BUSINESS ENVIRONMENT

Environment means the surroundings, external

objects, influences or circumstances under
which someone or something exists. The
environment of any organisation is the
aggregate of all conditions, events & influences
that surround & affect it.

BUSINESS ENVIRONMENT
Business firm is micro economic unit
Business environment furnishes macro economic
context for its operation
Environment in which business operates
Includes conditions, events, factors that influence
the working of business

INTERNAL
ENVIRONMENT

BUSINESS DECISIONS

EXTERNAL
ENVIRONMENT

Richman & Copen

Environment factors or
constraints are largely, if not totally, external and
beyond the control of individual industrial
enterprises & their managements. These are
essentially the givers within which the firms &
their managements must operate in a specific
country & they vary often greatly from country to
country.

CONTD
EXTRNL ENVRNMT
Political Environment

Economic
Environment
CUST
OMR
Natural
Environment

GOVT

Technological

INTERNAL
ENVRNMNT

RIVAL

INPUT
PRVIDER

Social
Cultural

Legal
FINANCIE
RS

Demographic

EXTRNL ENVRNMT

INTERNAL ENVIRONMENT
Regarded as controllable factors: companies
have control over them
Internal economy: some internal
contribute increase in productivity

factors

DETERMINANTS OF INTERNAL
ENVIRONMENT OF AN ORGANISATION
Mission & vision of the organisation
Management strategy
Industrial relations
Corporate culture & values
Line & staff relations
Quality control system
Team spirit among employees
Work culture
Compensation system
Career progression of employees

POLLUTANTS OF INTERNAL
ENVIRONMENT
Conflict b/w different owner groups
Conflicts b/w workers & managers
Inter departmental conflicts
Unhealthy competition & conflict among employees
Office politics
Discrimination at work place
Absenteeism

EXTERNAL FACTORS
Regarded as uncontrollable factors: by and
large beyond the control of company.
External economy: some external factors
contribute to the growth of the company.

EXTERNAL ENVIRONMENT
Micro Factors
Suppliers
Customers
Competitors
Financiers
Society

SYMBIOTIC RELATIONSHIP b/w BUSINESS &

ITS ENVIRONMENT (Macro Factors)
POLITICAL
LEGAL
TECHNOLOGICAL

CULTURAL

BUSINESS

GLOBAL

NATURAL

SOCIAL
ECONOMIC

DOMESTIC MACRO ECONOMIC

ENVIRONMENT
Economic system
Growth & distribution environment
Macro economic stability (price level, exchange rate,
interest rate, money supply, aggregate demand, BOP,
employment rate)
Economic policy (monetary policy, fiscal policy,
industrial policy, trade policy)

DOMESTIC MACRO NON ECONOMIC

ENVIRONMENT
Political environment
Social / cultural environment
Demographic environment
Technological environment
Natural environment

NON- ECONOMIC ENVIRONMENT OF

BUSINESS
(I) POLITICAL ENVIRONMENT
Political stability- changes in the form & structure of
government administration
Political organisation- ideology of ruling government;
influence of premier groups; conflicting role of public
& private sector

Example:
Nehru: transformation of agrarian economy into
industrialised economy
Indira Gandhi: state became active in agriculture
sector (subsidised fertilisers, expansion of
institutional credit); tightening of state control over
industrial finance, foreign investment, trade
Since 1990-91, political environment changedeconomy increasingly being liberalised

(II) REGULATORY & LEGAL ENVIRONMENT

Legal policies- formulation & implementation
Economic legislations- facilitator and/ or restrictor
Playa a vital role- dictating dos & donts of business
Flexibility & adaptability of law- constitutional
amendments
Foreign policy- tariffs, custom unions etc

(III) SOCIO- CULTURAL ENVIRONMENT

SOCIAL ENVIRONMENT
Made up of attitude, desires, expectations,
education, beliefs & customs of people
Changes gradually
To forecast a change is difficult

CULTURAL ENVIRONMENT
Organisational culture is the customary or traditional
ways on thinking & doing things, which are shared to
a greater or lesser extent by all the members of the
organisation, which new members must learn & at
least partially accept in order to be accepted into the
service of the firm.

A firm wanting to market its product in various

regions with diversified cultures will have to
carefully study the existing consumption pattern
& scope for creating demand for new products &
will
have
to
adjust
their
marketing
communication to cultural characteristics.
If the society is multi- cultural, then the firm can
not meet the demands of different groups with a
uniform product. To be successful in a multi
cultural society, the firm will have to carefully
study the consumption behaviour of different
groups.

Example:
Companies have to change their product
portfolio because of cultural differences as
McDonald and KFC did when they launched
their restaurant chain in India.

(IV) DEMOGRAPHIC ENVIRONMENT

(a) Size & growth rate of population
Growing population: boon
Increase in productive forces
Bigger market for products

Growing population: bane

Adverse impact on per capita income & standard of
living
Adverse impact on savings: unfavourable impact on
capital formation
Adverse impact on employment situation
Increasing pressure on agriculture

(b) age structure of population

It determines:
Productivity level
Demand pattern
Young population
Elderly population

(c) urban- rural population

Proportion of urban rural population increasing

Reasons
Pull factors:
Better employment opportunities in urban areas
Better income
Better education
Better health facilities

Push factors:
Low level of agriculture productivity
Disguised unemployment
Wide disparity between urban & rural levels of
living

(V) TECHNOLOGICAL ENVIRONMENT

Refers to body of skills, knowledge & procedures for
making, using & doing useful things
Positive effects of technology:
Increased productivity
Spread effects
Production of new & better goods of standardised
quality with more efficient use of raw materials
Basis for fast growing urban & industrial system

Negative effects of technology:

Displacement of labour
Environmental pollution
Switching over might be costly

(VI) NATURAL ENVIRONMENT

Industrial activity not entirely independent of
nature
Externalities

NATURE OF BUSINESS ENVIRONMENT

Dynamic
Uncertain
Element of Risk
Opportunities & threats
Internal & external factors
Economic & non-economic factors

SIGNIFICANCE OF BUSINESS
ENVIRONMENT
Facilitates operations of the organisation
Forms the basis of long term policies, plans,
strategies of organisation
Helps organisation in identifying & understanding
its competitors
Helps the firm to expand & grow

TYPES OF BUSINESS ENVIRONMENT RISK

Legal risk: arising from legal challenges or
changes in laws
Regulatory risk: arising from regulatory design &
its changes
Political risk: arising from political changes
Social risk: originating from social attitudes,
perceptions
Natural risk: associated with natural calamities

PROCESS OF ENVIRONMENTAL
ANALYSIS
Scanning: general surveillance of environmental
factors & their interactions
Monitoring:
events

tracking

environmental

trends,

Forecasting: developing plausible projections of

direction, scope & intensity of environmental
change
Assessment: identifying & evaluating how & why
current & projected environmental changes will
affect strategic management of organisation

ENVIRONMENT SCANNING
Strategic planning in which managers try to
determine best fit b/w organisation & its
external environment
Important step towards corporate planning &
business policy decisions
Aimed at continuous improvement of the
company, its policies & programs.

INTERNAL SCANNING: acquisition, analysis, use

of information from within the organisation that will
help the management in determining future course
of action of business
EXTERNAL SCANNING: acquisition, analysis, use
of information about events & establishing the
relationship of business with its external
environmental variables

Corporate managers analyse the Strengths (S),

Weakness (W), opportunity (O) & Threat (T) that
exist for their organisation in the context of its
environment.
O & T are external to the firm. With S the firm can
seize the O & captilise on it & because of its W it
becomes the victim of T in the environment

LINKAGES AMONG STAGES

MONITORING

FORECASTING

SCANNING

ASSESSMENT

ROLE OF BUSINESS ECONOMIST

To provide economic logic & perspective for
managerial decision making
Integrating economic theory with practical
business situations
Monitoring, scanning, careful analysis &
interpretations of business environment
Forecasting, future panning & formulating future
business strategy