ICAI Notes- Environemental Influence on Business | Business and Commercial Knowledge (Old Scheme) - CA Foundation PDF Download

ENVIRONMENTAL INFLUENCES ON BUSINESS

All living creatures including human beings live within an environment. Apart from the natural environment, environment of humans include family, friends, peers, neighbours and society. It also includes man-made structures such as buildings, furniture, roads and other physical infrastructure.

Just like human beings, business also does not function in an isolated vacuum. Businesses function within a whole gambit of relevant environment and have to negotiate their way through it. The extent to which the business thrives depends on the manner in which it interacts with its environment.

To be successful business has to not only recognise different elements of the environment but also respect, adapt to or manage and influence them.
The business must continuously monitor and adapt to the environment if it is to survive and prosper.

A successful business has to identify, appraise, and respond to the various opportunities and threats in its environment.

Cadbury Situation Complaints received across India of worms in chocolates few years back Quality of the product became questionable Sales dropped Regulatory authority probe ordered
	Famous Cadbury Fight back In house quality investigation to find out the cause Introduction of new improved packaging in record 90 days in the market Created a special Visi-cooler along with Voltas to keep chocolates in good and hygienic condition till the last POP (point of purchase) i.e. final consumer

Business functions as a part of broader environment. The inputs in the form of human, physical, financial and other related resources are drawn from the environment. Business converts these resources through various processes into outputs of products and/or services. The latter are partly exchanged with the external client groups, say customers. The exchange process brings in some surplus (or profits, reputation, good

public image and so on) to the business, which could be stored and used for further development and growth.

Different organizations use different inputs, adopt different processes and produce different outputs. For example, an educational institution produces literate people. A hospital provides health and medical services. Organizations depend on the external environment for the inputs required by them and for disposing of their outputs in a mutually beneficial manner. The input-output exchange activity is a continuous process and calls for an active interaction with the external environment.
Framework to understand the environmental influences

In spite of the problems in understanding business environment, organizations cannot ignore it. We will make an attempt to identify a framework for understanding the environment of organizations. This will help in identifying key issues, find ways of coping with complexity and also assist in challenging managerial thinking.

• Firstly, it is useful to take an initial view of the nature of the organizations environment in terms of how uncertain it is. Is it relatively static or does it show signs of change, and in what ways? Is it simple or complex to comprehend? This helps in deciding what focus the rest of the analysis is to take.
• Secondly, The next step might be the auditing of environmental influences. Here the aim is to identify which of the many different environmental influences are likely to affect the organization's development
  or performance. It is useful to identify the influencing factors and relate such influences.
• The final step is to focus more towards an explicit consideration of the immediate environment of the organization - for example, the competitive arena in which the organization operates.

There should be an attempt to understand why the forces are of strategic significance. It is also required to analyse the organization's competitive position: that is, how it stands in relation to those organizations competing for the same resources, or customers, as itself.