BM516-UNIT 1

Business Environment- Meaning, Characteristics, Scope and Significance, Components

of Business Environment. Micro Business Environment- Introduction to Micro-
Environment, Internal Environment, Value system, Mission, Objectives, Organizational
Structure, Organizational Resources, Company Image, Brand Equity, External
Environment: Firm, customers, suppliers, distributors, Competitors, Society. Macro
Business Environment- Definition, Differentiation, Analysis of Business Environment,
SWOT Analysis, Introduction to Macro Components – Demographic, Natural, Political,
Social, Cultural Economic, Technological, International and Legal.

Meaning:
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 e n vironment.
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

The aspects which fall under business environment are as follows:
 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 organisations’ decisions and actions and are directly
relevant to the achievement of organisations’ 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.

SIGNIFICANCE OF BUSINESS ENVIRONMENT

Following points describe the 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. The management has to draft new plans and policies to
deal with new competitors. Environmental awareness provides intellectual stimulation
to planners in their decision making. They can make changes in their plans
efficiently and effectively.
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.
 Business Environment

External Environment Internal Environment

Value System

Micro Environment Macro Environment

Objectives
• Organisation
Structure
• Suppliers of Inputs • Economic
Corporate Culture
• Customers • Political-legal Human Resources
Marketing Physical
• • Resources and
Global or International Financial
• • Socio-cultural Capabilities
Public Demographic
• •
Natural
•

Various components of business environment are as follows:

Internal environment: These are those factors or conditions that exist within an organisation
and affect its performance. These factors are controllable in nature and organisation can try
to change or modify these factors. Organisation’s resources like men, material, money,
method and machine come under internal environment. Various internal factors are as follows:
 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.
 Value system of the founders and persons holding top positions have some values.
These values influence their policies, practices, choice of business, vision-mission and
objectives of the organization. Eg: TISCO incorporated its social responsibility to
consumers, employees, shareholders, society and the people in articles of association.
This is due to the value system of JRD Tata and acceptance of it by persons at the top
of Tata business domain.
 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.
Vision-mission and objectives of the company decide the business domain, priorities,
direction of the development, business philosophy, business policy. Eg: Ranbaxy’s
thrust into the foreign markets and development have been driven by its mission “ TO
 BECOME A RESEARCH BASED INTERNATIONAL PHARMACEUTICAL
COMPANY.”
 Organisation/Management 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.
 Some complex management structures and styles delay decision making. Quality of the
board of directors is a vital element. There are some companies with highly qualified
and responsible board. Some companies have dishonest and unscrupulous board. Eg: in
some companies like WIPRO majority of the shares are held by promoters. In the case
of TATA group of companies, the share of promoters is very vulnerable. Financial
institutions had large shareholding in many Indian companies.
 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. Skill, quality, morale, commitment,
attitude of people contribute to the strength of the enterprise. Employee resistance to
change is a barrier to growth of an organization.
 Involvement, initiative of people vary from organization-to-organisation. Eg: john
towers, M.D. Rover group observes that a Japanese company of 30000 employees is
30000 process improves. Such a situation cannot be found in an Indian company.

 Company image and Brand equity: Image of the company plays a significant role
while raising finance, forming joint ventures, soliciting marketing intermediaries,
entering sale or purchase contracts, launching new products etc., brand equity is also
relevant.
 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:
1. 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.

Macro Environment: These are the factors or conditions which are general to all businesses
and are uncontrollable. Because of the uncontrollable nature of macro forces, a firm needs to
adjust or adapt it to these external forces. These factors are as follows:
 Economic environment: All those forces which have an economic impact on
businesses are called economic environment. It includes agriculture, industrial
production, infrastructure, and planning, basic economic philosophy, stages of
economic development, trade cycles, national income, per capita income, savings,
money, etc., For example, low per capital income will negatively impact business
because people have less money to spend.
 Political-legal environment: The activities of legislature, executive and judiciary
play a vital role in shaping, directing, developing and controlling business activities.
Rules and regulations, framed by the government, like licensing policy, polythene ban,
etc., affect the business. Business growth can be achieved by using a stable and dynamic
political-legal environment.
 Technological environment: Systematic application of scientific or other organised
knowledge to practical tasks or activities is called technology. As it is changing fast,
businessmen should keep a close look on those technological changes for its
adaptation in their business activities.
 Global or international environment: The global environment is also important
for shaping business activity. In the era of globalisation, whole world is a market.
Business analyses international environment to cope up with the changes.
 Socio-cultural environment: People’s attitude towards work and wealth, lifestyle,
ethical issues, role of family, marriage, religion and education and also social
responsiveness of business affect the business.
 Demographic environment: Population size and growth, life expectancy of the
people, rural-urban distribution of population, the technological skills and
educational levels of labour force come under demographic environment. These
features also affect the functioning of organisations.
 Natural environment: The natural environment plays an important role as it provides
raw materials and energy for production in a firm. Natural environment consists of
geographical and ecological factors a such as minerals and oil reserves, water and
forest resources, weather and climatic conditions and port facilities. These are very
important for many business activities. For example, in places where temperatures are
high, the demand for coolers and air conditioners is high. Also, demand for clothes
and building materials depends on weather and climatic conditions. Natural calamities
like floods, droughts, earthquakes, etc., immensely affect business activities.