The document discusses the business environment and its importance for strategic decision making. It defines the business environment as the aggregate of political, economic, social, technological, legal and other factors that influence organizational operations. It then classifies the business environment into internal and external factors, and discusses various components of the external environment like suppliers, customers, competitors, and socio-cultural, demographic, technological, political and economic conditions. The document emphasizes that regular environmental scanning and analysis is crucial to identify opportunities and threats and enable organizations to adapt proactively.

1. BUSINESS ENVIRONMENT

2. Environment means the surroundings, external
objects, influences or circumstances under
which someone or something exists. The
environment of any organisation is the
aggregate of all conditions, events & influences
that surround & affect it.

3. SCOPE OF BUSINESS
Purchase decision: Automobile
Supplier of raw materials
Manufacturer
Dealer
Advertising agency
Banker
Insurance agent

4. BUSINESS: BASIC PROPOSITIONS
Business- economic activity
Business firm- economic unit
Business decision making- economic in nature
Business achieve objectives by using
resources optimally
Decisions taken in the presence of
environmental factors

5. BUSINESS ENVIRONMENT
Business firm is micro economic unit
Business environment furnishes macro economic
context for its operation
Environment in which business operates
Includes conditions, events, factors that influence
the working of business

6. BUSINESS ENVIRONMENT
Classification:
Time: past, present & future environment of business
Space: local, regional, national , international
environment of business
Forces: forces of market like demand, supply
Factors: economic & non-economic

7. The classification of relevant environment into
components helps the organisation to cope with
its complexity, comprehend the different
influences operating & relating the environmental
changes to its strategic management process.
Business firms: adaptability & adoptability to
environment
Managers: capability & copability to deal with
environment

8. BUSINESS DECISIONS
INTERNAL
ENVIRONMENT
EXTERNAL
ENVIRONMENT

9. Richman & Copen…………
Environment factors or
constraints are largely, if not totally, external and
beyond the control of individual industrial
enterprises & their managements. These are
essentially the ‘givers’ within which the firms &
their managements must operate in a specific
country & they vary often greatly from country to
country.

10. LAYERS OF BUSINESS ENVIRONMENT
Business environment for a firm- multi layered
structure.
Layers:
 favourable/ adverse
 exhibit different characteristics
 affect adjoining layer over a period of time
 Closeness of interaction & interrelationship diff at diff
levels
Example: changes in global business
environment may effect the domestic growth
environment significantly

11. INTERNAL
ENVRNMNT
EXTERNAL
RIVAL
FINANCIE
RS
CUST
OMR
INPUT
PRVIDER
DOMESTIC MACRO
ECNMC ENVRNMNT
NON ECNMC MACRO
ENVRNMNT
SOCIAL
CULTRL
ECMNC
STBLTY
ECNMC
SYSTM
GRWTH
&DIST
ECO
POLICY
DEMGRPHC
INTRNTNL ENVRNMT
INTRNTNL ENVRNMT
GOVT
CONTD……

12. Change in environment presents opportunity to some
& threat to others
Examples:
General agreement on trade & services (GATS)
implemented in India on Jan 1, 2005: opportunity for
research based pharmaceutical cos like Ranbaxy but
threat to smaller companies.
HUL took advantage of new takeover & merger
codes: acquired Kissan from UB group, Lakme from
Tata, Modern foods from government.

13. INTERNAL ENVIRONMENT
Regarded as controllable factors: companies
have control over them
Internal economy: some internal factors
contribute increase in productivity

14. DETERMINANTS OF INTERNAL
ENVIRONMENT OF AN ORGANISATION
Mission & vision of the organisation
Management strategy
Industrial relations
Corporate culture & values
Line & staff relations
Quality control system
Team spirit among employees
Work culture
Compensation system
Career progression of employees

15. POLLUTANTS OF INTERNAL
ENVIRONMENT
Conflict b/w different owner groups
Conflicts b/w workers & managers
Inter departmental conflicts
Unhealthy competition & conflict among employees
Office politics
Discrimination at work place
Absenteeism

16. EXTERNAL FACTORS
Regarded as uncontrollable factors: by and
large beyond the control of company.
External economy: some external factors
contribute to the growth of the company.

17. EXTERNAL ENVIRONMENT
Suppliers
Customers
Competitors
Financiers
Society

18. SYMBIOTIC RELATIONSHIP b/w BUSINESS &
ITS ENVIRONMENT
BUSINESS
POLITICAL
LEGAL
ECONOMIC
SOCIAL
CULTURAL
TECHNOLOGICAL
GLOBAL
NATURAL

19. DOMESTIC MACRO ECONOMIC
ENVIRONMENT
Economic system
Growth & distribution environment
Macro economic stability (price level, exchange rate,
interest rate, money supply, aggregate demand, BOP,
employment rate)
Economic policy (monetary policy, fiscal policy,
industrial policy, trade policy)

20. DOMESTIC MACRO NON ECONOMIC
ENVIRONMENT
Political environment
Social / cultural environment
Demographic environment
Technological environment
Natural environment
Historical environment

21. DETERMINANTS OF INTERNATIONAL
ENVIRONMENT FOR BUSINESS
State of world economy
International economic cooperation
Role of multilateral economic institutions
International economic laws, agreements, codes
Political condition & system in different countries
Cultural factors across countries
Growth & spread of MNCs
Technology growth & transfer
International market structure & competition
Barriers to international trade & investment

22. NON- ECONOMIC ENVIRONMENT OF
BUSINESS
(I) POLITICAL ENVIRONMENT
Political stability- changes in the form & structure of
government administration
Political organisation- ideology of ruling government;
influence of premier groups; conflicting role of public
& private sector

23. Example:
Nehru: transformation of agrarian economy into
industrialised economy
Indira Gandhi: state became active in agriculture
sector (subsidised fertilisers, expansion of
institutional credit); tightening of state control over
industrial finance, foreign investment, trade
Since 1990-91, political environment changed-
economy increasingly being liberalised

24. Example:
In 1977, Janata govt came to power: Coca
cola, IBM had to leave country. All liquor cos
had to close operations.
1991 new economic order presented new
opportunities for business & also threat to
inefficient organizations.

25. (II) REGULATORY & LEGAL ENVIRONMENT
Legal policies- formulation & implementation
Economic legislations- facilitator and/ or restrictor
Playa a vital role- dictating dos & don’ts of business
Flexibility & adaptability of law- constitutional
amendments
Foreign policy- tariffs, custom unions etc

26. (III) SOCIO- CULTURAL ENVIRONMENT
SOCIAL ENVIRONMENT
Made up of attitude, desires, expectations,
education, beliefs & customs of people
Changes gradually
To forecast a change is difficult

27. CULTURAL ENVIRONMENT
Organisational culture is the customary or traditional
ways on thinking & doing things, which are shared to
a greater or lesser extent by all the members of the
organisation, which new members must learn & at
least partially accept in order to be accepted into the
service of the firm.

28. A firm wanting to market its product in various
regions with diversified cultures will have to
carefully study the existing consumption pattern
& scope for creating demand for new products &
will have to adjust their marketing
communication to cultural characteristics.
If the society is multi- cultural, then the firm can
not meet the demands of different groups with a
uniform product. To be successful in a multi
cultural society, the firm will have to carefully
study the consumption behaviour of different
groups.

29. Example:
Companies have to change their product
portfolio because of cultural differences as
McDonald and KFC did when they launched
their restaurant chain in India.

30. (IV) DEMOGRAPHIC ENVIRONMENT
(a) Size & growth rate of population
Growing population: boon
• Increase in productive forces
• Bigger market for products

31. Growing population: bane
Adverse impact on per capita income & standard of
living
Adverse impact on savings: unfavourable impact on
capital formation
Adverse impact on employment situation
Increasing pressure on agriculture

32. (b) age structure of population
It determines:
Productivity level
Demand pattern
 Young population: PTC high
 Elderly population: high savings

33. (c) urban- rural population
Proportion of urban rural population increasing
Reasons
Pull factors:
 Better employment opportunities in urban areas
 Better income
 Better education
 Better health facilities

34. Push factors:
 Low level of agriculture productivity
 Disguised unemployment
 Wide disparity between urban & rural levels of
living
In India, urban population increased from 17.3%
of total population in 1951 to 27.78% of total
population in 2001 (Source: Economic Survey
2003-04)

35. Example:
Demographic environment decides the
marketing mix for an organisation. A one
rupee sachet of shampoo or a five rupee ice-
cream cone are some examples.

36. (V) TECHNOLOGICAL ENVIRONMENT
Refers to body of skills, knowledge & procedures for
making, using & doing useful things
Positive effects of technology:
Increased productivity
Spread effects
Production of new & better goods of standardised
quality with more efficient use of raw materials
Basis for fast growing urban & industrial system

37. Negative effects of technology:
Displacement of labour
Environmental pollution
Switching over might be costly

38. Example:
FIAT was using old technology but MUL
had no option than to go for superior
technology.

39. (VI) NATURAL ENVIRONMENT
Industrial activity not entirely independent of
nature
Industrial units using weight losing inputs to be set
up at sources of these inputs
Externalities

40. (VII) EDUCATIONAL ENVIRONMENT
Attitude towards education & acquisition of
knowledge
Types of education- formal or informal
Literacy level
Educational match with skill requirement

41. (VII) HISTORICAL ENVIRONMENT
Historical events & ideologies have a strong impact
on the current state of business
Example: business environment in a number of
newly independent nation states has been
determined by the colonial status that these
countries had.

42. NATURE OF BUSINESS ENVIRONMENT
Dynamic
Uncertain
Element of Risk
Opportunities & threats
Internal & external factors
Economic & non-economic factors

43. SIGNIFICANCE OF BUSINESS
ENVIRONMENT
Facilitates operations of the organisation
Forms the basis of long term policies, plans,
strategies of organisation
Helps organisation in identifying & understanding
its competitors
Helps the firm to expand & grow

44. CORPORATE RESPONSE &
ADJUSTMENT TO SPECIFIC
CHANGES IN BUSINESS
ENVIRONMENT

45. Competitive environment
Marketing strategy
Developing new product
Satisfying customers
Measures for realisation of economies of scale &
scope

46. Technological environment
R & D
Foreign technical collaborations
Choice of technology
Capital labour ratio

47. Labour environment
Productivity
Employee motivation
Employees’ turnover rate
Working conditions
Compensation

48. Legal environment
Procedures & documentation
Ethical practices
Intellectual property protection
Credibility

49. Social environment
Social responsibility
Welfare expenditure
And so on………….

50. ANALYSIS: UB GROUP
Environmental changes:
Liberalisation era forced businessmen to think of
core competencies
Reckless diversifications made during pre
liberalisation era became liabilities

51. Strategic responses:
Restructuring business
Internationally to consolidate strength in
brewing & distilling
In India to focus on engineering, services,
health care, brewing & distilling
Hiving of non core business like
pharmaceuticals
ANALYSIS: UB GROUP

52. ANALYSIS: UB GROUP
Consequences:
With the excess baggage being shed, UB
group looks slim & vibrant

53. CONCLUSION
Firms that are able to make appropriate
adjustment to business environment changes
reduce risk & uncertainty & gain competitive
edge over others. Failure in making timely
adjustment may erode profitability,
competitiveness & market share.

54. TYPES OF BUSINESS ENVIRONMENT RISK
Legal risk: arising from legal challenges or
changes in laws
Regulatory risk: arising from regulatory design &
its changes
Political risk: arising from political changes
Social risk: originating from social attitudes,
perceptions
Natural risk: associated with natural calamities

55. INTERACTION MATRIX
Studies interaction, interdependence,
interlocking of various environmental factors
Economic environment is both- endogenous
& exogenous- it is determined as well as
determining

56. INTERACTION MATRIX I
Non
Eco
Envrnmt Eco.
Sys.
Eco.
Stru
Fnctng
of the
Eco
Eco
plng
Eco.
prgrm
Eco.
Polici
es
Eco.
contls
&
rgultio
ns
Eco.
gwth
& dvt
Sociolog
ical + + + + + + + +
Educatio
nal + + + + + + + +
Political + + + + + + + +
Historica
l + + + + + + + +
Eco
Envrnmt

57. INTERACTION MATRIX II
NON
PRESENT
ENVRNMT
PRESENT
ECO
ENVRNMT
(1)
PRESENT
NON- ECO
ENVRNMT
(2)
PAST ECONOMIC
(1)
+ +
NON
ECONOMIC
(2)
+ +
FUTURE ECONOMIC
(3)
+ +
NON
ECONOMIC
(4)
+ +
PRESENT
ENVRNMNT

58. Wiliam & Lawrence……..
Environmental analysis
& diagnosis give strategists time to anticipate
opportunities & to plan to take optional responses
to these opportunities. Its also helps strategists to
develop an early warning system to prevent threats
& to develop strategies which can turn a threat to
the firm’s advantage

59. PROCESS OF ENVIRONMENTAL
ANALYSIS
Scanning: general surveillance of environmental
factors & their interactions
Monitoring: tracking environmental trends,
events
Forecasting: developing plausible projections of
direction, scope & intensity of environmental
change
Assessment: identifying & evaluating how & why
current & projected environmental changes will
affect strategic management of organisation

60. ENVIRONMENT SCANNING
Strategic planning in which managers try to
determine best fit b/w organisation & its
external environment
Important step towards corporate planning &
business policy decisions
Aimed at continuous improvement of the
company, its policies & programs.

61. INTERNAL SCANNING: acquisition, analysis, use
of information from within the organisation that will
help the management in determining future course
of action of business
EXTERNAL SCANNING: acquisition, analysis, use
of information about events & establishing the
relationship of business with its external
environmental variables

62. Corporate managers analyse the Strengths (S),
Weakness (W), opportunity (O) & Threat (T) that
exist for their organisation in the context of its
environment.
O & T are external to the firm. With S the firm can
seize the O & captilise on it & because of its W it
becomes the victim of T in the environment

63. LINKAGES AMONG STAGES
MONITORING
SCANNING FORECASTING
ASSESSMENT

64. ROLE OF BUSINESS ECONOMIST
To provide economic logic & perspective for
managerial decision making
Integrating economic theory with practical
business situations
Monitoring, scanning, careful analysis &
interpretations of business environment
Forecasting, future panning & formulating future
business strategy