Environment

• Environment literally means the surroundings,

external objects, influences or circumstances under
which something exists and functions.
Environment

• The word is derived from geography and science and means

the circumstances, objects, or conditions by which one is
surrounded i.e. sum total of external factors in which
organisms live.
Environment

• Business environment means all those internal and external

factors that have an impact on business
Environment of Business

• Keith Davis defines environment of business as “the

aggregate of all conditions, events and influences that
surround and affect business”.
Environment of Business

• According to Bayord O. Wheeler business environment

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

According to Arthur M. Weimer, business environment

encompasses the climate or set of conditions, economic social,
political, or institutional in which business operstions are
conducted.”
Every business organisation tries to understand the environment in
which it operates and formulates its policies accordingly.
The term “business environment” generally refers to the
external environment and includes factors outside the firm
which can lead to opportunities for or threats to the firm.
Nature of Business Environment

• Aggregative
• Interrelated
• Dynamic
• General and Specific Forces
• Relative
• Intertemporal
• Uncertain
• Contexual
Some of the Direct Benefits of Understanding the
Environment

• First Mover Advantage: Allows a firm to take advantage of early opportunities

• Early Warning Signals: To take corrective steps
• Customer Focus: A firm can be sensitive to the needs and expectations of the customers
• Strategy Formulation: Helps in identification of threats and opportunities
• Change Agent: A business leader can become agent of change by taking decision as per environment
• Public Image: Being sensitive and responsive to environment, a firm can improve its public image
• Continuous Learning: Knowledge of changing environment can keep the organisation dynamic in its approach.
Most important factors are:

Social Factors
Economic Factors
Cultural Factors
Geographical Factors
Technological Factors
Political Factors
Legal Factors
Ecological Environment
Government Policies
Labour Factors
Competitive Market Conditions
Locational Factors
Social Factors

• Every business Organization operates within the norms of

the society and exists primarily to satisfy its needs.
• Culture, values, tastes and preferences, social conditions of
peace and conflict determine a firms business strategy.
• Social stratification in India plays a vital role in rural
societies.
 Economic Factors

• Economic factors such as:

• inflation,
• interest rates,
• foreign exchange position,
• per capita income,
• national income,
• Growth rate of GDP,
• natural resources,
• infrastructure development,
• capital formation, employment generation,
• propensity to consume,
• industrial development etc.
influence the business environment.
Cultural Factors

• Cultural variables such as social and religious practices,

education, knowledge, rural/urban community norms and
beliefs, predominantly influence the choices and strategies
of the business managers in India.
 Geographical Factors

In global business environment, geographical locations,

seasonal variations, climatic conditions etc. considerably
affect the taste and preferences of customers, and strategies
and choices of business managers.
The government policies are also influenced by
geographical factors, which in turn again influence the
business strategies and choices.
Managers in a global business environment must, therefore,
consider such geographical factors analytically.
Technological Factors

• Technology is considered to be one of the most important

factors of any business environment.
• Latest technology and technology transfer are very
important considerations for any business, as they affect the
techno-economic viability of the firm.
• The governments also promote and encourage the latest
technologies.
• Since technology advances rapidly, technological factors
must be taken into consideration by managers and policy
makers.
Political Factors

Ideology and approach of the political party in power

substantially influences the business environment. In India, INC,
BJP, Communist Parties and various regional parties have often
displayed different economic philosophies and approach toward
business and industry.
• During the long rule of communists in WB, industries
suffered, and industrial disputes and agitations were
prevalent.
• During the Janata Party rule at the centre, IBM and Coca
Cola had to wind up their business in India.
• Interest rates generally show a declining trend during NDA
rule.
• INC follows the middle of the path approach and believes
in subsidies.
Legal Factors

Legal environment plays a vital role in business.

Laws relating to:
• industrial licensing,
• company formation,
• factory administration,
• industrial disputes,
• payment of wages,
• trade unionism,
• monopoly and control,
• foreign exchange regulations,
• shops & establishment and
• taxation
Ecological Factors

• Now-a-days, all societies are sensitive to maintaining

ecological balance.
• Business is expected to preserve ecological factors for
achieving a sustainable growth.
• No society encourages industrial activities and business that
lead to environmental degradation.
• In India, there are laws against pollution of air and water;
and for protection of environment.
Government Policies

The government policies provide the basic environment for business.

The government policies towards:
 ease of doing business,
 import of technology,
 foreign direct investment,
 repatriation of profits,
 tax laws,
 domestic and foreign trade,
 labour,
 development of industries in backward areas,
 export-import,
 FE regulations,
 monetary and fiscal policies
define the overall business environment which are important considerations for any
promoter / business manager.
Labour Factors

Labour policies of the government and the general labour

climate form an important part of the external environment.
Militant unionism in an area is a threat to business and
industry.
Competitive Market Conditions

In a socialist economy, market is controlled by a centralized

authority; but in a capitalist economy, market forces
determine the environment of business.
India was following a mixed path, but from 1991 onwards,
opted for liberalization. As a result, market forces are
determining the business environment more and more.
As a result of globalization, national economies are
integrating into a global economy; and competitive market
has come to stay.
Locational Factors

Port cities and urban centres have a concentration of trade

and industries, due to various facilitating factors. But in the
last few decades, the government has been trying to remove
regional imbalances and promote industries in backward
regions too.
New trade centres have also been coming up in rural and
semi-urban areas.
The government policies vis-à-vis industrialization,
industrial licensing, incentives in backward areas, taxation
policies and credit facilities facilitate business environment.
Types of Environment

• Internal: Factors existing within a business firm

• External: Comprises of forces and factors outside an enterprise
Types of Environment
• Internal Environment:
• Factors existing within a business firm
• Generally Controllable
• Provide inherent strengths and weaknesses
• Examples:
• Culture: Values, beliefs and attitudes of the founders
• Vision and Mission,
• Organisational Structure
• Power Structure
• Company’s image and Brand Equity
• Policies and Programmes
• Human Resources
• Financial Position and Capital Structure
• Marketing Strategies
• R & D and Technological capability
• Physical Assets and Facilities
• MIS
Types of Environment

• External Environment:
• Comprises of forces and factors outside an enterprise
• Uncollable: Generally, beyond the control of the firm
• Examples: National Income, Social Forces, Government Policies, Population etc.
• Opportunities are favourable conditions while threats are unfvourable conditions
Types of Environment

• External Environment:
• Micro Environment
• Macro Environment
Types of Environment

• External Environment:
• Micro Environment
• Customers
• Competitors
• Suppliers
• Marketing Intermediaries
• Financiers
• Public
• Workers and Trade Unions
Types of Environment

• External Environment:
• Macro Environment
• Political and Legal Environment
• Social and Cultural Environment
• Economic Environment
• Financial Environment
• Technological and Physical Environment
• Natural Environment
• Global Environment
Types of Environment

• External Environment:
• Macro Environment
• Political and Legal Environment
• Social and Cultural Environment
• Economic Environment
• Financial Environment
• Technological and Physical Environment
• Natural Environment
• Global Environment
Types of Environment

• External Environment:
• Macro Environment
• Political and Legal Environment
i. The Constitution of the country
ii. Political organisation
iii. Political stability
iv. Image ofthe country and its leaders
v. Foreign policy
vi. defence and military policy
vii. Law governing business and legal system
viii. Flexibility and adaptability of laws
ix. The judicial system
Types of Environment

• External Environment:
• Macro Environment
• Social and Cultural Environment
• Demographic forces
• Social institutions and groups
• Caste structure and family organisation
• Educational System and literacy rates
• Customs, attitudes, beliefs, values and life styles
• Tastes, preferences of people and their buying behaviour
Types of Environment

• External Environment:
• Macro Environment
• Economic Environment and Financial Environment
i. The nature of economic system-capitalist, socialist or mixed economy
ii. Economic structure-occupational distribution of labour force, structure of national output, capital
formation, investment pattern, composition of trade, balance/imbalance between different sectors,
economic planning and budgets
iii. Economic policies-industrial policy, export-import policy, monetary policy, fiscal policy, foreign
investment policy and technology transfer policy
iv. Organisation and development of capital market and money market-banking system, securities markets
etc.
v. Economic indices- Gross National Product (GNP), per capita income, rate of savings and investment,
price level, BoP position, interest rates etc.
vi. Economic infrastructure and stage of development of the economy
vii. Product markets and factor markets-dgree of competition, market size etc.
Types of Environment

• External Environment:
• Macro Environment
• Technological and Physical Environment
i. Sources and types of technology
ii. Rate of technological change
iii. Approaches to production of goods and services
iv. New processes and equipment
v. Research and development (R&D) systems
Types of Environment

• External Environment:
• Macro Environment
• Natural Environment
i. Climatic and geographical conditions
ii. Agricultural, commercial and other natural resources
iii. Ecological system
iv. Level of pollution
Types of Environment

• External Environment:
• Macro Environment
• Global Environment
• Role of international agencies like World Bank, IMF, WTO, EEC etc.
• Crude oil prices
• Main determinants:
i. The state of world economy and distribution of world output
ii. International economic cooperation
iii. International market structure and competition
iv. Barriers to international trade and investment
v. National economic policies of different countries
vi. Role of multilateraal economic institutions
vii. International economic laws, treaties, agreements, codes and practices
viii. Political system and conditions in different countries
ix. cultural factors in different countries
x. Growth and transfer of technology
xi. Growth and spread of multinationals
Emerging Trends in Indian Business Environment

• Liberalisation, Privatisation and Globalisation is a continued work-in process

• Liberalisation of FDI and FPI Regulations
• Easier Technology Transfers
• Reform of Legal System
• Reform in Taxation System-Reduction in Corporate Tax rates, Introduction of GST
• Ease of doing business is a continuous process
• Home grown MNCs
• Proliferating Start-ups
• Automation and Technology driven processes
• Improvement in infrastructure
• Improvement in transportation and logistics
• Fast developing Financial Services Sector
• Sound FOREX Reserves
• BoP positive, Trade deficit under control
Sustainable Business Development

• Environmental awareness and responsibility

• Social responsibility of business