Unit 1

Introduction To Business Environment

Business Definition
Business refers to an enterprising entity or organization that carries out professional activities.
They can be commercial, industrial, or others. For-profit business entities do business to earn
a profit, while non-profit ones do it for a charitable mission. Business ownership includes
partnerships, sole proprietorships, corporations, etc. Businesses can be small-scale or large-
scale. Some of the biggest businesses in the world are Amazon and Wal-Mart.
In short-
 Business refers to any occupation in which people engage regularly to earn profits.
 In other words, it is concerned with engaged in economic activities which involves
 Production and sale of goods and
 Rendering services
 The objective of earning profits is to satisfy the customer’s needs for long-term
survival in the society.

The key point is that while a business aims for profit, it achieves this by satisfying customer needs.
Business involves any occupation where people earn income by producing, purchasing, selling, or
exchanging goods or services to fulfil others' needs, all to make a profit.

Characteristics of Business:
Characteristic Description

1. Economic Activity A business must be an economic activity generating monetary returns. For
instance, providing a transportation service for a fee qualifies as an economic
activity.
2. Production or Businesses either manufacture or purchase goods to sell for profit. They are
Trading involved in activities related to producing or buying goods and services like
transportation, housekeeping, and security.
3. Sale or Exchange After production or procurement, the next step is selling the product or service.
This involves offering it to the market and completing transactions between
buyers and sellers.
4. Regularity in Business activities must be regular. For example, selling a single item isn't a
Dealings business, but regularly dealing in second-hand bikes is.

5. Profit Earning The main goal of a business is to maximise profit. Businesses must generate
profit to survive by increasing sales or reducing costs.

6. Risk Factor Business involves risk, with no guarantee of success. The higher the risks
involved, the higher the possible rewards. However, these rewards are governed
by market demand and conditions, which are unpredictable.

7. Uncertainty of Business investments come with uncertainty in profit returns. There is always a
Returns possibility of earning less profit or incurring losses.

8. Legal Activity Business activities must comply with the law. They are crucial for a country but
must operate within legal boundaries. Legislation regulates business activities.

Objective of Business-
The business objective is a goal, i.e. where the business wants to reach in the future. For example, a
business wants to set up its franchise in another state in the next 3 years or it wants to increase its
workforce in the coming months.
Business needs objectives, without objectives the business is like a car without headlights driving blind.
Objectives of business are the purpose for which the business is established and performed. We can call
objectives the cornerstone of every business.

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The right choice of objectives is critical for the success of the business. The objectives of a business can
be classified into two main categories, which are
1. Economic objectives
2. Social objectives
Economic Objectives of Business
The economic objectives of the business are as follows:
1] Profit Earning
The main objective of any business is to earn a profit. Profit is necessary for growing and
expanding business activities. Profit guarantee a consistent stream of capital for the modernization and
augmentation of business activities in the future. Profits likewise show the scale of stability, efficiency, and
advancement of the business organization.
2] Market Share / Creation of Customers
In the long run, the survival of the business completely depends upon the market share captured by the
business. The creation of good and satisfaction of the needs of the customer is a crucial purpose of the
business. So to generate profit and demand, the business must supply premium quality and give value
for money products.
3] Innovation & Utilization of Resources
Innovation normally means to change processes or creating more effective processes, products and
ideas. Nowadays, business is ever-changing and dynamic. To keep up with the growing competition a
businessman has to introduce efficient design, latest trends, upgraded machinery, new techniques, etc.
4] Increasing Productivity
Productivity is a scale to measure the efficiency of the business activity. Each business must go for more
prominent productivity – to guarantee its survival and development. This goal can be accomplished by
decreasing wastages and making proficient utilization of machines and supplies, HR, cash and so forth.

Social Objectives of Business

According to Dayton Hudson “The business of business is serving society, not just making money.”
Business is one of the pillars on which the society stands. Therefore, it is a part of the societyThe
business earns its income from the sale of products and services to the society. It is mandatory on the
part of the business to take care of the social factors. The necessary social objectives of a business are
as follows:
1] Providing Goods & Services at Reasonable Prices
Business exists in the first place to satisfy the needs of the society. It‟s the first and major social objective
of the business. Products and services ought to be of better quality and these ought to be provided at
sensible costs. It is additionally the social commitment of business to keep away from misbehaviors like
boarding, Black promoting and manipulative advertising.
2] Employment Generation
One of the major problem today‟s generation facing is unemployment. Business generates employment.
Therefore, it is the social objective of a business to give chances to beneficial employment to individuals
of the society. In a nation like India, unemployment has turned into a critical issue.
3] Fair Remuneration to Employees
The people on the inside of the business are more valuable i.e. employees. They are an asset of the
business and make a ground-breaking contribution to the business. They must be given reasonable pay
for their work.
Notwithstanding wages and salary, a significant piece of profits ought to be distributed among them in
acknowledgment of their commitments. Such sharing of benefits will expand the inspiration and
proficiency of employees.
4] Community Service
Business must give back something to the society. As a result, the Library, dispensary, educational
foundations and so on which a business can make and help in the advancement of society are created.
Business enterprises can build schools, colleges, libraries, hospitals, sports bodies and research
institutions. They can help non-government organizations (NGOs) like CRY, Help Age, and others which
render services to weaker sections of society.

Meaning of Business Environment

The definition of Business Environment, “The sum total of all individuals, institutions and other
forces that are outside the control of a business enterprise but the business still depends upon
them as they affect the overall performance and sustainability of the business.”
The forces which constitute the business environment are its suppliers, competitors, consumer groups,
media, government, customers, economic conditions, market conditions, investors, technologies, trends,

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and multiple other institutions working externally of a business constitute its business environment. These
forces influence the business even though they are outside the business boundaries.
For example, changes in taxes by the government can make the customers buy less. Here the business
would have to re-establish its prices to survive the change. Even though the business had no involvement
in initiating the change it still had to adapt to it in order to survive or use the opportunity to make profits.
The importance of the business environment can be neatly understood if we consider the following facts:
1. Enables to Identify Business Opportunities
All changes are not negative. If understood and evaluated them, they can be the reason for the success
of a business. It is very necessary to identify a change and use it as a tool to solve the solve the problems
of the business or populous.
For example, Mr. Phanindra Sama was troubled by the ticket booking condition in India. He used to travel
a long distance to his travel agent to book his ticket but even after traveling this distance he was not sure
if his seat was confirmed. He saw the opportunity to establish an app in the face of the problem and co-
founded the online ticket booking app called „redBus‟.
2. Helps in Tapping Useful Resources
Careful scanning of the Business Environment helps in tapping the useful resources required for the
business. It helps the firm to track these resources and convert them into goods and services.

3. Coping with Changes

The business must be aware of the ongoing changes in the business environment, whether it be changes
in customer requirements, emerging trends, new government policies, technological changes. If the
business is aware of these regular changes then it can bring about a response to deal with those
changes.
For example, when the Android OS market was blooming and the customers were preferring Android
devices for its easy interface and apps, Nokia failed to cope with the change by not implementing Android
OS on Nokia devices. They failed to adapt and lost tremendous market value.
4. Assistance in Planning
This is another aspect of the importance of the business environment. Planning purely means what is to
be done in the future. When the Business Environment presents a problem or an opportunity, it is up to
the business to decide what plan would it have to come up with in order to address the future and solve
the problem or utilise the opportunity. After analysing the changes presented, the business can
incorporate plans to counteract the changes for a secure future.
5. Helps in Improving Performance
Enterprises that are thoroughly scanning their environment not only deal with the changes presented but
also flourish with them. Adapting to the external forces help the business to improve the performance and
survive in the market.

What Is Business Environment?

A business environment is a combination of internal and external factors and forces that significantly
influence the operations of a business.
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.
Elements/ Components Of Business Environment/ Factors affecting environment to the
business
The business environment can be categorised into two types based on the factors within the control
or outside the control of a business.
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

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 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.

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8 types of major external environmental factors affecting the business world
Political factors

Political factors are external factors such as government, trade and tax policies, general political
issues, changes in leadership, regulation, and political trends. They are very important as they
influence crucially the business‟ operations. But political factors have a unique characteristic: they can
actually influence the rest of the factors!
Governments and international bodies set laws and regulations. These can significantly impact the
world‟s economy, society, technological advancements, environmental regulations, and legal
systems. I explain this better here where you'll find everything related about this type of external
factors.
Political factors can be:
 Trade policies
 Political trends
 Taxation policies
 Regulation trends
 Government policies
 Changes in leadership
 General political issues
 General political issues
Political external factors example
1. Brexit is a political external factor that has had a significant impact on every company dealing
with the market in the UK. Specifically, Tesco had to adapt to new trade barriers and changes
in tariffs as we found out in our PESTLE analysis of the groceries company.
Economic factors
Economic factors are external factors that influence the economy‟s performance, which in turn can
affect businesses and individuals. These factors include:
 Inflation
 Interest rates
 Exchange rates
 Economic growth
 Unemployment levels
Economic external factor example
1. Energy prices are economic external factors that have direct impact on companies operating
in energy industry. Tesla, for example, will keep track of energy prices to find out how
competitive its electric vehicles can become compared to traditional vehicles..

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Social factors
Here, I have to look carefully at the social and cultural changes as external factors that affect the
business environment. It is vital to point out the trends and patterns of society. Social factors usually
include:
 Lifestyle trends
 Education level
 Age distribution
 General attitudes
 Consumer behavior
 Health consciousness
 Family and population size
Social external factor example
1. People can be very picky when it comes to their smartphones' electromagnetic radiation.
This is a social external factor that will affect Apple, for example, when it comes to iPhone
sales, Should Apple come up with a strategy to reduce their phones' radiation levels, will
make the iPhone even more popular and drive up sales.
Technological factors
Technological factors are external factors related to the existence, availability, and development of
technology. These could include everything related to technology. Notable technological factors I
come across during my analyses are:
 E-commerce
 Cybersecurity Threats
 Emerging Technologies
 Big data and computing
 AI and Machine Learning
 Supply Chain Automation
Technological external factor example
1. New technologies and innovation, as external factors, can help businesses in product
design and improvements. Nike, for example, capitalized on shoe technology recently and
launched the Air Max Dn,.
Legal factors
Legal factors are external factors that refer to how the law and regulations affect the way businesses
operate. These may include:
 Labor laws
 Consumer laws
 Market regulation
 Health and safety laws
 Import/Export regulations
 Anti-competitive practices
Legal external factor example
1. Copyright laws are usually legal external factors that affect the media industry. Netflix, for
example, needs to make sure they have the rights to serve up their shows on different
countries worldwide. Every country is expected to have somewhat modified copyright laws,
which will force Netflix to come up with a distribution plan,.
Environmental factors
Environmental factors are external factors that describe how our planet and ecosystem can impact
the organization. Since we cannot control the weather, organizations need to adapt their strategies
accordingly.
Whenever an analysis requires me to explore environmental factors and how they affect a business or
project, these come first to mind:
 Climate change
 Sustainability
 Environmental regulations
 Waste Management
 Consumer Environmental Awareness
Environmental external factor example
1. Increasing concern over carbon emissions and climate change have worked in Tesla's
favor,. Tesla positioned itself as a pioneer in electric vehicles (EVs) and sustainable energy
solutions. This led to benefits from various government incentives for clean energy.

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 2. Environmental risks associated with oil and gas extraction became a reality for BP
following the Deepwater Horizon oil spill in 2010. As a response, BP has committed to
becoming a net-zero company by 2050.
Ethical factors
Ethical factors cover the range of social values that shape business behavior. Ethics comes from the
Greek word “ethos,” meaning character. The values provide a basis for what is right and what is not.
The ethical ideas of a country will not change overnight. But, small changes in morality take place
over time.
Ethical factors are often the following:
 Bribery
 Violence
 Reputation
 Anonymity
 Volunteering
 Confidentiality
 Informed consent
Ethical external factor examples
1. A business is partnering with a third party to conduct an online survey. The business
communicates with their customers for their honest intentions and promises anonymity.
Unfortunately, the survey company collects personal data and other identifying information
with people's consent. The business will be negatively affected by losing the responders'
trust.
2. In our STEEPLE analysis of Samsung we examined how ethical factors affect Samsung's
operations. For example, we saw that reputation will affect Samsung. The electronics
company must build on its reputation by either offering reliable products, responding promptly
to customers with impeccable customer service, or volunteering for high-profile causes.
Demographic factors
Demographic factors are specific data about the population's characteristics. Such factors include:
 Gender
 Income
 Religion
 Age range
 Education level
 Homeownership
 Race and ethnicity
 Employment status

Demographic external factor examples

1. Demographic: falling birth rate. This leads to reduced demand for toys and kids' products. A
toy company, like LEGO or Mattel, is going to be affected negatively, most probably with
sales expected to drop.
2. Demographic: higher education level. This leads to a more skilled workforce available for
hiring. This will certainly be a positive external factor for a tech company such as Intel.

Importance of Business Environment

The market is essentially flooded with competing businesses. It is, thus, integral for a business to
keep a lookout for the forces that affect it.

Emphasis is laid on maintaining continuous interaction with a company‟s business environment.

Understanding this environment allows companies to –

 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.

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  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.. 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.
 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. 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.
Features Of Business Environment

A business environment is:

 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.