BUSINESS ENVIRONMENT

What is Business
Environment
Business Environment is made up of
two words
Business: The state in which a person
remains busy is called Business
In economic sense, it means human
activities that are performed for
earning profit.

 Environment : literally means the

surroundings, external objects, influences,
circumstances under which someone or
something exists.
Business Environment can therefore defined
as : the aggregate of all conditions, events,
and influences that surround and effect it
It is a set of social, legal, economic, political
or institutional conditions that affects the
functioning of an organization.

Why Study Business

Environment
1. It helps an organization to develop
its strategies and long term policies.
2. It enables an organization to
analyse its competitors strategies
and thereby formulate counter
strategies.
3.Knowledge about changing
environment will keep the
organization dynamic.

 4. It enables the organization to

foresee the impact of socio-economic
changes at the national and
international level on its stability.
5. Executives are able to adjust to
the prevailing conditions and, thus,
influence the environment in order to
make it congenial for the business.

 Business Environment has two

components:
Internal
External

Internal Environment
The internal factors are those over
which the organization has control
and are therefore also known as
controllable factors.
The organization can modify or alter
these factors to suit the
environment.
These factors contribute to the
success or failure of the organization
and impart strength or create

It consists of 5 Ms:
1. Man
2. Machinery
3. Money
4. Material
5.Management
That is it includes Organizational resources,
R&D and technical capabilities, Financial
Capability, Marketing Capability and
Operations capability.

 The important internal factors which

have a bearing on the strategy and
other decisions are :
Value System : The value system of
the founders and those at the helm
of affairs has important bearing on
the mission and objectives of the
organization, business policies and
practices.

 Mission and Objectives : The mission

and objectives of the company define the
purpose of existence of the business and
also gives direction to the business.
Management Structure and Nature :
The organizational structure, the
composition of the Board of Directors, and
the extent of professionalism in the
management have a bearing on the
business decisions.

 Some management structures and style

delay decision making whereas others
facilitate decision making.
Internal Power Relationship : The
relationships between different power centers
in the organization have an important bearing
on he working of an organization.
The amount of support the management
enjoys from different quarters also have
important influence.

 Human Resources : The characteristics

of the human resources like the skill,
quality, morale, commitment, attitude
etc. could contribute to the strength and
weakness of the organization.
Company image and Brand Equity :
the image and brand equity of the
company matters while raising finance,
forming joint ventures or other alliances.

External Environment
External Environment includes
factors outside the firm which can
lead to opportunities for and threats
to the firm.
These are beyond the control of the
firm and include Govt. and legal
factors, Geo-physical factors, Political
factors, socio-cultural factors,
demographic factors and
technological factors.

 External Environment is of two types:

1. Micro or Operating Environment
2. Macro or General Environment

Micro / Operating
Environment
The environment which is close to
business and affects its capacity to
work is known as Micro or Operating
Environment. It consists of Suppliers,
Customers, Market Intermediaries,
Competitors and Public.
(1) Suppliers: They are the
persons who supply raw material and
required components to the
company.

 (2) Customers: - Customers are

regarded as the king of the market.
Success of every business depends
upon the level of their customers
satisfaction. Types of Customers:
(i) Wholesalers
(ii) Retailers
(iii) Industries
(iv) Government and Other
Institutions

 (3) Market Intermediaries: - They

work as a link between business and
final consumers. Types:(i) Middleman
(ii) Marketing Agencies
(iii) Financial Intermediaries
(iv) Physical Intermediaries

 (4) Competitors: - Every move of

the competitors affects the business.
Business has to adjust itself
according to the strategies of the
Competitors.
(5) Public: - Any group who has
actual interest in business enterprise
is termed as public e.g. media and
local public. They may be the users
or non-users of the product.

Macro / General
Environment
It includes factors that create
opportunities and threats to business
units.

Economic Environment
(1) Economic Environment: - It is very
complex and dynamic in nature that keeps
on changing with the change in policies or
political situations. It has four elements:
(i) Economic Conditions of Public
(ii) Economic Policies of the country
(iii)Economic System
(iv) Other Economic Factors: Infrastructural
Facilities, Banking, Insurance companies,
money markets, capital markets etc.

Non- Economic Environment

(i) Political Environment: - It
affects different business units
extensively. Components:
(a) Political Belief of Government
(b) Political Strength of the Country
(c) Relation with other countries
(d) Defense and Military Policies
(e) Centre State Relationship in the
Country
(f) Thinking Opposition Parties

 (ii) Socio-Cultural Environment: Influence exercised by social and

cultural factors, not within the control
of business, is known as SocioCultural Environment. These factors
include: attitude of people to work,
family system, caste system,
religion, education, marriage etc.

 (iii) Technological Environment: A systematic application of scientific

knowledge to practical task is known
as technology. Everyday there are
vast changes in products, services,
lifestyles and living conditions, these
changes must be analysed by every
business unit and should adapt these
changes.

 (iv) Natural Environment: - It

includes natural resources, weather,
climatic conditions, port facilities,
topographical factors such as soil,
sea, rivers, rainfall etc. Every
business unit must look for these
factors before choosing the location
for their business.

 (v) Demographic Environment :It is a study of perspective of

population i.e. its size, standard of
living, growth rate, age-sex
composition, family size, income
level (upper level, middle level and
lower level), education level etc.
Every business unit must see these
features of population and
recongnise their various need and

 (vi) International Environment: It is particularly important for

industries directly depending on
import or exports. The factors that
affect the business are: Globalisation,
Liberalisation, foreign business
policies, cultural exchange.