Amity School of Business

MODULE – 1
Overview of business
environment

1
 Amity School of Business

Business environment
• That which envelops the business firm;
• consists of all those factors that have a bearing on the business.
• something external, beyond the control of an organization.
Points to note:
1. There exists a symbiotic relationship between business and its
environment; i.e, the business is influenced by its environment
and in turn, to a certain degree (and along with other firms) it
influences the environment.
2. The business environment always keeps changing (evolving).

2
 Amity School of Business

3. Therefore, the survival & success of a business firm depends upon

– its innate strength – resources at its command, physical
resources, human resources, skill and organisation;
– its adaptability to the environment;
– The extent to which the environment is favourable to the
development of the organisation;

Two set of factors affecting business: -

a) The internal factors (present inside the firm); and
b) The external factors (present outside the firm).

3
 Amity School of Business

What is business?
• Organised efforts of enterprises for the supply of goods and services in a
society and making profit in the process.
• An economic act, carried out by an organization to achieve some targets.

Importance of business
1. An important institution in the society. Business and society are dependent on
each other
2. Supplies goods and services
3. Creates employment
4. Contributes to the economic growth of a country

Characteristics of today’s business

1. Change: modern business is dynamic, new technologies, new products
2. Vastness: Mass production, mass marketing – fetching economies of scale to
the manufacturers and the resultant benefits getting passed on to the buyers.
 Amity School of Business

3. Diversification: is a form of growth strategy for a company. It

seeks to increase profitability through greater sales volume
obtained from new products and new markets. It also tends to
spread the dependency of the business on fewer products. Tata
group, a premier business house, is into iron & steel, fertilizers,
chemicals, automobiles, telecom, tea, shipping, hotels, information
technology, printing, & consultancy. Similar is the story of other
business groups as well.

There are three types of diversification: concentric, horizontal, and

conglomerate.

Concentric diversification refers to the process of adding new, but

related products or services. Hindustan Unilever Ltd. is the best
example of concentric diversification. In one line it has several
brands. e.g. in soaps, it has Lux, Liril, Lifebouy, Pears, Rexona,
Hamam, Breeze, Dove.
 Amity School of Business

Offering new and unrelated products or services to current customers

is called horizontal diversification. In a competitive environment, this
form of diversification is desirable if the present customers are have a
good image of the company’s products and if the new products have
good quality, well promoted and priced. In other words, this strategy
tends to increase the firm’s dependence on certain market segments.
e.g. in consumer non-durables, Hindustan Unilever is offering
products like soaps, shampoos, washing powder, hair oils,
moisturizing cream, ketchup, jams, tea, atta, salt, and ice creams to the
same set of customers.
Haldiram’s offerings like traditional Indian sweets, namkeens, and
syrups (thandai), alongside following a dual selling approach, i.e.
company-owned food outlets, and distributor-retailer system of
reaching to the consumers.
 Amity School of Business
Conglomerate diversification refers to adding new and unrelated
products or services that have no technological or commercial
synergies with current products, but which may appeal to new groups
of customers. Like the Anil Dhirubhai Ambani group’s presence in
varied areas like power generation and distribution, telecom services,
cinema production, DTH services, financial products like mutual funds,
and life insurance etc.
Main reasons of adopting such a strategy is to tap profitability existing in
different industries, risk diversification, and better reputation / brand
building as the company gets bigger.

4. Globalisation: going international is yet another feature of modern

businesses. Production facilities are being set-up in different countries
and products being sold world wide. Gradually, businesses are exposed
to global competition and risks. Technological innovations, crumbling
trade barriers, global flow of capital and technology, information
explosion, changing life styles, intensity of market competition, are all
strengthening globalisation of businesses.
 Amity School of Business

5. Science: an important force affecting business. Products / services

being demanded and offered, means of manufacturing and selling are
fast changing. This is primarily because of continuous development in
science and technology.
6. Information: Yet another characteristic of contemporary business is
the significance of information, which is key to success of every
business. Sources of information such as, internet, television, print
media etc. play a important role in business decision making. Further,
with the scientific advancement, the system of getting and giving
information, processing and storing data, preparation of effective
records and reports has also changed tremendously.
7. Government interference: makes laws, rules & regulations, polices,
levy taxes etc., thereby affecting business.
8. Competition: eliminate inefficiencies, cut down costs, improve
productivity, and offer competitively in market in order stay fit.
 Amity School of Business

• Business Environment consists of all the

factors that have an ability to impact the
way a business operates. All organizations
have certain missions, goals and
objectives which they seek to achieve by
means of Strategy. Strategy can be
viewed as actions trying to establish a
proper firm - environment fit.

9
 Amity School of Business

• The two sets of factors impacting business

decisions are
• 1. The Internal Environment
• 2. The External Environment

10
 Amity School of Business

• The internal factors are generally regarded

as Controllable factors, because the
company can alter or modify such factors.
The important internal factors are
1.Value System: The value system of the
founders and top management affects the
choice of business, mission, objectives,
business policies and practices. Value
system is shared by all in the company.
11
 Amity School of Business

• 2. Mission and Objectives: The mission

statement articulates the vision of the
founders and provides a general idea as to
the business domain, priorities , business
philosophy of the company.

12
 Amity School of Business

3. Management Structure and Nature:

consists of the organizational structure,
extent of professionalization of
management, shareholding pattern etc.

13
 Amity School of Business

4. Internal Power Relationship: The amount

of support the management enjoys from
relationships with various stakeholders in
the business.

14
 Amity School of Business

5. Human Resources: The skill, morale,

commitment, initiate, involvement,
willingness, quality, attitude of the work force
contribute to the overall environment of the
organization and provide it with the requisite
flexibility to engage in business.

15
 Amity School of Business

6. Company Image and Brand Equity: The

image of the company with its customers,
stakeholders etc which helps it in raising
finance, forming joint ventures, launching
new products etc.

16
 Amity School of Business

7. Miscellaneous Factors: Other internal

controllable factors like Physical assets,
R&D capabilities, marketing resources,
financial factors etc.

17
 Amity School of Business
Factors forming the Internal Environment:
1. Promoters / shareholders values
2. Mission & objectives
3. Management structure & nature
4. Internal human relationships
5. Physical assets and facilities
6. Financial factors / capabilities: financial policies, financial
position, capital structure etc.).
7. Human resources: skill, quality, morale, comittment, attitude etc.
8. Company image / brand equity : winning the customer, launching
new products, raising finance, forming joint ventures, soliciting /
maintaining business associates.
9. Technological Capabilities: company’s ability to innovate, use/
offer the latest & efficient technology for its advantage. 18
 Amity School of Business

External environment
• Consists of institutions, organizations and forces operating
outside the company.
• The external environment throws Opportunities and Threats
on to the business.
• The success of a business depends upon its successfully
grabbing (utilizing) the opportunities and countering the
threats by effectively leveraging its strengths and overcoming
its weaknesses.
• In other words, the survival and success of a business firm
depend on its ability to use resources at its command
(internal strength) and its adaptability to the external
environment.
19
 Amity School of Business
External Environment – has two layers

1. Micro (Task / operating) environment: consists of

actors in the company’s immediate environment, those
having a direct bearing on the performance of the
company. It includes customers, suppliers, competitors,
marketing intermediaries, publics etc.

2. Macro (General /Remote) environment: refers to larger

societal forces (economic and non-economic) those affect
all the actors in the company’s immediate environment,
including the company – namely, demographic, economic,
political, technological, cultural and legal. They influence
business activity in general.
20
 Amity School of Business

Factors effecting external environment of business

Micro external environment Macro external environment
• Customers • Domestic Macroeconomic
• Suppliers environment
• Competitors • International factors
• marketing intermediaries • Cultural factors
• Financiers • Political factors
• publics • Technological factors
• Legal factors
• Ecological factors
• Demographic factors
 Customer Amity School of Business

• Difference between Customer and consumer

• Identify, create, locate, way to reach, reach, sustain and monitor
customers
• Regular customer feedback
• Customer Relationship Management (combination of practices,
strategies and technologies that companies use to manage and
analyze customer interactions and data, improve customer service
relationships, promote customer retention and drive sales growth).
• Surpass customer expectations
• Different categories of customers (individuals / households,
industries, commercial establishments, institutions, govt.)
• Choice of customer segment (depending on profitability, stability
of demand, growth prospects, competition etc.)
• Domestic / global customer 22
 Amity School of Business

• Competitors- In the original business

world a company encounters various
forms of competition. The most common
competition which a company’s product
now faces is from differentiated products
of other companies.

23
 Amity School of Business

• Suppliers- the organisation can think of

availing the required material or labour
according to its manufacturing
programme. It can adopt such a purchase
policy which gives bargaining power to the
organisation

24
 Amity School of Business

• A public is any group that has an actual or

potential interest in or impact on a
company’s ability to achieve its
objectives.” The environmentalists,
consumer protection groups, media
persons and local people are some of the
well-known examples of publics.

25
 Amity School of Business

• 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

26
 Amity School of Business

Domestic Macroeconomic environment

• Type of economic system (market, command or mixed economy)
• GDP composition, growth, and distribution
• Saving rates, rate of interest, money supply, credit availability
• Capital stock, rate of capital formation
• Consumption demand, investment demand
• Rate of inflation
• Level of employment
• Exports, imports, exchange rates, balance of payments
• Economic policies of the govt.- planning / monetary / fiscal /
industrial / EXIM / Labour policies
• Trade cycles
27
 Amity School of Business

Determinants of International environment

• State of world economy
• Role of multilateral economic institutions (IMF,
World Bank, UN, ILO etc.)
• International economic laws and treaties
• Political system and conditions in countries
• International market structure and competition
• Barriers to international trade and investment

28
 Amity School of Business

Social / Cultural environment

• Culture is a set of socially accepted and shared set of beliefs, norms,
values and customs.
• Business has to regard cultural variables like social and religious
practices, community norms & beliefs, education, family & marriage.
• Differs among various population sub-groups causing differences in
perception of society & customers towards various products/services.
• E.g. in many societies non-vegetarian food, alcoholic drinks, beauty
parlours, fashion shows are despised whereas in others these are part
of normal life.
• Culture plays an important role in determining: the type of goods the
business is going to produce, work culture, employee productivity,
business negotiations, customer / public relations, social responsibility
of business, business ethics, human resource mgmt, scientific spirit.
 Political factors Amity School of Business

• Political environment refers to the influence exerted by the three

political institutions: legislature, executive and judiciary in shaping,
directing, developing and controlling business activities.
• A stable and dynamic political environment is prerequisite for the
growth of business.
• Type of political system and its attitude towards business also
matters a lot. The philosophy and approach of political party in
power substantially influences the business environment.
• Businesses have several risks associated with the political scenario:
Confiscation, Expropriation, Nationalization, Domestication,
General Instability risk, Operation risk, Transfer risk.

The risk is higher in absolutist, command economies. And also in

countries passing through economic, social or political crises. 30
 Amity School of Business

1. Consfication: when government forcibly possess ownership of a

property without compensation.
2. Expropriation: forcible possession of ownership by the govt.
followed by some compensation, which may not equal to market
value of the property.
3. Nationalisation: Also a compulsive process of transfer of ownership
and operations from private to public (govt.) hand. Compensation
more rational. E.g. nationalisation of commercial banks in India in
1969.
4. Domestication: when a foreign company is made to transfer, fully or
partly, ownership and control of its domestic affiliate to domestic
nationals. In India under FERA (1973) the MNCs were forced to
dilute 40 % of their equity in their Indian affiliates to Indian public /
institutions.
31
 Amity School of Business

1. General Instability Risk: uncertainty with regard to the

viability of the existing political system.
2. Operation risk: The risk arising from the possibility that the
govt. might in future restrict the operations of the firm in
marketing, finance, production, or in certain geographical
locations.
3. Transfer risk: It arises from the possibility of any future act of
the govt. by which it restricts transactions or transfer of funds or
profits between subsidiaries of a firm or from a subsidiary to the
parent company. The risk is more prominent in cases where the
subsidiary and its parent are located in different countries.

32
 Technological environment
Amity School of Business

• J.K. Galbraith defines technology as a systematic application of

scientific or other knowledge to practical tasks.
• Technology includes the tools, & machines (hard technology) and
ways of thinking (methods / soft technology) to perform certain
tasks efficiently, solve problems and promote societal progress.
• Technology has developed immensely during the past 150 years.
• A few benefits of technology – conquer distances, communications,
space research, healthcare, generate / preserve / distribute energy,
discover / invent newer and better products & services, development
of computers, biotechnology, etc.
• Features of technology – (a) change and then more change; (b)
widespread effects; (c) self-reinforcing, i.e. it acts as its own
multiplier – e.g. invention of wheel led rather quickly to a number of
more applications.
33
 Amity School of Business

• Technology is one of the important determinants of success of a

firm.
• It reaches people through business in form of goods and services.
Technological factors may increase or decrease the demand for
some existing products in the market.

• It results into high expectations of consumers for better goods /

services at affordable price. Drives businesses to continuously
work on product and process innovations, which, in turn, is
possible from investment in technology through R & D.

• System complexity & integration – technology has resulted in

making systems across the spectrum of economic activity more
complex and integrated. e.g failure of power supply affects other
areas of the system – will cause taps dry, affect traffic signals,
suspend elevators between floors, dark streets and so on.
 Amity School of Business

Impact of technology on businesses

• Increased productivity (both quality and quantity)
• Allocation of resources on Research and Development (R&D)
• Jobs tend to become more intellectual (upgraded)
• Resistance to change (among employees / managers / owners)
• Problems of technostructure
• Multi-professional Managers
• Increased Regulation
• Increased demand for Capital
• Rise and decline of products and organisations
• Business boundaries redefined
 Amity School of Business
Legal Environment of Business
• Every aspect of business is regulated by law in India. Legal system of a
country has a profound impact on decisions concerning both investment and
operations in business as it touches the very existence and legality of business
firms. Hence legal environment plays a vital role in business.

The broad areas covered by business legislation include: -

• industrial licensing, company formation, factory administration, industrial
disputes, payment of wages, trade unionism, monopoly control, forex
regulation, shops and establishment, product counterfeiting, gray markets,
taxes etc.
• Industrial development and regulation – licensing and registration of
industries; prices and output regulation, mergers, acquisitions and takeovers,
location of industries;
• Forex management
• Consumer protection – covering consumer rights, consumer disputes,
complaints and grievance redressal system;
 Amity School of Business

Essential commodities – their supplies, prices, and quality

Weights, measures and packaging – standard units, packaging norms,
declarations and inspection.
Patents & copyrights– application procedure, life of a patent, rights of
patent / copyright owners, infringement of patents / copyrights, claim
procedure and settlement;
Labour – employment norms / rules, employee insurance, payment of
wages / salaries, bonuses / gratuity / PF, disciplinary matters, disputes;

Changes in legal environment are caused by legislative changes /

amendments / and introduction of new laws. Business firms are also
affected by the speed with which justice is delivered. Professionally
managed companies give importance to legal conformity in their
business operations.
 Amity School of Business

Ecological Environment
• Ecology deals with the study of the
environment, biotic factors (plants,
animals, micro organisms), abiotic factors
(water, air, sunlight, soil) and their
interactions with one another.
• Protection of the environment and
preservation of ecological balance is the
responsibility of every business
organization.
38
 Amity School of Business

Demographic environment
• Demography includes population,
population density, sex ratio, fertility and
mortality rates, age composition, life
expectancy and geographical distribution
of population.
• Demographic factors are important basis
for market segmentation and product
positioning for marketers.

39