CHP 1 BUSINESS ENVIRONMENT
SCOPE
The term business environment refers to the sum total of all individuals, institutions and other forces that lie outside a business
enterprise but that may affect its functioning and performance.
DEFINITION
Business environment is the aggregate of all conditions, events and influences that surround and affect the business
organisation.
FEATURES OF BUSINESS ENVIRONMENT
Totality of External Factors
General and Specific Forces
Interrelated
Complexity
Diversity
Uncertainty
Dynamic
Environmental Scanning is the process by which business enterprises monitor their relevant environment to identify
opportunities and threats affecting their business. With the help of environmental scanning, an enterprise can consider the
impact of different events, trends, issues and expectations on its business operations.
IMPORTANCE OF BUSINESS ENVIRONMENT
First Mover Advantage- Awareness of business environment helps an enterprise to take advantage of early opportunities
instead of losing them to competitors. For example, Maruti Udyog became the leader in small car market because it was the first
to recognise the need for small cars on account of rising petroleum prices and a large middle class in India.
Early Warning Signal- Environmental awareness serves as an early warning signal. It makes a firm aware of the impending
threats or crisis so that the firm can take timely actions to minimise the adverse effects, if any. For example, when new firms
entered the mid-segment cars (threat), Maruti Udyog increased production of it Esteem threefold. An increase in production
enabled the company to make faster delivery. As a result, the company captured a substantial share of the market and became a
leader in this segment.
Customer Focus- Environmental understanding makes the management sensitive to the needs and expectations of customers.
For example, Hindustan Lever and other FMCG companies introduced small sachets of shampoos and other products realising
the wishes of customers. This helped the firms to increase sales.
Strategy Formulation- Environmental monitoring helps provide relevant information about the business environment. Such
information serves as the basis for planning and policy making. For example, ITC realised that there is a vast scope of growth in
the travel and tourism sector in India and the government is keen on promoting this industry because of its employment
potential. With the help of this knowledge, ITC planned new hotels both in India and abroad.
Coping with Change- Business leaders are expected to cope with changes in the environment. In order to decide the directions
and nature of the changes the leaders need to understand the aspirations of the people and other environmental changes
through environmental scanning. For example, contemporary environment requires prompt decision making and power to
people. Therefore, business leaders are delegating authority to empower staff and eliminate procedural delays.
Public Image- A business firm can improve its image by showing that it is sensitive to its environment and responsive to the
public. Leading firms like Reliance Industries, ICICI Bank and others have built a good image by being sensitive and responsive to
environmental forces. Environmental understanding enables firms to be responsive to their environment.
MICRO ENVIRONMENT
Micro environment refers to those internal and external factors which exercise a direct influence on the working and
performance of an individual business enterprise. It is also known as DIRECT SECTION ENVIRONMENT or TASK ENVIRONMENT.
INTERNAL FACTORS
Internal environment refers to all the factors existing within the business enterprise. The internal factors are controllable since
the enterprise has control over these factors. For example, an enterprise can modify or alter its organisation structure, policies
and programmes, physical facilities and marketing mix to suit the changes in the environment. However, an enterprise may not
, have complete control over all the internal factors. Internal factors impart strengths or cause weaknesses. Strength is an
inherent capability of an enterprise which can be used to gain strategic advantage over competitors. Weakness is an inherent
limitation or constraint of an enterprise which creates a strategic disadvantage.
MAIN INTERNAL FACTORS:
Corporate Culture- The values, attitudes and beliefs of founders and the top management of the company exercise a
strong influence on what the company stands for, how it does things and what it considers important. When the value
system is shared by all the members, the organisation is likely to be more successful. The value system of Narayan
Murthy and its acceptance by those at the helm of its affairs are responsible for the high ethical standard of Infosys
Technology. Ex- Wipro Technology and TISCO
Mission and Objectives- The business philosophy and purpose of a company guide its priorities, business strategies,
product market scope, and development process. The mission of Dhirubhai Ambani to make Reliance, the biggest group
in private sector, prompted him to launch world scale plants in petrochemical and other industries. Similarly, the
mission and objectives of other companies guide its thrust area and portfolio strategy.
Top Management Structure- The composition of the board of directors, degree of professionalisation and
organisational structure of the company have important bearing on its business decisions. The board of directors set
the directions and monitors the performance of the company. Companies having sound management structures and
styles facilitate timely decision making. The shareholding pattern of a company also influences its functioning. Some
companies are closely held like WIPRO whose majority shares are held by promoters, while there are some widely held
companies like TATA Steel whose promoters hold minority shares.
Power Structure- The internal power relationship between the board of directors and the chief executive is an
important factor. The extent to which the board of directors enjoy the support of shareholders and employees also has
an important bearing on decision making and working of the company.
Company Image and Brand Equity- The image and brand equity of a company also play an important role in raising
finances, choosing dealers and suppliers, launching new products, entering foreign markets, forming alliances, etc.
Human and Other Resources- The competence, morale and motivation of employees also play a vital role in the success
of the firm. Tata Steel can easily carry out large scale modernisation and restructuring. Some companies face difficulties
in such tasks due to strong resistance from employees and their unions.
External Factors
Customers
Competitors
Suppliers
Marketing Intermediaries
Financiers
Public
MACRO ENVIRONMENT
Meaning
Macro environment refers to the general or remote environment within which a business operates.
It includes external forces that:
do not directly interact with the firm
but indirectly influence its functioning and performance
Also called: Indirect Action Environment
Components of Macro Environment
Economic Environment
Meaning
It includes all factors related to the production and distribution of wealth.
Components
Economic system (capitalist, socialist, mixed)
Economic policies
Level of economic development
Per capita income
Interest rates
SCOPE
The term business environment refers to the sum total of all individuals, institutions and other forces that lie outside a business
enterprise but that may affect its functioning and performance.
DEFINITION
Business environment is the aggregate of all conditions, events and influences that surround and affect the business
organisation.
FEATURES OF BUSINESS ENVIRONMENT
Totality of External Factors
General and Specific Forces
Interrelated
Complexity
Diversity
Uncertainty
Dynamic
Environmental Scanning is the process by which business enterprises monitor their relevant environment to identify
opportunities and threats affecting their business. With the help of environmental scanning, an enterprise can consider the
impact of different events, trends, issues and expectations on its business operations.
IMPORTANCE OF BUSINESS ENVIRONMENT
First Mover Advantage- Awareness of business environment helps an enterprise to take advantage of early opportunities
instead of losing them to competitors. For example, Maruti Udyog became the leader in small car market because it was the first
to recognise the need for small cars on account of rising petroleum prices and a large middle class in India.
Early Warning Signal- Environmental awareness serves as an early warning signal. It makes a firm aware of the impending
threats or crisis so that the firm can take timely actions to minimise the adverse effects, if any. For example, when new firms
entered the mid-segment cars (threat), Maruti Udyog increased production of it Esteem threefold. An increase in production
enabled the company to make faster delivery. As a result, the company captured a substantial share of the market and became a
leader in this segment.
Customer Focus- Environmental understanding makes the management sensitive to the needs and expectations of customers.
For example, Hindustan Lever and other FMCG companies introduced small sachets of shampoos and other products realising
the wishes of customers. This helped the firms to increase sales.
Strategy Formulation- Environmental monitoring helps provide relevant information about the business environment. Such
information serves as the basis for planning and policy making. For example, ITC realised that there is a vast scope of growth in
the travel and tourism sector in India and the government is keen on promoting this industry because of its employment
potential. With the help of this knowledge, ITC planned new hotels both in India and abroad.
Coping with Change- Business leaders are expected to cope with changes in the environment. In order to decide the directions
and nature of the changes the leaders need to understand the aspirations of the people and other environmental changes
through environmental scanning. For example, contemporary environment requires prompt decision making and power to
people. Therefore, business leaders are delegating authority to empower staff and eliminate procedural delays.
Public Image- A business firm can improve its image by showing that it is sensitive to its environment and responsive to the
public. Leading firms like Reliance Industries, ICICI Bank and others have built a good image by being sensitive and responsive to
environmental forces. Environmental understanding enables firms to be responsive to their environment.
MICRO ENVIRONMENT
Micro environment refers to those internal and external factors which exercise a direct influence on the working and
performance of an individual business enterprise. It is also known as DIRECT SECTION ENVIRONMENT or TASK ENVIRONMENT.
INTERNAL FACTORS
Internal environment refers to all the factors existing within the business enterprise. The internal factors are controllable since
the enterprise has control over these factors. For example, an enterprise can modify or alter its organisation structure, policies
and programmes, physical facilities and marketing mix to suit the changes in the environment. However, an enterprise may not
, have complete control over all the internal factors. Internal factors impart strengths or cause weaknesses. Strength is an
inherent capability of an enterprise which can be used to gain strategic advantage over competitors. Weakness is an inherent
limitation or constraint of an enterprise which creates a strategic disadvantage.
MAIN INTERNAL FACTORS:
Corporate Culture- The values, attitudes and beliefs of founders and the top management of the company exercise a
strong influence on what the company stands for, how it does things and what it considers important. When the value
system is shared by all the members, the organisation is likely to be more successful. The value system of Narayan
Murthy and its acceptance by those at the helm of its affairs are responsible for the high ethical standard of Infosys
Technology. Ex- Wipro Technology and TISCO
Mission and Objectives- The business philosophy and purpose of a company guide its priorities, business strategies,
product market scope, and development process. The mission of Dhirubhai Ambani to make Reliance, the biggest group
in private sector, prompted him to launch world scale plants in petrochemical and other industries. Similarly, the
mission and objectives of other companies guide its thrust area and portfolio strategy.
Top Management Structure- The composition of the board of directors, degree of professionalisation and
organisational structure of the company have important bearing on its business decisions. The board of directors set
the directions and monitors the performance of the company. Companies having sound management structures and
styles facilitate timely decision making. The shareholding pattern of a company also influences its functioning. Some
companies are closely held like WIPRO whose majority shares are held by promoters, while there are some widely held
companies like TATA Steel whose promoters hold minority shares.
Power Structure- The internal power relationship between the board of directors and the chief executive is an
important factor. The extent to which the board of directors enjoy the support of shareholders and employees also has
an important bearing on decision making and working of the company.
Company Image and Brand Equity- The image and brand equity of a company also play an important role in raising
finances, choosing dealers and suppliers, launching new products, entering foreign markets, forming alliances, etc.
Human and Other Resources- The competence, morale and motivation of employees also play a vital role in the success
of the firm. Tata Steel can easily carry out large scale modernisation and restructuring. Some companies face difficulties
in such tasks due to strong resistance from employees and their unions.
External Factors
Customers
Competitors
Suppliers
Marketing Intermediaries
Financiers
Public
MACRO ENVIRONMENT
Meaning
Macro environment refers to the general or remote environment within which a business operates.
It includes external forces that:
do not directly interact with the firm
but indirectly influence its functioning and performance
Also called: Indirect Action Environment
Components of Macro Environment
Economic Environment
Meaning
It includes all factors related to the production and distribution of wealth.
Components
Economic system (capitalist, socialist, mixed)
Economic policies
Level of economic development
Per capita income
Interest rates
