Module 1: BUSINESS AND ITS ENVIRONMENT

1. Nature and scope of Business Environment - Meaning and nature of business,

environment and business environment.
2. Types of business environment – Internal and External.
3. Factors of Business Environment - Internal and External Factors; Economic and Non-
Economic Factors.
4. Forces shaping Competitive Business Environment – M.E. Porter Concept of
Competitive Business Environment.
5. Macroeconomic Factors/Variables Influencing Business.
6. Cases and Applications of M.E.Porter’s Concepts & Factors of Business Environment
on real business.

Definition of Business Environment -

Business environment consists all those factors that have a bearing on the business.

According to Aurther M. Weimer “business environment encompasses the climate or set

of conditions, economic, social, political, or institutional in which business operations are
conducted.”

According to Bayord O. Wheeler, business environment refers to the total of all things
external to firms and industries which affect their organization and operation.”

Definition of Economic Environment of Business -

An economic environment of business is a set of economic and non-economic conditions
influencing economic condition in which business operations are conducted.”

Since, business is an economic activity, the business firm is an economic unit and the
business decision is an economic process.

The economic environment of business is evaluating business policy, business strategies

and business tactics of any corporate entity in any national economy.
Nature of Business Environment: Nature of business environment constitutes –
1. Business environment is the result of aggregate economic and non-economic factors.
2. It is interrelated to different factors of business environment.
3. It is uncertain atmosphere.
4. It is relative concepts vary between different economic system.

Types/Classification of business environment –

Basis of Classification Types
Eco. Factors Economic and non-economic
Support Data and System
Space Local, regional, national and international
Time Present, past and future
Forces Market and non-market
Control Internal and External
External (a) direct/micro/task/operating
(b) Indirect/macro/general/remote

In the following section we discuss internal and external factors of business environment
A. Internal Business Environment -
Elements/factors of internal business environment refers to the factors existing within a
business firm.
The internal factors considered controllable because the enterprise has control over these
factors. For examples, a company can modify it - organization structure, policies and
programs, physical expansion, and marketing mix to suit the changes in environment.
However, enterprises may not sometimes have complete control over all the internal
factors.
The main internal factors / forces influencing the business decisions are:
1. Culture
2. Mission and Objectives,
3. Top Management Structure,
4. Power Structure,
5. Company Image and Brand Equity,
6. Human and other Resource.

Culture: The value, beliefs and attitude of the promoters and top management of the
firm exercise a strong influence on where the firm stands for, how it does things and what
it considered important. When the value, beliefs and attitude shared by all members, the
organisation is likely to be more successful. For examples –

1. Strong value, beliefs and attitude shared by all members of NTPC, SAIL, SBI, LIC,
TISCO, WIPRO, INFOSYS, TCS etc, these firms have remarkable success rate in all
aspect of business including profitability. Here members of firms comprises owner,
investors, government, publics, bankers, marketing intermediaries and general public.

2. Lower value, beliefs and attitude shared by all members of RIL, RCOM, HDFC,
ICICI, Gammon etc., these firms have higher success rate in profitability and capital
generation while lower success rate in other aspects of business such as - equal
distribution of dividend, national, social and environmental responsibility.

3. Least value, beliefs and attitude shared by all members of Satyam, Lehman Brothers,
and MSME firms; these firms have least success rate in all aspects of business,
irresponsible decisions, forgettable performance, and non-recognizable activities.

Mission and Objectives:

The business philosophy and purpose of a firm guide its priorities business strategies,
product scope and development process.

For example- The mission and objectives of JRD Tata and G.D. Birla to make their group
a “Ratna” in the private sector and always ready to pledge the resource for the country
and employee since establishment. Other are- Bajaj, Kirloskar, Godrej and Mahindra.

The mission and objectives of Dhirubhai Ambani to make Reliance the largest industrial
group.
The mission and objectives of MSME firm to earn maximum profit during its
unpredictable existence without any long term objectives.

Top Management Structure:

The structure and system of top management comprises owner and intellectual workforce
which play important role in business decision. But in normal cases the shareholding
pattern of a company influence the structure and system of management.

For Example – The owner of WIPRO, RIL, ADAG holds majority shares and pays
important role in business decision; while promoter of TISCO, L&T, ABG held minority
shares and take normal decision with help of intellectual advise and investors choice.
Thus, pattern of shareholding is one of the important factors of management structure.

Power Structure:
In power structure within the organisation influences the business decisions, the power
relationship between board of directors and the CEO of the unit; and power structure
between CEO and the management personnel of functional area influences the business
decisions of any organization.

Company Image and Brand Equity:

The image and brand equity plays an important role in internal business such as raising
fund from banking system or from the public, forming alliance with other firms,
decentralization of sells market (customers) and purchase market (suppliers) and
expansion of business.

Human and Other Resource:

The competence, trait moral and motivation of employee plays a vital role in overall
development of any unit. For example - Tata could easily carryout a large scale
modernization/expansion/shifting without any problems while firm with same capacity
facing many problems [RIL (Mukesh) and Reliance Power (Anil)].
The adequate tangible (economic resource) and intangible (goodwill) resources of a firm
influence success of that unit.

B. External Business Environment:

External Environment of Business consist forces and factors outside an enterprise. The
external factors are beyond the control of a firm.

A firm has almost zero control over national income, different economic and other
policies of government. However, few powerful firms have capacity to change some
external forces by wrong practice of business theory for (increase of KG Basin Crude Oil
Price from Bid Price i.e Rs. 2.32 to Rs. 4.34 per unit).

The external environment of business comprises - micro business environment and macro
business environment.

(i) Micro/Direct/Task/Operating Environment:

Micro environment refers to those individuals, groups and agencies with which the
organizations comes into direct and frequent contact in the course of its business
operation/function.

The main micro environment forces influencing the business decisions are :-
Customers, Suppliers, Competitors, Marketing Intermediaries, Publics and Financiers.

1. Customers – the firm/person who purchase final goods and services for consumptions.

2. Suppliers - the firm/person who supply factors product and services to for production /
services.

3. Competitors – The firm/person engaged in the same activity directly or indirectly.

4. Marketing Intermediaries – That firm/person provides/influences the business
through their network force. For example marketing & advertising firm.

5. Publics - Public includes all those groups who have an actual or potential interest in
the firm. For example – media group, NGO, Pollution Control Organisation etc, which
have direct or indirect interest in the firm on behalf of public or self-interest for
dissemination of information of the firm.

6. Financiers - All persons have investment in the firm can influence the business
process and decision, e.g. ordinary shareholder or lending institution/s.

(ii) Macro / indirect / general / remote environment:

Macro environment refers to the indirect, general or remote environment within which a
business firm and its forces operates.

The macro environment factors are less controllable than the micro forces. For example
increase in the cost of crude oil.

The important factors of macro environment of business influencing decisions of any

firm are-
1. Political Environment and Legal Environment,
2. Economic and Financial Environment,
3. Social & Cultural Environment,
4. Natural Environment,
5. Technological Environment, and
5. Global Environment.

Political and legal Environment:

Political Environment comprises the elements related to government affairs. Such as –
the constitutions, political system, political stability, image of country and important
decision makers, foreign policy, economic and non-economic policies of government ,
policy for defiance and military system, etc.

Legal Environment comprises Legal System of country, law governing business,

flexibility and adaptability of law, relevance of business and economic laws.

Social and Cultural Environment :

Social and cultural environment refers to the characteristics of the society in which a
business firm exist. The factors are –
1. Demographic forces – demographic structure and characteristics, size of population,
composition of population and mobility of population.
2. Social institutions and groups.
3. Religion and Cast structure.
4. Educational System and literacy rate.
5. Social customs and values of customs.
6. Test and preference of people.

Economic and Financial Environment: The economic and financial environment

comprises –
1. Nature of economic system (capitalist, socialist or mixed). Economic structure and
system of
country and different sectors.
2. Economic Policies (industrial, EXIM, Monetary, Fiscal, Investment and Disinvestment
Policies etc.).
3. Economic Indicators (Macroeconomic indicators).
4. Financial Market (Money, Credit, Debt) and Institutions (CB &FI).
5. Status of product (consumable goods) and factor market (resources).
6. Economic Resource & Infrastructure.
Technological Environment: The technological environment comprises –
1. Rate of changes in physical technology
2. New process and equipment
3. Research and Development System
4. Availability of technical intangible resource.

Natural Environment: Natural Environment constitutes –

1. Climatic conditions
2. Availability of natural resources,
3. Ecological system,
4. Pollution and other adverse externalities of society and nation.

Global Environment: Global Environment of Business constitutes international

economic and non-economic relationship with foreign countries (US or Japan or Pakistan
etc.), international Organizations such as - IMF, IBRD, IDA, IFC UNCTAD, WTO,
ADB, G-8, G-15, G-20, G-77, OECD, EEC, NAFTA, SAFTA, OPEC, SAARC, ASIAN
etc.

Forces Shaping Competitive Business Environment (M.E. Porter)

The competitive factors or forces which contribute to the business firm in their success or
failure in competitive business environment. According to Michael E. Porter, forces of
competitive business environment are -
1. Threat of new firm
2. Bargaining power of buyers.
3. Bargaining power of suppliers.
4. Threat of substitute product.
5. Rivalry among existing firms.
 Threat of Entry
by Potential
Entrants

Bargaining
Bargaining Rivalry among Power of
Power of Buyers Existing Firm Suppliers

Threat of
substitute
Product

1. Threat of new firm or threat of potential entrants:

Following are the common entry barrier for new entrants -
a. Economies of Scale – Economies of scale of existing firm create entry barrier for
potential entrants.
b. Product Differentiation – existing product differentiation is restricting the arrival of
new firm into the industry.
c. Capital Requirement - high capital requirement is an entry barrier for smaller firms.
d. Cost Disadvantages Independent of size - the existing firm in an industry may enjoy
certain cost advantages which are not available to new entrants irrespective of their size
or scale. Such advantages are from technology, learning/ experience curve, favorable
location and other factors of production.
e. Access to Distribution Channel or Monopoly Elements.
f. Government Policies – Government Policy, licensing norms and other regulatory
procedure restrict the entry of new firm in easy way.
2. Bargaining power of buyers:
In several industry buyers are potential competitors, they have different degree of
bargaining capacity. Buyer compete with the industry by forcing down prices, bargaining
for high quality product and service, more product and service, and playing competition
against each other.

The volume of purchase, differentiation of product, importance of product, and

profitability of buyer on particular purchase are the factors of bargaining force from
buyer side.

3. Bargaining power of suppliers:

The important determinants of supplier’s bargaining powers are-
a. when the group is dominated by a few firms.
b. when the product is unique or differentiated.
c. when there are lack of close substitute.
d. when buyer industry is less powerful than supplier industry.
e. when the product it supply is important for buying industry.

4. Threat of substitute product:

In industries firm is face competition from the supply of substitute goods such as
petrochemical product is an increasing substitute of iron, aluminum, jute and cotton base
product. That means petrochemical industry restricts the expansion of business and profit
of related firm.

5. Rivalry among existing firms:

Rivalry among existing firms is the most visible form of competition. The competitive
actions include product improvements, new products, better customer service, price
changes, promotional measure and other competitive factors.
The degree of rivalry among competitive firm depends on the following factors:-
a. Number of firms in the industry, their relative market share and their competitive
strength.
b. Degree of differentiation in the products of rival firm in terms of product quality, price
and services.
c. Cost advantages and disadvantages of rivalry firms in terms of fixed and storage cost.
d. State of sector growth - stagnant, slow, high or declining industry.
e. Strategic stake – when a number of firm have high stake in the industry, rivalry is
greater or competition is at high level.
f. Expected retaliation and corporate game (price game, profit game, quality game,
competition game, and so forth).
g. Switching Cost – switching cost is one of the most important among rival firm i.e.
witching of customers, suppliers, equipment, ancillary, employee from one firm to rivalry
firm.
h. Diverse competition among rivalry firm.

Macro Economic Variables Influencing Business:

The major macro economic variables which have influence over the business entity are –
Production, national income, employment, investment, money supply, prices, business
cycle, foreign trade and balance of payment, foreign exchange, and fiscal policy.

Important Questions :
1. Distinguish between micro and macro factors external environment of business?
2. Illustrate the elements of internal and external environment of business?
3. With help of M.E. Porter’s five force model, explain the competitive structure of
industries?