Environment means the surroundings, external

objects, influences or circumstances under

which someone or something exists. The
environment of any organisation is the
aggregate of all conditions, events & influences
that surround & affect it.
 Purchase decision: Automobile
 Supplier of raw materials
 Manufacturer
 Dealer
 Advertising agency
 Banker
 Insurance agent
 Business- economic activity
 Business firm- economic unit
 Business decision making- economic in nature

Business achieve objectives by using resources

optimally

Decisions taken in the presence of

environmental factors
 Business firm is micro economic unit
 Business environment furnishes macro economic
context for its operation

 Environment in which business operates

 Includes conditions, events, factors that
influence the working of business
Classification:
 Time: past, present & future environment of business

 Space: local, regional, national , international

environment of business
 Forces: forces of market like demand, supply

 Factors: economic & non-economic

The classification of relevant environment into
components helps the organisation to cope with
its complexity, comprehend the different
influences operating & relating the environmental
changes to its strategic management process.

Business firms: adaptability & adoptability to

environment

Managers: capability & copability to deal with

environment
 INTERNAL BUSINESS DECISIONS
EXTERNAL
ENVIRONMENT ENVIRONMENT
Richman & Copen…………
Environment factors or
constraints are largely, if not totally, external
and beyond the control of individual industrial
enterprises & their managements. These are
essentially the ‘givers’ within which the firms &
their managements must operate in a specific
country & they vary often greatly from country
to country.
 Business environment for a firm- multi layered
structure.
Layers:
 favourable/ adverse
 exhibit different characteristics
 affect adjoining layer over a period of time
 Closeness of interaction & interrelationship diff at
diff levels

Example: changes in global business environment

may effect the domestic growth environment
significantly
CONTD……
INTRNTNL ENVRNMT

DOMESTIC MACRO
ECNMC ENVRNMNT

GRWTH
ECNMC EXTERNAL &DIST
SYSTM GOVT
CUST
INTERNAL
OMR
ENVRNMNT
RIVAL
ECMNC ECO
INPUT
STBLTY FINANCIE POLICY
PRVIDER
RS

SOCIAL
DEMGRPHC
CULTRL
NON ECNMC MACRO
ENVRNMNT

INTRNTNL ENVRNMT
 Change in environment presents opportunity to some
& threat to others

Examples:
 General agreement on trade & services (GATS)
implemented in India on Jan 1, 2005: opportunity
for research based pharmaceutical cos like Ranbaxy
but threat to smaller companies.

 HUL took advantage of new takeover & merger

codes: acquired Kissan from UB group, Lakme from
Tata, Modern foods from government.
 Regarded as controllable factors: companies have
control over them

 Internal economy: some internal factors

contribute increase in productivity
 Mission & vision of the organisation
 Management strategy
 Industrial relations
 Corporate culture & values
 Line & staff relations
 Quality control system
 Team spirit among employees
 Work culture
 Compensation system
 Career progression of employees
 Conflict b/w different owner groups
 Conflicts b/w workers & managers
 Inter departmental conflicts
 Unhealthy competition & conflict among employees
 Office politics
 Discrimination at work place
 Absenteeism
 Regarded as uncontrollable factors: by and
large beyond the control of company.

 External economy: some external factors

contribute to the growth of the company.
 Suppliers
 Customers
 Competitors
 Financiers
 Society
 POLITICAL
LEGAL
TECHNOLOGICAL

GLOBAL
CULTURAL BUSINESS

NATURAL
SOCIAL

ECONOMIC
 Economic system

 Growth & distribution environment

 Macro economic stability (price level, exchange rate,

interest rate, money supply, aggregate demand,
BOP, employment rate)

 Economic policy (monetary policy, fiscal policy,

industrial policy, trade policy)
 Political environment
 Social / cultural environment
 Demographic environment
 Technological environment
 Natural environment
 Historical environment
 State of world economy
 International economic cooperation
 Role of multilateral economic institutions
 International economic laws, agreements, codes
 Political condition & system in different countries
 Cultural factors across countries
 Growth & spread of MNCs
 Technology growth & transfer
 International market structure & competition
 Barriers to international trade & investment
 (I) POLITICAL ENVIRONMENT

 Political stability- changes in the form & structure of

government administration

 Political organisation- ideology of ruling government;

influence of premier groups; conflicting role of public
& private sector
 Example:
 Nehru: transformation of agrarian economy into
industrialised economy

 Indira Gandhi: state became active in agriculture

sector (subsidised fertilisers, expansion of
institutional credit); tightening of state control
over industrial finance, foreign investment, trade

 Since 1990-91, political environment changed-

economy increasingly being liberalised
Example:
In 1977, Janata govt came to power: Coca
cola, IBM had to leave country. All liquor cos
had to close operations.

1991 new economic order presented new

opportunities for business & also threat to
inefficient organizations.
 (II) REGULATORY & LEGAL ENVIRONMENT

 Legal policies- formulation & implementation

 Economic legislations- facilitator and/ or restrictor
 Playa a vital role- dictating dos & don’ts of business
 Flexibility & adaptability of law- constitutional
amendments
 Foreign policy- tariffs, custom unions etc
 (III) SOCIO- CULTURAL ENVIRONMENT

SOCIAL ENVIRONMENT
 Made up of attitude, desires, expectations,
education, beliefs & customs of people
 Changes gradually
 To forecast a change is difficult
CULTURAL ENVIRONMENT
Organisational culture is the customary or traditional
ways on thinking & doing things, which are shared to
a greater or lesser extent by all the members of the
organisation, which new members must learn & at
least partially accept in order to be accepted into
the service of the firm.
A firm wanting to market its product in various
regions with diversified cultures will have to
carefully study the existing consumption pattern
& scope for creating demand for new products
& will have to adjust their marketing
communication to cultural characteristics.

If the society is multi- cultural, then the firm

can not meet the demands of different groups
with a uniform product. To be successful in a
multi cultural society, the firm will have to
carefully study the consumption behaviour of
different groups.
Example:

Companies have to change their product

portfolio because of cultural differences as
McDonald and KFC did when they launched
their restaurant chain in India.
 (IV) DEMOGRAPHIC ENVIRONMENT

(a) Size & growth rate of population

Growing population: boon
• Increase in productive forces
• Bigger market for products
 Growing population: bane
 Adverse impact on per capita income & standard of
living
 Adverse impact on savings: unfavourable impact on
capital formation
 Adverse impact on employment situation
 Increasing pressure on agriculture
 (b) age structure of population
It determines:
 Productivity level
 Demand pattern
 Young population: PTC high
 Elderly population: high savings
 (c) urban- rural population
Proportion of urban rural population increasing
Reasons
Pull factors:
 Better employment opportunities in urban areas
 Better income
 Better education
 Better health facilities
 Push factors:
 Low level of agriculture productivity
 Disguised unemployment
 Wide disparity between urban & rural levels of
living

In India, urban population increased from 17.3%

of total population in 1951 to 27.78% of total
population in 2001 (Source: Economic Survey
2003-04)
Example:

Demographic environment decides the

marketing mix for an organisation. A one
rupee sachet of shampoo or a five rupee ice-
cream cone are some examples.
 (V) TECHNOLOGICAL ENVIRONMENT

Refers to body of skills, knowledge & procedures for

making, using & doing useful things

Positive effects of technology:

 Increased productivity
 Spread effects
 Production of new & better goods of standardised
quality with more efficient use of raw materials
 Basis for fast growing urban & industrial system
Negative effects of technology:
 Displacement of labour

 Environmental pollution

 Switching over might be costly

Example:

FIAT was using old technology but MUL

had no option than to go for superior
technology.
 (VI) NATURAL ENVIRONMENT
 Industrial activity not entirely independent of
nature
 Industrial units using weight losing inputs to be
set up at sources of these inputs
 Externalities
 (VII) EDUCATIONAL ENVIRONMENT
 Attitude towards education & acquisition of
knowledge
 Types of education- formal or informal
 Literacy level
 Educational match with skill requirement
(VII) HISTORICAL ENVIRONMENT
Historical events & ideologies have a strong impact
on the current state of business

Example: business environment in a number of

newly independent nation states has been
determined by the colonial status that these
countries had.
 Dynamic
 Uncertain
 Element of Risk
 Opportunities & threats
 Internal & external factors
 Economic & non-economic factors
 Facilitates operations of the organisation
 Forms the basis of long term policies, plans,
strategies of organisation
 Helps organisation in identifying & understanding
its competitors
 Helps the firm to expand & grow
CORPORATE RESPONSE & ADJUSTMENT TO
SPECIFIC CHANGES IN BUSINESS
ENVIRONMENT
 Competitive environment

 Marketing strategy
 Developing new product
 Satisfying customers
 Measures for realisation of economies of scale &
scope
 Technological environment

 R&D
 Foreign technical collaborations
 Choice of technology
 Capital labour ratio
 Labour environment

 Productivity
 Employee motivation
 Employees’ turnover rate
 Working conditions
 Compensation
 Legal environment

 Procedures & documentation

 Ethical practices
 Intellectual property protection
 Credibility
 Social environment

 Social responsibility
 Welfare expenditure

And so on………….
 Environmental changes:

 Liberalisation era forced businessmen to think of

core competencies

 Reckless diversifications made during pre

liberalisation era became liabilities
Strategic responses:
 Restructuring business
 Internationally to consolidate strength in
brewing & distilling
 In India to focus on engineering, services,
health care, brewing & distilling
 Hiving of non core business like
pharmaceuticals
Consequences:

With the excess baggage being shed, UB group

looks slim & vibrant
Firms that are able to make appropriate
adjustment to business environment changes
reduce risk & uncertainty & gain competitive
edge over others. Failure in making timely
adjustment may erode profitability,
competitiveness & market share.
 Legal risk: arising from legal challenges or
changes in laws

 Regulatory risk: arising from regulatory design &

its changes

 Political risk: arising from political changes

 Social risk: originating from social attitudes,

perceptions

 Natural risk: associated with natural calamities

Studies interaction, interdependence,
interlocking of various environmental factors

Economic environment is both- endogenous

& exogenous- it is determined as well as
determining
 Eco Eco.
Envrnmt
Non contls
Eco Fnctng Eco. & Eco.
Envrnmt Eco. Eco. of the Eco Eco. Polici rgultio gwth
  Sys. Stru Eco plng prgrm es ns & dvt

Sociolog
ical + + + + + + + +

Educatio
nal + + + + + + + +

Political + + + + + + + +

Historica
l + + + + + + + +
 PRESENT PRESENT
PRESENT
NON ENVRNMNT ECO NON- ECO
PRESENT ENVRNMT ENVRNMT
ENVRNMT (1) (2)
PAST ECONOMIC + +
(1)
NON + +
ECONOMIC
(2)
FUTURE ECONOMIC + +
(3)
NON + +
ECONOMIC
(4)
Wiliam & Lawrence……..
Environmental analysis
& diagnosis give strategists time to anticipate
opportunities & to plan to take optional responses
to these opportunities. Its also helps strategists to
develop an early warning system to prevent
threats & to develop strategies which can turn a
threat to the firm’s advantage
 Scanning: general surveillance of environmental
factors & their interactions

 Monitoring: tracking environmental trends,

events

 Forecasting: developing plausible projections of

direction, scope & intensity of environmental
change

 Assessment: identifying & evaluating how & why

current & projected environmental changes will
affect strategic management of organisation
 Strategic planning in which managers try to
determine best fit b/w organisation & its
external environment

 Important step towards corporate planning &

business policy decisions

 Aimed at continuous improvement of the

company, its policies & programs.
INTERNAL SCANNING: acquisition, analysis, use of
information from within the organisation that will
help the management in determining future course
of action of business

EXTERNAL SCANNING: acquisition, analysis, use of

information about events & establishing the
relationship of business with its external
environmental variables
Corporate managers analyse the Strengths (S),
Weakness (W), opportunity (O) & Threat (T) that
exist for their organisation in the context of its
environment.

O & T are external to the firm. With S the firm can

seize the O & captilise on it & because of its W it
becomes the victim of T in the environment
 MONITORING

SCANNING FORECASTING

ASSESSMENT
 To provide economic logic & perspective for
managerial decision making

 Integrating economic theory with practical

business situations

 Monitoring, scanning, careful analysis &

interpretations of business environment

 Forecasting, future panning & formulating future

business strategy