Unit I

Introduction: Concept of Business Environment-Definition-Characteristics-Environmental

factors, Importance at national and international level – problems and challenges –
Environmental Scanning: Importance, Process of scanning- NITI Aayog: It’s Role in
Economic Development of India- Technological Environment: Features, Its impact on
Business, Restraints on Technological Growth.

BUSINESS
Business may be understood as the organized efforts of enterprises to supply consumers with
goods and services for a profit. It is a continuous production and distribution of goods and
services with the aim of earning profits under uncertain market conditions.

BUSINESS ENVIRONMENT
Business environment refers to those aspects of the surrounding of business enterprise which
have influence on the functioning of business. An organization can survive and grow only
when it continuously and quickly adapts to changing environment.

The business environment is the combination of internal and external factors of a business.
The internal factors are within the organization to control the activities is called as internal
factors, whereas external factors are beyond the control of a business like economic
environment, political, social, cultural, technological and international environment of a
business environment.

It consists of all those factors that have bearing on the business. A set of conditions – Social,
Legal, Economical, Political or Institutional that are uncontrollable in nature and affects the
functioning of organization.

DEFINITION

Business environment can be defined as “the forces, factors and institutions with which the
businessman has to deal with to achieve its objectives”.

“Business environment is the climate or set of conditions economic, social, political or

institutional in which business operations are conducted”
-Arthur M.Weimer

“Business environment is the total of all things external to business firms and industries
which affect their organization and operations”
-Bayard O.Wheeler
In general words we can say business environment is the surroundings in which business
exists.
NATURE AND CHARACTERISTICS OF BUSINESS ENVIRONMENT

1. Business environment is compound in nature.

2. It is constantly changing process.
3. It is different for different business units.
4. It has both long term and short term impact.
5. Unlimited influence of external environment factors.
6. It is very uncertain.
7. Inter-related components.
8. It includes both internal and external environment.

IMPORTANCE AT NATIONAL AND INTERNATIONAL LEVEL

1. Development of broad strategies and long-term policies of the firm.

2. Development of action plans to deal with technological advancements.
3. To foresee the impact of socio-economic changes at the national and international
levels on the firm’s stability.
4. Analysis of competitor’s strategies and formulation of effective countermeasures.
5. To keep oneself dynamic.
6. Complete knowledge of internal environment.
7. Economic policies of the Government.
8. To face business problems and challenges.

PROBLEMS AND CHALLENGES OF BUSINESS ENVIRONMENT

Macroeconomic Stability: Even moderate levels of inflation (between 20% and 40%) are a
constraint on enterprise performance and growth.
Taxation and regulation: High tax rates are the largest constraint on enterprise performance
and growth in the area of taxation and regulation. Tax evasion and arrears are major problems
and result in high burdens for enterprises that pay taxes. Excessive regulation encourages
corruption.
Crime and corruption: Crime is a significant problem for enterprises. Corruption is high,
harming domestic enterprises and deterring foreign investment. Corruption often affects
small enterprises more than medium sized enterprises.

Access to finance: High interest rates and poor access to long term loans are the most
significant problem related to access to finance. Access to finance is a greater constraint for
small enterprises than for medium or large enterprises.

The Legal system: existing commercial laws are poorly enforced and the legal infrastructure
is week.

FACTORS BOTH INTERNAL AND EXTERNAL INFLUENCING BUSINESS

ENVIRONMENT

Business
Environment

Internal External
Environment Environment

Primary Supportive Micro Macro

Activities Activities Environment Environment

A variety of factors can affect company's business. Such factors can be national level,
regional level, and international level environmental forces. These factors are also known as
societal factors or macro level business environment factors. In general, five forces are
taken as the general environmental factors namely economic, socio-cultural, political-legal,
technological, and international. Some writers included natural environment as a distinct
component but the growing social awareness on natural environment shows that this
component can be included into the socio-cultural environment.

Set of these environmental factors is mostly referred by first four factors PEST (Political-
legal, Economic, Socio-cultural, and Technological). The logic behind this is pervasiveness
of the international environment because it affects all these four sectors. Fast growing
technological development, outsourcing business, emergences of multinational companies,
and global and regional alliances have made the world a global village.

I. Internal environment: Internal environment is considered to be controllable as the

business can manage and control the factors easily. These factors can be modified or altered
by the business from time to time, but even then some problems are faced by the business.

i. Primary Activities: The one of the main usage of primary activities is to provide
facilities such as technological and strategically according to the firm requirement
some of these are;
a. Inbound logistics: These activities include receiving, storing, material
handling, warehousing, inventory control, vehicle scheduling and returns to
suppliers, etc.
b. Operations: It includes all those activities which convert the raw material to
finished products, such as, machining, packaging, assembly, equipment
maintenance, testing, and printing and facility operations.
c. Outbound logistics: Out bounding logistics include all the activities
associated with collecting, storing and distribution of goods to final
consumers, such as, warehousing, delivery vehicle operation, order processing
and scheduling, etc.
 d. Marketing and sales: It involves those activities which induce the buyers to
purchase the products, such as advertising, promotion, sales force, channel of
distribution and pricing.
e. Financial Resources: Finance is generally termed as the life blood of the
business. It is also an important internal environment affecting business
performances, strategies and decisions. It includes the factors related with
financial policies, financial position and capital and structure, etc.
f. Service: Activities associated with providing service to enhance or maintain
the value of the product such as installation, repair, repair, training, and parts
supply and product adjustment.
ii. Supportive Activities: Primary activities are more critical to a firm, but even then
support activities are also important to study the internal environment of the business.
a. Internal power relationship: It means the relationship between different
levels of management, management and shareholders, shareholders and board
of directors, employees to employees, management and Labour union, etc.
b. Procurement: Activities related with the procurement or purchasing of
different items, such as, raw material, machinery, services and so on.
c. Technology Development: Technology development means improvement in
this know-how, whether by the R&D department of the firm or by outsider.
d. Human Resource Management: Recruitment, training and development of
personnel in the organization comes under the scope of human resource
management. Every activity of the organization involves human resources and
therefore, it has great impact on the internal environment of the firm.
II. External Environment: External environment is largely consisted of uncontrollable
factors which influence a firm’s action and direction, organizational structure and
internal processes:

i. Macro/Remote environment: It is composed with set of factors which are generally

beyond the control of the firm. Such as, political, economic, social, technological,
natural and international factors. Macro environment is largely external to the
business enterprise. Macro environment factors are uncontrollable factors and beyond
the direct influence and control of the organization. Its factors are powerfully
influence to its functions. External environment consists of individuals, groups,
agencies, organizations, events, conditions and forces. These are frequently contacted
 by the organization for its functions. It establishes good interaction and
interdependent relations in form of conducts business transitions. Proper designing
and administration of macro environment enable appropriate strategies and policies to
cope with and make changes.

The macro/remote environment principally consists:

a. Economic environment
b. Political environment
c. Legal environment
d. Socio-cultural environment
e. Demographic environment
f. Natural environment
g. Technological Environment
h. Global or International environment
Economic environment: The economic environment is based on all the factors which
involves in the functioning of the business.
The business enterprise is affected by various economic factors which cannot be control by
the business. The one of the main usage of economic environment is to understand the more
economists to the find in the place of industrial establishment such as
 Economic system: The economic system of a country reflects the economic
composition, economic thinking and the economic liberalization. It also helps in
preparation of the business strategies.
o Socialist Economic System: Under socialistic economic system, the factors of
producing are to be organized, owned and managed by the government.
o Capitalist Economic System: A capitalist economic system is that system
which encourages private enterprises, free play of market force, strong
competition and directs the scare resource to most profitable once.
o Mixed Economy: It is a midway between socialist economy and capitalist
economy. Co-existence of both public and private sectors is the feature of
mixed economy. Our Indian economy system is also a mixed economy.
 Economic Policies: The term economic policy refers to Government policy towards
economy as a whole. These policies have great impact on the business. Economic
policy establishes relationship between Government and business.
  Economic Conditions: The impact of economic environmental changes can be seen
on business prospects over time in different ways. Increase in Green Revolution in
certain part of India led to growth in demand for a number of products like transistors,
radio sets, bicycles, tube wells and low horse power motors, as well as synthetic
textiles.
 Financial Environment: The financial environment is also an important constituent
of the economic environment as it is affected by the efficiency and efficacy of the
financial environment of the country. The level of development of the financial
system plays a crucial role in the business. The financial system of our country can
broadly be divided in two parts: money market and capital market.
Political Environment: All business firms are directly affected to a greater or lesser degree
by the government and its programmes. Political forces will decide the nature of business,
programmes and projects to the undertaken for the development of the country. If any
changes in the political scenario of the country can lead to change in the economic policies.

Natural Environment: It includes all the geographical conditions which influence the type
of industries and business in a region. The people of a particular geographical region will
have similar tastes, preferences and requirements. The geographical situation such as climate,
rainfall, humidity etc. decides the type of leaving in a region and only those industries which
could cater the needs for the people could develop. These factors may directly influence the
functioning of the business and they affect the different industries.

Demographic Environment: Demographic is a study of human population with reference

according

 Change in the size and structure of population.

 Age, sex and size of a family of population.
 Language, caste, education, religion of population.
 Economic level of population.
These factors may directly influence the cause of a business and customer requirement for its
survival and growth.

Social and Cultural Environment: Social and cultural attitude of a region influence the
business organizations of the regions in variety of ways. The business practices and the
management techniques of the organization should cope with the social and cultural attitude
of the people.
Social and cultural factors include attitude of people to work, attitude towards wealth, and
mobility of people. These are the important environmental factors those should be analyzed
while formulating business strategies.

Every society develops their own ‘Culture’ which means how the member of that society
behaves and interacts with each other in the society as well as outside society. The term
culture includes values, norms, customs, ethics, goals and other accepted behaviour pattern.

Technological Environment: Technology means “the systematic knowledge of the

industrial arts”. Techniques donate the method of performance. There are two increasingly
use in modern literature on industrial production the present age is the age of the technology.

Micro or Operating Environment:

Operating environment is also known as micro environment or competitive or task

environment. These factors can be influenced or controlled by the firm:
i. Competitive position: A business can improve its strategies by assessing its
competitive position for optimizing environmental opportunities. Competitors of a
business enterprise means the other firms which market the same or similar products
and all those who complete for the discretionary income of the consumers.
ii. Customer profile: The strategies of the firm should concentrate on the desire and
needs of customers. In developing a profile of present and prospective customers,
mangers can be able to plan the strategic operations of the firm.
iii. Suppliers and Creditors: An important force in the micro environment of a company
is the suppliers and creditors, i.e., those who supply the raw material and capital to the
company. The manager should analyze the supplier changes in the environment like
price of the material, continuous supply of material, providing material on credit, etc.
iv. Labour market: for a firm’s success, it is pre-requisite to attract and hold capable
employees. There are three major factors namely, reputation, employment rate and
availability of required knowledge and skills, which affect firm’s access to needed
personnel.
v. Public: A public is any group that has an actual or potential interest in or impact on
an organization’s ability to achieve its interests. Every company has to encounter with
certain public like, media, citizens, local public, etc. some companies are seriously
affected by such public, such as action by local to business, for example, media may
be used to disseminate useful information.
Environmental Scanning
Every organization has an internal and external environment. In order for the organization to be
successful, it is important that it scans its environment regularly to assess its developments and
understand factors that can contribute to its success. Environmental scanning is a process used by
organizations to monitor their external and internal environments.

The purpose of the scan is the identification of opportunities and threats affecting the business
for making strategic business decisions. As a part of the environmental scanning process,
the organization collects information regarding its environment and analyses it to forecast the
impact of changes in the environment. This eventually helps the management team to make
informed decisions.

As seen from the figure above, environmental scanning should primarily identify opportunities
and threats in the organization’s environment. Once these are identified, the organization can
create a strategy which helps in maximizing the opportunities and minimizing the threats.

The following is the need and importance of environmental scanning:

1. Identification of strength:

Strength of the business firm means capacity of the firm to gain advantage over its
competitors. Analysis of internal business environment helps to identify strength of the firm.
After identifying the strength, the firm must try to consolidate or maximise its strength by
further improvement in its existing plans, policies and resources.

2. Identification of weakness:

Weakness of the firm means limitations of the firm. Monitoring internal environment helps to
identify not only the strength but also the weakness of the firm. A firm may be strong in
certain areas but may be weak in some other areas. For further growth and expansion, the
weakness should be identified so as to correct them as soon as possible.

3. Identification of opportunities:

Environmental analyses helps to identify the opportunities in the market. The firm should
make every possible effort to grab the opportunities as and when they come.

4. Identification of threat:

Business is subject to threat from competitors and various factors. Environmental analyses
help them to identify threat from the external environment. Early identification of threat is
always beneficial as it helps to diffuse off some threat.

5. Optimum use of resources:

Proper environmental assessment helps to make optimum utilisation of scare human, natural
and capital resources. Systematic analyses of business environment helps the firm to reduce
wastage and make optimum use of available resources, without understanding the internal
and external environment resources cannot be used in an effective manner.

6. Survival and growth:

Systematic analyses of business environment help the firm to maximise their strength,
minimise the weakness, grab the opportunities and diffuse threats. This enables the firm to
survive and grow in the competitive business world.

7. To plan long-term business strategy:

A business organisation has short term and long-term objectives. Proper analyses of
environmental factors help the business firm to frame plans and policies that could help in
easy accomplishment of those organisational objectives. Without undertaking environmental
scanning, the firm cannot develop a strategy for business success.

8. Environmental scanning aids decision-making:

Decision-making is a process of selecting the best alternative from among various available
alternatives. An environmental analysis is an extremely important tool in understanding and
decision making in all situation of the business. Success of the firm depends upon the precise
decision making ability. Study of environmental analyses enables the firm to select the best
option for the success and growth of the firm.

Important Factors for Environmental Scanning

Before scanning the environment, an organization must take the following actors
into consideration:

 Events – These are specific occurrences which take place in different environmental
sectors of a business. These are important for the functioning and/or success of the
business. Events can occur either in the internal or the external environment.
Organizations can observe and track them.

 Trends – As the name suggests, trends are general courses of action or tendencies along
which the events occur. They are groups of similar or related events which tend to move
in a specific direction. Further, trends can be positive or negative. By observing trends, an
organization can identify any change in the strength or frequency of the events suggesting
a change in the respective area.

 Issues – In wake of the events and trends, some concerns can arise. These are Issues.
Organizations try to identify emerging issues so that they can take corrective measures to
nip them in the bud. However, identifying emerging issues is a difficult task. Usually,
emerging issues start with a shift in values or change in which the concern is viewed.

 Expectations – Some interested groups have demands based on their concern for issues.
These demands are Expectations.

NITI Aayog

The Planning Commission of India supervised the five-year plan for the economic development
of the country. However, in 2014, the 65-year-old Planning Commission was dissolved and a
think tank – NITI Aayog (National Institution for Transforming India) took its place.

It’s Role in Economic Development of India

1. To evolve a shared vision of national development priorities sectors and strategies with
the active involvement of States in the light of national objectives
2. To foster cooperative federalism through structured support initiatives and mechanisms
with the States on a continuous basis, recognizing that strong States make a strong nation
3. To develop mechanisms to formulate credible plans at the village level and aggregate
these progressively at higher levels of government
4. To ensure, on areas that are specifically referred to it, that the interests of national
security are incorporated in economic strategy and policy
 5. To pay special attention to the sections of our society that may be at risk of not benefiting
adequately from economic progress
6. To design strategic and long term policy and programme frameworks and initiatives, and
monitor their progress and their efficacy. The lessons learnt through monitoring and
feedback will be used for making innovative improvements, including necessary mid-
course corrections
7. To provide advice and encourage partnerships between key stakeholders and national and
international like-minded Think tanks, as well as educational and policy research
institutions.
8. To create a knowledge, innovation and entrepreneurial support system through a
collaborative community of national and international experts, practitioners and other
partners.
9. To offer a platform for resolution of inter-sectoral and inter departmental issues in order
to accelerate the implementation of the development agenda.
10. To maintain a state-of-the-art Resource Centre, be a repository of research on good
governance and best practices in sustainable and equitable development as well as help
their dissemination to stake-holders
11. To actively monitor and evaluate the implementation of programmes and initiatives,
including the identification of the needed resources so as to strengthen the probability of
success and scope of delivery
12. To focus on technology up-gradation and capacity building for implementation of
programmes and initiatives
13. To undertake other activities as may be necessary in order to further the execution of the
national development agenda, and the objectives mentioned above

Technological Environment
Technological environment refers to the state of science and technology in the country and
related aspects such as rate of technological progress, institutional arrangements for
development and application of new technology, etc.

According to the well-known economist J.K. Galbraith, technology means, “systematic

application of scientific or other organised knowledge to practical tasks”.

Technology comprises of both machines (hard technology) and scientific thinking (soft
technology) used to solve problems and promote progress. It consists of not only knowledge
and methods required to carry on and improve production and distribution of goods and
services but also entrepreneurial expertise and professional know how. Technology includes
inventions and innovations.

The main features of technological environment are as follows:

1. Technological environment is a component of macro or indirect action environment.

2. Technological environment changes very fast.
 3. Technological environment affects the manner in which the resources of the economy
are converted into output.
4. Technological environment is self-reinforcing. An invention in one place leads to a
sequence of inventions in other places.

Technological environment impact on business

The impact of technology under three heads: (a) Technology and Social Change (b)
Economic effects of technology and (c) technology and plant level changes.

Source: Business Environment, K Aswathappa, pg.no. 132.

 Technology reaches people through business: People are using great variety of
goods and services due to technology advancements is business.
 High expectations of consumers: People have high expectations. They want not
more same things but newer things as well.
 System complexity: Technology creates complexity. As a result living becomes more
complex.
 Social Change: Most of the dramatic effect of technology is felt on social life.
Thousands of workers find that the jobs they have been engaged till now become
irrelevant. They have to cope with new skills and new jobs.
 Social Systems: Technology has brought, along with it new words, new food, dress
and food habits.
 Increased productivity: Technology has contributed to increased productivity.
 Need to spend on R&D: Technological discontinuity – old replaced by new is
another dimension the businessman needs to keep in mind. Technology can either be
developed or in-house R&D.
 Jobs tend to become more intellectual
 Problem of Technostructure: It creates new problems – traditional incentives fail to
motivate – retention is problem - difficulty in placing people in a pattern.
 Need for bio-professional and multi-professional Managers:
 Increased regulation and still opposition.
 Insatiable demand for capital.
 Rise and decline of products and organisations: Products has a life cycle of its
own.
 Business boundaries redefined
 Training and Scientists and Engineers
 Technology and organisation structure: technology has considerable influence on
organisation structure.
 Fear of Risk:
 Total Quality Management:
 E-commerce: E-commerece through internet is made possible through technology.
 Patenting
 Transportation
 Marketing