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CHAPTER 1

INTRODUCTION TO BUSINESS ENVIRONMENT

Chapter Outline :

• Introduction
• Meaning of Business
• Business Objectives
• What is Business Environment ?
• Nature of Business Environment
• Components of Business Environment
• Determinant of Business Environment
• Review Questions
• References

Introduction :

Business environment is becoming highly complex, unstable and unpredictable in the

globalised economy of today. The environment is the result of changing social and
economic and political forces which creates challenges, opens up new opportunities and
affects the strength and weaknesses of various business segment. Business contributes to
economic growth, creates employment opportunities and provide all kinds of goods and
services which we need for our consumption. Business operates in a risky atmosphere
because of the profit motivation. It is an important institution in society. Be it for the
supply of goods and services; creation of job opportunities; offer of better quality of life;
or contributing to the economic growth of the country; the role of business is crucial. The
economic policies, political conditions, natural & human unsources and influence the
business activity. In this chapter we will explain how environment influences business
and for that chapter focus on the following points:

o Meaning of Business
o Business objectives
o Meaning of Business Environment
o Nature of Business Environment
o Components of Business Environment
o Determinants of Business Environment

Meaning of Business
In general business refer to all activities that are being organized and carried on with an
important purpose, viz; earn profit by supplying goods and services to consumers to
satisfy their felt needs. For our purpose this concept of business is too general and thus
cannot be of great help in analyzing the role of environment in present day business
activity. We shall, therefore, define business in modern concept. Modern business covers
a complex field of industry and commerce which involve activities related to both
production and distribution. These activities on the one hand satisfy society’s needs and
desires and on the other hand brings profit to business firms. Business include activities
connected with production, trade, transport, finance, banking, insurance, advertising, and
certain other activities related to industry and commerce. For example a ball pen
necessitates a long chain of activities involved in bringing raw materials to the factory
and the end product from there to the market constitute a business.

Thus, we can say that *business firm or unit is an economic unit which is engaged in the
production or distribution or both the production and distribution of goods and services
for the purpose of earning profits.

* A business firm is an economic unit which is engaged in the production or

distribution or both the production and distribution or both the production and
distribution of goods and services for the purpose of earning profits

BUSINESS OBJECTIVES OR GOALS

Every business small or big in size have some objectives which it tires to fulfill while in
operation. The business unit seeks to achieve more than one objective which may vary
with the passage of time.
1. Maximum Profit : Making profit is the primary goal of any business enterprise.
All the efforts of a firm are directed towards the achievement of this object. A
firm can earn maximum profits at the point where Marginal Cost (MC) and
Marginal Revenue (MR) are equal. Marginal cost means the cost incurred on the
production of an additional unit of a commodity. Marginal Revenue is the
revenue received from the sale of such additional unit.

2. Maximise total sales revenue : Second most important object of a firm is to

obtain maximum sales revenue. The attainment of this object does not mean to
have the maximum sale in terms of physical quantity but it means to obtain the
maximum amount of revenue at the point when its marginal revenue is zero. No
firm will take to increase its sales beyond this point, because beyond this point,
the firm will be suffering a loss.

3. Minimum Cost : Another important object of a business firm is to minimize the

cost of production of producing goods and services to that these goods and
services may be provided to the consumers at minimum possible price. To attain
this object, the business firm makes continuous use of various techniques of cost
central.
4. Establish long-run survival: Long-run survival is a prime object of all the
business firms. For this purpose, every firm makes best efforts to provide best
quality of goods and services to its consumers at reasonable prices. Some
business firms change their marketing strategies and marketing approach from
time to time so that they may maintain the demand of their products in the market.

5. Achieve Financial Soundness: No business firm can continue for long time if it
is not financially sound. Banks and financial institutions stress upon financial
soundness of the firms to grant them any sort of financial assistance. Therefore,
every business firm takes due care and precaution in the use of funds of the firm.

6. Achieve Economics self-sufficiency: A business firm cannot be successful in

achieving its objects if it depends only upon external sources for the programme
of expansion and diversification. A firm should be self-dependent in economic
affairs. If complete self-dependence is not possible, dependence on external
financial sources should be minimum, for this purpose, all the business firms try
to re-invest major part of their profits in their business.

7. Maximum welfare and employees satisfaction – Some business firms aims at

providing maximum facilities to their employees so that they may get maximum
job satisfaction and thief efficiency and ability may be increased. Such firms
spend huge amount on the welfare of their employees. The facilities of proper
working conditions, canteen, education, training, incentive wage system, bonus
etc., are provided to the employees. This is an important object and very helpful
in the achievement of pre-determined objectives of the firm because if the
employees of a firm are satisfied they will contribute their best efforts to achieve
the objectives of the firm.

8. Dominate the whole market: Some business firms have an object of dominating
the whole market. Such firms provide goods and services to consumers at the
lowest possible price. They provide best after-sale-services to the consumers.
Such firms also aim at selling product to the maximum number of customers so
that they can capture the market and establish their business empire.

9. Service to society: Business is a part of society and has several obligations

towards it. Some of them are :
 o Providing employment
o Offer of better quality of life
o Contributing to the economic growth of the country

This is the economic growth of the country beyond earning profit. It is an important
institution in society. Te role of business is crucial.

WHAT IS BUSINESS ENVIRONMENT ?

Business Environment is a relationship between a business’s actions and its environment.

Environment is the surroundings of a business by which business influenced directly or
indirectly. Where the political, economic, social and technological factors shopping a
business environment are assessed by a business so as to devise future strategy.

Political/legal factors – Business will be directly affected by the actions of government

and other political events. These might be major events affecting the whole of the
business community, such as a change of government. Similarly businesses will be
affected by the legal framework in which they operate. Example include the laws
preventing collusion between firms to keep prices up.

Economic factors – Economic factors which have an economic impact on business.

Industrial production, agriculture, planning, basic economic philosophy, infrastructure,
national income, per capital income, money supply, price level, population, savings,
stages in the economic development and trade cycles are major factors which make up
the total economic environment. There is close relationship between business and its
economic environment.

Social/cultural factors – This aspect of the business environment concerns social

attitudes and values. These includes attitudes towards working conditions and the length
of the working day, equal opportunities for different groups of people, the nature and
purity of products, the use and abuse of animals, role of family. The social/cultural
environment is highly relevant for a business unit as the variety of goods it produces, the
type of employees it gets and its obligation to society depend on the cultural atmosphere
in which the firm operates.

Technological factors – The pace of technological change had quickened. This has had a
huge impact not only on how firms produce products. The information technology
revaluation is also enabling much more rapid communication and making it possible for
many workers to do their job from home or while traveling.

The division of the factors affecting a firm into political, economic, social and
technological analysis and is widely used by business enterprise to audit their
environment and to help them establish a strategic approach to their business activities.

We must also be aware of the fact that the business environment is constantly changing.
To be successful, a business will need to adapt to these changes and, wherever possible,
take advantage of them. Ultimately, the better business manages understand the
environment in which they operate.

NATURE OF BUSINESS ENVIRONMENT

Everyday a number of decisions re made by us as individual or entrepreneurs. But all

decisions relate to Business nature.

Risk and uncertainty – Business firm works under risk and uncertainty, risk depends
upon possibility and uncertainty is unmeasurable risk. Every business have profit risk,
investment risk and product risk. And every business works under demand uncertainty,
production uncertainty, profit uncertainty, price and cost uncertainty and also
environmental uncertainty.

Profit Maximisation – Profit is the main incentive, motivator, strong sustainer, objective
indicator. The main aim of business is profit maximization and cost minimization, price
is a growth of business.

Competition – Today business nature is a became more competitive. Competition in

price, good quality, satisfaction on consumer, first server in the market etc. competition
in business protect to consumer. It provides best quality product at reasonable rate.
Technology oriented – The rapid technological change has become a pre-condition for
the survival f a company. Presently, technology orientation is quite strong in electronics,
telecommunications, pharmaceutical, fine chemical and processing industries. In fact,
companies wanting to build their future now here no choice but to engage in research and
development (R & D) function.

Change – The business has invented the strategy of making changes in product quality,
design or packaging. This strategy of offering differentiated products has been found
quite effective to maintain its identity in the market. So according to time, changes must
be there. For example colour televisions have replaced black and white televisions.

COMPONENTS OF BUSINESS ENVIRONMENT

I. Internal Environment

Business is normally under-taken for profit maximization. The internal factors are
generally regarded as controllable factors because the company has control over these
because the company has central over these factors; it can alter or modify such factors as
its personnel, physical facilities, organization and functional means, such as marketing
mix to suit the environment. The spirit of the internal environment of a firm is derived
from its mission that states as to why and for whom does it exist. This provides the basic
purpose of a firm’s existence and operations. Top management of the firm executes the
mission through a strategy which is based mission through a strategy which is based on
thorough planning in terms of clearly identified objectives to be achieved over a period of
time. The entire process takes place within the framework of a value system and
corporate culture and the persons occupying different line and staff positions here to fit
themselves into the value and culture framework. These factors establish the broad
internal environment within which different departments of the firm operate in an
interrelated manner.

Determinants of internal environment

• Mission and vision of the organization

• Management philosophy and strategy
• Industrial relations
• Corporate culture and values
• Line and staff relations
• Governance standards and codes
• Quality central system
• Team spirit among employees
• Work culture and socio-economic background of employees
• Job design and coordination
• Quality of internal communication
• Compensation system and career progression of employees
• Central system of the organization

II. External Environment

External environment of business consist of institutions, organizations and forces

operating outside the Company. All these individually as well as collectively exercise
their influence on the latter. Broadly external environment of business may be classified
into (A) Micro Environment and (B) Macro Environment.

The micro environment refers to such players whose decisions and action have a direct
bearing on the Company. Since modern business broadly has two aspects, viz.,
production and selling of goods, the micro environment of business can be divided
accordingly.

The most prominent performs in the micro environment are the following:

o Suppliers of inputs
o Workers and their unions
o Customers
o Market intermediaries
o Competitors
o Public
Input suppliers and workers together with their unions exercise influence on production-
customers, market intermediaries and competitors affect sales operations of the business
firm. The public may influence both production and sales.

A. Micro Environment

From the point of view of a Company’s business operations micro

environment has great relevance. Usually the players in micro environment do
not affect all the companies in an industry in the same way. Their decisions and
actions vis-à-vis individual company often differ in accordance with the size,
capability and strategies of each Company. For example suppliers of inputs are
normally more accommodating if the Company is large. However, they may not
give the same concessions to relatively small companies.
 B. Macro Environment

Macro Environment of a company refers to all those economic and non economic
factors which exercise their influence on the business activity in general and thus
determine opportunities that a company may have to promote its business.

The role of macro environment from the point view of the business may be both
positive and negative. This implies that the larger forces in the company’s environment to
not always provide wider space for business operations.

Macro environment of business can be broadly classified into economic environment and
non –economic environment. Since business is broadly divided on economic activity,
economic environment of business- both national and global of strategic importance. In
economic environment of the country, country’s economic system, macro-economic
scenario, phase of business cycle through which the economy is passing, organization of
the financial system and economic polices of the government are the most important
elements.

Economic system of the country determines the parameters of the business activity.
Macro-economic scenario refers to price situation, levels of saving and investment, fiscal,
monetary and balance of payments situations and overall growth activity. These factors
broadly determine the prospects of business activity. In a recessionary situation business
firms encounter steep fall in effective demand which inevitably leads to business slow
down. Developed financial system is now a precondition for efficient mobilization of
financial resources for business. Economic policies of the govt., particularly the
Industrial, trade, fiscal and monetary policies shape the opportunities for business.
However, at times, these policies are used by the governments to regulate the operations
of business firms.

Now because of liberalization from the point of view of the Company’s business, global
economic environment is as much important as the national economic environment. The
notable features of present day global environment are globalization, underdevelopment
of Russia and East Europe, recession in Japanese economy, slow recovery in the USA,
Regional Economic Groupings, protectionism, global slowdown and dominance of the
multinational corporations.

Business, despite the fact that it is an economic activity, is also influenced by its non-
economic environment political system, ideology of the government, legal framework,
social system, cultural values, demographic factors, level of technological development
and natural and physical environment of the country constitute non-economic
environment of business. In fact, all these non-economic elements are of great relevance
to present day business. These factors not only determine opportunities for business but
also, at times, have serious constraining effects.

Macro Environment of Business

DETERMINANTS OF BUSINESS ENVIRONMENT

I. Economic policies : II. Political Conditions : III. Resources

1. Industrial Policy 1) Political Stability 1) Natural resources

2. Trade Policy 2) Corruption rule of law 2) Human resources
3. Monetary Policy and governance including
4. Fiscal Policy business law and regulations
I. ECONOMIC POLICIES :-

Industrial Policy : Among various economic activities, industrial activity is more directly
related to business. In fact, the present day corporate business has grown as an extension
of industrial activity. Therefore, for analyzing economic environment of business,
industrial policy of the government has to be created examined.

The new Industrial Policy of 1991 has de-regulated the industrial economy in a
substantial manner. It has abolished all industrial licensing except for certain industries
related to strategic and social concerns. The number of industries reserved for the public
sector has been reduced to 3 which implies that the public sector’s role in future would be
very much diminished. On the recommendations of the Raghavan Committee the
government has decided to replace the MRTP Act by a new competition law. The new
industrial policy has also liberalized import of foreign capital and technology. In the case
of high investment priority industries, approval of foreign investment is automatic.
Guidelines have also been announced for the expeditious approval of foreign direct
investment in other industries.

Trade Policy : Trade policy is an important factor in the economic environment of

business. The basic objectives of trade policy are to promote exports, regulate imports,
improve terms of trade, enhance export competitiveness and create conditions of export-
led growth. Export promotion is generally attempted through international market
research support, credit facilities, infrastructure facilities, fiscal concessions and
incentives to exporters, information services, international trade fairs and exhibitions,
import entitlements, foreign exchange facilities, transportation priorities and procedural
simplification. Import regulation is monitored through a structure of tariff rates, quotas,
anti-dumping and counter vailing duties and product quality and safety norms. The
policy is substantially conditioned by WTO agreements and commitments and unilateral
and multilateral trade relations.

Monetary Policy : By monetary policy we mean the regulation of the money supply and
the control of the cost and availability of credit by the central bank of the country through
the use of deliberate and discretionary action for achieving the objectives of general
economic policy.

The main objectives of monetary policy are:

1. Maximum feasible output

2. High rate of economic growth
3. Fuller employment
4. Price stability
5. Greater equality in the distribution of income and wealth
 6. Healthy balance of payments

Instruments of monetary policy are the following:

1) Open market operations; 2) Bank rate policy; 3) Reserve requirement charges; and 4)
Selective credit controls

Fiscal Policy : This policy refers to the process of shaping taxation and public
expenditure in order to dampen the swings of the business cycle and the contribute to
rapid economic growth with high employment and stable prices. This policy when
mismanaged leads to fiscal imbalances which at times become unsustainable. At present
India’s fiscal situation is most unsatisfactory.

II Political Conditions

Firms will be directly affected by the actions of government and other political events.
The kind of political environment is conducive to business activity. Besides, the factor of
political stability is important. In Countries like Afganistan and Iraq, business activity
has suffered a lot due to political stability. Political system in India is far more stable
than in these countries. In India, due to criminalization of politics in certain states, the
business activity relatively unsafe in them.

Production in a market economy take place in a wide variety of business organizations.

However, the bulk of economic activity in the industrial sector takes place in corporations
which are set up under the provisions of the Company Law. The Contract Act provides
the rule for systematic exchange transactions. The country had legislations like the
Monopolies and Restrictive Trade Practices Act (MRTP Act) and the Foreign Exchange
Regulation Act (FERA). Both were restrictive in nature. The industries Act passed in
1951 aimed at both the development and regulation of industries in private sector. The
SEBI Act now empowers SEBI to regulate the securities market. It is thus clear that even
in a market economy like ours the modern corporate business is not entirely free. Its
activities are governed by various legislations which may be either facilitatory or
restrictive in their nature.

III. Resources

The framework of business environment of a country is set by the economic system,

resource base and structural problems faced by it. The economic system is generally
ordained by the constitution of the country or the deliberate choice of the successive
governments. The geographical and natural resources are the gifts of nature.
Natural resources covering available land, forests, minerals, fuels, rivers and water bodies
and environment quality are a major determinant of a country’s potential output. These
are the gifts or endowments of nature. The availability of natural resources by itself does
not guarantee growth; it is their utilization by other factors of production like labour and
capital that leads to growth. Availability and use of natural resources has had a great
impact on the growth of such countries as Canada, USA, Norway and Australia.
Countries like Japan, which have deficient or little natural resources, have to spend
heavily on the import of necessary raw materials or make foreign investment for their
economic growth.

Human resources refer collectively to the quantum and quality of the workforce and are
among the key determinants of economic growth. The number of people in the work
force directly depends on the population size and structure as well on the flows of
migration and immigration. The quality of human resources depends upon education,
training, skills, attitudes towards work, desire for self-improvement and even cultural
outlook and is reflected in its efficiency and productivity. Productivity of human
resources further depends upon the organizational culture and system, managerial
effectiveness, motivation and the overall work environment.

REVIEW QUESTIONS

1. What are business objectives?

2. “Profit making is the primary goal of any business enterprise”. Yes or No –
Discuss
3. What is business environment?
4. Discuss the nature and dynamism of business environment
5. Explain Micro and Macro Environment. And discuss what are the factors
included in both Environment
6. What are the economic policies which determine the business environment?

References

1. Arthur A. Thompson and A. J. Strickland, Strategic Management, Tata McGraw-

Hill, 2003, P-34
2. The Economic Times, Nov 5, 2004
3. Samuelson, P. A. and William D. Nordhaus (1998), Economics, New Delhi: Tata
McGraw-Hill
4. Carrol, Archine B. (1996), Business and society, Cincinnati, OH : South-Western
College Publishing.
5. Francis Cherunilam, Global Economy and Business Environment, Himalaya
Publishing House.
6. Government of India (2004), Economic Survey, 2003-2004 (New Delhi, Govt. of
India)