a new product/service/concept. Traditional culture should be protected in so far as it is not a hindrance to innovation, motivation, and development.
v) Demographic Environment
It assesses the overall population pattern of a given geographical region. It includes variables like age profile, distribution, sex, education profile, income distribution etc. The demographic appraisal can help in identifying the size of target customers.
B) Internal Environment
Internal environment is the environment which is under the control of a given organization. Following are the components of internal environment of a business:
ii) Raw Material: It assesses the availability of raw material now and in the near future. If the availability of raw material is less now or would be less in future then the entrepreneur should give a serious thought to establishing a venture as the entire system can come to a standstill due to shortage of raw material.
iii) Production/Operation: It assesses the availability of various machineries, equipment, tools and techniques that would be required for production/operation.
iv) Finance: It assesses the total requirements of finance in terms start-up expenses, fixed expenses and running expenses. It also indicates the sources of finance that can be approached for funding.
v) Human Resource: It assesses the kind of human resources required and its demand and supply in the market. This further helps in estimating the cost and level of competition in hiring and retaining the human resources.
As stated above, the objective of environmental scanning should be to gather information from as many sources as possible and to maximize this information for enhanced probability of success in the business.
Environmental Factors Affecting Entrepreneurship
A complex and varying combination of financial, institutional, cultural and personality factors determines the nature and degree of entrepreneurial activity at any time. The personal backgrounds of the entrepreneurs are determined mainly by the environment in which they are born and brought up and work. A multitude of environmental factors determine the entrepreneurial spirit among people. The entrepreneurs in turn create impact on the environment. The interaction between the entrepreneur and his environment is an ongoing process. At any given point of time, the entrepreneurs derive meanings from the environment prevailing at that time and try to adapt and/or change the environment to suit their needs.
Some of the environmental factors which hinder entrepreneurial growth are given below:
- Sudden changes in Government policy.
- Sudden political upsurge.
- Outbreak of war or regional conflicts.
- Political instability or hostile Government attitude towards industry.
- Excessive red-tapism and corruption among Government agencies.
- Ideological and social conflicts.
- Unreliable supply of power, materials, finance, labor and other inputs.
- Rise in the cost of inputs.
- Unfavorable market fluctuations.
- Non-cooperative attitude of banks and financial institutions.
Entrepreneurship is environmentally determined. The most important essential for entrepreneurial growth is the presence of a favorable business environment. A healthy business environment requires active social and cultural behavior of the people, efficient economic conditions, helpful motivating Government policies, etc. When environment mitigates entrepreneurship it must be modified.
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