What is the business environment? Explain the economic environment of business
The business firm is a micro-economic unit. The business
environment furnishes the macro-economic context within which firm operates.
Environment is to set of external factors or forces which affect the operation
of the business firm. The firm, individually does not have much influence on
the environment. Of course, the collective behavior of different firms may
affect the environment. The analysis of business environment, however, assumes
that environment remains external to the firm. The internal dynamics of the
firm is meant to adjust itself to the external environment. The business firm
must demonstrate adaptability as well as adoptability to environment; just as
the firm managers must have capability as well as capability to deal, with the
environment.
Business environment may be
classified on different criteria, such as time, space, forces and factors.
Based on ‘time’ we may talk of past, present, and future environment of
business. Based on space, we may think of local, regional, national and international
environment of business. Based on forces of market such as supply, price, etc.
or non-market institution environment of business. Finally, based on the
relevant of economic or non-economic factors, we may specify economic and
non-economic environment: of business. Such classification on environment
variable is mainly for reason: of analytical convenience to understand their
pull and/ or push. In real world situation, the environment variable interacts
with each other. Such interaction can be conceptualized though the formal
presentation of interaction matrix. Because of the involve nature of this
interaction, the environment often appears very complex, dynamic and sometime
beyond any theoretical comprehension. But for an efficient operation of the
firm, there is no alternative to identification, description and explain action
of its business environment, immediate and remote.
From the standpoint of analysis and
scanning, perhaps the most useful distinction is between ‘economic’ and
‘non-economic’ environment. Non-economic environment will encompass the
country’s history, culture, sociology, geography, polity and the government.
Non-economic environmental variables have no economic implications. For
example, the ideology of the existing government may have important bearing on
tax laws, formation of new company, existence of multinational and so on. In
fact, the political philosophy, is a very decisive element of the business
environment. Political philosophy, political institution, political parties,
political achievement and constraints-all have a strong influence on the
working of any economy. As a result, we often talk of the political economic
environment of business rather than just the economic environment. In the same
way, we also talk of the socio-economic environment of business.
Economic Environment of Business :
We consider the firms as an economic institution in a market system. The
market behavior of the firm reflects the nature of economic decision taken by
the manager by the firm. Micro-economic decision-making by the firm has
nevertheless to be made within the broader micro-economic environment. Economic
environment of business has reference to the broad characteristics of the
economic system in which the business
operates.
The present-day economic environment of business is a complex one.
The business sector has economic relation with the government, capital market,
household sector and of a broad sector. These different sectors together
influenced the trends and structure of the economy. The form and functioning of
the economy vary widely. The design and structure of any economy system is
conditioned by the socio-political arrangements have relevance from the
standpoint of macro-economic decision-making. For example, under a democratic
set-up, the public exercise an influence, direct or indirect, through a system
‘voting’ on the nature of decision for the entire country. Under a parliament
system, most decision are processed by the cabinet ministers, whereas under
residential form of government, the president act as real manager of the state;
it is he who takes or make decision. Similarly, the macro-decision- making is
not decentralized under a federal form of government than under a unitary form.
The reference here is to political
decisions, but it must be emphasized that the political decisions have got
far-reaching economic implications. After all, the government is the manager of
the economy. The nature of government ownership, control and regulation of
economic activities of a country provides form and shape to the nature of
economic organization. Under a capitalized form of society, the private sector,
induced by the profit motive and guided by the indication of a free market
mechanism, takes the major economic decisions, to invest, produced and
distribute. Under a socialist form of society, such decision is taken by the
public sector, guided by social welfare motive and central planning.
In a communist society, economic
decisions including consumption are taken by the state in the interest of the
community as a whole. In a mixed economy private, public and joint sectors, all
have some say in a major decision for the functioning of the economy. In some
mixed society socialistic pattern of society like India, we even hear of
co-operative sector of small individual worker’s sectors having investment and
production decisions of the economy.
All civilized economies whether
capitalist, socialist, communist or mixed, have certain fundamental economic
problems to solve. Despite the reference about “affluentSocity’, the hard fact
is that in each and every economy most resources are scare. Consequently,
choice have to be made by individuals, by business corporations, and by
society. It is the social choice and community preference which give substance
to the question of macro-economic decisions. From the standpoint of resource,
the basic economic problem of every economy is that of allocation of resources
and subsequent production.
This problem has got many facts :
what to produce? How to produce? For whom to produce? When to produce? Every
economy has decided the qualities and quantities of goods and services to be
produced. It has to decide on the nature of technology and technique of
production in view of factor endowment. It has to decide the course and pattern
of distribution of goods and services when these are produced. It has to decide
on the timing of production. Same decision is taken by the individual firm as
they are taken by the economy as a whole. The problems do not end in general;
one ends, another crops up. The process of decision making differs depending on
how these problems are solve in different economies. This is what constitutes
the functioning of the economy-the nature of economic environment. At the cost
of oversimplication, certain point can be made about the organization and
functionating of economies of modern age.
In most of the economies, both
free market pricing and centralized planning exist in different degrees. By
free market mechanism or price mechanism we mean the free pay of the forces of
market demand and market supply to determine and equilibrium solution of the
allocation problem. Market mechanism determines commodity prices, factor prices
and income distribution. By planning we mean a program of action showing
consistency and feasibility of attaining a set of targets, in view of a set of
objectives, through a set of instruments. In the present-day world around us,
planning is combined with free market pricing in arriving at macro-economic
decisions yielding maximum good for the maximum number. Thus, the economy in
which a business operates is not exclusively a free enterprise economy using
prices and markets, but to some extent direct and indirect by a system of
planning, control, regulation and co-ordination.
In most of the economies,
positive intervention by government in a day-to-day economic affair is on the
increase. Planning is a form of governmental intervention. Other than that, the
government can also intervene. Other than that, the government can also
intervene through a system of control and regulation. The welfare-state
principle induces the government of enforce minimum wages, commodity control,
fair trade practices, etc., though the legislation. The basic objectives of
economic policies of the government are : growth, efficiency and equity. Such
as inferring role of modern government has made most of the business firms
socially responsible. Social responsibility of business is a direct outcome of
social welfare of motive cultivate by national governments.
Modern economy id not closed
but open as it is engaged in international trade and co-operation. As such
international transmission effect is stronger than ever before. Though there
are disparities in the levels of income and stander of living over space and
overtime , there is a conscious effort to develop a poor nation. The
maintenance of stable growth in developed countries is dependent of the
acceleration of growth in under- developed countries. This idea given a new
dimension to issues like the role of multinational corporations, the iconological
balance, the recycling of petro-dollars and the transfer of technology.
Technological revolution is around almost everywhere. In order to keep their
dynamism, the economies are determined to develop science and technology and to
balance environment and ecology and this is going to act as a unifying force
for the world economic order as a whole. These facts define the environment and
set the constrains within which the modern business firm must operate.
Management cannot overlook either market or non-market environment. No
management can ignore either the function of markets, or the objective of
national planning, or the policies of the government or their social
responsibilities or the rate, pattern and structure of economic changes, or the
forms of international co-operation. Progressive management must keep itself
continuously informed about the magnitude and direction of changes in national
as well as international economic environment. Of course, both economic and
non-economic environment has an important bearing on economic decision-making
by management.