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Business Environment

• The business environment refers to all

those factors that can influence the
functioning of an organization. This
outcome can be positive or negative. It is
very essential for the organizations to
analyze the environmental influences
which will, therefore, assist them in
evaluating the market conditions. The
business environment can be further
segregated into -
Internal Environment
• The internal environment consists of all those
factors that associated very closely to the
business activities and are, by and large,
controlled by the actions of top management. It
has to be noted that although these internal
environment factors are very much in control of
the company but sill a lot of attention has to be
devoted for their appropriate management since
they can have an impact on the profitability of
the company.
Internal Environment
• Brand Image
The image that is associated with the brand, to a large
extent, is in the hands of the company itself. For
instance, Infosys, a big name in the aura of IT, is well
known for its ethical standards whereas Satyam
computers – a company in the same sector has lost the
faith of the customers through its deceptive actions. The
love, trust, faith and loyalty of the customers, more or
less, are shaped through the actions, policies and
procedures of the company. Even in the matters of
financing of a project or going public by raising of funds
through IPO’s, company’s brand image plays a vital role.
• Employees
The employees or the human resource of an
organization are an asset. A precise selection of
an efficient workforce can be a decisive factor in
the overall profitability of a company. A high
morale, skills, quality, attitude and commitment
of the employees towards the organization can
act as strength. By providing a good work
culture, the morale of the work force can be
boosted which in turn can lead to a positive
environment inside the organizations.
• Production facilities & quality
The establishment of production plants, technology,
supply chain network, production capacity etc have a
major influence on the quality of the product. A customer
buys a product when he feels that it is a bundle of
utilities for him. A high quality can lead to a satisfaction
and a poor quality can lead to frustrations amongst the
consumers. Therefore, it is the ethical and moral
responsibility of an organization to provide standardized
products to its customers which can enhance loyalty and
increase satisfaction.
• R&D
In a high tech era that is characterized by an
intense competition, it becomes imperative for
any firm to innovate and transform according to
the changing environment. The R & D
department of a firm is not only responsible for
innovating new ideas and concept but also
transforming these ideas into new products with
appropriate quality. An efficient R & D
department can act as a sustainable competitive
advantage for an organization.
External Environment
• The external environment of a business is
further divided into –

• The Micro environment

• The Macro environment
Micro Environmental Factors
• These are the factors close to the
company that have a direct impact on the
organizations strategy. These factors
• Organizations survive on the basis of
meeting the needs, wants and providing
benefits for their customers. Failure to do
so will result in a failed business strategy.
The customers contribute very heavily
towards the profitability of a company.
• Employing the correct staff and keeping
these staff motivated is an essential part
of the strategic planning process of an
organization. Training and development
plays an essential role particular in service
sector marketing in-order to gain a
competitive edge. This is clearly apparent
in the all the industries.
• Increase in raw material prices will have a
knock on affect on the marketing mix
strategy of an organisation. Prices may be
forced up as a result. Closer supplier
relationships is one way of ensuring
competitive and quality products for an
organisation. At the same time, the timely
supply of the raw materials is very
essential for an organisation.
• As organisation require greater inward investment for
growth they face increasing pressure to move from
private ownership to public. However this movement
unleashes the forces of shareholder pressure on the
strategy of organisations. Satisfying shareholder needs
may result in a change in tactics employed by an
organisation. Many internet companies who share prices
rocketed in 1999 and early 2000 have seen the share
price tumble as they face pressures from shareholders to
turn in a profit. In a market which has very quickly
become overcrowded many have failed.
• Positive or adverse media attention on an
organisations product or service can in
some cases make or break an
organisation.. Consumer programmes with
a wider and more direct audience can also
have a very powerful and positive impact,
inforcing organisations to change their
• The name of the game in marketing is
differentiation. What benefit can the
organisation offer which is better then their
competitors. Can they sustain this
differentiation over a period of time from
their competitors?. Competitor anlaysis
and monitoring is crucial if an organisation
is to maintain its position within the
Macro Environment
• There are many factors in the macro-
environment that will effect the decisions of the
managers of any organisation. Tax changes,
new laws, trade barriers, demographic change
and government policy changes are all
examples of macro change. To help analyse
these factors managers can categorise them
using the PEST model. This classification
distinguishes between:
• By using the PEST framework we can analyse the many
different factors in a firm's macro environment. In some
cases particular issues may fit in several categories. For
example, the creation of the Monetary Policy Committee
by the Labour government in 1997 as a body that was
independent of government but had the ability to set
interest rates was a political decision but has economic
consequences; meanwhile government economic policy
can influence investment in technology via taxes and tax
credits. If a factor can appear in several categories
managers simply make a decision of where they think it
best belongs
• However, it is important not to just list PEST factors because this
does not in itself tell managers very much. What managers need to
do is to think about which factors are most likely to change and
which ones will have the greatest impact on them i.e. each firm must
identify the key factors in their own environment. For some such as
pharmaceutical companies government regulation may be critical;
for others, perhaps firms that have borrowed heavily, interest rate
changes may be a huge issue. Managers must decide on the
relative importance of various factors and one way of doing this is to
rank or score the likelihood of a change occurring and also rate the
impact if it did. The higher the likelihood of a change occurring and
the greater the impact of any change the more significant this factor
will be to the firm's planning.
• It is also important when using PEST analysis to
consider the level at which it is applied. When analysing
companies such as Sony, Coca Cola, BP and Disney it is
important to remember that they have many different
parts to their overall business - they include many
different divisions and in some cases many different
brands. Whilst it may be useful to consider the whole
business when using PEST in that it may highlight some
important factors, managers may want to narrow it down
to a particular part of the business (e.g. a specific
division of Sony); this may be more useful because it will
focus on the factors relevant to that part of the business.
They may also want to differentiate between factors
which are very local, other which are national and those
which are global.
• Political factors. These refer to government
policy such as the degree of intervention in the
economy. What goods and services does a
government want to provide? To what extent
does it believe in subsidising firms? What are its
priorities in terms of business support? Political
decisions can impact on many vital areas for
business such as the education of the workforce,
the health of the nation and the quality of the
infrastructure of the economy such as the road
and rail system.
For instance:

• consumer laws; these are designed to protect customers against

unfair practices such as misleading descriptions of the product
• competition laws; these are aimed at protecting small firms against
bullying by larger firms and ensuring customers are not exploited by
firms with monopoly power
• employment laws; these cover areas such as redundancy,
dismissal, working hours and minimum wages. They aim to protect
employees against the abuse of power by managers
• health and safety legislation; these laws are aimed at ensuring the
workplace is as safe as is reasonably practical. They cover issues
such as training, reporting accidents and the appropriate provision
of safety equipment
The political environment includes –
• Stability of the political scenario
• Type of government
• How the government laws and regulations
influences the business.
• Government’s policy on economy
• FDI policy of the government
• Consumer protection act
• Labour laws
• The government policies – The
government laws such as the zoning laws,
environmental laws, provisions on
Licensing and Franchising, Laws on
recycling & Packaging materials, product
safety laws, Warranties and guarantees,
Sales tax, Restriction on pricing policies,
minimum price laws, price discrimination,
Restriction on lease agreements etc. can
also influence the decisions.
• Economic factors

These include interest rates, taxation changes, economic growth,

inflation and exchange rates. As you will see throughout the
"Foundations of Economics" book economic change can have a
major impact on a firm's behaviour.
For example:
• - higher interest rates may deter investment because it
costs more to borrow
- a strong currency may make exporting more difficult
because it may raise the price in terms of foreign currency
- inflation may provoke higher wage demands from
employees and raise costs
- higher national income growth may boost demand for a
firm's products
The economic environment includes –
• GDP of the country
• Rate of interest
• Inflation rate
• Past economic growth
• Future prospect of growth
• Monetary and Fiscal policy
• Level of taxes imposed
• Purchasing power
• The World Bank has categorized the
economies into Low income (LIC), lower
middle income (LMC), upper middle
income (UMC), high income OECD and
other high income countries. The LIC,
LMC and UMC countries comes under the
developing countries and the other rests
under the developed countries.
Developing nations – The following are the
characteristics of a developing nation.
• Widespread poverty
• High unemployment
• Lower productivity
• Disparity between urban and rural level of
• Dependence on overseas technology
Developed nations – The following are the characteristics
of a developed nation.
• High level of industrialization
• Supreme quality of life
• Sophisticated technology
• Good standard of living
• Excellent educational and health care facilities

Depending on kind of economy, the fluctuations in the

inflation rates, the living standards of the people, the
GDP, per capita income of the people etc. have an
impact on the retail business.
• Social and cultural factors. Changes in social trends can
impact on the demand for a firm's products and the
availability and willingness of individuals to work. In the
UK, for example, the population has been ageing. This
has increased the costs for firms who are committed to
pension payments for their employees because their
staff are living longer. It also means some firms such as
Asda have started to recruit older employees to tap into
this growing labour pool. The ageing population also has
impact on demand: for example, demand for sheltered
accommodation and medicines has increased whereas
demand for toys is falling.
Culture is the set of values and attitudes that are acknowledged by
a group of people and transferred from one generation to another.

• Characteristics of culture

• Culture is learned
• Transferred from one generation to another
• Different culture forms different perceptions about the same thing
• Culture is socially shared
• It is flexible and changes with the changing times. For instance, In
1980s the culture did not allowed the females to wear skirts.
However, with changing times, today wearing skirts among girls is a
fashion and is extensively accepted in the urban areas.
• The cultural factors mould the consumption
patterns, dressing styles, eating habits and
purchasing decisions of a country. They have to
be analyzed very carefully for being competitive.
For instance, in 1996, the Indian markets were
flooded with a large number of fast food retailers
like McDonalds from other countries. However, it
was very surprising for them to know that a
majority of the Indian people are vegetarian.
• Technological factors: new technologies create
new products and new processes. MP3 players,
computer games, online gambling and high
definition TVs are all new markets created by
technological advances. Online shopping, bar
coding and computer aided design are all
improvements to the way we do business as a
result of better technology. Technology can
reduce costs, improve quality and lead to
innovation. These developments can benefit
consumers as well as the organisations
providing the products.
• The contribution of technology is enormous in building a
dynamic society. Today the people want advanced
products with superior quality which are safe to use. For
instance, when mobile phones were launched in India,
they were mainly used as a medium of communication.
But with the technological advancements, it is also used
as a medium of entertainment. With MP3 & MP4 players,
Quality cameras, Video recording, MMS and Games, a
cell phone is a live example of technology.
• In most of the areas, technology has replaced human
beings and the work is done in a lesser time with more
• Technology has also positively affected the economic status of
several countries. It is generally observed that the countries
employing a high level technology is a well advanced nation. It has
increased productivity and has contributed enormously in producing
more quantity with quality. Some benefits of technology in
production process are –
– Reducing the inventory wastage
– Less waiting time
– Decreased over production
– Reduced shrinkage level
– Reduce costs on documentation
– Assists in production planning
– Reduces unnecessary movements of employees
– Reduce stock outs and ensures product availability
• The impact of technology is on all fields including
education. The use of laptops, electronic sharing of
notes and the popularity of multimedia boards etc. has
provided a new direction to the field of education.
• The increased utilization of e-commerce has transformed
the world in a small market. Today people from different
countries can trade with each other by a click of the
• Technology has played a vital role in developing the
transportation system. The jet aircrafts and super
freights have enabled transportation without any
An organisation has to answer the following
questions to verify the viability of technology.
• What is the level of technology?
• What are the prospects of producing innovative
products through sophisticated technology?
• What is the impact of technology on the
distribution channel?
• How technology can improvise the process of
product standardization?
• Environmental factors: environmental factors include the
weather and climate change. Changes in temperature
can impact on many industries including farming, tourism
and insurance. With major climate changes occurring
due to global warming and with greater environmental
awareness this external factor is becoming a significant
issue for firms to consider. The growing desire to protect
the environment is having an impact on many industries
such as the travel and transportation industries (for
example, more taxes being placed on air travel and the
success of hybrid cars) and the general move towards
more environmentally friendly products and processes is
affecting demand patterns and creating business
Social Objectives
Human Objectives
National Objectives
Corporate Social Responsibility

-- shareholders
-- employees
-- consumers
-- community
Responsibility to
• To protect the interests of the shareholders and
employees and safeguard the capital of the
• To provide dividend, the company should earn
sufficient profit.
• To innovate and growth the company should
consolidate and improve its position and help
strengthen the share prices.
• To improve and maintain the image of the
company, such that the shareholders should feel
proud of their company.
Responsibility to
• The payment of fair wages and
appropriate salaries.
• The provision of labor welfare facilities to
the extent possible and desirable.
• Arrangements for proper training and
education of the workers.
• Proper recognition, appreciation and
encouragement of special skills and
capabilities of the workers.
Responsibility to
• To improve the efficiency of the functioning of the
business so as to (a) increase productivity and reduce
prices, (b) improve quality, and (c) smoothen the
distribution system to make goods easily available.
• To do research and development, to improve quality and
introduce better and new products at reasonable prices.
• To take appropriate steps to improve the imperfections in
the distribution system, including black-marketing or
profiteering by middlemen or anti-social elements.

• To Provide the required after sales services.

• To provide sufficient information about the
products, including their adverse effects, risks,
and care to be taken while using the products.
• To avoid misleading the customers by
improper advertisements or otherwise.
• To provide an opportunity for being heard and
to redress genuine grievances.
• To understand customer needs and to take
necessary measures to satisfy these needs.
Responsibility to
• Taking appropriate steps to prevent
environmental pollution and to preserve the
ecological balance.
• Rehabilitating the population displaced by the
operation of the business, if any.
• Development of backward areas.
• Promotion of ancillarisation and small-scale
• Contributing to the national effort to build up a
better society.
Arguments for Social
• Changed Public Expectations of Business.
• Better Environment for Business.
• Public Image.
• Avoidance of Government Regulations.
• Balance of Responsibility with Power.
• Business has the Resources.
• Prevention is Better than Cure.
• Moral Responsibility.
• Citizenship Arguments.
• Duty of Gratitude.
Arguments against Social
• Profit Maximization.
• Society has to pay the Cost.
• Lack of Social Skills.
• Business has enough Power.
• Social overhead Cost.
Economic Problems that makes
India a developing country