1. FUNDAMENTALS
OF BUSINESS
ENVIRONMENT
UNIT- 1
Dr. Kumar Ratnesh

2. Business + Environment

3. Business
• It includes all activities which are
organised and operated to :
– Provide goods and services to the society
– Creation of employment opportunities
– Offer of better quality of life
– Contribution to the economic growth of
the country

4. Characteristics of Business
• Exchange of goods and
services
• Profit motive
• Continuity in dealings
• Entrepreneurship and Risk
• Creation of utility
• Customer satisfaction
• Innovation and research
• Human activity

5. Changing characteristics of Business
Globalisation
Increased
Competition
Liberalisation
Social Values and
Ethics
Privatisation
CSR
Information
Diversification
Technological
Changes

6. Environment
• It
refer
s
to the surroundings
an
d
circumstances
whic
h
influence a
business
entity or a
person.

7. Business Environment
• It refers to the totality of all such factors
which influence the working and decision
making of a business organisation. Every
business has to operate under a given
environment, which is called business
environment.

8. Business
Environment
Internal and
External
Factors
Impact the
functioning and
performance of
Organisation
Affect
Decision
Making

9. Business
Environment
environmen
t
• Busine
ss
consist
s
factors
of all
those
that have
a
powe
r
&
bearing on the
business, such
as:
• strengths,
• weaknesses,
• internal
relationship
s
organisation
orientations,
• government policies
and regulations,
• economy and
economic conditions,
• socio-cultural factors,
• demographic trends,
• natural factors,
• global trends,
• cross border
development
s.

10. Business
Environment
• Business environment means all of the
internal and external factors that affect how
the company functions including
employees, customers, management,
supply and demand and business
regulations.

11. Busine
ss
decisio
n
Internal
environmen
t
External
environmen
t

12. Survival
and
Success of
Organisatio
n
Internal/
Organisation
al Factors
Strength
s
Weakness
es
Extern
al
Factor
s
Opportunitie
s
Threat
s

13. Internal
Factors
• Controllable factors
– Value system
– Vision, mission and objectives
– Management structure and
nature
– Internal power relationship
– Human resources
– Company image and brand
equity

14. Macr
o
Micr
o
Interna
l
• PEST
EL
• Consumers
• Stakeholde
rs
• Suppliers
• Men
• Money
• Machinery
• Material
• Minutes

15. Characteristics of
Business
Environment
• Complex
• Dynamic
• Affects different firms differently
• Has both long term and short term impact
• Unlimited effect of external environmental
efforts
• Uncertain
• Interdependent components
• Includes both internal and external
environment

16. Nature of Business
Environment
B
E
Social
Responsibili
ty Approach
System
Approac
h
Creativ
e
Approac
h

17. System
Approach
• In original, business is a system by which it
produces goods and services for the
satisfaction of wants, by using several
inputs, such as, raw material, capital,
labour, etc. from the environment.

18. Social Responsibility
Approach
• In this approach business should fulfill its
responsibility towards several categories of
the society such as consumers,
stockholders, employees, government
etc.

19. Creative
Approach
• As per this approach, business gives
shape to the environment by facing the
challenges and availing the opportunities
in time. The business brings about
changes in the society by giving attention
to the needs of the people.

20. Significance of Business
Environment
• Help to understand Internal
Environment
• Help to Understand Economic
System
• Help to Understand Economic
Policy
• Help to Understand Market
Conditions

21. Relation between Business
and Environment
• Mutually related
• Dynamic
• Opportunities and
threats

24. Internal
Environment company’
s
It consists of the factors in
the immediate
environment that
affects the
performance of the
company.

25. Internal
Environment
The factors in internal environment of
business are to a certain extent
controllable because the firm can change
or modify these factors to improve its
efficiency.

26. Internal
Environment
Value System
Mission and
Objectives
Organisation
Structure
Corporate Culture
Human Resource
Labour Union
Physical Resources
and Technological

27. Value
System
The value system of an organisation means the
ethical beliefs that guide the organisation in
achieving its mission and objectives.
It is a widely acknowledged fact that the extent
to which the value system is shared by all in
the organisation is an important factor
contributing to its success.

28. Mission and
objectives
The business domain of the company, direction of
development, business philosophy, business
policy etc are guided by the mission and
objectives of the company.
The objective of all firms is assumed to be
maximisation of profit.
Mission is defined as the overall purpose or reason
for its existence which guides and influences its
business decision and economic activities.

29. Organisation
structure
• The organisational structure, the composition
of the board of directors, the professionalism
of management, etc. are important factors
influencing business decisions.
• The nature of the organisational structure has
a significant influence over the decision
making process in an organisation. An
efficient working of a business organisation
requires that the organisation structure
should be conducive for quick decision-
making.

30. Corporate
culture
• Corporate
cultur
e
is an important factor for
determining the internal environment of any
company.
• In a closed and threatening type of corporate
culture the business decisions are taken by top
level managers while the middle level and lower
level managers have no say in business decision-
making. This leads to lack of trust and confidence
among subordinate officials of the company and
secrecy pervades throughout the organisation.
This results in a sense of alienation among the
lower level managers and workers of the company.

31. Corporate
culture
• In an open and participating culture, business
decisions are taken by the lower level
managers and top management has a high
degree of confidence in the subordinates. In
this type of culture, participation of workers in
managerial tasks is encouraged.
• Development of work culture and the growing
involvement of the workers or employees in
company affairs and the sympathetic attitude
of the management towards its employees
are all equally responsible for maintaining a
healthy internal environment in the business.

32. Quality of Human
Resources
• The characteristics of the human
resources like
skill, quality, capabilities, attitude an
d commitment of its
employees, etc.
could
contribute to the strength and weaknesses of
an organisation.
• Some organisations find it difficult to carry
out restructuring or modernisation plans
because of resistance by its employees.

33. Labour
Union
• Labour unions collectively bargains with
the managers for better wages and better
working conditions of the different
categories of workers.
• For the smooth working of a business firm
good relations between management and
labour unions is required.

34. Physical resources and
technological
capabilities
Physical resources such as, plant and equipment
and
competitive strength which is an important
factor
technological capabilities of a firm determine its
for
determining its efficiency and unit cost of production.
Research and development capabilities of a company
determine its ability to introduce innovations which
enhances productivity of workers. It is, however,
important to note that the rapid technological growth
and the growth of information technology in recent
years have increased the relative importance of
intellectual capital and human resources as compared
to physical resources of a company.

35. External
environment
Macr
o
Micr
o

36. Micro
environment
Supplier
s
Customer
s
Competitor
s
Marketing
Intermediarie
s
Financer
s
Publi
c

37. Micro
Environment
• Micro environment includes those parties
whose decisions and actions have a direct
impact on the company.

38. Supplie
r
An important factor in the external micro
environment of a firm is the supplier of its
inputs such as raw materials and
components.
Normally, most firms do not depend on a
single supplier of inputs. To reduce risk and
uncertainty business firms prefer to keep
multiple suppliers of inputs.

39. Custom
er
The people who buy and use a firm’s product and
services are an important part of external micro
environment.
Since sales of a product or service is critical for a firm's
survival and growth, it is necessary to keep the
customers satisfied.
A concern for customers’ satisfaction is essential for
the success of a business firms. Besides, a business
firm has to compete with rival firms to attract
customers and thereby increase the demand and
market for its product.

40. Micro
environment
Business
Environme
nt
Compan
y
Supplier
s
Marketing
intermediarie
s
Competitor
s
Publi
c
Custome
r

41. Marketing
intermediaries
In the firm's external micro environment,
marketing intermediaries play an
essential role of selling and distributing its
products to the final customers.
Marketing intermediaries provide an
important link between a business firm and
its ultimate customers.

42. Competito
rs
Different firms in an industry compete with each other for
sale of
their products.
This competition may be on the basis of pricing of their
products and also non- price competition through competitive
advertising such as sponsoring some events to promote the
sale of different varieties and models of their products.
Now, Indian firms have to compete not only with each other but
also with foreign firms whose products can be imported. In
America, American firms faced a lot of competition from the
Japanese firms producing electronic goods and automobiles.

43. Publi
c
• Public is an important force in external
micro environment.
Environmentalists,
media
protection groups, local
groups,
groups, women’s associations,
consumer
Citizens
Association are some important
examples of publicswhich
have an important bearing
on
the
busines
s
existence of
decisions of
the
various types
firm.
The
of
public
s
influencesthe working of business
firms and compels them
to be socially responsible.

44. Macro
environment
Demographi
c
Economi
c
Natura
l
Technologic
Politica
l
Cultura
l

45. Macro
Environment
• The larger societal forces that affect the
micro environment – demographic,
economic, natural, .technological, political
and cultural forces.

46. ECONOMI
C
ENVIRONME
NT

47. General
economic
condition
s
Industrial
condition
s
Supply of
resources
for
production

48. Economic
Factors
Inflation
Rate
Interest
Rate
Buyer’s
Disposabl
e income
Credit
accessibilit
y
Unemployme
nt rates
Monetary /
Fiscal
Policies
Foreign
Exchange
rate

49. Economic
Environment
Economic environment includes all those forces
which have an economic impact on business.
It consists of agriculture, industrial production,
infrastructure, planning, basic economic
philosophy, stages of economic development,
trade cycles, national income, per capita income,
savings, money supply, price level and population.
Business and economic environment is closely
related. Business usually collect all its required
inputs from the economic environment available
and also absorbs the output of business units.

50. DEMOGRAP
HIC
ENVIRONME
NT

51. Demographic
Environment
• The demographic environment includes the size and growth of
population, life expectancy of the people, rural-urban
distribution of population, the technological skills and
educational levels of labour force.
• All these demographic features have an important bearing on
the functioning of business firms. The labour force in the
country is always changing. This will cause changes in the
work force of a firm.
• The business firms have to adjust to the requirement of their
employees. They have to provide child care services, labour
welfare programmes etc. The demographic environment
affects both the supply and demand sides of business
organisations.

52. Demographic
Environment
• The technological and educational skills of the workers of a
firm are determined by the human resources available in the
economy which are part of the demographic environment. The
size of the population and its rural- urban distribution
determine the demand for the products of industrial firms.
• The growth rate and the age composition of the population
determine the demand pattern of goods. If the child population
is high then the demand for baby foods and baby clothes will
be high. On the other hand, if the life expectancy of the
people is high then the demand for goods will be those that
will cater to the tastes and needs of elderly people.
• The demographic environment is also important for business
firms as it determines the choice of technology by them.

53. Age
Sex
Education
al
backgroun
d
Marital
status
Family
size Life
style

54. SOCIO-
CULTURAL
ENVIRONME
NT

55. Cultural
Implication
s
Genderand
Connected
Demographi
cs
Social
Lifestyles
Domesti
c
structure
s
Education
levels
Distribution
of
Wealth

56. Socio-Cultural
Environment
• Social and cultural environment includes
people’s attitude to work and wealth, ethical
issues, role of family, marriage, religion and
education and also social responsiveness of
business.
• The social and cultural environment also
influences the demand for a variety of goods
and the type of employees the industry
require.

57. Technologic
al
environmen
t

58. Technological
Environment
• Technology implies
systematic
application
of scientific or other organised
knowledgeto
practical tasks or
activities.
• Businessmakes it possible for
reach the people in proper
format.
technology to
• As technology is changing fast, businessmen
should keep a close look on those
technological changes for its adaptation in
their business activities.

59. Innovation and
technology
change
Product
improvemen
t
Research
and
developmen
t

60. New
Discoveri
es
Technologic
al
obsolescen
ce Rate
Innovative
T
echnologic
al Platforms
T
echnologic
al
Advances
Rate

61. • Options available
in technology
• Government’s approach
in respect of
technology
• Technology selection

62. Political and
Legal
Environment

63. Political-legal
Environment
• Business firms are closely related to the
government. The political- legal environment
includes the activities of three political institutions,
namely, legislature, executive and judiciary which
usually play a useful role in shaping, directing,
developing and controlling business activities.
• The legislature takes decisions on a particular
course of action, the executive implements those
decisions through government agencies and the
judiciary serves as a watch-dog for ensuring
public interest in all the activities of legislature and
executive.

64. Stable Government
Role of private
sector
Government
policies
Role of SSI and service
sector Type of
government

65. Political
Factors
Government Policies
Taxes, law and Tariffs
Stability of
Government Entry
Mode Regulations

66. Legal
Factors
Product Regulations
Employment
Regulations
Competitive
Regulations Patent
Infringements

67. Global
Environment
• Global environment plays an important role
in shaping business activity.
• With the liberalisation and globalisation of
the economy, business environment of an
economy has become totally different
wherein it has to avail all opportunities and
face the threats arising out of global
environment.

68. Natural
Environment
• The natural environment is the ultimate source of
many inputs such as raw materials and energy,
which firms use in their productive activity.
• The availability of natural resources in the region or
country is the basic factor in determining business
activity in it. The natural environment which
includes geographical and ecological factors such
as minerals and oil reserves, water and forest
resources, weather and climatic conditions are all
highly significant for various business activities.

69. Natural
Environment
• For example, steel producing industries are set up near
the coalmines to save cost of transporting coal to
distant locations.
• The natural environment also affects the demand for
goods. For example, in places where temperatures are
high, the demand for coolers and air conditioners are
high. Similarly, weather and climatic conditions
influence the demand pattern for clothing, building
materials for housing etc. Natural calamities like
floods, droughts, earthquake etc. are devastating for
business activities.

70. Environmental
Factors
Geographical Location
Climate and
Weather Waste
Disposal Laws
Energy Consumption
Rgulation

71. • Due to the efforts of environmentalists and international
organisations such as the World Bank the people have
now become conscious of the adverse effects of
depletion of exhaustible natural resources and
pollution of environment by business activity.
• Accordingly, laws have been passed for conservation of
natural resources and prevention of environment
pollution. These laws have imposed additional
responsibilities and costs for business firms. But it is
socially desirable that these costs are borne by
business firms if we want sustainable economic
growth and also healthy environment for human
beings.

72. Environmental
Analysis
• Evaluation of the possible or probable
effects of external forces and conditions
on an organisation’s survival and growth
strategies is called environmental
analysis.

73. Environmentaland Industry
Analysis
• The overall economic, regulatory, social
and political conditions that affect all
participants in an industrial market in a
similar way and cannot readily be
influenced by marketing. The industry
environment experienced by a business
can include such things as demographics,
lifestyle shifts and economic cycles.

75. Environmental
scanning
It is a process that systematically surveys
and interprets relevant data to identify
external opportunities and threats. An
organization gathers information about the
external world, its competitors and itself.
The next step is to conduct an internal
scan of the organization.

76. • Environmental scanning is the process
of gathering information about events and
their relationships within an organization's
internal and external environments.
• The basic purpose of environmental
scanning is to help management
determine the future direction of the
organization.

77. Purpose of Environment
Scan

79. Types of Environmental
Scans
• AdHoC
• Periodic
• Continuous

84. Sources of
Information

85. Sources of
INFORMATION

86. Failures- Environmental
Scanning

87. Porter’sFiveForceModel
• The Five Forces model of Porter is an outside-in
business unit strategy tool that is used to make an
analysis of the attractiveness/value of an industry
structure.
• It captures the key elements of industry competition.

88. Buyers
Suppliers
Substitut
e
Potentia
l
entrant
s
Industry competitors
Rivalry
among
existing firms
PORTER’sFIVEFORCESM
O
D
E
L

89. Threat of
N
T
e
h
w
re
E
a
n
tto
ra
fn
N
ts
ew
Entrants
PORTER’sFIVEFORCESM
O
D
E
L

90. Threat of New
Entrants
Barriers
to
Entry
Economies of
Scale
Product
Differentiation
Capital Requirements
Customer Switching Costs
Access to Distribution
Channels Government
Policy
Expected Retaliation

91. Bargaini
ng
Power
of
Supplier
s
Threat of
N
T
e
h
w
re
E
a
n
tto
ra
fn
N
ts
ew
Entrants
PORTER’sFIVEFORCESM
O
D
E
L

92. BargainingPowerofSuppliers
Suppliers exert
power in the
industry by:
* Threatening to raise
prices or to reduce
quality
Powerful suppliers
can squeeze
industry
profitability if
firms are unable
to recover cost
increases
Suppliers are likely to be
powerful if:
Supplier industry is dominated by a few
firms
Suppliers’ products have few substitutes
Buyer is not an important customer to
supplier
Suppliers’ product is an important input
to buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high switching
costs

93. Bargaini
ng
Power of
Buyers
Threat of
N
T
e
h
w
re
E
a
n
tto
ra
fn
N
ts
ew
Entrants
Bargaini
ng
Power
of
Supplier
s
PORTER’sFIVEFORCESM
O
D
E
L

94. BargainingPowerofBuyers
Buyers compete with
the
supplying industry
by:
* Bargaining down
prices
* Forcing higher
quality
* Playing firms off
of
each
other
Buyer groups are likely to be
powerful if:
Buyers are
concentrated
Purchase accounts for a significant
fraction of supplier’s sales
Products are
undifferentiated
Buyers face few switching
costs
Buyer presents a credible threat of
backward integration
Buyer has full information

95. Threat
of
Substitu
te
Product
Threat of
N
T
e
h
w
re
E
a
n
tto
ra
fn
N
ts
ew
Entrants
Bargaining
Power of
Buyers
Bargaini
ng
Power
of
Supplier
s
PORTER’sFIVEFORCESM
O
D
E
L

96. ThreatofSubstituteProducts
Products with
similar
function limit
the prices
firms can
charge
Keys to evaluate substitute products:
Products with
price/performance
improving
tradeoffs
industry
relative to present
products
Example:
Electronic security systems in place
of security guards
Fax machines in place of overnight
mail delivery

97. Threat
of
Substitu
te
Product
Threat of
N
T
e
h
w
re
E
a
n
tto
ra
fn
N
ts
ew
Entrants
Rivalry Among
Competing
Firms in Industry
Bargaining
Power of
Buyers
Bargaini
ng
Power
of
Supplier
s
PORTER’sFIVEFORCESM
O
D
E
L

98. RivalryAmongExistingCompetitors
Intense rivalry often plays out in the following
ways:
Using price competition
Staging advertising battles
Increasing consumer warranties or
service Making new product
introductions
Occurs when a firm is pressured or sees an
opportunity
Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but may
be costly to smaller competitors

99. Coca-cola
• Traditional competition:
 Prices of Pepsi, local brands
 Market share
 Promotional actions of competition
• New entrants:
 New “look-a-like” manufacturers
• Substitute products:
 Fashionable new drinks, milk drinks, coffee,
beer, ...

100. Coca-cola
• Suppliers:
 Price and availability of ingredients on world market
 Quality ,speed, safety, traceability, flexibility of
supply chain
• Buyers/consumers:
 High as a result of intense competition both among
branded and unbranded products.
 Combined purchase power of shops, bars,
supermarkets

101. CompetitiveAdvantage
• The Competitive Advantage model of Porter learns that
competitive strategy is about taking offensive or defensive
action to create a defendable position in an industry, in order
to cope successfully with competitive forces.
• Companies can combat the pressure of the five forces and
create competitive advantages.
• There are 2 basics types of Competitive Advantage :
 Cost leadership (low cost)
 Differentiation

102. Strengthsoffiveforcesmodel:
 The model is strong tool for competitive
analysis at industry level.
 It provides useful input for performing a
SWOT analysis.

105. Significance of Business
Environment
• The significance of business environment is explained with the help of the following points:
• (i) Help to understand internal Environment:
• It is very much important for business enterprise to understand its internal environment,
such as business policy, organisation structure etc. In such case an effective
management information system will help to predict the business environmental
changes.
• (ii) Help to Understand Economic System:
• The different kinds of economic systems influence the business in different ways. It is
essential for a businessman and business firm to know about the role of capitalists,
socialist and mixed economy.
• (iii) Help to Understand Economic Policy:
• Economic policy has its own importance in business environment and it has an important
place in business. The business environment helps to understand government policies
such as, export- import policy, price policy; monetary policy, foreign exchange policy,
industrial policy etc. have much effect on business.
• (iv) Help to Understand Market Conditions:
• It is necessary for an enterprise to have the knowledge of market structure and changes
taking place in it. The knowledge about increase and decrease in demand, supply,
monopolistic practices, government participation in business etc., is necessary for an
enterprise.