Paper: 12, Business Environment

Module: 01, Overview of Business Environment

Prof. S P Bansal
Principal Investigator Vice Chancellor
Maharaja Agrasen University, Baddi

Prof YoginderVerma
Co-Principal Investigator Pro–Vice Chancellor
Central University of Himachal Pradesh. Kangra. H.P.

Prof. Manjit Singh (Head)

Paper Coordinator University School of Applied Management
Punjabi University Patiala

Prof. Mandeep kaur

Content Writer Dept. Of Commerce,
Guru Nanak Dev University, Amritsar
Items Description of Module
Subject Name Management
Paper Name Business Environment
Module Title Overview of Business Environment
Module Id Module no.-01
Pre- Requisites Basic knowledge of what business is.
Objectives To study the basic concepts and components of business environment
Keywords Business Environment, Internal & External Environment, MICRO & MACRO
Environment.

QUADRANT-I

1. Module 1: Overview of Business Environment

2. Concept of Business Environment
3. Features of Business Environment
4. Importance of Business Environment
5. Components of Business Environment/ Factors Affecting Business Environment
5.1 Internal Environment
5.2 External Environment
5.2.1 Micro Environment
5.2.2 Macro Environment
6. Conclusion

Learning Outcome:
After completing this module the students will be able to:
 Understand the concepts of business environment.
 Describe the features & importance of business environment.
 Discuss the various factors affecting business environment.

1. Introduction

The term ‘Business Environment’ is a combination of words business and environment. Business
is associated with performing activities in the form of production or purchase of goods or rendering
services with the motive of earning profit. Businesses operate with the aim of delivering goods
and services to the society for mutual profit. In general, environment is the aggregate of conditions
that influence the community or the circumstances that surround someone. Business does not work
in a vacuum, it also affects the environment in which it operates. Business environment comprises
all conditions external and internal to an organization which affects its every aspect, be its
economic, political or technological and so on.

2. Concept of Business Environment

Business environment represents an aggregate of all conditions, events, and factors that surround
and influence the decision-making capabilities of the business. Every organization performed
under the influence of external and internal forces. The survival and success of an organisation
depend on upon how quickly it adapt to the changing environment. The external and internal forces
keep on changing in the contemporary world in the form of economic reforms, political changes,
technological innovations that keep affecting the functioning of business. Business environment
includes internal and external forces influencing business activities. The internal factors are
controllable factors, a business can exercise control over internal factors like company’s objectives
and strategy, financial, physical and human resources etc.
External factors include that forces which are beyond the control of the business and significantly
affect the every aspect of a business enterprise like socio-cultural, demographic, political,
economic and global environment. Environmental changes are so rapid that have direct and
indirect implication for business. These changes bring opportunities as well as threats. Business is
expected to identify, assess and respond to various opportunities and threats to ensure smooth
functioning of business. The success of a business lies in its alertness to adapt changes occurring
in the environment.

2.1 According to M.Weimer, “Business Environment encompasses the climate or set of

conditions, economic, social, political or institutional in which business operations are
conducted”

2.2 According to Bayard O. Wheeler, “Business Environment is the total of all things external
to business firms and industries which affect their organization and operations.”

2.3 In the words of Paire and Anderson, “Business environment is the sum of those inputs to
an organization which are under the control of other organizations or interest groups or are
influenced by the interaction of several groups, such as the economy.”

3. Features of Business Environment

 Business environment is an inherent part of business. Business requires a good

framework of economic, legal, political, social-cultural factors to perform its work
smoothly.

 Complexity: Business environment has become extremely complex as it is governed by

internal and external forces. The external changes are rapid one that is highly unpredictable.
Businesses operating under such complexity required to adapt changes for seizing
opportunities.

 Dynamic: Business environment is actively changing and proactive attention to changes

allows business to flourish. Changing customer preferences, competitor strategies,
technological improvements and operating business in many countries are the major
challenges in today’s business environment.
  Uncertainty: Risk is an inherent feature of business. External forces posed challenges,
risks, and uncertainty to business. For instance, it is very difficult to anticipate changes in
fashion and trends by the marketer.

 Business environment is multi-dimensional: Environmental changes may not affect all

the business in a similar manner. For some business change is welcomed as an opportunity
while other may take it as a threat or unfavorable. These changes can have short-term as
well as long-term impact on productivity and profitability of business.

4. Importance of Business Environment

Understanding the social, political, legal and economic environment helps the business in the
following ways:

 The internal environment helps the firm to identify the strengths and weaknesses of
business enterprises in terms of global developments.
 The forces of external environment help the firms to identify the various opportunities and
threats to the business.
 Business environment helps the firms to formulate their own strategies after analyzing the
competitors’ strategies.
 A Proper understanding of internal and external forces of environment enables the
enterprises to identify the areas for growth and expansion of their activities.
 Understanding of interaction of business with environment helps the organization to
formulate its broad strategies and long-term policies that should match with society needs.
 Environmental understanding enables the business enterprises to adapt itself as per the
dynamic changes, condition or events of the environment.

5. Components of Business Environment or (Factors affecting Business Environment)

Source: http://eiilmuniversity.ac.in

There are two set of factors – Internal and external that influences business. Internal environment
refers to internal factors that outline the strength and weaknesses of an organization in relation to
its external environment. Internal environment includes all the factors over which organization has
a considerable degree of control such as human resources, organization culture, organization
structure, location, company’s image etc.
Internal environment represents the world inside of an organization. Internal factors are
controllable factors and organization can alter, modify, introduce or phase out such factors as per
requirement of the environment.

5.1 Internal environment: The following components comprise the internal environment of
the business firm.

 Organization culture: Organization culture is widely acknowledged component of the

internal environment of the business. The culture of an organization refers to values, style
and learned ways that shape the collective behavior of humans within an organization.
Employees performing work in business enterprises hold some value system that influences
their working languages, ethical standards, working style and mutual interaction. A healthy
culture shared by all within organization promotes mutual cooperation and provides
satisfaction among all employees acts as a great internal strength of the business firm.

 Vision, mission, and objectives: Vision, mission and objectives of a company provide a
roadmap that guides its philosophies, priorities, policies. For instance, Wal-mart stores
Vision is “To become the worldwide leader in retailing” and Mission is “To help people
save money so they can live better”

 Top management structure: Top management supports the growth of the organization.
The composition of the board of directors and the extent of professionalism of management
greatly affects the success and failure of an organization for achieving its vision, mission,
and objectives. The quality, attitude and behavior of highest decision-making authority is
a critical factor for the development of the company. Shareholding pattern split among
promoter, promoter group and public could have important implication for business.
Experienced top management facilitates quick decision making that acts as internal
strength of an organization.

 Human resources: Workforce is an entitled as greatest asset of an organization as it plays

an important role in both strategy implementation and management system. A committed
and talented workforce with leadership skills ensures the success of the business. Business
leaders need to attract, develop and retain the best people necessary to seize elusive
opportunities, for reducing cost and optimize performance.

 Company’s image: Company’s image is more than its colorful logos, artistic designs, and
creative website etc. The image perceives by the mind of customers conveys lot that
influences its sales and profitability. Launching new products, attracting potential
customers, restraining competitive attacks, raising finance, forming joint ventures greatly
depends on upon company’s image. Brand equity can prove the greatest strength of the
company in the form of brand loyalty or repeated sales.

 Miscellaneous factors: Miscellaneous factors that highly affect decision-making

capabilities of business include-
 i) Natural resources: Adequate access to natural resources such as water, wood, iron, coal,
mineral deposits etc. considered valuable available for commercial disposal.

ii) Financial resources: Money available in the form of cash and securities held by an
organization is a prominent criterion to determine its real internal strength. Financial
resources determine company’s size and capacity to expand its operations as against
competitors.

iii) Physical resources: Physical resources include production facilities mainly machinery,
IT equipment, vehicles and distribution networks, physical infrastructure etc available to
an organization needed for smooth running of business.

iv) Research & development capabilities: Investment in research & development

activities ensures company’s ability to innovate new products for meeting diverse customer
expectations.

Others factors such as the location of business, patents & trade secrets, operational capabilities
&structure forms part of the business internal environment that influence the functioning of
business.

5.2 External environment: External environment connotes that fall outside the organization
boundaries and beyond the control of the business enterprise. The external environment forces are
an extensive and multidimensional phenomenon. It represents the world outside the business which
has a direct bearing on the functioning of business. External factors are uncontrollable factors that
can offer opportunities as well as pose threats to the business.

“The environment of business consists of all those external things to which it is exposed and by
which it may be influenced directly or indirectly.”
- Reinche and schoell

“In environment, there are external factors, which constantly bring opportunities and threats to
the business firm. It includes social, economic, technological and political conditions.”

- William Glueck and Jauck

Firms are expected to monitor changes in the external environment which are uncertain needed for
well being of business concern. All factors comprise external environment may not relevant for
particular business. Firms need to focus on such forces that affect its decision-making capabilities.
The external business environment is classified into the micro and macro environment.

5.2.1 Micro Environment

“The micro environment consists of factors in the company’s immediate environment which affects
the performance of business unit. These include suppliers, marketing intermediaries, competitors,
customers and the public.” - Philip Kotler
“The micro environment of a company consists of elements that directly affect the company such
as competitors, customers and suppliers. - Hill and Jones

Micro Environment of business discussed as follows-

 Customers: The survival of business solely depends on the satisfied customers. In today
competitive environment attracting and retaining customer has become more challenging.
In order to satisfy the different needs, tastes and likings of customers business spend
heavily on consumer research, product designing & advertising and after sales services.
For a business depending upon a single customer can prove risky. Different categories of
customers include
 Individuals & households
 Industries & other commercial establishments
 Government & other institutions.
Choice of the customer should be done by considering relative profitability, dependability,
the stability of demand, growth prospects, the extent of competition etc.
In the present scenario, with the concept of market segmentation business houses delivering
products to customers for satisfying their needs. The segmentation of consumer market can
be done on the basis of
 Income level of customer
 Demographic factors mainly age, gender, occupation etc.
 Geographical area
 Personality, lifestyle and attitude of the customer.
In a competitive market, where choices to customers are abundant and have more power to
control market big MNCs are also striving for retaining foreign customers.

 Suppliers: Suppliers are those who supply inputs and components in the form of raw
material, labor and capital to the company for the production process. Suppliers provide
the resources needed by the company such as labor, material, storage and credit facility.
For smooth functioning of the business source/sources of supply should be reliable. A
reliable source of supply ensures quality input material, less ordering and carrying cost,
minimum buffer stock that further reduce its cost of carriage and insurance charges.
Depend on a single source of supply can prove risky for a business during the strike and
lockout situation. The wrong choice of supplier can cause the company to lose cost
advantage benefit as well as loss of trust among customer as it happened in ‘Toyota’.

During 2009-11, Toyota had to recall nearly 10 million vehicles all around Europe as the
accelerators were not working properly. It was because the suppliers had supplied faulty
mechanical accelerators. Due to faulty accelerators there were many accidents out of which
nearly 89 were fatal and ended in death. Out of 10 million cars nearly 7 million were Toyota
Camry and Corolla. Toyota repaired all these cars and sent them back to their owners, but
they lost the trust of the customers. Business houses need to choose best suppliers that
should supply quality inputs with the reliable delivery system at low cost. Ultimately
supply of quality inputs determines the finished product quality.
  Competitors: Business gets affected by action and reaction of competitors. Healthy
competition between rival firms drives innovation that expands its product range in order
to build a better relationship with customers. The rivalry among firms such as coke vs.
Pepsi is for capturing maximum market share which is producing and delivering similar
products. In today’s globalized world domestic firms are also facing cut- throat competition
from big MNCs serving the customers with wide variety of products. Most popular type of
competition is ‘brand competition’ where national and international brands are striving for
winning same customer base. For buying Android phones the brand Nokia, Samsung,
Micromax, HTC, Gionee, Lava , Sony, Nexus , Apple, ZTE, Huawei, TCL, Lenovo etc is
available for customer choice. Competitors’ analysis is crucial for business in order to -
 Identifying its own weaknesses as against competitors
 Identifying weaknesses of its competitors
 Formulating strategies to combat competition.
The competitive environment ensures availability of desired products to the consumer at
affordable prices.

 Market intermediaries: For a business it is difficult to make products available to each

and every segment of customer. An intermediate agency that connects the company and
final consumer are crucial for promotion, selling and distribution of goods. Market
intermediaries include agent, brokers, wholesalers, retailers and distribution companies
that help the business house to make products available to existing customers as well as
finding new customers. The reliable channel of distribution provides timely feedback of
customer about products which is essential for strategic policy formulation. Apart from the
promotion of company’s products, market intermediaries also provide feedback regarding
unfulfilled demands of customers and untapped market by a business unit which can
become the source of innovation and new product developments.

 Public: In the words of Philip Kotler,” a public is any group that has an actual or potential
interest in or impact on a company’s ability to achieve its objectives”. The
environmentalists, consumer protection groups, media, local people, student unions,
religious groups etc. can affect the working of the business. The firm has a primary duty to
satisfy the general public at large along with customers. Creating positive image among
the public has a long-term impact on the company well being. Survival and overall success
of business depend on how society perceived their activities. Good public relation helps to
get a favorable response related to a company whereas adverse situation can pose a threat
to the business. For instance, an advertisement for a skin whitening product in Thailand
has drawn criticism on social media claiming in ad “you need to be white to win” runs with
the tagline. Suggesting people with dark skin are losers is definitely racist. Yulihan Group
(Thai Co.) apologized for this controversy.

5.2.2 Macro Environment: It is also known as General / Remote environment.

“Macro environment includes forces that create opportunities and pose threats to the business
units. It includes economic, demographic, natural, technological, political and cultural
environments.” - Philip Kotler
“The macro environment consists of the broader economic, social, political , legal, demographic
and technological setting with in which the industry and the business units are placed.”
- Hill and Jones

Source: http://download.nos.org/srsec319new/319EL3.pdf

Important macro environment factors include economic environment, political and regulatory
environment, social/cultural environment, demographic environment, technological environment.
These factors are discussed as follows:

 Economic environment

The survival and success of each and every business enterprise depend fully on its economic
environment. It refers to all factors related to the areas of production, distribution, income and
wealth have a bearing on the function of business. The main factors that affect the economic
environment are:

(a) Economic Conditions: The economic conditions of a nation refer to a set of economic
factors that have great influence on business organizations and their operations.

Aspects of economic conditions

GDP, GNP, Balance of Trade, Balance of Payment, Inflation, Poverty, Savings & Investment,
International Debt, Per Capita Income, Foreign exchange reserve, Foreign trade, Capital market
etc
(b) Economic Policies: All business activities and operations are directly influenced by the
economic policies framed by the government from time to time.

Aspects of economic policies

Industrial policy, Fiscal policy, Monetary policy, Foreign investment policy, Export –Import
policy (Exim policy)

The government keeps on changing these policies from time to time in view of the developments
taking place in the economic scenario, political expediency, and the changing requirement. Every
business firm has to function strictly within the policy framework and respond to the changes
therein.

(c) Economic System: The world economy is primarily governed by three types of economic
systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. India has
adopted the mixed economy system which implies co-existence of public sector and private sector.
Economic environment may put constraints and may offer opportunities to business. For instance,
with the easing of investment caps and controls, India’s high-value industrial sectors – defense,
construction, and railways – are now open to global participation.

 Social and cultural environment

Social environment consists of customs and traditions of a society in which business exists. Culture
refers to knowledge, beliefs, art, morale, law, customs, habits and capabilities of individuals
acquired from society. The social-cultural environment of a nation determines the value system of
the society which, in turns affects the functioning of business.

Aspects of social and cultural environment

Social Customs & traditions, Values & Beliefs, Ethical standards, Work Ethics, Language,
Conflict & cohesiveness, Quality of life, Birth & Death, Education/ literacy level, Consumption
habits, Family structure, Human relationship etc.

Strategies of business should be appropriate in the social- cultural environment. For e.g. Nestle
brews a very large variety of instant coffee to satisfy different nation’s tastes. As far as culture is
concerned, beef consumption is regarded as forbidden in countries like India, China, and Thailand
etc. Perception about color also varies from country to country like Green favorite in the Muslim
world but represents illness in Malaysia.

 Political environment
It constitutes all the factors related to government affairs such as the type of government in power,
the attitude of government towards different groups of societies, policy changes etc. It has an
immediate and great impact on business transactions so businessmen must scan their environment
very carefully so as to make changes accordingly.

Aspects of political environment

Present political system, Constitution of country, Government interventions in business, Profile

of political leaders, Foreign policy of government, Ideology of political parties etc.

The political environment has a close relationship with the economic system. Important economic
policies such as industrial policy, policy toward foreign capital & technology, fiscal policy, and
foreign trade policy are often political decisions. For e.g. India improved its position from last
year’s 134 to 130 in the World Bank Doing Business 2016 ranking. The rise in the 2016 ranking
was primarily on account of improvement in two areas - ease of starting a business and securing
an electricity connection. World Bank official lauds efforts of Modi Government as it took four
months in 2005 to start a business in India, but it takes only 29 days in 2015.

 Legal environment

It constitutes laws and regulations passed by parliament which can never be overlooked by
businessmen as he has to perform business transactions within the framework of the legal
environment. The important legislations that concern the business enterprises include:

(i) Companies Act, 2013

(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954
(viii) Trade Marks Act, 1999
(ix) Consumer Protection Act, 1986
(x) Environment Protection Act 1986
(xi) Competition Act, 2002

They provide opportunities to businessmen along with putting on some constraints. For e.g.
Companies Act, 2013 has replaced the old Companies Act, 1956 and partially made effective w.e.f.
12th September 2013 that contain comprehensive provisions to govern all listed and unlisted
companies in the country. GST will put in place a state-of-the-art indirect tax system by 1st April
2016. This will create a unified and common domestic market by replacing a confusing array of
taxes and preventing their cascading effects.

 Demographic environment
It refers to environmental factors related to density, location, age, gender, race, and occupation etc.
of the population. Basically, it’s a study of the human population living in an area. Its study
provides the base for decision making and policy formulation. Major demographic changes include
a change in family structures and labor force diversity such as women participation, ethnic
diversity etc.

Aspects of demographic environment

Population size, Density, Location, Age, Sex, Jobs, Income level. Life style, Education, Heredity
etc.

For instance, Census 2011 data shows that India’s working age population (15- 64 years) is now
63.4% of the total population, as against just short of 60% in 2001. Further the ‘dependency ratio’
the ratio of children (0-14) and the elderly (65-100) to those in the working age has also shrunk to
0.55. India is poised to become the world’s youngest country by 2020, with an average
age of 29 years, and account for around 28% of the world’s workforce. The International Labour
Organisation (ILO) has predicted that by 2020, India will have 116 million workers in the work
starting age bracket of 20 to 24 years, as compared to China's 94 million. In 2011, IMF reported
that India's demographic dividend has the potential to add 2 percentage points per annum to India's
per capita GDP growth over the next two decades.

 Technological environment

Technology is a most important element of the macro environment. It refers to changes taking
place in the methods of production, use of new equipment and machinery to improve the quality
of the product. A businessman must closely monitor the technological changes taking place in the
industry so as to implement them in a competitive environment. For instance, bulky computers
with CPU, keyboards and mouse have changed into portable laptops and netbook which help in
accessing the internet immediately.

Aspects of technological environment

Innovation and improvements, Scientific improvements, Development in IT sector, Import &

export of technology, Technological advancements in computers etc.

Internet and telecom system changed the whole world. The phenomenal growth of the internet and
associated World Wide Web (WWW) has made e-commerce possible allowing businesses to
communicate and collaborate beyond borders. Via Instagram and Twitter, businesses can stay in
touch with customers and provide them help to solve problems. Mobile devices like smartphones
and tablets, combining with the power of internet have revolutionized the way we work. The
Internet has simplified business processes with the help of video conferencing, cloud computing
and instant messaging. The result is greater productivity and efficiency. This calls for substantial
investment in Research and Development in order to remain competitive in the business world.

6. Conclusion

From the foregoing discussion, it can be concluded that there is a strong relationship between
business and environment. All factors comprise internal and external have an impact on business
decisions. For survival and success in this competitive environment, no firm can afford to ignore
changes occurring in their relevant business environment. Business houses required keeping
themselves updated about specific changes that can pose a threat to business. It is very clear that
business environment is a mixture of complex, dynamic, uncertain and uncontrollable factors
within which a business operates and with the help of internal factors the company tries to identify
new ways to rectify the external environment problems.