Amity School of Business
MODULE – 1
Overview of business
environment
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What is business?
• Organised efforts of enterprises for the supply of goods and
services in a society and making profit in the process.
• An economic act, carried out by an organization to achieve some
targets.
Importance of business
1. An important institution in the society. Business and society are
dependent on each other
2. Supplies goods and services
3. Creates employment
4. Contributes to the economic growth of a country
Characteristics of today’s business
1. Change: modern business is dynamic, new technologies, new
products
2. Vastness: Mass production, mass marketing – fetching economies
of scale to the manufacturers and the resultant benefits getting
passed on to the buyers.
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3. Diversification: is a form of growth strategy for a company. It
seeks to increase profitability through greater sales volume
obtained from new products and new markets. It also tends to
spread the dependency of the business on fewer products. Tata
group, a premier business house, is into iron & steel, fertilizers,
chemicals, automobiles, telecom, tea, shipping, hotels, information
technology, printing, & consultancy. Similar is the story of other
business groups as well.
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4. Science: an important force affecting business. Products / services
being demanded and offered, means of manufacturing and selling are
fast changing. This is primarily because of continuous development in
science and technology.
5. Information: Yet another characteristic of contemporary business is
the significance of information, which is key to success of every
business. Sources of information such as, internet, television, print
media etc. play a important role in business decision making. Further,
with the scientific advancement, the system of getting and giving
information, processing and storing data, preparation of effective
records and reports has also changed tremendously.
6. Government interference: makes laws, rules & regulations, polices,
levy taxes etc., thereby affecting business.
7. Competition: eliminate inefficiencies, cut down costs, improve
productivity, and offer competitively in market in order stay fit.
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Business environment
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That which envelops the business firm;
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consists of all those factors that have a bearing on the business.
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something external, beyond the control of an organization.
Points to note:
1. There exists a symbiotic relationship between business and its
environment; i.e, the business is influenced by its environment
and in turn, to a certain degree (and along with other firms) it
influences the environment.
2. The business environment always keeps changing (evolving).
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3. Therefore, the survival & success of a business firm depends upon
– its innate strength – resources at its command, physical
resources, human resources, skill and organisation;
– its adaptability to the environment;
– The extent to which the environment is favourable to the
development of the organisation;
Two set of factors affecting business: a) The internal factors (present inside the firm); and
b) The external factors (present outside the firm).
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Factors forming the Internal Environment:
1. Promoters / shareholders values
2. Mission & objectives
3. Management structure & nature
4. Internal human relationships
5. Physical assets and facilities
6. Financial factors / capabilities: financial policies, financial position,
capital structure etc.).
7. Human resources: skill, quality, morale, comittment, attitude etc.
8. Company image / brand equity : winning the customer, launching
new products, raising finance, forming joint ventures, soliciting /
maintaining business associates.
9. Technological Capabilities: company’s ability to innovate, use/
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offer the latest & efficient technology for its advantage.
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Internal factors
• Generally regarded as controllable factors because the firm
has control over these factors; the firm can alter or modify
them to suit the changing external environment.
• Form the Strengths and Weaknesses of the business firm.
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External environment
• Consists of institutions, organizations and forces operating
outside the company.
• The external environment throws Opportunities and Threats
on to the business.
• The success of a business depends upon its successfully
grabbing (utilizing) the opportunities and countering the
threats by effectively leveraging its strengths and
overcoming its weaknesses.
• In other words, the survival and success of a business firm
depend on its ability to use resources at its command
(internal strength) and its adaptability to the external
environment.
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External Environment – has two layers
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Micro (Task / operating) environment: consists of
actors in the company’s immediate environment, those
having a direct bearing on the performance of the
company. It includes customers, suppliers, competitors,
marketing intermediaries, publics etc.
2.
Macro (General /Remote) environment: refers to larger
societal forces (economic and non-economic) those affect
all the actors in the company’s immediate environment,
including the company – namely, demographic, economic,
political, technological, cultural and legal. They influence
business activity in general.
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Factors effecting external environment of business
Micro external environment
• Customers
• Suppliers
• Competitors
• marketing intermediaries
• Financiers
• publics
Macro external environment
• Domestic Macroeconomic
environment
• International factors
• Cultural factors
• Political factors
• Technological factors
• Legal factors
• Ecological factors
• Demographic factors
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Domestic Macroeconomic environment
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Type of economic system (market, command or mixed economy)
GDP composition, growth, and distribution
Saving rates, rate of interest, money supply, credit availability
Capital stock, rate of capital formation
Consumption demand, investment demand
Rate of inflation
Level of employment
Exports, imports, exchange rates, balance of payments
Economic policies of the govt.- planning / monetary / fiscal /
industrial / EXIM / Labour policies
• Trade cycles
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International (global) environment/factors
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International environment – most dynamic & volatile components of
Business Environment.
Concerns all business firms whether they have international
transactions or not.
Affects foreign trade, foreign investment, forex rates (variation affects
prices of imported goods, which, in turn, can bring about a change
in the prices and output of competing domestic goods).
Important determinants of international environment for business:
• The state of world economy
• Distribution of world output
• Role of multilateral economic institutions (WTO, IMF, WB, UN)
• International economic laws, treaties, practices and code
• Political conditions in different countries
International (global) environment/factors
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Cultural factors across countries
Growth and spread of multinational corporations
Technology growth and transfer
Corporate governance standards and ethical practices across
countries
International market structure and competition
Barriers to international trade and investment
National economic polices of different countries
Increase in number of free trade areas and custom union between
countries (like NAFTA, ASEAN, EU)
Economic slowdown in a number of industrial market economies
Economic reforms in a number of less developed, developing
countries including India
Social / Cultural environment
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Culture is a set of socially accepted and shared set of beliefs, norms,
values and customs.
Business has to regard cultural variables like social and religious
practices, community norms & beliefs.
Differs among various population sub-groups causing differences in
perception of society & customers towards various products/services.
E.g. in many societies non-vegetarian food, alcoholic drinks, beauty
parlours, fashion shows are despised whereas in others these are part of
normal life. Macdonalds, Maggi Atta noodles.
How because of change in society, businesses are evolving: day care
centre, ready-to-eat food, diet food, gym / health business, yoga classes.
Culture plays an important role in determining: the type of goods the
business is going to produce, work culture, employee productivity,
business negotiations, customer / public relations, social responsibility
of business, business ethics, human resource mgmt, scientific spirit.
Political factors
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• Political environment refers to the influence exerted by the three
political institutions: legislature, executive and judiciary in shaping,
directing, developing and controlling business activities.
• A stable and dynamic political environment is prerequisite for the
growth of business.
• Type of political system and its attitude towards business also
matters a lot. The philosophy and approach of political party in
power substantially influences the business environment.
• Businesses have several risks associated with the political scenario:
Confiscation, Expropriation, Nationalization, Domestication,
General Instability risk, Operation risk, Transfer risk.
The risk is higher in absolutist, command economies. And also in
countries passing through economic, social or political crises.
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Technological environment
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• Technology includes the tools, & machines (hard technology) and
ways of thinking (methods / soft technology) to perform certain
tasks efficiently, solve problems and promote societal progress.
• Technology has developed immensely during the past 150 years.
• A few benefits of technology – conquer distances,
communications, space research, healthcare, generate / preserve /
distribute energy, discover / invent newer and better products &
services, development of computers, biotechnology, etc.
• Features of technology – (a) change and then more change; (b)
widespread effects; (c) self-reinforcing, i.e. it acts as its own
multiplier – e.g. invention of wheel led rather quickly to a number
of more applications.
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Technology is one of the important determinants of success of a
firm.
It reaches people through business in form of goods and services.
Technological factors may increase or decrease the demand for
some existing products in the market.
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It results into high expectations of consumers for better goods /
services at affordable price. Drives businesses to continuously
work on product and process innovations, which, in turn, is
possible from investment in technology through R & D.
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System complexity & integration – technology has resulted in
making systems across the spectrum of economic activity more
complex and integrated. e.g failure of power supply affects other
areas of the system – will cause taps dry, affect traffic signals,
suspend elevators between floors, dark streets and so on.
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Impact of technology on businesses
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Increased productivity (both quality and quantity)
Allocation of resources on Research and Development (R&D)
Jobs tend to become more intellectual (upgraded)
Resistance to change (among employees / managers / owners)
Multi-professional Managers
Increased Regulation
Increased demand for Capital
Rise and decline of products and organisations
Business boundaries redefined
Impact of technology on businesses
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Better product technology, better sales.
Faster production, reduces per unit cost of the product.
Attractive/ Better Quality of products.
Minimum wastage or lesser errors in production process.
Large scale production.
Supply increases, per unit cost decreases, demand increases.
Mass reach( ADVERTISEMENTS).
Boundaries are re-defined making this world a GLOBAL VILLAGE.
More profitable for firms.
Better after sales service.
CRM: Customer Relationship Management
Better communication.
Eco-friendly processes and products.
Reduces labor efforts.
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Legal factors affecting business
environment
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Legal Environment of Business
• Every aspect of business is regulated by law in India. Legal system
of a country has a profound impact on decisions concerning both
investment and operations in business as it touches the very
existence and legality of business firms. Hence legal environment
plays a vital role in business.
Businesses have to abide the law of land where they operate.
The broad areas covered by business legislation include: • industrial licensing, company formation, factory administration,
industrial disputes, payment of wages, trade unionism, monopoly
control, forex regulation, shops and establishment, product
counterfeiting, gray markets, taxes etc. SEBI, TRAI, IRDA,
• Industrial development and regulation – licensing and registration
of industries; prices and output regulation, mergers, acquisitions and
takeovers, location of industries;
• Companies Act, 1956 [formation, appointment / duties / powers of
directors, company meetings, dissolution etc.]
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• Banking Regulation Act, 1949 [provides a
framework for regulating, licensing and
supervising banking firms in India –
mandated to RBI]
• Foreign Exchange Management Act, 1999
• Competition Act, 2002
• Consumer Protection Act– covering consumer
rights, consumer disputes, complaints and
grievance redressal system;
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Essential commodities – their supplies, prices, and quality
Weights, measures and packaging – standard units, packaging norms,
declarations and inspection.
Patents & copyrights– application procedure, life of a patent, rights of
patent / copyright owners, infringement of patents / copyrights, claim
procedure and settlement;
Labour – employment norms / rules, employee insurance, payment of
wages / salaries, bonuses / gratuity / PF, disciplinary matters, disputes;
Changes in legal environment are caused by legislative changes /
amendments / and introduction of new laws. Business firms are also
affected by the speed with which justice is delivered. Professionally
managed companies give importance to legal conformity in their
business operations.
Demographic Factors (environment)
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• Demographic (population related)
characteristics have important influence on
business
• Demography includes population, population
density, sex ratio, fertility and mortality rates,
age composition, life expectancy and
geographical distribution of population.
• Demographic factors are important basis for
market segmentation and product positioning
for marketers.
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