Business Environment: Nature and Significances of Business

Environment
The nature of Business Environment is simply and better explained by the following
approaches:

i) System Approach:
In original, business is a system by which it produces goods and services for the satisfaction
of wants, by using several inputs, such as, raw material, capital, labour etc. from the
environment.

ii) Social Responsibility Approach:

In this approach business should fulfill its responsibility towards several categories of the
society such as consumers, stockholders, employees, government etc.

(iii) Creative Approach:
As per this approach, business gives shape to the environment by facing the challenges and
availing the opportunities in time. The business brings about changes in the society by giving
attention to the needs of the people.

Significance of Business Environment:

Business Environment refers to the “Sum total of conditions which surround man at a given
point in space and time. In the past, the environment of man consisted of only the physical
aspects of the planet Earth (air, water and land) and the biotic communities. But in due course
of time and advancement of society, man extended his environment through his social,
economic and political function.”

In a globalised economy, the business environment plays an important role in almost all
business enterprises. The significance of business environment is explained with the help of
the following points:

(i) Help to understand internal Environment:

It is very much important for business enterprise to understand its internal environment, such
as business policy, organisation structure etc. In such case an effective management
information system will help to predict the business environmental changes.

(ii) Help to Understand Economic System:

The different kinds of economic systems influence the business in different ways. It is
essential for a businessman and business firm to know about the role of capitalists, socialist
and mixed economy.
(iii) Help to Understand Economic Policy:
Economic policy has its own importance in business environment and it has an important
place in business. The business environment helps to understand government policies such as,
export-import policy, price policy; monetary policy, foreign exchange policy, industrial
policy etc. have much effect on business.

(iv) Help to Understand Market Conditions:

General Agreement on Trade in Services (GATS)

Snapshot

 The GATS is the service trade rules of the WTO

 Service trade has tremendous trade potential for India as it has a

skilled labour force.

 At the same time, countries are putti ng restrictions on service

trade and there amidst low tradability of services.

 GATS define services in four modes.

What is GATS?

           GATS envisage the objective of establishing a sound multilateral

framework or principles and rules for trade in services. Many countries
directly have laws, which restrict entry of foreign services enterprises in
areas like finance, media, communications, transport etc.

The GATT looks upon these regulations relating to investment in the

service sector as distorting factors affecting free trade. Hence these
distortions have to be eliminated or minimized. The GATS Agreement
covers all services (there are 161 tradable services under GATS) – financial
services (banking insurance etc), education, telecommunications, maritime
transport etc.

Service trade expansion has big prospects though countries are in general
reluctant to liberalise it. According to the WTO, “while services currently
account for over 60 percent of global production and employment, they
represent no more than 20 per cent of total trade (BOP basis).”

The Four Modes of Services Supply

The GATS define services in four ‘modes’  of supply: cross-border trade,

consumption abroad, commercial presence, and presence of natural persons.

Mode 1: Cross Border

Services which themselves cross-frontiers from one country to another e.g.

Distance learning, consultancy, BPO services.

Mode 2: Consumption abroad

Services, which are made available within a country for foreign

consumers’, e.g.: tourism, educational students for students, medical
treatment etc.

Mode 3: Commercial Presence

Services supplied by an entity of one country, which is commercially

pressed in another e.g.: banking, hotel etc.

Mode 4:  Movements of natural persons

This is a foreign national providing services like that of doctor, nurse, IT

engineer etc. functioning as a consultant, employee, from one country to
another. 

Services given by governments are exempted from GATS. These are

services provided on a non-market basis (e.g. Social security schemes,
health Education etc). Besides, Air Transport Services are also exempts
from coverage that affects traffic rights. GATS divides services
liberalization commitments into two – general obligations and specific
obligations.

The GATS is basically a primary step towards service trade that was
reached at the Uruguay Round. Service trade liberalization under it is at the
entry level stage. As a Multilateral rule making and trade liberalization
regime, the GATS has to be expanded by making further discussions.

Environmental Scanning
In any business organization, there is an internal and external environment. They
comprise all the factors that can affect the business of a company in any way. And
they also present opportunities for the business to grow and threats that may harm
the business. So these environments need constant monitoring. This is where
environmental scanning comes into the picture.

Environmental scanning meaning is the gathering of information from an

organizations internal and external environments, and careful monitoring of these
environments to identify future threats and opportunities. It is the analyses of all
factors that may affect the future of the organization.

Now that we know the environmental scanning meaning, let us see the purpose. The
purpose of this process of environmental scanning is to provide the entrepreneur
with a roadmap to the changes likely to happen in the future. So this way they can
adapt the business to overcome the threats and capitalize on the opportunities
coming their way.

Importance of Environmental Scanning

1] SWOT Analysis

As we saw previously in the environmental scanning meaning, it is a complex

process. The close study of the internal and external environment of an organization
will reveal some very valuable information, i.e. the strengths, weaknesses,
opportunities, and threats of a company. Let us take a brief look.

 Strength: After analysis of the internal environment of a company, we will

be able to identify the strengths that give the company a competitive
advantage. The entrepreneur can use this information to maximise these
strengths and earn more profits.

 Weakness: Study of the internal environment also point out the weaknesses
of the company. For the growth and stability of the company, these identified
weaknesses must be corrected without delay.
 Opportunity: Analysis of the external environment helps with the
identification of possible opportunities. The entrepreneur can prepare to
capitalize on these.

 Threats: Analysis of the external environment will also help in the

identification of any business threats from competitors or any other factors.
The company can come up with a strategy to diffuse such threats or minimize
its impact.
2] Best Use of Resources

Environmental scanning helps us conduct a thorough analysis and hence leads to

the optimum utilization of resources for the business.

Whether it is capital resources, human resources or other factors of production, their

best use and utilization is very important for any business.

Environmental scanning will help us avoid any wastages and allow for the most
effective and economical use of these resources.

3] Survival and Growth of the Business

It is a very competitive world and for any business to survive and thrive it is a
difficult task. But if the business employs all the techniques of environmental
scanning it can gain a significant advantage.

It will allow the firm to prepare for future threats and opportunities while at the
same time eliminating their weaknesses and improving on their strengths.

4] Planning for Long Term

A business must have a plan for both short term and long term. The planning of
long-term objectives can only occur after proper analysis and environmental
scanning meaning. This will help the entrepreneur plan the necessary business
strategy.
5] Helps in Decision Making

Decision making is the choice of the best alternative done by management.

Environmental scanning allows the firm to make the best decision keeping in mind

the success and growth of the business. They point out all the threats and

weaknesses. And they also identify the strengths of the firm.

Example of Environmental
Scanning
Microsoft has been able to work crucially to use its research and
development to adapt to the changing trends in the software and mobile
devices development. Initially, the software giant has a deep root in
making software for desktops and mobile PCS until they started making
mobile devices like phones and pads to compete well globally and expand
their reach.

To achieve their goal of breaking into the leaders of firms making mobile
devices, they have partnered with other suppliers of materials. They are
continuing their research to leverage their strength, which lies in their
ability to create software that will come in handy in their new venture.

Not many software firms have the foresight to diversify and move to more
important things happening in their environment.

Scope of Environmental Scanning

Environmental scanning is a crucial aspect of the business process as it is
the task of any serious organization to keep a close tab on things that can
affect the chances of the organizations in satisfying the consumers and
making profits. The staff of the organization source for the prominent
internal and external threats which negatively affect the organization.  Big
firms have employees that are specially trained and dedicated towards
research purposes that continuously learn about market trends, changes
and provide information to the senior management, which will aid them in
meeting up with industry trends.

Having adequate knowledge about the trends in business and market

changes will help management make informed and productive decisions
that will help the company profitably.

Components of Environmental
Scanning
The environment of a business organization can be split into two types,
which are the external environment and the internal environment. There
are different dimensions to both the internal and external environments.

1. Internal Environmental

Internal environmental components are the ones that lie within the
organization, and changes in these components affect the general
performance of the organization. There are different internal
environmental like human resources, capital resources, technological
resources, and a lot more like objectives, Organizational structure, Value
system, corporate structure, and labor union, etc.

2. External Environmental Components:

External components are the components that are outside the walls of the
business organization. Although these components are outside the
organization, they still affect the activities of the organization. This
external environment can be divided into two categories, like the
microenvironmental components and macro environmental components.

Porter's Five Forces Framework is a method for analyzing competition of a business. It

draws from industrial organization (IO) economics to derive five forces that determine the
competitive intensity and, therefore, the attractiveness (or lack of it) of an industry in terms of
its profitability. An "unattractive" industry is one in which the effect of these five forces
reduces overall profitability. The most unattractive industry would be one approaching "pure
competition", in which available profits for all firms are driven to normal profit levels. The
five-forces perspective is associated with its originator, Michael E. Porter of Harvard
University. This framework was first published in Harvard Business Review in 1979.[1]
Porter refers to these forces as the microenvironment, to contrast it with the more general
term macroenvironment. They consist of those forces close to a company that affect its ability
to serve its customers and make a profit. A change in any of the forces normally requires a
business unit to re-assess the marketplace given the overall change in industry information.
The overall industry attractiveness does not imply that every firm in the industry will return
the same profitability. Firms are able to apply their core competencies, business model or
network to achieve a profit above the industry average. A clear example of this is the
airline industry. As an industry, profitability is low because the industry's underlying
structure of high fixed costs and low variable costs afford enormous latitude in the price of
airline travel. Airlines tend to compete on cost, and that drives down the profitability of
individual carriers as well as the industry itself because it simplifies the decision by a
customer to buy or not buy a ticket. A few carriers--Richard Branson's Virgin Atlantic is
one--have tried, with limited success, to use sources of differentiation in order to increase
profitability.
 Porter's five forces include three forces from 'horizontal' competition--the threat of substitute
products or services, the threat of established rivals, and the threat of new entrants--and two
others from 'vertical' competition--the bargaining power of suppliers and the bargaining
power of customers.
Porter developed his five forces framework in reaction to the then-popular SWOT analysis,
which he found both lacking in rigor and ad hoc.[2] Porter's five-forces framework is based on
the structure–conduct–performance paradigm in industrial organizational economics. Other
Porter strategy tools include the value chain and generic competitive strategies.
Five ForcesEdit
1* Threat of new entrantsEdit
Profitable industries that yield high returns will attract new entities. New entrants eventually
will decrease profitability for other firms in the industry. Unless the entry of new firms can be
made more difficult by incumbents, abnormal profitability will fall towards zero (perfect
competition), which is the minimum level of profitability required to keep an industry in
business.
The following factors can have an effect on how much of a threat new entrants may pose:
[
citation needed]
 The existence of barriers to entry (patents, rights, etc.). The most attractive segment is one in
which entry barriers are high and exit barriers are low. It's worth noting, however, that high barriers to
entry almost always make exit more difficult.
 Government policy such as sanctioned monopolies, legal franchise requirements,
or regulatory requirements.
 Capital requirements - clearly the Internet has influenced this factor dramatically. Web sites
and apps can be launched cheaply and easily as opposed to the brick and mortar industries of the past.
 Absolute cost
 Cost advantage independent of size
 Economies of scale
 Product differentiation
 Brand equity
 Switching costs are well illustrated by structural market characteristics such as supply chain
integration but also can be created by firms. Airline frequent flyer programs are an example.
 Expected retaliation - For example, a specific characteristics of oligopoly markets is that
prices generally settle at an equilibrium because any price rises or cuts are easily matched by the
competition.
 Access to distribution channels
 Customer loyalty to established brands. This can be accompanied by large brand advertising
expenditures or similar mechanisms of maintained brand equity.
 Industry profitability (the more profitable the industry, the more attractive it will be to new
competitors)[citation needed]

2* Threat of substitutesEdit
A substitute product uses a different technology to try to solve the same economic need.
Examples of substitutes are meat, poultry, and fish; landlines and cellular telephones; airlines,
automobiles, trains, and ships; beer and wine; and so on. For example, tap water is a
substitute for Coke, but Pepsi is a product that uses the same technology (albeit different
ingredients) to compete head-to-head with Coke, so it is not a substitute. Increased marketing
for drinking tap water might "shrink the pie" for both Coke and Pepsi, whereas increased
 Pepsi advertising would likely "grow the pie" (increase consumption of all soft drinks), while
giving Pepsi a larger market share at Coke's expense.

Potential factors:

 Buyer propensity to substitute. This aspect incorporated both tangible and intangible factors.
Brand loyalty can be very important as in the Coke and Pepsi example above; however contractual
and legal barriers are also effective.
 Relative price performance of substitute
 Buyer's switching costs. This factor is well illustrated by the mobility industry. Uber and its
many competitors took advantage of the incumbent taxi industry's dependence on legal barriers to
entry and when those fell away, it was trivial for customers to switch. There were no costs as every
transaction was atomic, with no incentive for customers not to try another product.
 Perceived level of product differentiation which is classic Michael Porter in the sense that
there are only two basic mechanisms for competition - lowest price or differentiation. Developing
multiple products for niche markets is one way to mitigate this factor.
 Number of substitute products available in the market
 Ease of substitution
 Availability of close substitute

3* Bargaining power of customersEdit

The bargaining power of customers is also described as the market of outputs: the ability of
customers to put the firm under pressure, which also affects the customer's sensitivity to price
changes. Firms can take measures to reduce buyer power, such as implementing a loyalty
program. Buyers' power is high if buyers have many alternatives. It is low if they have few
choices.
Potential factors:

 Buyer concentration to firm concentration ratio

 Degree of dependency upon existing channels of distribution
 Bargaining leverage, particularly in industries with high fixed costs
 Buyer switching costs
 Buyer information availability
 Availability of existing substitute products
 Buyer price sensitivity
 Differential advantage (uniqueness) of industry products
 RFM (customer value) Analysis

4* Bargaining power of suppliersEdit

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw
materials, components, labor, and services (such as expertise) to the firm can be a source of
power over the firm when there are few substitutes. If you are making biscuits and there is
only one person who sells flour, you have no alternative but to buy it from them. Suppliers
may refuse to work with the firm or charge excessively high prices for unique resources.
Potential factors are:
 Supplier switching costs relative to firm switching costs
 Degree of differentiation of inputs
 Impact of inputs on cost and differentiation
 Presence of substitute inputs
 Strength of distribution channel
 Supplier concentration to firm concentration ratio
 Employee solidarity (e.g. labor unions)
 Supplier competition: the ability to forward vertically integrate and cut out the buyer.

5* Competitive rivalryEdit
For most industries the intensity of competitive rivalry is the major determinant of the
competitiveness of the industry. Having an understanding of industry rivals is vital to
successfully marketing a product. Positioning pertains to how the public perceives a product
and distinguishes it from competitors‘. An organization must be aware of its competitors'
marketing strategies and pricing and also be reactive to any changes made.

Potential factors:

 Sustainable competitive advantage through innovation
 Competition between online and offline organizations
 Level of advertising expense
 Powerful competitive strategy which could potentially be realized by adhering to Porter‘s
work on low cost versus differentiation.


SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition,

Strengths (S) and Weaknesses (W) are considered to be internal factors over which you have
some measure of control. Also, by definition, Opportunities (O) and Threats (T) are considered to
be external factors over which you have essentially no control.

SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position
of the business and its environment. Its key purpose is to identify the strategies that will create a
firm specific business model that will best align an organization’s resources and capabilities to
the requirements of the environment in which the firm operates.

In other words, it is the foundation for evaluating the internal potential and limitations and the
probable/likely opportunities and threats from the external environment. It views all positive and
negative factors inside and outside the firm that affect the success. A consistent study of the
environment in which the firm operates helps in forecasting/predicting the changing trends and
also helps in including them in the decision-making process of the organization.

An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given
below-
 1. Strengths - Strengths are the qualities that enable us to accomplish the organization’s
mission. These are the basis on which continued success can be made and
continued/sustained.

Strengths can be either tangible or intangible. These are what you are well-versed in or
what you have expertise in, the traits and qualities your employees possess (individually
and as a team) and the distinct features that give your organization its consistency.

Strengths are the beneficial aspects of the organization or the capabilities of an

organization, which includes human competencies, process capabilities, financial
resources, products and services, customer goodwill and brand loyalty. Examples of
organizational strengths are huge financial resources, broad product line, no debt,
committed employees, etc.

2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our
mission and achieving our full potential. These weaknesses deteriorate influences on the
organizational success and growth. Weaknesses are the factors which do not meet the
standards we feel they should meet.

Weaknesses in an organization may be depreciating machinery, insufficient research and

development facilities, narrow product range, poor decision-making, etc. Weaknesses are
controllable. They must be minimized and eliminated. For instance - to overcome
obsolete machinery, new machinery can be purchased. Other examples of organizational
weaknesses are huge debts, high employee turnover, complex decision making process,
narrow product range, large wastage of raw materials, etc.

3. Opportunities - Opportunities are presented by the environment within which our

organization operates. These arise when an organization can take benefit of conditions
in its environment to plan and execute strategies that enable it to become more
profitable. Organizations can gain competitive advantage by making use of
opportunities.

Organization should be careful and recognize the opportunities and grasp them
whenever they arise. Selecting the targets that will best serve the clients while getting
desired results is a difficult task. Opportunities may arise from market, competition,
industry/government and technology. Increasing demand for telecommunications
accompanied by deregulation is a great opportunity for new firms to enter telecom
sector and compete with existing firms for revenue.

4. Threats - Threats arise when conditions in external environment jeopardize the

reliability and profitability of the organization’s business. They compound the
vulnerability when they relate to the weaknesses. Threats are uncontrollable. When a
threat comes, the stability and survival can be at stake. Examples of threats are - unrest
among employees; ever changing technology; increasing competition leading to excess
capacity, price wars and reducing industry profits; etc.

Advantages of SWOT Analysis

SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it
involves a great subjective element. It is best when used as a guide, and not as a prescription.
Successful businesses build on their strengths, correct their weakness and protect against
internal weaknesses and external threats. They also keep a watch on their overall business
environment and recognize and exploit new opportunities faster than its competitors.

SWOT Analysis helps in strategic planning in following manner-

a. It is a source of information for strategic planning.

b. Builds organization’s strengths.
c. Reverse its weaknesses.
d. Maximize its response to opportunities.
e. Overcome organization’s threats.
f. It helps in identifying core competencies of the firm.
g. It helps in setting of objectives for strategic planning.
h. It helps in knowing past, present and future so that by using past and current data,
future plans can be chalked out.

SWOT Analysis provide information that helps in synchronizing the firm’s resources and
capabilities with the competitive environment in which the firm operates.

SWOT ANALYSIS FRAMEWORK

Limitations of SWOT Analysis

SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances
as very simple because of which the organizations might overlook certain key strategic contact
which may occur. Moreover, categorizing aspects as strengths, weaknesses, opportunities and
threats might be very subjective as there is great degree of uncertainty in market. SWOT Analysis
does stress upon the significance of these four aspects, but it does not tell how an organization
can identify these aspects for itself.

There are certain limitations of SWOT Analysis which are not in control of management. These
include-

a. Price increase;
b. Inputs/raw materials;
c. Government legislation;
d. Economic environment;
 e. Searching a new market for the product which is not having overseas market due to
import restrictions; etc.

Internal limitations may include-

a. Insufficient research and development facilities;

b. Faulty products due to poor quality control;
c. Poor industrial relations;
d. Lack of skilled and efficient labour; etc