CHAPTER 6 BUSINESS ENVIRONMENT

6.1 Concept and Nature of Business Environment

6.1.1 Features of business environment
6.2 Significance/Importance of Business Environment
6.3 Types of Business Environment
6.3.1 Internal environment
6.3.2 External environment
6.3.3 Micro environment
6.3.4 Macro environment
6.3.5 Components of macro environment
6.4 Managerial response to environmental challenges
6.5 Characteristics of Business-friendly Environment
6.6 Government Policy changes and Business
CONCEPT & NATURE OF BUSINESS
ENVIRONMENT
• In the words of Keith Devis, Business environment as “the aggregate of all conditions,
events and influences that surround and affect it.”
• According to William Gluck & Jauch, “Environment contains the external factors that
create opportunities and threats to the business.This includes socio-economic
conditions, technology and political conditions.”
• Business Environment means a collection of all individuals, entities and other
factors, which may or may not be under the control of the organisation, but
can affect its performance, profitability, growth and even survival.
• The sum total of all individuals, institutions and other forces that are outside
the control of a business enterprise but the business still depends upon them
as they affect the overall performance and sustainability of the business.”
• The forces which constitute the business environment are its suppliers,
competitors, consumer groups, media, government, customers, economic
conditions, market conditions, investors, technologies, trends, and multiple
other institutions working externally of a business constitute its business
environment.
FEATURES OF BUSINESS ENVIRONMENT

Dynamic & Ever-changing

Complex

Uncertain

Mutual Interdependence between Business & Environment

Far reaching Impact

Relativity
IMPORTANCE OF BUSINESS
ENVIRONMENT Helpful in assembling & tapping resources

Helps to adapt & adjust with the rapid change

Enables the firm to identify opportunities & getting first mover

advantage

Customer Focus

Strategy Formulation

Public Image

Continuous Learning

Giving direction for growth

Change Agent
TYPES OF BUSINESS ENVIRONMENT
 INTERNAL AND EXTERNAL ENVIRONMENT
• INTERNAL ENVIRONMENT- Survival of a business depends upon its strengths and
adaptability to the environment.The internal strengths represent its internal environment.
Internal environment consists of controllable factors that can be modified according to needs
of the external environment. It includes the factors which exist within the organization,
imparting strength or causing weakness to the organization. It covers financial; physical;
technological resources; value system; vision & mission; objectives; corporate culture; human
resources; labor union etc.
• EXTERNAL ENVIRONMENT- External Environment consists of those factors which
provide an opportunity or pose threats to the business.These are uncontrollable factors and
firms adapt to this environment.They adjust internal environment with the external
environment to take advantage of the environmental opportunities and strive against
environmental threats.
• The external environment consists of the micro environment and macro environment
• Micro Environment: It includes the immediate periphery of the business that has a continuous and direct
impact on it. These factors affect the performance of a company and its ability to serve the customers. It
includes suppliers, customers, competitors, market, intermediaries, etc. which are specific to the business.
• Macro Environment: Macro Environment, is one such environment that influences the functioning and
performance of every business organization, in general.The macro environment consists of the economic
and non- economic variables that provide opportunities and threats to firms.This is largely uncontrollable
and, therefore, firms adjust their operations to these environmental factors. It comprises of the
demographic, socio-cultural, legal, political, technological, and global environment.
INTERNAL ENVIRONMENT
ORGANIZATIONAL AND OPERATIONAL

STRATEGIC RISKS

INNOVATION

FINANCIAL

VALUE SYSTEM

VISION, MISSION AND OBJECTIVES

ORGANIZATIONAL STRUCTURE

CORPORATE CULTURE

HUMAN RESOURCES

PHYSICAL RESOURCES AND TECHNOLOGICAL CAPABILITIES

EXTERNAL ENVIRONMENT-MICRO

CUSTOMERS

SUPPLIERS

COMPETITORS

PUBLIC

MARKET INTERMEDIARIES
EXTERNAL ENVIRONMENT-MACRO

ECONOMIC ENVIRONMENT

SOCIAL ENVIRONMENT

POLITICAL ENVIRONMENT

LEGAL ENVIRONMENT

TECHNOLOGICAL ENVIRONMENT

NATURAL ENVIRONMENT

GLOBAL/INTERNATIONAL ENVIRONMENT
ECONOMIC ENVIRONMENT
NATURE OF ECONOMIC SYSTEM

ECONOMIC CONDITIONS

ECONOMIC POLICIES

INDUSTRIAL POLICY

FISCAL POLICY

MONETARY POLICY

FOREIGN INVESTMENT POLICY

IMPORT EXPORT POLICY

SOCIO-CULTURAL ENVIRONMENT
CULTURE AND TRADITIONS

SOCIAL TRENDS

VALUES

DEMOGRAPHIC FACTORS

RELIGIOUS, ETHICAL & MORAL/ACTORS

LABOUR MOBILITY
POLITICAL ENVIRONMENT
TAX AND ECONOMIC
POLICIES

POLITICAL STABILITY

FOREIGN TRADE
REGULATIONS

EMPLOYMENT LAWS
 LEGAL ENVIRONMENT
• The legal environment includes the laws passed by the government as well as the
decisions rendered by the various commissions and agencies at every level of the
government.
• It’s important that every business must function according to the law of the area in
which it wishes to operate. The government, therefore, may legislate on matters like
wage fixation, managerial remuneration, safety and health at work, location of plants,
entry of multinationals, price control, import – export policy, licensing policy etc.
• It includes various aspects such as: statutory warnings to be printed on the label; legal
policies related to licensing; various laws and legislative acts; laws to keep a check on
advertisements; foreign exchange regulation and management act.
• In India, a working knowledge of Companies Act 1956; Industries (Development and
Regulations) Act 1951; Foreign Exchange Management Act and the Imports and Exports
(Control) Act 1947; Factories Act, 1948;Trade Union Act; 1926;Workmen’s
Compensation Act, 1923; Industrial Disputes Act, 1947, Consumer Protection Act, 1986,
Competition Act, 2002 and host of such other legal enactments as amended from time
to time by the Parliament, is important for doing business.
 TECHNOLOGICAL ENVIRONMENT
• Technological factors represent major opportunities and threats that must be
taken into account while formulating strategies.Technological advances in
computers; various innovations and inventions; scientific improvements;
developments in IT sector; import and export of technology are some of the
factors affecting business environment these days.
• Technological breakthroughs can dramatically influence organization’s products,
services markets, suppliers, distributors, competitors, customers, manufacturing
processes, marketing practices and competitive position.
• Technological advancements can open up new markets, result in a proliferation of
new and improved products, change the relative cost position in an industry, and
render existing products and services obsolete.
• Technological changes can reduce or eliminate cost barriers between businesses,
create shorter production runs, create shortages in technical skills, and result in
changing values and expectations of customers and employees.
NATURAL ENVIRONMENT

• According to Watrick and Wood, “the natural environment ultimately is the source
and support of everything used by businesses (and almost any other human activity)
– every raw material, every energy source, every life-sustaining factor, even every
waste disposal site”.
• The natural environment determines what can be done in a society and how
institutions can function. Resource availability is the fundamental factor in the
development of business in societies.”
• Thus, geographical and ecological factors, such as natural resource endowments,
weather and climatic conditions, topographical factors, locational aspects in the
global context, port facilities, etc. are all relevant to business.
• Government policies aimed at the preservation of environmental purity and
ecological balance, conservation of non-replenishale resources, etc., have resulted in
additional responsibilities and problems for business, and some of these have the
effect of increasing the cost of production and marketing.
 GLOBAL/INTERNATIONAL ENVIRONMENT
• Global environment basically consists of international interactions of a firm over which it has
no control. So, now in this global market with such a high level of competitiveness,
all companies must be mindful of the global environment.
• Thanks to liberalization, Indian companies are forces to view business issues from a global
perspective. Business responses and managerial practices must be fine-tuned to survive in
the global environment.
• For example, a recession in foreign markets, or the adoption of protectionist policies by
foreign nations, may create difficulties for industries depending on exports.
• On the other hand, a boom in the export market or a relaxation of the protectionist policies
may help the export-oriented industries.
• A liberalization of imports may help some industries which use imported items, but may
adversely affect import-competing industries.
• Many companies now plan production capacities and investment taking into account also the
foreign markets.
• Export marketing facilitates the attainment of optimum capacity utilization; a company may
be able to mitigate the effects of domestic recession by exporting.
MANAGERIAL RESPONSE TO CHANGES IN
BUSINESS ENVIRONMENT
INSTALLATION OF MIS(MANAGEMENT INFORMATION
SYSTEMS)

FORECASTING

RECRUITMENT OF EXPERTS

INNOVATION

PATH OF LEAST RESISTANCE

ACQUISITIONS, MERGERS & JOINT VENTURE

SYSTEMATIC ADAPTATIONS
CHARACTERISTICS OF BUSINESS
FRIENDLY ENVIRONMENT
• The Hartland Business Association (HBA) has developed a “working
definition” of business friendly,
• Businesses feel welcome and are perceived by officials to be valuable contributors to
the community.
• Businesses are accepted as unique from one another.The Township accepts such
diversity, and does not prevent each from implementing unique branding and
marketing methodologies.
• The commissions and boards avoid making actual business decisions which are best
made by the owner of the business whose capital is at risk.
• Existing and proposed regulations are reviewed for necessity, to assure protection
and convenience of the public. Regulations or standards that exist to establish and
maintain community values are clearly articulated and analyzed for competitive
impact.
• The Township submits itself to all regulation and approval processes that it requires
of businesses and citizens of the community.
GOVT. POLICY CHANGES &
BUSINESS
INCREASED COMPETITION

INCREASED DEMAND

CHANGE IN BUSINESS POLICIES

TECHNOLOGICAL CHANGES

NEED FOR TRAINED PERSONNEL

GREATER MARKET ORIENTATION

LESS RELIANCE ON BUDGETARY SUPPORT BY PUBLIC SECTOR

ENTERPRISES