OE: BUSINESS ENVIRONMENT

UNIT -01

INTRODUCTION TO BUSINESS ENVIRONMENT

Introduction:
The act of being busy is business. Environment is about the aspects of surroundings. So the
business environment is an environment in which business is carried out. There is a close and continuous
interaction between the business and its environment. This interaction helps in strengthening the business
firm and using its resources more effectively.

Business operates in unique environment and cannot function in isolation. A business is created to provide
product and services to customer by their efforts and its owner can earn return on their investment.

Meaning:
The business environment refers to all the external forces which affect business decisions. It mainly
consists of social, economic, political, and technological factors. All these factors which affect the business
environment are beyond the control of business progress. Business organizations can control all these only
up to a certain level.

Definition:
According to Reinecke,” The environment of business consists of all those external things to which it
is exposed and by which it may be influenced directly or indirectly”.

According to William Gluck and Jauc, “Environment contains the external factors that create
opportunities and threats to the business. This includes socio-economic conditions, technology, and
political conditions.”

Objectives of Business Environment:

1. Knowledge of Information: By studying the business environment, we can know the changes of
business. This information is very useful for our business. Every businessman should aware current
environment of business. With this, he can think the future of his business in such environment.

2. Identify Business Opportunity: The business environment helps the business to find opportunities in
the market. Change in the market condition, customer behavior, technology, and other factor, business need
to finding new opportunities. Business needs to change to survive in the market. Business needs to identify
the problem of the market and solve it to gain the customer.

3. Improving Performance : The company is a group of activities undertaken with the possibility of a sale
to make a profit. The business environment helps to improve sale and profit. The main aim of any business

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is to make a profit. If the sales grow it leads to an increase in profit. Higher profit means the performance is
also increasing.

4. Basis of Decision: The business environment provides information about inside and outside of the
organization. The information related to change in culture, fashion, trends, customer purchasing power, and
others. This information becomes the basis of the decision of any organization.

5. Helpful in Making Policies: For making good business policies, we need to know and scan business
through business environment. The business makes policy according to the market conditions. The market
condition can find out by analyzing the environment of the business. This is how the business environment
helps in the making policies of the organization.

6. Assistance in Planning: Planning is the fundamental management function, which involves deciding
beforehand, what is to be done, when is it to be done, how it is to be done, and who is going to do it. The
business environment provides enough information to make a plan for the future.

7. Survive in the Business: Survive in the market is very difficult in the time of competition. The business
environment helps the business to find out information about the internal and external environment. So that
the business can make Good decisions to survive in the market.

Importance and Uses of Business Environment:

There is a close and continuous interaction between a business and its environment. The
interaction helps in strengthening the business firm and using its resources more effectively. It helps the
business in the following ways:

i. Determining Opportunities and Threats: The interaction between the business and its environment
would bring out opportunities for and threats to the business. It helps to find new needs and wants to the
consumers, changes in laws, changes in social behavior of people and tells what new things the competitors
are bringing in market. Thus, determining opportunities and threats.

ii. Giving Direction for Growth: The Interaction with the environment enables the business to identify
the areas for growth and expansion of their activities. Once the company knows the changes happening
around it, it can plan and strategize to fight it off and emerge as a successful business.

iii. Continuous Learning: The managers are motivated to continuously update their knowledge,
understanding and skills to meet the predicted changes in the realm of business.

iv. Image Building: Environmental understanding helps the business organizations in improving their
image by showing their sensitivity to the environment in which they operate. Understanding the needs of
the environment be it government, consumers, or any other element, it helps showcase that the business is
aware and responsive to the needs. It creates a positive image and helps it to prosper and win over the
competitors.

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v. Meeting Competition: It helps the firm to analyze the competitors’ strategies and formulate their own s
strategies Accordingly the idea of any business is to flourish and beat competition for its product and
services.

Meaning of Environmental Analysis:

Environmental Analysis is a process of identifying the relevant factors that have a direct or
indirect impact on the effective and efficient functioning of the business.

In other words, Environmental analysis is a strategic tool. The analysis entails assessing the level of threat
or opportunity the factors might present.

These evaluations are later translated into the decision-making process. The analysis helps align strategies
with the firm’s environment.

Process of Environmental Analysis:

Environment analysis is managerial decision-making based on the assessment of opportunities and threats
in the environment. The steps in the environmental analysis are:

1. Scanning: It is the process of analyzing the environment. Identification of emerging/ensuing trends is a

critical purpose of environmental scanning. The main aim of environmental scanning is alerting the
organization to potentially significant external impingement before it has fully formed or crystallized.
Successful environmental scanning draws attention to possible changes and events before their occurrence,
allowing time for suitable action. It includes: • Identifies early signs of future environmental changes. They
are indicated by trends and events. • Detects changes already underway.

2. Monitoring: It involves tracking environmental trends and events. It is the auditing of the environment.
It entails perspective follow up and a more in-depth analysis of the relevant environmental trends identified
at the scanning stage. The purpose of monitoring is to assemble sufficient data to discern (make out)
whether certain patterns are emerging. The outputs of monitoring are threefold:

• A specific description of environmental patterns to be forecast.

• Identification of trends for further monitoring.

• Identification of patterns requiring further scanning. •

3. Forecasting: Forecasting is concerned with the development of possible directions of directions, scope,
speed, and intensity of environmental change to layout the evolutionary path of anticipatory change in the
environment. This step forecast what is likely to happen. Its layout of the path to anticipate changes.

This step provides:

• Key forces at work in the environment. They can be political-legal, economic, social, cultural, and
technological.

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• Understanding of the nature of key influences and drivers of change.

• Projection of future alternative paths available.

4. Assessment: Assessment involves drawing up implications/ possible impacts. In an assessment, the

frame of reference moves from understanding the environment of the focus of Scanning, Monitoring and
Forecasting-to identifying what that understanding of environment means for the organization.

In short, it involves drawing of possible impacts of the environmental changes on the organization which
includes,

• Opportunities which are a favorable condition that creates risks and weakens the competitive position.

• The threat which are in unfavorable condition that strengthens, the organization’s competitive position of
the organization.

Limitations of Environmental Analysis:

1. Based on Assumptions: All forecasts are based on certain assumptions which may not always be true.
The basic assumption behind forecasting is that events do not change randomly and there is an orderly
pattern in their behavior. This assumption may not hold good in all cases. As a result, forecast may become
unreliable.

2. Unexpected and Unanticipated Events: The future events and factors which may affect an
organization are unanticipated and uncertain. These events and factors cannot be predicted and quantified
accurately. Sometimes, business have to face unexpected things happenings. So, there will be no benefit of
Environmental Analysis in these cases.

3. No sufficient Guarantee: Forecasts merely indicate the trend of future events and may not be fully
guaranteed. The various technique of forecasting simply project the future trends and cannot guarantee that
a particular trend will occur in future. All forecasts are wrong, they only differ in the degree of error. There
is always a possibility of mistake. Hence, it does not give guarantee whether all events will happen as per
estimation in business environment.

4. Uncritical Faith: Decisions based on Environmental Analysis is not always true. However, managers
think their strategy is win – win which may not be the case and leads to business to incline towards risk.
Thus, there is always an uncritical faith on the decisions taken from Environmental Analysis.

5. Time Consuming and Expensive: The process of environment analysis involves time and money. It is
a lengthy process that includes steps such as Scanning , Monitoring, Forecasting, and Assessment. Lot of
time and money are involved in the collection, analysis and interpretation of data for the process.
Therefore, it is useful only to the extent that benefits expected from it exceed the time and cost involved.

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6. Too much Information: Sometimes, too much of information relating to business environmental
analysis will create the doubt in businessmen regarding which information he can relay on and what to be
prioritized and such other.

7. Inaccurate Data: The process of environment analysis is based on the data which is collected for the
same purpose. But it may be possible that the data used for forecasting or predicting future event is
inaccurate.

Environmental Factors:
There are lot of factors that needs to be considered for carrying out any business.
Organizations never exist or operate in "Vacuum". It operates in an environmental which are two elements
within the external marketing environment: micro and macro.

These environmental factors are beyond the control of marketers, but they still influence the decisions
made when creating a strategic marketing plan.

Micro Environmental Factors:

Micro environment refers to the environment which is in direct contact with company and
affects the routine activities of business straight away. It is a collection of forces or factors that are close to
the organization and can influence the performance as well as the day-to-day activities of the firm. Six
components of micro environment are: Company, Suppliers, Marketing Intermediaries, Competitors,
General Public, and the Customers.

1. The Company: Various groups in an organization like the top management, finance, operations, human
resourcing, research and development (R&D), accounting etc needs to be taken into account by the
marketing management for designing the marketing plans. Marketing managers needs to work closely with
them as that will help them to make decisions with broader strategies and plans. With marketing team
taking the lead, other departments like manufacturing, finance, legal and human resources teams takes the
responsibility for understanding the customer needs as well as creating customer value.

2. Suppliers: The suppliers are an important part of an organization’s overall customer value delivery
network. They are the ones who provide inputs to business like raw materials, parts, cutting tools,
equipment etc. The quality and reliability of vendors are very essential for smooth functioning of business
of any organization. Marketing managers must have a control on the suppliers availability and costs. Any
shortage or delays of supplies, in terms of natural disasters or other events can cause damage to sales in
short run and lead to customer dissatisfaction in the long run.

3. Marketing Intermediaries: The marketing intermediaries are also an important component for
company’s overall value delivery network. They include those individuals or firms who help the company
in promotion, sales and distribution of its goods to the final buyers. Examples includes middlemen (agents
or merchants) who help the company find customers, physical distribution firms such as warehouses or

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transportation firms that help the company in stocking and moving goods from their origin to the
destination and marketing service agencies such as market research and advertising firms.

4. Competitors: Competitors are rivals who compete with the organization in market and resources as
well. According to the marketing concept, a company needs to provide greater customer value and
satisfaction that its competitors, in order to be successful. The marketers must not only try to simply adapt
to the needs and demands of target customers, but also try to attain strategic advantage against the
competitors by positioning their products strongly in the market.

5. General Public: The public refers to the group of people who have an actual or potential interest in
company’s product or who can have an impact on the organizations ability to achieve its objective. There
are seven types of publics identified in a company’s marketing environment which includes financial
publics, media publics, government publics, citizen-action publics, internal publics, local publics and
general public.

6. Customers: The most important actors in the company’s microenvironment are its customers. The
whole of value delivery network aims to engage the target customers and create strong relationships with
them. There are five types of customer markets that companies might try to target. These include consumer
markets, business markets, government markets, reseller markets, and the international markets.

Macro Environmental Factors:

Macro environment refers to the major external and uncontrollable factors that influence the decision
making of an organization. A company does not operate alone in its business environment but operates in a
larger context. It comprises of forces that provide opportunities, but at the same time also pose threats to
company. Six components of macro environment are Demographic, Economic, Natural, Technological,
Political and Cultural environments.

1. Demographic environment:

Demography can be defined as the study of human population in context of size, density, age, location,
gender, race, occupation and other statistics. The marketers have special interest in the demographic
environment because it consists of people and people are the driving force for development of markets. The
large and diverse demographics offer both opportunities as well as challenges for businesses.

2. Economic environment :

The economic environment consists of factors that can affect consumer purchasing power as well as the
spending patterns. As an example, it is not advisable for a company to start exporting its goods to a country
before having examined the citizens spending patterns. Important economic criteria includes GDP, GNI,
Import duty rate, unemployment, inflation, spending patterns as well as the disposable personal income.

3. Natural environment:

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It refers to the natural resources or physical environment that are required as inputs by marketers or which
is affected by the marketing activities. The ecological conditions have become a crucial factor to consider
as the environmental concerns have grown strongly in the recent years. Example, air and water pollution,
floods, droughts, etc.

4. Technological environment :

Technology has a crucial influence in the macro environment. An organization needs to perform a thorough
research on the spread and use of technology, before investing in any of marketing activities. The company
needs to have an understanding of the technology penetration as well as user interface technology in the
region and make plans accordingly for their communication and campaigns.

5. Political environment:

The developments in the political environment strongly affect the marketing decisions. This involves laws,
government agencies, as well as the pressure groups that can influence or give constrains to various
individuals or organizations in a given society.

6. Cultural environment :

The cultural environment links to factors which affects the basic values, preference, perceptions, and
behavior of the society. Organizations needs to understand the cultural beliefs and practices prevalent in
society for marketing decision making. Failure of companies in understanding foreign cultures can lead to
many cultural blunders. For example, a symbol having a positive meaning in one culture can have a
negative meaning in some other culture.

Finally, success of any marketing campaigns is highly dependent on the micro and macro
environmental factors. Any strategic marketer should have an in-depth consideration of these factors for
any decision making. Considering these factors can boost the success rates of marketing campaigns for any
organization as well as increase the reputation of brand in long term.

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