SESSION

FEB/MAR 2021

ROLL NO
PROGRAM BACHELOR OF BUSINESS ADMINISTRATION (BBA)
SEMESTER SEMESTER 1
COURSE CODE & NAME DBB1103 - BUSINESS ENVIRONMENT
SESSION FEB/MAR 2021

Q1. Define the term ‘business environment’. Explain macro external environment with
examples.

Ans 1.

Business environment:
Generally speaking, the environment includes the air we breathe, the water we drink, the
available business, social and educational infrastructure in the locality, state and country. It
literally means the surroundings, external objects, influencing factors, or circumstances under
which someone or something exists. In the context of business, the environment refers to the sum
of internal and external forces operating on an organization. Business environment means the
environment that affects business, be it external or internal. Managers must understand the
impact of these forces on the business. This understanding of the business environment helps
managers to react effectively to changes in the environment. This helps managers make better
decisions. Environmental factors also help organisations plan for the future.
 
External Macro Environment
This environment consists of factors that operate in a larger environment, creating forces that
shape opportunities and pose threats to the company. The external macro environment consists of
all the outside institutions and forces that have an actual or potential interest or impact on the
organization's ability to achieve its objectives: competitive, economic, technological, political,
legal, demographic, cultural, and ecosystem. Though non-controllable, these forces require a
response in order to keep positive actions with the targeted markets. An organization with an
environmental management perspective takes aggressive actions to affect the forces in its
marketing environment rather than simply watching and reacting to it.
 
Economic environment: The economic environment consists of factors that affect consumer
purchasing power and spending patterns. Economic factors include business cycles, inflation,
unemployment, interest rates, and income. Changes in major economic variables have a
significant impact on the marketplace. For example, income affects consumer spending, which
affects sales for organizations. According to Engel's Laws, as income rises, the percentage of
income spent on food decreases, while the percentage spent on housing remains constant.
 
Technological environment: The technological environment refers to new technologies, which
create new products and market opportunities. Technological developments are the most
manageable and controllable force faced by marketers. Organizations need to be aware of new
technologies in order to turn these advances into opportunities and a competitive edge.
Technology has a tremendous effect on lifestyles, consumption patterns, and the economy.
Advances in technology can start new industries, radically alter or destroy existing industries,
and stimulate entirely separate markets.
 
Political and legal environment: Organizations must operate within the framework of
governmental regulations and legislation. The government’s relationship with organizations
encompasses subsidies, tariffs, import quotas, and deregulation of industries.
The political environment includes governmental and special interest groups that influence and
limit various organizations and individuals in a given society. Organizations hire lobbyists to
influence legislation and run advocacy ads that state their point of view on public issues. Special
interest groups have grown in number and power over the last three decades, putting more
constraints on marketers.
 
Demographic environment: Demographics help marketers identify the current and potential
customers, where they are and how many are likely to buy what the marketer is selling.
Demography is the study of human populations in terms of size, density, location, age, sex, race,
occupation, and other statistics. Changes in the demographic environment can result in
significant opportunities and threats presenting themselves to the organization.
 
Social/cultural environment: Social/cultural forces are the most difficult, uncontrollable
variables to predict. It is important for marketers to understand and appreciate the cultural values
of the environment in which they operate. The cultural environment is made up of forces that
affect society's basic values, perceptions, preferences, and behaviors. U.S. values and beliefs
include equality, achievement, youthfulness, efficiency, practicality, self-actualization, freedom,
humanitarianism, mastery over the environment, patriotism, individualism, religious and moral
orientation, progress, materialism, social interaction, conformity, courage and
 
Ecosystem environment: The ecosystem refers to natural systems and theirresources that are
needed as inputs by marketers or that are affected by marketing activities. Green marketing or
environmental concern about the physical environment has intensified in recent years. To avoid
shortages of raw materials, organizations can use renewable resources (such as forests) and
alternatives (such as solar and wind energy) for non-renewable resources (such as oil and coal).
Organizations can limit their energy usage by increasing efficiency.
 
Global environment: The economic conditions in other countries may affect business. The
global environment refers to those global factors that are relevant to business. Certain
developments such as a hike in the price of crude oil can have a major global impact affecting all
nations. International political factors like wars or political tensions create uncertainties in the
business environment.

Q2. What is economic environment? Explain how global economic environment has
changed over time.
Ans 2.

Economic environment: An economic environment is the total number of economic factors that
make up the economy. The economic environment is of two types: microeconomic and
macroeconomic. The microeconomic environment includes information relating to the economic
situations of individuals in society. The macroeconomic environment includes economic factors
relating to the aggregate economic information of business industries, sectors or other particular
groups of individuals and businesses. The present day economic environment is a complex one.
The business sector has economic relations with the government, household sector, capital
market and the global sector. These different sectors influence the trends and structure of the
economy. The economic environment may be classified on different criteria, such as:

 Space-Local, regional, national and international

 Time-Past, present and future

 Forces-Market and Non market

Now look closely at some of the factors that constitute the functioning of the economy.

i) Free Market Economy and Centralized Economies: By free market mechanism we mean
the free play of the forces of market demand and market Commodity prices, factor (input) prices
and income distribution can be determined by the market mechanism or can be fixed by the
government.

ii) Welfare State Principle: The basic objectives of government policies are growth, efficiency
and equity. The welfare state principle induces the government to enforce minimum wages,
commodity control, fair trade prices. Social responsibilities of business are a direct outcome of
the social welfare motive cultivated by national governments.

iii) Closed and Open Economies: Modern economies are open to international trade and co-
operation. The maintenance of stable growth in the developed countries is dependent on the
acceleration of growth in the developing countries. Only then would the developed countries be
able to expand and market their goods. This idea has given a new dimension to the role of
multinational corporations (MNCs), the ecological balance and transfer of technology.

Global market conditions

In the past fifty years, the global economy has changed rapidly. Particularly marked has been the
development of world economic integration and standardized products. Coca Cola, Nissan and
Marlboro cigarettes are examples of products which serve nearly every market. The economic
environment is a major determinant of global market potential and opportunity.

 Generally, there have been four major changes:

 Capital movements and trade have become the driving force of the global economy.

 Production has become uncoupled from employment.

 Primary products have become uncoupled from the industrial economy and,

 The world economy is in control-individual nations are not, despite the large world
economic share of the USA and Japan.

Now we see the stages of growth of economies which help us understand better a nation’s
economic development. Rostow (1971) produced a five-stage model of economic takeoff:

 Stage 1: Traditional society, little increase in productivity, no modern science application

systematically, low level of literacy

 Stage 2: The preconditions of takeoff, modern techniques in agriculture and production,

developments in infrastructure and social institutions

 Stage 3: The takeoff, normal growth patterns, rapid agricultural and industrial
modernization, good social environment.

 Stage 4: The drive to maturity, modern technology applied to all fronts,

 International involvement can produce anything.

 Stage 5: The age of high mass consumption, production of durable goods and services.

These classifications enable marketers to assess where and how to operate in countries that may
display the stage characteristics. For example, African exporters would look to stage 4 and 5
economies to obtain the greatest revenue opportunities for their produce.

Q3. What is meant by political environment of business? Explain the business risks posed
by political system in India.

Ans 3.

Political environment and the economic system

The political environment is one of the most powerful factors that impacts the viability and
sustenance of a business venture. The economic policies of the government prevailing in the
region where business exists as well as the politico-economic scenario of the world at large have
a bearing on commerce and business. Business today is not localized. Events and happenings in
faraway places can also have a decisive impact on it.

Business Risks Posed by the Indian Political System

India is the largest democracy in the world and can boast of a pluralistic political scenario.
Unlike America, which has only two dominant political parties, India has a plethora of active
political parties at the national as well as the regional levels. These parties with ideologies
ranging from the extreme Left to the extreme Right have diverse political and economic agendas.
At times, the government is unable to push through economic reforms because of political
opposition, as in the case of subsidies. The contradictions inherent in the political system in India
can pose serious threats to the success of a business venture.
The following are the major risks and hurdles that can threaten the viability of a business
organization in India:

1. Though the Indian economy has been opened up, the political ideologies of some parties pose
serious hurdles to economic development. Tata’s Nano experience is a telling example of
how a major venture can be bogged down by narrow political compulsion.
2. Economic reforms have often been bogged down by high inflation. Inflation has emerged as
a major challenge for policymakers, threatening to choke off growth in India’s domestic
demand-driven economy by eroding the purchasing power of consumers.
3. As inflation increases, banks have had to increase lending rates. An excessive rise in the cost
of credit adversely impacts business expansion plans and slows down the economy.
4. Over the last decade or so, India has been governed by a coalition political system at the
centre as well as in many states. There are many pulls and pressures exerted by the various
partners in a coalition. This can lead to instability of the government and can hinder
economic thrust and thus have a negative impact on business.
5. Political opposition can slow down economic reforms. The government has made headway in
some areas: it has pledged to reform tax laws, sell stakes in some 60 state-run firms and
formed an experts panel to ease foreign investment in the financial sector. But progress has
been uneven.
6. Many economic policy proposals are shelved because of intense opposition, such as opening
up the country’s multi-brand retail sector. It is a sensitive political issue that concerns the
livelihoods of millions of people dependent on mostly unorganized retail. Many reform bills,
such as those to open up pension and insurance, are with various parliamentary panels.
7. Threat levels in India have always posed a question mark for business in India. Political
unrest in many parts of the country, like Kashmir and Assam, can destabilize the economy.
The danger of militant attacks always looms large. However, markets have proven highly
resilient to terrorism.
8. Business in India is unlike that of the west. With 23 official languages, India is more like a
continent than a country. For example, Punjabis from Ludhiana in the north function very
differently from Malayalis from Kochi in Kerala.
9. India’s business methods areunlike those of China or Japan or other Asian countries. Its
business culture is distinct from those of the rest of the continent.
10. The political system has spawned a business culture that moves at a snail’s pace. Permits,
licenses, ministerial approval etc., test one’s patience. Redtapism can often deter
businessmen from starting a venture. Few companies succeed without major setbacks in
India.