Business Environment and Strategy

Unit-01

Semester-03
Master of Business Administration
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 UNIT
Introduction to Business
Environment

Names of Sub-Unit

Introduction to Business Environment: Business, Scope of a Business/Business Scope, Goals and

Objectives of a Business, Business Environment, Nature of Business Environment, Scope of Business
Environment, Importance of Business Environment, Components of Business Environment, Relation
Between Business Environment and Strategic Management

Overview

The unit begins by explaining the meaning of the business environment. Further, it discusses the
meaning, scope, goals and objectives of a business. The unit explains the nature of the business
environment. It also discusses the scope of the business environment, the importance of Business
Environment as well as its components. Towards the end, you will be acquainted with the study of
Relation Between Business Environment and Strategic Management.

Learning Objectives

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 In this unit, you will learn to:
 Explain the meaning and scope of business
 Comprehend the meaning and scope of Business Environment
 Elucidate the Relation Between Business Environment and Strategic Management
 Describe the nature of business environment
 Discuss the goals and objectives of a business
 State the importance of business environment
 Explain the components of the business environment

Learning Outcomes

At the end of the unit you would:

 Assess the classification of business objectives
 Evaluate the internal and external factors of a business strategy
 Analyse the important factors of business environment
 Examine the macro factors of business environment

Pre-Unit Preparatory Material


 https://nios.ac.in/media/documents/SrSec319NEW/319_Bus_Studies_Eng/319_Bus_Studies_Eng_
Lesson1.pdf

1.1 Introduction

Businesses, like humans, do not operate in isolation. They operate within a particular
environment and negotiate their way through it. The extent to which a business flourish is
determined by how it interacts with its surroundings. Businesses that stay oblivious to crucial
changes in the environment ultimately vanish from the market.
To be successful, businesses must not only be aware of the various elements of the environment,
but also appreciate, adapt to, manage and influence them. If a business wants to survive and
thrive, it must constantly monitor and adapt to the environment. Disturbances in the
environment might either pose a serious threat to the business or provide it with new chances.
A successful business must be able to recognise, assess and respond to the numerous
possibilities and risks that exist in its surroundings.
For example, a firm must make the appropriate adjustments to adapt to the new policies.
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Similarly, a shift in technology may make the current product obsolete or irrelevant, as we have
seen with the introduction of computers, which replaced typewriters, and with the arrival of
colour television, which made black and white television obsolete. A change in fashion or
customer preferences can also modify demand in the market for a certain product; for example,
the demand for jeans reduced the sale of other conventional clothing. All of these elements are
external to the business and beyond its control. As a result, in order to survive and prosper in
business, business units must adapt to these changes.

1.2 BUSINESS
A business is an economic activity performed by an enterprising entity or an organisation often with
the objective of maximising profits. Economic activities performed by a business organisation include
production (conversion of inputs into output), distribution (supply of output in the market) and sales
(exchange of products with buyers for money). The essential idea underpinning a firm is the concept
of the business based on which the business model, plan, vision and mission are created. For example,
Uber was founded on the idea of combining taxi drivers and providing on-demand services under one
brand. This principle served as the foundation for all other corporate strategies.
All business entities have to deal with limited resources; therefore, it becomes challenging for business
entities to allocate resources in such a way that profits can be maximised and at the same time costs
are kept to a minimum. In the process of allocating resources and maximising profits, business entities
need to answer the following questions:
 What to produce?
 How much to produce?
 Where to produce?
 How to produce?

Let us understand with the help of an example. An automobile manufacturer may face a dilemma
whether to produce cars or buses. Once it decides to produce both, the manufacturer needs to decide
whether to produce both cars and buses in equal quantities, or cars should be produced more. After
this, the automobile manufacturer has to decide the location of its manufacturing plant. Finally, the
manufacturer has to take a call on which methods of production or technology should be used. Generally,
the methods chosen are cost effective so that profits can be maximised.

 Scope of a Business/Business Scope

Business is an organised and systematic activity for earning profit. It is an integral part of society as it
creates employment opportunities. The following points explain the scope of business:
 Enhances living standards of the people by providing a variety of goods and services at the
righttime and at the right place.
 Generates employment opportunities, which in turn reduces poverty
 Makes optimal utilisation of scarce resources of the nation
 Improves nation’s image by producing and exporting quality goods and services to foreign
countries
 Provides a better return to the investors on their capital investment
 Promotes social interest by providing tourist services, sponsoring trade shows, etc. in the

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 country
 Facilitates exchange of culture among the people of different nations, thereby
maintaininginternational harmony and peace
 Performs research and development to promote innovation

 Goals and Objectives of a Business

Business objectives refer to results that a business organisation aspires to achieve or accomplish over
a specified period of time. It is a common belief that all business organisation has a single objective i.e.,
to make a profit. However, no business organisation can overlook the interests of its different
stakeholders,
i.e. employees, customers and society and the nation as a whole. Thus, business objectives of the business
organisations are classified into four types, which are listed in Figure 1:

Economic Objectives

Social Objectives

Human Objectives

National Objectives

Figure 1: Business Objectives

Let us explain these business objectives in detail.

 Economic objectives: These objectives include earning maximum profits, exploring new market
opportunities, acquiring new customers, expanding business operations, making innovation,
improving existing goods and services, making the optimal utilisation of available resources.
 Social objectives: These objectives are sought by organisations for the benefit of society.
Some ofthese social objectives are producing and supplying goods and services to society at
reasonableprices; preventing malpractices such as hoarding, black marketing overcharging,
puffery, etc.; promoting consumer education; ensuring fair returns for investors, protecting
the environment;and so on.
 Human objectives: These objectives are meant for protecting the interests of employees and
ensuring their welfare. Some of these objectives are providing fair remuneration and incentives
to employees, arranging better working conditions, providing job satisfaction, arranging training
and development programmes for the growth of employees and providing equal job
opportunities forall classes of the society.
 National objectives: These objectives of business organisations include generating employment
opportunities, promoting social justice, paying taxes and duties, implementing the government’s
economic and financial policies and so on.

1.3 BUSINESS ENVIRONMENT

The Business environment comprises surroundings, external objects, influences and circumstances

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under which a business exists. These factors can be internal or external and have a direct impact on
the business decisions of an organisation. Business and its surroundings are inextricably linked and
mutually dependent as a business acquires resources from its environment. The following are the
definitions of business environment:
According to Keith Davis, “Business environment is the aggregate of all conditions, events and influences
that surround and affect it.”
As per A.M. Weimer, “Business environment encompasses the climate or set of conditions—economic,
social, political or institutional in which business operations are conducted.”
Customers, rivals, suppliers, as well as the social, political, legal and technological framework of country
comprise the external environment. On the other hand, organisational resources as well as technological,
financial, marketing and operations capabilities of a business organisation fall under the internal
environment. It should be noted that internal factors are controllable, while external factorsare
uncontrollable.

 Nature of Business Environment

A business environment comprises various characteristics. The following are some important
characteristics of a business:
 Complex: A business environment comprises a range of elements, events, situations and
influences originating from various sources that have a significant impact on business, making it
more complex.
 Interdependence: Social, economic, legal, cultural, technological and political issues all play a key
role in the business environment. These environmental elements are interdependent. For
example, the

 evolution of the latest technology is influenced by a country’s economic standing. A wealthy

countrycan afford to spend enough on research and development. Similarly, changes in the
environment policies can have a substantial impact on the business of manufacturing
organisations.
 Dynamic: The Business environment is always evolving. The business environment is dynamic
because it is always changing due to technical advancements, shifts in consumer tastes, and the
introduction of new competitors. The numerous factors in the environment are always changing,
making business dynamic rather than static.
 Uncertainty: The business environment is primarily unpredictable since it is difficult to forecast
future events, particularly when the environment is subject to frequent changes, for example, the
business environment of information technology and fashion industries.
 Relativity: As the business environment varies from country to country and area to region, it is a
relative concept. For example, the business environment existing in India will not be the same as
that of the United States due to different market conditions and factors.

 Scope of Business Environment

Like human beings, business organisations do not exist in a vacuum. Each business organisation survives
and grows within the context of different environmental forces. While these forces are uncontrollable,
business organisations have no alternative but to respond to them timely. A good understanding of the

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environment by business managers enables them not only to identify and evaluate, but also to react
to the forces external to their firms. Let us understand how a thorough understanding of the business
environment helps business organisations in the following points:
 Identifies business opportunities and threats: A business environment aids in the
identification of numerous opportunities (new markets, lifting of government restrictions, etc.)
and dangers (arise in the number of new entrants, etc.) to the business organisation. All threats
may be easily identified with good interaction between the business and its surroundings. It will

allow businesses to take corrective

 action in a timely manner. For example, Samsung saw the popularity and scopeof smartphones
and rode on the most popular and advanced Android OS, whereas Nokia failed to recognise this
scope and continued to utilise its Symbian OS, resulting in Nokia’s market share fallingfrom 55
percent to 27.7% in 2014. Similarly, Volvo has made good use of its first-mover advantage in
India’s luxury bus market. It currently controls roughly 74% of the market.
 Helps in planning and policy formulation: A thorough understanding of the business
environment aids in the formulation of more effective policies and plans. It provides businesses
with up-to-date information about market circumstances. Business organisations that are
well-versed with theirenvironment make sound judgments.
 Provides useful resources: The business environment provides a variety of inputs such as raw
materials, capital and labour to a business organisation so that it can carry out business activities.
These inputs are transformed into goods and services in order to meet market demands. An
organisation cannot continue to operate unless it has a sufficient supply of inputs. For receiving
inputs and delivering the essential goods or services, it is completely reliant on the environment.

 Improves performance: The business environment plays an important role in boosting

corporateorganisations’ overall performance. Managers keep their knowledge and abilities
up to date by maintaining constant awareness of the environment. Environmental research
is used as a tool toeducate managers. Environmental monitoring gives qualitative data that
aids in the development of strategic thinking. It enables managers to regulate and improve
corporate performance by implementing appropriate management techniques.
 Helps in coping with rapid changes: The factors that make up the corporate environment are
always changing. They fluctuate in their appearance from time to time. Changes in customer
preferences, fashion, technology, economic situations and so on are all examples of these
changes. The ability to recognise these occurring changes is aided by a thorough awareness of
the business environment. It enables them to effectively deal with these changes by taking the
relevant steps in the appropriate time. Managers are sensitive to such changes and respond
efficiently as a result of continual monitoring of the environment.
 Enhances business image: Businesses can improve their public image by having a thorough
graspof their surroundings. They are more responsive and sensitive to environmental concerns
as a result of their thorough understanding of the corporate environment. Environmental
research gives them the information they need to make realistic strategies and put them into
action. Businesses are betterable to provide better service and serve the common good. People
are pleased with the company andhave developed trust in it. This aids in the development of a
better market image.
 Assists in facing competition: All facts regarding market competitors are sent to businesses
through the business environment. Every business organisation must be aware of its
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 competitors’ actions and tactics in order to effectively meet competition. It aids businesses in
developing plans and procedures in response to competition activity. Businesses can address
market problems and competitiveness by planning ahead of time in a methodical and efficient
manner.

 Importance of Business Environment



There is a close and continual contact between a business and its surroundings, regardless of its nature
or size. This engagement also aids the firm’s strength and efficient utilisation of its resources. As a
result, comprehending the significance of the business environment will aid in the pursuit of further
business prospects. Let’s take a look at it one by one.
 Identifying Business Threats and Opportunities: One of the most important advantages of a
business environment is that the interaction between a company and its surroundings
usually exposes the company’s potential and risks.
 Providing Growth Direction: When a company interacts with its surroundings, it becomes easier
to identify areas for expansion and growth. Is there a shift in consumer preferences for certain
goods or services? Are there any features that your competitors offer that you should incorporate
in your products as well? By connecting into its business environment, a company can acquire
answers to comparable inquiries.
 Learning that is ongoing: Because nature is essentially dynamic, the environment is always
changing. This keeps managers motivated to maintain their knowledge and abilities up to date.
This aids them in preparing for both anticipated and unanticipated changes in the
commercial world. How has your customers’ purchasing behaviour altered since the
introduction of GST, for example?
 Image Construction: When a company shows environmental sensitivity, its image might increase
significantly. In order to accomplish so, the company needs also have a thorough
understandingof its surroundings. Many factories, for example, consider power shortages to
be a problem intheir operations. As a result, several businesses have installed captive power
plants (CPPs) in their factories to meet their power needs.
 Taking on the Competition: It is critical to be informed of your competitors’ actions and strategy
in any business. Firms can study their competitors’ tactics and behaviours in a business setting.
They might also devise their own techniques in this regard. Almost all telecom carriers offer
identicalservices at similar pricing, if you take a fast look at the industry.

The reason for this is that most telecom companies make it a point to keep up with their competitors’
tactics and actions. Markets are very competitive, and businesses must fight to stay afloat and thrive.
Understanding the relevance of the business environment and allocating resources to thoroughly
examine it can be a major stepping stone toward a company’s success.
Consider that for a moment. Maruti Udyog looked at its business environment a few decades agoand
spotted an opportunity in the demand for tiny automobiles. It began by producing low-cost little
automobiles and quickly rose to the top of the small car industry. Any company that isn’t aware of its
surroundings is blind to the hazards and/or possibilities hiding around every corner.

1.4 COMPONENTS OF BUSINESS ENVIRONMENT

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The environment of a business is divided into two parts, namely the internal environment and external
environment. The internal environment comprises the strengths and weaknesses of a business
organisation, while the external environment includes opportunities and threats for the organisation.
Figure 2 lists the components of the business environment:

Components of Business
Environment

Internal Environment External Environment

Micro Environment Macro Environment

 Strategy  Suppliers  Political factors

 Structure  Interme  Economic fact
 Skills of people diaries  Sociocultural
 Financial Competi factors
capability tors  Technological
 Marketing  The public factors
capability  Legal factors
 Operating and  Environmental
technical capabilities factors

Figure 2: Factors Affecting Business Environment

Let us discuss these factors in detail.
 Internal environment: It is the environment within an organisation; thus can be controlled internally.
The internal environment involves strengths and weaknesses of the organisation in different
functional areas, namely marketing, operations, finance, information technology, personnel,
etc.These factors can be modified or controlled by the organisation from time to time. Some of
the internal factors that are important to be identified and analysed for an organisation are
explainedas follows:
 Strategy: It represents the courses of actions taken by an organisation to fulfil its business
objective. To put in simple words, the business strategy of the organisation determines the
environment within which the business organisation operates.
 Structure: An organisational structure represents the relationship between different levels
of management and the board, employees to employees, managers to employees,
management to labour unions, etc. Harmonious relationships between these parties have
significant effect onthe business decisions of an organisation.
 Skills of people: The success of a business organisation depends a great deal on the
skills andcompetencies of its employees. Many organisations need to incur a high cost
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 due to unskilled employees or wrong hiring of employees. Thus, it is important for the
business organisation to ensure that right people are hired with the right skills. Also, the
business organisation shouldconduct training and development programmes from time
to time to keep building the skills of its existing employees.
 Financial capability: It is the finance that keeps a business organisation moving and affects
its business performance, strategies and decisions to a large extent. The financial capability
of a business organisation encompasses sources of funds, capital investment, acquisition of
assets, management of funds, and so on.
 Marketing capability: Marketing involves the sending the message to the customers
regarding availability of products or services. The marketing capability involves the modes
of promotion, marketing channels, brand equity, distribution networks, etc.
 Operating and technical capabilities: The operating capability involves the production of
goods and services and use of material resources. On the other hand, the technical
capability involves the adoption of techniques used for production and various other
business functions. Right operating and technical capabilities at place lead to improvement
in productivity and quality.
 External environment: It comprises the factors on which a business organisation has no control;
however, timely response by the organisation makes it play safely. The success and survival of a
business organisation depends on its ability to respond to external factors. External environment
is further divided into two types, which are:
 Micro environment: It comprises factors existing in the immediate environment of a
business organisation. These include suppliers, intermediaries, competitors and the public.
These micro factors affect different organisations in the same industry differently. On the
other hand, some micro factors are particular to one business organisation only. Although
the micro factors arethe same for business organisations operating in the same industry,
the relative success of a business organisation depends on how effectively it deals with
these micro factors.
 Macro environment: Micro factors of a business organisation exist in a large environment
known as macro environment. The micro environment poses a number of threats and
opportunities for a business organisation. The following are the macro factors of
business environment:
 Political factors: These include government policies, political stability, systemic
corruption, tax policies, labour regulations, trade barriers, etc.

 Economic factors: These include economic growth, exchange rates, interest

and inflationrates, and so on.
 Sociocultural factors: These include country’s demographics, population
growth rate, agedistribution, career attitudes, health consciousness, and so
forth.
 Technological factors: These include automation, research and development,
technologyawareness, and so on.
 Legal factors: These factors are related to the constitutional framework of
a country, directive principles, fundamental rights, policies related to export
and import.
 Environmental factors: These factors include the availability of natural
resources, climaticconditions, location aspects, pollution control measures, etc.
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 1.5 RELATION BETWEEN BUSINESS ENVIRONMENT AND STRATEGIC MANAGEMENT
As explained above, business environment consists of all the factors that affect an organisation’s
operations, actions and outcomes. It is divided into internal and external
environment. An organisation is able to better respond to the external environment if it is well-versed
with its internal environment. Strategy is the part of an organisation’s internal environment. A
strategy is a plan of action designed to achieve a particular goal. The external and internal
environment influence strategy planning; but,because the environment is difficult to forecast, it
may be ineffective. As a result, marketers should constantly gather new information about the
business environment and develop strategic plans thatcan adapt to changing situations.
An organisation needs to formulate a business strategy after considering all internal and external
factors. For example, if an organisation desires to enter the international market, it needs to thoroughly
analyse the economic, political, technological, legal, sociocultural factors of the country and match with
its internal capabilities. Similarly, to expand its business in the domestic market, an organisation needs
to analyse various factors such as number of competitors, government laws, demand for products and
services, and so on. Without analysing the environment, the entire business strategy of an organisation
may lead to failure.

Conclusi 1.6 CONCLUSION

on

 A business is an economic activity performed by an enterprising entity or an organisation often

with the objective of maximising profits.
 Business objectives refer to results that a business organisation aspires to achieve or accomplish
over a specified period of time.
 Business environment comprises surroundings, external objects, influences and circumstances
under which a business exists. These factors can be internal or external and have direct impact on the
business decisions of an organisation.
 A good understanding of environment by business managers enables them not only to identify and
evaluate, but also to react to the forces external to their firms.
 The environment of a business is divided into two parts, namely internal environment and external
environment. The internal environment comprises strengths and weakness of a business
organisation, while the external environment includes opportunities and threats for the organisation.
 An organisation needs to formulate a business strategy after considering all internal and external
factors.
 A business environment aids in the identification of numerous opportunities (new markets, lifting of
government restrictions, etc.) and dangers (rise in the number of new entrants, etc.) to the business
organisation.
 The success of a business organisation depends a great deal on the skills and competencies of its
employees.
 If a business wants to survive and thrive, it must constantly monitor and adapt to the environment.
Disturbances in the environment might either pose a serious threat to the business or provide it with
new chances.
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 1.7 GLOSSARY

 Business: An activity of making money by producing or buying and selling products

 Environmental factors: These factors include the availability of natural resources, climatic
conditions, location aspects, pollution control measures, etc.
 Industry: A group of businesses that produces a closely-related set of raw materials, goods, or
services
 Standard of living: The material well-being of the average person in a given population

1.8 CASE STUDY: TATA NANO–ENVIRONMENTAL ANALYSIS

Case Objective
The case study explains the failure of Tata Nano due to poor environment analysis.

Tata Motors is a leader in manufacturing of commercial, passenger, military and electric vehicles. It is
also the world’s 4th largest truck and 2nd largest bus manufacturer by volume. In January 2008, Tata
Motors introduced Tata Nano, dubbed as the ‘People’s Car’ and also known as the world’s cheapest
car. The car was launched in March 2009 which created a significant impact in the Indian automobile
market. Tata Motors Ltd. is one of the few companies which have its own R&D centres. It has established
an engineering research centre at Pune (with strength of around 3,500 personnel).
The main target group of customers for Tata Nano are the lower- and middle- income families in India,
many of whom resisted purchasing four-wheelers mainly due to the price affordability and maintenance
cost. Launching of Tata Nano gave an opportunity for these groups to purchase a car within their means.
During the initial launch, Tata Nano was priced at about rupees one lakh. In December 2008, the cost of
the car increased significantly due to higher raw material costs.
Further, in 2013, Tata Nano was rated as the most trusted 4-wheeler brand by Brand Trust Report
India Study. Tata Motors was so confident about Nano that they thought this is going to be a massive
success. But it failed and became one of the most disaster products in the history of marketing due to
the following reasons:
 Tata Nano projects itself as the cheapest car. Nobody wants to drive the cheapest car. Buying a
caris related to social status and prestige in society.

 So many Nano cars catch fire. This created a complete buzz in media. Despite the low price,
everyonehesitated to buy them because of the incidences of fire.
 After the announcement of Nano, the second-hand market of cars faces a drop in price by 15%
to20%. New cars like Alto 800, Maruti 800, Indica, etc., also have to reduce the price. People
called it a Nano effect.
 The vision of Tata was an affordable car that could fit a family of four. But, in reality, it was
not fitting an Indian family of 4 with ease.
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 Source: https://bking.in/tata-nano-failure-case-study/

Questions
 What was the vision of Ratan Tata behind the launch of Nano project? How did he analyse the
environment?
(Hint: Low-income group people, safety, substitute for a bike.)
 In spite of extensive research and development programme, Nano was a huge failure. Why?
(Hint: Poor vision and mission, competition, quality, etc.)

Self- Assessment questions

A. Essay Type Questions

1. What do you mean by the term business?
2. What is the scope of business?
3. Explain the factors comprising the internal environment of a business.
4. What is the impact of external environment on the decisions of a business organisation?

Answers for Self- Assessment questions

A. Hints for Essay Type Questions

1. A business is an economic activity performed by an enterprising entity or an organisation often
with the objective of maximising profits. Refer to Section Business
2. Business is an organised and systematic activity for earning profit. It is an integral part of society
as it creates employment opportunities. Refer to Section Business
3. The internal environment involves strengths and weaknesses of the organisation in different
functional areas, namely marketing, operations, finance, information technology, personnel, etc.Refer
to Section Components of Business Environment
4. External environment comprises the factors on which a business organisation has no control;
however, timely response by the organisation makes it play safely. The success and survival of
a business organisation depends on its ability to respond to external factors. Refer to Section
Components of Business Environment

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 Post Unit Reading Material

 http://www.jiwaji.edu/pdf/ecourse/tourism/Introduction,%20definition,%20concept%20&%20
features%20of%20Business%20environment.pdf
 https://www.mgkvp.ac.in/Uploads/Lectures/47/2724.pdf

Topics for Discussion Forums

 Find information on how important it is for managers to understand the business of their
organisations.

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