Business Environment

Reference: Economic Environment Misra & Puri Pg no:5-60

Characteristics / Nature of Modern Business
•

Large size
•

Oligopolistic character
•

Diversification
•

Global reach
•

Technology orientation
•

Change
•

Government control
Environment of Business
Environment by definition is something external to an individual or an organization.
Business environment refers to all external factors which have direct or indirect bearing
on the activities of business. The business environment is divided into
•

Internal environment
•

External environment
a. Micro environment
b. Macro environment
Diagrammatic Representation of Business Environment

Economic Environment
Since business is basically an economic activity, economic environment of business –
both national and global – is of strategic importance.
In the economic environment of the country,
•

country’s economic system,

•

macroeconomic scenario ,
•

phase of business cycle through which the company is passing,

•

organization of the financial system and

•

economic policies of the government are the most important elements.

1.Economic System
a. Capitalism
b. Socialism
2. Macro-economic Scenario
a. High rates of growth
b. Inflation
c. High rates of savings and investment
d. Fiscal imbalance
e. Balances of payments
f. Deficits
Phases of business cycle
a. Prosperity
b. Recession
c. Depression
d. Stagflation
Financial System
Economic Policies
a. Industrial policy
b. Trade policy
c. Monetary policy
d. Fiscal policy
Non-Economic Environment
The non- economic environment of business can be classified as:
•

Political environment
•

Legal environment
•

Socio-cultural environment
•

Demographic environment
•

Technological environment
•

Natural environment
3

(a) Political Environment

(b) Legal Environment
The governments sets the legal framework within which business operate.
Legislations defining property and business organizations, laws of contracts and
bankruptcy, mutual obligations of labour and management and a multitude of laws and
regulations constraining the way business activities are carried out constitute legal
environment of business.
Economic legislations, as these, are often called, have a direct bearing on the business.
Economic legislations can be classified into two categories:
Legislations which have a facilitatory role.
Ex: The Contract Act provides the rules for systematic exchange transactions.
Legislations which are restrictive in nature.
Ex: MRTP Act and FERA.
(c) Socio-cultural Environment
The Social environment is made up of the attitudes, desires, expectations, degrees, of
intelligence and education, beliefs and customs of people in a group or a society.
Culture is the heart of a particular group or society – what is distinctive about the way
members interact with one another and with outsiders – and how they achieve what they
do.
Socio-cultural environment is made up of attitudes, desires, expectations, beliefs, faiths,
customs of people besides their set of material practices through which people produce
goods and services that they need for satisfying their wants.
Globalization of culture
Multiculturalism
a. Caste
b. Race
c. Ethnic issues
Demographic Environment
Demographic factors like the Size and Growth rate of population, Life Expectancy, Age and sex
composition of population, Work participation rate, Employment status, Rural- urban distribution,
Educational levels, Religion, Caste, Ethnicity and Language are all relevant to business.
Some of the issues are:
•

Size and growth of population

•

Age structure of population

•

Urban-rural population
•

Burden of population on environment