ECONOMIC ENVIRONMENT OF
BUSINESS
MBA / MBA (IB) CP-203
Uzair Khan, PhD candidate
Interntional Organization Division,
School of International Studies, JNU, New Delhi
UNIT ONE
• Business Environment: Meaning, Nature and Significance - Economic and non-economic
environment of business;
• defining competitive business environment;
• macroeconomic variables' effect on business;
• “Laissez faire” to government intervention and back in economic activities and consequences for
business.
• Business Environment refers to all those internal and external factors
which impact the functioning/performance of a firm and/or its decision-
making, particularly strategies. Although the scope of the term business
environment includes, in a broad sense, both internal and external
factors impacting the business (i.e., internal and external environments)
in its common usage it often refers to the external factors.
• Keith Davis defines business environment as “the aggregate of all
conditions, events and influences that surround and affect business.”
• According to Bayord O. Wheeler, business environment refers to “the total
of all things external to firms and industries which affect their
organisation and operation”.
• In the words of Arthtur M. Weimer, “business environment encompasses
the climate or set of conditions, economic, social, political, or
institutional in which business operations are conducted”.
INTERNAL ENVIRONMENT
• Value System
o The value system of JRD Tata and the acceptance of it by others whose matter were
responsible for the voluntary incorporation in the Articles of Association of TISCO, its
social and moral responsibilities to consumers, employees, shareholders, society and
the people.
o After the EID Parry Group was taken over by the Murugappa Group, one of the most
profitable businesses (liquor) of the ailing Parry Group was sold off as the liquor
business did not fit into the value system of the Murugappa Group.
o Infosys Technologies Limited- " Wealth creation for employees"
• Human Resources
o Eg- H1B Visa
• Miscellaneous Factors
o Physical Assets and Facilities
o R&D and Technological Capabilities
o Marketing Resources
o Financial Factors
• Vision, Mission and Objectives : Vision, mission and objectives set the scope, direction,
philosophy and pace of development
o Ranbaxy’s thrust into the foreign markets and development were driven by its mission “to
become a research-based international pharmaceutical company”
EXTERNAL ENVIRONMENT
• the external business environment consists of a micro environment and a macro
environment.
• Micro Environment “The micro environment consists of the actors in the
company’s immediate environment that affect the performance of the
company".
• Macro Environment : The macro environment consists larger societal forces that
affect all the actors in the company’s micro environment — namely, the
demographic, economic, natural, technical, political and cultural forces.”
MICRO ENVIRONMENT
In the words of Philip Kotler, “micro environment consists of the actors in company’s immediate environment that
affect the performance of the company.”
Micro environmental factors exercise a direct and intimate influence on the operations of the enterprise. Therefore, it
is also known as Direct Action Environment or specific forces or Stakeholders.
• Suppliers
o Supply chain management is critical to the efficiency of a firm.
• marketing intermediaries
o Different marketing intermediaries can be very helpful in formulating and operationalising the marketing strategy.
• Competitors
• customers
o In choosing the customer segments, a company should consider such factors as the relative profitability, dependability,
stability of demand, growth prospects and the extent of competition.
• and the publics.”
o Growth of consumer publics (like NGOs) is an important development affecting business
o Non-government organisations (NGOs), particularly in developed countries, have been mounting up protests against
child labour, sweat labour, cruelty against animals, environmental problems, deindustrialisation resulting from imports
and so on.
MACRO-ECONOMIC FACTORS
MACRO ENVIRONMENT
• a) Technological Environment :
o Technology is understood as the systematic application of scientific or other organized
knowledge to practical tasks. Technology changes fast and to keep pace with it, businessmen
should be ever alert to adopt changed technology in their businesses. Eg AI/Tech policy in
Biden and Trump Era
• b) Economic Environment There is close relationship between business and its economic
environment. Business obtains all its needed inputs from the economic environment and it absorbs
the output of business units.
o if the cost of the imported components increases substantially because of the
depreciation of the domestic currency, a solution may be their domestic
manufacture.
o Fertilizer Import impact on Forex
o US approach is helmed by capital markets willing to back riskier ideas, while
Europe has traditionally been a banking-system led one.
• c) Political Environment It refers to the influence exerted by the three political institutions viz.,
legislature executive and the judiciary in shaping, directing, developing and controlling business
activities. A stable and dynamic political environment is indispensable for business growth.
• d) Natural Environment Business: an economic pursuit of man, continues to
be dictated by nature. To what extend business depends on nature and what
is the relationship between the two constitutes an interesting study.
• e) Global or international Environment : The global environment refers to
those global factors which are relevant to business, such as the WTO
principles and agreements; other international
conventions/treaties/agreements/ declarations/protocols etc.; economic and
business conditions/sentiments in other countries etc. Similarly, there are
certain developments, like a hike in the crude oil price, which have global
impact.
o Impact of COP 29 on business entities
• f) Social and culture Environment: It refers to people’s attitude to work and
wealth; role of family, marriage, religion and education; ethical issues and
social responsiveness of business.
o Tata group donates 5Cr to IISc for a medical college.
FOLLOWING ARE THE MAJOR DIFFERENCES
BETWEEN MICROECONOMIC AND
MACROECONOMIC FACTOR:
Aspects Macroeconomic Factor Microeconomic Factors
These are the factors that impact a
Meaning These factors impact a smaller population.
larger population.
Deals with an entire economy like Deals with factors impacting individual
Scope
a country or a region. consumers, firms, and markets.
To understand how a nation
To understand how producers and
allocates its resources and
Goals consumers allocate their scarce resources
maintains the overall economic
to obtain maximum benefits.
health and stability.
•Inflation •Demand
•Interest Rates •Supply
Factors
•GDP •Price Determination
•National Income •Individual Income and Savings
Government bodies use these
Businesses use these factors to decide
Uses factors to formulate monetary and
their production and pricing level.
COMPETITION IN INDUSTRY
• According to Michael Porter’s well-known model of structural analysis of
industries, the state of competition in an industry depends on five basic
competitive forces, viz.,
o 1. Rivalry among existing firms
o 2. Threat of new entrants
o 3. Threat of substitutes
o 4. Bargaining power of suppliers
o 5. Bargaining power of buyers.
IMPORTANT COMMON ENTRY BARRIERS:
• 1. Government Policy: In many cases government policy and regulation are important entry
barriers. For example, prior to the economic liberalization in India, government dictated entry
barriers were rampant, like reservation. of industries products for public sector and small scale
sector, industrial licensing, regulations under MRTP Act, import restrictions, restrictions on foreign
capital and technology etc.
• 2. Economies of Scale: Economies of scale can deter entry in two ways: it keeps out small
players and discourages even potentially large players because of the risk of large stakes.
• 3. Cost Disadvantages Independent of Scale: Entry barrier may also arise from the cost
advantages, besides that of economies of scale, enjoyed by the established firms which cannot be
replicated by new firms, such as proprietary product technology, learning or experience curve,
favorable access to raw materials, favorable location, government subsides etc.
• 4. Product Differentiation: Product differentiation characterized by brand image, customer
loyalty, product attributes etc. may form an entry barrier forcing new entrants to spend heavily to
overcome this barrier.
• 5. Monopoly Elements: Proprietary product / technology, monopolization / effective control over
raw material -supplies, distribution channels etc. are entry barriers which are insurmountable or
difficult to overcome.
o Eg. Defence Manufacturing
• 6. Capital Requirements: High capital intensive nature of the industry is an entry barrier to small 15
05/16/2025
• RIVALRY AMONG EXISTING COMPETITORS
• Rivalry among existing competitors is often the most conspicuous of the competitions. Firms in an
industry are "mutually- dependent" - competitive moves of a firm usually affects others and may be
retaliated. Common competitive actions include price changes, promotional measures, customer
service, warranties, product improvements, new product introductions, channel promotion etc.
• There are a number of factors, which influence the intensity of rivalry. These include:
• 1. Number of Firms and their Relative Market Share, Strengths etc.: Rivalry is likely to be affected by
the number firms, their relative market shares, competitive strengths, etc.
• 2. State of Growth of Industry: In stagnant, declining and, to some extent, slow growth industries a
firm is able to increase its sales only by increasing its market share, i.e., at the expense of others.
• 3. Product Standardization and Switching Costs: When the product of different firms is standardized,
price, distribution, after-sales service, credit etc. become important strategic variables of
competition. Absence of switching costs makes firms more vulnerable.
• 7. Exit Barrier: High exist barriers. (For example, compensation for labor, emotion! attachment to the
industry etc.) tend to keep firms competing in an industry even thou~ the industry is not very
attractive.
• 9. Switching Costs: In some cases a barrier to entry is created key switching costs (i.e., on time costs
facing the buyer of switching from one supplier's product to another's) such
• 10. Expected Retaliation: The potential entrants' expectations about the reactions of the existing
competitors may also sometimes deter entry.
05/16/2025 16
THREAT OF SUBSTITUTES
• An important force of competition is the power of substitutes.
“Substitutes limit the potential returns in an industry by placing a
ceiling on the price firms in the industry can profitability charge.
The more attractive the price performance alternative offered by
substitutes, the firmer the lid on industry profits.”
• Firms in many industries face competition from those marketing
close or distant substitutes.
• Porter points out that substitute products that deserve the most
attention are those that are: (1) subject to trends improving their
price-performance trade-off with the industry’s product, or (2)
produced by industries earning high profits.
• BARGAINING POWER OF BUYERS
• For several industries, buyers are potential competitors – they may integrate backward.
Besides, they have different degrees of bargaining power. “Buyers compete with the
industry by forcing down prices, bargaining for higher quality or more services, and
playing competitors against each other – all at the expense of industry profitability”. 15
• Important determinants of the buyer power, explained by Porter, are the following:
• The volume of purchase relative to the total sale of the seller.
• The importance of the product to the buyer in terms of the total cost.
• The extent of standardisation or differentiation of the product.
• Switching costs.
• Profitability of the buyer (low profitability tends to pressure costs down).
• Potential for backward integration by buyer.
• Importance of the industry’s product with respect to the quality of the buyer’s product or
services.
• Extent of buyers’ information.
05/16/2025 19
• BARGAINING POWER OF SUPPLIERS
• The important determinants of supplier power are the following:
1. Extent of concentration and domination in the supplier industry.
2. Importance of the product to the buyer.
3. Importance of the buyer to the supplier.
4. Extent of substitutability of the product.
5. Switching costs.
6. Extent of differentiation or standardisation of the product.
7. Potential for forward integration by suppliers.
• Porter’s analysis, thus, shows that competition in an industry goes
well beyond the established players.
05/16/2025 20
WHAT IS A LAISSEZ-FAIRE ECONOMY, AND HOW DOES IT WORK?
• It is a French term that translates to “leave alone,” or more literally to “let you
do.
• an economic philosophy of free-market capitalism
• opposes government intervention.
• Laissez-faire advocates that economic success is inhibited when governments
are involved in business and markets.
• Free-market economists built on the ideas of laissez-faire as a path to
economic prosperity, though detractors have criticized it for promoting
inequality.
• Critics argue that markets do need a certain degree of government regulation
and involvement.
• An economy would follow the principles of laissez-faire if it followed an
approach where the government was not at all involved in the workings of the
economy, business, or markets. Instead, the free market would not only
regulate prices but also discipline producers to remain good actors. In reality,
ELON MUSK SPEAKS AT THE INAUGURAL PARADE INSIDE
CAPITAL ONE ARENA
1ST ROW OF THE INAUGURATION: THE RICHEST MEN IN AMERICA, WHO OWN ALL COMMUNICATIONS PLATFORMS
2ND ROW: THE CABINET.
05/16/2025 23
• Advocates of Free market:
• free market and free economic competition were extremely important to the health of a free society.
• They believed the government should only intervene in the economy to preserve property, life, and individual
freedom
• “Invisible hand”—should be allowed to proceed unhindered. (British economist Adam Smith).
• Laissez-faire advocates argue that if individuals serve their own interests first, societal benefits will follow.
• Negatives :
• capitalism as a system has moral ambiguities built into it; it does not inherently protect the weakest in society.
• The idea of letting an economic system run without regulation or correction in effect dismisses or further
victimizes those most in need of assistance, which leads to poverty and imbalances in the society.
PROS AND CONS OF LAISSEZ-FAIRE
Pros Cons
1 Lack of regulations can harm consumers
Reduces government involvement in business, and the environment
which is thought to be inefficient and stifling
2 Encourages self-responsibility and innovation Can generate negative externalities
3 Promotes free markets and competition Competition naturally leads to wealth
inequality
May incentivize bad actors
STRATEGY AND STRATEGIC
•MANAGEMENT
Glueck defines strategy as a “unified, comprehensive and integrated
plan relating the strategic advantages of the firm to the challenges of the
environment. It is designed to ensure that the basic objectives of the
enterprise are achieved.”
• Strategic management is defined as “that set of decisions and actions
which leads to the development of an effective strategy or strategies to
help achieve corporate objectives
• According to Paine and Naumes, “Strategic management involves the
decision-making and the activities in an organization which:
(1) have wider ramifications,
(2) have a long time perspective, and
(3) use critical resources towards perceived opportunities or threats in
a changing environment”
RAYMOND IN 2024
• Retail and Global Presence Raymond's retail network is extensive,
with over 2 million square feet of retail space across 1100+
locations in 380+ cities and towns. The company has a robust
international presence, exporting to over 55 countries, including
the USA, Canada, Europe, Japan, and the Middle East . Diverse
Business Segments Garment Business: Through subsidiaries like
Silver Spark Apparel Ltd. and EverBlue Apparel Ltd., Raymond
manufactures and exports high-quality garments globally. Shirt
Business: Raymond's Kolhapur facility produces premium shirt
fabrics, catering to national and international brands. Denim
Business: Raymond UCO Denim, a joint venture with UCO NV of
Europe, specializes in specialty ring denim for both domestic and
international markets .
• In addition, the government makes transfer payments, payments that are made
to people without their providing a current service in exchange. Typical transfer
payments are social security benefits and unemployment benefits. Transfer
payments are not counted as part of GDP because transfers are not
part of current production. We speak of transfers plus purchases as
government expenditure.
05/16/2025 30
• NATURE OF THE ECONOMY
05/16/2025 31
05/16/2025 32
05/16/2025 33
• GDP is the value of all final goods and services produced in the country within a given period.
• On the production side, output is paid out as factor payments to labor and capital. On the demand side, output is consumed or
invested by the private sector, used by the government, or exported.
• Y!C"I"G"NX.
• C"G"I"NX!Y!YD"(TA$TR)!C"S"(TA$TR).
• The excess of the private sector’s saving over investment is equal to the sum of the
• budget deficit and net exports.
• Nominal GDP measures the value of output in a given period in the prices of that
• period, that is, in current dollars.
• Inflation is the rate of change in prices, and the price level is the cumulation of past
• inflations.
• Nominal interest rates give the return on loans in current dollars. Real interest rates
• give the return in dollars of constant value.
• The unemployment rate measures the fraction of the labor force that is out of work
• and looking for a job.
• The exchange rate is the price of one country’s currency in terms of another’s.
05/16/2025 34
05/16/2025 35
