Business environment unit 1

BUSINESS ENVIRONMENT
PREPARED BY: Kanika PARASHAR

BUSINESS AND ITS ENVIRONMENT —
AN INTRODUCTION
• Business may be understood as the organised efforts of enterprises to
supply consumers with goods and services for a profit.
• Whether a business unit has one or two people working at home, 10
operating in a retail store, 1000 employed in a factory, or 100,000
operating in multiple units spread across the country, all businesses
share the same purpose: to earn profits.
• The purpose of business goes beyond earning profit. It is an important
institution in society. Be it for the supply of goods and services; creation
of job opportunities; offer of better quality of life; or contributing to the
economic growth of the country and putting it on the global map; the
role of business is crucial. Society cannot do without business.

BUSINESS OBJECTIVES
PROFIT POWER
QUALITY PRODUCT
& SERVICES
GROWTH
EMPLOYEE
SATISFACTION AND
DEVELOPMENT
MARKET
LEADERSHIP
SERVICE TO SOCIETY JOY OF CREATION

BUSINESS OBJECTIVES
• Profit: Making profit is the primary goal of any business enterprise. Profit is the excess
of income over expense. Profit is the main incentive, motivator, strong sustainer,
judicious allocator of resources, objective indicator of productivity and a solid basis for
growth, expansion and survival. Profit enables a businessman to realise his other
objectives too
• Power: Business houses have vast resources (in the form of money, materials, men and
know-how) at its command. These resources confer enormous economic and political
power on owners and managers of business ventures. Next to the Prime Minister and
Chief Ministers, perhaps, it is the business people who enjoy considerable clout in our
country.
• Quality Products and Services: Providing quality products and services is yet another
objective of business. Those who insisted on and persisted in quality survived
competition and stayed ahead of others in the market. Persistent quality of products
earns brand loyalty, a vital ingredient of success. Hindustan Unilever is flourishing
mainly because of the quality of its products. Some of its products like Liril, Vim,
Lifebuoy, Surf, Rin, Sunlight, Signal, Close-up, Lux, Rexona, Pears and others have
become household names throughout the country

BUSINESS OBJECTIVES
• Growth: Growth is another primary objective of business. Business should grow in all
directions over a period of time. An enterprise which remains stagnant for long is presumed
to suffer from an organic defect. The strategies adopted to achieve growth are: (a) add more
products/markets; (b) diversify into new areas; (c) integration — forward or backward; (d)
increase market share; (e) expand markets or (f) cut down costs and increase productivity.
• Employee Satisfaction and Development: Concern for employees continues to be an
important orientation of management, contrary to the expectation that human element will
lose its significance thanks to automation. In fact, quality of personnel is considered to be
one of the hallmarks of best managed and highly respected companies.
• Market Leadership: To gain market leadership is another objective of business. To gain and
retain market leadership is extremely difficult in these days of severe competition.
Nevertheless, such factors as innovation, quality, cost, supply and after-sale service keep a
firm ahead of others
• Joy of Creation: It is through business strategies new ideas and innovations are given a
shape and are converted into useful products and services for the benefit of customers.

BUSINESS OBJECTIVES
• Service to Society: Business is a part of society and has several
obligations towards it. Some of them are: (i) providing safe and quality
goods at reasonable prices; (ii) providing employment; (iii) patronising
cultural and religious activities; (iv) maintaining and protecting ecology;
and (v) supporting less privileged sections of people in society like
Scheduled Castes and Scheduled Tribes, the physically handicapped,
women and children.

WHAT IS ENVIRONMENT?
• Environment refers to all external forces which have a bearing on the
functioning of business.
• 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,
suppliers, competitors, and government.”

WHAT IS BUSINESS ENVIRONMENT ?
• 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.

FACTOR INFLUENCING BUSINESS
ENVIRONMENT
• Natural Resources: Business environment is affected by natural resources available in
country, including land, quality of soil, mineral wealth, water resources, vegetation, formation
of surface and climate. If the natural resources are abundantly available, their utilisation will
result in economic development and large volume of employment. If these are scarce then
poverty, starvation, unemployment and backwardness will adversely affect the business
environment also.
• Human Resources: Human resource is an important determining factor for business
environment.. A country having human resources healthy, intelligent, efficient trained and
adequate then rapid economic development is possible. Shortage of labour force and
unhealthy and inefficient Labour force obstacles in the way of business development.
• Forms of Economic System: The forms of economic system also affect the economic
development environment. The economic system has positive as well as negative impact
both.
• Infrastructural Facilities: Business environment is directly affected by infrastructural facilities
and composition. The countries, where the infrastructural facilities are sound, economic
development will be rapid and strong in those countries. In India, infrastructural facilities has
lacked and even today these are not adequate.

ENVIRONMENT
• Economic Policies: Business environment is also affected by economic policies of
Government. The industrial policy, licensing policy, monetary policy, fiscal policy, agricultural
policy, price policy, and Employment policy, all have impact on economic Industrial
Development.
• Technological Development: Technology is understood as the systematic application of
scientific or other organized knowledge to practical tasks. It is through a business that
technology reaches people. Technology changes fast and to keep pace with it, Businessman
should be ever alert to adopt change technology to their business.
• Capital Formation and Investment: Capital formation is an important factor of business
environment. Rate of capital formation, development of capital market and availability of
investments in the country directly affect the business environment.
• Capital and Money Market: The money market arranges short term credit, whereas capital
market arranges long term credit. If the money market of the countries active in the proper
direction, the pace and directions of economic development will also be proper. Otherwise,
the country may remain in the grip of inflation or deflation. Similarly, the capital markets also
has its own control on Financial Institutions, savings investments, capital formation.

ENVIRONMENT
• Monetary and Fiscal Policies: During the period of boom, economic stability is sustained by
controlling inflation, through reducing the volume of money and credit. On the contrary,
during periods of depression, momentum of economic development is speed up by
increasing the volume of money and credit.
• Situations of Market: In situation of perfect competition, optimum utilisation of resources is
achieved through over production, low costs, competitions and moderate profits, etc.
In Monopoly market, development of the country is blocked due to high costs, high prices,
low production, Monopoly profits and exploitation of consumers.
• Entrepreneur and Innovation: Entrepreneur and innovation is an important factor among
several factors which effects the business environment of any country. “Economic
development depends upon technical progress and innovations. The entrepreneur provides
contribution towards economic development by taking advantage of technical knowledge, in
utilisation of the resources.
• Economic Laws: Economic laws include various laws, including trade law, Industrial law,
Factories Act and labor law, monopolies restrictive and trade policies act, various taxation
laws for income tax, sales tax, wealth tax, etc. These laws regulate business environment.

ENVIRONMENT
• Social Cultural Factor: Social-Cultural fabric is an important environmental factor that
affects the business environment. The buying and consumption habits of the people,
their language, beliefs, and values, customs and traditions, tastes and preferences,
education are all factors that affect the business environment.
• Transport and Communication: Transport and communication system is also an
important element of the business environment. Developed the transport and
communication system helps in the economic development of a country. Well
developed means of transport and communication mobilize the whole economic
system and lead to business development.
• Education System: The education system and training facilities also play an important
role in the economic development of a Nation.
• Population: Overpopulation, as well as underpopulation, adversely affects the
business environment. Overpopulation generates the problems of unemployment,
poverty, starvation, and immorality. It also creates the problem of per capita income
and low living standard.

COMPONENTS OF BUSINESS
ENVIRONMENT
•Financial Capability
•Marketing Capability
•Operations Capability
•Personnel Capability
•General Management Capability
Internal
Environment
•Micro Environment
•Macro Environment
External
Environment

INTERNAL ENVIRONMENT:
It refers to all the factors within an organization which affect its functioning. These
factors are generally regarded as controllable i.e. the organization can alter or modify
such factors.
i. Financial Capability: Financial capability factors relate to the availability, usage and
management of funds.
ii. Marketing Capability: Marketing capability factors relate to the pricing, promotion
and distribution of products or services.
iii. Operations Capability:: Operations capability factors relate to the production of the
products or services, use of material resources.
iv. Personnel Capability: Personnel capability factors relate to the existence and use of
human resources and skills.
v. General Management Capability: General management capability relates to the
integration, coordination and direction of the functional capabilities towards common
goals.

EXTERNAL ENVIRONMENT
The external environment consists of all the factors which provide opportunities or pose threats to an
organization
Micro Environment: Micro external factors have an important effect on business operations of a firm.
These are as follows:
a) Customer: The prime task for any business is to attract and retain customers. This is to ensure its
own long-term profitability and existence in the market. Changing tastes and preferences of the
customer should not only be observed as they happen, but forecasted before, and necessary
corrections should be made in the product/service profile by the company.
b) Products: Product factors such as the demand, image, features, utility, function, design, life cycle,
price, promotion, distribution, differentiation and availability of substitutes of products or services also
form an intimate part of the business environment. The product/service features are the key to
attract/retain customers.
c) Marketing Intermediary: This includes all those who facilitate distribution of goods from the centres
of production to the various centres of consumption. These are the middlemen who form part of the
distribution channel and those who help reach the product/service to the ultimate consumer.
d) Competitors: The world has become a global market. There exists tremendous competition in each
and every area. There are other business entities that manufacture similar products and compete
with a company for market share and turnover.
e) Suppliers: An important factor in the micro environment is the supplier, i.e., those who supply raw
materials and components and machines to the company. The suppliers should be reliable and act as
business partners, working in coordination to fulfil the ultimate consumer expectations.

ii. Macro Environment: The macro environment is the larger, uncontrollable environment
consisting of societal forces that affect all other environments. They offer tremendous
opportunities for any business and also present threats that can harm a business in a
major way.
a) Socio-Cultural Environment: This consists of the society and culture of a place where
the organisation is doing its business. It is a general entity and influences almost all
firms in a similar manner. These factors are listed below:
I. Demographic characteristics such as population, its density and distribution, etc.
II. Social concerns such as the role of business in society, etc.
III. Social attitudes and values such as the expectations of the society from business.
IV. Family structures
V. Educational levels
VI. Awareness and work ethics
VII. Beliefs and value systems
VIII. Local festivals

• b) Political Environment: The political environment consists of factors related to the
management of public affairs and their impact on the business of an organization.
Political environment has a close relationship with the economic system and
economic policies. For Example, communist countries have a centrally planned
economic system. In most countries apart from those laws that control investment
and related matters, there are a number of laws that regulate the conduct of the
business. These laws cover such matters as standard of product, packaging,
promotion, etc.
• Some aspects of the political environment are as follows:
• I. The general state of political development
• II. The degree of politicization of business and economic issues
• III. The level of political morality
• IV. The law and order situation
• V. Political stability
• VI. Political ideology and practices of the ruling party

c) Economic Environment: The economic environment consists of macro level
patterns related to the areas of production and distribution of wealth that
have an impact on the business of an organization.
Some of the important factors and influences operating in economic
environment are:
• Economic Policies: It is the apt and timely economic policies taken and
implemented by the government that decides the fortunes of the country
and the citizens. Think of India before 1991 and now. Indian economy was
on the verge of collapse where foreign reserves were just sufficient to pull
on another eight days
• Interest Rates: The rate of interest influences the demand for the goods
and services in the economy when the goods and services are bought
through borrowed funds. In case the rate of interest is low, the demand for
products may be consumer durables or non-durables. This gives flip to the
industries to grow. Opposite is true when the rates are high. Today, R.B.I,
has come out with lowest rates of interest to boot the demand for
consumer durables and non-durables and this is going to take Indian
economy out of the rut of pessimism and morrows.

d) Regulatory Environment : The regulatory environment consists of factors
related to the planning, promotion and regulation of economic activities by
the Government that have an impact on the business of an organization.
Some of the important factors and influences operating in the regulatory
environment are as follows:
I. The constitutional framework, directive principles, fundamental rights and
distribution of legislative power between Central and State Government.
II. Policies related to licensing monopolies, foreign investment and finance of
industries.
III. Policies related to distribution and pricing and their control.
IV. Policies related to imports and exports.
V. Other policies related to the public sector, small — scale industries, sick
industries, development of backward areas, control of environment pollution
and customer protection.

• e) Technological Environment:
• The technological environment consists of those factors related to knowledge applied and
the materials and machines used in the production of goods and services that have an
impact on the business of an organization. For many enterprises, technology is the most
dynamic of all environmental factors. An individual firm is concerned with its product and
process technology.
• Some of the specific factors that can be described are as follows:
• I. Sources of technology like company sources, external sources and foreign sources.
• II. Technological development, stages of development change and rate of change of
technology and research and development.
• III. Impact of technology on human beings, the man – machine system and the
environmental effects of technology.
• IV. Communication and infrastructural technology and technology in management.
• V. Technological obsolescence.
• In the Indian context, we find the state of technological development varies among
different sectors of the industry. Generally it is felt that the technological aspect of
competition varies with customer needs and Government policy. Technology is often used
as a strategic weapon by companies operating in highly competitive environment.

f) Demographic Environment:
This environment deals with the composition and characteristics of the population of a
place. All the relevant descriptions of the population of a place with respect to its
demographic profile will affect business decisions drastically. It would be in the interest
of any firm to consider these aspects in detail before planning the strategy.
It includes factors such as:
• I. Average family size
• II. Size of population
• III. Educational levels
• IV. Economic stratification of the population
• V. Job profiles and Income levels
• VI. Sex ratio composition of the population
• VII. Life expectancy
• VIII. Religion, Caste and customs and traditions
• IX. Spatial mobility of the population

CASE STUDY: QUESTIONS
1. Just after the declaration of Lok Sabha Elections 2014 results. The
Bombay stock exchange’s price index (Sensex) rose to 1000 points in a
day. Identify the environmental factor which led to this rise giving
reason. Also state any 2 components of business environment along
with examples.
2. Which component of business environment requires that
advertisements of baby food must necessarily inform the potential
buyers that mother’s milk is the best?
3. With changes in the consumption habits of people, Neelesh, who was
running a sweet shop, shifted to the chocolate business. On the eve of
Diwali, he offered chocolates in attractive packages at reasonable
prices. He anticipated huge demand and created a website chocolove.
com for taking orders online. He got a lot of orders online and earned
huge profits by selling the chocolate.
Identify and explain the dimensions of business environment discussed

SOCIAL RESPONSIBILITY OF BUSINESS
• Social responsibility of business implies the obligations of the
management of a business enterprise to protect the interests of the
society.
• According to the concept of social responsibility the objective of
managers for taking business decisions is not merely to maximize profits
or shareholders’ value but also to serve and protect the interests of
other members of a society such as workers, consumers and the
community as a whole.

1. Economic Responsibility : What is a business? The business itself is an economic activity. Its main
function is to earn profits. To earn profits means to understand the needs and demands of consumers
whether it is regarding the quality of the product or its price. While understanding the perspective of the
consumer and meeting their needs and demand to earn a profit is the economic responsibility of a
business. When a business earns a profit, it also means that the employees earn the profit in terms of
incentives. The economic growth of a business is not restricted to it but affects the society as a whole.
2. Legal Responsibility Legal responsibilities are not only liable to the individuals in the society but also to
the businesses in the society. As business is an entity itself, it must also follow laws and rules. Every
business has a responsibility to operate within the boundaries set by the various commissions and
agencies at every level of the government. These rules and regulations are set for maintaining balance and
the greater good of the society.
3. Ethical Responsibility Ethical responsibilities include the behaviour of the firm that is expected by the
society but not codified in law. The factors of ethical responsibility include that the business must be
environmentally friendly. The business should always be aware of its activities and how do they affect the
environment. It is the moral and ethical responsibility of every human and every business.
4. Philanthropic Responsibility Business is one the most important pillar of the society. And therefore it
should support and improve the society whenever it can. If a business is making significant profits it is the
business responsibility that it should be philanthropic towards the society by donating funds or its goods
and services. It’s the philanthropic responsibility of the business to help different groups of the society. It
should also work towards providing free education by opening educational institutes and training
institutes or helping the people affected by natural calamities such as floods and earthquakes.

CORPORATE SOCIAL RESPONSIBILITY
• Corporate social responsibility (CSR) is how companies manage their
business processes to produce an overall positive impact on society. It
covers sustainability, social impact and ethics, and done correctly should
be about core business - how companies make their money - not just
add-on extras.
• “CSR is a concept whereby companies integrate social and environment
concerns in their business operations and in their interaction with their
stakeholder on a voluntary basis.

Business environment unit 1

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