Core Paper - 10

BUSINESS ENVIRONMENT

Code: Teaching hours:

90
Credit: 4 Max. Marks:
75
COURSE OBJECTIVES:
1. To introduce the concept of business environment and its impact on business
decisions.
2. To enable the students to have an overview of business environment - political, social
and global.
3. To enable the students to appreciate the importance of environment and its impact on
business and society.

UNIT I Introduction

The concept of Business Environment – its nature and significance – Brief overview
of political – Cultural – legal – economic and social and environments and their impact on
business and strategic decisions.

UNIT II Political environment

Political Environment – Government and Business relationship in India – Provisions
of Indian Constitution pertaining to business.

UNIT III Social environment

Social environment – Cultural heritage – social attitudes – impact of foreign culture –
castes and communities – joint family system – linguistic and religious groups – Types of
social organization –social responsibilities of business.

UNIT IV Economic environment

Economics Environment – Economic systems and their impact on business –
Macroeconomic parameters like GDP – growth rate of population – Urbanization – Fiscal
deficit – Plan investment – Per capita income and their impact on business decisions – Five
Year Planning.

UNIT V Financial environment

Financial and technological Environment – Financial system – Commercial banks –
Financial Institutions – RBI Stock Exchange – Non Banking Financial Companies (NBFCs)-
Mutual Funds-Meaning and functions.
 UNIT-I

Meaning of Business Environment:

The word ‘business environment’ indicates the aggregate total of all people, organisations
and other forces that are outside the power of industry but that may affect its production.
A business environment includes all external factors and forces which have a certain degree of
impact on the business actions, decisions, and strategies of the firm. Usually, the success of a
business is dependent on its environment. Businesses are expected to identify, appraise, and
respond to all threats and opportunities in their environments.

In order to survive and grow, a business must constantly monitor its environment and adapt to it.
The Glueck and Jauch model of a business environment is shown below:

Definitions of Business Environment:

Business environment has been defined by Bayard O. Wheeler as “the total of all things
external to firms and industries which affect their organisation and operation.”

According to Arthur M Weimer, business environment encompasses the ‘climate’ or set of

conditions, economic, social, political or institutional in which business operations are
conducted.
Concept of Business Environment:
A business firm is an open system. It gets resources from the environment and supplies its
goods and services to the environment. There are different levels of environmental forces.
Some are close and internal forces whereas others are external forces. External forces may be
related to national level, regional level or international level. These environmental forces
provide opportunities or threats to the business community. Every business organisation tries
to grasp the available opportunities and face the threats that emerge from the business
environment. Business organisations cannot change the external environment but they just
react. They change their internal business components (internal environment) to grasp the
external opportunities and face the external environmental threats. It is therefore, very
important to analyse business environment to survive and get success for a business in its
industry. It is therefore, a vital role of managers to analyse business environment so that they
could pursue effective business strategy. A business firm gets human resources, capital,
technology, information, energy, and raw materials from society. It follows government rules
and regulations, social norms and cultural values, regional treaty and global alignment,
economic rules and tax policies of the government. Thus, a business organisation is a
dynamic entity because it operates in a dynamic business environment.
Nature/Characteristic/Features of Business Environment:
Business environment refers to all factors outside the firm, that is the external environment
which lead to opportunities and threats of a firm. The nature of business environment is as
follows.
i) Complex: Environment consists of a number of factors, events, conditions and
influences arising from different sources which impact business, thus making the
business complex.
ii) Inter-dependence: The environment is mode of social, economic, legal, cultural,
technological and political factors. These factors of the environment are
interdependence.
iii) The totality of External Forces: Business environment includes everything which is
outside the organisation. If we add all these forces, they will form a business
environment. Example: When Pepsi and Coca-Cola got permission to set up their
business in India, it was an opportunity for them and threat for local manufacturers
like gold spot, camp-cola etc. Specific and General Forces: Those forces which
directly affect the operational activities of the business enterprise.
Example: Suppliers, Customers, Investors, Competitors, Financers etc. General
forces are those forces which indirectly affect the functioning of business enterprises.
Example: Economic, Social, Political, Legal and Technological conditions.
iv) Inter-relatedness: Different forces of business environment are interrelated to each
other. One component of the business environment affects the functioning of other
components. Example: The increased life expectancy of people and awareness of
health consciousness has increased the demand for many health products like diet
coke, olive oil, and so many health products.
v) Dynamic Nature: The business environment is dynamic in nature and keeps on
changing in terms of :(a) Technological improvement, (b) Shifts in consumer
preferences, (c) The entry of new competition in the market. Example: Many
established companies in FMCG (Fast Moving Consumer goods) sector are focusing
on producing the goods with natural ingredients with the entry of ‘Patanjali Products’.
vi) Uncertainty: The changes in the business environment cannot be predicted accurately
because of future uncertainties. It is very difficult to predict the changes in the
economic and social environment. Example: There has been a sharp decline in the
prices of Android smartphones due to the entry of many new companies.
vii) Complexity: All forces of the Business environment are interrelated and dynamic,
which makes it difficult to understand. Complex nature of Business environment can
be understood if we study it in parts. Example: Increase in goods and service tax to
15 % would increase the revenue of the government (economic), which would help
the government to improve social being of people (social) and reduce the personal
disposable income of rich people and thereby controlling inflation.
 viii)Relativity: Business Environment differs from place to place, region to region
and country to country. Example: In China, the electricity to the industry is provided
at cheaper rates as the consumption increases and hence, it leads to mass production
whereas, in India, it is otherwise, higher consumption of electricity leads to costly
electricity which results in lower production & higher cost of production.
Significance/ Importance of Business Environment:
Just like us, business operations do not survive in confinement. Every enterprise is not an
island to itself; it subsists, endures and develops within the circumstances of the part and
forces of its situation. Good knowledge of the environment by business managers allows
them not only to recognise and assess but also to respond to the forces outside to their
enterprises.
(A) It Helps in Identifying Opportunities and Making First Mover Advantage

 The environment provides numerous opportunities, and it is necessary to identify the

opportunities to improve the performance of a business.
 Early identification gives an opportunity to an enterprise be the first to identify
opportunity instead of losing them to competitors. Example: ‘Airtel’ identified the
need for fast internet and took first-mover advantage by providing 4G speed to its
users followed by Vodafone and Idea.
(B) It Helps the Firm Identify Threats and Early Warning Signals

 The business environment helps in understanding the threats which are likely to
happen in the future.
 Environmental awareness can help managers identify various threats on time and
serve as an early warning signal. Example: Patanjali products have become a warning
signal to the rest of the FMCG.
 Chinese mobile phones have become a threat for Indian mobile phone manufacturers.
(C) It Helps in Tapping Useful Resources

 Business and industry avail the resources (inputs) from the environment and convert
them into usable products (outputs) and provide to society.
 The environment provides various inputs (resources) the like finance, machines, raw
materials, power and water, labour, etc.
 The business enterprise provides outputs such as goods and services to the customers,
payment of taxes to the government, to investors and so on.
Example: With the demand for the latest technology, manufacturers will tap the resources
from the environment to manufacture LED TVs and Smart TVs rather than collecting
resources for colour or Black & White TVs.
(D) It Helps in Coping with Rapid Changes

 The business environment is changing very rapidly, and the industry is getting
affected by changing market conditions.
 Turbulent market environment, less brand loyalty, divisions of markets, changes in
fashions, more demanding customers, and global competition are some examples of
changing the business environment.
Example: Jack Ma started Alibaba as he could see the potential of interest in E-Commerce.
(E) It Helps in Assisting in Planning and Policy Formulation

 The business environment brings both threats and opportunities to a business.

 Awareness of business environment helps in deciding future planning or decision
making.
Example: Multiple entries of Chinese phones like VIVO, Gionee, OPPO, etc. have posed a
threat to local players like Micromax, Karbonn, Lava etc. to think afresh how to deal with the
situation.
(F) It Helps in Improving Performance

 Environmental studies reveal that the success of any enterprise is closely bound with
the changes in the environment.
 The enterprises which monitor and adopt suitable business practices not only improve
their performance but become leaders in the industry also.
Example: Apple has been successful in maintaining its market share due to its proper
understanding of the environment and making suitable innovations in its products.
Components / Classification of Environment:
Political and Legal Environment:
There are many external environmental factors that can affect your business. The aim is
always to take better decisions for the firm’s progress. The political environment can
impact business organizations in many ways. Changes in the government policy
make up the political factors. Increase or decrease in tax could be an example of
a political element. Your government might increase taxes for some
companies and lower it for others. The decision will have a direct effect on
your businesses. So, you must always stay up-to-date with such political
factors. Government interventions like shifts in interest rate can have an
effect on the demand patterns of company.

Cultural Environment: Cultural environment is an aggregate of all sub-cultures each with

distinct concept beliefs and faith. New demands are created and old one lost in due course.
Ex: In North India, the people preferred more wheat. In South India the people preferred rice,
so the culture and social behaviour were changing place to place.
Legal Environment:
The term "Legal Environment of business" relates to the code of conduct of any company.
It defines the legal boundaries and the scope of the firm. The laws which are passed by the
government for business operation is called legal environment. In every country, the
government regulates business activities. These regulations of government are considered
as legal environment. In practice legal and regulatory goes hand in hand. The business legal
environment plays a very important role in determining the success of
any businesses around the globe. The government taxes that are being imposed among
other regulatory measures help to promote economic growth and to protect consumers
from exploitation and other illegal factors.
Ex: the business to be governed by formal licensing, and adopting fair trade practices and
paying the necessary taxes to the government.
 Economic Environment:
The economic environment refers to all the economic factors that affect commercial and
consumer behaviour. The economic environment consists of all the external factors in the
immediate marketplace and the broader economy. These factors can influence a business, i.e.,
how it operates and how successful it might become. The economic environment consists of
different things for different people. For example, for a farmer, the weather and price of
fertilizers are important factors. For a TV channel on the other hand, the growth in Internet
advertising matters a great deal, but not the weather. Internet advertising matters to a TV
station because the Internet competes for advertising business. For a farmer, however,
advertising media is not important.

Social Environment:
Social environment is concerned with the environment of society as a whole of which
everyone involved. It refers to the immediate physical and social setting in which people live
or in which something happens or develops. It includes the culture that the individual was
educated or lives in, and the people and institutions with whom they interact. Social
environment consists of the customs and traditions of the society in which business is existing. It
includes the standard of living, taste, preference and education level of people living in the society
where business exists.

Demographic Environment:
Demographic environment includes a number of sub factors viz, size, growth, age and sex
compositions of the population, educational levels, languages, castes, religion etc. The impact
of this demographic factor is more vital in India than any other country in the rest of the
world. Indian population is highly heterogeneous with varied religions, languages, castes and
creeds. Naturally their tastes, preferences, beliefs are bound to differ. Ex: In India most
average selling of the shoes is 7 or 8. In Australia most average selling size of shoes is 10, 11
and 12.

Physical Environment:
Physical factors are those which include Geographical factors like weather, climatic
conditions. Ex: If rainfall is less, this may affect the demand for fruits and vegetables. It
becomes costly and less available.

Technological Environment:
Technological development in the field of technology which affects business by new
inventions of productions and other improvements in techniques to perform the business
work. Technological environment consists of external factors in technology that impact
business operations. Ex: Technological changes are seen in Aviation, Electronics, Energy,
Communication, Consumer goods industry, Optics, Medicines and Manufacturing.