Business Environment

 The term ‘business environment’ means the sum total of all

individuals, institutions and other forces that are outside the
control of a business enterprise but that may affect adversely
or favorably its performance.

 “Business is an institution organised and operated to provide

goods and services to society under the incentive of private
gain”.
By Bayard O Wheeler

“Business can be defined as all profit directed economic and

commercial activities that provide goods and services
necessary to a nation’s standard of living” .
By Boon and Kontz
 Business
 Business does not function in a vacuum. It has
to act and react to what happens outside the
factory and office walls.
 These factors that happen outside the business
are known as external factors or influences.
 These will affect the main internal functions of
the business and possibly the objectives of the
business and its strategies.
 Totality of external forces
 Business environment is the sum total of
all things external to business firms and,
as such, is aggregative in nature.
 Specific and general forces

 Specific forces (such as investors,

customers, competitors and suppliers)
affect individual enterprises directly and
immediately in their day-to-day working.
 General forces (such as social, political,
legal and technological conditions) have
impact on all business enterprises and
thus may affect an individual firm only
indirectly.
 Inter-relatedness
 Different elements or parts of business
environment are closely inter-related.
For example, increased life expectancy of
people and increased awareness for health care
have increased the demand for many health
products and services like diet Coke, fat-free
cooking oil, and health resorts.
New health products and services have, in turn,
changed people’s life styles
 Dynamic nature

 Business environment is dynamic in that it

keeps on changing whether in terms of
technological improvement, shifts in
consumer preferences or entry of new
competition in the market.
 Uncertainty:

 Business environment 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.
 Complexity:
 Since business environment consists of
numerous interrelated and dynamic
conditions or forces which arise from
different sources, it becomes difficult to
comprehend at once what exactly
constitutes a given environment. In other
words, environment is a complex
phenomenon that is relatively easier to
understand in parts but difficult to grasp
in its totality.
 Relativity
 Business environment is a relative concept
since it differs from country to country and
even region to region. Political conditions
in the USA, for instance, 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.
Importance of Business Environment
 It enables the firm to identify opportunities
and getting the first mover advantage.
 It helps the firm to identify threats and early
warning signals.
 It helps in tapping useful resources. It helps in
coping with rapid changes
 It helps in assisting in planning and policy
formulation
 It helps in improving performance
 Elements of Business
Environment
 Economic
 Social
 Technological
 Political
 Legal
 Political Environment
Political factors, including international political
relations, matter a lot particularly for large
multinational firms and export firms operating in
a country.
 Legal Environment
Legal system of a country establishes codes and
procedures for various types and aspects of
business and deals with deviations or
infringement law like bribery, product
counterfeiting, gray markets, black markets,
consumer deception and tax evasion.
 Cultural Environment

Culture has a profound impact on the language,

literature and communication process within a society
and business firms have to adjust their marketing
communication to the cultural characteristics.

 Demographic Environment
Demographic characteristics of a country like size,
growth rate of population, population density, sex ratio,
fertility and mortality rates, age composition, life
expectancy have an important influence on business
environment.
 Internal Environment

 The internal environment is critically

dependent on line and staff relations,
industrial relations, job design and
coordination, team spirit, quality of internal
communication, work and productivity
standards, compensation systems and
employee motivation.
 Threats refer to the external environment trends and
changes that will hinder a firm’s performance. Besides
opportunities, environment happens to be the source of
many threats. Environmental awareness can help
managers to identify various threats on time and serve
as an early warning signal.
For example, if an Indian firm finds that a foreign
multinational is entering the Indian market with new
substitutes, it should act as a warning signal. On the
basis of this information, the Indian firms can prepare
themselves to meet the threat by adopting such
measures as improving the quality of the product,
reducing cost of the production, engaging in aggressive
advertising, and so on.
 Environment is a source of various resources for running a
business. To engage in any type of activity, a business enterprise
assembles various resources called inputs like finance, machines,
raw materials, power and water, labour, etc., from its environment
including financiers, government and suppliers. They decide to
provide these resources with their own expectations to get
something in return from the enterprise. The business enterprise
supplies the environment with its outputs such as goods and
services for customers, payment of taxes to government, return on
financial investment to investors and so on. Because the enterprise
depends on the environment as a source of inputs or resources and
as an outlet for outputs, it only makes sense that the enterprise
designs policies that allow it to get the resources that it needs so
that it can convert those resources into outputs that the environment
desires. This can be done better by understanding what the
environment has to offer.
 Today’s business environment is getting increasingly
dynamic where changes are taking place at a fast pace.
It is not the fact of change itself that is so important as
the pace of change. Turbulent market conditions, less
brand loyalty, divisions and sub-divisions (fragmentation)
of markets, more demanding customers, rapid changes
in technology and intense global competition are just a
few of the images used to describe today’s business
environment. All sizes and all types of enterprises are
facing increasingly dynamic environment. In order to
effectively cope with these significant changes,
managers must understand and examine the
environment and develop suitable courses of action.
 Since environment is a source of both
opportunities and threats for a business
enterprise, its understanding and analysis
can be the basis for deciding the future
course of action (planning) or training
guidelines for decision making (policy). For
instance, entry of new players in the
market, which means more competition
may make an enterprise think afresh about
how to deal with the situation
 The final reason for understanding business
environment relates to whether or not it really
makes a difference in the performance of an
enterprise. The answer is that it does appear to
make a difference. Many studies reveal that the
future of an enterprise is closely bound up with
what is happening in the environment. And, the
enterprises that continuously monitor their
environment and adopt suitable business
practices are the ones which not only improve
their present performance but also continue to
succeed in the market for a longer period.
Factors Producing Changes in
Business Environment
Changes in Government Policies
Government affects business environment in various
roles as regulator, promoter, entrepreneur, planner and
consumer. Changes in fiscal policy affect expenditure
levels and the structure of taxation. Monetary policy
changes impact the cost (rate of interest) and availability
of credit (liquidity). Public debt policy affects the supply
of savings and the aggregate level of demand.
 Variations in Growth Performance
Variations in growth rate bring about corresponding
change in the business environment and business firms
adjust to the changing scenario. Along with the overall
growth rate, the sectoral contributions from different
segments of agriculture, industry, infrastructure and
services also change depending upon sectoral
environment conditions.
Corrective Policy Actions
Corrective actions are taken when actual performance
deviates from intended or planned performance.
Government often makes fiscal correction to keep
revenue and expenditure growth on budgeted lines.
Central banking authorities undertake monetary
correction under which they readjust money supply and
credit growth rates according to the output performance
and liquidity condition
 Changes in Market Structure and Competition
The market structure basically depends upon the
number of buyers and sellers in the market, freedom of
entry and exit, independence between firms, mobility of
the factors of production and availability of market
information to the various participants. The determinants
of market structure are constantly changing and so is the
state of competition. Trade liberalisation and import
competition are further impacting the market structures.
 Future Expectations and Business Speculation
Both individuals and business firms, on the basis of past
trends and current scenario anticipate future changes in
a number of variables such as rate of interest, rate of
inflation, exchange rate, taxes, government borrowings,
advertisement expenditure, production in the various
sectors and market demand. Current changes and future
expectations lead to the establishment of markets for
futures and forwards in respect of commodities and
financial investments.
  Changes in Consumer Attitudes, Tastes and Preferences
 Consumer attitudes and tastes play a major role in
product designing, delivery and accompanying services
and are subject to slow change over time. The main
factors that bring about changes are education,
geographical mobility, fashion trends and compulsions of
seasonal factors. The changes on the side of consumer
induce changes in product content and presentation
making the environment more competitive.
 Imports and Foreign Investment Changes
 Exposure to foreign products and foreign business firms
can cause a sea change in the nature of business
environment. imports not only add to competition but
also create an environment in which domestic firms learn
about new products and the technologies on which they
are based. Foreign firms not only bring in investment, but
also new management philosophies, cultures, work
ethos and performance standards.
 External Economic Shocks
 Globally inter-dependent economies freely transmit, like
infectious diseases, such problems like inflation,
stagnation, unemployment and slump. The greater the
degree of international economic linkage of a country,
the greater is its vulnerability to external economic
shocks.
 Non-economic Factors
 A wide variety of non-economic factors can destabilise
the business environment. Social tensions, communal
violence and religious fanaticism can trigger
disturbances in internal law and order situation and can
disrupt smooth flow of business. Similarly, political
changes. Major industrial accidents and natural
calamities can have a destabilising effect on the
business environment.
 Corporate Response and Adjustment
Firms that are able to make appropriate
adjustment to business environment
changes reduce risk and uncertainty and
gain competitive edge over the rivals.
Failure to make timely adjustment may
seriously erode profitability,
competitiveness and market share.
The corporate policies must have sufficient
flexibility to enable the firm to adjust to the
changing environment.
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