Business Environment An Introduction

Meaning And Definition  Business Environment means the aggregates of all conditions, events and influences that surround and affect it. - Keith Devis

Importance of the Study of Business Environment  To develop its broad strategies and long term policies  To analyse its competitors’ strategies and thereby formulate effective counter strategies  Knowledge about the changing environment will keep the organisation dynamic in its approach  Enables the firm to foresee impact of socio-economic changes

Factors Determining Business Environment  There are two sets of factors influencing business organization Internal – Controllable Factors External – Uncontrollable Factors

Important Internal Factors  Organisational Resources  Research and Development  Technological Development  Financial Capabilities  Marketing Capabilities  Operations Capabilities

External Environment  The term “Business Environment” generally refers to the external environment.  It includes the factors outside the firm and pauses opportunities and threat for the firm.

Important External Factors  Economic Factors  Social and Cultural Factors  Political Factors  Technological Factors  International Factors  Environmental and Ecological Facotrs  Legal Factors

Economic Factors  Economic System  National Income and Per Capita Income  Distribution of Income and Wealth  Infrastructure Development  Exploitation of Natural Resources  Capital Formation  Employment

Economic System  Economic systems revolve around how people in those societies allocate scarce resources to satisfy competing wants and needs.  An Economic System is a mechanism which deals with the production, distribution and consumption of goods and services in a particular society and comprises of people, institutions and their relationships.  An economic system defines the institutional framework regulating the business environment in a country.

Economic Systems  Market Economy OR Capitalism  Adam Smith (Wealth of Nations-1776)  Planned Economy OR Communism  Karl Marx (Das Kapital-1886)  Mixed Economy

Free Market of Adam Smith “The uniform, constant and uninterrupted effort of everyman, to better his own condition, the principal from which national and public as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things towards improvement, in spite both of the extravagance of government, and of the greatest errors of administration.”

How Does This Happen?  Buyers and sellers negotiate prices in a free market and carry out transactions of buying and selling that leave all parties mutually better off.

Capitalism  System based on Free Market  Capital: Owned by a minority of individual  Private Property Rights: legal right to use this capital for private gain  Market System (Supply and Demand Factors)  To distribute of goods & Services  To allocate resources  To establish income levels, wages, rents & profits  Govt. role is limited  Difference between market economy and planned economy lies not in the degree of government influence but in how that influence is used.

Milton Friedman  Economic order can emerge as the unintended consequences of the actions of many people, each seeking his own interest.

Important Merits of Capitalist System  Freedom of enterprise  Encourage initiative and entrepreneurial skills  Promotes R &D and innovation  Offers choice to consumers  Promotes fast economic Development

Demerits of Capitalist System  Ignores the production area with less profit possibilities. Priority area are ignored  Leads to accumulation of wealth and so monopoly  Causes inequality in distribution of income and wealth  Results in degradation of natural resources

Communism As Explained by Marx  The natural evolution of communism after capitalism  State owns all factors of production and distribution  The workers reap the profits from their labour rather than subsistence wages.

Important Limitations  Government ownership of factors of production. No appropriation of profit  Limited choice to consumers  Absence of individual freedom

Important Advantage  Equitable Distribution of income and wealth  Judicious use of natural resources

Mixed Economy  Equal importance to private and public sector. However, major factors of production and distribution are owned and managed by the state.

Innovations in Mixed Economy  Market Socialism: Market socialism refers to various economic systems where the means of production are publicly owned, managed and operated for a profit in a market economy.means of production the fundamental difference between a traditional socialist economy and a market socialist economy is the existence of a market for the means of production and capital goods under market socialism.socialist economy E.g. Systems evolved in Yugoslavia, Hungary

Innovations in Mixed Economy  Socialist Market Economy One of the major changes between the old planned economy and the socialist market model is the corporatization of state institutions. E.g Chinese model