Business Environment

Definition of Business Environment is sum or 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. These factors
affect the function of the company and how a company works directly or
indirectly. Sum of these factors influences the companies or business organisations
environment and situation.

Business environment helps in identifying business opportunities, tapping useful

resources, assists in planning, and improves the overall performance, growth, and
profitability of the business. There are various types of Business Environment like
Micro Environment and Macro Environment.

Definitions of Business Environment

Environment consists of factors that are largely if not totally, external and beyond
the control of individual industrial enterprise and their managements. These are
essentially the ‘givers’ within which firms and their management must operate in a
specific country and they vary, often greatly, from country to country.

– Barry M. Richman and Melvgn Copen

Business environment is the aggregate of all conditions, events and influences that
surround and affect business.

– Keith Davis

Business environment refers to “the total of all things external to firms and
industries which affect their organisation and operation.

– Bayord O. Wheeler

Business environment encompasses the climate or set of conditions, economic,

social, political, or institutional in which business operations are conducted.

– Arthtur M. Weimer
The environment includes factors outside the firm which can lead to opportunities
for or threats to the firm. Although there are many factors, the most important of
the sectors are socio-economic, technological, supplier, competitors, and
government.

– Glueck and Jauch

Types of Business Environment

The business environment comprises an internal and external environment that

directly or indirectly affects business operations.

 Internal Environment: It includes all the factors that are well within the
control of a company. These factors are relatively predictable and can be
worked on by the company to eliminate forces that negatively impact its
operations.

 External Environment: It includes factors that exist outside the company’s

control. They tend to be unpredictable as a company cannot possibly control
or predict a change in them. Their unpredictable nature has the potential to
abruptly hinder or even boost a company’s functioning.

Importance of Business Environment

 Plan for Long Term: A sound knowledge of the business environment

helps the company know its advantages and limitations, making it easier to
choose the better positioning and plan to stay in the market for the long term.

 Identify Opportunities and Trends – Timely analysis allows a company to

identify and consequently explore new opportunities and better performance
ideas. A business opportunity is a factor that, upon identifying, allows the
initiation of a business venture or aids the development of an existing
business. An example of this is Nokia, a company that has previously held a
whopping 49.9% of the global market share for mobile phones. However,
the company did not adapt to the market’s changing demands as it failed to
analyse new trends. Keeping a constant lookout for the new trends that rival
firms are setting allows the company to adapt accordingly.
  Identify threats – Identifying potential threats to the business is another
reason why a company needs to keep a watch on its environment. Threats
are factors that have the potential to hurt a business. Steering clear of any
possible threats ahead of time is integral for the survival of a company.
Staying updated and adapting to the turbulent state of the overall business
environment grants the company better flexibility when it comes to coping
when a sudden, unexpected threat approaches the company. Understanding
these conditions and forces thoroughly allows analysts to determine what
direction the company should steer towards to stay relevant in the market.

 Gain First- Mover Advantage – A company gains the first-mover’s

advantage if it succeeds to identify market demands at the right time. This
allows the company to create its brand and gain brand recognition which
benefits the business in the long run. As time passes, competitors try to enter
the market after having examined the product’s expansive market demand.
By that time, the first mover has plenty of time to establish strong customer
loyalty and hence a significant market share which will be hard to compete
with. A closer look at the history of Amazon shows how Jeff Bezos had
recognised the power of the internet after having come across a statistic that
claimed that the internet would change the way businesses operate.
Identifying the internet’s potential ahead of time has made Amazon the
world’s largest e-commerce company today.

Features Of Business Environment

 Dynamic: The constant changing of the environment – be it socially,

politically, economically and technologically – results in the dynamic nature
of the business environment. A heavy interrelatedness of factors that
consequently lead to this ever-changing environment is witnessed.

 Unpredictable: Due to its dynamic nature, an air of uncertainty always

persists. Precognition is impossible, and hence, there is no way to foresee a
future event that might impact the business environment.

 Complex: The interrelatedness of factors and circumstances form a rather

tangled environment which is often difficult to analyse. It is an arduous task
to keep track of the sources and their impacts on conditions and forces that
 make up the business environment. Hence, it is a complex task to measure
the relative impact a certain force may have on a business.

 Susceptible: It is difficult to foresee the impact a slight change in the

environment can have on a business. An insignificant change may influence
a company’s operations largely. It has the potential to impact a business’
entire existence, its revenue and development.

 Relative: The business environment is not the same at all places. It varies
from place to place. The political crisis in one nation affects the business
environment only in that nation, not elsewhere. Hence, the business
environment is a relative concept.

 Multiple-angled: A social, political or economic occurrence may have

different impacts on different businesses. A political move that seems
beneficial for one business might seem threatening to another. Hence, there
exist multiple perceptions in a business environment.

Components Of Business Environment

Internal Environment:-The internal business environment constitutes several

internal forces or elements within the control of a business that influences its
operations. These include:

 Value System: It is the ethical belief that guides the business towards
achieving its mission and objective. The value system includes all
components that form a business’s regulatory framework – organisational
culture, climate, work processes, management practices and organisational
norms.

 Vision, Mission, and Objectives: The vision, mission, and objective of a

business relate to what it wants to achieve or accomplish in future. It is the
reason why the business exists.

 Organisational Structure: It outlines how the activities are directed within

the organisation to achieve its goals. It includes the rules, roles, and
responsibilities, along with how tasks are delegated and how the information
flows among the organisation’s levels.
  Corporate Culture: It is a powerful system of shared norms and attitudes
that works as a homogenising factor for an organisation’s employees and
gets appropriated by them.

 Human Resources: Human resources form all the employees and other
personnel associated with the business. It forms the most valuable asset of
the organisation as success or failure depends on it.

 Physical Resources and Technological Capabilities: It includes tangible

assets and the technical know-how that play an essential role in ascertaining
the business’s competitive capability and future growth prospects.

External Environment:-External components are those factors that a business

cannot control. These exist beyond a business’ jurisdiction and supervision limit.
External components influencing a business environment are further classified into
two categories:

 Micro Environment

 Macro Environment

Micro Environment:-Micro environment is the business’s immediate external

environment that influences its performance as it has a direct bearing on the firm’s
regular business operations. It includes factors outside of the business’s control but
can be analysed and worked upon by managing the business to prevent any
business losses. Micro factors include:

 Customers comprise the target group of the business.

 Competitors are other market players who target a similar target group and
provide similar offerings.

 Media is the channel the business use to market its offering to the customer.

 Suppliers include all the parties that provide the business with the resources
it needs to perform its operations.

 Intermediaries comprise the parties involved in delivering the offering to

the final customers.
  Partners are all external entities like advertising agencies, market research
organisations, consultants, etc., who conduct business with the organisation
and satisfy customer needs.

 Public includes any group with actual or potential interest in the business’s
operations or a group that affects its ability to serve its customers.

Macro Environment: PESTLE:-The macro environment includes remote

environmental factors that influence an organisation. The extent of influence a
macro element can have on a business is significant as they usually affect the
industry as a whole. These factors are classified under PESTLE: P – Political, E –
Environmental, S – Social, T – Technological, L – Legal, E – Economical.

 Political Factors comprise government policies, political stability,

corruption in the system, tax policies, labour laws, and trade restrictions that
affect the business or the industry.

 Legal Factors are laws that affect business operations. They include
business-specific, industry-specific, and even state-specific laws.

The market develops according to the political and legal environment in

various areas. This means that every business needs to be up to date with
such forces worldwide in order to be able to make the right decisions. This
generally includes legal factors such as:

 Copyright law

 Employment law

 Fraud law

 Discrimination law

 Health and Safety law

 Import/Export law

 Economical Factors relate to the economy of the country. They include

economic growth, exchange rate, interest and inflation rates, etc. Basically,
 the very environment of the economy can have an effect on two essential
aspects – your company’s levels of production and the decision-making
process of your customers. Some examples of economic factors affecting
business:

 Interest rates

 Exchange rates

 Recession

 Inflation

 Taxes

 Demand / Supply

 Social and culture Factors comprise the demographics of the country. They
include population growth rate, age distribution, career attitudes, health
consciousness, etc. Finally, it is crucial to understand that the product that
you bring to the market can have a strong impact on society. For example,
your production needs to eliminate every practice that is hazardous to
society, and show that it is socially responsible. There is a wide variety of
social and cultural factors, some of them being:

 Purchasing habits

 Level of education

 Religion and beliefs

 Consciousness about health issues

 Social classes

 Structure and size of a family

 Growth rate of the population

 Emigration and immigration rates

 Life expectancy rates and age distribution

 Different lifestyles

 Technological Factors pertain to innovation in technology that affects the

operations of the business. This refers to automation, research and
development activities, technological awareness, etc. These factors are
related to skills and ability that are implemented into production, as well as
all the materials and technology that a particular product requires to be
made. They are essential and can have a big impact on how well your
business is running. It boils down to even the most basic factors, such
as what kind of maintenance trolleys you use in order to preserve your tools
and equipment for as long as you possibly can. Some of the most common
technological factors are:

 Automation

 Internet connectivity

 3D technology

 Speed/power of computer calculation

 Engine performance and efficiency

 Security in terms of cryptography

 Wireless charging

 Environmental Factors comprise of all those that influence or are

determined by the environment a business operates in. It includes the
weather, climate, environmental policies, and even pressure from NGOs to
care for the environment. Every business must also take into account the
very planet and its resources. There are those that can be renewed, such as
forests and agricultural products, and those that cannot, such as coal,
minerals, oil, and the like. Both are strongly related to production. So,
natural and physical forces can be:

 Climate change
 Pollution
 Weather
  Availability of both non-renewable and renewable resources
 Laws that regulate the environment
 Survival of particular biological species

 Demographic factors each and every chunk of the market is affected

by universal demographic forces. These are age, education level, cultural
characteristics, country and region, lifestyle, and so on. The crucial
variables include:

 How income variables influence business

 Age variables that affect business

 Geographic Region Variables

 Education Level as a Variable

New Industrial Policy During Economic Reforms of 1991

The long-awaited liberalised industrial policy was announced by the Government
of India in 1991 in the midst of severe economic instability in the country. The
objective of the policy was to raise efficiency and accelerate economic growth.

Features of New Industrial Policy

 De-reservation of Public sector: Sectors that were earlier exclusively

reserved for public sector were reduced. However, pre-eminent place of
public sector in 5 core areas like arms and ammunition, atomic energy,
mineral oils, rail transport and mining was continued.Presently, only two
sectors- Atomic Energy and Railway operations- are reserved exclusively
for the public sector.
 De-licensing: Abolition of Industrial Licensing for all projects except for a
short list of industries. There are only 4 industries at present related to
security, strategic and environmental concerns, where an industrial license is
currently required-
 Electronic aerospace and defence equipment
 Specified hazardous chemicals
 Industrial explosives
  Cigars and cigarettes of tobacco and manufactured tobacco
substitutes

 Disinvestment of Public Sector: Government stakes in Public Sector

Enterprises were reduced to enhance their efficiency and competitiveness.

 Liberalisation of Foreign Investment: This was the first Industrial policy

in which foreign companies were allowed to have majority stake in India. In
47 high priority industries, upto 51% FDI was allowed. For export trading
houses, FDI up to 74% was allowed. Today, there are numerous sectors in
the economy where government allows 100% FDI.

 Foreign Technology Agreement: Automatic approvals for technology

related agreements.

 MRTP Act was amended to remove the threshold limits of assets in respect
of MRTP companies and dominant undertakings. MRTP Act was replaced
by the Competition Act 2002.

Outcomes of New Industrial Policies

 The 1991 policy made ‘Licence, Permit and Quota Raj’ a thing of the
past. It attempted to liberalise the economy by removing bureaucratic
hurdles in industrial growth.
 Limited role of Public sector reduced the burden of the Government.
 The policy provided easier entry of multinational
companies, privatisation, removal of asset limit on MRTP companies,
liberal licensing.
 All this resulted in increased competition, that led to lower prices in many
goods such as electronics prices. This brought domestic as well as foreign
investment in almost every sector opened to private sector.
 The policy was followed by special efforts to increase exports. Concepts like
Export Oriented Units, Export Processing Zones, Agri-Export Zones,
Special Economic Zones and lately National Investment and Manufacturing
Zones emerged. All these have benefitted the export sector of the country.
Limitations of Industrial Policies in India

 Stagnation of Manufacturing Sector: Industrial policies in India have

failed to push manufacturing sector whose contribution to GDP is stagnated
at about 16% since 1991.

 Distortions in industrial pattern owing to selective inflow of

investments: In the current phase of investment following liberalisation,
while substantial investments have been flowing into a few industries, there
is concern over the slow pace of investments in many basic and strategic
industries such as engineering, power, machine tools, etc.

 Displacement of labour: Restructuring and modernisation of industries as a

sequel to the new industrial policy led to displacement of labour.

 Absence of incentives for raising efficiency: Focussing attention on

internal liberalisation without adequate emphasis on trade policy reforms
resulted in ‘consumption-led growth’ rather than ‘investment’ or
‘export-led growth’.

 Vaguely defined industrial location policy: The New Industrial Policy,

while emphasised the detrimental effects of damage to the environment,
failed to define a proper industrial location policy, which could ensure a
pollution free development of industrial climate.

Impact of government policy changes on the business

i. Increased Competition: As a result of the policies such as relaxation of the
licensing policy and reduction of import duties, the competition faced by the
domestic firms increases. India companies experienced competition in service
industry such as telecommunication, banking, insurance, etc.

ii. Increased Demand: As competition increases, the choice of goods and services
for the consumers also increases. Thus, consumers also gain from quality products
and greater variety.
iii. Change in Business Policies: The government policies directly impact the
functioning of the business enterprises. As a result, they have to alter their policies
appropriately.

iv. Technological Changes: As competition increases firms tend to find new and
innovative ways to survive in the market. In such a scenario, technological
improvements become imperative.

v. Need for Trained Personnel: Innovations and improvement in product,

application of improved technologies requires skilled and trained personnel. Thus,
there arises a need for the development of human resources.

vi. Greater Market Orientation: With increased competition, the production

has become market oriented. That is, the enterprises produce as per the demand
market.

vii. Less Reliance on Budgetary Support by Public Sector Enterprises: To

survive the increased competition, the public sector enterprises must improve
efficiency and productivity rather than relying on budgetary support to cover their
losses.

MANAGERIAL RESPONSE TO ENVIRONMENTAL CHALLENGES

1. Anticipating and Adapting. Sometimes, managers can anticipate changes in

environmental conditions and adapt appropriately to the expected changes. With
information gleaned from forecasting, managers can help their organisations adapt
internally to anticipated environmental demands. For instance, hotels and
restaurants in popular hill stations can anticipate the tourist season and increase
their supplies of food, liquor and various other customer services.

2. Smoothing or Levelling. This strategy aims at smoothing the sales throughout

the year. During periods of low demand, an organisation may offer inducements,
such as price reductions, to encourage consumers to buy its products. During peak
periods, it may charge a premium rate to make up for lean season. Smoothing
explains why geysers are cheaper during the summer and air-conditioners during
the winter.
3. Competitive Advertising. In order to meet competition in the market, business
firms may resort to competitive advertising. For instance, Pepsico and Campa Cola
companies have often used this strategy to either increase or maintain their market
share.

4. Brand Building. Often, multinational companies have invested huge amounts

on building brands, such as LG, Samsung, Hyundai. During the cricket World Cup
2003, LG was always at the forefront to build its brand throughout the world.

5. Strengthening of Distribution Network. Several companies like Hindustan

Unilever, Coca Cola, Pepsico, Maruti, Titan, ITC, etc. have strengthened their
distribution network in India. They have been concentrating on marketing in rural
markets by launching low priced models of their products. Rural markets in India
have a great potential. Direct marketing companies like Amway and Tupperware
have also been successful in pushing up their sales directly to the customers.

6. Upgradation of Technology. Use of latest technology can provide a

competitive edge to their users. That is why, most of the big companies spend huge
budgets to develop new technology or acquire new technology from multinational
corporations. Technology transfer to India has now become easier because of
government policy of economic liberalisation.

7. Diversification Strategy. Many companies have undertaken diversification

programmes to strengthen their position in the market. Reliance has diversified
into textiles, petrochemicals, financing, information technology, communication,
etc. Eureka Forbes, known for vacuum cleaner, has entered into water purifier,
food processor, electric iron, etc.

8. Joint Venture. Many companies in India have entered into joint venture
arrangements with foreign multinational corporations for the supply of latest
technology. For instance, Mahindra and Mahindra entered into joint venture with
Ford and SIEL with Honda. This has helped them to offer improved models in the
market.

9. Merger and Acquisition. Two or more competing firms may merge together to
create a bigger unit or one firm may acquire another firm to increase its
competitive strength. For instance, Hindustan Unilever took over Tata Oil Mills
(TOMCO) to take on competition from Proctor and Gamble. It also acquired
Kissan and Kwality brands. Similarly Coce Cola acquired Parle Drinks (the
manufacturer of Limca and Thumps Up) to take on Pepsico.

Liberalization:-The basic aim of liberalization was to put an end to those

restrictions which became hindrances in the development and growth of the nation.
The loosening of government control in a country and when private sector
companies’ start working without or with fewer restrictions and government allow
private players to expand for the growth of the country depicts liberalization in a
country.

Objectives of Liberalization Policy

 To increase competition amongst domestic industries.

 To encourage foreign trade with other countries with regulated imports and
exports.

 Enhancement of foreign capital and technology.

 To expand global market frontiers of the country.

 To diminish the debt burden of the country.

Privatization:-This is the second of the three policies of LPG. It is the

increment of the dominating role of private sector companies and the reduced role
of public sector companies. In other words, it is the reduction of ownership of the
management of a government-owned enterprise. Government companies can be
converted into private companies in two ways:

 By disinvestment

 By withdrawal of governmental ownership and management of public sector

companies.

Forms of Privatization

 Denationalization or Strategic Sale: When 100% government ownership

of productive assets is transferred to the private sector players, the act is
called denationalization.
  Partial Privatization or Partial Sale: When private sector owns more than
50% but less than 100% ownership in a previously construed public sector
company by transfer of shares, it is called partial privatization. Here the
private sector owns the majority of shares. Consequently, the private sector
possesses substantial control in the functioning and autonomy of the
company.

 Deficit Privatization or Token Privatization: When the government

disinvests its share capital to an extent of 5-10% to meet the deficit in the
budget is termed as deficit privatization.

Objectives of Privatization

 Improve the financial situation of the government.

 Reduce the workload of public sector companies.

 Raise funds from disinvestment.

 Increase the efficiency of government organizations.

 Provide better and improved goods and services to the consumer.

 Create healthy competition in the society.

 Encouraging foreign direct investments (FDI) in India.

Globalization:-It means to integrate the economy of one country with the

global economy. During Globalization the main focus is on foreign trade & private
and institutional foreign investment. It is the last policy of LPG to be implemented.
Globalization as a term has a very complex phenomenon. The main aim is to
transform the world towards independence and integration of the world as a whole
by setting various strategic policies. Globalization is attempting to create a
borderless world, wherein the need of one country can be driven from across the
globe and turning into one large economy.