INTRODUCTION TO BUSINESS

ENVIRONMENT
WHAT DO YOU MEAN BY BUSINESS
ENVIRONMENT???

 The term Business Environment is composed of two

words ‘Business’ and ‘Environment’.
 Business in its economic sense means human
activities like production, extraction or purchase or
sales of goods that are performed for earning profits.
 Word ‘Environment’ refers to the aspects of
surroundings.
 Therefore, Business Environment may be defined as
a set of conditions – Social, Legal, Economical,
Political or Institutional that are uncontrollable in
nature and affects the functioning of organization.
 WHAT DO YOU MEAN BY BUSINESS
ENVIRONMENT???

The environment of any organization is “ the

aggregate of all conditions, events and influences
that surround and affect it.”
Characteristics of Business Environment:
 Complex

 Dynamic

 Multi-faceted

 Far- reaching impact

WHY STUDY BUSINESS ENVIRONMENT
 Development of broad strategies to ensure
sustainability

 Toforesee the impact of socio-economic changes at

the national and international levels on firm’s
ability

 Analysis of competitor’s strategies and formulation

of effective counter measures

 To keep oneself dynamic

TYPES OF ENVIRONMENT
 InternalEnvironment
 External Environment
 Micro environment
 Macro environment
Economic

Non Economic
 INTERNAL ENVIRONMENT
It includes 5 Ms i.e.

Man,

Material,

Money,

Machinery and

Management,

Usually within the control of business. Business can make changes in these
factors according to the change in the functioning of enterprise.
EXTERNAL ENVIRONMENT
 Includes all factors outside the organization
which provide opportunities or pose threats to
the organization

 Uncontrollable factors

 Consists of Micro and Macro environment

MICRO ENVIRONMENT

“It consists of the factors in the

company’s immediate environment
that affect the performance of the
company”.
MICRO ENVIRONMENT FACTORS

Suppliers
Customers
Marketing Intermediaries
Competitors
Public
Financial Community
MICRO ENVIRONMENT OF A TYPICAL CAR
MANUFACTURER

Potential
Supplier Components
Supplier

Local Potential
Communities Customers

Stakeholders Customers
Customers

Pressure Car
Groups Manufacturer

Government

Potential
Competitors Car Dealers Dealers

For For
Customers Supplies
MACRO ENVIRONMENT
It comprises general trends and forces that may
not immediately affect the organization but
sooner or later will alter the way organization
operates.

Macro Environment :-
 Economic

 Non Economic
ECONOMIC ENVIRONMENT
 Economic stages that exists at a given time in a country
 Economic system that is adopted by a country for example.
Capitalistic, Socialistic or Mixed Economy
 Economic planning, such as five year plans, budgets, etc.
 Economic policies for example, monetary, industrial and fiscal
policies
 Economic Indices such as National Income, Per Capital
Income, Disposable Income, Rate of growth of GNP,
Distribution of Income, Rate of savings, Balance of Payments
etc.
 Economic Problems
 Functioning of economy
NON ECONOMIC ENVIRONMENT

 Regulatory Environment

 Socio- Cultural Environment

 Demographic Environment

 Technological Environment

 Political Environment
NON- ECONOMIC ENVIRONMENT
 Cultural Environment

 Social Customs & Rituals and practices

 Lifestyle patterns

 Family structure

 Role & position of men, women, children and aged in

family & society
NON- ECONOMIC ENVIRONMENT
 Demographic Environment

 Growth of population

 Age Composition

 Life Expectancy

 Sex Ratio

 Fertility and Mortality rates

 Inter-state migration
MACRO ENVIRONMENT
 Technological Environment
 Sources of technology
 Technological development
 Impact of technology
 Political Environment
 Political parties in power
 Political Philosophy
MACRO ENVIRONMENT
 Regulatory Environment

 Constitutional framework

 Policies relating to pricing and foreign investment

 Policies related to the public sector, SSIs,

development of backward areas and control of
environmental pollution
INTERNATIONAL ENVIRONMENT
Important factors that operate at global level which have an impact on
organization are:

 Growth of world economy

 Distribution of world GDP

 International institutions IMF,WTO ILO

 Economic relations between nations

 Global human resource-nature and quality of skills, mobility of labor

 Global technology and quality standards

 Global demographic patterns

 WTO AND ITS RELEVANCE FOR
INDIAN COMPANIES
The main guidelines of WTO are:
 Trade without discrimination
 Growing market access
 Promotion of fair competition

The response of Indian government to WTO

constitutes the following actions
 Reduction of tariffs
 Opening Indian markets for Global Players
 Rationalizing industrial licensing and removal of
controls on the size of operations
WTO AND ITS RELEVANCE FOR INDIAN
COMPANIES

The impact of WTO on Indian companies is likely to

include the following :
 Increasing competition

 Consolidation of activities in core competence

areas
 Improvements in infrastructure to negate
structural disadvantages.
 Shake out of minor players and M&As to gain
global scale.
 OVERVIEW OF BUSINESS ENVIRONMENT

MACRO ENVIRONMENT

ECONOMIC
Environment

MICRO ENVIRONMENT

BUSINESS

Internal Environment

Values,
Mission & Objectives.
TECHNOLOGICAL Human Resources,
FACTORS Co. Image & Brand Equity

DEMOGRAPHIC
FACTORS
MARKETING
INTERMEDIARIES SOCIAL
CULTURAL
FACTORS

Non - Economic
Environment
ENVIRONMENTAL ANALYSIS
Environmental Scanning
The process by which organizations monitor
their opportunities and threats affecting
their business is known as environmental
scanning

SWOT Analysis
TOOLS FOR ANALYZING THE
ENVIRONMENT
 PEST Analysis
 PESTLE
 STEEPLE
 S - Social
 T - Technological
 E - Economic
 E - Environmental
 P - Political
 L - Legal
 E - Ethical
GLOBAL COMPETIVENESS INDEX
 The World Economic Forum has ranked 139
economies in its 2010-2011 Global
Competitiveness Report.
 In overall competitiveness India scores a
passable 51st place. It ranks notably ahead of
Latin America’s powerhouse Brazil (58) and way
ahead of its neighbors Pakistan (123), Sri Lanka
(62) and Bangladesh (107), but behind China
(27).
 Switzerland tops the chart and USA is on 4th
position due to economic instability from 2007-10
DELHI TOPS 2010 RANKING OF INDIA'S MOST
COMPETITIVE CITY

 Chennai cornered the second position in the list ahead of

Mumbai , which dropped to third place from second position
last year.

Chennai's ranking improved on the back of good performance

under all the sub-indices used to benchmark the cities,
particularly its educated workforce and logistics
infrastructure, while Mumbai's fall was primarily due to the
worsening state of its physical infrastructure.

Bengaluru is at fourth place in the list, followed by Kolkata,

Hyderabad , Ahmedabad, Pune, Nagpur and Jaipur.

 Ahmedabad and Pune have emerged as the most competitive

tier-two cities in India.
QUESTIONS FOR CASE STUDY
Prepare the environmental threats and opportunity profile
(ETOP) for Arvind Mills.

Prepare the strategic advantages profile (SAP) for Arvind

Mills.

On the basis of ETOP and SAP, propose strategic

alternatives before Arvind Mills.

List down all components of Internal & External

Environment of Arvind Mills & identify its strengths &
Weaknesses
GLOBALIZATION
 It
is a phenomenon which permits mobility of
factors of production across globe except land.

 Refersto a process of deepening economic

integration, increasing economic and growing
economic interdependence between countries in
the world economy.
ECONOMIC SYSTEMS

 Capitalism: Adam Smith & The Wealth of

Nations (1776)

 Communism: Karl Marx & Das Kapital (1886)

 Mixed Economy
THE FREE MARKET OF ADAM SMITH
“The uniform, constant and uninterrupted effort of
every man, to better his own condition, the
principle from which national and public as well as
private opulence is originally derived, is frequently
powerful enough to maintain the natural progress
of things toward improvement, in spite both of the
extravagance of government, and of the greatest
errors of administration.”

- Adam Smith
HOW DOES THIS HAPPEN?
Buyers and sellers negotiate prices in a free market
and carry out transactions of buying and selling
that leave all parties mutually better off.
CAPITALISM

 System based on Free market

 Capital: owned by a minority of individuals
 Private Property rights: legal right to use this
capital for private gain
 Market system (Supply & Demand factors)
 To determine distribution of goods & services
 To allocate resources
 To establish income levels, wages, rents & profits
 Govt. Role is limited
 Ex: USA, UK etc.
A STARTLING IDEA
Economic order can emerge as the
unintended consequence of the actions of
many people, each seeking his own
interest.

-Milton Friedman
 COMMUNISM
ACCORDING TO MARX

 The natural evolution of communism after

capitalism

 State owns all factors of production and

distribution. Ex: Cuba

 The workers reap the profits from their labor

rather than subsistence wages
QUESTION?

 Why did the people of the United States

choose markets as the means to organize
economic activity?
MIXED ECONOMY
 India’s experience since the First Five Year Plan
 Equal importance to private and public sector.
However, major factors of production and
distribution are owned and managed by the
state.
 Success or Failure?…Debatable issue

Ex: India, France and Holland

POVERTY
 Absolute Poverty:

Measured as total number living below a

specified min level of real income/poverty
line(people who are unable to satisfy basic
needs)
HUMAN POVERTY INDEX (HPI)
 UNDP HPI measures poverty in terms of 3
deprivations-of life(percentage of people unlikely
to live beyond 40 years),of basic education(as
measured by % of adults who are illiterate), & of
overall economic provisioning(% of people without
access to health services & safe water+% of
under-weight children under 5)
[Source:HD report 2001, UNDP]
POVERTY CHARACTERISTICS
 Rural Poverty, Women & Poverty, Ethnic Poverty
 Rural Poor as % of population is 79%(India),
80%(Malaysia), 37% (Mexico), 96%(Kenya).
 Women make up majority of world’s poor.

 Minority ethnic groups are poor (Latin America

etc.
 INCOME DISTRIBUTION AND
PLANNING - POLICY OPTIONS

1. Altering the distribution of income to change

factor prices (eg: relative price of labor, ensuring
min.wages)
2. Progressive Distribution of Asset Ownership
(Classic case: Land reforms): Purpose is to
transform tenant cultivators into small holders
who will then have incentive to raise production
and improve their income.
INCOME DISTRIBUTION AND
PLANNING - POLICY OPTIONS
3. Reducing income distribution at the Upper levels
through progressive income and wealth taxes
(Rich required to pay larger % of their income in
taxes than poor and high indirect taxes on
cigarettes and beer)
4. Direct Transfer Payments & Public Provision of
Goods and services (Ex: Public Distribution
system in India). Subsidies for farmers, Pension
and policies to keep price of essential foodstuffs
low.
INDIAN SCENARIO
The impact of planning strategy of the last 2
decades on social sector indicate significant
improvements - yet, there is need to improve the
quality of life. Govt expenditure for social services
has more than doubled from Rs.11,631 crore in 95-
96 to Rs.35,478 in 03-04. As per the Planning
commission estimates, there was a significant
decline in proportion of people living below poverty
line, from 51.3% (77-78) to 26.1% (99-00).
 ECONOMIC GROWTH AND DEVELOPMENT
GDP AND GNP:
GDP is the basic measure of national output and economic
growth. GDP is the value of all final goods and services
produced within the country’s geographical territory,
irrespective of the ownership of resources.

GNP consists of income produced by the country’s owned

resources, irrespective of the place of production. For ex:
Indian Software Professional’s (working in US) salary in
US is part of US GDP while Citibank’s income in India is
India’s GDP.
 TRADITIONAL TOOLS TO MEASURE
ECONOMIC GROWTH
1.Gross Domestic Product/Gross National
Product

2. Per Capita Income : Growth of Per Capita

national income takes into account the ability
of a nation to expand its output at a rate faster
than the growth of its population.
CHARACTERISTICS OF DEVELOPING NATIONS

 Low levels of living characterised by low income,

inequality, poor health and inadequate education.
 Low Levels of Productivity
 High Rates of Population growth
 Substantial dependence on agricultural production
and primary-products exports
 Prevalence of imperfect market
 Dominance, dependence and vulnerability in
international relations
ECONOMIC DEVELOPMENT
 Improvement in Quality of life, ie, better
education, less poverty, higher standards of
health etc. Development must be conceived as a
multi-dimensional process with improvement in
social indicators. Most common way to define the
developing world is by Per Capita Income. Best
known system is that of World Bank. World Bank
has ranked countries by their levels of Gross
National Income per Capita.
MEASURING GROWTH AND
DEVELOPMENT

 Per Capita Income

 Human Development Index (first published in 1990
by UNDP). HDI is a measure of a desired standard
of living that has a value between 0 and 1. HDI
takes into account 3 major factors:
a. Life Expectancy at birth (Healthy Life)
b. Levels of educational attainment
c. GDP per capita
HDI RANKING, SCORE AND
PER CAPITA INCOME (PPP)

Country HDI Rank HDI Score Per capita

Income (USD)
India 127(127) 0.595 2248
China 85(92) 0.718 3617
S.Africa 120(71) 0.702 8908
Oman 71(38) 0.747 13356
Kuwait 44(30) 0.818 17289
UK 15(20) 0.923 22093
Source: Human Development Report, 2005, UNDP (Rank of the country
based on PCI is given in bracket)
PER CAPITA INCOME RANK – HDI RANK

 India 0
 China +7
 S.Africa –49
 Oman –33
 Kuwait –14
 UK +5
(A +figure indicates that HDI Rank is better than the
real GDP per capita rank, -ve indicates the opposite).
HDI, GDI, GEM

 HDI value lies between 0 and 1. HDI is

constructed using variables life expectancy at
birth (health), literacy and mean years of
schooling (Education) and per capita income.
 GDI (Gender Development Index) and
GEM(Gender Empowerment Measure)
introduced by UNDP in 1995. GDI is simply, the
HDI adjusted downwards for gender inequality.
 GEM

 “GEM’ indicates whether women are able to

actively participate in economic and political life.

The variables used for construction of GEM are

a)% of seats held in parliament for women, b) %

of women administrators and managers c) % of

women as professional workers

HDI AND GDP PER CAPITA RANKS
(COUNTRY-WISE)

 (GDP Per capita rank in brackets)

 Canada 5(8), France 16 (15),Norway 1(9), USA 10(3), The

Netherlands 12(19), Japan 11(7) Switzerland 7(4) Saudi
Arabia 77(41), Nigeria 158(173)
 Brazil 63(68), Denmark 14(10), Germany 20(16), Ireland
8 (25)
 Source: Human Development Report, UNDP
 HDI AND GEM VALUES(GEM IN
BRACKETS)

 Srilanka 0.71(0.31), India 0.45(0.23), Pakistan

0.45 (0.19)
 UAE 0.86 (0.24), Kuwait 0.84 (0.33),

 Egypt 0.61(0.27), Moroco 0.57(0.30)

 OECD Countries - Canada 0.96(0.70), France

0.95(0.45), Norway 0.94 (0.78)
 USA 0.94 (0.67),Sweden 0.93 (0.78)
 INTERSTATE RANKS (PCI & HDI) IN
INDIA

 Punjab 1(2), Haryana 2(4), Kerala 10(1),

Maharashtra 3(3), Gujarat 4(5), TN 8 (7),
Karnataka 6 (6), W.Bengal 7(9), AP 5 (10)
 MP 13 (14), Orissa 14(13), UP 15(17), Rajastan
11 (12), Bihar 16(15)
 References: Human Development Reports-UNDP
Publication, India Development Report-IGIDR
PHASES OF THE BUSINESS
CYCLE
BUSINESS CYCLE
 Definition: alternating increases and decreases in
the level of business activity of varying amplitude
and length
 How do we measure “increases and decreases in
business activity?”
 Percent change in real GDP!
BUSINESS CYCLE
 Why do we say “varying amplitude and length?”
 Some downturns are mild and some are severe
 Some are short (a few months) and some are long
(over a year)
 Do not confuse with seasonal fluctuations!
REAL GDP 1958-2007, IN 2000 DOLLARS
 Note: “Years” is on horizontal axis and “real GDP”
is on vertical axis.
 General trend of economic growth
 Recession years are shaded blue: note downward
slope on graph indicating that GDP is decreasing.

Note: Shaded areas indicate recessions.

U.S. real gross domestic product per person
from 1900 to 2004
 THE PHASES OF THE BUSINESS
CYCLE

Expansion Recession Expansion

Total Output

Peak

Trough

0 Jan.- Apr.- July- Oct.- Jan.- Apr.- July- Oct.- Jan.- Apr.-
Mar June Sept. Dec. Mar June Sept. Dec. Mar June

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

LONG-RUN ECONOMIC GROWTH

Secular long-run growth, or long-run growth, is the

sustained upward trend in aggregate output per person
over several decades.
A country can achieve a permanent increase in the
standard of living of its citizens only through long-run
growth. So a central concern of macroeconomics is what
determines long-run growth.
 THE CONVENTIONAL THREE-PHASE
BUSINESS CYCLE

Peak

Peak
Peak Prosperity

Trough Trough

2005 2010 2015

Year

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 10-4
RECESSION
 What is a recession?
 Generally, 2 or more quarters of declining real GDP
 Implication: it’s not officially a called a recession
until the economy has already been declining for 6
months!
 Who decides when we’re in a recession?
 National Bureau of Economic Research traditionally
declares recessions
 Private research organization, not a federal agency

 Recession dates from peak of business

 Post-World War II Recessions*

*The February 1945–October 1945 recession began before the war ended in August 1945.

Note: These recessions were of varying duration and severity.

ANOTHER LOOK AT EXPANSIONS AND
RECESSIONS

Can you find a pattern? Neither can economists! That’s why

recessions are hard to predict.