Impact of Environment on Business and Strategic Decisions

A business enterprise is a part of society and changes in environment influence its functioning and performance. The environment may pose constraints on the enterprise as well as open new opportunities for it. The impact of different elements of macro environment on business decision-making may be summarized as follows:

• The economic system prevailing in a country determines the scope for private enterprises. The general level of development of the economy influence the nature and size of demand. The structure of the economy in terms of contributions of agriculture, industry and services indicates the prospects for different types of business. The economic environment exercises most significant influence on business because business itself is an economic institution. For example, decline in interest rates has reduced the cost of capital for business firms in India. Reforms in industrial and fiscal policies have led to the growth of new in India. Reforms in industrial and fiscal policies have led to the growth of new business such as venture capital funds, mutual funds, vulnerable to competition from multinational corporation and liberal imports due to liberal economic policy of the Government.

• Social and cultural forces exercise significant influence on business. For example, social consciousness among public requires more responsible behavior on the part of business in the matter of environment, customer service and labour welfare. Growing number of working women have increased the demand for life style products. Demand for reservation in jobs for minorities and women, equal pay for equal work, rise in middle class are some of the social changes affecting business. The costs of ignoring the customs, beliefs, tastes and preferences of society can be very high. Pepsi’s cola lost market share in some countries where the company’s slogan ‘come alive’ translates as ‘come out of the grave’ in local language. Customs and beliefs of society shape the legal and technological system. For example, social pressures against pollution led to antipollution system. For example, social pressures against reduce pollution. Shifts in population may cause changes in plant location. Preference for small family influences sales of baby food, toys and other such items. Emergence of a strong consumer movement led to new marketing strategies such as Customer Relationship Management.

• The political and legal environment provides the framework within which business has to function. The viability of a business firm depends upon its ability for meeting the challenges arising out of political and legal change. No business can succeed without understanding the dynamics of the country’s political system and without the support of public opinion. A stable, efficient and honest political system serves as a boost for growth of business, political instability due to terrorism, fall of Government, civil war, etc. restricts business growth. Political decisions have serious economic and business implications. In fact major economic policies such as industrial policy, fiscal policy and foreign trade policy are political decisions. Political environment determines the nature of governance. The supportive political climate has for example made Bangalore and Hyderabad as the hub of information technology firms. Similarly, deregulation of capital markets has led to surge in initial public offers (IPO). Multinationals and foreign direct investment (FDI) have come to India in a big way due to removal of controls over foreign exchange.

• Technological, physical and natural environment also affect business. For example, cable TV has adversely affected radio and cinema. Xerography has example, cable TV has adversely affected radio and cinema. Xerography has damaged carbon paper business. Digital watches destroyed business prospects of traditional watches. Information technology and telecommunications have given rise to a global market which requires better system of production (robots controlling factories) and distribution (internet marketing).