BUSINESS

ENVIRONMENT
BUSINESS

• Business may be understood as the organized efforts of enterprises to supply

consumers with goods and services for a profit.

• Business includes all activities connected with production, trade, banking,

advertising, packaging and numerous other related activities.
BUSINESS TODAY

• Modern business is dynamic.

• If there is any single word that can best describe today’s business, it is change.

• This change makes the companies spend substantially on Research and development
(R & D) to survive in the market.
ENVIRONMENT
• Environment refers to all forces which have a bearing on the functioning of business.

• The business environment poses threats to a firm or offers immense opportunities for
potential market exploitation.
TYPES OF ENVIRONMENT
TYPES OF ENVIRONMENT
INTERNAL
• The 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, organisation and functional means to suit the environment.
• It may, however, be noted that a firm may not sometimes have complete control over all
the internal factors.
EXTERNAL
• The external factors, on the other hand, are, by and large, beyond the control of a
company.
• The external or environmental factors such as the economic factors, socio-cultural
factors, government and legal factors, demographic factors, geo-physical factors etc.,
are, therefore, generally regarded as uncontrollable factors.
Internal Environment: There are a number of internal environmental factors that influence
the strategic decisions in a business. Some of these factors are :

• Value system and ethical standards which the organisation has adopted;
• Mission, goals and objectives of the companies as they determine the priorities, direction
of development, philosophy, etc. of the business;
• Organisational structure determining the extent of professionalization of management,
characteristics of available human resources like skill, morale, commitments, attitudes,
etc.
• Physical assets and facilities like nature of available technology, production capacity,
distribution, which has a direct bearing on marketing efficiency;
• Financial factors such as financial position, composition of funds, sources of funds etc.
of the company; and
• Corporate image and brand equity which the company has created over the years.
External environment: The External environment can be broadly classified into
micro environment and a macro environment.
• The micro environment refers to the environmental forces which are in the
immediate contact of the business such as customers, competitors, marketing
intermediaries, suppliers, workers and the publics.

• Macro environment, on the other hand, are the larger societal or physical
forces which may have an impact not only on the business but also on its micro
environmental players. These are economic, politico-legal, socio-cultural,
demographic, technological, international and natural forces.
 EXTERNAL MICRO ENVIRONMENT
• Customers: In order to create and sustain customers, the management has to set up
systems for monitoring customers' attitudes, behaviour and satisfaction on continuing
basis. (Pepsi stopped using aspartame)
• Competitors: Samsung TV is not only competing with other brands of televisions in the
market but it is also competing with other firms manufacturing products such as
refrigerators, mobile phones, cooking ranges, etc. because the customers with
discretionary income may settle for any of these products as the discretionary income
available with the customers may be limited and desire to purchase products
unlimited. (Jio, Airtel)
• Marketing Intermediaries: The intermediaries such as wholesalers, retailers,
distribution firms, agents, etc. perform various kinds of functions to assist the business
firm in promoting, selling and distributing its goods to the final buyers. (would not
stock more, want more margin…)
• Suppliers: Suppliers are those who provide various kinds of inputs such as raw
materials etc. Every firm strives to operate at a low cost of a production for which it has
to ensure uninterrupted supply of inputs. (increase raw material cost)
• Workers and Unions: The relationship which a business firm has built up with its
workers is of crucial importance for its success. If the workers are organised and have
strong unions, they would invariably resort to collective bargaining and would be less
vulnerable to the exploitation of the management. (put pressure on management…)
EXTERNAL MACRO ENVIRONMENT

Example –
hearing aids
Example – artificial
intelligence (AI)
 Example – natural
calamity

Example – election results

day – stock market slump,
Trump assassination attempt
Example –
1. Language – GERBER EXAMPLE
2. Culture – eg – COLOR –
SAMSONITE – BLACK SUITCASE
FAILED IN MEXICO (ass. death)
3. Tradition – DIWALI GIFTING
4. Religion – McD IN ASR/KATRA
NATURE OF BUSINESS ENVIRONMENT
• Complex: Environment consists of a number of factors, events, conditions and influences
arising from different sources which impact business thus making the business complex.
• Interdependence: The economic status of a country affects the development of
technology. A rich country can make sufficient expenditure on the research and
development.
• Dynamic: As it keeps on changing in terms of technological improvement, shifts in
consumer preferences or entry of new competition in the market.
• Inter-relatedness: factors are co-related. For example, a change in the import-export
policy with the coming of a new government to power. Thus, a change in one factor
affects the other factor.
• Impact: has both long term and short term impact. Environment therefore has different
effects on different firms in the same industry.
• Uncertainty: is largely uncertain as it is very difficult to predict future happenings,
especially when environment changes are taking place too frequently as in the case of
information technology or fashion industries.
• Relativity: It is a relative concept since it differs from country to country and region to
region. Political conditions in the USA, for example differ from those in China or
Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may be
almost non-existent in France.
 WHY IS IT IMPORTANT
TO UNDERSTAND BUSINESS
ENVIRONMENT?
SIGNIFICANCE – SWOT
1. Customer Focus: makes the management sensitive to the changing needs and
expectations of consumers. For example: shampoo companies launched small sachets
of shampoo and other products realizing the wishes of customers. This move helped the
firms to increase sales.
2. Strategy Formulation: relevant information about the business environment serves as
the basis for strategy making. For example: ITC realised that there is a vast scope for
growth in the travel and tourism industry in India and the government is keen to
promote this industry because of its employment potential. With the help of this
knowledge ITC planned new hotels both in India and abroad.
3. Public Image: A business firm can improve its image by showing that it is sensitive to
its environment and responsive to the aspirations of public. Leading brand like Mama
Earth, have built good image by being sensitive and responsive to environmental
forces.
4. Giving Direction for Growth: The interaction with the environment leads opening up
new frontiers of growth for the business firms. It enables the business to identify the areas
for growth and expansion of their activities.
5. Change Agent: Business leaders act as agents of change. In order to decide the direction
and nature of change, the leaders needs to understand the aspirations of people and
other environmental forces through environmental scanning.

For example: contemporary environment requires prompt decision-making and power to

people. Therefore, business leaders are increasingly delegating authority to empower their
staff and to eliminate procedural delays.
INTERACTION MATRIX
INTERACTION OF SOCIAL AND ECONOMIC ENVIRONMENT
• The economic environment of business exercise a strong influence on the non-economic
environment of business just as the non-economic environment influences the economic
environment.
• The social environment affects and gets affected by the economic environment of
business. Social attitudes towards business and management determine how many
people get attracted to private business as an activity and to management as a career.
• If business gets social sanction as a respectable profession, the occupational structure of
a country will reflect a sizable category of professional mangers.
• On the other hand, if more and more of the active labour force joins professional
management, the social attitude towards business and its management also changes.
• Example: brain drain
The educational cultural environment and the economic environment of business are
also interdependent.
• The state of economic development acts as a decisive factor in the choice of a system
of education.
For example, only a relatively high-income country can afford to impart costly higher
education.
• The system of education, on the other hand, may be responsible for a given economic
environment.
For example, the emphasis on education in the arts and a lack of vocational course may
be held responsible for the economic problem of unemployment in many countries.
At the corporate level, the interdependence between educational and economic
environmental factor may at times take the form of a vicious circle.
The politico-legal environment and economic environment of business are also interlocked
to such an extent that we sometimes think of political economy business.
• In a situation of political stability, business enterprises happen to be forthcoming and
businessmen are willing to take more economic risk.
• But if there is political instability, business uncertainties multiply and, therefore,
entrepreneurs may not like to take up new business ventures.
• Similarly, the ideology of the ruling party influxes the economic system.
• The ruling party which believes in PRIVATIZATION, is favourably viewed by the private
business sector.
• On the other hand, sometimes a series of political legislations may be necessary to cope with
the economic environment.
• In fact, different legislations of the Government (like MRTP Act) are often politico-
economic in character.
• Monopolistic and Restrictive Trade Practice under MRTP Act, 1969: To ensure that the
operation of the economic system does not result in the concentration of economic power in
hands of few, To provide for the control of monopolies.
The interaction between the physical environment and the economic environmental
business in that country.
• A number of legislations have been enacted in many countries to conserver natural
resources and to preserve natural physical environment.
• These environment allegations may impose a constraint on the expansion of a given
business concern like a factory.
• On the other hand, the size of a plant, the scale of output, the structure and action of
industries may lie at the root of either environmental improvement or environmental
delay.
• Thus, the social responsibility of business today means taking care of the environmental
impact of various economic and technological activities and laws rating to business and
industry will increasingly turn out to be laws relating to the physical environment of
business.
The historical environment and the economic environment of business are also
interdependent.
The achievements of the Five-Year Plans in the past may provide a direction to the
formulation and implementation of the current Five-Year Plan of an economy
And the present performance of a plan will decide the future course of planning. It
suggests that the environments factors are interrelated on the time scale too.

If you think a little more, you will discover that individually each critical element of the
economic environment (namely, economic system, economic structure, functioning of the
economy through sectors, economic polices, programmes and controls) interacts with each
critical element of the non-economic environment (namely, sociological, political,
historical and physical).
• One can conceptualise this interdependence or interlocking of various environmental
factors in terms of an Interaction Matrix.
• For example, in Interaction Matrix below we have listed the critical elements of the non-
economic environment along the rows and the critical elements of the economic
environment along the columns.
• When a given element of the economic environment influences a given element of the
non-economic environment, you draw a short line vertically, and
• when an element of the non-economic environment influences a given element of the
economic environment, you draw a short line horizontally.
• Thus in case of interdependence among the environmental elements, you end up with a
plus sign which suggests a two-way interaction. The Interaction Matrix serves as ready-
reference for understanding environmental relations and relations.
COMPETITIVE STRUCTURE OF BUSINESS
Porter’s 5 forces model
• Organizations use Porter’s Five Forces model to assess their
competitive environment and make informed decisions.

• When you understand the forces affecting your industry, you can
adjust your strategy, boost your profitability, and stay ahead of the
competition
According to Michael Porter’s well known model of structural analysis of industries, the
state of competition in an industry depends on five basic competitive forces, viz.

1. Rivalry among existing firms

2. Threat of new entrants
3. Threat of substitutes
4. Bargaining power of suppliers
5. Bargaining power of buyers
Rivalry among Existing Competitors
• Extent of business competition.
• Example – Pepsi and Coca-Cola for soft drinks, Nike and Adidas for sneakers
• Determinants of intensity of competition:
• The number of competitors
• Exit barriers
• Common competitive actions include price changes, promotional measures, customer
service, warranties, product improvements, new product introductions, channel
promotion etc. (how do competitors differentiate themselves)
• There are a number of factors, which influence the intensity of rivalry.
• These include: Number of Firms and their Relative Market Share, Strengths; state of
Growth of Industry, Fixed or Storage Costs, Product Standardization and Switching
Costs, Exit Barrier.
Threat of Entry
• A growing industry often faces threat of new entrants that can alter the
competitive environment. There may, however be a number of barriers to
entry.
• Potential competition is high if the industry is profitable or critical, entry
barriers are low
• The following are some of the important common entry barriers:
• Govt policy, Product differentiation (customer loyalty), monopoly
elements (control over raw material –supplies), capital requirements
(High capital intensive).
• Factors determining how much new entrants threaten an industry:
• Status of established brands, capital requirements, etc.
Threat of Substitutes
• An important force of competition is the power of substitutes. Substitutes
limit the potential returns in an industry by placing a ceiling on the price
firms in the industry can profitable charge. The more attractive the price
performance alternative offered by substitutes, the firmer the lid on industry
profits.
• Firms in many industries face competition from those marketing close or
distant substitute.
• Porter points out that substitute products that deserve the most attention are
those that
(1) are subject to trends improving their price-performance trade off with
the industry's product, or
(2) are produced by industries earning high profits.
Bargaining Power of Suppliers
The important determinants of supplier power are the following:
1. Extent of domination in the supplier industry
2. Importance of the product to the buyer.
3. Importance of the buyer to the supplier
4. Switching costs.
5. Extent of differentiation or standardization of the product.
6. Switching costs.
7. The number of suppliers.
Bargaining Power of Buyers
• For several industries, buyers are potential competitors they may integrate backward.
• Important determinants of the buyer power, explained by Porter, are the following.
1. The volume of purchase relative to the total sale of the seller.
2. The importance of the product to the buyer in terms of the total cost.
3. The extent of standardization or differentiation of the product.
4. Switching costs.
5. Profitability of the buyer (low profitability tends to pressure costs down).
6. Importance of the industry's' product with respect to the quality of the buyer's
product or services.
8. Extent of buyer’s information.
9. Number of buyers.
10. Purchase size.