Business environment notes

Unit 1
Business environment meaning ---

Those external factors and institutions over which business does not have any direct control Factors
affecting functioning of organisation directly or indirectly. Set of factors like social, economic,
technological etc. which are uncontrollable in nature and decisions of business is called business
environment.

According to Keith Davis, Business environment is the aggregate of all conditions, events and influences
that surround and affect it.

Nature of business environment ---

1. Internal and external environment: Internal environment can be controlled by an organisation,

like men, money, material, machine and method, whereas external environment is uncontrollable
like political conditions, technologies, legal regulations, etc.
2. Dynamic and ever-changing: business environment changes frequently and all other factors
which makes it dynamic.
3. Complexity of the environment: BE cannot be easily analyzed because too much complexity is
involved. Environment consists of a number of factors and other things which impact the
business, thus making business complex.
4. Inter-relatedness: all factors of BE are inter related. Changes in one factor also affect other
factors. For example, change in political parties will result in changing the government rules, fiscal
policies, market conditions, technology, etc.
5. Uncertainty: It is difficult to predict the changes going to take place in future because
environment keeps on changing. These changes are uncontrollable. So, business can only try to
combat from these challenges. For example, in case of fashion industries, changes take place so
frequently, economy could collapse any time.
6. Impact: Impact means the effect of environment on business. Business environment has both
long-term and short-term impacts on business. For example, different firms may get influenced
differently from change in monetary policy.
7. Inter-dependence: A business firm and its environment are mutually interdependent.
Importance of business environment ---

1. Identification of business opportunities: Many opportunities are provided by business

environment to the organisation. Scanning business environment would help business get the first
mover advantage. If changes are analysed carefully, then they can be the reason for business
success.
2. Optimum utilization of resources: Resources like raw material, machine, money, labour, etc., are
input for business. All these inputs are provided by environment to the business firms for carrying
out their activities and also expect something in return.
3. Identification of threat and early warning signal: Business can recognise the threat by analysing
the change taking place in the environment. For example, if any new multinational company is
entering the Indian market, the manager of an Indian firm dealing with same product as that of
the multinational company should take it as a warning signal. Before the MNC launches its
product, the manager should implement measures, such as improving the quality of his product
and heavy advertisement.
4. Coping with rapid changes: To efficiently cope with these changes, managers must understand
the environment and should adopt appropriate courses of action at the right time. It helps
management become more sensitive to ever-changing needs of customers.
5. Meeting competition: This helps firms analyse competitors’ strategies and formulate their
strategies accordingly.
6. Identifying firm’s strength and weakness: Business environment helps identify the individual
strength and weakness in view of the technological and global developments.
7. Assisting in planning and policy formation: Business environment brings both threats and
opportunities to a business. Having a good understanding of the business environment can
immensely help an organisation’s management in their future planning and decision-making
endeavours. For example, competition increases with the entry of new firms in the market.

Components of business environment

Internal environment:- These are those factors or conditions that exist within an organisation
and affect its performance. These factors are controllable in nature and organisation can try to change
or modify these factors. Organisation’s resources like men, material, money, method and machine come
under internal environment. Various internal factors are as follows:

1. Value system: The values are the ethical beliefs that guide the organisation in achieving its
mission and objectives. It is framed by top-level managers like board of directors. The extent to
which the value system is shared by all in the organisation is an important factor contributing to
its success.
 2. Mission and Notes objectives: The objective is the end towards which business activities are
directed. All businesses focus on maximisation of profit. Mission is defined as the overall
purpose or reason for its existence. A mission guides and influences an organisation’s decisions
and economic activities. An organisation can change or modify its mission and objective
accordingly.
3. Organisation structure: The organisational structure is the hierarchy in business that define
roles, responsibilities and supervision. The composition of the board of directors, the
professionalism of management, etc., comes under organisation structure and are important
factors influencing business decisions.
4. Corporate culture: Shared values and belief in an organisation which determine its internal
environment are called corporate culture. Organisation where there is strict supervision and
control results in lack of flexibility and unsatisfied employees.
5. Human resources: Human quality of a firm is an important factor of internal environment. Skills,
qualities, capabilities, attitude, competencies and commitment of its employees, etc., could
contribute to the strengths and weaknesses of an organisation.
6. Physical resources and financial capabilities: Physical resources, such as plant and equipment,
facilities and financial capabilities of a firm determine its competitive strength which is an
important factor for determining its efficiency and unit cost of production. Also research and
development capabilities of a company determine its ability to introduce innovations which
enhance the productivity of workers. Financial capabilities are company’s source of fund
generation.

External environment:- These are those factors and the conditions which are outside the
organisation and affect the performance of business. External factors are further divided into micro
environment and macro environment which are as follows:

Micro environment: Those factors which have direct impact on business. The various constituents
under micro environment are as follows:

1. Suppliers of inputs: The suppliers of inputs are important factors in the external micro
environment of a firm. Suppliers provide raw material and resources to the firm. A firm should
have more than one supplier for proper inflow of inputs.
 2. Customers: They are the buyers of firm’s products and services. Customers are an important
part of external micro environment because sales of a product or service are critical for a firm’s
survival and growth, so it is necessary to keep the customers satisfied.
3. Marketing intermediaries: Intermediaries play an essential role of selling and distributing its
products to the final customers. Marketing intermediaries are an important link between a
business firm and its ultimate customers. Retailers and wholesalers buy in bulk and sell business
products and services to the ultimate consumer.
4. Competitors: Competitors are the rivalry in business. Competition can based on pricing of
products or based on competitive advertising. For example, organisations may sponsor some
events to promote the sale of different varieties and models of their products. Business
formulates strategies after analysing their competitor.
5. Public: Public or groups, such as environmentalists, media groups, women’s associations,
consumer protection groups, are important factors in external micro environment. Public,
according to Philip Kotler, is any group that has an actual or potential interest in or impact on
the company’s ability to achieve its objective.

Macro Environment: These are the factors or conditions which are general to all businesses and are
uncontrollable. Because of the uncontrollable nature of macro forces, a firm needs to adjust or adapt it
to these external forces. These factors are as follows:

1. Economic environment: All those forces which have an economic impact on businesses are
called economic environment. It includes agriculture, industrial production, infrastructure, and
planning, basic economic philosophy, stages of economic development, trade cycles, national
income, per capita income, savings, money, etc., For example, low per capital income will
negatively impact business because people have less money to spend.
2. Political-legal environment: The activities of legislature, executive and judiciary play a vital role
in shaping, directing, developing and controlling business activities. Rules and regulations,
framed by the government, like licensing policy, polythene ban, etc., affect the business.
Business growth can be achieved by using a stable and dynamic political-legal environment.
3. Technological environment: Systematic application of scientific or other organised knowledge
to practical tasks or activities is called technology. As it is changing fast, businessmen should
keep a close look on those technological changes for its adaptation in their business activities.
 4. Global or international environment: The global environment is also important for shaping
business activity. In the era of globalisation, whole world is a market. Business analyses
international environment to cope up with the changes.
5. Socio-cultural environment: People’s attitude towards work and wealth, lifestyle, ethical issues,
role of family, marriage, religion and education and also social responsiveness of business affect
the business.
6. Demographic environment: Population size and growth, life expectancy of the people, rural-
urban distribution of population, the technological skills and educational levels of labour force
come under demographic environment. These features also affect the functioning of
organisations.
7. Natural environment: The natural environment plays an important role as it provides raw
materials and energy for production in a firm. Natural environment consists of geographical and
ecological factors such as minerals and oil reserves, water and forest resources, weather and
climatic conditions and port facilities. These are very important for many business activities.

Environmental scanning –

Environmental scanning is the process of gathering information about events

and their relationships within an organization's internal and external
environments. The basic purpose of environmental scanning is to help
management determine the future direction of the organization.