BUSINESS ENVIRONMENT

1. INTRODUCTION

Just like human beings, business also does not function in an isolated vacuum. Businesses
function within a whole gambit of relevant environment and have to negotiate their way
through it. The extent to which the business thrives depends on the manner in which it
interacts with its environment. A business, which continually remains passive to the relevant
changes in the environment, is destined to gradually fade-away in oblivion. To be successful
business has not only to recognize different elements of the environment but also respect,
adapt to or have to manage and influence them. The business must continuously monitor and
adapt to the environment if it is to survive and prosper.

The basic challenge before any company is its survival. For long term survival,
a company must have at least the following two capabilities:

(a) The ability to prosper

(b) The ability to change

Initially only external forces were considered as the business environment. But in
modern scenario, business policies and actions are affected by internal forces
also. Thus, the integral elements of business environment include both the internal as
well as the external factors, as both have an impact on business .

2. MEANING

―The aggregate of all the forces, factors and institutions which are external to and
beyond the control of an individual business enterprise but which exercise a
significant influence on the functioning and growth of individual enterprises.‖

3. DEFINITION

Environment consists of factors that are largely if not totally, external and beyond
the control of individual industrial enterprise and their managements. These are
essentially the ‘givers’ within which firms and their management must operate in a
specific country and they vary, often greatly, from country to country.
 – Barry M. Richman and Melvgn Copen

Business environment is the aggregate of all conditions, events and influences that
surround and affect business.

– Keith Davis

Business environment refers to “the total of all things external to firms and industries
which affect their organisation and operation.

– Bayord O. Wheeler

Business environment encompasses the climate or set of conditions, economi c, social,

political, or institutional in which business operations are conducted.

– Arthtur M. Weimer

The environment includes factors outside the firm which can lead to opportunities for
or threats to the firm. Although there are many factors, the most i mportant of the
sectors are socio-economic, technological, supplier, competitors, and government.

– Glueck and Jauch

4. CHARACTERISTICS
a. Complex

Different elements of business environment are closely inter-related and

interdependent. It is complex in the sense that it is very difficult to know the exact
influence of a particular factor on the entity. A change in one element affects the
other elements. Economic environment influences the non-economic environment
which in turn affects the economic conditions.
For example:

 The economic liberalisation in India since 1991 has opened up new

opportunities for private sector and foreign entrepreneurs.
 The social pressures against pollution led to the enactment of anti -pollution
laws.
  The introduction of smart mobile phones has made cd player, watches, camera,
etc. almost obsolete.
 Therefore, managers should not consider environmental factors in isolation
from one another, although it is difficult to analyse the impact in totality.
b. Dynamic

Dynamic means keeps on changing from time to time. The volatility prevails in
the environment due to constant change in nature, shape, character and pervasiveness
of the varied influencing factors.
For example:

 In music industry, audio cassette was replaced by CD. Later on ev en the

market of CD is affected due to smart phones. At present, the film industry
makes more revenue from ringtones and caller tunes rather than by selling
music CDs.
 Before COVID-19 pandemic, the small multi-screen theaters were popular. But
now there is a change in trend in the cinema industry and movies are skipping
theatrical releases and are going for direct digital releases on OTT platforms
such as Netflix, Amazon Prime Video, Disney+Hotstar, Zee5, MX player,
SonyLIV, etc.

c. Relative

Business environment is a relative concept. It differs from country to country and

even region to region. Capitalist economies like those of USA and UK have a
different kind of environment than communist economies. The nature of economic
system in a country affects the environment of business. The technology in one
country differs from that in another country.
For example:

 In India, the Honda Activa 7G is expected to launch by mid 2022, whereas in

USA 10G scooters are being launched.

d. Uncertainty
 Business environment is largely uncertain because it is very difficult to forecast
the future environment. When the environment is volatile, i.e. changes very fast,
uncertainty increases.
For example:

 In some industries like Fashion, Film, Information Technology, etc. It is

almost impossible to predict the future trend.
 On the other hand, it has created a threat on the people engaged in school
canteens, transportation of students, etc.
e. Multifaceted

The term implies ―having many different parts or sides‖. Due to complexity,
uncertainty and dynamism of a business environment, there is a continuous change in
its shape, character and scope. The perception of the observer is very important as a
new change or development may bring fresh opportunities to one but may be a threat
to another.
For example:

 The Covid-19 has shifted offline to online learning. It has opened new avenues
for ed-tech players like UpGrad, Vedantu, CL Educate, Toppe, etc. It has also
given the PC industry a boost due to robust increase in demand for tablets.
 On the other hand, it has created a threat on the people engaged in school
canteens, transportation of students, etc.
f. Far Reaching Impact

The term implies ―having important and widely applicable effects or implications‖
Each business organization operates in its unique environment and it influences and
being influenced by such environment. The business environment has a very great
influence not only on the growth but also on the survival of the organization. If you
do not change as per the changed scenario, the business may come to an end.
For example:

 The famous WIPRO company was started in 1945 to manufacture and sell
vegetable oil. In 1966, when Azim Premji took over the company from his
 father, expanded into IT. At present, WIPRO is one of the world‘s large st and
most successful IT services companies.
 The food delivery apps have introduced a new concept of online booking and
delivery from your favourite restaurant. The major players include Zomato,
Swiggy, Foodpanda, etc. The impact of this development prove d to be far
reaching for the players in restaurant industry. Now, they can cater the
services to a consumer located at a far place, without his physical presence,
through there delivery apps.
 Mukesh Ambani group tapped into the changes in its environment, moved
from textile and refinery to retail outlets, mobile services, news and business
channels, etc.

Therefore, the management of a business enterprise must have a deep

understanding and appreciation of the environment. The changes taking place in the
environment must be continuously monitored to judge their impact on business.
Appropriate and timely steps must be taken to face the environmental changes .

5. IMPORTANCE

The survival and success of any enterprise depends upon its inherent
capabilities (physical, financial, human and other resources) and its ability to adapt
to the changing environment. It is very important for business firms to understand
their environment and changes occurring in it. Business enterprises which know their
environment and are ready to adapt to environmental changes would be successful.
On the other hand, firms which fail to adapt to their environment are unlikely to
survive in the long run.

a. First Mover Advantage

It is related with determining the opportunities. Awareness of environment

helps an enterprise to take advantage of early opportunities instead of losing them to
competitors.
 For example, Maruti Suzuki became the leader in small car market because it
was the first to recognise the need for small car on account of rising petroleum prices
and a large middle class.

b. Early Warning Signal

Environmental awareness serves as an early warning signal. It makes a

firm aware of the impending threat or crisis so that the firm can take timely action
to minimize the adverse effects, if any.

For example, ‗when new firms entered in the mid segment cars (threat),
Maruti Suzuki increased the production of its Esteem threefold. In crease in
production enabled the company to make faster delivery. As a result, the company
captured a substantial share of the market and became a leader in this segment.

c. Customer Focus

Environmental understanding makes the management sensitive to the

changing needs and expectations of consumers.

For example, Hindustan Unilever and several other FMCG companies

launched small sachets of shampoo and other products realising the wishes of
customers. This move helped the firms to increase sales.

d. Strategy Formulation

Environmental monitoring provides relevant information about the business

environment. Such information serves as the basis for strategy making.

For example, ITC realised that there is a vast scope for growth in the travel
and tourism industry in India and the Government is keen to promote this industry
because of its employment potential.

Study of environment enables an organisation to analyse its competitors’

strategies and thereby formulate effective counter strategies. All strategic decisions
such as what business to do, whether to expand or reduce a business, and so on
require a thorough understanding of the internal and external environment of the
organisation.

e. Change Agent

Business leaders act as agents of change. They create a drive for change at
the gross root level.

For example, contemporary environment requires prompt decision-making

and power to people. Therefore, business leaders are increasingly delegating
authority to empower their staff and to eliminate procedural delays.

f. Public Image

A business firm can improve its image by showing that it is sensitive to its
environment and responsive to the aspirations of public.

For example, leading firms like Reliance Industries, ICICI Bank and others
have built good image by being sensitive and responsive to environmental forces.

Environmental understanding enables business to be responsive to their

environment.

g. Continuous Learning

Environmental analysis serves as broad based and ongoing education for

business executives. It keeps them in touch with the changing scenario so that they
are never caught unaware. With the help of environmental learning managers can
react in an appropriate manner and thereby increase the success of their
organisations. Knowledge of changing environment can keep the organisation
dynamic in its approach.

6. TYPES

The components of business organizations are Internal and external. Further, the
external components may relate to Micro or Macro environment.
 A. Internal Environment

Internal environment is a component of the business environment, which is

composed of various elements present inside the organization, that can affect or can
be affected with, the choices, activities and decisions of the organization.
It encompasses the climate, culture, machines/equipment, work and work processes,
members, management and management practices. In other words, the internal
environment refers to the culture, members, events and factors within an
organization that has the ability to influence the decisions of the organization,
especially the behaviour of its human resource. The factors which are under the
control of the organization, but can influence business strategy and other decisions
are termed as internal factors. It includes:

(a) Value System: Value system consists of all those components that are a
part of regulatory frameworks, such as culture, climate, work processes, management
practices and norms of the organization.

(b) Vision, Mission and Objectives: The company‘s vision describes its
future position, mission defines the company‘s business and the reason for its
existence and objectives implies the ultimate aim of the company and the ways to
reach those ends.

(c) Organizational Structure: The structure of the organization determines

the way in which activities are directed in the organization so as to reach the ultimate
goal. It can be matrix structure, functional structure, divisional structure, bureaucratic
structure, etc.

(d) Corporate Culture: Corporate culture or otherwise called an

organizational culture refers to the values, beliefs and behaviour of the organization
that ascertains the way in which employees and management communicate and
manage the external affairs.

(e) Human Resources: Human resource is the most valuable asset of the
organization, as the success or failure of an organization highly depends on the
human resources of the organization.
 (f) Physical Resources and Technological Capabilities: Physical resources refer
to the tangible assets of the organization that play an important role in ascertaining
the competitive capability of the company. Further, technological capabilities imply
the technical know-how of the organization.

B. External Environment

A business does not operate in a vacuum. The business operates in a complex

business environment and is duly affected by it. These factors that happen outside
the business are known as external factors or influences. The external factors or the
environment not only affect the business‘s internal functions but also create
pressure on the organization to revisit and redefine, if necessary, its objectives and
strategies. There are two major types of external environment:

1. Micro Environment
2. Macro Environment

(a) Micro Environment

―Micro environment‖ is the environment that exists within a company organization

and can influence daily operations. It refers to the specific and immediate surroundings in
which a company operates and interacts with various stakeholders. It encompasses the factors
that directly affect the organization‘s ability to serve its customers and achieve its objectives.
Understanding the microenvironment is essential for businesses as it helps them identify
opportunities, assess risks, and develop effective strategies.

In simple terms, the microenvironment is like a close-knit ecosystem that directly

influences a company‘s day-to-day operations and decision-making. It is comprised of factors
that are within the company‘s control or that can be directly influenced. These factors are
closer to the company and have a more immediate impact compared to the macro
environment, which includes broader societal, economic, and political forces. Like the
individuals or organizations that purchase the products or services of a business. For
example, a restaurant‘s micro environment includes regular customers who visit the
establishment frequently. Their taste, preferences, demands, etc., directly influence its sales
and strategies affecting the restaurant‘s profits.
Factors of Micro Environment

Customers

Customers are at the heart of the microenvironment. Understanding their needs,

preferences, and buying behavior is essential for a company‘s success. Factors to consider
include customer demographics, purchasing power, motivations, and decision-making
processes.

Suppliers

Suppliers provide the necessary resources, materials, and components for a

company‘s operations. Establishing strong relationships with reliable suppliers is important to
ensure the timely availability of quality inputs. Factors to consider include supplier reliability,
pricing, flexibility, and technological capabilities.

Competitors

Competitors are other companies operating in the same industry, offering similar
products or services. Analyzing competitor strengths, weaknesses, strategies, and market
positions helps a company differentiate itself and gain a competitive advantage. Factors to
consider include market share, product differentiation, pricing strategies, and marketing
tactics.

Intermediaries

Intermediaries are organizations that facilitate the distribution of products or services

from the company to the end customers. These can include wholesalers, retailers, distributors,
and logistics providers. Understanding the relationships and dynamics with intermediaries is
crucial for efficient and effective distribution.

Public

Public refer to groups or individuals interested in or impacting the company‘s

operations and performance. This includes the media, government agencies, local
communities, and special interest groups. Managing relationships and addressing different
public concerns is important for maintaining a positive reputation and minimizing negative
impacts.
Financial Institutions

Financial institutions such as banks and investors play a crucial role in providing
capital and financial resources to businesses. Establishing good relationships with financial
institutions is important for obtaining funding, managing cash flow, and supporting business
growth.

Employees

Employees are an integral part of the microenvironment. Their skills, knowledge,

motivation, and commitment directly impact a company‘s performance. It is essential to have
effective human resource management practices to attract, retain, and develop talented
employees.

Stakeholders

Stakeholders include individuals or groups with a vested interest in the company and its
activities. This can include shareholders, employees, customers, suppliers, and the local
community. Understanding their expectations and addressing their concerns is important for
maintaining long-term sustainability and social responsibility.

Understanding and managing the micro environment is crucial for organizations to thrive
in their specific industry or market. Business owners must consider factors such as
competitors, shareholders, distributors, customers, suppliers, etc. Examining how they affect
a business‘s day-to-day operations, market positioning, and customer relationships is
important to stay competitive in a dynamic business environment.

(b) Macro Environment

Macro environment refers to the external forces within an economy. Macro
environment factors like inflation, fiscal policy, monetary policy, consumer spending, GDP,
and employment rates considerably affect business operations. Governments and institutions
strategize policies based on these factors.
Macro environment factors impact decision-making, strategies, and growth of a
business. But, at the same time, the management cannot control these economic and non-
economic factors. For long-term sustainability, businesses try to predict macro-environmental
factors. Based on macro analyses, businesses prepare for future threats and opportunities.
Macro Environment Factors

The factors are as follows:

Demographic Factors: Demographics refer to age, language, lifestyle, income distribution,

cultural differences, etc. Financial literacy depends on demographics.

Ecological and Physical Factors: Business performance depends on various geographical

and ecological forces—availability of natural resources, climate change, weather conditions,
biological balance, pollution, etc.

Political and Legal Factors: The government imposes various regulations on businesses—
employment laws, import/export laws, copyright laws, labor laws, health and safety laws, and
discrimination laws.

Economic Factors: Consumer buying decisions are significantly impacted by

macroeconomic factors—demand-supply, inflation, interest rates, taxes, exchange rates, and
recession.

Technological Factors: Technological growth and advancement within a nation greatly

influence the production and sale of goods or services. Innovation, automation, and internet
facilities are some examples.

Socio-Cultural Factors: A business needs to be socially responsible and culturally aware.

Socio-cultural factors comprise education, population growth rate, life expectancy rate, social
status, buying habits, religion, etc.

Culture

Culture, which is a very intriguing and complex factor is, often, a very

critical component of business environment. Proper understanding of the cultural

dimensions is very important for product development, promotion, business

negotiations, human resource management, management of the social and political

environment etc. An important problem is that several dimensions of culture are

not easily explicit. A company which sets out to do business in unfamiliar cultural

environment may, therefore, encounter several problems if proper home work is not
done Many multinational businessmen point out that cultural differences are the

most significant and troublesome variables encountered by the multinational

company. The failure of managers to comprehend fully these disparities has led to

most international business blunders.

On the basis of the various definitions of culture, Francis Merill formulates

the concept of culture as follows." Culture:

 is the characteristically human product of social interaction

 is cumulative, for it is handed down from generation to generation in a given

society

 is meaningful to human beings because of its symbolic quality

 is learned by each person in the course of his development in a particular

society.

 is, therefore, a basic determinant of personality

 depends for its existence upon the continued functioning of society but is

independent of any individual or group

Culture consists of both material culture and non-material culture. Material

culture involves man- made things (e.g., automobile, television, telephone, etc.) and

man-made alternations in the environment. Non-material culture includes such

factors as language, ideals, beliefs, values, music, etc.

The culture traits, complexes and patterns differ from community to

community. This indicates some of the complexities involved in multicultural

business.

Some important cultural factors which have implications for business are

described below:

Cultural Adaptation

The term cultural adaptation refers to the manner in which a social system o

an individual fits into the physical or social environment. The social system may be

a small group, such as the family or a larger collectivity, such as an organisation, or

even a total society, like a tribal society

 Adaptation is essential for survival. The type of clothing, food and dwelling,

suitable for the climatic and weather conditions, are forms of adaptations Culture

adaptation can be viewed in a very wide context. We have adapted to the energy

crisis caused by the oil price hikes by modifying our energy policy and intensifying

oil exploration, developing, alternative source of energy and restricting oil

consumption Humanity adapts to contagious diseases by immunisation.

It is often necessary to know the process and nature of the cultural

environment for a successful formulation of business strategies For example, while

introducing new ideas, techniques, products while segmenting the market, while

formulating the product and promotion mix strategies, one should consider the

extent to which different categories of consumers adapt to the new things or

environmen and the factors favouring and disfavouring adaptations (and also the

general attitude of society to the new ideas and environment and their impact on

different categories of consumers).

Cultural Shock

Environmental changes sometimes produce culture shock-a feeling of

confusion insecurity, and anxiety caused by the strangeness of a the new

environment. For example, if a youngster born and brought up in a large city, is

posted to a bank office in a remote village, he may experience cultural shock.

Similarly, a villager may experience a cultural shock when he takes up a job in a

large modern company in a far away metropolitan city or foreign nation. They

have, however, to adapt to the new culture in due course if they want to survive

Executives and other employees on foreign assignments may experience

culture shock in alien environment. Sometimes the organisation itself may suffer

shock. Proper home work to understand the culture can help avoid the shock. This

also highlights the importance of the selection of people for foreign markets

Cultural Conformity

Individuals in a culture tend either to conform to the cultural norms or to

deviate from them. If the culture endures as it is, most people would conform to the

norms. As Inkeles observes, "the social order depends on the regular and adequate
fulfilment of the role obligations incurred by the incumbents of the major status

positions in a social system. It follows that the most important process in society is

that which ensures that people do indeed meet their role obligation. A student who

abides by the rules of his school discipline, does his home-work promptly and studies

properly is conforming to his role obligations. Similarly, an employee who works

properly conforms to his role obligation. And an employee who strikes work for a

reasonable cause in response to a strike call by his union is also conforming to his

role as member of the union "When an individual has incorporated within himself

the knowledge and appropriate skills necessary to the fulfilment of a role, and when

he accepts the value or appropriateness of the action, sociologists speak of his having

"internalised' the role and its psychological underpinnings. Such internalisation

helps achieve cultural conformity.

Knowledge of the nature and extent of cultural conformity and deviance will

sometimes be helpful in business decision-making. If a society is, by and large,

characterised by blind conformity, it would be very difficult to market new

revolutionary ideas (including products and techniques) in such a society. Special

efforts may be required in such a society to change the attitudes of the people in

favour of unconventional ideas. It is also important to understand the extent and

nature of the snow- balling effects of initial deviations in a society.

Cultural Lag

The cultural lag thesis put forward by William F Orgburn says that the

various parts of modern culture do not change at the same rate, and that since

there is a correlation and interdependence of parts, a rapid change in one part of

our culture requires readjustments through other changes in various correlated

parts of that culture. These readjustments are often difficult, if not impossible, to

make because of a variety of factors, ranging from ignorance to active resistance.

Technological changes call for adaptive changes in non-material culture, which is

inherently conservative. The cultural lag thus places constraints on the scope of

social change through technological development. For example, in some cultures

social inertia and religious sentiments come in the way of population control,

though a variety of techniques are available for birth control. The important factors
that contribute to cultural lag include ignorance, wrong notions, conservatism,

sentimental factors, political factors and vested interests.

International business arena is replete with cases of cultural lag. It indicates

that different markets may be in different levels of readiness to accept a new

product or idea. To successfully market a new idea (including product, service,

technique), it is necessary to identify the factors causing the lag and to overcome

them by taking appropriate measures. It would be a blunder to introduce a product

to a market which is not ready to adopt it.

7. RELATIONSHIP BETWEEN AN ORGANISATION AND ITS

ENVIRONMENT

Since a business does not operate in a vacuum, external factors affect its actions. These
factors may be related to micro as well as macro environment. An organization gets a range
of opportunities, limitations, pressures and threats from the external environment. The style,
structure, scope and functioning of the enterprise is affected by this environment. There is a
close relationship between the organization and the environment. The nature of the
relationship depends on the various parameters of an organization like its size, management,
nature of ownership, age and nature of business, etc. In the significant areas of interaction,
the focus of the relationship is on exchange. These areas of interaction are outlined below:

a. Exchange of Information

The organization scans the external environment. Important information is

generated after scanning, and it helps the organization to get over the problem of
uncertainty and competitiveness of the external environment. Such information is
gathered on economic activity and market conditions, social and demographic factors,
technological developments, activities of rival organizations, etc. The organization
uses this information for planning, decision-making, and control purposes. This
information may be current or projected, but both are important for the organization.
This information is also transmitted to several external agencies, either voluntarily,
inadvertently or legally.

b. Exchange of resources
 Apart from information, there is an exchange of information also. To produce
goods and services, a firm needs inputs from its environment: finance, materials,
workforce, equipment, etc. The acquisition of these inputs requires interaction
between organization and market. The resources are typically categorized as 5 M’s:
Men, Money, Method, Machine, Material. The interaction is also required to dispose
of its output to a wide range of clientele such as customers, employees, shareholders,
creditors, suppliers, local community, the general public, etc.

c. Exchange of influence and power

There are two aspects in this regard:

i. Organization is conditioned and constrained:

The external environment can impose its will on the organization as it holds
considerable power over a firm due to the following reasons:

 The business environment is inclusive.

 It has command over resources, information and other inputs.
 It offers opportunities for growth on the one hand and constraints on the other.

ii. Organization may be well-positioned:

Sometimes organization enjoys considerable power and influence over some of

the elements of the external environment:

 Organization may have command over information and resources.

 Such organizations have more autonomy and freedom of action.
 They can dictate terms of its environment and mould them to its will.

8. ENVIRONMENTAL INFLUENCE ON BUSINESS

 The extent to which the business thrives, depends on the manner in which it interacts with
its environment.
 If a business desires to be successful, it should recognize all the various elements of the
environment so that it may mange its affairs to manage and adopt them in their better
interest to survive and prosper.
 A successful business has to identify, appraise, and respond to the various opportunities
and threats in its environment.
 The Business functions as a part of broader environment. All the organizations differ in
terms of their inputs, processes, outputs, etc.
 The environment influences the business as organizations depend on the external
environment for:
 The inputs required by them
 For disposing of their outputs in a mutually beneficial manner.

It is important to note that this input-output exchange activity is a continuous process

that prevails over the long term. Thus, the environment influences the business and there
should be an active interaction with the external environment.

9. ENVIRONMENTAL ANALYSIS

Environmental Analysis is a process of identifying the relevant factors that have a direct
or indirect impact on the effective and efficient functioning of the business. In other words,
Environmental analysis is a strategic tool. It is a process to identify all the external and
internal elements, which can affect the organization‘s performance.

The analysis entails assessing the level of threat or opportunity the factors might present.
These evaluations are later translated into the decision-making process. The analysis helps
align strategies with the firm‘s environment.

Steps:

The steps in environmental analysis are:

1. Scanning
2. Monitoring
3. Forecasting and
4. Assessment.

Utility of Environment Analysis:

Environmental analysis helps the strategists in the following manner:

 In anticipation of opportunities
 In planning or taking optimal responses to these opportunities.
 In developing an early warning system to prevent threats or in developing the strategies
which can turn a threat to the firm‘s advantage.

Goals of Environment Analysis:

The three basic goals of Environmental analysis are as follows:

(a) To provide an understanding of current and potential changes taking place in the
environment.

(b) To provide inputs for strategic decision making.

(c) To facilitate and foster strategic thinking in organizations