What is Business Environment?
The term business environment is defined as the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance.
According to Bayord O. Wheeler, business environment is defined as the total of all things external to firms and industries which affect their organisation and operation.
Therefore, business environment includes all internal and external factors, which affect a business. Business environment is affected by organisations’ orientations, guidelines and regulations of regulatory authorities, nature of the economy, economic conditions, socio-cultural elements, demographic trends, global trends and cross-border development.
Table of Content
International Business Environment
The International business environment includes all controllable and non-controllable factors influencing an organisation’s decisions related to business activities at an international level. At a broad level, the international business environment is divided into internal and external international environment.
The internal international environment comprises an organisation’s objectives, strengths, weaknesses, behaviour and competencies. On the other hand, external international environment involves social factors, technological factors, economic factors, etc.
An organisation must constantly analyse its international business environment to evaluate the changes taking place in the international market and identify possible threats or opportunities for their businesses.
Forces of International Micro Environment
Micro environmental factors have a direct effect on the operations of a business. Due to this, micro environment is also known as the Direct Action Environment. Micro environment or task environment of an organisation includes all the forces that affect a business.
Customers
Individuals and entities who buy an organisation’s products and services are its customers. An organisation’s main objective is to satisfy its customers by ensuring that their needs and requirements are met. In addition, the organisation must also analyse the characteristics of its target market.
In management, phrases such as ‘Customer is always right’, ‘Customer is king’, etc. are used frequently and highlight the importance that organisations attach to their customers. The organisation must understand the behaviour and nature of customers. An organisation must ensure customer satisfaction if it wants to capture maximum market share irrespective of whether an organisation is operating globally or domestically.
Customers are usually classified into various types such as:
- Loyal customers: Such types of customers are completely satisfied with the products of an organisation. These customers help in increasing sales and profits by doing word-of-mouth publicity for the products. Such customers are less in number and they always tend to purchase the same products of the same company. Therefore, it is necessary for organisations to maintain regular interaction with loyal customers.
- Discount customers: Such customers buy products that are offered on discounts. These customers buy low cost products only. If more discounts are offered, they purchase more. Such customers are important for small industries that focus on low cost products.
- Impulsive customers: Such customers buy products based on their impulses. It is difficult to convince such customers because they tend to make purchases based on what catches their attention. It is difficult to handle such customers because they tend to see and select from a wide variety of products that are available. Organisations that are able to convince impulsive customers usually earn high profits.
- Need-based customers: Such customers purchase products and services that they actually need.
- Wandering customers: Such customers keep on evaluating the features of multiple similar products that are available in the market. Organisations are able to get minimum profit from such customers as they may or may not buy the products.
Competitors
When two or more organisations offer similar products, it leads to competition. Under the situation of competition, organisations try to gain the maximum market share. Organisations can capture maximum market share by adopting various business strategies such as low cost strategy or providing excellent quality. The competitors, at times, differentiate their products to attract more customers.
Some competitors may also offer better quality or premium products as compared to other competitors. To analyse the overall strengths and weaknesses of competitors and to evaluate their strategies, the organisations conduct competitor analysis. There are various types of competitive market structures.
Some major types are explained as follows:
- Monopoly: When there is only one organisation that enjoys full control over the supply of a product and there is absence of competition. Examples of monopoly are Indian Railway Catering and Tourism Corporation (IRCTC), Hindustan Aeronautics India Limited, Nestle Cerelac, Coal India Limited etc.
- Oligopoly: When only a few organisations are selling similar products in the same market, it is called the oligopoly market structure. Example of Oligopoly in India is automobile market for cars in India which includes few companies such as Maruti, Hyundai, Tata, Ford, Honda, etc. If Tata makes any change in its vehicle (say, Tiago) this will induce other companies like Maruti, Hyundai to do some modifications in their respective vehicles.
- Monopolistic competition: When quite a good number of organisations sell similar products that are differentiated with respect to quality, packaging and appearance, it is called monopolistic competition. Examples of monopolistic competition are Restaurant, Hotels, Pubs, Salon etc.
- Perfect competition: When a large number of organisations sell the same product in the same market, it is called perfect competition. It is an idealistic and not realistic situation. In such a market, the price of products depends on market forces of demand and supply. Examples of perfect competition are Dairy, agriculture, Online shopping etc.
Media
For business organisations, it is important to communicate and engage with their customers. Media is an important tool that is used by organisations to promote their products and services. There are various types of media such as television, radio, Internet, social media, etc. When media is used, it helps organisations in connecting with the customers, who in turn, get detailed information with respect to the different products and services available in the market.
Organisations use media to communicate information about their activities, products, customer feedback and financial position to its stakeholders. The consumers may give positive or negative response regarding organisations’ products and services which may impact the goodwill and position of an organisation in the market. It must be remembered that positive media attention can give a boost to the organisation (or its products) whereas poor media attention can destroy an organisations’ repute.
Various organisations also hire Public Relations (PR) experts who act as their public face when the organisation needs to communicate with the outside world.
Suppliers
Suppliers are extremely important for organisations and are a part of the international micro environment. Suppliers provide raw materials for the production of goods and services. A business would not be able to fulfil the needs of its customers if the suppliers do not provide raw materials. Therefore, it can be said that the suppliers have direct influence on the profits of businesses as the final price of the product depends on the price of raw material.
Organisations usually keep a tab on changes in the price of inputs and any supply shortages. Having a dependable source of raw materials is essential because any uncertainty with respect to delivery compels organisations to hold excessive inventories which lead to increase in cost. Some organisations like Maruti Suzuki undertake supplier improvement to make sure timely delivery of raw materials and parts.
Marketing Intermediaries
Marketing intermediaries are organisations that help an organisation in promoting, selling and distributing (marketing) their products and services. These intermediaries serve as a link between organisations and customers. There are several types of marketing intermediaries as follows:
- Resellers: Resellers are individuals or entities that purchase products from producers and sell them to end customers after adding their margin. In this way, producers as well as resellers gain profits. Wholesalers and retailers are examples of resellers.
- Distribution firms: Organisations that store goods till they are delivered to the end customers are distributors. One major function of these organisations is that they help in ensuring that the right products are distributed to the right customers.
- Marketing agencies: Market agencies such as marketing research and advertising agencies help in promoting products in the market.
- Financial intermediaries: Organisations such as banks, credit companies, insurance companies and non-banking finance companies provide finance for conducting their operations.
Public
Public includes all groups who have an actual or potential interest in the business. Some of the examples of public include media groups, environmentalists, non-authorities organisations (NGOs), purchaser institutions and neighbourhood. While preparing marketing plans, organisations usually consider their respective public.
There are different types of public as follows:
- Financial public: It helps in procuring funds to carry on business activities.
- Government public: It takes due care in the development of an organisation and its effect on the economy.
- Media public: It helps organisations to analyse their position with respect to their competitors through news and editorial opinion.
- Local public: It includes neighbourhood residents and community organisations.
- General public: It helps to make an organisation aware of customers’ attitudes towards the product.
- Internal public: It includes the board of directors, managers and employees of an organisation.
Global Trading Environment
Global trade includes the import and export of products and services across the global borders. Every country produces exports products and services wherein it has a comparative advantage. Similarly, countries import goods and services in which it does not have any competitive advantage. The international trade environment comprises all external forces that affect the organisation’s domestic and international markets. Global trade has become extremely important for organisations because it has an ability to increase the wealth of nations and standard of living of citizens.
Global trade can have positive as well as negative effects on the environment. For instance, economic growth as a result of trade expansion can lead to increase in pollution or degrade natural resources. Free and unrestricted trade of goods and services is usually good for developed goods but it may harm developing countries as import of cheap goods from developed countries harms the local industries. If a country continues to import more than it exports, then, it may lead to build-up of large trade deficit.
Trade Development Strategies
International trade is the essential for creation of a strong global economy. An organisation having global trading partners helps the organisation to enter new global markets. Global trade has an enormous impact on the economic growth of countries and the world. For any organisation, it is an arduous task to develop a global trade strategy.
There are seven major strategies for development of international trade as follows:
- Strong offerings: Any successful plan for global trade must begin with a great product having high quality. Duplicating and offering products that are already available in the marketplace will prevent an organisation from creating a unique place in foreign markets because the existing players in the concerned market already have an advantage over other players.
- Market opportunity: Building an international strategy involves undertaking an extensive market research. Businesses must consider factors such as the nuances of the market, size of international and home competitors, assessing product demand, creating the unique business proposition for entering international market.
- Supply chain logistics: Supply chain management and logistics becomes all the more important in case of international trade. If an organisation is exporting goods directly or using a foreign partner to deliver goods to a foreign location, a robust supply chain must be present. The organisation must ensure that its partners are able to support a stream of international shipments. In case of logistics failure, international orders might get delayed resulting in penalties and order cancellations.
- International law compliance: Global trade is usually affected by three different sets of rules and regulations namely home country’s legal guidelines, legal guidelines of the foreign country in which an organisation operates and the global legal guidelines that govern international trade.
- Strategic partnerships: Finding local partners to assist the organisation in last-mile logistics and sales is another strategy for the development of international trade. Whether an organisation intends to set up offices in different international locations, having a network of trustworthy contacts and partners can make such difficult matter less challenging.
- Local resources: While building connections with local entities, the organisation must ensure that local partners sources are used in fulfilling their global ambitions.
Free Trade vs Protectionism
Various trade and economic experts around the world hold different views with respect to the level of control that must be imposed on trade. While some of these experts promote free trade, others promote protectionism.
Under a Laissez-faire economy, the countries should encourage free trade. It means that there should not be any restrictions or interference on trade practices by the governments. According to this view, market forces of demand and supply help in ensuring efficient and sufficient production on a global scale.
Under the protectionist theory, international trade should be governed by strict regulations for smooth and proper functioning of international trade. This view holds that governmental interference is essential for ensuring fair competition between domestic and international markets. For this purpose, governments use measures like tariffs, subsidies, quotas and restrictions.
International trade allows allocating tasks to individuals or organisations based on their specialised skills. This specialisation thus helps in efficient use of available resources and enables a country to accelerate economic growth by tapping its potential to produce and acquire goods. On the other hand, the opponents of international trade argue that due to inequalities existing in international trade, developing economies hardly gain financially.
International trade allows allocating tasks to individuals or organisations based on their specialised skills. This specialisation thus helps in efficient use of available resources and enables a country to accelerate economic growth by tapping its potential to produce and acquire goods. On the other hand, the opponents of international trade argue that due to inequalities existing in international trade, developing economies hardly gain financially.
Some of the arguments given in favour of free trade are as follows:
- Increase in production due to specialisation
- Increase in economies of scale
- Increase in rate of savings and investments
- Increase in import of capital goods
- Increase in transfer of technology
- Increase in healthy competition
Some of the arguments given in favour of protectionism are as follows:
- Nationalism
- Increase in domestic employment
- Protection of infant industries
- Protection from dumping
- Redistribution of income
- Correcting the balance of payments deficit
Foreign Trade in India
Foreign Trade is quite crucial for the economic development of any country. Foreign trade in India includes all the imports and exports to and from India. The Ministry of Commerce and Industry looks after foreign trade in India. The Directorate General of Foreign Trade (DGFT) under the Department of Commerce is responsible for implementing the policy and schemes under the Foreign Trade Policy (FTP).
The objective of formulating long-term foreign trade policy is to lessen unpredictability of the foreign trade regime. However, the frequency of modifications has made it necessary to issue revised annual policies.
India’s Foreign Trade Policy has two major objectives:
- To double India’s proportion in international products trade in the subsequent five years.
- To act as a powerful instrument of financial growth by giving a thrust to employment generation.
In order to achieve the said objectives, India has adopted the strategies as follows:
- Creating an environment of trust and transparency to harness benefits from India’s domestic businessmen, industrialists and traders
- Simplifying operations and lowering transaction costs Neutralising the effect of all levies and duties on inputs utilised in export products
- Facilitating the development of India as a worldwide hub for manufacturing, trading and services
- Identifying and nurturing special industries to generate extra employment opportunities Facilitating technological and infrastructural upgradation of Indian economy through import of capital goods
- Ensuring value addition, productivity and quality Strengthening the role of Indian embassies in export