Business Environment Textbook PDF

2 The following facts are discussed in this chapter. 2.1 Business environment 2.2 Technological and economic environment Technological environment Economic environment 2.3 Global environment and business activities 2.4 Importance of studying business environme...

2 The following facts are discussed in this chapter. 2.1 Business environment 2.2 Technological and economic environment Technological environment Economic environment 2.3 Global environment and business activities 2.4 Importance of studying business environment 13 For free distribution 2.1 Business environment Any business has an environment related to it. The factors within the business or outside the business affect the existence of a business either directly or indirectly. Hence, the business environment can be defined as the environment in which the factors affecting businesses are activated. The businesses require undergoing changes continuously due to the fact that environmental forces are also dynamic and businesses need to adhere to them. For a business to be successful, it is essential to pay constant attention to its environment. New business opportunities can be identified through the changes in environmental forces and different trends arising in the environment.Therefore, successful businesses continuously study the business environment and adopt their business activities accordingly. Classification of business environment The business environment can be classified mainly as follows. Y Internal environment Y External environment There are different parties and forces present in both the internal and external environment of a business.This chapter discusses only the following parties and forces. Business environment Internal environment External environment Owners Customers Managers Suppliers Employees Competitors Political environment Legal environment Technological environment Economic environment Global environment Figure 2.1 - Classification of business environment 14 For free distribution Internal environment Different parties and forces acting within a business and affecting a business are known as the internal environment. The parties within the internal environment and their impact over the businesses are depicted below. Owners - Owners are the persons supplying the required capital for a business. Their financial strength, business knowledge and experience will lead to the success of a business. Managers Managers are the persons taking decisions to direct the resources of a business in order to achieve the objectives of its owners. The managers are responsible to build a good relationship between the customers and the employees of a business. In certain businesses, owners will also be the managers. Employees - Employees are persons who duly perform their tasks assigned using their own skills and competencies. Their dedication and good attitudes also matter for a business to be successful. External environment Different parties and forces acting outside the business and affecting a business are known as external environment. The impact of these external environmental factors to a business is depicted below. Customers Customers buy goods and services from a business. The survival of a business depends on its customers. Therefore, businesses are required to identify different needs and wants of customers and satisfy them appropriately. The changes in the buying patterns of customers will have a close impact over the activities of a business. Competitors Competitors are the businesses producing goods or services, which are similar to the goods or services of another business. The way, competitors conduct their business activities, price and quality of the competitor's products, marketing techniques, etc. would closely influence a business. 15 For free distribution Suppliers The parties providing required raw materials and other services to a business are known as suppliers. It is vital to supply raw materials and other services at the right time and to provide quality raw materials to ensure continuous operations of a business. Political environment In a country, the policies of a government will have an influence on businesses.The businessmen have to conduct their businesses by considering these policies. The following are some examples for government policies. Examples :- Infrastructure development policy Fiscal policy Legal environment The legal environment consists of laws and regulations, enforced in order to protect consumers, to protect domestic manufacturers and business community and to protect the environment. In addition, the government appoints institutions, boards, commissions and responsible authorities and individuals to enact these laws. The following are some examples for such laws and regulations. Examples :- Companies Act No. 07 of 2007 Consumer Affairs Authority Act No. 09 of 2003 Shop and Office Employees Act No. 14 of 1954 The following are some designations and institutions appointed to enact these laws and regulations. Examples :- Y Registrar of Companies Y Consumer Affairs Authority Y Public Health Inspector Y Central Environmental Authority Due to these legal regulations and institutions, businessmen have limits over their ability to conduct businesses according to their own will. Every businessman is expected to comply with these laws and regulations that are applicable, imposed by the government. 16 For free distribution 2.2 Technological and economic environment Technological environment The technological environment grows rapidly due to new innovations.The business activities as well as life style of individuals have changed due to changes in the technological environmental factors. Advancement in computer technology, advancement in communication technology due to internet, advancement in production methods due to nano technology and digital technology and the advancement in transportation technology have significantly changed the business environment. Figure 2.1 The following are some examples for the changes occurred in the business environment due to changes in technology. Examples :- The fabric manufacturers used simple manual weaving machines in the history. But today, they use modern machines, computer technology etc. to manufacture quality fabric at a low cost within a short period of time. Businesses now use telephones and e-mails instead of the snail mail used in the past. In early days, businessmen published their advertisements with their postal mail address. However, today they provide their telephone numbers, e-mail addresses and invite customers to visit their web site for more information. Today, computers and information systems are used to record accounting information instead of the manual accounting books used in the past. Historical manual production processes are now automated by using computerized machines. 17 For free distribution Some goods and services become outdated rapidly due to rapid changes in the technology. Economic environment Economic environment consists of economic factors that affect businesses.The government of a country is mainly responsible for setting economic policies. A set of economic factors can be briefly explained as follows. Interest rate It is the interest rate given for bank deposits and charged for bank loans. Inflation Inflation is the continuous increase in the general price levels of goods and services. Income distribution It is how the national income of a country has been distributed among its people. Level of If every one expecting a job receives a suitable job, a country employment will achieve a full employment level. International relations International relations are the relationships existing between countries. These relationships are built up through trade zones and trade agreements. Foreign exchange rate It is the rate at which the currency of one country is exchanged with the currency of another country. Savings It is the proportion of the income that individuals keep without spending on consumption. Higher the savings of a country the higher will be the amount of funds available for investment. 18 For free distribution 2.3 Global environment and business activities Globalization is the mutual relationship among countries in terms of economic, social and cultural dimensions. Globalization facilitates the conduct of business activities freely without any cross border or any other restriction. Due to the ad- vancement in information and communication technology, the entire world has now become a single global village. Goods and services, labour and capital, etc. are moved between countries by reducing the distance among the people in different countries. Therefore, changes in different factors in the global environment will have both positive and negative impacts on domestic businesses. Positive impacts from the global environment on domestic businesses Y Possibility to obtain latest technology Y Possibility to obtain quality raw materials from abroad Y Possibility to obtain efficient machines Y Inflow of foreign capital Y Possibility to find foreign markets for domestic goods and services Negative impacts from the global environment on domestic businesses Y Creating a highly competitive environment. Y Domestic skilled workers migrating to foreign countries. Y Instability of the existence of domestic businesses. Y Negative changes on the local culture. Activity 01 Collect the information on the exchange rates relating to the currency with the Sri Lankan Rupee and fill the table. Foreign Currency Exchange Rate US Dollar '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' British Pound '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' Japanese Yen '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' Indian Rupee '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' Euro '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 19 For free distribution  Activity 02 Write an article to your Wall Paper by collecting news on various incentives given by the government to businesses. 2.4 Importance of studying environment of a business Every internal and external environment factor mentioned above will have an impact either positively or negatively to businesses.The businessmen are required to study the business environment in order to identify these conditions. The strengths and weaknesses of a business can be identified by studying the internal environment. The strengths can be used to grow a business, whereas weaknesses are to be minimized. The following are some examples for strengths and weaknesses of a business. Strengths Y Availability of adequate capital Y Experience of managers Y Specialized knowledge and dedication of employees Y Specialized production methods Y Having a recognized brand name Weaknesses Business knowledge of owners is not sufficient Y Y Limited financial capability of owners Y Scarcity of trained workers Y Knowledge about new technologies not been updated Y Negative attitudes of workers Y Geographical location of the business is unfavorable Opportunities and threats available for a business can be identified by analyzing external environment. Hence, the businessmen can exploit the opportunities and face the threats successfully. 20 For free distribution The following are some examples for opportunities and threats of a business. Opportunities Y Changes in the life style of consumers Y Introducing low interest loans by the government Y Providing tax incentives for businesses Y Designing new cities Y Constructing high ways Threats Y New competitors entering in to the industry Y Natural disasters Y Imposition of international trade embargo Y Difficulties in adapting new technological methods Clever businessmen continuously pay their attention on the internal and external environment of a business. A business can exploit its strengths and opportunities to achieve growth in the business and take necessary steps to minimize or avoid weaknesses and threats to ensure the business stability. Activity 03 Observe the strengths, weaknesses, opportunities and threats of a business in your area and complete the table. Name of the business........................... Strengths Weaknesses Opportunities Threats........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 21 For free distribution  Activity 04 Explain five domestic and global environmental changes affecting businesses. Activity 05 Write an article to the commerce magazine of your school on "The importance of \studying business environment." 22 For free distribution