External Components of Business Environment | General Environment

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General environment

Political-legal, economic, socio-cultural, and technological (PEST) are main elements of general environment. They provide opportunities and threats to the organization. Business organization has no control over the general components of business environment.

External Components of Business Environment | General Environment
External Components of Business Environment | General Environment

Political-legal environment:

  • The political -legal environment: Political-legal environment is an important element of business environment. This refers to government regulation of business and the relationship between business and government. It consists of political philosophy, political system, political institutions, legal system, courts of law, and law administration.
  • Political philosophy: Political philosophy may be democratic or socialist or mixed. The power remains in the hand of the people in democratic philosophy. Private companies play important roles in democratic countries. In the socialist philosophy, the power remains in the hands of the state. The government plays important roles in this philosophy. In mixed political philosophy, the power lies in the hands of both the people and the state. In such political philosophy, both the private sector and the state play important roles in the economy. So, business organizations should analyze political philosophy of the country. Both private and public sectors have important roles in the Nepalese economy.
  • Political system: A political system is a system of the government. It is usually compared to the legal system, economic system, cultural system, and other social systems. This system consists of political ideology, election process, the process of government formation, political stability, or instability, and so on. Political system also affects business organizations.
  • Political institutions: Political institutions are organizations that create, enforce, and apply laws; mediate conflicts; make policies on the economic and social systems; and provide representation for the populous. This includes executive, legislative, and judiciary systems. They also affect the business organizations.
  • Legal system: Another element of political-legal environment is the legal system. It is the system of civil law, common law, and religious law. Each country often develops variations on each system and incorporates many other features into the system. The legal system also affects business organizations.
  • Courts of law: A court is a tribunal, often a government institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law. The court settles all kinds of legal problems or disputes.
  • Law administration: Law administration is one of the elements of political-legal environments. It consists of law implementation bodies such as the government department, police, advocates, etc.

Economic environment:

The economic environment is an important component of the business environment. It refers to all the economic surroundings that influence decisions of the organization. Economic system, economic policies, economic conditions, and regional economic groups are major components of economic environment.

  • Economic system: An economic system is a system of production and exchange of products or services as well as allocation of available resources. It shapes the role of private sector and market forces. It can be free market economy, centrally planned economy, and mixed economy.
  • Economic policies: Economic policy refers to the actions that government takes in the economic sector. Monetary policy, fiscal policy, industrial policy, etc. are major economic policies. Monetary policy is concerned with supply of money, interest rate, credit availability, and so on. Similarly, fiscal policy is related with taxation, budgets, and so on. Likewise, industrial policy is related with investment, licensing, technology transfer, and so on.
  • Economic conditions: Economic condition refers to the economic health of the country at a specific period of time. For example- employment rate, budget surpluses or deficits, GDP growth rates, inflation rates, income distribution, stage of economic development, and so on.
  • Regional economic groups: A region of the globe forms a regional economic group. It ensures the free flow of products, services, and capital. European Union (EU), African Union (AU), Arab League, Association of Southeast Asian Nations (ASEAN), Organization of American States (OAS), Caribbean Community (CARICOM), and South Asian Association for Regional Cooperation (SAARC), etc. are some regional economic groups.

Socio-cultural environment:

The socio-cultural environment of business is also an important component of the business environment. It refers to the immediate physical and social setting in which people live or in which something happens or develops. It consists of demography, pressure groups, reference groups, lifestyles, social classes, religions, beliefs, attitudes, and languages.

  • Demography: Demography is the composition of a particular human population. It is the study of both quantitative and qualitative aspects of the human population. It consists of the growth of the population, size of the population, age group, population distribution; urbanization, migration, etc. Demography directly affects the business organization.
  • Pressure groups: A pressure group is an organized group that seeks to influence the policy of the organization for the particular interests of group members. Consumerism, Civil Society, Human Rights Associations, Woman Rights Associations, Environment Protection Groups, etc. are examples of pressure groups.
  • Reference groups: A reference group is a group of people whose attitudes, behavior, beliefs, opinions, preferences, and values are used by an individual as the basis for his/her judgment. Famous film stars, musicians, poets, singers, politicians, authors, etc. fall into the reference groups. They can bring changes in consumers’ lifestyles, fashion, behavior, belief, etc.
  • Lifestyles: Lifestyle is the way in which a person lives. The lifestyle of individuals can be different. Social change brings a change in the lifestyle of individuals. A lifestyle is a set of attitudes, habits, or possessions associated with a particular person or group. Your lifestyle can be healthy or unhealthy based on your food choices, activity level, and behavior. A positive lifestyle can bring you happiness, while a negative lifestyle can lead to sadness, illness, and depression.
  • Social classes: Social class is a division of a society based on social and economic status. All people do not belong to the same social and economic class. On the basis of economic status, society can be classified as high class, middle class, and lower class. Generally, the interest, capacity of expenses, and behavior of people of the same class become similar.
  • Religions: Religion is another component of the socio-cultural environment. It is an organized collection of beliefs, cultural systems, and world views that relate humanity to an order of existence. Consumers may be Hindus, Muslims, Christians, and others. Religion affects the way of life of the people. For example, worship, shopping, traveling, eating, wearing, etc. are affected by religion.
  • Beliefs: Beliefs are assumptions that are held to be true, by an individual or a group regarding events, people, or things. Belief may or may not be rational. It may or may not be correct.
  • Attitudes: Attitudes are beliefs, feelings, and behavioral tendencies towards objects or groups, events, or symbols.
  • Languages: Another element of the socio-cultural environment is language. Language works as communication media. It influences organizational activities. English, Chinese, French, Sanskrit, Urdu, Hindi, Nepali, etc. are the languages used by consumers. Languages are different in different countries. Various languages can be spoken in a country.

Technological environment:

The technological environment is another component of the business environment. It is a term that refers to a body of knowledge. Technology includes the use of materials, tools, techniques, and sources of power to make life easier or more pleasant and work more productive. The development of technology affects business through new inventions of production and other improvements in techniques to perform business work. The level of technology, the pace of technology, the research and development budget, and technology transfer are the main technological elements.

  • Level of technology: The level of technology influences organizations. Technology can be labor-based or capital-based.
    • Labor-based technology uses labor for the production process. This technology is represented by manpower, handloom, etc.
    • Capital-based technology uses machinery for the production process. This technology is represented by automatic, computerized or digital, and robotized.
  • The pace of technology: Technology is dynamic. The pace of technology is very fast. Organizations should adopt changing technological forces. They should also upgrade the skills of their human resource to effectively cope with the demand of technological changes. Technological change influences organizations in the following.
    • It can make existing industries obsolete
    • It can rejuvenate existing industries through product improvements or cost reductions
    • It can create entirely new industries
    • It can increase government regulations
  • Research and Development budget: Research and development are the essences of innovation. Customers expect new products of superior quality which are safe, comfortable, and environment friendly. Organizations must have a sufficient budget to conduct research and development activities to cope with the need of the customer. Thus, the manager should pay attention to this aspect of the environment.
  • Technology transfer: Technology transfer is the transfer of new technology from the originator to a secondary user, especially from developed to developing countries in an attempt to boost their economies. Technology can be transferred through globalization, projects, trade, technical assistance, training, publication, and so on.

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