Business Environment

Why should I do business?

1. Profit - Primary goal

2. Growth - In all directions over a period of time.

3. Power - Business houses have vast resources commanding

enormous economic & political power.

4. Employee satisfaction and development - Business is people.

Employee satisfaction and development.

5. Quality Products and Services – Consistent improvement in

quality of products earns brand loyalty - vital for success.

6. Market Leadership - Earn a niche for oneself in the market

innovation is the key factor.
Why should I do business?

7. Challenging- Offers vast scope of challenges and poses

formidable challenges.

8. Joy of creation- Through business strategies new ideas and

innovations are given a shape and are converted into useful
products and services .

9. Service to society - Business is a part of society and has several

obligations towards it; pursue NGO

10. Motivation – Each day

11. Passion – follow your passion

Why should I do business?

12. Financial independence

13. Control your lifestyle and schedule

14. Start from scratch

Concept of Business Environment (BE)

Who will shape and influence and shape our business?

• collection of all internal and external factors such as employees,

customers needs and expectations, supply and demand,
management, clients, suppliers, owners, activities by government,
innovation in technology, social trends, market trends, economic
changes, etc.

The concept of business environment states that:

• ―any and all factors and forces, both external and internal, that
influence, affect, or shape in any way the policies, decisions,
strategies, and operations of a business comprise the business
environment of that business.‖
Concept of Business Environment (BE)

For example:

• increase in taxes by the government makes everything expensive

in the market

• technology changes may make the existing product obsolete

• political uncertainty creates fear in the mind of investors

• increase in competition in the market may affect business profit

• changing in demand and preferences may increase the need for a

new product and decrease the demand for old product.
Importance of Business Environment (BE)

• Knowing how these factors (internal and external factors) that

affect a business environment can help to adapt to changes and
manage a company's daily operations and resources better.
Meaning of Business Environment (BE)

• As business enterprise does not functions in a vacuum – it is an

integral part of the ecology and social system. Its decisions and
performance are influenced by a host of diverse factors.

Important decisions related to business such as:

• what business to do
• which should be the customer segments to target at
• what strategies be adopted
• where to do the business
• when to do the business
• how to do the business
• whether to continue a business
• whether to expand a business – if yes how and where to expand
Business Ecology

Individual for survival and success depend on:

• his innate capability – such as the physiological and psychological
factors — to cope up with the environment
• Skill
• and the extent to which the environment is conducive to the
development of the individual.

Business Firm’s survival and success depends on:

• Its innate strength — resources at its command, including
physical financial, human resources
• Synergy and its adaptability to the environment
• and the extent to which the environment is favorable to the
development of the organisation.
Business Ecology

• The survival and success of a firm, thus, depend on two sets of

factors, viz., the internal factors (the internal environment) and
external factors (the external environment).

• The external environment has, broadly, two components, viz.,

business opportunities and threats to business.

• Similarly, the organisational environment (the internal environment)

has two components: strengths and weaknesses of the
organisation.

• Thus, strategy formulation is properly pitting the organisational

factors strengths and weaknesses against the opportunities and
threats in the external environment.
 BE interrelationship
• Based on an assessment of the external & internal environments
affecting the business certain mission, objective(s) and goal(s)
and a strategy are set to achieve them.

• A SWOT analysis is one of the first steps in the strategic

management process.

• Business dynamics, to a large extent, is a dependent factor — it

depends on, inter alia, the environmental dynamics.

inter alia = amongst other things

Types of Environment

There are several factors and environments that that have a bearing
on the business – the Business Environment.

• the strengths, weaknesses, internal power relationships and

orientations of the organization (internal).

• government policies and regulations; nature of the economy and

economic conditions; sociocultural factors; demographic trends;
natural factors; and, global trends and cross-border
developments (related to national, regional or international level
external).
 Two types of environment:

internal external environment:

environment:
factors external to the
factors internal to firm which have
the firm relevance to it.
Concept of Business Environment

• Business organizations cannot change the external environment

but they can react to change their internal business
components to grasp the external opportunities or the external
environmental threats.

• Therefore, we must analyse business environment to survive and

to get success for a business.

• Business firm gets human resources, capital, technology,

information, energy, and raw materials from society

• It follows government rules and regulations, social norms and

cultural values, regional treaty and global alignment, economic
rules and govt tax policies.
Types of Environment

• A. Internal factors are generally regarded as controllable

factors because the company has control over these factors; it
can alter or modify such factors as its personnel, physical
facilities, organization and functional means, such as marketing
mix, to suit the environment.

• B. External factors, are generally beyond the control of a

company has (i) micro and (ii) macro enviornment.
Types of Environment

B (i) Micro Environment:

• Some of the external factors have a direct and intimate impact
on the organization‘s operations – is classified as micro
environment.
• Factors that directly affect are: suppliers, labour unions, and the
various laws of the land, customers and competitors.

B (ii) Macro Environment:

• There are other external factors which affect an industry very
generally – may not have an immediate direct effect on
operations but influence the activities of the firm,
• Factors that indirectly affect are : industrial policy demographic
factors, technology, socio-cultural and political factors, general
economic conditions and so on.
Internal Environment – factors
1. Value System

• Value system of the founders and those at the helm of affairs has
important bearing on the choice of business, the mission and
objectives of the organization, business policies and practices.

• Extent to which the value system is shared by all in the

organization is an important factor contributing to success.

• “set of beliefs and principles that guide the way a company

conducts its operations and interacts with stakeholders. These
values can influence a wide range of business decisions, including
product development, marketing strategies, employee
management, and corporate social responsibility”.
Internal Environment – factors
1. Value System

• In a professional environment, core values form the foundations

that build any business – and – these need to be upheld and
implemented across the entire business.

• Business value is the estimated health and well-being of a

business by measuring concrete and abstract elements such as
monetary assets and utility and employee, customer, supplier
and societal value.

• In Marketing: price and quality.

• Bad values: are those that are harmful to yourself or others –
dishonesty, greed, manipulation, overindulgence or addiction,
attention-seeking and selfishness.
Internal Environment

• The value system of JRD Tata and the acceptance of it by others

who matter were responsible for the voluntary incorporation in
the Articles of Association of TATA STEEL its social and moral
responsibilities to consumers, employees, shareholders, society
and people.

• After the EID Parry group was taken over by the Murugappa
group, one of the most profitable businesses (liquor) of the ailing
Parry group was sold off as the liquor business did not fit into the
value system of the Murugappa group.
Internal Environment

2. Vision, Mission and Objectives

• Business domain of the company, priorities, direction of

development, business philosophy, business policy etc., are guided
by the vision mission and objectives.

• Dr Reddy’s Lab thrust in to the foreign markets and development

has been driven by its mission "to become a research based
international pharmaceutical co.‖

• Arvind Mills' mission - "To achieve global dominance in select

business built around our core competencies through continuous
product and technical innovation, customer orientation and focus
on cost effectiveness."
 Internal Environment

3. Management Structure and Nature

• Organizational structure, the composition of the Board of Directors,

extent of professionalisation of management etc., are important
factors influencing business decisions. Some management
structures and styles delay decision making while some others
facilitate quick decision making.

• For the performance of the organization, the quality of the Board is

a very critical factor for the development and performance of
company..

• Again, whether a business decides to make decisions using

centralization or decentralization.
 Internal Environment

4. Internal Power Relationship

• Factors like the amount of support the top management enjoys

from different levels of employees, shareholders and Board of
Directors have important influence on the decisions and their
implementation.

• The relationship between the members of Board of Directors and

between the chief executive and the Board are also critical factors.

• Investors in the firm, employees and managers – who have skills

and knowledge that are valuable assets to their firms
 Internal Environment

5. Human Resources

• Human skills like – quality, morale, commitment, attitude etc.,

could contribute to the strength and weakness, of an organization.

• Some organizations find it difficult in restructuring or

modernization because of resistance by employees while others do
it smoothly.

• “finding and hiring new talent, providing training and development

opportunities, to ensuring compliance with labor laws and
managing compensation and benefits.”
Internal Environment

6. Company Image and Brand Equity

• Image of the company matters while raising finance, forming joint

ventures or other alliances, soliciting marketing intermediaries,
entering purchase or sale contracts, launching new, products etc.

• Brand equity is also relevant in several of these cases.

• UPS: Logistics delivery service UPS promotes trustworthiness and

security as two of their brand identity values, and their brand
image aligns perfectly with this.
Internal Environment

7. Physical Assets and Facilities

• like the production capacity, technology, efficiency of the

productive machinery, distribution, logistics etc., are among the
factors which influence the competitiveness of a firm.

“the buildings, parking lots, tracks, plumbing system, heating system,

and electrical system located on the Premises”.

• Example, quality is important to Cadila Healthcare, that does not

compromise on it and also keeps quality norms stricter than
international norms.
 Internal Environment

8. R & D and Technological Capabilities, determine a company‘s

ability to innovate and compete.

9. Marketing Resources like quality of the marketing men, brand

equity and distribution network have direct bearing on marketing
efficiency. They are important for brand extension, new product
introduction etc.

10. Financial Factors like financial policies, financial position and

capital structure affect business performances, strategies and
decisions.
External business environment has micro environment
and macro environment

• Micro environment consists of the company's immediate

environment that affects the performance of the company. These
include the suppliers, marketing intermediaries, competitors,
customers and the publics.

• Macro environment consists larger societal forces that affect

company's micro environment - demographic, economic, natural,
technical, political, cultural forces.
Micro Environment
Micro Environment are factors that directly affect functioning:

1. Suppliers
2. Competitors
3. Labourers
4. Business Associates
5. Customers
6. Investors and Stakeholders
7. Regulating Agencies

Obviously, micro environmental factors are more intimately

linked with the company than the macro factors
 1. Suppliers

• Suppliers are the people who supply the inputs to the

business.

• Suppliers hold an important value for a business as the

suppliers are responsible for helping a business meet its
business demands.

• A delay by suppliers would result in loss for the business and

it would result in customers moving to another business.

• A company that provides microprocessors to a major computer

business
Suppliers

• Important inputs (for transforming inputs into outputs) are

materials, equipment, energy, capital and labour. The
relationship between the organization and the suppliers of these
inputs presents the forces in the environment that directly
influence the operations of a firm.

• If an organization is unable to obtain these essential inputs of

right quality, quantity and at the right price, it cannot possibly
achieve the objectives.

• Suzuki Motor Gujarat Private Limited (SMGPL) is owned

by Suzuki Motor Corporation. Located in Hansalpur Becharaji
village of Mandal Taluka in Ahmedabad District (wholly owned
directly by Suzuki as a foreign company, as the other plants are
owned by Maruti Suzuki).
• The plant supplies vehicles to Maruti Suzuki in the domestic
market and to overseas markets. The plant (2017) has the total
annual capacity of 750,000 units. The plant has helped Suzuki
achieve exports of 2 million units from India.

Suzuki Motor Gujarat currently has of four plants:

• 1. Plant A (Feb 2017), with annual capacity of 250,000 and is
currently assembling the Baleno.
• 2. Plant B (Jan 2019) has a total vehicle producing capacity of
250,000 and it is currently assembling the Swift.
• 3. Plant C (Apr 2021) an annual capacity of 250,000 and is
currently assembling the Dzire.
• 4. Powertrain plant has an annual capacity of producing
500,000 engines and 500,000 powertrains (a powertrain
consists of the engine or motor and its internal components,
such as the energy storage system, transmission and
driveshaft).
• Maruti Suzuki India Limited (MSIL) is set to operationalize its
first electric vehicle (EV) manufacturing plant in Gujarat in the
fiscal year 2024-25. It will be as an additional assembly line
within its existing campus at Suzuki Motor Gujarat (SMG).

• The Center of Excellence at ITI Becharaji, spread over 12,000 sq

ft. is equipped with Maruti Suzuki Basic Training lab, Safety
Simulation hop, Finishing schools for Weld shop, Paint shop and
Assembly shop along with six class rooms.

• The CoE has a capacity to train 150 trainees per week.

• Maruti Suzuki has invested around Rs 4 crore to set up the

facility. The components suppliers of the company have also
invested an equal amount of investment to set up their
respective plants.
 2. Business Associates

• Business Associates are allies of the business who help

the business during the time of the crisis.

• A business needs to have proper allies in order to survive

the times of crisis.

• Answering service, Patient safety or accreditation

organizations, Telemarketing, Accreditation companies,
Medical transcription companies, Data processing firms,
a Chartered Accounting company.
 3. Customers

• Customers are most important for the business.

• Thus a business is very much influenced by the customers’

taste and preference.

• A business needs to take into account the taste and preference

of the customers.

• Customers buying - Dishwasher, Clothes dryer, Freezer,

Refrigerator, Cooker, Oven, Cooking plate, Water heater,
Washing machine, Trash compactor, Microwave, Air
Conditioner.
Customers
• According to Peter F. Drucker‘s, the purpose of any business is
to create a customer. Those organisations which neglect the
customer expectations and aspirations would find the long-term
survival very difficult. Customers‘ tastes and preferences are not
static, but keep on changing.

• Changes in the recent past: the cell phone, the preference for
quartz watches, audio-video gadgets, various sophisticated
domestic appliances, cotton garments, fast foods and so on.

• Organizations which are adept in identifying the changes in the

customers‘ attitudes and preferences or which can comfortably
respond to the changes would survive and those which fail to
take cognizance of changes would ultimately fall on the way
side.
Large companies that failed to keep up to the change in taste with
the customers‘ preferences:
1. Nokia
2. Yahoo
3. Kodak
4. Polaroid
5. Xerox
6. BlackBerry
7. IBM
8. My Space
9. Macy‘s
10. Hitachi
11. Toshiba
12. Motorola
13. Pan Am
14. Hummer

Source: https://www.valuer.ai/blog/50-examples-of-corporations-that-
failed-to-innovate-and-missed-their-chance
4. Competitors

• Competitors play an important role for a business.

• A business needs to carefully analyze its competitors’

strategies in order to develop counter strategies and deal with
the competition.

• A competitors strategy when carefully analyzed becomes an

opportunity.

• Direct Competition (Coke vs Pepsi), Substitute Products (Pencil

– Regular vs Mechanical) Similar Products (Garbage disposals).

• Philips TV faces competition from other companies like LG,

Panasonic, Videocon, O General and others.
 5. Labour
• Labourers help a business in producing goods to meet the
demand.

• Labourers are responsible for production of quality goods and

thus are very important for the business

• A business needs to manage its laborers well and keep them

satisfied otherwise there would be strikes and lockouts which
would effect the business negatively.

• Unskilled Labor: Menial jobs. Lacks training

• Semiskilled Labor: Mechanical abilities / Skills to operate
machinery
• Skilled Labor: Tasks without supervision. Operate complex
equipment.
• Professional Labor: Knowledge based education with managerial
skills.
 6. Regulating Agencies
• Regulating agencies are the government agencies responsible for
the implementation of the rules and laws related to businesses.

• Regulating agencies ensures that a business abides by all the

laws of the state.

• RBI (Sector: Banking & Finance, Monetary Policy)

• SEBI (Sector: Securities (Stock) & Capital Market)
• IRDAI (Sector: Insurance),
• NABARD (Sector: Financing of rural development)
• SIDBI (Sector: Financing Micro, Small and Medium-Scale Enterprises)
• TRAI (Sector: Telecommunication & Tariffs and Cyber-Security
• BCCI (Sector: Cricket)
7. Investors and Stakeholders

• For a business to function properly it needs investors.

• Investors carefully monitor the activities and influence its

decisions for ROI.

• Types of investments include: equity, debt securities, real

estate, currency, commodity, derivatives such as put and call
options, futures, forwards, etc.

• Stakeholder is any individual / group, that has an interest in an

organization and the outcomes of its actions.

• Common examples of stakeholders include employees,

customers, shareholders, suppliers, communities, and
governments.
Macro Environment
Macro Environment includes all those factors which indirectly
influence the business:

1. Economic Environment
2. Political Environment
3. Socio-Cultural Environment
4. Demographic Environment
5. Natural Environment
6. Technological Environment
7. International Environment
8. Legal Environment
• Economic environment comprises of all those economic factors
that indirectly affect the business:

It includes:

1. Economic System (Socialist, Capitalist or Mixed Eco)

2. Economic Condition (Inflation or Deflation)
3. Economic Growth
4. Economic Policies (eg. Fiscal Policies etc.)
5. Exchange rates and interest rates
 Economic Factors
• Economic factors are determinants of a certain economy‘s
performance.

• Factors include economic growth, exchange rates, inflation rates,

interest rates, disposable income of consumers and
unemployment rates.

• These factors may have a direct or indirect long term impact on a

company, since it affects the purchasing power of consumers and
could possibly change demand/supply models in the economy.

• Consequently it also affects the way companies price their

products and services.
Economic Conditions

• Economic activities of a nation as measured by the various

parameters like the gross domestic product (GDP), price level,
employment, aggregate demand and supply of consumer and
industrial goods, etc. have far reaching impact on the prosperity
of the business.

• When the economy is in an upbeat mood, firms normally

benefit enormously and commit the resources for further growth
with a hope of continuity of favourable economic conditions.

• Problems arise when the economy turns downswing. It is at

that stage, firms have to adjust themselves to the down turn in
economic conditions.
Economic Factors – some factors
• Growth rate
• Interest rate
• Inflation rate
• Exchange rate
• Availability of credit
• Level of disposable income
• Propensity of people to spend
• Central government budget deficits
• Gross domestic product trend
• Unemployment trend
• Stock market trends
• Price fluctuations
Political Environment

In India, Political Environment comprises of :

1. Legislative: responsible for making laws

2. Executive: implements laws

3. Judiciary: enforces laws

Any business needs to know its political environment well and

has to abide by all the rules and laws of the land it functions in.
Political Factors
• All the influences that a government has on any business:

• Including government policy, political stability, corruption,

foreign trade policy, tax policy, labour law, environmental law
and trade restrictions.

• Govt may have a profound impact on a nation’s education

system, infrastructure and health regulations.

• All these factors that need to be accounted for when assessing

the attractiveness of a potential market.
Political Factors
• Government
stability/instability
• Corruption level
• Defense expenditures
• Level of government subsidies
• Bilateral relationships
• Import-export
regulation/restrictions
• Trade control
• Tax policies
• Freedom of press
• Government regulation and
deregulation
• Special tariffs
• Political action committees
• Government involvement in
trade unions and agreements
• Competition regulation
• Lobbying activities
• Size of government budgets
Political Environment

• Since government is fully empowered to monitor and control the

institutions of the society, the policies pursued by the
government affects the business in a significant way. The
continuity of policies is very much essential. That depends on
the stability of the government of the particular nation.

• Of late, we see a lot of change in the attitude of the government

both at central and state level towards the business. Various
state governments are weighing with each other with attractive
packages to woo the foreign investment in many core sector
industries.
Socio-Cultural Environment
Includes:

1. Social caste and class system

2. Religious beliefs
3. Linguistic Base
4. Racial diversity
5. Social evils

• Socio-cultural environment decides the taste and preferences

of the people and would create opportunities of threats for the
business.
Social Factors
• This dimension of the general environment represents the
demographic characteristics, norms, customs and values of the
population within which the organization operates.

• This includes population trends such as the population growth

rate, age distribution, income distribution, career attitudes,
safety emphasis, health consciousness, lifestyle attitudes and
cultural barriers.

• These factors are especially important for marketers when

targeting certain customers.
Social Factors
• Population size, growth rate
• Birth rates
• Death rates
• No. of marriages, divorces
• Immigration rate
• Life expectancy rates
• Age distribution
• Wealth distribution
• Social classes
• Per capita income
• Family size and structure
• Lifestyles
• Health consciousness
• Average disposable income
• Attitude towards work
• Buying habits
• Ethical concerns
• Cultural norms and values
• Religion and beliefs
• Education level
• Minorities
• Crime levels
• Attitudes towards saving,
investing, retirement,
leisure time, product
quality, customer service.
• Sound understanding of the cultural variables is important for
firms in a country like India where there are several diversities
in cultures of various regions within the country.

• Firms which have their operations in more than one country

have to adapt to the respective cultures in an effective way.

• Culture is a wider concept which includes value systems,

beliefs, likes and dislikes, altitudes and perceptions. If the
products or services of a firm are not in line with the culture of
the place, they may not be accepted by the society.

• For instance, in India ‗Miss‘ brand cigarette targeted at the

women was a failure because it is against the cultural ethos of
the society.
Demographic Environment
Demographic Environment includes:

1. Population of a country
2. Literacy Rate
3. Birth / Death rate
4. Age classes
5. Standard of living

• A business needs to know its demographic environment well

to tackle and meet its demand well and adjust itself
according to the populations‘ demand.
 Natural Environment

It includes:

1. Climatic Conditions
2. Topographical Features
3. Kind of Soil
4. Weather
5. Natural resources

A business needs to know its natural environment well in order

to take advantage of its natural surroundings.
Environmental Factors
• Environmental factors have come to the forefront only since last
2 decades, because of scarcity of raw materials; pollution and
carbon footprint targets set by governments.

• These factors include ecological and environmental aspects such

as weather, climate, environmental offsets and climate
change which may especially affect industries such as tourism,
farming, agriculture and insurance.

• Furthermore, growing awareness of the potential impacts of

climate change is affecting companies operation and the
products they offer. This has led to many companies getting
more and more involved in practices of CSR and sustainability.
Environmental Factors
• Weather
• Climate
• Environmental policies
• Climate change
• Pressures from NGOs
• Natural disasters
• Air and water pollution
• Recycling standards
• Attitudes towards green products
• Support for renewable energy
Technological Factors

• These factors pertain to innovations in technology that may affect

the operations of the industry referring to technology incentives,
the level of innovation, automation, R&D activity, technological
change and the amount of technological awareness that a market
possesses. These factors may influence decisions to enter or not
enter certain industries, to launch or not launch certain products.

• By knowing what is going on technology-wise, you may be able to

prevent your company from spending a lot of money on
developing a technology that would become obsolete very soon
due to disruptive technological changes elsewhere.
 Technological Environment
• It is the most dynamic environment of the business since it
keeps changing rapidly.

• A business needs to promote innovation and needs to

change itself with the changing technology to be able to
compete well with the competition and take all the
advantages over the competitors.

• Video streaming (Netflix), “capture the entire trillion-dollar

Hollywood ecosystem”

• iPhone, disrupted something completely unexpected: the

laptop market. It changed the way people accessed the web
and created a new market of app users and phone users.
Technology

• Technological developments that have profoundly affected the

organizations and society in the last two decades are:
• the computer, cell phone technology, laser, xerography,
integrated circuits, semiconductors, television, satellite
communication, nuclear power, synthetic fuels and foods, etc.

• All these innovations have thoroughly changed the face of the

society. Therefore, today‘s organizations need to keep abreast of
technological changes that affect their operations and products
so as to remain competitive, else it would cost the business its
survival.

• Depending upon the nature of business and the type of

technology used, every organization has to assess the
technological environment form time to time.
Technological Factors
• Technology incentives
• Automation
• R&D activity
• Technological change
• Access to new technology
• Level of innovation
• Technological awareness
• Internet infrastructure
• Communication infrastructure
• Life cycle of technology
International Environment

• Includes all the laws related to the Export and Import of

commodities, various international policies, bilateral treaties,
international boundaries to trade etc.

• It is important for an export and import business to study the

international environment well in order to survive and grow in
the market.

• Legal factors can decide whether or not there is a business

behind selling a certain product (drugs, sharp objects).
Legal Factors
• Although these factors may have some overlap with the political
factors, they include more specific laws such as discrimination
laws, antitrust laws, employment laws, consumer protection laws,
copyright and patent laws, and health and safety laws.

• It is clear that companies need to know what is and what is not

legal in order to trade successfully and ethically.

• If an organisation trades globally this becomes especially tricky

since each country has its own set of rules and regulations.

• Also, you want to be aware of any potential changes in legislation

and the impact it may have on your business in the future.
Legal Factors

• Discrimination laws
• Antitrust laws
• Employment laws
• Consumer protection laws
• Copyright and patent laws
• Health and safety laws
• Education laws
• Consumer protection laws
• Data protection laws
Laws

• Virtually every aspect of the business is influenced by the laws

of the land. The form of organization, the management and the
way how a firm conducts itself in the society are very much
influenced by the various provisions of the laws.

• The Companies Act, Factories Act, Workmen’s Compensation

Act, Industrial Disputes Act, Provident Fund Act etc.

• As a responsible corporate citizen, an enterprise has to comply

itself with the provisions of these acts.