Introduction to Business

Environment

Chapter Outline=
1.1 Introduction
1.2 Nature of Business Environment
1.3 Importance of Business Environment

1.4 Types of Environment

1.4.1 Internal Environment
1.4.2 External Environment
1.4.3 Micro Environment
1.4.4 Macro Environment
1.4.5 Socio-Cultural Environment
1.5 Characteristics of Business
1.6 Scope of Business

1.6.1 Industry
1.6.2 Commerece
1.6.3 Trade
1.6.4 Aids to Trade

1.1 INTRODUCTION

The environment is something which surrounds a given system, an economy,

an industry or a business firm. It consists of numerous external factors or forces
affecting the phenomenon, directly or indirectly, to a cognizable extent. The
environment expands or contracts according to the size of phenomenon it
surrounds. For example, as the size of a business firm increases, the (business)
environment will contract. Consequently, the area of influence of the firm will
expand weakening the impact of the extenal forces. Industry, national economy
 1.2 Business Environment
and international economy constitute the environment. As one
one mo
move from
the firm to the industry and the economy, more and more external
internalised. This also results in increase in the availability of
of in formas
information are
and
reduction in the degree of uncertainty.
The individual business firm does not have much influence on the environs
Thus, each firm must show adaptability and adoptability to environment u t
industry faces recession, the business firm must cut down the rate of uction
pile up inventory accumulation. similarly, when the market is flooded with
a number of for
substitutes, the firm go aggressive advertisement
or cut
competition. Likewise, when the Government enforces security measures fa
throat
permanent staff, the firm may decide to recruit only casual workers.
The environment is not merely uncertain on account of technological
dynamics, but may also be hostile until it is monitored and adopted properly
This calls for collection, storage and analysis of information.
Larger firms have
an edge over the smaller ones on account of their better access to
information.
Each business firm interacts with the environment for its survival,
stability and
growth, particularly in decision making under different market conditions.
The prevailing environment may act as either a stimulant or a
constraint for
the firm. The former is favourable for the of
prosperity business. For example,
subsidy given by the Government results in positive response from the firm.
The latter is unfavourable
having disincentive effect. Taxation by Government
is an example, which results in tax evasion and under
the firm. Sometimes, the environment
reporting of profits by
may act as both constraint as well as
stimulant. For example, a high tax rate induce firms
may to restrict output,
sales and profits. On the other hand, this will
also give an opportunity for
thriving business by the tax consultants.
Busines environment means in
totality the various forces, factors and
institutions, which are external to and
that has a substantial beyond the control of a business firm
impact on the functioning as well as growth of
enterprises. Some of the popular definitions of business individua
as following: environment are give
"Business environment
encompasses the climate or set of conditions,
social, political, or institutional in which business econo
operations are conduc ed"
Arthur M. Weimer
Business environment refers to "the total of all and
industries which affect their things external to firm>
"
organization and operation.
Bayord O Wheeler
Business environment can be defined as "the
and influences that surround aggregate of all events
and affect
business." condition is
Keith Davis
Introduction to Business Evironment
1.3
1.2 NATURE OF BUSINESS
ENVIRONMENT
Various elements of business environment
have different and degree of
impact on the business. A factor having favorable effects on type
one firm
adverse effect on the other. The may have
management of the business firm must have
complete understanding of the environment. It should also monitor
in the environment in order to changes
take appropriate timely action. The
features explain the nature of the business environment. following
(1) Ag8regative: Business environment is the
forces which affect the aggregate of all the external
working and decision making of a business
enterprise.
(2) General and Specific Forces: Business environment includes both
general and specific forces. The former include economic, social,
cultural, political, legal, natural and technological conditions affecting
all business firms. The latter include investors, customers,
competitors,
suppliers, etc. influencing individual firms.
(3) Dynamic: Business environment is dynamic in nature, which keeps on
changing over time.
(4) Inter dependent: Various elements of business environment are
interdependent in the sense that a change in one element causes a
change in the other element. Therefore, managers should never consider
environment factors in isolation. Rather, wholistic approach is required
for proper understanding of business environment.
(5) Relative: Business environment is a relative concept. It varies from place
to place. The nature of economic system of the country also affects thee
business environment.
(6) Uncertain: Since it is difficult to predict future with certainty, business
environment is by and large uncertain. This uncertainty rises with
volatility of the environment.
(7) Contextual: Business environment provides the broad macro
framework within which the individual business enterprise (a micro
unit) operates.

1.3 IMPORTANCE OF BUSINESS ENVIRONMENT

The survival and success of business firms depend on their preparedness to

adapt tothe changing environment besides their inherent capabilities

(financial, physical, human and other resources). The firms which ignore the
environment changes fail to formulate and implement business plans. Thus,
long r u n . While the firms which
they are unlikely to survive in the environment
the are more effective. Some
systematically analysis and diagnose
of the advantages of knowledge of
environment and changes therein are as
follows:
 1.4 Business Environment

(1) First Mover Advantage: Knowledge of environment helps a business firm

to take advantage of early opportunities instead of losing them to
competitors. For example, Maruti Suzuki was the first to recognise the
requirement of small car by large middle class.
(2) Early Warning Signal: Awareness of environment gives an early
warning signal of a crisis so that the firm can take timely action to
minimise its adverse impact, if any.
(3) Customer Focus: Understanding of environment enables the
management to be sensitive to the changing needs and expectation of
the consumers.
(4) Strategy Formulation: Persistent monitoring of business environment
helps in getting information required for strategY tormulation.
Accordingly, business firm can respond to the strategies of the rivalss as
well as frame effective strategies to pose challenges for the
competitors
through expansions, contraction, diversion, diversification or other
changes in the business.
(5) Change Leader: Business firms can act as change leaders by creating a
drive for change at the grass noot level. In order to decide the
nature,
magnitude or direction of change, business firms as change agents have
to understand the aspirations of the people by monitoring the
environment to identify opportunities and threats affecting their
business. This process is called as environmental
scanning. With this,
the firm can consider the impact of various environment
forces, issues,
events and trends on its business
operations. By reducing uncertainties,
they can eliminate procedural delays by delegating authority.
(6) Public Image: An organisation can improve its image by being sensitive
andresponsive to the expectation of people.
(7) Ongoing Learning: Environmental study serves as an ongoing learning
process for the business leaders. Such dynamic approach of
understanding the broad-based changing scenario and reacting timely
as well as in appropriate manner makes the organisation successful.
1.4 TYPES OF ENVIRONMENT
Business environment may be classified on the basis of
time, space, market
forces and factors. One can think
or desirable) environment
of past, present (actual) and future (probable
of business on the basis of time. Based on 'space, we
may think of local, regional, national and international environment
business. "Market forces' of demand and oj
supply or non-market
Government classify environment as market and non-market
institutions
like
environment of
business. Further, environment can be economic and
non-economic (social,
cultural, political, nature and technological). This most useful
is internal and external environment.
classification
Introduction to Business Environment 1.5

The elements or forces within an individual firm effect its behaviour. These are
by and large within the control of decision making power of the firm. This forms
the internal environment including various functional areas like
finance, marketing, production, operational research, and so on. On the other
personnel,
hand, the external environment includes forces, like shareholders, customers
creditors, suppliers, distributors, technology, ecology, society, Government, etc.,
which not only originate from outside sources, but are also beyond the firms
control. If the firm can resolve their conflicting goals, it gets the better of
environment. If, however, the conflicts accentuate, the firm becomes the victim
of environment.
The strengths and weaknesses under SWOT analysis' pertain to internal
environment, while opportunities and threats pertain to external environment.
By and large, business environment is external. With strengths, a firm can seize
the opportunity and capitalise on it. But, weaknesses make the firm the victim
of threat in the environment. The SwOT analysis precedes the formulation of
strategic planning and tactical decisions by the firm.

1.4.1 Internal Environment

A business organisation derives strength, (i.e. capability to gain strategic
advantage over its rival firms) from the internal environment. This
environment also leaves weakness on the firm, i.e., constraint creating a
strategic disadvantage. Various internal factors which affect business decision
are as follows:
(1) Culture: The values, beliefs and attitudes of the top management of the
organization have strong impact on the company. Uniform acceptance
of the culture values and ethical standards is responsible for the success
as well as growth of the organisation.
(2) Mission and Objectives: The business philosophy, mission and
objectives of an enterprise helps in guiding its priorities, business
strategies, thrust market area, development process and portfolio
strategy.
(3) Management and Power Structure: The composition of the board of
directors, the degree of professionalism and organisation structure have
profound influence on business decisions of the company. The top
management sets the goals and monitors the performance of the
organisation. Qualified, experienced and responsible top management
can make the company out perform than others through sound
management styles and appropriate timely decision making. Further, the
extent to which top management enjoys the support of shareholders and
employees at different levels has an important impact on the functioning
of the enterprise

1. A strategy under business policy encompassing strengths, weaknesses, opportunities and

threats (SWOT).
 1.6 Business Environment
(4) Company Image and Brand Equity: The image and brand equity of the
company has an important role in raising finance, forming alliances,
choosing dealers as well as suppliers launching
new
products, expanding
or diversifying business, entering global markets etc..
(5) Other Factors: The competitiveness and success of an organisation
depends on its financial position, distribution system, marketing
competence, technological capability, physical assets, production
capacity, management information system, etc.. Further, human resource
management plays a significant role in boosting the morale as well as
motivation of the employees to avoid their resistance to positive harsh
changes.
1.4.2 External Environment
External environment creates a favourable condition (i.e. opportunity) as well
as unfavourable condition (i.e. threat). Only a powerful organisation can
change the external factors to its advantage. The external environment of a
business comprises of micro environment and macro environment.

1.4.3 Micro Environment

Micro environment is also known as the task or operating environment
because the micro environment forces have a direct bearing on the operations
of the firm. It consists of the players in the company's immediate environment
affecting the performance of the company. These include the suppliers,
marketing intermediaries, competitors, customers and the public.
It is quite obvious that the micro environment factors are more intimately linked
with the company than the macro factors. The micro forces need necessarily
affect all the firms in a particular industry in the same way. Some of the micro
factors may be particular to a firm. For example, a firm which depends on the
supplies may have a supplier environment entirely different from that ofa firm,
whose supply source is different. When competing firms in an industry have
the same micro elements, the relative success of the firm depends inter alia, on
their relative effectiveness in dealing with these elements
Following are the elements of micro environment:
(1) Suppliers: An important element of micro environment is suppliers
who supplies the inputs like raw material, fuel and primary factors of
production viz., land, labour, capital equipments, etc. to the
units business organisations for the smooth
manufacturing or
not supplied by the
functioning of the business. If inputs are scarce or
supplier timely, then business organisation must have to maintain high
stock or inventories, which increases cost of production. According to
Lipsey, when we consider the supply of any factor of production or
inputs, we must consider the amount supplied to the economy as a whole,
to each industry and to each firm.
Jntroduction to Business Environment 1.7

The
supply management plays very important role in a
scarciy
environment, as it is very risky to depend on a single supplier. In case of
strike, lockout or any other production problem with that supplier,
business may be seriously affected. Similarly, a change in the attitude or
behavior of the supplier may also affect the business. Hence, multiple
sOurces of supply and proper management of supply helps to reduce such
risks.
Our wants are unlimited, but resources are scarce or limited. That is why
production in India have to maintain indigenous stock of 3-4 months
and imported stocks of 9 months as against an average of a few hours to
two weeks in Japan. Liberalisation has caused a significant change in
the situation after adopting new economic policy. At present, all around
the world partnering or relationship marketing are increasing. This
provides a challenging opportunity to Indian suppliers to become
international players.
(2) Customers: Customers or consumers are those persons who demand
goods and services. Without customers demand, suppliers can't sell their
products and business can't achieve its goal of maximising the profit.
The major task of a business is to create and sustain, customers, since
business exists only due to its customers. Therefore, a prerequisite for
the business success is monitoring the consumers' sensitivity. A company
may have different categories of consumers like individuals, households,
industries, other commercial establishments, Government and other
institutions. For example, the customers of a tyre company may include
individual automobile owners, automobile manufactures, public sector
transport undertakings and other transport operators.
It is often too risky for a business organisation to depend on a single
ustomer. It may place the company in a poor bargaining position, apart
from the risks of losing business consequent upon the winding up of
business by the customer or switching over to the competitors of the
company.
The choice of the customer segments should be made by considering a
number of factors including the relative profitability, dependability
stability of demand, growth prospects and the extent of competition.
Now a days, the customer environment is increasingly becoming global
Not only that the markets of other countries are becoming more open,
the Indian market is becoming more exposed to the global competition.
(3) Competitors: A firm's competitors include the other firms, which
market the same products as well as all those who compete for the
discretionary income of the consumers. For example, the competition
for a company's television may come not only from other T.V.
manufactures, but also from two wheelers, refrigerators, cooking ranges,
stereo sets as well as from firms oftering saving and investment schemes
 1.8 Business Environment
like banks, UTI (Unit Trust of India), companies
accepting public
deposits or issuing shares or debentures, etc. This type of competition is
called desired competition because it affects the basic desire of the
consumer. Such desire competition is generally
very high in those
countries, where consumers have limited disposable income and
unsatisfied wants or desires. If the consumers decide to many
spend their
disposable income or discretionary income on recreation (or recreation
cum education), they will still be confronted with a
numbers of
alternatives to choose T.V., stereo, two-in-one, three-in-one, etc.
This
type of competition among such alternatives which satisfy a particular
category of desire is called generic competition.
Ifa consumer decide to go in for
a T.V. or to
spend his disposable income
on T.V., he has to decide which type of T.V. he desires, like Plazma, L.E.D
or L.C.D, etc.. This
type of competition is called product form
competition. Finally, the consumer encounters the brand competition,
i.e., the competition between the different brands of the same
product.
An implication of these different demands is that a
markets should strive
to create
primary and selective demand for his products.
Consequent upon the liberalisation, the competitive environment in
India has been undergoing a vast
their business portfolio as well as
change. Many companies restructured
strategies. Now a days, the competition
between the existing firms and new comers firms is
increasing.
(4) Financiers: Another important factor of micro environment is
the
financiers of the business organisation or
company. Financiers provide
finance to the business enterprises so that
they could run their business
smoothly. Without finance, business plan for any project can't be
implemented. Business enterprises need working capital or finance to
fulfill their day to day
requirements and also require short term as well
as
long term finance for achieving their goals or
objectives.
financing capabilities, company policies, strategies, Besides, the
risk and ability to provide non-financial attitudes towards
role in the assistance, etc. also plays a vital
functioning of the organisation.
(5) Marketing Intermediaries: The immediate environment of a
may consists of a number of company
firms that help the marketing intermediaries, which are the
company in promoting, selling and
goods to final consumers. distributing its
The marketing intermediaries
include middle men such as
merchants,
who aid the in
agents or
company finding customers.
distribution firms, which
help the Physical
goods from their origin place to company is stocking and
their destination moving
warehouse or place,
transportation firms are also included under such as

intermediaries. Further,
marketing services agencies, whichmarketing
assist the
company targeting and promoting its
in
products to the right markets
 Introduction to Business Environment 1.9
such as advertising agencies, marketing research firms, media or
consulting firms, too as marketing intermediaries. Finally, marketing
intermediaries, include financial intermediaries, which finance-
marketing activities and insure business risks.
Marketing intermediaries are vital links between the company and the
final
consumers. Any disturbance or
dislocation of the link, or a wrong8
choice of the link, may cost the
company very heavily. For instance, retail
chemists and druggists in India once decided to boycott the products of
aleading company on some issue such as poor retail margin. This move
for collective boycott was, however, objected to by the MRTP
(Monopolistic Restrictive Trade Practices) commission. Otherwise, this
company would, perhaps, have been in trouble. Hindustan Lever too0
faced major challenges when it faced a collective boycott in Kerela on
the issue of trade margins.
(6) Trade Union: The relationship of the firm with the trade union or
workers has an important effect on its
functioning and performance.
Thus, firm's work environment and industrial relations must be
congenial for its efficient functioning.
(7) Publics: A company may encounter certain publics in its environment.
A public is any group that has an actual or potential effect on the
organisation's ability to achieve its interests. Media publics, citizens
action publics and local publics are some of the
examples of publics.
Some companies are seriously affected by such publics. For example, one
of the leading companies in India was frequently under attack by the
media public, particularly by a leading daily. It was allegedly bent on
bringing down the share prices of this company by tarnishing its image.
Such exposures or campaigns by the media might even influence the govt.
decisions affecting the company.
Many companies are also affected by the local publics. Environmental
pollution is an issue often taken up by a number of local publics. Actions
by local publics on this issue have caused some companies to suspend
operations and or take pollution abatement measures. Many NGOs (non-
government organisations), particularly in developed countries, have
been mounting up protest against child labour, cruelty against animals,
environmental problems, deindustrialsation resulting from imports.
Exports of developing countries, particularly, are affected by such
developments. Growth of consumer publics is an important
development affecting business.
It is wrong to think that all publics are threat to business. Some of the
actions of the publics may cause problems for companies. However,
publics are on opportunity for the business. For example, the media public
may be used to disseininate useful intormation, say, regarding
consumerism as an opportunity for the business. Similarly, a company-
local publics cooperation may be established for the mutual benefits of
the company and local community.
1.10 Business Environment
1.4.4 Macro Environment
Macro Environment is also known as general environment and ren
environment. The macro forces means whole level or larger societalT
are generally more uncontrollable than the micro forces. When the e
environment is uncontrollable, the success of a company depends on.
its
adaptability to the environment.
It is difficult to identify, describe and analyse the environment, as it is not onv
complex, but also dynamic. The economic and not-economic factors in th
he
environment are so closely related and intermingled that it becomes dants
task to separate them. However, the indentification of the non-economic
ting
environment is very important in the sense that it aftects and gets affected by
the economic environment.
A company as well as the forces in its micro environment operate in a larger
macro environment of forces that shape opportunities and pose threats to the
company. Important macro environment factors include economic environment.
political& regulatory environment, social/cultural environment demographic
environment, technological environment, natural environment and global

environment.
(1) Political Environment: India, the world's largest democracy., possesses
a solid, time tested political infrastructure and institutions. The laws
protect individual rights. The Government is increasingly deregulating
business. Earlier restrictions to protect state monopolies have mostly
gone.
Political environment includes political conditions such as general
stability, peace in the country and Government attitude towards
business.
The political environment give shape to business. It consists of the
political system, specially its institutions as well as their ideology.
The Government as a political institution can say things it does not
mean or can mean things which it does not say. This communication
gap between the business and Government may make businessmen to
feel that the Government is not meaning what it is saying, even though
it says things which it means. Trading with potential enemies of the
country., political stability, Government administration, particularty
during conditions of emergency or civil war, philosophy of the politica
parties on donations by business houses to the parties, bureaueratic delays,
red tapism, image of the country, etc. are some of the political factors.
Political stability builds up confidence
among business people to inv
in the long term projects. But, political instability can shake hat
confidence. The attitude of the Government towards business
affects its performance. For example, it the Government provia
ides
subsidy in the production of cotton
garments, it will have positu
impact on cotton textile businesses.
Introduction to Business Environment 1.11

(2) Legal Environment: It includes various legislations passed by the

Government, parliament, court-judgments, etc. Such legislations
include: Trademark Act, 1999, Essential Commodities Act, 1955,
Consumer Protection Act, 1986, etc. Several laws to root out corruption
arebeing proposed, e.g. RTI (Right to Information) Act, Whistle Blower
Bill, etc. An adequate knowledge of rules and regulations framed by the
Government is a prerequisite for better business performance. Non-
compliance of laws can land the business enterprise into legal problems.
For example, the advertisement of
cigarettes should carry the statutorY
warning. cigarette smoking is injurious to health.
The legal environment has a permanent and lasting impact in shaping
business, specially its organisational form, activities and relationship
with the society and the Government. It is distinct from political
environment in the sense that political systems may differ across
countries, but legal systems are more or less similar, differing only in
their relationship with the respective Governments. The regulation
business activities by the Government through formulation and
of
implementation of laws, rules, regulations, and policies is undebatable.
Legal framework presents a challenge for the business. Legal factors
include efficiency and effectiveness of legal rules, frequency of
constitutional amendments, foreign policy on alignment, tariffs,
customs, etc., are some of the legal factors influencing economic
envronment of business.
(3) Social Environment: These include the social structure, norms as well
as values of a society and their inter-relationship with business,
particularly, social responsibility and accountability of business. Among
these factors we may list social attitude towards business and
management, view towards achievement in work (leading to promotion
or transfer), idealogy towards authority, responsibility and delegation,
idea towards change and risk (lovers and averters).
(4) Cultural Environment: India has a high context culture. In such cultures,
the communication may be indirect. The expressive manner, in which the
message is delivered becomes critical. The co-existence of several
communities, differentiable on the basis of religion, region, caste, etc. is
testimony to be fabled Indian character. This environment includes
6) customs, (i) traditions, (ii) educational background, (iv) society's
expectations from business, (v) family relationships, and (vi) personal
rapport.
Educational cum cultural environment affects business activities and
managerial skills. These factors include literacy, type of education
(formal or informal), attitude towards education and acquisition of
knowledge (quantity and quality of higher education), match of
education with skill requirements of business (specialised, vocational
and technical training).
 1.12

(5) Economic Environment: Economic

Business Environment
environment is the most sia.
component of the business environment. It
survivalificant
business organisation affects the
the survivalnt
of industry can be
as well as its success.
The economic of a
studied under three broad
categories.
environ.ament
(a) General Economic
Conditions: General
a
country are influenced by various factorseconomic
like conditionss itin
industrial output trends, per
capita income agriculture tre
income distribution, pattern of saving and trends, pattern of
levels, employment trends,
impact of
expendit: re, price
economic systems. Government policies.and
(b) Industrial Conditions:
influenced by the prevalent Economic environment of a countryi
industrial conditions as
industrial policies of a country. An well a
to the market economy needs to pay
growth of the industry, demand attention
industry, and its stage in product life cycle. patterns of the
(c) Stage of Supply of
Resources of Production:
required for production determines Supply of resources
inputs,
product. Land, labour, capital, machinery, which are
available for
are the most
important resources required forequipment, and
managers
factors determine the
economic environment of a production. These
up, economic environment country.
describes the overall economic
To sum
in a situation
country and helps in analysing GNP
growth, inflation rate, interest per capita, rate of economic
Therefore, it is necessary to rates, unemployment problems, etc.
environment of the country examine carefully the economic
(Table 1.2).
Table 1.2 : Statistical Indicators of
Economic Goals
Economic Goal
1. Statistical Indicator
High level of aggregate
income. output and 1. GNP, GDP.

Rapid growth of income.

2.
Average annual rate of growth of GNP,
GDP.
3. Greater
equality in income distribution. 3. Gini coefficient.
4. More equality in
income distribution. 4. Distribution of labour force by industrial
and
occupational classification and
5. income.
Lower international dependence. 5. Foreign
trade and international
6. Price stability. payment proportions in total output.
6. Price indices.
7. Greater regional balance. 7. Gross
Source: Adapted from David
regional product per capita.
P. Louchs,
(eds.): Economywide Models and Planning for Multiple Goals in C. Blitzer, Clark and L.
Development Planning (OUP, London, P. Taylor
1975), P. 214.
Introduction to Business Environment 1.13

(6) Technological Environment: It includes forces relating to scientific

improvements and innovation. They provide new ways of producing
goods and services as well as new methods of techniques of operating
a busines. For
example, technological advancement has made it
possible to book railway and air tickets through internet from home,
office, etc.
Technology is the life and blood for gowth and competitiveness of
business. It is is necessary to acquire information on the cost and
availability of present technology, its impact on cost, Government's
policies on impact of technology, incentives for the development of
indigenous technology.
(7) Demographic Environment: It includes size of
death rate, age
population, birth rate,
composition, rural-urban population, occupation, male
female ratio, density of population, infant mortality rate, etc. This
environment also affects the business
leads to increase in demand, which can
enterprises. Increase in population
bring boom in business and
vice-versa.
(8) Natural and Ecological Environment: Exercise use of natural resources
like land, water, petroleum, fossil fuel, forest wind and solar
etc.
products, energy
may accelerate the pace of growth, but would mean, environmental
degradation as well as loss of natural endowments. This will reduce the
capacity of future generation for their growth and development.
Many times, the use of modern tecnology involves huge social cost in
terms of deterioration of environmental
pollution and ecological
balance by consumers, biologists,
sociologists and ecologists has forced
the governments in many countries to enact laws to control
pollution.
Some countries have set up environmental boards to study pollution and
related aspects. In their clearance is necessary for
some cases,
setting up
an industrial unit. Businesss now has to compute the soical net
profitability (social benefit-social cost) of its ventures. In this
calculation, business must consider quantity as well as quality of forest
wealth, exploitation of sea products like fish, health hazards arising out
of pollution, etc.
(9) Global Environment: It includes those global factors which are relevant
to business, such as the WTO principles and agreements, other
international conventions/treaties/agreements/declarations/ protocols,
etc. economic as well as business conditions/sentiments in other
countries etc. Similarly, there are certain developments, like a hike in
the price of crude oil, which have global impact. The import and
investment liberalisations mandated by WTO have substantially
changed the competitive environment in India. Economic conditions
in other countries may also affect the business. If in a
company export,
markets are very good, export prospects are generally very good and
 1.14
Business Environment
vice-versa. Provision in other countries can increase the import threats,
including dumping.
1.4.5 Socio-Cultural Environment
The socio-cultural environment is
crucial in taking the business decisions. It
refers to a set of beliefs, customs,
practices and behaviour that exists
population. International companies often include an examinationwithin a

of the
socio-cultural environment prior to
the veracity of entering their markets. Keeping in view
investments, it becomes pertinent to know the cultural
background of the probable buyers of the product. No businessmen would be
successful if the factors
governing the socio-cultural environment are not
care
of for determining the price, design, colour, shape and size of the taken
Socio-cultural environment is a collection of social factors
product.
and includes social affecting a business
traditions, values and beliefs, level of literacy and education,
the ethical standards and
state of
conflict and cohesiveness, and so society,
the extent of social stratification,
forth. The aim of a business is to make
optimum use ofits available resources to generate revenue, and maximise
its
profits. Whether or not a business is able to make optimum use of its available
resources depends
upon numerous internal and external factors. One of such
notable factors that play a decisive role in the
is the socio-cultural environment of functioning of an organisation
the region in which the
operating. Socio-cultural factors such as social attitudes, belief organisation is
education, law, politics, etc., have a bearing on the systems,
business overlooks, or fails to identify the effects
prospects of a business. If a
runs the risk of
of socio-cultural factors,it
alienating itself with its immediate environment. In this
chapter, we will try to simplify the impact of social and cultural factors on
business.
Socio-cultural environment consists of factors related to human
relationships
and the impact of social attitudes and cultural values on the business of the
organisation. The beliefs, values and norms of a society determine how
individuals and organisations should be inter-related. Social and cultural
environment has a profound effect on the policies and strategies of a business.
The core beliefs of a particular society tend to be rigid. It is difficult for
businesses to change these core values, which become a determinant of its
functioning. Some of the important factors and influences operating in this
environment are as follows:
(i) Social concerns, such as the role of business in society, environmental
pollution, corruption, use of mass media, and consumerism.
(ii) Social attitudes and values, such as expectations ofsociety from business,
social customs, beliefs, rituals and practices, changing lifestyle patterns,
and materialism.
(iii) Family structure and the changes in it, attitude towards and within the
family, and family values.
 Introduction to Business Environment 1.15

(iv) Role of women in society, position of children and adolescents in family

and society.
(v) Educational levels, awareness and consciousness of rights, and work
ethics of members of society.

1.5 CHARACTERISTICS OF BUSINESS

Business in the mainspring of modern life. Though it is very much around us,
very few people understand its true nature, role and characteristics. Business
is an economic activity, concerned with earning money and acquiring wealth
In the
through the production sale transfer and exchange of goods and services.
words of Wheeler "Business is an institution organised and operated to provide
goods and services to society under the incentive of private gain."
Business' means busyness or the state of busy. Following are the distinguishing
characteristics of the business.
purchase of goods and
(1) Sale, Transfer or Exchange: production or
services for personal use or for presenting as gifts to others does not
constitute business as here no sale or transfer for value in involved.

(2) Continuity in Dealing of Goods and Services: Every business firm

comes into existence to provide goods or servicer to the society, which
may be procured through production and/or purchase. Such goods may
be meant for direct consumption in the original or processed form, called
as consumer goods. These goods when used to produce other goods are
called as producer goods. Further, dealings in these goods should be
continuous on regular basis. Recurring sale rather than isolated oneis
hallmark of business.

(3) Profit Motive: The basic purpose or inducement of

business is to earn
sector undertakings are
profits and acquirement of wealth. Even public
these profits should be
expected to earn profit or surplus. However,
earned through legal and fair means and not by exploiting the society.
and
That is why, making money through gambling, cheating, smuggling
black marketing cannot be called as business.
firm involves
(4) Risk and Uncertainty: Decision environment of business
which may be known or unknown. While definite outcome
changes,
associated with known changes results is certainty, indefinite outcome

associated with known changes involves risk. When

the risk element
calculable risk). The
cannot be insured, it results in uncertainty (non
economic activity, but
element of risk and uncertainty is there in every
it is more significant is case ot business. Thus, business has the goal of

profit, but risk of loss due to unknown future. Following are the factors
over which business has no control, resulting in risk (i) and uncertainty

(ii) to (vii).
2. Wheeler, B.O.: Business An Introductory Analysis, P.25
1.16 Business Environment
(i) Fire, theft and other natural calamities, which can be insured
against.
(ii) Changes in consumers tastes, preferences, fashion, etc.
demand.
affecting
(iii) Changes in technology resulting in obsolescence of plant,
machinery and production techniques.
(iv) Shortage of raw materials, power, fuel, etc.
(v) Labour trouble in the form of strikes, lockouts, gheraoes, etc.
(vi) Increase in competition in the market.
(vii) Faulty management decision regard appropriate resource
utilisation.

1.6 SCOPE OF BUSINESS

Business activities can be classified into industry and commerce. While
industry produces goods and services, these are distributed through
commerce. Further, commerce encompasses trade and auxiliaries to trade.
There is a close interrelationship between trade, industry and commerce.
Each one of them functions with the support of others. Commerce helps
industry before and after production through the purchase of materials and
sale of finished products. Further more, production of goods and services is
meaningless unless these are distributed among the consumers through
commerce. Trade through sale and purchase of goods and services maintains
a smooth flow of commetce, thereby supporting industry. Finally, industry
provides goods and services for distribution giving rise to commerce. As
industry develops, trade and commerce grow. Industry provides the base
for commerce and commerce serves as the backbone of industry. In this
manner, industry, commerce and trade are interdependent, as shown is
Chart 1.1.

Chart 1.1: Interrelationship between Industry, Commerce and Trade

Industry

Trade
Commerce
Introduction to Business Environment 1.17

Board classification of business activities has been summarised in Chart 1.2.

Chart 1.2

Classification of Business Activities

Industry Commerce

Trade Aids to Trade

Extractive Genetic Manufacturing Construction

Domestic Foreign
Analytical Synthetical Processing Assembling

Wholesale Retail

Imports ExportsEntrepot
(Re-export)|

Transportation Warehousing Banking Insurance and Advertising Marketing

Banking Research

1.6.1 Industry
It is that branch of business which is concerned with the
production of goods
and services. Industry depicts the processes by which useful things are extracted
from environment, transformed, processed, fabricated and converted into other
products. It is of following types.
(1) Extractive Industries: Such industries extract or draw out products from
natural resources like earth, soil, water, air, etc. The products drawn by
these industries are provided by nature and procured by human
beings.
The products of these industries can be used by manufacturing and
construction industries. Oil exploration, fishing, mining, quarrying, etc.
are some examples.
(2) Genetic Industries: Genetic or parentage industries involve reproduction
of certain species of plants and animals. Forestry, plant breeding nurseries,
cattle breeding farms, poultry farms, etc. are some
examples
(3) Manufacturing Industries: These industries transform raw materials
and semi-finished products, thus giving form utility.
Manufacturing
industries supply most of the products for daily use. These industries
supply goods what may be known as factory production. These industries
may be analytical, synthetical, processing and assembling. The examples
oil refinery, cement, textiles and automobiles
respectively.
 Business Environment
1.18

engaged in the
Construction Industries: Such industries
are
(4)
construction of buildings, bridges, dams, canals, etc. by using the
industries, e.g., stone, marble, bricks, etc. They also
products of extractive
use the products of manufacturing industries such as cement, iron and
basic infrastructure for the
steel, wires etc. These industries create the
fabrication process. In case of construction
development by using the
for sale. Rather, these
industries, products are not taken to the market
are made or fabricated at the fixed sites.

1.6.2 Commerce
and
In includes all such activities that enable a free and
smooth flow of goods
services from producers to the consumers, bridging
the gap between them. It
involves an organized system or process for the interrupted exchange of goods

and services by removing the following hindrances.

ultimate consumers are
(1) Person (through Trade): The producers and
not situated at the same place, who is often
unknown to each other. Here,
them. These
traders are the persons who can bridge the gap between
establish contact
traders like wholesalers, retailers and mercantile agents
between sellers and buyers
are often produced places at
(2) Plan (through Transportation): Goods be
barrier of distance can
far away from the points of consumption. The
removed through the means of transportation, providing place utility.
the function of storage
(3) Time (through Storage): Warehouses perform
and consumption,
balancing the time gap between production the
generating time utility. The need
for storage arises as goods are often
With storage facility, the goods can
produced in anticipation of demand. them.
be made available when the consumers demand
and storage, goods
(4) Risk (through Insurance): During transportation
storm,
be subject to theft or damage due to fire, flood, earthquake,
may
hindrance by covering the risk
riot, etc. Here, insurance overcomes this
of loss to the goods.
safe and
(5) Exchange (through Banking): Exchange of goods requires
economical arrangement for payment as per schedule of time and place.

Money removes this hindrance of exchange byserving as a medium of

exchange. Here, banking system facilitates exchange by providing credit
is various forms.
is not
(6) Knowledge (through Advertisement): Exchange of goods
possible unless sellers bring these goods to the knowledge of prospective
buyers. Advertisement and sales promotion provide the necessary
information to the potential buyers about the utility and features of
various products.
Introduction to Business Environment 1.19

1.6.3 Trade
Trade is the branch of commerce involving the sale, transfer or exchange of goods
and services. It is the nuclears of commerce, because all business activities revolve
and transter or exchange. Trade provides the solid foundation upon which
the superstructure of commerce has been raised.
(1) Domestic Trade: Domestic or internal or inland or home trade is
erned with the sale and purchase of goods within the boundaries of
a country. Here, the payment for the goods sold is made in domestic
currency either in cash or through the banking system. Domestic trade
may be whole sale or retail trade. The former involves the sale or purchase
of goods of a specific variety in bulk, serving as a link between the
and the retailers. The latter involves the sale of goods to the
producers
ultimate consumers after purchasing the same from the wholesalers or
manufactures, thereby serving as a last link in the chain of distribution.
(2) Foreign or International Trade: Foreign trade is concerned with the
exchange of goods and services between persons or organisation
operating in two or more countries. It involves the use of foreign
currency and international means of transport. It may be classified as
import or export trade. It can also be entrepot or re-export trade
involving the import of foreign goods so as to re-export themn.

1.6.4 Aids to Trade

In addition to trade, commerce also includes several auxiliaries services that
facilitate exchange of goods and services. These include:
(1) Transportation: Through transportation, goods are carried from
producers to traders and finally to the consumers. It beings speed and
efficiency in exchange by bridging the geographical distances.
Transportation thus, provides place utility. It gives the wheels to the
commerce and facilitates trade throughout the world.
(2) Storage: Warehousing or storage facility enables the holding and
preservation of goods until these are ultimately consumed. In this
manner, warehousing matches supply with demand. It makes available
the reasonably produced goods throughout the year. In the absence of
warehousing, producers would have to dispose of the goods as soon as
there are produced. Thus, warehousing provides time utility.
(3) Insurance: Insurance facilitates trade by providing a cover against the
loss or damage of goods in the process of transit and storage. Suitable
packaging can also be used to protect the goods during transit and
storage.
(4) Banking: Banks help in the sale and purchase of goods by providing a
convenient and safe mode of payment. They also make available credit
to business firms for expansion of trade.
1.20
Business Environment
(5) Advertising: Advertising and publicity brings goods and services
knowledge of potential buyers by highlighting the to the

products. As a result, distinguishing

features and utilities of different
get better value for their money. consumers can

Check Your Progress:

1.
Explain the meaning and nature of business
2. Discuss the environment.
3.
significance and aims study the environment of business.
to
Define the term 'business
environment. What are the different
environment? types of
4.
Explain the various elements of internal
5. environment of business.
Distinguish between micro and macro environment.
affect the external
environment of Explain the factors that
6. What business.
are the various
environmental factors components business.
of external environment?
Discuss the
7.
Explain economic and
the
influencing
8. "The term environment non-economic factors affecting the business.
refers to the
external to and
beyond the control of
totality of all the factors which are
their management" Explain. individual business enterprises and
9. "Business environment is
the environment." very complex, with heterogeneous elements in
10.
"Sociological environment affects and gets affected
environment of business."
Comment. by the economic
11.
Explain socio-cultural environment and
12. Define socio-cultural polico-legal environment.
environment?
environment? Explain each of them. What factors
constitute this
13. Define the term 'business.
Describe the main
14. Enumerate the branches of business. characteristics of business.
15. "Commerce is the sum total of all Explain various types of industry.
the
removal of the hindrances of those activities which are
Elucidate. person, place, time, exchange andengaged in the
16. Explain the scope of business
knowledge"
industry, commerce and trade. highlighting the
interdependence among
17. What do you mean by the term 'trade'? Discuss the
various aids to trade.