chapter 4 environmental context of management

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CHAPTER 4

ENVIRONMENTAL CONTEXT OF MANAGEENT

Unit Objectives:

After completion, students are expected to know the following:

• Concept of Business Environment

• Types of Business Environment

o Internal and External

• Basic Components of Economic, Socio – Cultural, Political, and Technological Environments

• Social Responsiility of Business – Concept and !pproaches

• !reas of Social Responsiility

• Business Ethics – "eaning and Significance

• Emerging Business Environment In #epal

OR,

$% Concept and "eaning of Business Environment

$%$ &eatures of Environment

'% Types of Business Environment

'%$ Internal Environment

'%' External Environment

(% Components of Political)*egal Environment

+% Components of Economic Environment

% Components of Socio)Cultural Environment

-% Components of Technological Environment

.% Social Responsiility of Business

.%$ Concept of Social Responsiility

.%' !pproaches to Social Responsiility

.%( !reas of Social Responsiility

/% Business Ethics

/%$ "eaning of Business Ethics

/%' Significance of Business Ethics

0% Emerging Business Environment In #epal

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1 CONCEPT AN! MEANING OF "U#INE## ENVIRONMENT

"$siness Envi%&n'ent

Business environment is a comination of the 1ords usiness)environment% Business includes all activities

connected 1ith production, trade, an2ing, insurance, finance, energy, advertising, pac2aging and numerousother related activities%

Environment refers to all external forces, 1hich have a earing on the functioning of usiness% The environment

includes factors outside the firm 1hich can lead to opportunities for or threats to the firm% !lthough there aremany factors, the most important of these factors are socio)economic, technological, supplier, competitors and

government%

Business is a very complex process% It does not operate in a vacuum% Environment is the macro setup 1ithin

1hich the usiness firm operates% The term 3usiness environment4 denotes the total surrounding, having

various opportunities and constraints for usiness and have direct or indirect earing on its functioning or inother 1ords it can e stated that it refers to the aggregate of all forces and institutions 1hich are external to

usiness and eyond the control of management%

!e(initi&ns &( "$siness Envi%&n'ent

!ccording to ")*)%+ O -ee.e%, usiness environment refers to 5The total of all things external to firms and

industries, 1hich affect their organisation and operation6%

/eit- !)vis, defines usiness environment in his famous oo2 0T-e c-)..enes &( "$siness2 as 5Business

environment is the aggregate of all conditions, events and influences that surround and affect it%6

!ccording to A%t-$% M ei'e%, 5Business environment encompasses the climate or set of conditions

economic, social, political or institutional in 1hich usiness operations are conducted6%

Thus, usiness environment encompasses all those factors 7internal and external8 that affect a company4s

operations and include strengths, 1ea2nesses, internal po1er relationships, orientations of the organisation,nature of economy and economic conditions, social cultural factors, demographic trends, natural factors, gloal

trends and cross)order development, clients and suppliers, technological developments, la1s and government

activities%

11 FEATURE# OF ENVIRONMENT

The main features of usiness environment are9

$% C&'3.e:It is very difficult to understand the impact of Business environment on the companies% !lthough it is easy to

scan the environment ut it is very difficult to 2no1 ho1 these changes 1ill influence Business decisions%Some)time change may e minor ut it might have large impact% For example, a change in government policy

to increase the tax rate y : may affect the income of company y large amount%

5 !*n)'ic:

Business environment is highly flexile and 2eep changing% It is not static or rigid that is 1hy it is essential to

monitor and scan the usiness environment continuously%

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6 M$.ti7()cete+:

The environment is perceived differently y different perceivers or oservers% For example, the same ne1development li2e nuclear agreement et1een !merica and India, is perceived as opportunity y some

7Congress Party8 1hile threat y others 7;pposition Party8%

OR,

Environmental changes are freations 1hile some others ta2e it as a threat for their

survival%

8 F)%7%e)c-in i'3)ct:

Business enterprise operates 1ithin a given environment and gets affected y it% The gro1th and profitaility of usiness depends critically on environment% Thus, the environment has a far) reaching impact on usiness

organi>ations%

9 Unce%t)int*:

It is very difficult to predict the changes of Business Environment% !s environment is changing very fast forexample in IT, fashion industry fre


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It is 1idely ac2no1ledged fact that any usiness organi>ation is normally underta2en for profi

maximi>ation% #onetheless, persons holding top positions in certain modern corporate enterprises havesome values 1hich influence their policies, norms, 1or2ing language, systems, symols practices and

overall internal environment% This may e refer as culture of the organi>ation 1hich is the collective

ehavior of humans that are part of an organi>ation% The extent to 1hich the culture of the organi>ationis shared y all, leads to an important factor contriuting to success%

iii) Organizational resources

Resource availaility sets a limit on organi>ational activities% They can e physical, human, financial,information and technical% The recent developments in information technology have greatly facilitated

the activities of organi>ation%

iv) Organizational structure

It is the overall frame1or2 for organi>ational roles, rules, hierarchy, relations and authority% It is the

design of @os and relationships% It is concerned 1ith the division of activities 7differentiation8 andcoordination of efforts 7integration8% ;rgani>ations must function 1ithin the oundary of their structure%

55 Ete%n). Envi%&n'ent ;M)c%& Envi%&n'ent<

External environment refers to external aspects of the surroundings of usiness enterprise, 1hich have influence

on the functioning of usiness% The environment that remains outside of the organi>ation is 2no1n as externalenvironment% !s the environment is outside, it is not under control of management% Ao1ever, the external

environment affects the activities of the organi>ation% External environment is classified into t1o types% Theyare9

551 #3eci(ic=T)s> Envi%&n'ent

The specific or tas2 environment consists of those factors that are outside the organi>ation and do

not only affects the organi>ation ut are also affects y the organi>ation% The tas2 environment

consists of follo1ing elements%

)< C$st&'e%s

They are highly influential as they are the central point of every usiness% Success of usiness largelydepends on identifying he need, desire, tastes li2ing etc% of a customers%

b< #$33.ie%s

Business enterprises re


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;rgani>ations depend on financial institutions for the supply of funds% They can e an2s, insurance

companies and other capital mar2et institutions% Effective 1or2ing relationships 1ith financiainstitutions is important to facilitate fund moili>ation%

(< G&ve%n'ent

?overnments are the regulating ody of usiness activities% ?overnment forms rules and regulation%

Business activities must e performs according to the government% There is also certain impact of

usiness upon the government%

< L)b&$% Uni&ns

They represent the prolems and feelings of their memers to management% ;rgani>ations must manage

their laour relations effectively% They should cooperate 1ith laour unions for collective argaining%

#epalese organi>ations need to deal 1ith multiple laour unions affiliated to various political parties,

-< C&''$nic)ti&n Me+i)

It may e in print, visual, audio and others% ;rgani>ation must deal effectively 1ith media% Every action

of the organi>ation is su@ect to media scrutiny% Pulic relations programmes are needed to promote and protest the image of the organi>ation%

555 Gene%). Envi%&n'ent?eneral Environment is the most important dimension of usiness environment as usinessman

cannot influence or change the components of general environment rather he has to change his

plans and policies according to the changes ta2ing place in general environment% It is also 2no1n

as macro environment% The elements of general environment are eyond the organi>ational control?eneral environment consists of the follo1ing elements%

A P&.itic). )n+ Le). Envi%&n'ent

The political and legal environment refers to government regulation and legal system for usiness% It is

influenced y legislative, executive and @udiciary% These institutions formulate la1s, implement the la1s

and maintain @ustice% Political and legal environment consists of numer of components ased on 1hich

usiness decisions are ta2en%• Political Environment

• *egal Environment

1 P&.itic). Envi%&n'ent:

Political environment of usiness refers to the government actions 1hich affect the operation of a usiness%These actions may e on local, regional, national or international level% "anagers pay close attention to the

political environment to measure ho1 government actions 1ill affect their company%

The political segment represents ho1 organi>ations try to influence government and they understand theinfluences of government actions on their strategic move% The asic components of political environment are9

i< C&nstit$ti&n: Constitution is the fundamental la1 of the country% It is the duty of every citi>en to follo1 theconstitution%

ii< P&.itic). P-i.&s&3-* ;I+e&.&*


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Democratic: nder democratic ideology, the po1er is vested on people% &undamental rights are ensured%

The private sector is regarded as the indispensale part of development of the country%

otalitarian: nder it, the po1er is centrali>ed to the government that does not tolerate parties of

differing opinion% The private sector doesn4t flourish under such ideology%

!ix: ! mix of oth is ased on po1er sharing%

Political philosophies influence organi>ations activities% Democracy provides greater role to private sectorTotalitarianism provides greater role to state% "ixed philosophies provide roles to oth private sectors and state%

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*egal environment is concerned 1ith%

• Protecting the rights and interests of organi>ations, consumers, employees, and the society% Intellectual

property rights are also produced%

• Providing grounds on 1hich organi>ations activities can e carried out% It encourages of restrains

activities y providing facilities to la1 aiders% It gives punishments to lo1 rea2ers%

• Regulations activities through legal provisions relating to licencing, employment, monopoly, foreign

investment, foreign exchange, environment protection, consumer protection, product safety, industriallocation, imports, exports, pricing, and taxation etc%

• ;rgani>ation must ensure that their activities conform to the lo1 of the land% They must comply 1ith

legal provisions in force% Changes in la1 affect strategy%

The elements of legal environments that influence organi>ation are9

iations%

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*ndustrial polic(: It is concerned 1ith industrial licensing, location, incentives, facilities, foreign

investment, technology transfer, and nationali>ation of industries%

iii< Ec&n&'ic C&n+iti&ns: They represent economic soundness of a country% They are represented y

&ross domestic product #&D$)9 It is the roadest measure of a country4s economy% It represents the total

mar2et value of all goods and services produced in a country during a given year%

*nflation: It represents changes in the level of retail prices for the asic consumer as2et% Inflation istied directly to the purchasing po1er of a currency%

%mplo(ment indicators: They involve numer of @os created or destructed percentages of active andunemployed 1or2force% They indicate the economic health of a country%

alance of pa(ment 9 It represents the ratio et1een the amount of payments received from aroad andthe amount of payments going aroad%

*ncome distri+ution: It sho1s ho1 a notion4s total ?DP is distriuted amongst its population%

usiness C(cles: They affect the health of organi>ation% They may e depression 7contraction8, recovery7revival8, prosperity and recession%

iv< Rei&n). Ec&n&'ic G%&$3s ;Inte%)ti&ning

tariffs and other restrictions on economy at international level% It promotes cooperation and free trade among thecountries% Economic integration has een promoted y S!!RC, !PEC, !SE!#, E and the GT;%

C #&ci&7C$.t$%). Envi%&n'ent

! usiness is a social system% It conducts its activities in the society% Socio)cultural environment is the sum of

all the cultural elements that affect the operation of a usiness directly or indirectly%

The norms, values, eliefs, attitudes, language, symols, and ehaviour 1hich are learned and developed over

time collectively from culture% It is a complex phenomenon and transfers over generations% Some of the

important constituents of socio)cultural environment are mentioned elo19

i< !e'&%)3-ics: Demography is the study of human population% It consists of composition of population

ased on age, groups, male and female, urani>ation, migration of people etc% it determines the mar2et

segmentation of usiness% Therefore, it is essential for the managers to ma2e detailed analysis of the

demographic structure of nation%

ii< #&ci). Instit$ti&ns: Social institution includes family, reference groups and social class%Famil(: &amily is the primary unit of society 1hich involve memer4s relation 1ith other families%

eference &roups: Reference group represents the prestigious individuals 1hose activities may ring

change in attitude and life style of people%

-ocial Class: Social class is the division of society on the asis li2e upper, middle and lo1er economic

group% The division of social institution changes attitudes and eliefs of people that affect usiness%

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Attitudes: It is a positive or negative concept to1ards product, person, organi>ation, and other

elements%

eliefs: Beliefs are descriptive thoughts aout something% They are ased on 2no1ledge

experience and religion%

eligion: Religion reflects and shapes culture% It is shared eliefs, values and rituals%

"anguage: It is a medium of communication% It also reflects culture%

%ducation: It is a continuous process of learning% Education is very important for developing

and nurturing culture%

Famil( structure and social organizations: Social organi>ations are in the form of common

interest group and communities%

! Tec-n&.&ic). Envi%&n'ent

The technological segment of usiness environment includes the institutions and activities involved in creating

ne1 2no1ledge and translating it into ne1 products, processes, and materials% Technology has pervasive anddiversified scope% Aence, it affects many parts of a society% ?iven the rapid pace of technological change, it is

vital for firms to study the technological segment thoroughly% The importance is that early adopters of ne1

technology often achieve higher mar2et shares and earn higher returns% The follo1ing are the importantelements of technological environment%

"evel of technolog(: It may e manual, mechani>ed, automated, computeri>ed and rooti>ed technology%

$ace of change: It is the stage and speed of the technological change%

echnolog( transfer: It implies technology imported from foreign countries%

esearch and development udget9 It is the spending y the government or usiness organi>ations for

technological adaptation, up)gradation and development%

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chapter 4 environmental context of management

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