Business Environment

Dr Subhash Gupta
 Meaning of Business Environment

• Business Environment consists of all those factors that

have a bearing on the business, such as the strengths,
weaknesses, internal power relationships and
orientations of the organisation; 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.
 What is Business Environment?
•A business organization does not exist in a vacuum. It exists in a world of
concrete places and things, natural resources and living persons. The sum
of all these factors and forces is called the Business Environment.
•Business Environment consists of both Internal and External factors.
•Business Environment in the present era of LPG is becoming increasingly
complex.
•Business Environment can be further classified into two major categories:
the economic environment and the non-economic environment.
•The economic environment includes factors like—the Fiscal Policy, the
Monetary Policy, the Industrial Policy, the price and Income equation,
Nature of the Economic System, the pace of Economic Development etc.
•The Non-economic environment includes factors like—social, cultural,
political, legal, technological factors etc.
 What is the Environment of Business?

The relationship between business and its environment is one of mutual benefit
and therefore, it has been shown as a two-way relationship in Figure. This may
be referred to as a ‘symbiotic relationship’ as business functions in such a way
that it both takes from and gives nurture to the various segments of its
environment. Only through such a relationship, a business can survive and
prosper.
Social Political
System System
Including Including
Moral Legal

Business

Scientific
And
Technology Economic
System System

Relationship between business and its environment

 Leading determinants of the Environment for
Business
• The state of the World Economy and Distribution of World Output.
• International Economic Cooperation.
• Role of Multilateral Economic Institutions.
• International Economic Laws, Treaties, Agreements, Practices.
• Political system and conditions in different countries.
• Cultural factors across countries.
• Growth and spread of Multinational Corporations.
• Technology growth and Transfer.
• Corporate Governance standards and ethical practices across
countries.
• International market structure and competition.
• Barriers to International Trade and Investment.
• National Economic policies of different countries.
 ENVIRONMENT TYPES

Macro Political

Conventional Economic Micro

Competitors

Environ-
mental Internal Buyers
Suppliers
Social

New New
Substitutes Entrants
Legal

Technological
 The Micro and Macro Environment
Macro Business Environment Model
Socio-Cultural Factors Political and Govt. Factors
Micro Business Environment Model

Suppliers Labour Customers

Demographic Factors Natural Factors

Competitors
Regulating
Agencies
Business

Business
Associates
Economic Factors International Factors

Technological Factors
Types of Environment
Environmental Factors and their Features
 Macro Environment
1. ECONOMIC ENVIRONMENT
b. Economic Conditions
c. Economic Systems
d. Economic Policies
(i) Budgets, (ii) Industrial Regulations, (iii) Economic Planning, (iv) Import & Export Regulations, (v)
Business laws, (vi) Industrial Policy, (vii) Control on Prices and Wages, (viii) Trade and Transport
Policies, (ix) The size of the National Income,
(x) Demand and Supply of various goods
The important acts are
(i) Factories Act, (ii) Industrial Disputes Act, (iii) FERA, (iv) Imports and Exports Act,
(v) Companies Act, (vi) Industries Act.
d. Economic Growth
e. Interest Rates
f. Currency Exchange Rates
g. Inflation Rates
2. POLITICAL AND GOVERNMENT ENVIRONMENT
a. Legislature
b. Executive
c. Judiciary
3. SOCIO CULTURAL ENVIRONMENT
a. people’s attitude to work and health
b. Role of family
c. Marriage
d. Religion
e. Education
f. Ethical issues
g. Social responsibility of business
4. NATURAL ENVIRONMENT includes
a. Natural resources endowments
b. Weather & climate conditions
c. Topographical factors
d. Location aspects
e. Port facilities etc.
Almost every aspect of business depends upon natural environment. For
example.
(i) Manufacturing depends on physical inputs
(ii) Mining and drilling depends on natural deposits
(iii) Agriculture depends on nature
(iv) Trade between two nations depends on geographical factors
(v) Transport and communication depends on geographical factors
(vi) Topographical factors may affect the demand pattern
5. DEMOGRAPHIC ENVIRONMENT includes
a. Size, growth rate, age composition, sex composition etc. of population
b. Family size
c. Economic stratification of population
d. Educational level
e. Caste, religion etc.
 INTERNATIONAL ENVIRONMENT

1. Due to liberalization, Indian companies are forced to view

business issues from the global perspective.
2. Safe and protected markets are no longer there. World is
becoming small in size due to advanced means of transport and
communication facilities.
3. Learning of foreign languages is a must for every business
manager.
4. Acquiring familiarity with foreign currencies is also a must.
5. Facing political and legal uncertainties is inevitable.
6. To survive amidst intense competition every businessman should
try to adapt his products to different customer needs and tastes.
7. Mobilization of resources, particularly financial is an essential
starting point in the process of international environment.
 Micro Environment
1. SUPPLIERS
Suppliers are the persons who supply the inputs like raw materials and
components to the business.
IMPORTANCE:
(i) For the smooth functioning of the business it is very important to have a
reliable source of supply.
(ii) Uncertainty regarding the supply or other supply problems will compel the
companies to maintain high inventories which will cause increase in costs.
WHY MULTIPLE SOURCES OF SUPPLY?
(i) It is very risky to depend on a single supplier because a strike, lockout or
any other production problem with that supplier may seriously affect the
company.
(ii) A change in the attitude or behavior of the supplier may also affect the
company.
2. CUSTOMERS
(i) Industrial Customers
(ii) Retail Customers
(iii) Wholesale Customers
(iv) Government as Customer
(v) Foreign Customers
3. LABOUR
4. BUSINESS ASSOCIATES
5. COMPETITORS
(I) Generic Competition: Competition in the same line of business.
(II) Product form Competition
(III) Brand Competition
6. REGULATING AGENCIES
 SCOPE OF BUSINESS ENVIRONMENT
• USE OF LATEST SCIENTIFIC & TECHNICAL KNOW-HOW.
• CHALLENGES AND DIFFICULTIES ENCOUNTERED IN CONVERTING
RAW MATERIALS INTO SALEABLE PRODUCTS.
• PROBLEMS CONFRONTED IN RAISING AND SPENDING MONEY FOR
THE GOOD OF BUSINESS.
• THE UPHILL TASK OF BRINGING EMPLOYESS TOGETHER AND
MOTIVATING THEM TO ACHIEVE HIGHER PRODUCTIVITY.
• SLEEPLESS NIGHTS SPENT FOR R&D AND FOR BETTER
MARKETING OF THE PRODUCTS.
• THE TASK OF COMPLYING WITH LEGAL RESTRICTIONS AND
GOVERNMENT REQUIREMENTS AND DISCHARGING OBLIGATIONS
TO CONSUMERS, EMPLOYEES, OWNERS, AND TO OTHER INTEREST
GROUPS WHICH HAVE A STAKE IN BUSINESS DIRECTLY OR
INDIRECTLY.
OBJECTIVES OF BUSINESS ENVIRONMENT

• ECONOMIC OBJECTIVES---SURVIVAL, ROI, GROWTH, INNOVATION,

MARKET SHARE.

• SOCIAL OBJECTIVES---PROTECT CONSUMER INTEREST, WORKERS

INTEREST , SOCIETY’S INTEREST.

• PRIMARY OBJECTIVES---BUILDING FINANCIAL INDEPENDENCE, FAIR&

REGULAR DIVIDENDS TO SHAEHOLDERS, PAYMENT OF FAIR WAGES,
CHARGING FAIR PRICES.

• SECONDARY OBJECTIVES---BONUS FOR THE WORKERS, PROVIDING

AMENITIES TO THE LOCALITIES.

• SHORT RUN OBJECTIVES---

• LONG RUN OBJECTIVES---TO INCREASE MARKET SHARE.

 ENVIRONMENTAL ANALYSIS
• ENVIRONMENTAL ANALYSIS MEANS TO FIND OUT THE
IMPLICATIONS OF THE POLICIES OF THE COUNTRY AND COUNTRIES
FOR THE COMPANY- THREATS, OPPORTUNITIES etc.

STAGES OF ENVIRONMENTAL ANALYSIS

1. SCANNING THE ENVIRONMENT TO DETECT WARNING SIGNALS.

2. MONITORING SPECIFIC ENVIRONMENTAL TRENDS-CULTURAL,

TECHNOLOGICAL, ECONOMIC etc.

3. FORECASTING THE DIRECTION OF FUTURE ENVIRONMENTAL

CHANGES-WHERE TO MOVE AND IN WHICH DIRECTION.

4. ASSESSING CURRENT AND FUTURE ENVIRONMENTAL CHANGES FOR

THE ORGANISATION.
ENVIRONMENTAL SCANNING
• Identification and forecasting phenomena in
the environment
• Ongoing environmental scanning is essential
for strategy formulation
• Enterprises continuously engage in identifying
and forecasting opportunities and threats
• Enterprises need to proactively or reactively
respond to changing conditions in the
environment
• Various sources of information are available to
assist with scanning
 ENVIRONMENT MEGATRENDS

• Rise of BRIC countries

• Faster technological advance
• Shorter product life cycles
• Increasing industrial concentration
• Global branding
• More strategic alliances
• Liberalisation and decentralisation
 ENVIRONMENT MEGATRENDS

• Peace dividend
• Rising real incomes
• Ageing population
• Physical resource depletion
• Green concerns
• Economic turbulence
• Clash of Civilisations
Forces Driving Industry Competition
 INDUSTRY ANALYSIS
FIVE FORCES
• (1) BARRIERS TO ENTRY
– Economies of Scale
– Technology
– Patents
– R&D spend
– Controlled Supply
– Government Protection
– Specialist Knowledge
 INDUSTRY
ANALYSIS
● FIVE
(2) INTENSITY FORCES
OF RIVALRY
●Number of Existing Competitors
●Similarity
●Exit Barriers
●Slow Industry Growth
●Type and Diversity of Competitors
●Strategic Stakes
● (3) SUBSTITUTES
 INDUSTRY
ANALYSIS
FIVE FORCES
● (4) POWER OF BUYERS
Buyers Low Profits
Buyers Low Switching Costs
Buyers Total Material Costs
● (5) POWER OF SUPPLIERS
Concentration
Few Substitutes
Customer Importance
Crucial Product
 INDUSTRY
ANALYSIS
FIVE MORE FORCES
● POTENTIAL RATE OF GROWTH
● STRUCTURE OF DEMAND
● TECHNOLOGICAL SOPHISTICATION
● RATE OF INNOVATION
● MANAGERIAL CAPABILITY
 Benefits of Environmental
Analysis
1. Environmental analysis gives an idea of organization's
environment.
2. Environmental analysis gives a brief about competitors.
3. Environmental analysis tells us about opportunities to
reap profits.
4. Environmental analysis gives details about threats in the
environment.
5. Environmental analysis keeps the manager informed and
alert.
6. Business is all about making the right decision at the right
time. Without proper environmental analysis, the right
decision can't be made.
7. Environmental analysis helps in predicting the future.
8. Environmental analysis helps in suitable modification of
strategies, as and when required.
 Limitations of Environmental
Analysis
1. Today the environment is turbulent and dynamic and it is
difficult to forecast or predict the environment.

2. Business environment is global and any development in any

part of the world can influence the business. Even a small
political move can have a drastic impact, which is very difficult to
scan and assess. A sudden disintegration of USSR had very
adverse impact on many exporters in India. A sudden attack of Al
Qaeda on the Twin Towers in the US resulted in the hike of global
petroleum prices. After signing the WTO, all of a sudden the
toy market of India was captured by Chinese products.
Today it is extremely difficult to predict the external environment.

3. The Effectiveness of environmental analysis depends upon

how it is practiced, i.e., whether it is a systematic approach, ad
hoc or processed. Under a systematic approach, information for
environmental scanning is collected, scanned and monitored on a
continuous basis and forecast and is assessed for the relevant
factor.