BUSINESS ENVIRONMENT

II SEMESTER BBA

BUSINESS ENVIRONMENT (NEP)

STUDY MATERIALS 2022

PREPARED BY
PROF TAMIL SELVAN. MBA,M.COM
SNR DEGREE COLLEGE,JIGANI,ANEKAL TK

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SYLLABUS:
UNIT-I: INTRODUCTION TO BUSINESS ENVIRONMENT
Meaning of Business, Scope and Objectives of Business, Business Environment, Micro and Macro-
Environment of Business (Social, Cultural, Economic, Political, Legal Technological and Natural
Environment) Impact of these factors on Decision Making in Business, Environmental Analysis and
Competitive Structure analysis of Business.

UNIT-II GOVERNMENT AND LEGAL ENVIRONMENT

Government Functions of the state, Economic Role of Government, State intervention in business,
Reasons for and types of State intervention in Business. Impact of Monetary policy, Fiscal Policy,
Exim Policy and Industrial Policy on Business.
Legal Environment, Various Laws affecting Indian Businesses.

UNIT-III ECONOMIC ENVIRONMENT AND GLOBAL ENVIRONMENT

An Overview of Economic Environment, nature of the Economy, Structure of Economy. Factors
affecting Economic Environment.
Globalization of Business: Meaning and Dimensions, Stages, Essential conditions of globalization,
Foreign Market Entry Strategies, merits and demerits of globalization of Businesses, MNC’s, TNCs
etc.

UNIT-IV TECHNICAL ENVIRONMENT

Meaning and Features, Types of Innovation, Impact of Technological changes on Business.
Technology and Society, Technological Acquisition Modes.IT revolutions and business,
Management of Technology.

UNIT-V NATURAL ENVIRONMENT

Meaning and Nature of physical Environment. Impact of Natural Environment on Business.

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UNIT-I: INTRODUCTION TO BUSINESS ENVIRONMENT

Meaning of Business, Scope and Objectives of Business, Business Environment, Micro and Macro-
Environment of Business (Social, Cultural, Economic, Political, Legal Technological and Natural
Environment) Impact of these factors on Decision Making in Business, Environmental Analysis and
Competitive Structure analysis of Business.
Meaning
Business refers to an economic system in which goods and services are exchanged for one another
or money.
Business Activities are concerned with the transfer or exchange of goods and services.

Scope of Business:
The scope of business can be described as follows:
1.Improvement in standard of living:
Business helps people in general to improve their standard of living.
2.Proper utilization of resources:
It leads to effective utilization of scarce resources of society. It provides facility of mass
production.
3.Better quality and large variety of goods and services:
It involves production. Purchase and sale of goods and services for price. Customer satisfaction is
the backbone of modern business. Services such as supply of water, electricity etc. May be
considered highly significant for the community.
4.Creates Utilities:
Business makes goods more useful to satisfy human wants.it adds to products the utilities of
person, time, place, form, knowledge etc. thus people are able to satisfy their wants effectively
and economically.
5.Employment Opportunities:
It provides employment opportunities to large number of people in society.
6.Workers Welfare:
Business Organizations these days take care of various welfare activities for workers. They provide
safer and healthier work environment for employees.

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Objectives of Business:
1.Profit Making:
Profit is the backbone of any business enterprises. It is the excess of income over expense. Profit
is the main motivator, strong sustainer and judicious allocator of
2.Growth:
It is another primary objective of business.it should grow in all directions over a period of time.by
add more products or Markets, forward and backward integration, increase market share, expand
markets.
3.Power:
Business has vast resources such as money, materials, men and know -how these resources confer
enormous economic and political power on owners and managers of business venture.
4.Employee Satisfaction and Development:
Every enterprise aims at improving its worker’s performance by payment of fair wages and by
providing other benefits, such as housing, education, medical facilities etc.
5.Quality of Product and Services:
This is one of the major objectives of businesses. Those who insisted on and persisted in quality
survived competition and stayed ahead of others on the market. persistent quality earns brand
loyalty a vital ingredient of success.
6.Market Leadership:
To earn market leadership is yet another objective of business. To earn a niche for one self in the
market, innovation is the key factor. Innovation is one of the key factor. Innovation may be in
product, advertising, distribution, finance or in any other field.
7.Challenging:
Business offers vast scope and poses formidable challenges. Success in a business venture speaks
of the abilities of individuals who and manage and failure, their inability and incompetence. The
real worth of an individual is tested more in business than in any other profession.
8.Service to Society:
Business is part of society and has several obligations towards it .Providing safe and quality of
goods at reasonable prices. Providing Employment etc.
9.Good Corporate Citizenship:
Citizenship implies that the business unit complies with the rules of the land, pay taxes to the
government regularly discharges its obligation to the and case for its employees and its
customers.
10.production of wealth:
The business has to produce tangible form of wealth for the benefit of the community. It is an
arrangement, where the supplies are created and made available to people according to their
needs and their economic position.

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11.Provison of Employment:
Business involves employment of the factors of production. Hence expansion expansion of
business means creation of more work opportunities to the members of the society.
12.To charge of reasonable prices:
Charging reasonable price is another social responsibility of a business. prices which cover the
costs of production and have a fair margin of profit will be acceptable to the society.

BUSINESS ENVIRONMENT

Meaning:
Business Environment refers to SumTotal of internal & external forces operating in an organization.
Managers should identify, evaluate, and react to the forces triggered by external environment.
Definition:
Business Environment” According to Keith Davis “Business Environment is the aggregate of
condition events and influences that surround and effect business”
The term Environment refers to the surroundings and circumstances which influence a
Business Unit.
FEATURES OF BUSINESS ENVIRONMENT:
1.Business environment is the sum total of all factors external to the business firms and that greatly
influence their functioning.
2.It covers customers, competitors, suppliers, government and social cultural, political, technical and
legal conditions.
3.It helps to supply of goods and services to the society.
4.The business Environment is dynamic in Nature i.e it keeps on changing.
5.It creates job opportunities and reduce poverty and unemployment.
6.It offers better quality of life by raising the standard of living of the people.
7.Business environment is unpredictable since future events are uncertain .
8.Business environment change from place to place ,region to region,country to country.
9.It contributes economic development of the country.
10.It is multifaceted.

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Internal factors
Internal factors are controllable factors which are forces inside the business organization or which are
within the control of the organization. The middle level and lower level management are more
concerned with the internal environment.
External factors
External factors are not controllable/ uncontrollable forces which may either offer opportunities for
the firm or threats to the firm. The policy makers and the managers at the top level are concerned
with the external environment
Dimensions of Business Environment

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A. Internal Environment

The factors in internal environment of business are to a certain extent controllable because the firm
can change or modify these factors to improve its efficiency. Internal environment includes
management of men, material, money and machinery.
The various internal factors are:

1. Value system

Value system of the founders, Board of Directors, Managers, Workers of the organization has
important bearing on the strategies of the organization.
2. Mission and objectives:
Firm’s philosophies, priorities, development, policies are guided by the mission and objectives of the
organization. Mission and objectives are the first step in the development of the organization.
3. Organization structure:
The organizational structure, composition of the board of director and the professionalism of
management are important factors influencing business decisions. The nature of the organizational
structure has a significant influence over the decision-making process in an organization. An efficient
working of a business organization requires that the organization structure should be conducive for
quick decision-making.
4. Corporate culture
Corporate culture is the pattern of values, norms, beliefs, attitudes and assumptions that may
followed by employees in the organization.
Corporate culture refers to the beliefs and behaviors that determine how a company’s employees and
management interact and handle outside business transactions.
Examples: Dress code, customs, religious belief and traditions.
5. Quality of human resources
Quality of employees that is of human resources of a firm is an important factor of internal
environment of a firm. The characteristics of the human resources like skill, quality, capabilities,
attitude and commitment of its employees etc could contribute to the strength and weaknesses of an

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organization.
6. Labour unions
Labour unions collectively bargains with the managers for better wages and better working conditions
of the different categories of workers. For smooth working of a business, the firm supports good
relations between management and labour unions.
7. Physical resources and technological capabilities
Physical resources such as, plant and equipment and technological capabilities of a firm determine its
competitive strength which is an important factor for determining its efficiency and unit cost of
production. Research and development capabilities of a company determine its ability to introduce
innovations which enhances productivity of workers. The rapid technological growth and the growth
of information technology in recent years have increased the relative importance of intellectual
capital and human resources as compared to physical resources of a company.
E x a m p l e : The growth of Bill Gates’ Microsoft Company and Murthy’s Infosys technologies is mostly
due to the quality of human resources and intellectual capital than to any superior physical resources.
8. Physical Assets

Physical assets refers to installation of plant, machinery, technology and their capabilities adapted to
suit the equipment and produce required quality goods and services on time.
A. External Environment

External factors are uncontrollable factors which are forces that affect a business enterprise from
outside or which are not in the control of the organization. The top level is concerned with the external
environment.
External environment includes Micro & Macro External Environment

External Micro- Environment

Micro Environment is called as operating environment. Micro environment includes the players
whose decisions and actions have a direct & immediate impact on the company. Production and
selling of commodities are the two important aspects of modern business. Accordingly, the micro
environment of business can be divided. The various constituents of micro environment are as under:

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i. Suppliers of inputs
An important factor in the external micro environment of a firm is the supplier of input such as raw
materials and components. Normally, most firms do not depend on a single supplier of inputs. To
reduce risk and uncertainty business firms prefer to keep multiple suppliers of inputs.
ii. Customers
The customers buy and use a firm’s product and services. The sale of a product or service is critical
for a firm's survival and growth necessary to keep the customers satisfied. The concern for customer
satisfaction is essential for the success of a business firms. A business firm has to compete with rival
firms to attract customers and increase the demand of the product.
iii. Marketing intermediaries
The firm's external micro environment consist marketing intermediaries who play vital role in selling
and distributing its products to the final customers. Marketing provides an important link between a
business firm and its ultimate customers.
Marketing Intermediaries include Distribution, Transport, Promotion, Finance and Insurance
iv. Competitors
The firms in an industry compete with each other for sale of their products. This competition may be
on the basis of pricing of their products and also non- price competition through competitive
advertising such as sponsoring some events to promote the sale of different varieties and models of
their products. Indian firms have to compete with each other but also with foreign firms whose
products can be imported. In America, American firms face a lot of competition from the Japanese
firms producing electronic goods and automobiles.
v. Public
Public are an important force in external micro environment. Environmentalists, media groups,
women’s associations, consumer protection groups, local groups, Citizens Association are some
important examples of publics which have an important bearing on the business decisions of the firm.

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2. Macro External Environment

Macro Environment represents uncontrollable nature of macro forces a firm has to adjust
or adapt it to these external forces India.
Various components of External Environment:
1. Political Environment
2. Economic Environment
3. Socio- Cultural Environment
4. Technological Environment
5. Legal Environment
6. Natural Environment
7. International Environment
8. Demographic Environment
1. Political Environment:
Political environment simply refers to the way a country is being run in terms of politics. The
political environment includes all laws , government agencies and lobbying groups that
influence or restrict individuals or organization.
1. Political system 5. Monopoly controls
2. Political Risk 6.Legislations
3. Political ideologies 7. Trading Policies
4. Indicators of political instability 8. Government term and changes.
2. Economic Environment:
Economic forces refer to economic conditions. They comprised business booms and
depressions, shortages, price level, Money supply, Rate of interest, purchasing power of the
people, take home pay of the people, spending pattern of the people, etc.
Economic Environmental Factors:
1. National Income , per capita income
2. Economic policy
3. Production and distribution of income and wealth
4. Tax policies and Taxation
5. Privatization ,FDI
6. Inflation and deflation
7. Balance of Payment and Balance of Trade
8. Business cycles
3.Socio cultural environment:
Socio cultural environment refers to a set of beliefs, customs, practices, norms and behavior
that exists within a society which describes relationship to themselves and others.
1. Changes in life styles 6.Demographies

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2. Family structures 7.Brand ,Company , Technology Image
3. Attitudes and values 8.Ethnic / Religious factors
4. Household patterns 9.Consumer Buying Patterns
5. Social mobility 10.customs beliefs, and Literacy Rates
4. Technological Environment:
Technological environment means the advancement in the field of technology which
influences business by new inventions of production and other innovation in techniques to
perform the business operations and product development.
1. Degree of automation
2. Emerging technologies
3. R&D activities
4. Technology transfer
5. Use of IT and communication.

5.Legal Environment:
Legal Environment Provides a frame work on laws , regulations and Government policies
relating to legal or regulatory set up. Various regulations and law influences marketing plans.
1. International law
2. Employment law
3. Company law
4. Health and safety law
5. Regional Legislation.

6.Environmenatal factors:
Natural environment refers to combination of natural resources which used by business as
inputs and affect their marketing activities.
1. Geographical Location 2. Availability of resources
3. Access to natural resources 4. Concern for environment
5. Increased energy cost. 6. Environmental Impact
7. Environmental Legislation 8. Waste disposal
9. Environmental pollution and Control 10. Ecological Balance system
7.Demographic Environment:
Demographic factors like Size, growth rate, age composition, sex composition etc of the
population, common family size, education level ,language, cast ,religion etc will have a
profound influence on business organization.
8.International Environment:
International Market influences the growth of Domestic companies, especially export oriented
industries. A fourable export market enables business firm to develop a good foreign Market

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for its products and strengthen its domestic position. It helps
1. Optimum use of resources
2. Providing international quality products
3. Large scale production
4. Meeting the international demand
5. Maintaining the good relationships between countries.
6. Advanced Research and Development.

Business Environment” According to Keith Davis “Business Environment is the aggregate of

condition events and influences that surround and effect business”
The term Environment refers to the surroundings and circumstances which influence a
Business Unit.
According to WF Glueck and Lawrance R jauch “ 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 important of these factors are socio economic, technological, supplier,
competitors and Government.

Environmental Scanning:
Environmental scanning is the monitoring and disseminating of information from the
external and internal environments to key people within the organization.
According to Abell” Environment appraisal is the identification, measurement and
assessment of environmental impacts.
Need for Environmental analysis
1. Environmental scanning provides information about the environment about the favorite
opportunities and impending threats.
2. Systematic Analysis helps managers to predict the future and more adjustment to meet
the uncertainty.
3. Environmental scanning gives a clear idea about the existing competitors, their current
operations and future plans.
4. It helps to identification of internal weakness of the organization.
5. It also helps in understanding the claims and the expectations of the society.
6. It helps the organization to determine input –output relationship.

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PORTER’S FIVE FORCE MODEL

1.BARGAINING POWER OF SUPPLIERS 2.BARGAININGPOWEROF

Supplier Concentration CUSTOMERS/BUYERS
Importance Of Sales to Supplier Bargaining Leverage
Differentiation Of Inputs Buyer Volume
Switching Cost for Firms in The Industry Buyer Knowledge
Presence Of Alternate Inputs Brand Identity
Threat Of Forward Integration Price Sensitivity
Cost Relative to Total Purchases by Industry Threat Of Backward Integration
Product Differentiation
Buyers Concentration Vs Industry
Substitutes Available
Buyer’s Incentives

3.THREAT OF NEW ENTRANTS 4.THREAT OF SUBSTITUTES

Create Barriers to Entry Switching Costs
Absolute Cost Advantage Buyer Inclined to Substitute
Access To Inputs Price -Performance
Government Policy Trade -Off of Substitutes
Economies Of Scale Industry Profits
Capital Requirements
Brand Identity 5.DEGREE OF RIVALRY
Switching Costs Exit Barriers
Access To Distribution Industry Concentration
Expected Retaliation Fixed Cost/Value Added
Proprietary Products Industry Growth
Overcapacity
Product Differences
Switching Costs
Brand Identity
Wealth Rivals
Corporate Interest

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Importance of business Environment Analysis

1.Identifying firm’s Strength and Weaknesses
Business Environment helps to identify the strength and weakness in view of technological and
global development.
2.Determining opportunities and threats:
The interaction between the businesses and its environment would identify opportunities for
and threats to the business.it helps the business enterprise for meeting the challenges
successfully.
3.Direction of Growth:
The interaction with environment leads to opening up new frontiers of growth for business
firms.it enables the business to identify the areas for growth and expansion of their activities.
4.Keeping the Business Enterprise alert:
Environment study is needed as it keeps the business unit alert in its approach and activities.
The problems and prospects of business can be under stood properly through the study of
business environment.
5.Continous learning:
Environmental analysis makes the task of managers easy in dealing with business challenges.
The mangers are motivated to continuously update their knowledge and skills to meet the
predicted changes in realm of business.
6.Image Building:
Environmental understanding helps the business organisations in improving their image by
showing their sensitivity to the environment within which they are working.
7.Meeting Competition:
It helps the firms to analyse the competitor’s strategy and formulate their own counter strategy
accordingly to survive cut-throat competition.

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8.Keeping business flexible and dynamic:

Study of business environment is needed for keeping business flexible and dynamic as per the
changes in the environmental forces.This will enable the development of business orgnaisation.
9.Understanding the future prospects and problems:
Business Environment enables to understand future problems and prospects of business in
advance. This enables the organisations to be more research oriented to make positive
contributions toward the organisational goals and enables them to face the problems boldly.
10.Ensure Optimum utilisation of resources:
The study of business environment is needed as it ensures optimum utilisation of resources
available for this study of economic and technological environment enables the organisation to
take full benefit of Government policies concessions provided and technological developments
and so on.
11.Ensures survival and growth:
Business Environment informs about suitable changes to be incorporated in business
policies.this helps the businesses organisations to grow and prosper.
12.Making the business socially acceptable:
Environment study enables the business man to expand the businesses and also make it
acceptable to different social groups.Business Organisations make positive contribution for
maintaining ecological balance by studying social environment.

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Important questions
I. Answer the following 2 marks questions
1.what is business?
2.Define Environment?
3.What is business Environment?
4.What is Internal Environment?
5.What is External Environment?
6.Mention any four Internal Factors?
7.Mention any four external factors?

II. Explain the following

1.Explain the nature and scope of Business?
2.Explain the nature of Business Environment?
3.Explain the various components of Internal Environment?
4.Explain the various Components of External Environment?
5.Explain Porter’s five force model?
6.Explain the importance of Business Environment Analysis?

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