The document discusses the business environment and its importance for business success. It defines the business environment as the combination of internal and external factors that influence a company. It notes that the environmental factors can influence all aspects of a business from its products to policies. The document then discusses why understanding the business environment is important for adapting to changes beyond a company's control. It also outlines some of the key components of the business environment like economic, political, legal, technological and socio-cultural factors. Finally, it discusses some techniques for analyzing the business environment like PESTEL, SWOT, ETOP and SAP analyses.

1. Business I Environment I Society

2. Issue
# 1
Business Environment

3. Business Environment
Definition:
The combination of internal and external factors that influence a
company's operating situation. The business environment can
include factors such as: clients and suppliers; its competition and
owners; improvements in technology; laws and government
activities; and market, social and economic trends.

4. Why Business Environment?
Understanding the environment within which the business has to
operate is very important for running a business unit successfully at
any place.
Its because, the environmental factors influence almost every
aspect of business, be it its nature, its location, the prices of
products, the distribution system, or the personnel policies.
Hence it is important to learn about the various components of the
business environment, which consists of the economic aspect, the
socio-cultural aspects, the political framework, the legal aspects
and finally the technological aspects etc.

5. Why Business Environment? Contd…
The success of every business depends on adapting itself to the
environment within which it functions. For example, when there is
a change in the government policies, the business has to make the
necessary changes to adapt itself to the new policies.
Similarly, a change in the technology may render the existing
products obsolete, as we have seen that the introduction of
computer has replaced the typewriters; the colour television has
made the black and white television out of fashion, the use floppy
disks replaced by DVDs, now the Blue Ray Discs / External
HDDs/SSDs.

6. Why Business Environment? Contd…
Again a change in the fashion or customers’ taste may shift the
demand in the market for a particular product, e.g., the demand
for Jeans reduced the sale of other traditional wear. All these
aspects are external factors that are beyond the control of the
business.
So, the business units must have to adapt themselves to these
changes in order to survive and succeed in business. Hence, it is
very necessary to have a clear understanding of the concept of
business environment and the nature of its various components.

7. Features of Business Environment
On the basis of the earlier discussion the features of business
environment can be summarized as follows…
1. Business environment is the sum total of all factors external to
the business firm and that greatly influence their functioning.
2. It covers factors and forces like customers, competitors,
suppliers, government, and the social, cultural, political,
technological and legal conditions.
3. The business environment is dynamic in nature, that means, it
keeps on changing.

8. Features of Business Environment contd…
4. The changes in business environment are unpredictable. It is
very difficult to predict the exact nature of future happenings and
the changes in economic and social environment.
5. Business Environment differs from place to place, region to
region and country to country.

9. Importance of Business Environment
There is a close and continuous interaction between the business
and its environment. This interaction helps in strengthening the
business firm and using its resources more effectively.
To be more specific, proper understanding of the social, political,
legal and economic environment helps the business in the
following ways…
1. Identifying Firm’s Strength and Weakness: Business
environment helps to identify the individual strengths and
weaknesses in view of the technological and global developments

10. Importance of Business Environment
2. Determining Opportunities and Threats: The interaction
between the business and its environment would identify
opportunities for and threats to the business. It helps the business
enterprises for meeting the challenges successfully.
3. Giving Direction for Growth: The interaction with the
environment leads to opening up new frontiers of growth for the
business firms. It enables the business to identify the areas for
growth and expansion of their activities.

11. Importance of Business Environment
4. Continuous Learning: Environmental analysis makes the task of
managers easier in dealing with business challenges. The managers
are motivated to continuously update their knowledge,
understanding and skills to meet the predicted changes in realm of
business.
5. Image Building: Environmental understanding helps the business
organizations in improving their image by showing their sensitivity
to the environment within which they are working.
6. Meeting Competition: It helps the firms to analyze the
competitors’ strategies and formulate their own strategies
accordingly.

12. Types of Business Environment
• External environment
Mega environment
 Micro environment
Relevant environment
• Internal environment

13. ment
Firm
Mega Environment
Micro Environm
Internal Environment
Relevant
Environment

14. Constituents of Mega Environment
Legal Political Economic Technological Socio-cultural
The Mega
Environment

15. The business environment (the external forces) acting on the
business consists of a large number of forces. These are…
1. Economic Forces
These forces, can be divided into two categories, i.e. Demand
Force and Competitive Force. For a business firm to survive and
thrive, it should have adequate demand for its products. At the
same time, the firm has to complete with the rival firm
producing similar products or substitute products.
Economic forces affecting demand:
For customers to buy the commodity of the firm, they should have
the ability to buy and willingness to buy. The ability to buy a
commodity depends on the income of the customer, to be very
precise, the disposable income of the customer.

16. Out of the total income, the individual has to pay taxes due to the
government and the disposable income will be less if the taxes are
high. Secondly, if the individual wants to save more, the amount for
spending will be less. Thus, the ability to buy a commodity depends
on the
a) Total income earned out of the employment of the individual
b) The taxes of the government and
c) The savings of the individual.
An increase in tax will reduce the demand for the commodity. The
attitude of the individual towards ‘Saving’ will affect the demand.

17. A change in ‘Price’ of the commodity will affect the demand.
Expectation of a further change in price or change in taxes will also
affect the demand…like…
Competitive forces: The competitive tools are price cutting,
advertisement, product differentiation, marketing strategies
and consumer service.
 Price cutting: Price cutting or price reduction is a method
which has to be adopted very cautiously, as it may
ultimately lead to price-war between firms competing,
resulting in reduction of profits.

18.  Advertisement: Advertisements in modern days have
become a very powerful tool in persuading the consumers
of a product to a particular brand. In monopolistic
competition, a large share of the market is entrenched by
firms making effective and aggressive advertisement.
 Product differentiation: A firm tries to get competitive
strength by differentiating its product from those of its
rivals. By having special design, colour, packing and
features, the firm tries to get competitive edges.

19.  Marketing strategies and Consumer Service: Modern firm
adopt various types of marketing strategies to create
market for their products. Installment system, credit
system, hire-purchase, etc., are the prominent ways by
which firms try to cut through the poor segments of the
society and convert them their customers.
Besides customer service like, free door delivery, quick
service, after sales service, guarantee from defects up to a
certain period are adopted to have more and more demand
for their commodities.

20. Some important variables under Economic forces are:
GDP trends, Interest rates, Money supply, Inflation
rates, Unemployment rates, Wage/ Price controls,
Devaluation/Revaluation, Energy availability &
cost, Disposable discretionary income etc.

21. 2. Political & Government Forces:
This includes the political system, the government policies and
attitude towards the business community and the unionism. All
these aspects have a bearing on the strategies adopted by the
business firms.
The stability of the government also influences business and
related activities to a great extent. It sends a signal of strength,
confidence to various interest groups and investors. Further,
ideology of the political party also influences the business
organisation and its operations. You may be aware that Coca-
Cola, a cold drink widely used even now, had to wind up
operations in India in late seventies.

22. • Again the trade union activities also influence the
operation of business enterprises. Most of the labour
unions in India are affiliated to various political parties.
Strikes, lockouts and labour disputes etc. also adversely
affect the business operations.
• However, with the competitive business environment,
trade unions are now showing great maturity and
started contributing positively to the success of the
business organisation and its operations through
workers participation in management.

23. 3. Legal Forces:
• This refers to set of laws, regulations, which influence the
business organisations and their operations. Every business
organisation has to obey, and work within the framework of
the law.
The important legislations that concern the business enterprises
include:
(i) Companies Act, 1956
(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951

24. Legal Forces (contd…):
(vii) Prevention of Food Adulteration Act, 1954
(viii) Essential Commodities Act, 2002
(ix) The Standards of Weights and Measures Act, 1956
(x) Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade Marks Act, 1999
(xii) Bureau of Indian Standards Act, 1986
(xiii) Consumer Protection Act, 1986
(xiv) Environment Protection Act
(xv) Competition Act, 2002

25. Some important variables under Political & Legal forces are
• Anti-trust litigation
• Environment Protection Law
• Tax Laws
• Special incentives
• Foreign Trade Regulations
• Attitude towards Foreign Companies
• Recruitment Laws
• Stability of Govt.

26. 4. Technological Forces:
Technological environment include the methods, techniques and
approaches adopted for production of goods and services and its
distribution. The varying technological environments of different
countries affect the designing of products. For example, in USA
and many other countries electrical appliances are designed for
110 volts. But when these are made for India, they have to be of
220 volts. In the modern competitive age, the pace of
technological changes is very fast. Hence, in order to survive and
grow in the market, a business has to adopt the technological
changes from time to time. It may be noted that scientific
research for improvement and innovation in products and
services is a regular activity in most of the big industrial
organisations. Now a days in fact, no firm can afford to persist
with the outdated technologies.

27. • Some important variables under Technological forces are:
• Spending by Govt. for R & D
• Total industry spending for R&D
• Focus of technology
• Patent protection
• New products
• Commercialization & Transfer from lab to market place
• Productivity improvements

28. 5. Socio-cultural Forces:
• The social environment of business includes social factors like
customs, traditions, values, beliefs, poverty, literacy, life
expectancy rate etc. The social structure and the values that a
society cherishes have a considerable influence on the
functioning of business firms. For example, during festive
seasons there is an increase in the demand for new clothes,
sweets, fruits, flower, etc.
Likewise due to increase in literacy rate the consumers are
becoming more conscious of the quality of the products. Due
to change in family composition, more nuclear families with
single child concepts have come up. This increases the
demand for the different types of household goods. It may be
noted that the consumption patterns, the dressing and living
styles of people belonging to different social structures and
culture vary significantly.

29. 6. Demographic Forces:
• This refers to the size, density, distribution and growth rate of
population. All these factors have a direct bearing on the
demand for various goods and services. For example a
country where population rate is high and children constitute
a large section of population, then there is more demand for
baby products.
Similarly the demand of the people of cities and towns are
different than the people of rural areas.

30. Some important variables under Socio-cultural & Demographic
forces are:
• Lifestyle changes
• Career expectations
• Consumer activism
• Growth rate of population
• Age distribution of population
• Gender
• Regional shift in population
• Life expectations
• Birth rates
• Income
• Educational level
• Family size

31. The high rise of population indicates the easy availability of
labour. These encourage the business enterprises to use
labour intensive techniques of production.
Moreover, availability of skill labour in certain areas motivates
the firms to set up their units in such area. For example, the
business units from America, Canada, Australia, Germany, UK,
are coming to India due to easy availability of skilled
manpower.
Thus, a firm that keeps a watch on the changes on the
demographic front and reads them accurately will find
opportunities knocking at its doorsteps.

32. The Micro Environment
The Micro Environment
Marketing
intermediaries
Markets: Types
& Demand
Competition
E-commerce
Skill level of
workforce
Industrial
relations
climate
Regulatory
provisions
Financial
institutions
Suppliers

33. Important Aspects of an Organization’s
Internal Environment
• Organizational aspects
• Marketing aspects
• Financial aspects
• Personnel aspects
• Production aspects
• Managerial aspects

34. Organizational aspects
• Structure
• Communication network
• Record of success
• Hierarchy of objectives
• Policies, procedures and rules
• Ability of management teams

35. Marketing aspects
• Market segmentation
• Product strategy
• Pricing strategy
• Promotion strategy
• Distribution strategy

36. Financial aspects
• Liquidity
• Profitability
• Activity
• Investment opportunity

37. Personnel aspects
• Labour relations
• Recruitment practices
• Training programmes
• Performance appraisal system
• Incentive systems
• Turnover and absenteeism

38. Production aspects
• Plant facility layout
• Research and development
• Use of technology
• Purchasing of raw materials
• Inventory control
• Use of subcontracting

39. Managerial aspects
• Management style
• Management competence
• Managerial values and norms

40. Techniques for environment analysis
Environmental analysis is a strategic tool. It is a process to
identify all the external and internal elements, which can
affect the organization’s performance. The analysis entails
assessing the level of threat or opportunity the factors
might present. These evaluations are later translated into
the decision-making process. The analysis helps align
strategies with the firm’s environment.
• PESTELD Analysis
• SWOT Analysis
• ETOP (Environment Threat & Opportunity Profile)
• SAP (Strategic Advantage Profile)

41. PESTLED analysis
• PESTLED analysis consists of various factors that affect the
business environment. Each letter in the acronym signifies
a set of factors. These factors can affect every industry
directly or indirectly.
• The acronym for PESTLED are:
• Political factors
• Economic factors
• Social factors
• Technological factors
• Legal factors
• Environmental factor
• Demographic factors

42. SWOT Analysis
• SWOT, which stands for strengths,
weaknesses, opportunities and threats, is an
analytical framework that can help your
company face its greatest challenges and find
its most promising new markets. The result of
PESTLED provides the input for SWOT analysis.

43. SWOT Analysis
• Strengths: Internal capabilities of a firm which can be
used to gain competitive advantage over its rivals
• Weaknesses: Limitations or constraints which tend to
decrease the competencies of the firm particularly in
comparison to its rivals.
• Opportunities: Major favourable conditions in a firm’s
environment which help a firm strengthen its position.
• Threats: Major unfavourable conditions in a firm’s
environment which may pose a risk or damage the
firm’s position in comparison to its rivals.

45. ETOP (Environment Threat & Opportunity
Profile)
• The preparation of an ETOP provides a clear picture to the
strategists about which sectors and the different factors in
each sector have a favorable impact on the organization. By
the means of an ETOP, the organization knows where it
stands with respect to its environment. Obviously, such an
understanding can be of a great help to an organization in
formulating appropriate strategies to take advantage of the
opportunities and counter the threats in its environment.
• A matrix of comparison is drawn where one item or factor
is compared with other items after which the scores arrived
at are added and ranked for each factor and total weight
age score calculated for prioritizing each of the factors.

46. Environmental
Sectors Impact of each sector
Social (↑)
Customer preference for motorbike, which
are fashionable, easy to ride and durable.
Political (→) No significant factor.
Economic (↑)
Growing affluence among urban
consumers; Exports potential high.
Regulatory (↑)
Two Wheeler industry a thrust area for
exports.
Market (↑)
Industry growth rate is 10 to 12 percent
per year, For motorbike growth rate is 40
percent, largely Unsaturated demand.
ETOP for a Motor Bike company

47. SAP
• strategic advantage profile is a summary
statement which provides an overview of the
advantages and disadvantages in key areas
likely to affect future operations of a firm. it is
a total for making systematic evaluation of
strategic advantage factors which are
significant for the company in its environment.
it involves functional areas like marketing,
production, finance, accounting, personnel,
human resource and R & D.

49. Thank You!