Concept of Business

Environment
 What is Business Environment ?
• Business Environment refers to all internal and external forces which
influence the development, performance and outcome of a business
including employees, customers, management, supply and demand
and business regulations.
• Business Environment refers to all external forces, which have a
bearing on the functioning of business.
• Environmental factors are largely if not totally, external and beyond
the control of individual industrial enterprises and their
managements.
• The business environment possess threats to a firm or offers
immense opportunities for potential market exploitation
• It refers to the institutions or forces that affect the organization’s
performance.
• Business Environment includes such factors as socio-economic,
technological, supplier, competitor and the government
• Business environment is multi-layered, multi-dimensional and
interwoven in which concrete events and abstracts ideas
intertwine to create business scenarios

Definitions:
• Keith and Davis: “Business environment is the aggregate of all
conditions events and influences that surround and affect it.”
• S.P. Robbins and Mary Coulter: “Business environment refers to
institution or forces that effect the organizations performance.”
• Business establishes, grows or operates and dies in environment
• It exchanges resources in environment
• It collects inputs i.e. Man money, materials, machines etc. And
provides output i.e. Goods and services in the environment
• Business environment defined as a force that affects on
organizational performance
• Environment adaptation is the essence of business survival and
growth
• Business environment is dynamic, complex, specific, uncertain,
long term and short term impact
 Importance of Business Environment
Business Environment is the most important aspect of any business. To be
aware of the ongoing changes, not only helps the business to adapt to
these changes but also to use them as opportunities.
Business Environment presents threats as well as opportunities for any
business. A good business manager not only identifies and evaluates the
environment but also reacts to these external forces.
 The importance of the business environment can be
1. Adaptation : Business success depends on timely adaptation to environmental
changes. Analysis of environment helps to monitor changes and development which
results into adaptation to environment.
2. Strategy formulation : The study of environmental trends and events fosters strategic
thinking which leads to formulation of new strategies.
3. Boundary Spanning : The study of environment helps to analyze competition. They
can span their boundary of operations by increasing the scope of activities.
4. Lobbying : The study of environment helps business organizations to lobby for
influencing the changes.
5. Stability : Analysis of the environment helps the organizations to develop action
plans to cope with such changes to maintain stability in operations.
6. Dynamism : The study of environment helps to keep the business dynamic by
providing information about environmental changes.
7. Enables to Identify Business Opportunities: All changes are not negative. If
understood and evaluated them, they can be the reason for the success
of a business. It is very necessary to identify a change and use it as a tool
to solve the solve the problems of the business or populous.
8. Helps in Tapping Useful Resources
9. Coping with Changes
10. Assistance in Planning
11. Helps in Improving Performance
IMPORTANCE OF B.E. CAN ALSO BE
DESCRIBED AS
• Development of broad strategies and long-term policies of the
firm.
• Development of action plans to deal with technological
advancements.
• To foresee the impact of socio-economic changes at the
national and international levels on the firm’s stability.
• Analysis of competitor’s strategies and formulation of effective
countermeasures.
• To keep oneself dynamic.
 Components of Business
Environment

Internal Environment External Environment

Task General
Environment Environment
 A. Internal Environment
• It refers to those conditions and forces within the business
organization that affects its performance and outcome and can be
controlled by the organization.
• It is also known as micro environment.
• It is located within the business organization
• It includes five M i.e. Man, Material, Money, Machinery and
Management
• It provides strength and weaknesses to the organization
components of internal environment

1. Goals, policies, strategies : Goals are the desired outcomes and end
results. Policies are the guidelines for decision making. Strategies
are the broad action plans.

2. Organizational Culture : It refers to the assumptions that members

of an organization share in common. It consists of value, beliefs,
expectations, customs that guide behaviors.
3. Organizational Resources : Business activities are resource based. Resources can be
physical, financial, human and technological. The availability of resources sets a limit
on the activities of business organization.
4. Organizational Structure : Structure is the design of jobs and relationships. It defines
how jobs are formally divided, grouped and coordinated.
5. Shareholders: As they are the owner of business they have directing the
performance of the organization. The directors elected by them represent their
interest in board.
6. Unions: Labor unions represent the problem and feelings of their members to
management. Labor unions bother and negotiate with management regarding
wages, working hour and working condition which strongly affect the internal
environment of business organization.

 
B. External Environment
External environment consists of conditions and forces outside the
business that influence its performance and outcomes. It can not be
controlled by business organizations. It provides opportunities and
threats for business. It is also known as macro environment.
1. Task Environment : It consists of outside forces that are
immediately relevant for achievement of the goals of business
organizations. They are closer to the business organizations.
2. General Environment : It consists of broad forces in a business
organization’s surroundings. It is located outside the business and
can’t be controlled.
1. Task Environment (Operating environment)
a) Customers : Customers are the main targets of business. All the
activities of business are focused on satisfying customer needs.
Customers vary greatly in terms of needs, preferences, purchasing
power and buying behavior.
b) Suppliers and Allies : Suppliers supply inputs resources to business
organizations. Shortages, delays in supplies adversely affect
business activities. Organizations develop strategic alliances with
other organizations. Such alliances not only provide expertise but
also spread risk.
c) Competitors : Competitors are the rivals who deals in similar line
of business. Business organizations should maintain competitive
positions through product differentiations and positioning.
d) Financial Institutions : These are those institutions which are the
source of supply of funds and insurance of risks. Cordial working
relationships are essential with financial institutions to get
prompt services.
e) Distributors : Business organizations need services of market
intermediaries to sell their products to customers.
f) Labor Unions : A labor union is an organization of working acting
collectively to promote and protect mutual interests through
collective bargaining.
g) Pressure Groups : These are special interest groups which
pressurize and lobby business organizations to protect their
rights and interest groups.
h) Media : Media consists of newspapers, magazines, radio,
television, films and internet. Every action of business
organizations is subject to media scrutiny. Media should be
effectively and promptly handled by business
organizations.
 2. General Environment
a) Political Environment : Forces in the political environment
consists of factors related to management of public affairs. It
consists of:
i) Political System : It consist of political parties, election
procedures, and power centers. Political instability adversely
affects business activities.
ii) Political Institutions : They consist of legislature, executive and
judiciary. Legislature enacts laws that guide business activities.
Executive lays down policies, regulations and procedures that
influence business activities. Judiciary serves as watchdog. Its
ruling influences business practices.
iii) Political Philosophy : It can be democratic, totalitarian or a
mix or both. Political philosophies influence business
activities.
iv) Pressure Groups : They can be special interest groups that
use political process to advance their position on an issue
of social concern.
b) Legal Environment : It refers to all the legal surroundings that
affect business activities. It consists of rules, acts, regulations,
institutions and processes. It consists of :
i) Business Laws : They consist of laws that regulate business
activities. They protect the rights and interests of consumers,
labor, business and society.
ii) Courts of Law : Courts are institutions established by law to solve
legal disputes. Court of law carry out judicial review, give rulings
on business disputes.
iii) Law administrators : They are law enforcement agencies that
ensure implementation of laws. Laws without effective
implementation are meaningless.
c) Economic Environment : It refers to all the economic surroundings
that influence business activities. It consists of :
i) Economic System : It determines the scope of private sector
participation and market forces in business. It consist of free market
economic system, centrally planned economic system and mixed
economic system.
ii) Economic Policies : Policies are the guidelines for decision making.
They aim to achieve economic growth, stability, employment
generation and balance in external payments. They determine
money supply, interest rates, credit availability and exchange rates
that influence the cost of capital of business. Government purchases
and subsidies influence business activities.
iii) Economic Conditions : The level of income and business cycle duly
affect the business activities.
d) Socio-cultural Environment : It refers to all the social and cultural
surroundings that influence business. It consist of factors related
to human relationships as well as customs, traditions, religion,
languages and symbols that affect business. It consist of :
i) Demography : It is concerned with human population and its
distribution. It influence the size of market and location of
customers.
ii) Social Institutions : They consist of family, reference groups and
social class that influence business. Buying behavior differs among
classes which affect the business activities.
iii) Cultural Factors : Culture influences values and beliefs, attitude
which affect the business activities. People of different religions
go for different foods, beverages, clothes, materials.
e) Technological Environment : It refers to all the technological surrounding that
influence the business. Technology is the method of converting inputs into
outputs.
i) Level of technology : The level of technology can be Labor-based or Capital-
based. The level of technology influences the processing aspects of business
organizations.
ii) Technological Change : Technology is dynamic. The speed of technology is
accelerating. Business organizations should adapt to the changing
technological forces. They should upgrade the skills of their human resources
to cope with the changing technology.
iii) Technology Transfer : It is technology imported from advanced foreign
countries. The transfer of technology duly affects the business.
iv) Research and Development : It is the essence of innovation. Customer expect
new products of superior quality which are safe, comfortable and eco-friendly.
It is important for technological adaptation, up gradation and development.
 Environmental Analysis
• Environmental analysis is the study of the organizational environment to pin point
environmental variables or factors that can significantly influence organizational
operations
• Environmental analysis is the assessment of opportunities and threats in the external
environment of business.
• relatively qualitative and involves in the identification of the business needs and
determines solutions to the business problems created by the components of business
environment
• related with the performance characteristics of the functional areas of the firm
• William F. Glueck: “The process by which stratigists monitor the economic, legal,
competitive, geographic, technical and social setting to determine opportunities and
threats to their firms.”
• Philip Kotler: “Environmental analysis is the process of assessing the emerging trends.”
 Methods of Environmental analysis
the techniques and sources of gathering relevant information for apprising and
monitoring the environment
1. Scanning
2. SWOT Analysis
3. Monitoring
4. Forecasting
5. Benchmarking
6. Assessment
 1. Scanning
• It involves acquiring information from the environment. It detects trends that
have potential impact on business.
• It involves general surveillance of all environmental factors and their interactions
in order to:
• Identify early signals of possible environmental change
• Detect environmental change already underway
• Scanning can be of two types :
1. Concentrated : It focuses on selective factors such as technology or economic
factors.
2. Comprehensive : It focuses on all the relevant factors in the environment in a
comprehensive way.
The steps involved in scanning process are :
1. Identify relevant forces in the environment : It involves identifying
PEST forces.
2. Determine sources of observation : It involves identifying sources
for collection of information.
3. Select Scanning Method : It involves selecting a suitable scanning
method. The scanning method can be :
i) Extrapolation method : Information from past is used to explore
the future.
ii) Historical method : Trend is studied by establishing historical
parallels with other trends.
iii) Intuitive reasoning : Rational intuition by scanner for free thinking
based on past experiences and personal biases.
iv) Scenario building : Constructing a time-order sequence of events
that have logical cause and effect relationship.
v) Model building : Mathematical and econometric models of the
environment are simulated.
vi) Network methods : Contingency trees and relevance trees are
studied.
vii) Delphi technique : Systematic pooling of expert opinions in varying
stages. Feedback is used to develop new forecasts.
viii)Surveys : Gathering of opinions of experts, customers and others
about future environment.
ix) Morphological analysis : All possible ways are identified to achieve
objectives.
4. Scan and respond to data : In this step collected data is studied,
analyzed, assessed, interpreted, correlated and understood.
 2. Monitoring
It involves tracking environmental trends and events. It is auditing of
environmental influences. The likely effects of environmental influences
on business performance are identified.
It involves sequences of events, or streams of activities. It frequently
involves following signals or indicators unearthed during environmental
scanning.
This step provides:
1. Specific description of environmental trends and events.
2. Identification of trends and events for further monitoring.
3. Identification of areas for forecasting.
 3. Forecasting
• This step is estimate of future situation. It focuses on what is likely to
happen.
• It lays out a path for anticipated changes.
• It helps in projection of future alternative paths available to reduce
uncertainty.
• Strategic decision-making requires a future orientation.
• Naturally, forecasting is an essential element in environmental analysis.
• Forecasting is concerned with developing plausible projections of the
direction, scope, and intensity of environmental change
 4. Assessment
• In assessment, the frame of reference moves from
understanding the environment- the focus of scanning,
monitoring and forecasting – to identify what the
understanding means for the organization.
• Assessment, tries to answer questions such as what are the key
issues presented by the environment, and what are the
implications of such issues for the organization.
• This step identifies key opportunities and threats.
• The competitive position of business is analyzed.
 The Five Forces Model of Michael Porter
Potential
Entrants

Competitive
Suppliers Buyers
Rivalry

Substitute
Products
It is also known as Porter’s Model. It was developed by Michael
Porter. It is used to analyze competition or analysis of industry
environment. It assesses the attractiveness of competitive
environment. The forces are :
1. Competitive rivalry : It is among firms with similar products and
same customer group. The seller competes for bigger sales and
market position. Increased competition results into lower profits.
2. Potential entrants : Easy entry for new firms leads to lower prices
and profits. It assesses how easy is it for new firms to enter the
industry.
3. Suppliers : If there are only a few suppliers of important items,
the bargaining power of suppliers is high. Supply costs rises.
4. Buyers : IF there are only few large buyers, their bargaining
power is high. They can lower down prices.
5. Substitute products : Substitute are products of firms of
other industries. The greater availability of substitutes
drives down prices and profits.
Importance of environmental analysis
 Strategic Management
• involves formulation, implementation and control of strategy to achieve long term
objectives.
• involves strategies, decisions and actions of top management.
• It turns strategies in to action.
• It controls strategic performance.
• It recognizes the complexity of environment.
• It seeks to establish competitive advantage at all levels.
• Acc. to Glueck, “Strategic management is that set of decisions and actions which leads
to the development of an effective strategy or strategies to help achieve corporate
objectives.”
• Acc. to Prasad, “S.M. is a process that identifies present and future critical issues for
the organization and develops ways to resolve them within the organization’s
resources and external constraints.”
Use of Environmental Analysis in Strategic
Management
• E.A. is useful for S.M. to understand
• environmental elements of forthcoming business realities.
• Changing demographics.
• Corporate governance standards and practices
• Changing lifestyles and attitudes
• Effects of globalization and international alliances
• Technological changes and their impacts and develop, upgrade and acquire
new technology
• Emerging environmental patterns
• Deal with intensifying competition strategy
• Enhance the competency of management
• Develop more customer-responsive
• Reducing the impact of environmental forces
• Creating organizational structure and control system
• SWOT analysis
• Strategy implementation
• Strategies provides long term direction and scope to the business
organizations.
• Strategic management is concerned with decisions and actions of top
level management to implement strategies.
• Strategic management process :
1. Strategic planning: i) Environmental analysis : External environment is
analyzed to identify opportunities and threats and internal environment for
strengths and weaknesses. ii) Strategy formulation from best alternatives
2. Strategic choices : Opportunities of strategic advantages are matched with
resources of strengths to identify strategic options.
3. Strategic Implementation : Strategic choices are implemented. Structure is
designed. Resource planning is done.
4. Strategic control : It tracks implementation performance for evaluation.
Deviations are corrected.
5. Feed back:
 Unit-One
1. What is business environment? What are the components of business environment?
2. What is business environment? State the different components of the operating environment of the business
environment.
3. Define business environment. Why is it important for managers to understand environmental forces?
4. Give an overall picture of the prevailing business environment in Nepal elucidating the opportunities and threats
these environments provide. How do you think that the present environment can be improved?
5. Why is it necessary to study business environment?
6. Discuss the importance of environmental analysis.
7. Explain the environmental analysis process/steps.
8. What is environmental scanning? Explain the process and methods of environmental scanning.
9. Discuss the different models of environmental analysis.
10. “Strategic management without environmental analysis is not possible.” justify.
11. Explain the nature of business-environment interaction. Describe the impact of various environmental forces on
a modern business firm.
12. Discuss the nature and dynamism of business environment. What factors trigger changes in the business
environment?
13. What do you understand by environmental uncertainty? What factors cause environmental uncertainty?
14. What is SWOT analysis? Discuss its significance in environmental analysis.
That’s All