Environment means the surroundings, external

objects, influences or circumstances under

which someone or something exists. The
environment of any organisation is the
aggregate of all conditions, events & influences
that surround & affect it.

Purchase decision: Automobile

Supplier of raw materials
Manufacturer
Dealer
Advertising agency
Banker
Insurance agent

Business- economic activity

Business firm- economic unit
Business decision making- economic in nature
Business achieve objectives by using resources
optimally
Decisions taken in the presence of
environmental factors

Business firm is micro economic unit

Business environment furnishes macro economic
context for its operation
Environment in which business operates
Includes conditions, events, factors
influence the working of business

that

Classification:
Time: past, present & future environment of business
Space: local, regional, national , international
environment of business
Forces: forces of market like demand, supply
Factors: economic & non-economic

The classification of relevant environment into

components helps the organisation to cope with
its complexity, comprehend the different
influences operating & relating the environmental
changes to its strategic management process.
Business firms: adaptability & adoptability to
environment
Managers: capability & copability to deal with
environment

INTERNAL
ENVIRONMENT

BUSINESS DECISIONS

EXTERNAL
ENVIRONMENT

Richman & Copen

Environment factors or
constraints are largely, if not totally, external
and beyond the control of individual industrial
enterprises & their managements. These are
essentially the givers within which the firms &
their managements must operate in a specific
country & they vary often greatly from country
to country.

Business environment for a firm- multi layered

structure.
Layers:
favourable/ adverse
exhibit different characteristics
affect adjoining layer over a period of time
Closeness of interaction & interrelationship diff at
diff levels
Example: changes in global business environment
may effect the domestic growth environment
significantly

CONTD
INTRNTNL ENVRNMT
DOMESTIC MACRO
ECNMC ENVRNMNT
GRWTH
ECNMC
&DIST
SYSTM
GOVT
CUST
INTERNAL
OMR
ENVRNMNT
RIVAL
ECO
ECMNC
INPUT
STBLTY
FINANCIE POLICY
PRVIDER
RS
EXTERNAL

SOCIAL
DEMGRPHC
CULTRL
NON ECNMC MACRO
ENVRNMNT
INTRNTNL ENVRNMT

Change in environment presents opportunity to some

& threat to others

Examples:
General agreement on trade & services (GATS)
implemented in India on Jan 1, 2005: opportunity
for research based pharmaceutical cos like Ranbaxy
but threat to smaller companies.
HUL took advantage of new takeover & merger
codes: acquired Kissan from UB group, Lakme from
Tata, Modern foods from government.

Regarded as controllable factors: companies have

control over them

Internal economy: some internal

contribute increase in productivity

factors

Mission & vision of the organisation

Management strategy
Industrial relations
Corporate culture & values
Line & staff relations
Quality control system
Team spirit among employees
Work culture
Compensation system
Career progression of employees

Conflict b/w different owner groups

Conflicts b/w workers & managers
Inter departmental conflicts
Unhealthy competition & conflict among employees
Office politics
Discrimination at work place
Absenteeism

Regarded as uncontrollable factors: by and

large beyond the control of company.

External economy: some external factors

contribute to the growth of the company.

Suppliers
Customers
Competitors
Financiers
Society

POLITICAL
LEGAL
TECHNOLOGICAL

CULTURAL

BUSINESS

GLOBAL

NATURAL

SOCIAL
ECONOMIC

Economic system

Growth & distribution environment

Macro economic stability (price level, exchange rate,

interest rate, money supply, aggregate demand, BOP,
employment rate)

Economic policy (monetary policy, fiscal policy,

industrial policy, trade policy)

Political environment
Social / cultural environment
Demographic environment
Technological environment
Natural environment
Historical environment

State of world economy

International economic cooperation
Role of multilateral economic institutions
International economic laws, agreements, codes
Political condition & system in different countries
Cultural factors across countries
Growth & spread of MNCs
Technology growth & transfer
International market structure & competition
Barriers to international trade & investment

(I) POLITICAL ENVIRONMENT

Political stability- changes in the form & structure of

government administration

Political organisation- ideology of ruling government;

influence of premier groups; conflicting role of public
& private sector

Example:

Nehru: transformation of agrarian economy into

industrialised economy

Indira Gandhi: state became active in agriculture

sector (subsidised fertilisers, expansion of
institutional credit); tightening of state control
over industrial finance, foreign investment, trade

Since 1990-91, political environment changedeconomy increasingly being liberalised

Example:
In 1977, Janata govt came to power: Coca
cola, IBM had to leave country. All liquor cos
had to close operations.
1991 new economic order presented new
opportunities for business & also threat to
inefficient organizations.

(II) REGULATORY & LEGAL ENVIRONMENT

Legal policies- formulation & implementation

Economic legislations- facilitator and/ or restrictor
Playa a vital role- dictating dos & donts of business
Flexibility & adaptability of law- constitutional
amendments
Foreign policy- tariffs, custom unions etc

(III) SOCIO- CULTURAL ENVIRONMENT

SOCIAL ENVIRONMENT
Made up of attitude, desires, expectations,
education, beliefs & customs of people
Changes gradually
To forecast a change is difficult

CULTURAL ENVIRONMENT
Organisational culture is the customary or traditional
ways on thinking & doing things, which are shared to
a greater or lesser extent by all the members of the
organisation, which new members must learn & at
least partially accept in order to be accepted into
the service of the firm.

A firm wanting to market its product in various

regions with diversified cultures will have to
carefully study the existing consumption pattern
& scope for creating demand for new products
& will have to adjust their marketing
communication to cultural characteristics.
If the society is multi- cultural, then the firm
can not meet the demands of different groups
with a uniform product. To be successful in a
multi cultural society, the firm will have to
carefully study the consumption behaviour of
different groups.

Example:
Companies have to change their product
portfolio because of cultural differences as
McDonald and KFC did when they launched
their restaurant chain in India.

(IV) DEMOGRAPHIC ENVIRONMENT

(a) Size & growth rate of population

Growing population: boon
Increase in productive forces
Bigger market for products

Growing population: bane

Adverse impact on per capita income & standard of

living
Adverse impact on savings: unfavourable impact on
capital formation
Adverse impact on employment situation
Increasing pressure on agriculture

(b) age structure of population

It determines:
Productivity level
Demand pattern
Young population: PTC high
Elderly population: high savings

(c) urban- rural population

Proportion of urban rural population increasing

Reasons
Pull factors:
Better employment opportunities in urban areas
Better income
Better education
Better health facilities

Push factors:

Low level of agriculture productivity

Disguised unemployment
Wide disparity between urban & rural levels of
living
In India, urban population increased from 17.3%
of total population in 1951 to 27.78% of total
population in 2001 (Source: Economic Survey
2003-04)

Example:
Demographic environment decides the
marketing mix for an organisation. A one
rupee sachet of shampoo or a five rupee icecream cone are some examples.

(V) TECHNOLOGICAL ENVIRONMENT

Refers to body of skills, knowledge & procedures for
making, using & doing useful things

Positive effects of technology:

Increased productivity
Spread effects
Production of new & better goods of standardised
quality with more efficient use of raw materials
Basis for fast growing urban & industrial system

Negative effects of technology:

Displacement of labour
Environmental pollution
Switching over might be costly

Example:
FIAT was using old technology but MUL
had no option than to go for superior
technology.

(VI) NATURAL ENVIRONMENT

Industrial activity not entirely independent of

nature
Industrial units using weight losing inputs to be
set up at sources of these inputs
Externalities

(VII) EDUCATIONAL ENVIRONMENT

Attitude towards education & acquisition of

knowledge
Types of education- formal or informal
Literacy level
Educational match with skill requirement

(VII) HISTORICAL ENVIRONMENT

Historical events & ideologies have a strong impact
on the current state of business
Example: business environment in a number of
newly independent nation states has been
determined by the colonial status that these
countries had.

Dynamic
Uncertain
Element of Risk
Opportunities & threats
Internal & external factors
Economic & non-economic factors

Facilitates operations of the organisation

Forms the basis of long term policies, plans,
strategies of organisation
Helps organisation in identifying & understanding
its competitors
Helps the firm to expand & grow

CORPORATE RESPONSE & ADJUSTMENT TO

SPECIFIC CHANGES IN BUSINESS
ENVIRONMENT

Competitive environment

Marketing strategy
Developing new product
Satisfying customers
Measures for realisation of economies of scale &
scope

Technological environment

R&D
Foreign technical collaborations
Choice of technology
Capital labour ratio

Labour environment

Productivity
Employee motivation
Employees turnover rate
Working conditions
Compensation

Legal environment

Procedures & documentation

Ethical practices
Intellectual property protection
Credibility

Social environment

Social responsibility
Welfare expenditure

And so on.

Environmental changes:

Liberalisation era forced businessmen to think of

core competencies

Reckless diversifications made during pre

liberalisation era became liabilities

Strategic responses:

Restructuring business

Internationally to consolidate strength in

brewing & distilling

In India to focus on engineering, services,

health care, brewing & distilling

Hiving of non core business like

pharmaceuticals

Consequences:
With the excess baggage being shed, UB group
looks slim & vibrant

Firms that are able to make appropriate

adjustment to business environment changes
reduce risk & uncertainty & gain competitive
edge over others. Failure in making timely
adjustment may erode profitability,
competitiveness & market share.

Legal risk: arising from legal challenges or

changes in laws

Regulatory risk: arising from regulatory design &

its changes

Political risk: arising from political changes

Social risk: originating from social attitudes,

perceptions

Natural risk: associated with natural calamities

Studies
interaction,
interdependence,
interlocking of various environmental factors
Economic environment is both- endogenous
& exogenous- it is determined as well as
determining

Eco
Envrnmt
Non
Eco
Envrnmt Eco.
Sys.

Fnctng
Eco. of the
Stru Eco

Eco.
Eco Eco. Polici
plng prgrm es

Eco.
contls
&
rgultio
ns

Eco.
gwth
& dvt

Sociolog
ical

Educatio
nal

Political

Historica
l

NON
PRESENT
ENVRNMT
PAST

FUTURE

PRESENT
PRESENT
ECO
ENVRNMNT
ENVRNMT
(1)

PRESENT
NON- ECO
ENVRNMT
(2)

ECONOMIC
(1)

NON
ECONOMIC
(2)

ECONOMIC
(3)

NON
ECONOMIC
(4)

Wiliam & Lawrence..

Environmental analysis
& diagnosis give strategists time to anticipate
opportunities & to plan to take optional responses
to these opportunities. Its also helps strategists to
develop an early warning system to prevent
threats & to develop strategies which can turn a
threat to the firms advantage

Scanning: general surveillance of environmental

factors & their interactions

Monitoring:
events

Forecasting: developing plausible projections of

direction, scope & intensity of environmental
change

Assessment: identifying & evaluating how & why

current & projected environmental changes will
affect strategic management of organisation

tracking

environmental

trends,

Strategic planning in which managers try to

determine best fit b/w organisation & its
external environment

Important step towards corporate planning &

business policy decisions

Aimed at continuous improvement of the

company, its policies & programs.

INTERNAL SCANNING: acquisition, analysis, use of

information from within the organisation that will
help the management in determining future course
of action of business
EXTERNAL SCANNING: acquisition, analysis, use of
information about events & establishing the
relationship of business with its external
environmental variables

Corporate managers analyse the Strengths (S),

Weakness (W), opportunity (O) & Threat (T) that
exist for their organisation in the context of its
environment.
O & T are external to the firm. With S the firm can
seize the O & captilise on it & because of its W it
becomes the victim of T in the environment

MONITORING

FORECASTING

SCANNING

ASSESSMENT

To provide economic logic & perspective for

managerial decision making

Integrating economic theory with practical

business situations

Monitoring, scanning, careful analysis &

interpretations of business environment

Forecasting, future panning & formulating future

business strategy