Business Environment

Asad Kareem Usmani

 Business Environment
De nitions

• ‘‘Business environment is the aggregate of all conditions, events and in uences

that surround and a ect it.”—Keith Davis
• “The environment of business consists of all those external things to which it is
exposed and by which it may be in uenced directly or indirectly”. —Reinecke and
Schoell.
• “Business Environment encompasses the -climate’ or set of conditions, economic,
social, political or institutional in which business operations are conducted.”—
Arthur M. Weimer
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Business Environment
What is Business Environment?

• Business Environment is set of all internal and external factors, that a ects the
performance, pro tability, growth and even survival of the organisation.

• Business environment is the sum total of all factors external to the business rm and that
greatly in uence their functioning.

• It covers factors and forces like customers, competitors, suppliers, government, and the
social, cultural, political, technological and legal conditions.

• The business environment is dynamic in nature, that means, it keeps on changing.

• The changes in business environment are unpredictable. It is very di cult to predict the
exact nature of future happenings and the changes in economic and social environment.

• Business Environment di ers from place to place, region to region and country to country.
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Business Environment
Components or Elements

• INTERNAL ENVIRONMENT:
• Employees, Management, Rules & Regulations, Values structure, Power
relation, Organisational Structure and Physical Resources

• EXTERNAL ENVIRONMENT:
• Micro Environment - Suppliers, Customers, Competitors, Market
intermediaries.

• Macro Environment - Economic, Socio-cultural, Legal, Political,

Technological.
 Internal Environment
• Internal environment is composed of various elements present inside the organization,
that in uences the choices, activities and decisions of the organization
• Employees: Human resource is the most valuable asset of the organization. The employee must
be skilled, competent, knowledgeable with high motivation and commitment
• Management: The nature of people at the top. Their style of leadership and working
• Rules and Regulation: The rules and regulation that guides the working. Are there proper rules
and regulation?, are they being understood and followed
• Value Structure: How strongly are values, moral and ethical code of conduct? Are they followed
and adhered to. Are these values and believes part of the organisational culture or not
• Power Relations: How th the relation between the key people in the organisation. Is there
organisational politics that is affecting th over-all organisational performance
• Organizational Structure: The structure of the organization determines the way in which
activities are directed in the organization so as to reach the ultimate goal.
• Physical Resources: Physical resources refers to the tangible assets of the organization that
play an important role in ascertaining the competitive capability of the company
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External Environment
Micro Environment
• Micro environment is the immediate environment of rm. Organisation has every less control over these
factors
• It is external and speci c for every organisation thus every organisation have its own set of micro
environment
• It consists of
• Suppliers: Suppliers are either individuals or business houses who provide resources that are needed by the
company. Quality and reliability with respect to vendors is important for smooth conduct of business operations
• Customers: The business enterprises aims to earn pro t through serving the customer demand. In order to do it
it must understand the needs and requirement, preferences, and purchase habits of its customers
• Competitors: People or organisations that are providing same, similar or alternative product. What are their
product and services, what are their strategies. Firms also ght for the discretionary income of customers
• Market Intermediaries: People or organisation responsible for ensuring that the product reaches the end users
or the customers. Channel of distribution
• Public: Literally word ‘public’ refers to people in general. Public is any group that has an actual or potential to
have an impact on a company’s ability to achieve its objectives. The environmentalists, consumer protection
groups, media persons and local people are some of the well-known examples of publics
.

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External Environment
Macro Environment
• These are the broad set of factors external to organisation and a ecting its
functioning.
• These a ects organisations di erently depending upon the industry to which it
belong, size and type of business it is into.
• These factors are uncontrollable and the company is powerless and incapable of
exercising any control over them.
• The external environment consists of:
• Economic environment
• Political environment
• Legal environment
• Socio-Cultural environment
• Technological environment
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External Environment
Macro Environment

• Economic Environment
• Economic syste
• Overall condition of econom
• Employment scenari
• Money supply in the econom
• Resources and their availabilit
• Infrastructur
• Income of people
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External Environment
Macro Environment
• Political Environment
• Political environment constitutes all the factors related to government a airs such as:
• Type of government in power, its orientation and philosophy
• Attitude of government towards di erent groups of societies,
• Policy changes implemented by di erent governments etc.
• The political environment has immediate and great impact on the business and can be very
critical for their survival.

• The businessman has to make changes in his organisation according to the changing factor
of political environment. For example, in 1977 when Janata Government came in power they
made the policy of sending back all the foreign companies. As a result the Coca Cola
Company had to close its business and leave the country.
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External Environment
Macro Environment
• Legal Environment
• Legal environment constitutes the laws and various legislations passed in the parliament.
• The businessman cannot overlook the legislations, as business transactions are performed within the
framework of legal environment.
• The legal environments create a system of rules and regulations that must be followed by business
organisations. They may sometimes put constraints on the businesses or sometimes they provide
opportunities also.
• Some Aspects of Legal Environment:
• Various laws and legislative Acts.
• Legal policies related to licensing.
• Legal policies related to foreign trade.
• Statutory warnings essential to be printed on label.
• Foreign Exchange Management Act.
• Laws to keep a check on Advertisements.
External Environment
Macro Environment
• Socio-Cultural Environment
• Social-Cultural Environment consists of the customs, traditions and culture of the
society in which business is existing.

• The businessman cannot overlook the components of social environment as these

components are very important and directly a ects the choice of products and
services demanded by the customers.

• The social environment is made up of the attitudes, desires, expectations, degrees

of intelligence and education, beliefs, customs and culture of people in a given
group or society. The choice of product depends upon these factors.

• The product and services o ered by business must be in conformance to the social
and cultural construct of the society in which it is operating.
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External Environment
Technological Environment
• Technological environment refers to changes taking place in the method of
production, use of new equipment and machineries to improve, the quality of
product etc.

• The businessman must closely monitor the technological changes taking place in
the industry because he will have to implement these changes to remain in the
competitive market.

• Technological changes always bring quality improvement and more bene ts for
customers.

• It increase both production and productivity, and can therefore can help in raising
the wages of the employees and declining the prices of some products.

• It makes organisation more competitive

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Importance of Understanding Business Environment
Why should a manager have understanding of business environment?

• Identifying Firm’s Strength and Weakness

• Determining Opportunities and Threat
• Adapt to environmental change
• Continuous Learnin
• Image Buildin
• Facing Competitio
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