Business Environment

Learning Outcom es
After studying this chapter, the learners will be able to :
► Understand the concept and nature of business environment
► Examine the interface between business and environment
► Explain the-dimensions of business environment
► Arialyse economic, politico-legal, socio-cultural and international environment
► Highlight the broad features of economic reforms initiated by·the Government in 1991
► Explain the impact of Liberalisation and Globalisation on business

Environmental analysis is the process 1of monitoring ,.the· environm ent to determine the
opportunities for an,d· threats· to· at ~tis1ne,ss .. Such ·an analysis involves data colfection ,
information proc·e ssing an~f' fore.ca~tirig tcFpr0v:ide a · rational basis· for de\'elopin g goals
0

and strategies of business. /!I( business firm '·can:set ·its -f uture direction only when it has
visualised and perceived the opportunities and iconstrain ts·that lie ahead. Environm ental
analysis is a prerequis ite ·of ·strategic,. planning .. ln- ithis chapter, we-shall study the natl:lre
and importance of business·-,environme.nt and;also the.,eleme nts,of business environm ent
whict:r influence-the. pplicies, strate.g ies .and :ope.rations ,of business firms.

4.1 CONCEPT AND NATURE OF ENVIRONMENT

I~ simple terms, environm ent refers to the surround ings, influence s and circumsta nces
which affect the functioni ng of an organisa tion. Keith Davis has defined business
environment as the aggrega te of all conditio ns, events and influenc es that
surround and affect a . business . It implies that business environm ent refers to all
conditions and forces external to a business under which it operates. These forces include
customers, creditors, competito rs, suppliers , governm ent, socio-cultural organisat ions,
political parties, internatio nal organisat ions, etc. Some of these forces have direct influence
on the business, while others affect its functioni ng indirectly . These forces are external

4.1

J
 ND MANAGEMENT
BUSINESS ORGANISATION A . t Howe ver, some write rs
4.2
n as exter nal envir onme ~ ~ss and label them int also
erlla}
to a busin ess and are kno:n dition s withi n the busin
consi der the forces and c
envir onme nt.
· ment .
4.1.1 Internal Environ .. d I'. ces withi n an organ isatio n th Qt
. { ondit wns an 'or . .
c t of the inter nal envir onme nt includ
rnhe . t ernal envir onme nt consi sts o ent Aspec s e
.L , in d board of direc tors, mana gers, emplo yees
affect its opera tions and mana gem .
organ isatio n's missio n, cultu~e, ~wne rsltan and vario us units or sub-s ystem s of the
anisa tion cu ure n resou rce, Iega1 and R & D
organ isatio n struct ure, org k t·ng huma
busin ess. Thus, produ ction, financ ~, mar et If a busin ess. Vario us const ituen ts ofthe
· t o
al envir onme n ble
depar tment s are part of In ern t 11 and they opera te to creat e stren gths
of a firm Which
intern al envir onme nt are gei:ie rallyA c~:r;: :h is an inher ent capab ility
and weak nesse s _for the bu_s~nessd t over its comp etitor s. But a weak ness is an
e disad vanta ge
can be used to gain comp etitI~ e a fvanfi age which creat es a comp etitiv •
inher ent limita tion or const raint o a rm

4.1.2 External Environment

n (ro17}' outsid e its
The external enviro nment consists of all forces that affect an org? nisa~
bu~o n channels
boundaries. These include customers, competitors, credit ors, suppl iers, distn
But m actua l life,
and economic, social, political, technological and intern ation al forces, etc.
ce, share holde rs
the bound ary of the organ isatio n is not alway s clear and precis e. For instan
nt throu gh their
are a part of the organ isatio n and they affect its intern al envir onme
viewe d as a part of
repres entati ves at the Board of Directors. But as inves tors, they are also
the extern al environment.
t a busin ess
Exter nal envir onme nt includ es all those condi tions and forces whic h affec
over the busin ess
firm from outsid e. Some of these factor s may have direc t influe nce
or interm ediat e
firm while other s may opera te indire ctly. They may be called : (i) meso
in Fig. 4.1.
macro enviro nmen t; and (ii) Macr o or gener al envir onme nt as show n
busin ess firm
Micro envir onme ntal forces gener ally influe nce the work ing of a
tors, emplo yees,
direct ly. These includ e custo mers, owne rs and inves tors, suppl iers, credi
led dire ct actio n
trade union s, comp etitor s, regul atory agenc ies, etc. and may be label
elem ents.
and meso
. Macr o envir onme ntal force s can influ ence both busin ess firms
cal and globa l or
~nvir on~e nt. These inclu de econo mic, politi cal, socia l, techn ologi
int~r natio nal forces which may be label led as indir ect actio n
elem ents Macr o 0

smal l b usine ss
entvi ro~e nt is also called remo te envi ronm ent as many of the
not direct ly infl uence d bY th e gene ral force s. But medi um and large
ent erpns . es are .
en erpns es are often influe nced direc tly by the macr o envir onme nt.
 BUSINESS ENVIRONMENT
4.3

Macro
Environment

Meso
Social ✓ Environment
forces

Customers
Owners
Internal and
Environment · Investors
Suppliers of Business

Employees

Technological
forces

Fig. 4.1 Laye rs of Busi ness Envi ronm ent

4.1.3 Characteristics of External Environment

We can sum up the char acte risti cs of envi ronm ent
of mod ern busi ness as follows :
1. Ext ern al For ces. Bus ines s envi ronm ent is aggr
egat ive in natu re. It repr esen ts
the sum tota l of all the exte rnal forces that have influ
ence on the work ing of a busi ness .
2. Spe cifi c and Gen era l For ces. Bus ines s envi ronm
ent covers both specific and
gene ral envi ronm ent. Spec ific envi ronm ent (suc h
as inve stors , cust ome rs, com petit ors,
supp liers , etc.) affe cts the busi ness direc tly. But gene
ral envi ronm ent (suc h as economic,
social, poli tical , inte rnat iona l forces, etc.) affects the
busi ness both dire ctly and indi rectl y.
3. Dyn ami c. Bus ines s envi ronm ent is dyna mic in
natu re; it keep s on chan ging .
4. Unc erta inty . Bus ines s envi ronm ent crea tes unce
rtain ty for the busi ness firm s
as it is very diffi cult to pred ict the tren d of any envi
ronm enta l force with full accu racy .
5. Rel ativ e Infl uen ce. Bus ines s envi ronm ent is rela
tive in natu re. For exam ple, a
chan ge in econ omic envi ronm ent may be favo urab le
for one busi ness and unfa vour able
for anot her.
6. Con text ual. Bus ines s envi ronm ent prov ides the
fram ewo rk with in whic h a
busi ness ente rpri se or a micr o enti ty oper ates . The
man agem ent of a busi ness has to
worli: with in the fram ewo rk of busi ness envi ronm ent.
\1,
7. Inte r-te mpo ral. Vari ous dim ensi ons of busi ness
envi ronm ent chan ge in the
long -run . For inst ance , econ omic envi ronm ent in Indi
a in the pre- 1991 era and the post
1991 era can be dist ingu ishe d clea rly. The pre- 1991
era is char acte rize d by exce ssiv e
gove rnme nt cont rols whe reas the post 1991 era is char
acte rised by liber al economic policies
and glob alisa tion .
 NAGEMENT
4.4 BUSINESS ORGANISATION AND MA

SWOT An aly sis nment

ive strate gic pla ns, it is ess en tial to analyse both ~nternal env!ro
For making effect ofile. Analysis of the mter~al enviro
nment
vir on me nt to pre pa re SW OT -Pr
and external en the firm, whereas analysis ~f the extern
al
gth s and we akn ess es (W ) of
will reveal the stren po rtu nities (0 ) in ·the environment.
An
hlig ht the thr ea ts (T) op
environment will hig a thr eat is a~ unravoura~le conditio
n
rab le co nd itio n wh ere as
opportunity is a favou le, an aly sis of the internal environment
of a
vironm en t. Fo r exa mp
in the external en , and the top manag.em~nt migh
t then
ea l a cas h sur plu s po siti on
business might rev an investment opportunity, such as
a
ext ern al en vir on me nt for
decide to search the
sets and laptops.
project for producing mobile hand

Environment
4.1.4 Importance of Business
din g the en vir on me nt of bu sin ess is de scr ibe d bel ow :
Th e im po rta nc e of un de rst an
Op po rtu nit ies to ge t Fi rst M ov er Ad va nt ag e. By keeping
1. Id en tif ica tio n of me nt, an en ter pr ise ca n identify
in the ex ter na l en vir on
in tou ch wi th the ch an ge s ita lis e on the op po rtu nit ies at the earliest.
e str ate gie s to cap
op po rtu nit ies an d for mu lat for tw o-w he ele rs is go ing to inc rea se, an
tha t de ma nd
Fo r ins tan ce, if it is lea rnt rea se pro du cti on an d int rod uc e ne w models
tak e ste ps to inc
automobile company firm can va nta ge .
cus tom ers . By do ing so, the fir m wi ll ge t the fir st mo ve r ad
to lur e new to
of Th rea ts or W ar nin g Sig na ls. En vir on me nta l sca nn ing helps
2. Id en tif ica tio n if an Ind ian fir m fin ds tha t an MNC
is
s in fut ure . Fo r ins tan ce,
identify possible thr eat es. Th is sho uld wo rk as a wa rni ng sig nal
for
rke t wi th ne w sub sti tut
ent eri n? the Ind ian ma the Ind ian fir m can im pro ve the qu ali ty
of its
sed on thi s inf orm ati on ,
the Ind ian firm. Ba in agg res siv e ad ve rti sin g, etc .
cos t of pro du cti on , eng age
products, reduce nm ent
ion of Ma na ge me nt. A ke en wa tch on the tre nd s in env iro
3. Se ns iti sat nt to the ch an uin g tec hn olo gy co mp e 1 10n,
t·t·
to sen sit ize the firm 's ma na ge me l:,~
,

would help . . sto me rs.

go vem me n t po 11c1 es an d ch an gin g ne ed s of the cu
l exercise
tua l Sti mu lat ion . An aly sis of en vir on me nt is an int ell ec tua are
h 4. In t~l lec -m aki ng . Al l str ate uic d ec1· s10·
na ge rs in the ir dec isi on ns
t at can sti ~u lat e thealma ana lys is.
oA
bas ed on env iro nm ent

an d o~ p! ~~ ~: :!: ~i :f !!:::;~h En vir on me nta l ana lys i~ he lps in ide nti

tt: ~~=,:~rt:'ulation
::.
fyi ng threats
of a strategy
cap ita lis e : : \ ; ; ;;: ~t
to co un ter th: eat es an d 0
.
Str ate gy for mu lat io . t
. 6. Co nt~ nu ou s Le ar
wi
nin
th
g.
the ex ter n . n is a co nu ou s pro ces s tha
nti
mv olv es ke ep ing in tou ch 1
hvi rob n~ent. Th us, ma na ge rs ke ep a watch
on the en vir on me nta l cha ng es an d act a ent
on e th as1s of su ch i ft t ·
.
sear ch of
. . n orm a rnn
. ate gy to de al wi th en vir on me nt are pa rts of the
a 1ter1_1atives an d choice of a str e
lea rni ng pro ces s.
is sen sit ive to th t .
7. Im ag e Bu ild ing . If a firm
. e ex ern al en vir on me nt, it wil l corne
d ser vic es to me et th t Th i uld
ou t wi th ne w pro du cts an e req uir em en ts of the cu s om ers . s wo
. the firm in th general
bu ild the im ag e or rep uta tio n of e eye s of the cu sto me rs an d the
public.
 CU~ ll'IC.:);:) Cl'IVIHU NMENT
4.5
teraction betw een Busi ness and ,•Exter nal Envir onme nt
4.1.5 In
. . is an open system which gets inputs from the enviro nmen t and in
turn suppl ies
,;,.A business
t to the enviro nment . As shown in Fig. 4.2, a b usine · ss fi rm receiv
· es inpu
· t s sueh
its outp_~ labou r, mach ines and equip ment , mate rials, etc. from the exter nal
1
as ~a:pi a ~t It conve rts them into goods and servic es desire d by the
nvironme . . ess custo mers who
e art of the envircm.m ent. Thus, a busin firm d epend s on its
. exter l . nment
are aiting na en':ro
variou s input s and for the sale of its inputs . At the same time, the en,vi
forge t mers) also depen ds on the busin ess for the suppl y of desire d goods
ro~en t
and servic es.
(e.g., cu:h:r e is a mutu al interd epend ence betwe en busin
ess and its envir onme nt.
Thus, the influe nce of envir onme nt on busin ess is much more than that of
However' . busin ess
· onme nt This is becau se of the fact that busin . 11
ess is a sma er syste m and is .
on envtr ·
only a part of the envir onme nt which is a bigge r syste m .
.ENVIRO NMENT

INPUTS BUSINE SS UNIT OUTPU T

Capital, Labour -+ Manage ment of Goods and
Machines, Production, Service s
Materials, etc. Finance, Marketi ng; desired by
Information Human Resource Custom ers

I
'----------+--------------------+-------J
Fig. 4.2 Excha nge of Resou rces betwe en Busine ss and its Enviro nment
The forces in the exter nal envir onme nt may prese nt both threa ts
·• or nega tive
const raint s and oppo rtun ities or posit ive stimu lants for the busin
ess. When they
act as positi ve stimu lants, the produ ctive efficie ncy and profi~ ability
of the busin ess are
increased. On the other ·hand , when the envir onme ntal factor s .act as negat
ive const raints ,
they hinde r o:pera tions as a resul t of which busin ess effici ency and
profit abilit y suffer .
It should also be noted that a chang e in envir onme nt may prese nt an
oppor tuntit y to
one busin ess unit and threa t to anoth er: For instan c.e , if the gover
nmen t allow s the
import of foreig n capita l and techn ical know -how, it will mean grow
th and expan sion
for the comp any which collab orates with a foreig n comp any and at
the same time, it
may create a risk of survi val for the small comp any which canno
t afford impor t of
technology. Thus, it is a great chall eng.e befor e the mana geme
nt of a busin ess to
transf orm the challe nges into oppor tuniti es. ··

4.2 LAYERS OF BUS INES S ENV l·R O.N MEN T

~ 1,
1

A busin ess firm is surro unde d by three layer s of envir onme

(ii) 111 d ... nt, name ly, (i) Mi~ro ,
. . .
·
1.r1..eso, an (iu) Macr o e,n viron ment . Micro envir onme. n t is
. the imme diate
t
enviro nmen t of the firm inclu ding its missi on, polici es, resou rces, organ · t·10n struc ure,
isa t · g on a
organ isatio n cultu re etc. Meso envir onme nt inclu des all extern al force~
firm t th . ' opera inppliers
a e interm ediat e or indus try level such as custo mers, compe titors, su ,
 4.b cu;::,11'1c.:>.:, vn"-" ~' .,...,, "·-· • · ·· ·
~
· t Meso
dist ribu tion par tner s, reg ulat ors, e c. . onmenv
ent
iron men t is, in fact , the sett ing he
. . ent and mac ro env ir of the firm . Ma cro env iron men t c tw~~4
the micro environ m h t rem ote and ma y not hav e any dire . Oll.si
of the exte rn~ l factors orThforces t apl= ~nc lud ct inn Sta
on sma ll bus ines s firms. e economic, soc ial, pol itic al, technololl:ll.~
e exa m . • 1
inte rna tion al factors, et c. The ec onomic' social poh tica and t ech no1ogic · 1~ t
a 1ac ors Illg\ca1,
' ay he
clubbed toge ther as domesic env iron men t.

4.3 MICRO ENVIRONMENT

Mic ro env iro nm ent inc lu~ es a~l for ces
or fac tor s ,tha_t ~ha p~ t~e inte"11cil
env iron men t of a bus ine ss ent erp rise . It encomp
~sse~ firm s rmssion, obJectives, P<>licies
resources, processes, org anis atio n stru ctur e, org
aru sati on cul.ture, etc. Res o~c es incllld~
hum an resources (ma nag ers and ope rati ve emp
loyees) phy sica l and fina ncia l resources
and techological capabilities.
The elem ents of mirco env iron men t exis t wit
hin the bus ine ss ent erp rise and are
the sources of its stre ngt hs and wea kne sses .
For inst anc e, late st tech nol ogy acts as a
source of stre ngt h whe reas sho rtag e of fina ncia
l reso urc es acts as a sou rce of weakness.
The stat e of micro elem ents det erm ine the
effe ctiv ene ss of inte rfac e of the business
firm wit h forces in the exte rna l env iron men t.
Sou nd inte rna l env iron men t can help the
business firm in competing wit h oth er firm s in
the ind ust ry and enc ash ing opportunities
in the exte rna l env iron men t.
The components of micro env iron men t of a bus
ine ss sys tem are as follows :
(i) Mission and objectives of the firm
.
(ii) Ma nag eme nt of the firm and its
policies.
(iii) Fin anc ial, hum an, phy sica l and technolo
gical reso urc es of the firm.
(iv) Pro duc tion and control processes.
(v) Org anis atio n stru ctu re of the firm
.
(vi) Org anis atio n cult ure of the firm.

4.4 ME SO ENVIRONMENT

Me so env iro nm ent con sist s of all ext ern al

for ces ope rat ing on a bus ine ss at the
int erm edi ate or ind ust ry lev el. In oth
er wor ds, it is the sett ing betw een micro
env iro nm ent and mac ro env iron men t of a
bus ines s. An und ers tan din g of meso level
env iro nm ent inv olv es ana lysi s of forces
ope rati ng at the ind ust ry lev el including
cus tom ers , clie nts, com peti tors , sup plie rs, and
dist ribu tion cha nne ls. The se forces have
dir ect imp act on the firm 's ma rke t and
ope rati ons . It is to be not ed tha t meso
env iron me nt has its imp act on bot h the bus
ine ss firm and oth er firm s tha t it competes
wit h. How eve r, the mes o forces may not infl
uen ce all the firm s in a par ticu lar industry
in the sam e ma nne r. For inst anc e, a firm's sup
plie r env iron men t may be enti rely different
fro m tha t of ano the r firm whi ch has arra nge
men ts for in-h ous e sup plie s.
Me so env iron me nt is rela ted to the imm edi
ate
t 0 b atc hed clos ely bec aus e of its dire ct infl uen ce per iph ery of a bus ine ss firm and has
on the bus ines s. Meso environmental
ew te und er the infl uen ce of mac ro forces incl
fu ~S ~~ . . udi ng economic, social, political,
legal, teeh no1Oe, oica6
l and inte rna tion al env iron men t.
 U V'-'ll'I C...:>. ::>Cl'I VIHU NMt:. NI
4.7

Meso fior ces include the following :

(i) Customers/Consumers
(ii) Competitors
(iii) Investors
(iv) Ma nag ers and emp loy ees
(v) Suppliers
(vi) Inte rme diar ies like age nts,
who lesa lers , reta iler s, etc.
(vii) Reg ulat ors app oin ted by the
gov ern men t (e.g ., SEB I) .
.c. es ope rate bet wee n the mic ro and mac ro
These •iorc env iron me nta l forc es and so are
term edi ate env iron men t. The y hav e the · · l to 1n
· fl uen ce t h
called m . . pot ent ia e wo rking of
organisation dire ctly .
an (i) Co nsu me rs/ Cu sto me rs : Acc _
ord ing to Pet er Dru cke r, the aim of the
. to create and reta in cus tom er. Cus tom bus ine ss
ers are the peo ple wh o pay mo ney to acq
is org ani sati on's pro duc ts or ser vic es. uire
The org ani sat ion can not sur viv e wit
:ist ome rs. Cus tom ers ma y or ma y not be hou t
con sum ers. Con sum er is one wh o ulti ma
consumes or use s the pro duc t or serv ice. tely
A fath er ma y buy a pro duc t as a cus tom
his dau ght er who wil l be a con sum er. A er for
con sum er occ upi es the cen tral pos itio n
marketing env iron men t. The ma rke ter has in the
to find ans wer s to the foll owi ng que stio
1. Who are the cus tom ers / con sum ns :
ers ?
2. Wh at ben efit s are the y loo kin g for ?
3. Wh at are the ir buy ing pat ter ns?
(ii) Co mp etit ors : Com pet itor s
are oth er bus ine ss ent itie s tha t com pet
resources as wel l as ma rke t. A stu dy of e for the
the com pet itiv e sce nar io is ess ent ial for
mar kete r, par ticu larl y to und ers tan d thr the
eat s from com pet itio n. The foll owi ng que
need to be add res sse d for ana lys ing com stio ns
pet itio n :
1. Wh o are the com pet itor s?
2. Wh at are the ir obj ecti ves and stra teg
ies .
3. Wh o are the mo st agg res siv e and pow
erfu l com pet itor s?
(iii) Inv est ors : The y are the sha reh old
ers , gro ups or ins titu tion s wh o hav e a maj
stak e in the com pan y as sup plie rs of fina or
nce . The y hav e a ves ted inte res t in the
being of the com pan y. wel l-
(iv) Ma nag ers and Em plo yee
s : Ma nag ers pla n, org ani se and coo
wor kin g of the firm . The y get thin gs don rdin ate the
e fro m ope rati ng emp loy ees . Em plo yee s
people who act ual ly do the wo rk in the are the
org ani sat ion . Bo th ma nag ers and emp loy
~ro cur ed from the ext ern al env iro nm ent ees ~re
. On join ing the bus ine ss firm s, the y bec
inte gra l par t and par tici pat e in sha pin g ome its
the int ern al env iron me nt of firm . It is i~p
for the org ani sat ion tha t em plo yee s em bra ~rt ant
ce the val ues and goa ls of the organ~satio_
they wo rk tow ard s dif fer ent goa ls, the n. If
effe ctiv ene ss of the org ani sati on wil l be
. . imp aire d.
(v ) S up p11er s : . t f mes
·
any b us1 nes s firm wh ich
Sup
.
plie
is
rs
dep
for
end
m an
ent
imp ort ant com pon en
h 1
° o env iron
O f ma teri als eqm pm
.
men t of
ent .
s on ·
t hem for t e sup p
erv1· ces an d so on. Lar ge firm s rely on Y •
1·iers to ma1nta1• n t h eir
. ' oduction
mul tip• l
e sup p . pro pr
curement
acti viti es. A bus ine ss firm has to exp lore
alte rna tive sup plie rs for economy in

\
\
and ensuring continuous supply in future. Another important d~sion that the finn h
to ~e relat.es to outsourcing vs. in-house production depending upon the supplias
envnumnent. et

(ui) Intermediaries : Business firms are generally dependent on a number

marketing intermediaries in promoting, selling and dis~buting i~ pro~ucts to th:
customers. Intermediaries like agents, wholesalers ~d retailars es~blish a link ~tw~ll
the producers and the consumers. Firms engaged m transportation, ware~ousmg etc
help in the physical distribution of goods. ~larketing research agencies help i ·
~derst.anding the needs and expectations of ~nsumers, and advertising. agenci~s he):
m promoting the firm's products. Thus, efficient management of relations with the
marketing intermediaries is necessary for success in marketing of goods and services.
(vii) Regulators : Most of the business firms have to interact with a number of
regulatmy bodies subject to the nature and volume of business and the ~ of industry
they are in. Such bodies have been created by the government to momtor compliance
with the concerned laws, rules and regulations at the local, state and national levels.
They are authorised to control the policies and practices of the firms under their
respective purview, For instance, in India, business is regulated by the following
authorities :
1. Registrar of Companies for the registration of companies and compliance with
the provisions of the Companies Act, 1913 by them.
2. Competition Commission of India (CCI) for ensuring fair competition between
firms in each industry and checking unfair trade practices.
3. Securities and Exchange Board of India (SEBI) for the regulation of issue
securities by the corporate sector and fair trading in securities at the stock
exchange.
4. Insurance Regulatory and Development Authority of India (IRDA) regulating
the operations of Insurance companies.
5. Telecom Regulat.ory Authority of India (TRA) for regulating the activities of
the companies in telecom sector.
6. Food Safety and Standards Authority of India (FSSAI) for specification of safety
and quality standards of food items and for ensuring their compliance by the
units producing various food items.

4.5 MACRO ENVIRONMENT

Macro environment may be defined as the general (or remote) factors that have
the potential to influence the working of all business firms. It may include such
factors which have no direct contact or influence on the specific business. Such factors
include economic, social, clutural political, legal and technological forces over which a
firm has no control. In other words, they are beyond the control of the business firm.
Macro environmental forces have the potential to influence a specific firm by
influencing the meso environmental forces. That is why, they are also known as indirect
action elements or remote environment. However, in some cases, macro forces may
have direct influence on a particular firm engaged in hi-tech products at the international
 BUSINESS ENVIRONMENT 4.9

--- im ort house is affected directly ,b y the changes in t~e import

level. For example, anent p The extent of influence of macro forces on a business firm
policy of the_ Gov_ern:_atu~e and area of operation. They can create both threats and
depends on its size, b . firm The components of macro environment may be
nities for the usiness ·
opport u .
categorised as follows .
• Economic environment
• Political environment
• Legal-regulato ry environment
• Socio-cultural environment
• Technological environment
• International environment . .
·d s these a business also operates under the influence of ecological and histoncal
Besi e , .
the purview o t e present b ook •
environment which are outside . f h

Political

Fig. 4.3. Elements of Macro Environment

4.5.1 Economic Environmen t

Economic environment refers to the nature of economy ( capitalist, socialist or
mixed), economic policies of the government, markets for materials, labour,
capital, etc., business firms and institutions such as banks, insurance companies,
transport companies, etc. and level of income of the people. 1
'

Economic environment is greatly influenced by the government through fis,cal

policies, economic controls, industrial policy and import-export policy. For instance, if
the government announces a cut in the excise duty on refrigerators, the sales of business
firms manufacturing refrigerators will go u,p. Similarly, if the government a llows liberal
finance to export-oriented units at conce ssional rates, such units will get a boost.
Economic environment of a firm also includes all markets in which it buys and
sells, raises funds, gets labour, etc. The busine s s is invariably i:0:flue nced by the
conditions of various markets. For instance if there is uncertainty in the capita l m a rket,
it will not be advisable to issue shares and debentures to the public because of risk of
 "'Ta I U
ou;::,1Nt::SS ORGANISATION AND MANAGEMENT

under-su bscriptio n.

The main compone nts of economic environm ent include the followin g:
(i) S t ructure of the economy in terms of relative role of private and public sect
(ii) p 0
rs
lanned outlay of the governm ent in private and public sectors
(iii) Agricult ural and industria l productio n trends
(iv) Service sector trends
(v) Expansi on of power, transpor tation and commun ication facilities
(vi) Rates of growth of GDP and per capita income
(vii) Rates of savings and investme nts
(viii) Money supply in the economy
(ix) Capital market trends
(x) Money market trends
(xi) Volume of imports and exports of different items
(xii) Balance of payment s and foreign exchange reserves.

In July 1991, the Central Government announced a package of liberalisation measures

under its Industrial Policy. The Industrial Policy, 1991 seeks to liberate the industry from
the shackles of licensing system, drastically reduce the role of public sector and
encourage foreign participation in India's industrial development. The implementation
of this policy has resulted into liberalisation of Indian economy and globalisation of
Indian business.

4.5.2 Political Environment

Politica l environ ment compris es politica l parties and their ideologi es, type of
governm ent (single party or multi-pa rty coalition ), stability of governm ent,
governm ent policy towards business , governm ent policy regardi ng internat ional
business and multina tional corpora tions (MNCs), etc. All these factors influence
investme nt in business and also the stability, growth and profitabi lity of business. For
instance, the operation s of an MNC, Campa Cola Company, were discontin ued in India
in the late nineteen seventies because of the governm ent's policy of restrictin g the
growth of multinat ional companie s in the country. In 1989, the governm ent allowed
another multinat ional company , Pepsico to enter the Indian market to give a boost to
the food processin g industry . Later, the Industria l Policy, 19~1 paved the way for entry
of multinat ional corporati ons into India in a big way.
The importan t co~pone nts of politic_a l environm ent include the following :
(i) Prevailin g political system in the country.
(ii) Political institutio ns like governm ent and allied agencies.
(iii ) Political ideology and policies of the ruling party.
(iv) Nature of political leadershi p and profile of political leader s .
 ~
\ BUS INE SS ENV IRO NM ENT
4_ 1
E . 1
gal-R egulatory nv1ronment
4,5,3 Le
vir on
. . •
1
al en me nt of bu sin es s is de ter mi
Leg . l l . d ne d by Co ns tit ut io na l pr ov
,,,orni·c law s, co mm. er cia l
aw s, in us tri
.
al an d la bo ur la ws
isi on
go ve rn me nt s,
ecgouJations un de r va r~ ou st· ~wt· d
re guiation of economic ac 1vi 1es s an f thcobu rt_ de cis '
ion s. Th ese he lp the go ve rnm en
tbe :q ui re d to op era te wi thi n
o e us1 ne ss en ter pri ses . Th e bu sin ess en ter prit in
the fra me wo rk of leg al- reg ula ses
ae The rel ati on sh ip be tw ee n th e ind tor y en vir on me nt. .
us try an d the reg ula tor y en vir
two-way pro c~ ss. Th e go :er nm on me nt ex ist s as
en t ~ays do wn the po lic ies ,
a ding to wh ich the bu sin ess pro ce du res an d ru les
accor an d ind us try ha ve to fun cti
. ess an d in d us tn· a1 org an 1s · at·ion s su h on . Th e ass oc iat ion s of
bu si: erc e an d In du str y (F IC CI e as Fe de rat ion of In dia n Ch am be rs of
) an d Co nfe de rat ion of In dia
Co~fluence the go ve rnm en t thr n In du str y (C II) als o try
to 10 ou gh lob by ing , cre ati ng pu bli
b •ssuing pre ss ad ve rti• se me nts c aw are ne ss an d op ini on
to cre ate a fav ou rab le go ve rnm
r:r \he gro wt h of bu sin es s an d en t po lic y fra me wo rk
ind us try .
The im po rta nt co mp on en ts of leg
al- reg ula tor y en vir on me nt inc
lud e the fol low ing :
(i) Th e Co ns tit uti on al fra
me wo rk - dir ec tiv e pri nc ipl
div isi on of leg isl ati ve po we rs es, fun da me nta l rig hts an d
be tw ee n ce ntr al an d sta te go
(ii) Co mm erc ial an d eco no mi ve rnm en ts.
c law s an d go ve rnm en t po lic ies
to lic en sin g, mo no po lie s, for eig un de r the law s rel ati ng
n inv est me nt, etc .
(iii ) Go ve rnm en t po lic ies rel
ate d to for eg in dir ec t inv est me
(iv) Go ve rnm en t po lic ies
nt, im po rts an d ex po rts .
rel ate d to sm all sca le ind us tri
pro tec tio n, co ntr ol of en vir on es, sic k ind us tri es, co ns um er
me nta l po llu tio n, etc .
(v) Go ve rnm en t po lic ies
rel ate d to pri cin g an d dis tri bu
tio n of ess en tia l co mm od itie s.
(vi ) Th e ex ten t an d na
tu re of go ve rnm en t int erv en
tio n in bu sin ess .
(vi i) Co urt de cis ion s for th
e pro tec tio n of co ns um ers , en
ba lan ce. vir on me nt an d eco log ica l

Li be ra lis ati on of FDI Ru les

On June 20, 2016, the Central
Government eased Foreign Dir
rules for several sectors includ ect Investment (FDI)
ing retail, aviation defence,
increased the flow of FDI into the pharma and food. This
country and stimulated investm
leading to fas ter ec on om ic ent ~n the above sectors
gr ow th an d employm·ent ge
opportunities for certain busines ne rat ion . It op en ed up
s houses like Walmart, Tesco,
Industries, M & M, Bharat Forge Apple, Spicejet, Reliance
, etc. It is also likely to create
medium enterprises particularly threats for small and
in the retail sector. '
4.s,4 So
cio-Cultural En vi ro nm en t
So cio -cu ltu ral en vir on me nt is
cultur l h sh ap ed by so cia l fa cto rs su
a er ita ge be lie fs an d cu ch as att itu de s ofpe op le, ,
ora • l d
sto ms of pe op e, e uc a t.ion sy ste m co ns um er s
ba nis ati.on s, tra'de un ion s, an . ' . 1 · al
facto h d ot he r no n- go ve rn me n t or•n
e.
an isa tio ns . Socio ogic
fi rs sue as ca ste an d oc cu . na l · . th ds res pe ct
pa tio str uc tur e, vie w t
ow a rd s sci en tif ic me O ,
or sen ior ity , etc ., mi gh t ha ve
a fa r rea ch ing im pa ct on bu . F • tan ce the
sin ess . or ins '

.
4. 12 BU SIN ES S ORGANISATION
AN D MA NA GE ME NT ~
, cu st0 ~
ice s in de ma nd de pe nd s up on people'_s at tit ud es
na tu re of go od s an d se rv op le ha. s,
In di a, th e at tit ud es of pe
so cio -cu ltu ral va lu es etc . be sid es th eir
ng
inc om
as a
e
re
In
su lt of in du str
"e
ial isa tiohn, emploYz:n"s;llt
foo d an d clo thi · Th .
ch an ge d wi th re sp ec t to ea se d lev el of ed uc ati on . is as res ult ed ~ .
ice s an d in cr .
of wo me n in fac tor ies an d off f: nn g.
g an d ga rm en t m an u ac tu
th e gr ow th of food pr oc es sin co de of co nd uc t th e bu sin es
s shou.J
me nt de ter mi ne s th e
So cio -cu ltu ral en vir on es , var i01 .~s so cia ~ gr ou ~s ~nd_ governrn.en
.d
un eth ica l pr ac tic
fol low . If a bu sin es s fol low s r in sta nc e, if an in du str ia l un it is in du lg
in g i~
e it. Fo
wi ll in ter ve ne to dis cip lin ng , co ns um er fo ru ms an d go ve rn m en t ag
en ci
ck ma rk eti
ad ul ter ati on , ho ard ing or bla it. Ov er th e ye ar s, se ve ra
l so ctl
ma y re so rt to dir ec t ac tio n ag ain st su ch in du str ial un
(N GO s) ha ve co me up wh
ich ha:
or ga nis ati on s ca lle d no n- go
air
ve
,
rn
wa
me
ter
nt or
an d
ga
no
ni sa
ise
tio
po
ns
llu tio n by th e in du str ie s.
Th ey ha/
ra ise d th eir voice ag ain st fro m the
ur ts for sh ift in g of po llu tin g in du str ia l un its aw ay
ev en ap pr oa ch ed th e co g in du str ies (o f 'F ' ca teg or y) ha ve
be en close;
lhi , th e po llu tin nn ed •
po pu lat ed are as . In De se l bu se s ha s als o be en ba
by th e ord ers of the Su pr em e
pr
Co
em
ur
e
t.
Co
Pl
ur
yin
t ..
g
Th
of
es
die
~ or de rs ha ve be en pa ss ed on
th ePJ1
Delhi_ by the orde~s _of t~ e Su ·
at1 0n s) fil ed by ce rta in so cia l or ga ni sa tio ns .
(P ub hc In ter es t L1tig low ing :
of so cio -cu ltu ral en vi ro nm en t in In di a in clu de th e fol
Th e i~ po rta nt ele m~ nts ra tes , lif e ex pe cta nc y, pr op or tio n of
lik e bi rth an d de ath
(i) De mo gra ph ic fac tor ~
ma les an d fem ale s 1n th e tot al po pu lat ion , etc .
Sh are of wo rki ng po pu lat ion in th e to tal po pu lat ion .
(ii)
(iii ) Ca ste an d oc cu pa tio
na l str uc tur e.
(iv ) Fa mi ly str uc tur e,
jo in t vs. nu cle us fam ili es.
(v) Po pu lat ion sh ift s fro
m ru ra l to ur ba n ar ea s
an d lit era cy rat es . .
(vi ) Ed uc ati on al sy ste m
(vi i) Sh are of wo me n in
th e wo rkf orc e.
1 .
iii) Co ns um pti on ha bit s of dif fer en t se gm en ts of th e po pu at1 0n
(v .
(ix ) L"£ t l f . t se gm en ts of po pu lat ion .
I es ye s o dif fer en
(x) Cu sto ms , be lie fs, va
lue s an d-· att itu de s of pe op 1e.
nment
4.5.5 Technological Enviro
tec hn olo la s .
In an y c~ un try , th e sta te of u: :~ ~~ r!~ nt ro le in de ter mi ni
ng th e type
rv ice s to ~e Pp r:d nt
::t :-u a1 17 of go od s an d se
a e ty pe of pl an t an d e ui me
use_ . In th e mo d.e rn wo
;ec hn ol og ica l en vir on me nt
inf lue
rld
nc ~s
th
bu
e
sf n::s
of tec ~n olo gic al ch an ge s is v~ r:
fas t.
s in te rm s of in ve stm en t in
;;hnf ogy, co ns ist en t ap pli ca tio n
Ad er e or e, ev e:Y ortom ga nis ati on ha s
of tec
to
hn
be
olo
ac
gy
tiv
:r~
l n
~~ 1s
e
ati
eff
on
ec ts of tec hn olo gy on ma rk ets
e y en ga ge d in te chnO1og ica .
.

au ati o d ;-~ ·n l for ec ast ing .

va nc em en ts mt. n an uu or ma tio n tec hn olo gy g sit ua tio ns
fo r th e or ga nis . e. WI cr ea te ch all en gin
a ion s In th e ne ar fu tur

nm en t
4. 5. 6 In te rn at io na l En vi ro
is ve ry . "fi
In ter na tio na l en vir on me nt _firm ~ en ga ge d in im po rts an d ex po rts
m an :~ ~u ;: ~; e~ :~
an d als o fo r th e fir ms ha vi ng ion s in ot he r co un tri es . In ter
na tio na l