BUSINESS ENVIRONMENT & ENTREPRENEURSHIP

WHAT IS BUSINESS
Business is an economic activity which is related with continuous production of
good and services for satisfying human wants.
1. Exchange of goods/services 2. Deals in numerous transactions.
3. Profit is main objective. 4. Risk and uncertainties.
5. Buyer and seller. 6. Marketing and distribution of
goods/services.
7. To satisfy human wants. 8. Social obligation
Business does not function in isolation or in vacuum. It is affected by internal and
external factors. These internal and external factors collectively constitute
business environment. Internal environmental factors are within the control of
business, whereas external factors are beyond the control of business.

‘Environment’ refers to the system in which human beings live and they
have to adjust themselves according to it. So it is surroundings, external
agents, influences or circumstances under which something exists.
Business Environment can be defined as the combination of internal and external
factors that influence a company’s operating situation. The business
environment can include factors suchas: clients and suppliers; its competition
and owners; improvements in technology; laws and government activities; and
market, social and economic trends.
Business Environment literally means all those aspects that have a bearing on
the business such as its strengths, weaknesses, internal power relationships and
orientations of the organization; government policies and regulations; nature of
the economy and economic conditions: socio-cultural factors: demographic
trends; natural factors; and, global trends and cross-border developments.
Business environment plays a key role in shaping the business decisions and
strategies of a firm. The opportunities and threats for a business come mainly
from its external environment which includes factors like economic, political,
technological and social. Similarly, the internal factors like managerial
capabilities, efficiency in resource utilization etc make an organization strong or
weak.

Business Environment can be defined as the aggregate of all

those forces, factors and institutions which directly affect the
working of a business organization.
Some of these constituents may be static, while others may be changing.
“Business Environment is the aggregate of all conditions, events
and influences that surround and affect the business.”
Keith Davis
CHARACTERISTICS/NATURE OF BUSINESS ENVIRONMENT
Business Environment is very complicated, dynamic and multi-
dimensional and affects different business institutions in different ways. It
exhibits many characteristics like:
1. Complex: Environment comprises of many factors. All these factors are
related to each other. Therefore, their individual effect on the business
cannot be recognised. This is perhaps the reason which makes it difficult
for the business to face them.
2. Dynamic: As is clear that environment is a mixture of many factors and
changes in some or the other factors continue to take place. Therefore, it
is said that business environment is dynamic.
3. Uncertain: Nothing can be said with any amount of certainty about the
factors of the business environment because they continue to change
quickly. The professional people who determine the business strategy take
into consideration the likely changes beforehand.
4. Multi-dimensional: Business environment is related to the local
conditions and this is the reason as to why the business environment
happens to be different in different countries and different even in the
same country at different places.
6. Interdependent components: The different factors of business
environment are co-related. For example, change in the import-export
policy with the coming of a new government.
In this case, the coming of new government to power and change in the
import-export policy are political and economic changes respectively.
Thus, a change in one factor affects the other factor.
IMPORTANCE/SIGNIFICANCE OF BUSINESS ENVIRONMENT
Business and its environment are closely inter-related and mutually
interdependent. Environment has its bearing on business and business
has its bearing on environment. The success of business lies in
understanding the environmental changes and adapting its business
policies accordingly. The surroundings of business enterprise which are
constantly changing, carry with them both opportunities and risks or
uncertainties which can make or mar the future of business. Significance
of the study of environment in business sector may be explained as
follows:
1. Early identification of opportunities helps a business organization to be
the first to exploit them.
2. A business organization should make its policies keeping in view the
demands of environment.
3. The study of business environment is important to ensure optimum
utilization of resources like, financial resources, human resource and
physical resource etc.
4. Environment analysis helps the business organizations to identify
strengths and weaknesses.
5. Environment analysis helps the business organizations to identify
threats and explore opportunities available to business.
6. Environment analysis helps in adapting latest technological
development which results in improved efficiency.
7. Scanning the business environment helps to understand Political
Situation and its effect on business.
8. Scanning the business environment helps to understand economic
policies of Government and their impact on business.
9. Because of globalization, the impact of international events on business
is increasing. To understand global events and their impact on business,
study of international environment is must.
10. By environmental analysis, business organizations come to know
about the strategies of competitors to formulate counter plans.
11. Environment analysis helps in understanding the market conditions
i.e. change in demand/supply, change in fashion, taste, boom or
depression etc.
COMPONENTS/TYPES/CONSTITUENTS/FACTORS OF BUSINESS
ENVIRONMENT
Every business faces two types of environments simultaneously i.e. Internal
Environment and External Environment.
1. INTERNAL ENVIRONMENT: All those factors within an organization which
impart strengths or cause weaknesses constitute the internal environment.
These factors can be controlled by business, but they are quite important in
shaping the behaviour of people working in it. Hence, managers have to take
internal factors into account while taking actions.
2. EXTERNAL ENVIRONMENT: All those factors outside the organization which
provide opportunities or pose a threat to the organization make up the
external environment. These factors are those over which the business
organization has no control.

According to William Glueck and Jauck “In environment there are external
factors, which constantly bring opportunities and threats to the business
firm. In includes Economic, Social, Technological and Political conditions.”
Examples of situations that may cause change in the external
environment include:
(i) Improvement in production techniques (ii) Fluctuations in the
levels of demand (iii) Fluctuations in interest rates (iv)
Changes in laws and regulations
(v) Changes in taxation (vi)International influences
(vii) New social trends, fashions or lifestyles
 INTERNAL ENVIRONMENT
The internal environmental factors are regarded as controllable as the
firm can exercise prober control on these elements. All factors operating
within the boundaries of the organization come under this category.
Unlike the external environment, a firm is free to make necessary
modifications in these factors.
The prominent internal factors which have implications on the tactics and
decisions of a business organization are given below:
1. Vision, mission and objectives: Concepts like vision, mission and
objectives of a company plays a key role in deciding business province,
preferences, course of development, business philosophy, business policy
etc. The mission of Tata Consultancy Services (TCS), that is to help
customers achieve their business objectives by providing innovative, best-
in-class consulting, IT solutions and services, enabled it to be one of the
triumphant companies of the world.
2. Values: Factors like mission and objectives of the organization, business
policies and practices are moulded based on the values of the founders
and pioneers of the organisation. Endorsing and dissemination of strong
values by the whole organization leads to its success while weak value
base ends up in its failure.
3.Management structure and nature: Factors like organizational structure,
the composition of the board of directors, level of professionalization of
management etc have a sway upon business decisions and strategies.
Quick decision making is easily enabled by some management structures
while some others cause delay in it.
4.In-house authority liaison: It intends that certain features like support
from different levels of employees to the top management, shareholders
and board of directors etc are swaying decisions and strategies.
5. Human Resources: The attributes of the employees like soft and hard
skills, eminence, self-esteem, dedication, attitude and aptitude etc could
add to the strength and weaknesses of an organization.
6. Owners: Owners are people who have invested their fund in the
company and have property rights and claims on the organization. Owner
can be an individual or a group of persons who created the company; or
who purchased the shares from the share market. They have the right to
change the company policies at any time. Hence it can be said that they
are a decisive component of the internal environment.
7. Board of Directors: The board of directors is the governing body of the
company who are elected by stockholders, and they are given the
responsibility of administering a firm’s top managers and other officials.
They have crucial control over the internal environment.
8.Company image and brand equity: The image of the company have a
say in doing operations like mobilization of finance, materialization of joint
ventures or other alliances, entering purchase or sales contracts,
marshalling raw materials, opening new product lines etc.
9. Research and development: Good research activities undertaken by an
organization is a strong internal component that can contribute to its
prosperity as such a venture will enhance its reputation and can exploit
first mover advantage.
10. Technological factors: Factors like introduction of new technology, its
effective exploitation etc have a sway on the affluence of the business.
There are a number of other internal factors like physical assets and
facilities like production capacity, marketing capabilities like marketing
personnel and distribution networks etc. The top management of the firm
can renovate the internal environment with more strength and less
weaknesses.
 TYPES OF EXTERNAL ENVIRONMENT
MICRO ENVIRONMENT: Micro environment consists of factors in the
company’s immediate environment that affect the performance of the
company. These include the suppliers, marketing intermediaries,
competitors, customers and the public.
According to Philip Kotler “The micro environment consists of factors in
the company’s immediate environment which affect the performance of
the business unit. These include suppliers, marketing intermediaries,
competitors, customers and the public.”
According to Hill and Jones “The micro environment of a company
consists of elements that directly affect the company such as competitors,
customers and suppliers.”
MICRO ENVIRONMENT
1. Suppliers: Suppliers are important for any business unit. Suppliers are
those who supply the inputs like raw material and components to the
company. Organizations should keep two things in mind regarding
suppliers: Reliability Multiple suppliers
2. Customers or clients: A business exist only because of its customers.
Hence, a major task of a business is to create and sustain customers.
Monitoring the customer’s sensitivity is a pre-requisite for business
success.
A company may have different types of customers
(i) Individual and household customers (ii) Government bodies
(iii) Foreign customers (iv) Retail customers
(v) Wholesale customers

3. Competitors: Competitor means other business units which are making

similar products or a very close substitute of our product. Competitors
play a vital role in running the business enterprise. Business has to adjust
its various activities according to the behaviour of the competitors.
4. Market Intermediaries: Every business enterprise may be assisted by
market intermediaries which include agents, brokers who help the
company find customers. It is a link between company and final consumer.
Market intermediaries help the company to promote, sell and distribute its
goods to final buyers. Examples: Wholesalers, retailers, advertising
agencies, consultancy firms, banks, insurance companies, warehouse,
transport agencies etc.
5. Public: Public is any group that has actual or potential interest in the
business. To achieve this interest, it has its impact on the business. Public
includes users and non-users of the product like Environmentalists, NGOs,
Local Community, Media.
6. Financiers: The term financiers include commercial banks, money
lending institutions, private persons etc who have lent money for business
operations. In addition to the financing capabilities, their policies and
strategies, attitudes, ability to provide non-financial assistance etc are
vital.
7. Regulators: Regulators are units in the task environment that have the
authority to control, regulate or influence an organization’s policies and
practices. Government agencies are the main player of this environment.
8. Strategic Partners: They are the organizations and individuals with
whom the firm is in an agreement or understanding for the benefit of the
organization. Such strategic partners may influence the organizations
activities in various ways.
EXTERNAL ENVIRONMENT
A company and the forces operate in a larger Macro environment that shape
opportunities and pose threats to the company. These factors are generally more
uncontrollable than the micro forces.
According to Philip Kotler “Macro environment includes forces that create
opportunities and pose threat to the business unit. It includes economic,
demographic, natural, technological, political and cultural environments.”
According to Hill and Jones “The macro environment consists of the broader
economic, social, political, legal, demographic and technological setting within
which the industry and the business units are placed.”

1. ECONOMIC ENVIRONMENT: Economic environment consists of economic

factors that influence the business in a country. It is very complex and
dynamic in nature that keeps on changing with the change in policies or
political situations.
Key components of economic environment are:
(A)Economic Conditions of Public
(B) Economic Policies
(C ) Economic System
2. POLITICAL-LEGAL ENVIRONMENT: Political environment affects different
business units significantly. A stable and dynamic political environment is
essential for business growth. Whenever there is a change in the
Government in a democratic country, it is a sign of change in economic
policies. The Political environment of business depends on:
1. Ideology of the Government 2. Political Establishment
3. Political Stability in the country 4. Relations with other countries
5. Defense and Military Policy 6. Centre State Relationship
7. Approach of Opposition parties towards business
LEGAL ENVIRONMENT: Legal environment constitutes the laws framed by
the Government and various legislations passed in the parliament. The
businessman cannot overlook the legislations because he has to perform
his business transactions with in the framework of legal environment.
Every aspect for business is regulated by law in India. Government has
also framed legislations which regulate and control the business.
Some of the main legislations regulating the business are as follows:
1. Industrial Dispute Act, 1947 2. Factories Act, 1948
3. Consumer Protection Act, 1986 4. Companies Act, 1956
5. Foreign Exchange Management Act 1999 6. Securities and Exchange
Board of India Guidelines, 2000
3. SOCIAL & CULTURAL ENVIRONMENT: Business is an integral part of
society and both influence each other. Influence exercised by social and
cultural factors is known as socio-cultural environment. These factors
include: attitude of people, family system, caste system, religion,
education, marriage, habits and preferences, languages, urbanization,
customs and traditions, ethics etc.
4. TECHNOLOGICAL ENVIRONMENT: A systematic application of scientific
knowledge is known as technology. Everyday there are vast changes in
products, services, lifestyles and living conditions, these changes must be
analysed by every business unit and should adapt these changes.
5. DEMOGRAPHIC ENVIRONMENT: Demographic environment refers to the
study of the features of population i.e. size of population, growth rate,
gender ratio, age composition, income level, education level, family size,
family structure etc. All these factors affect size of demand, tastes,
fashion, liking, preferences of consumer etc.
6. NATURAL OR ECOLOGICAL ENVIRONMENT: It includes geographical and
ecological factors such as natural resources, weather and climatic
conditions, port facilities, topographical factors such as soil, rivers, rainfall,
pollution etc. Every business unit must look for these factors before
choosing the location for their business.
7. INTERNATIONAL/ GLOBAL ENVIRONMENT: International environment is
important for industries directly depending on import and export. A
recession in foreign market or protection policy by foreign nations may
create difficulties for industries depending on exports. Liberalization of
import may help some industries but may adversely affect other
industries.
Following factors of international environment affect business:
1. Globalization 2. Liberalization
3. International agreements and declarations 4. International
terrorism
5. Cultural exchange
Privatization in India
Privatization refers to the process of transfer of ownership, can be of both
permanent or long-term lease in nature, of a state-owned or public owned
property to individuals or groups that intend to utilize it for private
benefits and run the entity with the major aim of profit maximization.
Although the contribution of Public Sector Undertakings is essential to our
economy, their poor performance isa barrier that shall be conceived well.
In the social service sector, low level of satisfaction led to exit raising the
provision of services (Kapur & Ramamurti, 2002). Privatization got
tremendous strength by the introduction of new economic policy in 1991
that allowed deli censing, relaxing entry restrictions and equity funding.
Bureaucracy, red tapism, political hiccups, corruption are prominent
obstacles in the development of India and also becomes hindrances to
foreign investors.
Features of privatization
Enhanced competitive characteristics: That competitiveness shall be
fruitful to the business as well as the country. In this sense, many scholars
had supported privatization as a vital source to enhance economic
enticements, amplify better managerial skills of the private sector, extend
the share ownership, and lower the public borrowings in order to sustain
sustainable services.
An attempt to enhance market potencies: Privatization essentially is an
effective tool for restructuring and reforming the public enterprises.
Because public sector is conceived as self-motivated entities and superior
producer of quality goods.
Types of privatizations
 Delegation: Government keep hold of responsibility and private
enterprises deal fully or partly the delivery of product and services.
 Divestment: Government surrenders the responsibility.
 Displacement: The private enterprise develops and gradually displaces
the government entity
Advantages of privatization
 Microeconomic advantages
1. Private enterprises show better results in terms of revenue, efficiency
and productivity.
2. Privatization brings strong structural changes in a competitive manner.
3. Privatization leads to the adoption of global best practices and
improvised management of resources.
 Macroeconomic advantages
1. It has a positive impact on the financial health of the sector by reducing
debts and deficits.
2. Net transfer to the State-owned Enterprises is lowered through
privatization.
3. Helps in escalating the performance parameters of the industry in
general.
4. In long term, employees shall avail benefits that offer prosperity.
5. Privatized enterprises provide better and prompt services to the
customers and help to the betterment of infrastructure in the country.
 Disadvantages of privatization
1. Private sector primarily focuses on profit maximization and lesson social
services.
2. There is lack of transparency in private sector and public do not get the
complete information about the functioning of these enterprises.
3. Private enterprises support unnecessary corruption and illegitimate ways
of accomplishments of licenses and business deals.
4. Private enterprises may deviate from the societal commitments and may
solely exist for profit making.
5. Private entities result in high employee turnover and may require high cost to
train the employees.
6. Another argument against privatization is price inflation.
SWOT Analysis
It is an important form of business environment analysis, which is
accepted all over the world. A SWOT analysis (alternatively SWOT matrix)
is a configured planning method used to assess the strengths,
weaknesses, opportunities and threats involved in a project or in a
business venture. It is not feasible for an organization to exploit all the
opportunities present in the environment due to the short of strengths and
abilities. It may also fail to successfully overcome threats due to the lack
of capabilities. Proper Strength, Weaknesses, Opportunities, and Threats
(SWOT) analysis may reveal that the company is not efficient in particular
fields of business. It can give up such business activities and concentrate
more on competent areas.
A firm’s strengths are its resources and abilities that can be used as a
foundation for expanding competitive advantage. It includes factors like
better brands, reputation and goodwill, cost reduction etc. Similarly,
weaknesses include those zones where the firm is not strong.
For instance, high-cost structure and inefficient production processes may
keep a firm weak. Opportunities are the factors which open doors to
profitability and expansion for a firm, and are present in the external
environment of a business. Novel technologies developed, a particular
need of consumers etc can be seen as opportunities for improvement. The
vibrant external environment can challenge the prosperity of an enterprise
by throwing threats against it. Such threats include a new policy of
regulation by government, steeply increasing cost of raw materials etc. In
SWOT analysis, one has to identify all the four factors. Strengths should be
enhanced, and weaknesses should be eliminated for effectively reaping
benefits of opportunities and avoiding challenges of threats.
Merits of SWOT analysis
a. It is a source of information for strategic planning.
b. Builds organization’s strengths
c. Helps to deplete firm’s weaknesses.
d. Maximize organization’s response to opportunities.
e. Overcome organization’s threats.
f. It helps in identifying core competencies of the firm.
g. It helps in setting of objectives for strategic planning.
h. It gives a clear picture of the past, present and future aspects of the
organization.