UNIT-1

Business Environment

Definition Of Business
The term business is understood and explained in different
ways by different people.
For some, business is an activity, for some it is a method of
transacting, for some others, it is a method of money making
and some people argue that business is an organized activity
to achieve certain predetermined goals or objectives.
Dictionary meaning of business is: the act of buying and
selling of goods and services, commerce and trade. Based on
all these meanings of business, we may define business as:
gainful activity through which various elements of society
conduct exchanges of the desirable things.
 Definition Of Business Environment
“The total of all things external to firms and industries
which affect their organization and operation”—Bayard O.
Wheeler

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.
 Types Of Environment

The business environment poses threats to a firm or offers

immense opportunities for potential market exploitation.
The business is determined by two factors namely:
1. Micro environment or internal factor or endogenous
factor.
 2. Macro environment or external factor or exogenous
factor
Micro Environment
Micro environment relates to internal matters of business
such as:
Ք Structure of business
Ք Size of the business
Ք Policy relating to business
Ք Product produced
Macro Environment Or Business Environment Or
External Environment
Demographic environment
Ք Economic environment
Ք Geographical and ecological environment
Ք Legal environment
Ք Technological environment
Ք Social environment
Ք Cultural environment
Ք Political environment
Features of Business Environment:

Feature # 1. Environment is Dynamic:

Feature # 2. Environment is Multi-Dimensional:

Feature # 3. Environment is Complex:

Feature # 4. Environment Affects Organization:

 Components of Business Environment
 The environment of organization can be divided into two parts:
1. External Environment
2. Internal Environment
The external environment also known as Macro Economic environment
includes those factors which are not in much control of organization.
The internal environment is known as Micro Economic environment includes
those factors which are in some control of organization.
An external environment provides the opportunities and threats, and the internal
environment needs the understanding of the strengths and weaknesses for the
existence, growth and profitability of any organization.
A systematic approach to understand the total environment is known as SWOT
(Strengths, Weaknesses, Opportunities and Threats) Analysis.
Business firms undertake SWOT analysis to understand the external and internal
environment. SWOT analysis helps to understand organization’s existing
strengths and weaknesses and accordingly organization analyze the opportunities
and threats in the environment so that an effective strategy can be formulated.
 Significance of Business Environment
A study
  of business environment is highly significant for management for
the following reasons:

(i) Smooth functioning of business cycle depends on availability of inputs and

disposal of output. Business enterprises obtain inputs like raw-materials,
machines, technology, manpower etc. from the society (which is part of
business environment); and dispose of output i.e., finished goods to society.

(ii) A study of business environment is essential to take full advantage of

opportunities for gain hidden in the business environment.
Some examples of opportunities for gain might be:
a. Export concessions offered by the government.
b. Rising demand for many products (due to expanding markets)
c. Availability of skilled man-power (clue to rising levels of education in
society).
d. Availability of latest technology.
(iii) Legal – regulatory factors are an important
dimension of business environment. By studying
business environment intelligently, management can
avoid legal consequences which many arise due to non-
adherence to legal provisions applicable to the business
enterprise. It is better to swim with the current than
against it.

(1v)By studying business environmental factors

(particularly competitive and technological);
management can ensure better competitiveness and
higher profitability for the business enterprise.
(v) A study of business environment is a great aid in ensuring survival
and growth of the business enterprise amidst volatile and turbulent
environmental factors (Volatile and turbulent factors are those which are
re likely to change suddenly and easily becoming dangerous). For
ensuring survival and growth under the circumstances management can
do better planning; introduce organisational flexibilities; come out with
innovations; resort total joint ventures and merges or follow a policy of
systematic adaptation (These concepts are explained in the next sub-title
i.e., managerial response to changes in business environment).

(vi) By studying business environment, management can plan to better

meet social responsibilities and add to the prestige and goodwill of the
business enterprise.
 
(vii) By studying social-religious-cultural factors; business management
can capitalise on (i.e., to take advantage of) changing social values like
emerging fashions, craze for a higher standard of living (creating demand
for new types of luxurious goods/services) etc.
 Micro-Environment
Micro Environment consists of the factors in the company's
immediate environment. These factors affects the performance
of the company and its ability to serve the customers.

Internal Environment: Internal Environment refers to the

factors existing within a business firm. These internal factors
are considered to be controllable because the enterprise has
control over these factors. The main internal factors which
influences Business Decisions are as follows:
i)Culture: The values, beliefs and attitudes of the founder and
top management of the company exercises a strong influence
on what the company stands for, how it does things and what
it considers important. When the value system is shared by all
the members, the organization is likely to be more successful.
ii)Mission And Objectives: The Objectives of all the firms is assumed to
be Profit Maximization in the long run. But Mission is different from this
narrow objective of profit maximization. Mission is defined as the
overall purpose or reason for existence which guides and influences a
firm decisions and economic activities.
iii)Top Management Structure: The structure of the organization also
influences the business decisions. The composition of the board of
directors, the degree of professionalization of management and the
organizational structure of a company have a important bearing on its
business decisions.
iv)Power Structure: The internal power relationship between the board of
directors and the Chief Executive Officer is an important factor. The
extent to which the top management enjoys the support of shareholders
and employees at different levels, also has an important bearing on
decision making.
vs)Company Image And Brand Equity: The image and Brand Equity of
the company plays a very important and significant role in raising
finance, forming alliances, choosing dealers and suppliers etc.
External Environment: External Environment refers to
the factors existing outside a business firm. These External
factors are considered to be uncontrollable because the
enterprise has No or Partial control over these factors.
a)Customers: Customers constitutes an important segment
of the micro environment. Customer is the king of the
market and every business exists to serve its customers. A
business has no meaning until and unless there are
customers to serve.
b)Suppliers: Suppliers are the person who supply various
inputs such as money, raw material, fuel, power etc. and
help in the smooth conduct of business. Further, firms
should have more than one supplier so that changes in the
policies of one supplier does not effect their production
schedules
c)Competitors: Competitors form an important part of the Micro
Environment. Business Firms compete to capture a larger share in the
market. They constantly watch the competitors policies and adjust their
policies to gain customer confidence.
d)Intermediaries: Market intermediaries are either individuals or
business houses who come to the aid of the company in promoting,
selling and distributing the goods to the ultimate consumers. They are
Middlemen (wholesalers, retailers and agents), distributing agencies,
market service agencies and financial institutions. 
e)Shareholders: They own shares of the company, so they are actually
owners of the company in a way. This means they get a say in the
running of a company. Shareholders will also demand a return on their
investment. So it is the company's duty to earn profits and pass on this
benefits to the shareholders.
 Macro Environment:
The Macro Environment consists of the Economic and Non-
Economic variables that provide opportunities and threats to
firms. This is largely uncontrollable and therefore, firms must
adjust their operations to these environmental factors. Macro
Environment consists of the following:

a)Political Environment: Political Environment consists of the

elements relating to government affairs. The political environment
provides the framework within which business has to function.
b) Economic Environment: The Economic Environment consists
of the economic forces that affects the business activities. These
forces influences the buying behavior and spending patterns of
consumers and institutions.
c)Social And Cultural Environment: Social Environment refers to the
characteristics of the society in which a business firm exists and operates. The
main components of social and cultural environment are:
 Demographic Forces: includes Size, Composition and Mobility of
Population.
 Social Institutions and Groups.
 Caste Structure and Family Organisation.
 Educational System and Literacy Rate.
 Customs, beliefs, values and life styles.

d)Technological Environment: Technology is changing at a fast pace and

technological environment is dramatically affecting the business environment
either due to easy import policies or because of technology up-gradation. The
main components of Technological Environment are:
 Rate of Technological change and Diffusion.
 New approaches to the production of goods and services.
 Use of New processes and equipment.
 Transfer of Foreign Technology.
ASSIGNMENT:

Legal Environment
Natural Environment