Chapter 1: Introduction to Business Environment

Very Short Questions Answers

1. Define business environment.

Business environment is combination of all the factors that influence a business activity. It consists of the internal and external forces prevalent in the environment, which have a bearing on the development, performance and outcomes of a business organization.

2. Define task environment.

Task environment refers to the factors of immediate competitive situation of a particular organization. Forces in the task environment result from the actions of suppliers, distributors, customers and competitors. They are closer than general environment.

3. Enlist the components of business environment.

Business environment consists of internal and external components.

Internal components: They include the factors internal to an organization such as objectives, resources, structure, culture, etc.

External components: They include task environment such as customer, suppliers, competitors, etc. and general environment such as political, economic, socio-cultural, technological environment, etc.

4. What do you mean by environmental scanning?

Environment scanning is the technique of acquiring information about environmental uncertainty, complexity and dynamism and analyzing the trends emerging in the environment. It is a detailed study of the environment. Hence, it is also called x-ray of the environment. It shows the early signal and trend of the environment in terms of opportunity and threats.

5. Explain any one method of environmental scanning.

One of the methods of environmental scanning is Delphi method. Under this, a panel of expert is formed who are questioned about the environmental trend likely to arise in the future. The responses are collected and summarized and returned to the members for assessment. It continues till the acceptable consensus is achieved regarding the changes in the environment.

6. Enlist the environmental analysis process.

Environmental analysis has a certain process as mentioned below:

• Scanning
• Monitoring
• Forecasting
• Assessing

7. What do you mean by centralized environmental scanning?

Centralized scanning is an approach to environmental scanning in which some specific components of the environment are only scanned. Since few components are scanned, it is economical and less time consuming. For example, if political conditions are only scanned, it is called centralized scanning.

8. Write with example about comprehensive environmental scanning.

If all the environmental components which are likely to impact the organization are scanned, it is called comprehensive scanning. Since many et components are scanned, it is costly and time consuming.

9. Write about the approaches to environmental scanning.

There are three approaches to environmental scanning.

• Systematic approach
• Ad-hoc approach
• The processed form approach

Short Questions Answers

1. Why is the study of business environment important to organization? Explain.

It is essential for a business manager/entrepreneur to have the profound knowledge about environment surrounding to business to make managerial and business decision. Hence, he/she should have continuous analysis and assessment of the business environment. The significance of understanding business environment to organizations are:

• Comprehensive strategy formulation: Business firms have to formulate broad strategies and long-term policies for their continuous existence. An assessment of environmental components enables a manager to formulate business strategies and policies. The assessment can be done through SWOT (Strength, Weakness, Opportunities, and Threats) analysis.
• Competitive analysis: Businesses should regularly analyze the strength and weakness of competitors and formulate strategies accordingly in order to retain its superiority in the market. The study of business environment facilitates to formulate effective measures to analyze the strategies of the competitors and face them.
• Adaptability: The foremost concern of any business firm is to adjust with the emerging environmental forces. As a result of environmental analysis, managers are able to adapt to the prevailing conditions and thus influence the environment in order to make it congenial or less harmful to their business.
• Stability: The study of environment enables the firms to foresee the impact of the socio-economic and political changes taking place at the national and international levels on their stability. They can develop action plans to cope with such changes to maintain stability.
• Dynamism: Business firms should change and mould themselves with the changing environment. The knowledge of business environment enables a manager to be well acquainted with the changing business scenario and take proper steps to keep the firm up-to-date.
• Lobbying: The study of environment helps business firms to lobby fo influencing the environmental changes. To influence new laws and policies o the state different groups or associations of business play a vital role.

2. What do you mean by business environment? What are its features? Explain.

Meaning of Business Environment

Business environment is the combination of all the factors that influence a business. It refers to the set of all factors that can affect the business operation It consists of the internal and external forces prevalent in the environment to which have a bearing on the development, performance and outcomes of a business organization. The internal environmental forces provide strength of create weaknesses and the external environmental forces provide opportunities or pose threats to a business.

Features of Business Environment

The following are some of the notable features of business environment.

• Complex: Business environment is complex due to its unpredictability. It consists of interacting events, conditions and influences arising from varied sources.
• Dynamic: Business environment is dynamic. It continuously changes shape and character.
• Multi-faceted: Different people perceive the environmental changes differently. A particular change or development in the environment can be opportunity for one organization but the threat for another organization.
• Far-reaching impact: Business environment exerts far-reaching impact to se business organization. It greatly affects the capacity on an organization over a long period.
• Aggregate of factors: Business environment includes events, conditions and trends in environment. Hence, it can be stated as the aggregate of factors.

3. Explain in brief the general environmental components that affect a business.

The general environmental components that affect a business are mentioned below.

• Political environment: The components of political environment are political system, political institutions and political philosophy. Political system consists of ideological forces, political parties, election procedures and power centers. Political institutions consist of legislature, executive and judiciary. The political philosophy can be of democratic, totalitarian or a mix of both.
• Legal environment: The legal environmental factors that influence business are business law, courts of law and law administrators. Business law consists of an array of laws that regulates business activities. Courts of law are institutions established by law to solve legal disputes; law administrators are the various law enforcement agencies which ensure implementation of laws and the judgments of the courts of law.
• Economic environment: Economic environment refers to all economic surrounding that influence business activities. Economic systems, economic policies, economic conditions and regional economic groupings are the components of economic environment of business.

Economic system may be free market economy based on private sector ownership of factors of production or centrally planned economy based on public sector ownership of all factors of production or mixed co-existing both private and public sector.

The economic policies are monetary policy concerned with money supply, interest rates, credit availability, exchange rates, etc, fiscal policy concerned with the use of taxation and government expenditure to regulate the level of aggregate economic activity and industrial policy concerned with industrial licensing, location, incentives, facilities, foreign investment, technology transfer, nationalization of industries, etc.

Economic condition is also important component of economic environment which is determined by the factors like level and distribution of income, business cycles, inflation, stage of economic development etc.

• Socio-Cultural environment: Socio-cultural environment of business refers to all the social surroundings that influence a business. It is made up with the components such as culture, social institutions, pressure group and social change. Culture includes knowledge, customs, traditions, morals, and values, religion, language, symbols, works of arts and architecture and accepted behavior pattern of people. Social institutions consist of family, reference groups and social class. Pressure groups are the special interest groups organized to use the political process to advance their position on an issue of social concern. Social change implies modification in relationships and behavior pattern of individuals and groups in a society.
• Technological environment: Technological environment refers to all the technical surroundings that influence business activities. The components of technological environment are level of technology, pace of technological change, technology transfer and R&D budget. The level of technology may be labor based or capital based. Pace is the stage and speed of the technological change. Technology transfer implies technology imported from technologically advanced foreign countries. R&D budget is the situation of research and development budget by government or business organizations for technological adaptation, upgradation and development.
• The physical environment: The physical environment of business consists of the level of energy consumption, environment policy, compliance of environmental law and natural resources. A business has to respond the physical environment positively to maximize the opportunities and minimize threats.
• Global environment: With globalization, markets are becoming more global. A business should consider global issues and conditions while doing its business. It should analyze global economic, political, socio cultural, technological and other global components and prepare itself for global o competition. Regional and global economic groupings such as SAARC BIMSTEC, ASEAN, EU, WTO, etc are promoting the cooperation and free trade among the member countries.

4. What do you mean by task environment of a business? Explain its components.

Task environment involves factors in the immediate competitive situation of a particular organization. Forces in the task environment result from the actions of suppliers, distributors, customers and competitors. The components of task environment are:

• Customers: Customer is the most important component of a business. All the business activities are directed towards satisfying customer needs and desires. The actions of customers have immediate effect on the growth and development of business. The rise of middle class and educated customers provide enough opportunities for the growth of business.
• Suppliers: Suppliers provide input to the business. The competitiveness among the suppliers will definitely provide opportunity to the business sector. Likewise, a good relationship with the customer also helps create business opportunities.
• Distributor: Distribution is one of the important factors that determines the effectiveness of business in terms of cost and speed of delivery. A close relationship with the distributors creates a number of business opportunities.
• Special interests groups: The rise of special interests groups poses both opportunities and threat to the business sector. They may be environmentalists, consumer advocates, women’s group, etc.
• Financial institutions: Development of financial institutions like commercial banks, finance companies, insurance companies and capital market institutions creates opportunities to the business.
• Media: The media keep an eye on the vital decisions or actions of the business. They create opportunities to the business if properly dealt with.
• Competitors: Businesses compete for customers. Hence, a business should always analyze the competitor and formulate plans and programs accordingly. Hence, the activities of the key competitors are very important for a business.

5. Explain the process of environmental analysis.

Environmental analysis is the process through which the environment is continuously monitored to determine the opportunities and threats to an a organization. It involves the determination of the factors in the environment threatening the organization’s present objectives and strategies. Environmental analysis has a certain process as mentioned below.

1. Scanning: This is the first step of environmental analysis process. Environment scanning is a technique of acquiring information about the environmental uncertainty, complexity and dynamism and analyzing the trends emerging in the environment. It involves the study of the general environment. It is a detailed and micro study of the environment. It helps to identify the early signals of potential changes in the environment.
2. Monitoring: This is the second step of environmental analysis process. It involves observation of environmental changes. It helps to assess the environmental trend. It provides meaning to different environmental events and trends. Scanning and monitoring are particularly important when a firm CAR competes in a highly volatile environment. They help gather knowledge about different environmental components.
3. Forecasting: In the third step of environmental analysis process, environment is forecasted. Forecasting is done on the basis of scanning and monitoring. It involves developing feasible projections of what might happen and how quickly. It is done on the basis of changes and trends. Forecasting is a challenging work.
4. Assessing: This is the last step of environmental analysis process. It determines the timing and significance of the effects of environmental changes and trends that have been identified. Assessing connects the data and information should be interpreted with competitive relevance. The data and information to determine the trend as opportunity or threat for the organization.

6. Write the techniques/methods of environmental scanning.

Environmental scanning is a tool to monitor, evaluate and disseminate information from the environment. The different techniques/methods of environmental scanning are discussed below.

• Executive opinion method: Under this method, environment is forecasted on the basis of opinion and views of a panel of top executives.
• Expert opinion method: Under this method, environment forecasting is done on the basis of opinion of outside experts or specialist. The experts have better knowledge about the environmental components.
• Delphi method: This method involves forming a panel of experts and questioning each member of the panel about the environmental trend. Later, the responses are summarized and returned to the members for assessment. This process continues till the acceptable consensus is achieved.
• Intuitive reasoning: Under this method, environment is scanned on intuitive and rational basis. Environmental is forecasted on individual judgment. Reliability of this method depends on the knowledge and experience of the top managers.
• Scenario building: Scenarios are the pictures of possible future. They are built to address future contingencies.
• Cross-impact matrix: Under this, environmental forecasts through various methods are combined to form an integrated and consistent description of future. Cross-impact matrix is used to assess the internal consistency of the forecasts.

Long Questions Answer

1. Discuss the various components of the environment that affect a business. You are also required to mention how the business environment in Nepal may be improved.

Business environment is the combination of the forces and conditions prevalent inside and outside the boundaries of a firm. The internal environmental forces provide strength or create weaknesses and the external environmental forces provide opportunities or pose threats to a business.

External environment is composed of the outside conditions and forces that influence performance and outcomes. It is located outside the business organization and cannot be controlled by the efforts of the business organization. The business environment may be discussed under the following components.

General Environment

The general environment is composed of the factors that are broad and affect the industries and the firms competing with each other. The general environment should be scanned, monitored, forecasted, and assessed to determine its effects on the firm i.e. to recognize and evaluate opportunities and threats. The different components of general environment are :-

Task Environment

Task environment refers to the factors of the immediate competitive situation of a particular organization. Forces in the task environment result from the actions of suppliers, distributors, customers and competitors. They are closer than general environment.

Improvement of Business Environment

Starting and operating a business in developing countries is usually difficult as complex and conflicting regulations, weak institutions, inefficient bureaucracy and ineffective justice system hamper smooth operations. The business environment in Nepal can be improved with a clear and transparent policy and good governance. The government should always adopt an open market policy to promote the business sector in Nepal. The infrastructures of the business development should be prioritized at the policy level. The organizations in Nepal should try to build up competitiveness to compete at national as well as international level. Political stability is one of the important challenges in Nepalese business environment. The following are some of the ways of improving the business environment in Nepal.

Amendment to eliminate the conflicting provisions of different laws

• Decrease the number of agencies and departments of government involved
• Long term solution of energy problem
• A strong provision of business security
• Institutional provision for the maintenance of industrial relations.
• Make the policy orientation clear
• Strengthen the institutions necessary for a well functioning market
• Removal of red tape and bureaucratic hassles
• Elimination of discretionary power of the bureaucracy
• Institutional provision for the assistant to the business