1) ECONOMIC ENVT.
Business is one unit of the total economy. Economic environment refers to all those economic factors which have a bearing on the functioning of a business. Business depends on the economic environment for all the needed inputs and also to sell the finished goods. It is supplementary to political environment as it is influenced by political decisions and events. Economic environment is the net result of economic policies of the govt.
Important factors and influences operating in the economic environment:
1) The economic stage at which the country exists at a given point of time:
i.e. The rate at which the country grows, whether the country is going through prosperity or recession or is moving towards recession or is in the revival stages.
2) The economic structure adopted/economic system:
There exists 3 distinct economic philosophies viz. Capitalism, socialism (Maxist-Lenin(communism) & Non- Maxist-Lenin (mixed economy)) and communism.
The system of capitalism believes in private ownership of all agents of production, in private sharing of distribution process that determine the functional rewards of each participant and in individual expression of consumer choice through a free market place.
Mention should be made of the welfare state concept which has developed in recent years, that provides for an increasing degree of state regulation when certain deficiencies appear in the economy eg.USA.
Under socialism, the tools of production are to be organised, managed and owned by the government, with the benefits accruing to the public. Strong public sectors, agrarian reforms, control over private wealth and investment and national self reliance are the other planks of socialism.
Communalism goes further to abolish all private property and property rights to income. The state would own and direct all instruments of production. Alternatively called Marxism, communism was followed in Russia till 1991.
encourages individual initiatives, free play of market forces,
answers to problem of capitalism
gross inequities of income,
recurrence of trade cycles since free play,
exploitation of poor,
negative effect on environment,
wasteful standard of living
denial of individual freedom,
assumes total commitment of people to country’s welfare (but people work for rewards),
rulers did not set examples,
lack of flexibility
Socialism seems to fall between capitalism and communalism, partaking the strong points of both the philosophies and avoiding their weaknesses at the same time.
India chose mixed economy as our economic philosophy. The economic set-up under this philosophy is split up into 3 parts:
(a) Sectors in which both production and distribution are entirely managed and controlled by the state to the complete exclusion of private enterprise.
(b) Sectors in which the state and private enterprise jointly participate in production as well as in distribution.
(c) Sectors in which the private enterprise has complete access subject only to the general control and regulation of the state.
3) Economic policies:
The term “industrial policy” refers to government policies towards industries-their establishment, functioning, growth and management. The industrial development of a country will be shaped, guided, regulated and controlled by its industrial policy.
Eg. New industrial policy, 1991 (given in class).
In its narrow sense, monetary policy refers to the steps taken by a central bank to regulate the cost and supply of money and credit in order to achieve certain socio-economic objectives like price stabilisation, full employment, exchange regulations and faster economic growth.
The RBI’s monetary policy has been one of controlled expansion i.e. Adequate financing of economic growth and at the same time ensuring reasonable price stability.
Fiscal policy refers to the policy of the govt. Regarding taxation, public expenditure and public debt. Fiscal policy operates through the budget. Also known as budgetary policy.
4) Economic planning:
India is a planned economy. It carries out its economic planning through Five Year Plans. The 11th Five Year Plan (2007-2012) has laid down objectives in the following areas:
a) Income and Poverty
d) Women and Children
Massive investments are made in all the five- year plans to realise its objectives. These plans are developed, executed and monitored by the Planning Commission.
5) Economic Indices:
e.g. National Income, per capita income, disposal personal income, rate of savings and investments, balance of payments, GDP, etc.
6) Infrastructural factors:
eg. FI’s, Banks, Modes of transport, communications, energy sources, etc.
In order to meet the challenges of rapid economic growth and international competitiveness, there is an urgent need to achieve greater efficiency and accountability is these sectors.
2) POLITICAL ENVT.
Political environment includes management of public affairs and its impact on business.
Political environment refers to the influence exerted by the 3 political institutions viz. Legislature, Executive and Judiciary, in shaping, directing, developing and controlling business activities.
The Legislature lays down the framework through the enactment of laws, within which the business houses can operate & take their decisions. The executive, i.e., the government implements or enforces the laws passed by the legislature, & the judiciary plays the role of watchdog to see that both the legislature & the executive function within the constitutional limits.
Political environment in any country at any time is the result of political system, constitutional provisions, party system and the political events which take place in the country from time-to-time.
Elections, assurances given by political parties at the time of election, policies of the ruling party, political developments, political scandals, corruption charges of leading politicians, war and aggression are some major political factors which affect the political environment.
The main issues in political environment are: Political stability, Proper law and order situation, strong party in power, responsible opposition and responsible role of press and public media.
Business responsibilities to govt.:
- Tax payment
- Voluntary programmes
- Providing information to help decision making
- Govt. contracts
- Service of business leaders to govt.
- Political activity (corporate involvement in politics:
· Money contributions to political parties at the time of elections
· Contest elections as independents or on party labels
· Lobbying (securing favour for business)
Govt.’s responsibilities to business:
- Establishment & enforcement of laws & a system of courts
- Maintenance of order
- Regulate money & credit
- Ensures orderly growth – regional growth & prevents wide fluctuations
- Information services of different departments
- Assistance to small industries
- Transfer of technology
3) REGULATORY/ LEGAL ENVT.
The objective of regulatory environment is to prevent exploitation of consumers, employees, investors, to protect firms from unfair competition, to ensure better ecological balance, etc.
Some of the important laws regulating business are:
§ The Factories Act, 1948
§ The Essential Commodities Act, 1955
§ Consumer Protection Act, 1986
§ Competition Act, 2002
§ Negotiable Instrument Act, 1881
§ Companies Act, 1956
A business manager should keep an up-to-date & detailed information & knowledge of the rules & regulations governing production, distribution & consumption of goods & services. He should also possess good knowledge of labour laws & laws relating to consumers.
4) SOCIO-CULTURAL ENVT.
“Culture consists of the thought and behaviour patterns that members of a society learn through language and other forms of symbolic interaction – their customs, habits, beliefs and values, the common viewpoints which bind them together as a social entity.......Cultures change gradually, picking up new ideas and dropping old ones, but many of the cultures of the past have been so persistent and self-contained that the impact of such sudden change has torn them apart, uprooting their people psychologically.”
-Elbert W. Steward and James A. Glynn
1. Culture creates people
People are a blend of heredity, cultural experiences, sub-cultural experience. Culture trains people along particular lines, tending to put a personality stamp upon them eg. Indian, Japanese etc. When people with different cultural background promote, own and manage organizations, organizations themselves tend to acquire distinct cultures. Thus the culture of the Tata group of co.’s is different from the culture of Infosys.
2. Culture and globalisation
As business units go international, the need for understanding and appreciating cultural differences across countries is essential. Work motivation, profit motivation, business goals, negotiating styles, greetings, significance of body gestures, attitude towards development of business relationship, etc. vary from country to country.
3. Culture determines goods and services
Culture broadly determines the type of goods and services a business should produce. The type of food people eat, the clothes they wear, the beverages they drink and the building materials they use to construct dwelling houses vary from culture to culture and from time to time within the same culture. Business should realise these cultural differences and bring out products accordingly.
4. People’s Attitude to Business:
Attitude of people towards business is largely determined by their culture. Indeed, their very existence depends upon social philosophies which conduct and support various kinds of business actions.
5. People’s attitude to work:
Motivation, morale and other related aspects of human resource management are based on the workers attitude towards work which depends on his culture. Preoccupation with work is considered a virtue in some parts of the world and a vice in others. As a result different types of appeal, reward and penalty are effective in different cultures.
6. Ambitions or complacent: An individual’s ambition to grow or remain complacent depends on his or her culture. An ambitious individual is highly motivated, has a strong urge to excel, is prepared to change organisations & even take risks.
9. Ethics in Business
10. Marriage and social beliefs and customs
12. Social responsibility of business (section 3)
5) TECHNOLOGICAL ENVT.
The technological environment consists of those factors that are related to the knowledge applied and the materials and the machines used in the production of goods and services which have an impact on business.
Some of the important factors & influences operating in the technological environment are as follows:
1. Sources of technology like company sources, external sources & foreign sources; cost of technology acquisition; collaboration & transfer of technology
2. Technological development, stages of development, change & rate of change of technology & Research & development
3. Impact of technology on human beings, the man-machine system, &the environmental effects o technology
4. Communication & infrastructural technology in management
Interface between Business and Technology:
1) Technology reaches people through business
Business is an institution through which man expects new discoveries to be converted into goods and services. E.g. New discoveries in the television industries means nothing to man until a business organisation works on the discoveries to convert them into a product. E.g. LCD TV’s, etc. The economic prosperity of a nation depends on the technical progress it has achieved.
2) Increased Productivity
The most fundamental effect of technology is greater productivity in terms of both quality and quantity. E.g. In a hospital the objective may be qualitative, such as maintaining life with electronic monitoring equipment. In a factory, the objective may be quantitative in terms of more production at less cost. Technology results in better quality products at reduced prices.
3) Need to spend on research and Development (R & D)
Though business organizations are the means through which new innovations are given practical shape, it is the business which has to spend lots of money on discovering new technology. It is essential for business to invest in R & D to be a winner in the intensely competitive market.
4) Fast changing Technology
Many of today’s products were not even heard of years back. Business units and their managers must always watch out for changes and developments taking place around. New developments must be adapted and new ideas explored lest the business units would expire early.
5) Rise and decline of products and organisations
Schumpeter saw technology as a force for ‘creative destruction’. A new technology may spawn a major industry but it may also destroy an existing one. E.g. Typewriter replaced by computers. Music systems have hurt the gramophone industry. This poses problem to certain businesses. “Today’s growth product is tomorrow’s earthen pot.”
6) High expectations of consumers
High expectations of consumers pose a challenge and an opportunity to the owners of business institutions. Technology has resulted in an increase in standard of living of people. People now demand more of many things than more of the same things. Customers expect new varieties of products, superior in quality, free from pollution, safer and more comfortable.
7) Jobs tend to be more intellectual
With the advent of technology, jobs tend to be more intellectual or upgraded. A job hitherto handled by an illiterate and unskilled worker now requires the services of an educated and competent worker.
Induction of new technology dislocates some workers unless they are well equipped to work on new machines (but for those who pick up and acquaint themselves with new technology, the job is rewarding).
This makes it obligatory on the part of business (& govt.) to retrain its employees and to rehabilitate those displaced and who cannot be trainable.
8) Need for multi-professional managers
9) Problem of Technostructure
Management is in a tight position to balance the ruffled feelings of technocrats and the social consequences of business decisions.
10) Increased regulation and stiff opposition
Government has the powers to investigate and ban products that are directly harmful or hurt the sentiments of a section of society e.g. Banning of certain drugs.
Technological advancement is inviting opposition from those who fear that new innovations are a threat to ecology, privacy, simplicity and even the human race. The public must be enlightened that technology is not always unidirectional in its effects. It can be corrective as well as curative.
Technology has created antibiotics which give rise to side effects. The same technology has also shown remedial measures for the side effects.
11) Massive requirement of capital.
12) Social change
An invention may destroy the economic basis of a city, displace thousands of workers, yet the same invention may result in creation of a new city somewhere else with more jobs there. Besides uprooting population, technology directly changes the patterns of their social life. An invention may open new employment opportunities to women, radically change hours spent at work & with the family. Status differences are also created by technological advancements. The way we cook, communicate, work, spend leisure time are affected by technology.