Lecture # 05

(Chapter # 03: Business Environment and Entrepreneurship)

₪ Environment and Business Environment

 Environment is the conditions, circumstances etc. affecting a person’s life.
 Business environment is the climate or set of conditions- economic, social, political or institutional in which
business operations are conducted.
 We should keep in mind that external factors and internal factors can influence each other and work together to
affect a business. For example, a health and safety regulation is an external factor that influences the internal
environment of business operations.

₪ Scanning & Analyzing of Business Environment: Meaning

• Environmental scanning involves reviewing external sources and factors that impact the internal operations of
a business.
 The factors of the business environment may be healthy or unhealthy. Business and its environment interact
with each other. Changing business environment is important because they bring opportunities for a company as
well as create threats for it.
 Environmental scanning and analysis is a strategic tool. It is a process to identify all the external and internal
elements, which can affect the organization's performance. The analysis entails assessing the level of threat or
opportunity the factors might present.
 Environmental scanning is a process that systematically surveys and interprets relevant data to identify external
opportunities and threats that could influence future decisions. It is closely related to a S.W.O.T. analysis and
should be used as part of the strategic planning process

₪ Scanning & Analyzing of Business Environment: Importance

 “Environmental monitoring- also called environmental scanning is the process of (i) gathering
information regarding a company’s external environment (ii) analyzing it and (iii) forecasting the
impact of whatever trends the analysis suggests” - W J Stanton.
 With effective forecasting, analyzing and scanning of the environment, a firm can convert the
environmental threats into opportunities. So it is very essential to forecast the environmental factors
and to establish a monitoring or early warning system.

 Constantly watching and adapting to the changing business environment is important because they
bring opportunities for a company as well as create threats for it.
₪ Scanning & Analyzing of Business Environment: Objectives and Advantages/ Significance
Some specific objectives and significance of scanning and analyzing of business environment are mentioned below:
Objectives
1) To know the internal as well as external factors of business
2) To know the latest environmental conditions
3) To determine the potential changes
4) To convert the environmental threats into opportunities.
5) To take decisions
6) To prepare, evaluate and formulate future strategies.

Significance
1) Helps to identify the latest environmental conditions

2) Enables the firm to take decisions

3) Helps to convert the threats into opportunities

4) Helps to understand the complexity and causes of changing

5) Helps to prepare the business and strategic plan

6) Helps to determine the potential effects

7) Helps in tracing the sources of opportunities & threats

8) Helps in determining the behavior with competitors

9) Enable to cope with the threats

₪ Opportunities and Threats of Business Environment

 Opportunities i.e. healthy business environment means the conditions are favorable to the growth of business.
whereas threats i.e. unhealthy business environment implies conditions hostile or unfavorable to business
operations.
 Opportunities and threats are external things that are prevailing on outside of the company, in the larger market.
** Sources of Opportunity:
* Fresh demand; * A new discovery;
* Development of new markets; * A technological breakthrough;
* Adverse period of competitors; *Target/Mission changes by competitors

** Sources/Causes of Threats:
* Increased competitors * Technological obsolescence
* Product obsolescence * Declining demand
* Government regulations * Complexities in business
* Adverse political situations * Limitations in natural resources
* Changes in world economy structure * Increased public awareness etc.
₪ Internal and External Business Environment

 Internal business environment is the conditions, factors or forces within an organization.

 Internal business environment includes the forces inside the organization that can influence the business and its
performance.

Some significant components / forces of internal business environment are: Owners / Shareholders, Board of
Directors, Managers, Employees, Objectives of business, Internal working environment etc.

 The external environment consists of a variety of factors outside the company doors that we don't have much
control over. These factors are divided into two levels i.e. micro and macro level or may be called as task forces
and general forces.

 This macro environment of business consists of some components / forces that shape opportunities and pose
threats to the development of a business.

₪ Elements / Forces of Marketing Environment

BUSINESS ENVIRONMENT

Internal Environment External Environment

1) Owners Micro / Task Forces Macro / General Forces

2) Shareholders 1) Competitor 1) Demographic Forces
3) Board of Directors 2) Suppliers 2) Economic Forces
4) Departmental Managers 3) Customers 3) Natural Forces
5) Employees 4) Creditors 4) Technological Forces
6) Objectives of Business 5) Intermediaries 5) Cultural Forces
7) Internal culture 6) Regulatory & Law 6) Social Forces
8) Working Environment Enforcing Authorities 7) Industry Forces
7) Strategic alliances 8) Legal & Political Forces
8) Publics 9) Global / International
Forces
1) Demographic Environment
 Demography is the study of human populations in terms of size, density, location, age, gender, race,
occupation and other statistics.
 Business executives i.e. the company always keep close track of demographic trends and developments
in their business and observe some variables as Changing age structure of the population, Geographic
shifts, Gender, Profession, Occupation, Diversity of population etc.

2) Economic Environment
 The economic environment consists of the following factors that affect public’s purchasing power and
spending patterns.
 The following information is required in decision making for business executives: *National income,
*Inflation rate, *Infrastructure facilities, Economic and Industrial growth rate, *Buying & spending
pattern, *Price movements, *Corporate taxation and incentives, *Unemployment rate, Credit & monetary
policies etc.

3) Natural Environment
 Natural environment is composed of the natural resources that are needed as inputs by the organizations /
managers.
 Organizations should be aware of several trends in the natural environment such as- Cost of energy,
Trends of pollution, Government intervention in natural resource mgt. etc.

4) Technological Environment

 It is most dramatic force. It changes rapidly.

 Every new technology creates new markets and opportunities. However, every new technology replaces
an old technology.

 If ignore new technology, every possibility to fail in the business. So the business executives should
watch the technological environment closely.

5) Cultural Environment
 A cultural environment is a set of beliefs, practices, customs and behaviors that are found to be common
to everyone that is living within a certain population. Cultural environments shape the way that every
person develops, influencing ideologies and personalities.
 Some cultural characteristics can affect business decision making- Cultural Values, Sub-cultures, Shifts
in Secondary Cultural Values etc.

6) Social Environment

The social environment consists of the sum social factors like society's beliefs, customs, practices and
behaviors. Every society constructs its own social environment. Significant forces of social environments
are: Family, Educational Institutions, Religion, Social Attitudes etc.
7) Industry Environment

 Industry analysis is a tool that facilitates a company's understanding of its position relative to other
companies that produce similar products or services.

 Understanding the forces at work in the overall industry is an important component of effective strategic
planning. Forces are: *Nature of Competition, Employee Turnover, Length of Product Life Cycles, Focus
on Sales/Profits, Available Capital etc.

8) Legal and Political Environment

 The political environment refers to the actions taken by the government, which potentially affect the
daily business activities of any business or company.

 Political & Legal environment consists of laws, government agencies and pressure groups that influence
and limit various organizations and individuals in a given society.

9) Global / International Environment

The global business environment is multiple sovereign nations outside of the organization's
home environment influencing how the organization makes decisions for how to use its resources. The
company's operating situation depends on both external and internal factors. Some international policies,
agreements and political situations also affect the business decision making.

₪ PEST and PESTLE Analysis of Business Environment

 PEST is an acronym for Political, Economic, Social and Technological. This analysis is used to assess
these four external factors in relation to your business situation.
 Basically, a PEST analysis helps you to determine how these factors will affect the performance and
activities of your business in the long-term.
 PESTLE means Political, Economic, Social, Technological, Legal and Environmental Factors (business
evaluation).
 A PESTLE analysis is a framework to analyze the key factors (Political, Economic, Sociological,
Technological, Legal and Environmental) influencing an organization from the outside. It offers people
professional’s insight into the external factors impacting their organization.