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Factors of External Environment of Business

Factors of External Environment of Business

What do you mean by Business Environment: The sum total of all things external to firms and industries that affect the functioning of the organization is called Business Environment.

Elements of Business Environment

1.       ECONOMIC

2.       SOCIAL

3.       CULTURAL

4.       POLITICAL

5.       LEGAL





factors of external environment of business

1. Economic Environment

This refers to all economic factors that influence and affects the very survival of an organization. Can be classified into

·         Economic factors affecting demand

·         Competitive forces

Economic factors affecting demand

The existence of an organization depends on the demand for its products or services. The customers’ ability to buy and willingness to pay determine the demand factor.

The buying power is determined again by

·         Employment

·         Income taxes

·         Saving and

·         Prices

The money acquired by an individual through employment is utilized for paying taxes which is the first priority and then comes saving or spending. In developing countries like India, much importance is attached to the habit of saving in the form of insurance policies or mutual fund deposits or investment on immovable assets. This makes the economy strong and stable even during times of recession, whereas we witness the economy of some developed countries entirely shaken when there is an economic depression.

Sub Prime Lending

Sub prime lending may prove to be disastrous for a growing or grown nation when the money is lent by the banks to third parties without proper securities or collaterals. While the initiative is intended to increase the growth rate or GDP, the end result may not live up to the expectations when the money is parted to individuals or firms with poor financial credentials.

Disposable Income

Disposable income also decreases when the tax rate increases and his/her ability to buy is reduced. Equally important is the willingness to by because the fact that an individual has the ability does not mean that he or she will buy. Willingness is affected by the preferences for products and the expectation about future factors like the price fluctuation, increase in one’s own income, general economic trend and so on.

Competitive forces

Firms have to first survive in order to succeed in the market. To accomplish this they exert competitive force on each other through one or the other following methods.

·         Price cutting

·         Promotion-advertising, personal selling

·         Design, feature and packing

·         Number and type of customer services offered give a cutting edge to firms competing in the race.

2. Social and Cultural Environment

The social environment depends upon the

·         The class structure

·         Mobility

·         Nature of the social organization and

·         Development of social institutions

People always have the unending desire to move from one occupational category to another and this is the main reason for high job turn over in IT industries for various reasons like pay, promotions, job satisfaction etc., This is the same reason which can be attributed to the failure of many good projects that go underway due to lack of continuation of the same initiative with which it was started.

The above said process is more prevalent in urban societies than rural where scope of mobility is much the less among farmers, artisans and those engaged in traditional crafts and cottage industries.

3. Political Environment

A smart manager has to be on tenter hooks to gauge the trends in political scenario that directly or indirectly affect the functioning of the firm. The political weather is highly unpredictable and may be classified into

·         Long-term changes

·         Quick changes

·         Cyclical changes

·         Regional changes

Now-a-days we see that the economic depression in Europe or America creating a big whirlpool all over the world. Such is the interdependence of global economy and each country has to strive to improve its productivity through green energy methods in order to conserve our environment.

4. Legal Environment

Business law is the complex system of regulations that form the legal environment of business. We see that every corporate firm has to have an able Company Secretary who takes care of the legal implications of the organization’s functions. Indian Labor Laws are very pro-active of the labor force and some of them are listed below:

·         Law of Contracts codified in Indian Contract Act, 1872

·         Companies Act, 1956

·         MRTP Act, 1969 (Monopolies and Restrictive Trade Practices Act)

·         IDRA (Industrial Development and Regulation Act, 1951)

·         FERA (Foreign Exchange Regulation Act, 1973)

·         Factories Act, 1948

·         Essential Commodities Act, 1955

5. Technological Environment

Technology is the scientific knowledge to practical problems. Technology affects business in two major ways:

·         Through its impact on society in general

·         Through its direct influence on business operations and activities

6. Demographic Environment

Demography refers to the study of human population especially with reference to

·         Size

·         Distribution and

·         Vital statistics

Market surveys mainly take this demographic quotient as the key factor for in Market Segmentation, choice of manufacturing, choice of sales personnel and advertising style.

7. Geographical Environment

This influences the location and marketing of business. But now geographical boundary is not at all a limiting factor in business owing to the mega advancement and development in transport and communication facilities.

8. Ecological Environment

The governments all over the world should take stringent action in order to protect and preserve our natural habitat against the anti-environmental activities of industries and businesses. In Tirupur in Tamilnadu, India, numerous dyeing plants were forcibly closed due to lack of proper effluent treatment and waste disposal processes. The action must be taken at the grass root level- that is license must be given to only those industries that have proper infrastructure that satisfies the ecological conservation laws.