BUSINESS ENVIRONMENT MB-106

Introduction

Business is an organisation or enterprise engaged in producing goods and services for profit
motive. It is a collective effort where a firm is engaged in commercial, industrial or
professional activities. The main aim of business is to satisfy the needs of customers. The
success of every business depends on adapting itself to the environment within which it
functions. For example, with changes in the government policies, the business needs to adapt
itself with the new policies. Similarly, any technological advancement may render the
existing products obsolete, such as the introduction of smart phones has replaced the
telephone to a greater extent. Therefore, it is very important to have a clear understanding of
the basic concept of business environment and the nature of its various components.

Business environment includes those external factors and institutions over which it does not
have any direct control. These factors affect the functioning of an organisation directly or
indirectly. These include customers, competitors, suppliers, government, and the social,
political, legal and technological factors, etc.

The set of external factors, such as economic factors, social factors, political and legal factors,
demographic factors, and technical factors, etc., which are uncontrollable in nature and affect
the business decisions of a firm, is called business environment.

The relationship between business and its environment can be explained by following points:

Business is affected by its environment and, in turn, to some extent, it will also influence the
external factors. Similarly, economic environment influences socio- cultural environment and
vice versa. Other environmental factors also have same relationship with each other.

The environmental factors are constantly changing. Similarly, business is also dynamic.

One business firm, by itself, may not be able to change its environment. But together with other
businesses, it will be in a position to mould the environment in its favour.

Concept of Business Environment In general sense, all businesses aim to achieve multiple
objectives. A business manager identifies and sets some important objectives like survival,
stability, growth, profitability and efficiency. Enterprise needs to balance these objectives.
Profit is the biggest stimulus for the survival of the business and its future development. There
is always a risk involved in business and profit is the reward for taking the risk. Business can
be established, but it is difficult to survive in this competitive world where whole world is one
market. So, it is important for business to scan the environment. Environment refers to all
external forces which affect the functioning of business. Environment factors are largely, if not
totally, external and beyond the control of individual industrial enterprises and their
managements. The surrounding in which business operates is called business environment.

The word ‘Business Environment’ has been defined by various authors as follows:

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

According to Reinecke and Schoell, the environment of business consists of all those external
things to which it is exposed and by which it may be influenced directly or indirectly.

These definitions give a clear understanding of the business environment. We can say that
business environment is a combination or mixture of complex, dynamic and uncontrollable
external factors within which a business is to be operated.

The change in tastes and preferences of customers, introduction of new technologies,

innovations, government policies, etc., all are parts of the business environment. Business needs
to accept and adapt these changes promptly to survive in the market. So, it is necessary for the
business to analyse the business environment.
Nature of Business Environment

The business environment of an organisation usually poses threats as well as opportunities. To

grasp the opportunities and reduce the threat, it is important to know the nature of business
environment. Following are some points which describe nature of business environment:

Internal and external environment: Every business is surrounded by 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.

Dynamic and ever-changing: Business environment keeps on changing frequently in terms of

technologies, government rules and regulations, socio-economic conditions, etc., which make
business dynamic.

Complexity of the environment: Business environment cannot be easily analysed because of

too much complexity involved. Environment consists of a number of factors, events,
conditions and influences, generating from different sources which impact business, thus,
making the business complex.

Inter-relatedness: Factors of business environment are related to each other. For example,
change in political parties will result in changing the government rules, fiscal policies, market
conditions, technology, etc. So, all the factors need to be scanned properly because these factors
are inter-related to each other.

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.

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.

Inter-dependence: A business firm and its environment are mutually interdependent. The
economic status of a country affects the development of technology or it may change the lifestyle
of people.

Scope of Business Environment

Internal and external environment: Internal environment includes all those factors that are
within an organisation and impart strength or cause weakness in business. For example,
inefficient human resource, superior raw material, etc. External environment includes those
factors which are beyond the control of business and are outside the organisation. They provide
opportunities and pose threat to business. For example, change in political conditions,
technological change, etc.

Specific and general environment: Specific environment includes external forces that directly
impact or influence organizations’ decisions and actions and are directly relevant to the
achievement of organizations’ goals. The main forces that make up the specific environment
are customers, suppliers, competitors and pressure groups. General environment includes the
economic, political/legal, socio-cultural, demographic, technological and global conditions that
affect organisations. External forces do not affect organisations to a great extent, but
organisations must plan, organise, lead and control their activities taking into account these
factors.

Micro environment and macro environment: Micro environment impacts the working of a
particular business. It has direct impact on business activities. It includes customers, suppliers,
market intermediaries, competitors, etc. These factors are controllable to some extent. Macro
environment is general environment that impacts the working of all businesses. It is
uncontrollable and influences indirectly. Political conditions, economy, technology, etc., come
under macro environment.

Controllable and uncontrollable environment: All those factors which are governed by
business come under controllable environment. Internal factors are treated as controllable
factors, like men, material, machine, money, etc. Uncontrollable factors are external and are
beyond the control of business like technological change and law related change.

Importance of Business Environment

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.
Optimum utilisation 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.

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.

Coping with the 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. As a result, they
are able to respond to such changes effectively.

Meeting competition: This helps firms analyse competitors’ strategies and formulate their
strategies accordingly.

Identifying firm’s strength and weakness: Business environment helps identify the individual
strength and weakness in view of the technological and global developments.

Assisting in planning and policy formulation: 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

The performance of an organisation is affected by the business environment. It has a far-

reaching impact on its survival, profit and growth. There are certain forces inside and outside
the organisation. These forces affect the business both in positive and negative ways.

Figure 1 displays components of business environment:

Business Environment
 External Environment
Internal Environment

•Value System
•
Mission and Objectives
Micro Environment Macro Environment
Organisation
Structure
•
Various components of business environment are as follows: Corporate Culture
Human Resources
Internal environment:
• These are those• factors
Suppliers of Inputs or conditions that
Economic existPhysical
withinResources and
an organisation
• Customers Financial Capabilities
• Political-legal
and affect its
• performance.
Marketing These factors
• are controllable in nature and organisation can try to
Technological
Intermediaries • Global or International
change or modify these Public
Competitors factors. Organisation’s
• resources like men, material, money, method
Socio-cultural
• Demographic
and machine• come under internal environment.
•
Various internal factors are as follows:
Natural
•
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.
Mission and 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.

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. come under organisation structure and are important
factors influencing business decisions. For efficient working of a business organisation and to
facilitate prompt decision making, the organisation structure should be conducive.

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. The sets of values that help
members understand what organisation stands for how it does work, what it considers, cultural
values of business forces of business, and so on. It helps in direction of activities.

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. Organisations may find it
difficult to carry out modernisation and redesigning because of resistance by its employees.
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:

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.

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.

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.

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.

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.

What is Environmental Scanning?

Environmental scanning is a process of gathering information about the events and their
relationship with the internal and external environment of the organization. The primary aim of
environmental scanning is to find out the future prospects of business organization. As a
significant resource to the management, the Environmental Scanning Committee enables the
management to make decisions from fundamental analysis of historical events to estimate
future events. The committee also helps in creating action plans to address these upcoming
events, analyzing action plans and arranging appropriate resources for those plans, and putting
management in contact with fellow employees with the knowledge set to provide quality data
for decision making.

What are the Characteristics of Environmental Scanning?

The characteristics of environmental scanning are as follows: 

Continuous Process- The analysis of the environment is a continuous process rather than being
sporadic. The rapidly changing environment has to be captured continuously to be on track.

Exploratory Process- Scanning is an exploratory process that keeps monitoring the

environment to bring out the possibilities and unknown dimensions of the future. It stresses the
fact that “What could happen” and not ”What will happen”.

Dynamic Process- Environmental scanning is not static. It is a dynamic process and depends on
changing situations.

Holistic View- Environmental Scanning focuses on the complete view of the environment rather
than viewing it partially.

Components of Environmental Scanning

Internal Environmental Components- The components that lie within the organization are
internal components and changes in these affect the general performance of the organization.
Human resources, capital resources and technological resources are some of the internal
environmental components.

External Environmental Components: The components that fall outside the business
organization are called external environmental components. Although the components lie
outside the organization, they still affect the organizational activities. The external components
can be divided into micro environmental components, and macro environmental components. 

Micro environmental components include competitors, consumers, markets, suppliers,

organizations, etc. Macro environmental components include political, legal, economical,
cultural, demographic, and technological factors.  

 Techniques of Environmental Scanning

SWOT Analysis- SWOT analysis is an acronym for Strengths, Weaknesses, opportunities and
threats analysis of the environment. Strengths and weaknesses are considered as internal factors
whereas opportunities and threats are external factors. These factors determine the course of
action to ensure the growth of the business.

PEST Analysis- PEST stands for Political, economic, social, and technological analysis of the
environment. It deals with the external macro-environment.

ETOP- ETOP stands for the Environmental Threat Opportunity Profile. It helps an organization
to analyze the impact of the environment based on threats and opportunities.

QUEST- QUEST stands for the Quick Environmental Scanning Technique. This technique is
designed to analyze the environment quickly and inexpensively so that businesses can focus on
critical issues that have to be addressed in a short span. 

Process of Environmental Analysis Scanning- The process of analyzing the environment to

spot the factors that may impact the business is known as Environmental Scanning. It alerts the
enterprise to take suitable strategic decisions before it reaches a critical situation.

Monitoring- The data is gathered from various sources and is utilized to monitor and find out
the trends and patterns in the environment. The main sources of collecting data are spying,
publication talks with customers, suppliers, dealers and employees.
Forecasting- The process of estimating future events based on previously analyzed data is
known as environmental forecasting.

Assessment- In this stage, the environmental factors are assessed to identify whether they
provide an opportunity for the business or pose a threat. 

Importance of Environmental Scanning

Goal Accomplishment: The objectives of an organization cannot be fulfilled unless it adapts

itself to environmental changes. One has to adjust the strategies to fit in the changing demands
of the environment.

Threats and Weakness Identification: For an organization to grow, it must minimize its threats
and identify its weaknesses. This is made possible with the help of environmental scanning with
which better strategies can be developed.

Future Forecast: Environmental changes are often unpredictable. An organization cannot

anticipate all the future events but based on the analysis, it can make better strategic decisions in
the future. Hence, environmental analysis helps to forecast the prospects of the business.

Market Knowledge: Every organization must be aware of the ongoing changes in the market. If
it fails to incorporate strategic changes due to changing demands, it will not be able to achieve
its objectives.

Focus on the Customer: Environmental scanning and analysis make an organization

sensitive to the changing needs and expectations of the customer.

Opportunities Identification: With the analysis of the current environment, an organization

will be able to identify the possible opportunities and take necessary steps. 

Limitations of Environmental Scanning

Overloading of information may sometimes result in indecision. Hence it is not completely

reliable.

It does not forecast the future or eliminate uncertainties. Organizations may face unexpected
events. However environmental scanning should aim at minimizing such threats to the business.
It often makes an organization cautious and thereby delays decision making. It is better to have a
strategic approach to analyze the environment and take decisions or actions on time.

When the organizations rely completely on the analyzed information without data verification
and accuracy, it may lead to deviation in the desired outcomes. 

Conclusion

At last, it is concluded that environmental scanning is beneficial for an organization as it helps

the business to identify their competitive advantage, disadvantages, and how they are measured.
Adopting a simple SWOT analysis helps an organization to determine their strength, weakness,
opportunities, and threat to enhance the sustainability of an organization. This information also
helps an organization to determine its future strategies.