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Business

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Environment
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Outline
• Concept & Definition of Business Environment
• Nature

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• Significance
• Types of Business Environment

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• Coping with environmental changes
• Limitations

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Concept
• The total of all things external to firms and industries which
affect their organisation and operation – Bayord O. Wheeler

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• Business environment encompasses the climate or set of
conditions, economic, social, political or institutional in which
business operations are conducted – Arthur M. Weimer

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• Thus, business environment means all those factors that have
an impact on business.

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DEFINITION
• It is defined as the aggregate of all the forces, factors and
institutions which are external to and beyond the control of an
individual business enterprise but which influence the

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functioning and growth of business enterprise.

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 Nature of Business Environment
• Aggregative: totality of all external forces which influence the
working and decision-making of an enterprise.
• Inter-related: different elements of business environment are

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closely inter-related and interdependent. A change in one
element affects the other elements.

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• Dynamic: keeps on changing from time to time
• General and specific forces: general forces such as economic,
social, political, legal , natural and technological. Specific
forces such as investors, customers, competitors etc.
• Relative: a relative concept. Differs from country to country
• Inter-temporal: it changes over time
• Uncertain: difficult to forecast the future environment.
• Contextual : business environment provides the macro 5
framework within which the business firm operates.
 Significance
Knowledge of environmental changes is very helpful in the formulation and
implementation of business plans. A business can obtain this knowledge
through environmental scanning.

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Environmental scanning is a process by which organizations monitor their

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relevant environment to identify opportunities and threats affecting their
business.

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 Significance
Some of the direct benefits of understanding the environment are given
below:

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• First mover advantage: awareness of environment helps an enterprise
to take advantage of early opportunities instead of losing them to
competitors.

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• Early warning signal: environmental awareness serves as an early
warning signal. It makes a firm aware of the impending threat or crisis
so that the firm can take timely action to minimize the adverse effects,
if any.
• Customer focus: environmental understanding makes the management
sensitive to the changing needs and expectations of consumers.

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 Significance
• Strategy formulation: environmental monitoring provides relevant
information about the business environment which serves as the
basis for strategy making.

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• Change agent: business leaders create a drive for change at the
grass root level. In order to decide the direction and nature of

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change, the leaders need to understand the aspiration of people and
other environmental forces through environmental scanning.
• 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.
• Continuous learning: environmental analysis keeps them in touch
with the changing scenario so that they are never caught unaware.
Knowledge of changing environment can keep the organization
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Types of business environment
Business firm

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Internal External
environment environment

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Internal environment
• Refers to all factors existing within a business firm.
• Controllable factors

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• Internal environment imparts strengths or causes weaknesses.
• Example: a company can modify or alter its organisation

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structure, policies, programmes, personnel, physical facilities
and marketing mix to suit the changes in the environment.

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 Internal environment
Main internal factors which influence the business decisions are:
• Culture - values, beliefs and attitudes of the founders and top management
• Mission and objectives- the business philosophy and purpose of a company guide

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its priorities, business strategies, product market scope and development process.
• Top management structure- the composition of Board of directors, the degree of
professionalism of management and the organizational structure of a company have

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important bearing on its business decisions.
• Power structure- the internal power relationship between the board of directors and
the chief executive is an important factor. The extent to which top management
enjoys the support of shareholders and employees at different levels also has an
important bearing on decision making and working of the company.
• Company image and brand equity- the image and brand equity of the company
plays a significant role in raising finance, forming alliances, choosing dealers and
suppliers, launching new products, entering foreign markets etc.
• Human and other resources- the competence, morale and motivation of employees
plays a vital role in the success of the firm.
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External environment
• Consists of forces and factors outside an enterprise
• Uncontrollable external forces

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• External environment creates opportunities and threats for an
enterprise.

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• Example: a company has no control over national income,
social forces, government policies, population etc.

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External environment

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External environment

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Micro Macro
environment environment

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Micro/ task environment
• Refers to those individuals, groups and agencies with which
the organization comes into direct and frequent contact in the
course of its functioning.

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• Factors exercise a direct influence on the operations of the
enterprise.

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• Consists of the groups in the company’s immediate operating
environment which have a stake in the company

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 Micro environment- elements
• Customers
• Competitors

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• Suppliers
• Marketing intermediaries

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• Financiers
• Public
• Workers and trade union

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Macro environment
• Refers to the general environment or remote environment
within which a business firm and forces in its micro
environment operate.

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• Company does not regularly or directly interact with the
macro env.

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• Forces create opportunities for and pose threats to the
company.
• Less controllable factors

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 Macro environment- elements
• Political and legal environment
• Social and cultural environment

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• Economic environment
• Financial environment

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• Technological and physical environment
• Natural environment
• Global environment

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Macro-environmental Forces

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General Environment

• Dimensions in the broader society that influence

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• Economic
• Sociocultural

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• Global
• Technological
• Political/legal
• Demographic

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Industry Environment

• Set of factors directly influencing a firm and its

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Socio-Cultural Environment
• Social and cultural environment refers to the influence
exercised by certain social factor which are “beyond the
companies gate”

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• Culture refers to dance, drama, music and festival include

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Knowledge, belief, art, moral, law, customs & others capability

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• Following characteristics of culture are
• 1.
1. Learned : Culture is not inherited or biologically based, it is
acquired by learning and experience
2. Shared : People are member of a group, organisation, or

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society share culture, it is not specific individual.
3.Tran generational : Culture is passed on from one generation

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to the next.
4.Symbolic: Culture is based on the human capacity to symbolic
or use one thing that represent another. 5.Adaptive : Culture is
based on the human capacity to change or adapt, as opposed
to the more genetically driven driven adaptive process of
animals.
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Competitor Environment
• All of the companies that the firm competes against.

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Coping with environmental
changes
• Buffering- used to soften the impact of environment on the
organisation. Ex: stocking material, preventive maintenance,
employee training, building inventory

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• Levelling- attempts to reduce fluctuations in the environment.
• Anticipation- acquiring information about probable changes in

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the environment.

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Coping with environmental
changes
• Rationing- allocating organisational resources according to a
system of priorities.

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• Dominating- facing the challenges and converting threats into
opportunities.
• Changing- an organization may change itself, its operations

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and output.

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