You are on page 1of 12


Chapter 1: Business Environment

Each business organization operates in its unique environment.

Environment influence businesses & also gets influenced by it.

Q. 1) Business
It refers to the state of being busy for an individual, group, organization or
society. It also interpreted as one’s regular occupation or profession. It also
refers to a particular entity, company or corporation.
It is said that a business exists for profits. Profit, as a surplus of business,
accrues to the owners. It is a reward for risk taking. As a motive, profit serves as
a stimulant for business effort.
Other things being equal, the higher the efficiency the greater is the level
& volume of profit. Business efficiency is often expressed in terms of percentage
of profit to sales volume, to capital employed, to market value of corporate
shares & so on.
Two conclusions drawn by Peter F. Drucker on what is a
business :
1. Business is created & managed by people. There will be a group of
people who will take decisions that will determine whether an organization is
going to prosper or decline, whether it will survive or will eventually perish.
This is true of every business.
2. Business cannot be explained in terms of profit. Profit maximization, in
simple terms is selling at a higher price than the cost. It includes
development of wealth, to include several non-financial factors such as
goodwill, societal factors, relations & so on.

Q. 2) Objectives of a Business
Business has some purpose. A valid purpose of business is to create customers
or market. It is the customer who determines what a business is. The customer
is the foundation of business & keeps it in existence.
(Key: Gross Profit Ensures Stability & Survival)
1. Survival : It is the will & anxiety to perpetuate into the feature as long
as possible. It is basic, implicit objective of most organizations.
2. Stability : It is one of the most important objectives of business
enterprises. It is a cautious, conservative objective. It is a least expensive
& risky objective in terms of managerial time.
3. Growth : It is a promising & popular objective which is equated with
dynamism, vigour, promise & success. Enterprise growth may take one or
more forms like,
• Increase in assets
• Manufacturing facilities
• Increase in sales volume

• Improvement in profits & market share

• Increase in manpower employment
• Acquisition of other enterprises & so on.
4. Efficiency : It is doing things in the best possible manner & utilizing
resourses in a most suitable combination. It is very useful operational
5. Profitability : Generally, private enterprises are motivated by the
objective of profit. All other objectives are facilitative & are meant to be
subservient to profit motive.

Q. 3) Environmental influences on Business

1. All living creatures including human beings live within an
2. Apart from natural environment, environment of humans include family,
friends, peers & neighbours & also building, furniture, roads & other
physical infrastructure.
3. Business does not function in an isolated vacuum.
4. To be successful, business has to not only recognize different elements of
environment but also respect, adapt & manage them.
5. Business must continuously monitor & adapt to the environment for
6. Environment is sum of several external & internal forces/factors that affect
the functioning of business. Most Important sectors are socio-economic,
technological, supplier, competitors & government.
7. Business converts environmental resources through various processes into
outputs of products and/or services. These are then exchanged with
external client group.
8. Different organizations use different inputs, adopt different processes &
produce different ouputs. E.g., an educational institution produces literate
people. A hospital provides health & medical services.

Q. 4) Problems in
understanding the environment influences
1. The environment has many different influences; the difficulty is in
making sense of this diversity in a way which can contribute to strategic

2. The second difficulty is that of uncertainty. Managers typically claim that

the pace of technological change & the speed of global communication
mean more & faster change now than ever before. It is very difficult to
understand future external influences on an organization.
3. The third difficulty is to cope with complexity. One of the tasks of the
strategic manger is to find ways & means to break out of oversimplification
or bias in understanding of their environment.

Q. 5) Framework to understand the environmental influences

1. Firstly, it is useful to take an initial view of the nature of
organizations environment in terms of how uncertain it is. This helps in
deciding what focus the rest of analysis is to take.
2. Next step might be the auditing of environmental influences. The aim is to
identify which of the many different environmental influences are likely to
affect the organization’s development or performance. It is done by
considering the way in which political, economic, social & technological
influences have a bearing on organizations.
3. Final step is to focus more towards an explicit consideration of the
immediate environment of the organization. It is also required to analyse
the organization’s competitive position.
Q. 6) Why Environmental Analysis ?
• Through environmental analysis strategists get time to anticipate
opportunities & to plan to take optional responses to these opportunities.
• It also helps to develop an early warning system to prevent threats or to
develop strategies which can turn a threat to the firm’s advantage.
• Environmental analysis has three basic goals:
I. The analysis should provide an understanding of current & potential
changes taking place in the environment. It is important that one
must be aware of the existing environment.
II. Environmental analysis should provide inputs for strategic decision
making. Mere collection of data is not enough. The information
collected must be useful for & used in strategic decision making.
III. Environmental analysis should facilitate & foster strategic thinking in
organizations. It should challenge current wisdom by bringing fresh
viewpoints into the organization.

Q. 7) Characteristics of Business Environment

(Key: Rahman Music C D)
1. Environment is Complex : Environment consists of a number of factors
events, conditions & influences arising from different sources. All in all,
environment is a complex that is somewhat easier to understand in parts
but difficult to grasp in totality.
2. Environment is Dynamic : Environment is constantly changing in
nature. There is dynamism in the environment causing it to change
continuously its shape as character.

3. Environment is Multi-faceted : The shape & character environment

assumes depends on the perception of the observer.
4. Environment has far Reaching impact : An organization’s growth &
profitability depends on the environment in which it exists.
Q. 8) Components of Business Environment
Internal (Micro Environment) : All the factors within an organization which
impact strengths or cause weaknesses of a strategic nature.
External (Macro Environment) : All the factors outside an organization
which provides opportunity or pose threats to the organization.
Four Environment Influences could be described as follows:
1. S : A strength is an inherent capacity which an organization can use to
gain strategic advantage over its competitors. E.g., superior R & D skills.
2. W : A weakness is an inherent limitation which creates a strategic
disadvantage. E.g., over dependence on a single product line.
3. O : An opportunity is a favourable condition in the organization’s
environment which helps to strengthen its position. E.g., growing demand.
4. T : A threat is an unfavourable condition in the organization’s
environment which creates a risk & causes damage to the organization.
E.g., new strong competitors.
A systematic approach to understanding the environment is the SWOT
analysis. Business firms undertake SWOT analysis to understand the external &
internal environment.
Q. 9) Relation between Organization & its Environment
It is discussed in terms of interactions between them in major areas as below :
1. Exchange of Information :
• The organization scans external environment variables, their behavior
& changes, generates information which it uses for planning, decision-
making & control. Information generation is one way to get over the
problems of uncertainty & complexity of external environment.
• Information is to be generated on economic activity & market
conditions, technological developments, social & demographic factors,
political-governmental policies, activities of other organization & so on.
Both CURRENT & PROJECTED information is important for the
• The organization also transmits information to several external
agencies as the other organizations & individuals may be interested in
organization & its functioning.
• Also, sometimes the organization may be legally bound to supply
information on its activities either to government, investors,
employees, trade unions, professional bodies & the like.
2. Exchange of Resources :
• The organization receives inputs like finance, materials, manpower,
equipments, etc. from the external environment & is able to sustain by
producing output or providing services.

• It competes & collaborates with other organization to ensure

consistent supply of input.
• The organization is dependent on the external environment for disposal
of its output of products & services by satisfying the needs of
customers, employees, shareholders, creditors, suppliers, local
community, general public & so on.
3. Exchange of Influence & Power :
• External environment is more powerful than the organization as it has
command over resources, information & other inputs.
• External environment also dominates its will over the organization.
E.g., government control over the organization.
• Other organizations, markets, customers, shareholders, etc. also
exercise considerable collective power & have an influence over the
organizations on its planning & decision-marking processes of the
• In turn, sometime the organization is in a position to wield considerable
power & influence over external environment.
• Organization can dictate terms to the external forces & mould them to
its will.
Hence, all organizations do not behave in the same way in relation to their
external environment.

Q. 10) Environment of Business

Q. 11) Environmental Scanning /
Environmental Monitoring
It is process of gathering
information regarding company’s
environment, analyzing it & forecasting
the impact of all predictable
environment changes. Successful
marketing depends largely on
synchronization of its marketing
programmes with its environmental
Q. 12) Elements of Micro
The following are elements of micro environment : (Key: I am MicroSoft C
E O)
1. Consumers / Customers :

• According to Peter F. Drucker, the aim of business is to create & retain

• They are people who pay money to acquire company’s products both in
form of goods or services.
• Organization cannot survive without customers & will cease to exist.
• Customers may or may not be a consumer.
• Consumer is the one who ultimately consumes or uses the product or
• The marketer has to know the changes in consumers tastes,
preferences & their buying habits & answer the following questions :
o Who are customers / consumers?
o What benefits they want?
o What are their buying patterns?
2. Competitors :
They are other business entities that compete for resources as well as
markets. Competition shapes business.
3. Organization :
It consists of group that are likely to influence an organization :
• Owners – individuals, shareholders, groups or organization who have
major stake.
• Board of Directors – elected by shareholders, found in companies
formed under the Companies Act, 1956.
• Employees – workforce in an organization.
4. Markets :
Markets are larger than customers. The following issues should be taken
care of :
• Cost structure of the market.
• The price sensitivity of the market.
• Technological structure of the market.
• Distribution system of the market.
• Is the market mature?

5. Suppliers :
• Providers of raw materials, equipments, services & so on.
• Large organizations rely on hundreds of suppliers to maintain in their
6. Intermediaries :
• Major determining force in the business.
• Consumers are not aware of the manufacturer of the products they
buy. E.g., Big Bazaar.

Q. 13) Elements of Macro Environment

The following are elements of macro environment :
(Key: Global Technology has Political Culture to Demograph Economy)

1. Demographic Environment :
It includes population race, age, income, educational attainment, asset
ownership, home ownership, employment status & location.
2. Economic Environment :
• It refers to the nature & direction of the economy in which a company
competes or may compete.
• Economic Environment determines the strength & size of the market.
• It includes conditions in resources market, which influence supply of
inputs to the enterprise, their costs, quality, availability & reliability of
Key economic factors are as follows :
o Interest rates.
o Tax rates.
o Government Budget Deficit.
o Consumption pattern price fluctuations.
o Import / export factors.
o Stock market trends.
o Money market rates.
o Inflation rates.
o Availability of credit.
o GNP trend.
3. Political / Legal Environment :
• Government : Business is highly controlled by government policies.
Hence, a type of government running a country is a powerful influence
on business. E.g., introduction of Fringe Benefit Tax (which is abolished
from 2009 by Pranab Mukerjee).
• Legal : Organization prefer to operate where there is a sound legal
• Political : Political pressure groups influence & limit organization &
force them to pay more attention towards consumer’s rights, minority
rights & women rights.
4. Socio-Cultural Environment :
It consists of factors related to human relationships & the impact of social
attitudes & cultures influence the organization.

5. Technological Environment :
The important factor, which is controlling & changing people’s life, is
technology. It has created wonder. The following factors are to be
considered for technological environment :
• Opportunities arising out of technological development.
• Role of R & D in a country.
• Government’s R & D Budget.
• Risk & uncertainty of technological development.
6. Global Environment :

Organization must analysis global environment as it is rapidly changing.

The following factors are to be considered for global environment :
• Potential Positive & negative impact of international events such as a
sports meet or a terrorist attack.
• Identification of emerging global markets & changing global markets.
• Differences between cultural & institutional attributes of individual
global markets.

Q. 14) Nature of Globalization

1. Globalization means several things for several people.
2. For developing countries, it means integration with the world economy.
3. In simple economic terms, it is process of integration of the world into one
huge market.
4. At the company level, globalization means two things :
i. The company commits itself heavily with several manufacturing
locations & offers products in several diversified industries.
ii. Ability to compete in domestic market with foreign competitors.
5. A company which has gone global is called a multinational (MNC) or a
transnational (TNC).
6. An MNC, therefore, is the one that by operating in more than one country,
gains R & D, production, marketing & financial advantages in its cost &
also the reputation which is not available to domestic competitors.
7. An MNC views the world as one market.
8. A global company has three characteristics as follows :
i. It is a single unit of multiple units but all linked by common
ii. Multiple units draw a common pool (source) of resources, such as
money, credit, information, patents, trade names & control systems.
iii. All units respond to some common strategy. E.g., Nestle

Q. 15) Why do companies go global?

1. Rapid shrinking of time & distance across the globe due to faster
communication, speedier transport, growing financial flows & rapid
technological changes.
2. It is being realized that the domestic market are no longer adequate &
3. As foreign demand grows, economics of foreign products changes &
eventually the foreign market becomes large enough, to good return in
foreign market, to justify foreign investment.
4. Another reason may also vary by industry. E.g., Petroleum & mining
companies go global to get cheaper source of raw materials.
5. To reduce high transportation costs.
6. To generate higher sales & better cash flow.
7. Due to rapidly changing technologies.

8. Due to globalization of firms & industries.

Q. 16) Manifestation of globalization

Globalization manifests itself in many ways, as follows :
1. Configuring anywhere in the world : An MNC locates its different
operation in different countries on raw material availability, consumer
markets & low-cost labour.
2. Interlinked & independent economies : Globalization means
economically independent international environment.
3. Lowering of trade & tariff barriers : Trade tariff & custom barriers are
getting lowered, resulting in cheaper & abundant supply of goods.
4. Increasing trend towards privatization : Private entrepreneurs are
given greater access & freedom to run business units.
5. Infrastructural resources & inputs : Infrastructural inputs must be
ensured at competitive prices, if the companies want to compete globally.
6. Entrepreneur & his unit have a central economic role :
They are a central figure in economic growth & development of a nation.
Only firms which are cost effective & quality oriented survive & prosper.
7. Mobility of skilled resources : As skilled resources are now mobile they
are transferable from any other part of the world to any other part of the
globe due to which entire world has become a global village.
8. Market side efficiency : Integration of global markets means that costs,
quality processing time, & terms of business become dominant
competition drivers. The customers can choose products or services on
the basis of maximum value for money.
9. Formation of regional blocks : It strives for social progress & cultural
development in the region & accelerate economic growth. E.g., NAFTA -
North American Free Trade Area, SAARC – South Asian Association for
Regional Co-operation.

Q. 17) How to respond strategically to environment?

It is difficult to determine exactly what business should do in response to a
particular situation in the environment. Strategically, the businesses should
make efforts to exploit the opportunity through the threats. The following
approaches may be noted :
1. Least resistance : Some businesses just manage to survive by way of
coping with their changing external environments. They are simple goal-
maintaining units & least resistence in their goal-seeking.
2. Proceed with caution : Business here seek to monitor the changes in
environment & analyse its impact on their own goals & activities & use it
for survival, stability & strength.
3. Dynamic response : The feedback systems here are highly dynamic &
powerful. They convert threats into opportunities & are highly confident of
their own strengths & the weaknesses of their external environment.
Q. 18) Competitive Environment

1. The essence of strategy is to cope with competition.

2. All organizations have competition.
3. MNCs & large organizations clash directly on every level of product &
4. Mid-sized & small businesses also chase same customers & find that the
prices & product quality depend on the moves of competitors.
5. The nature & extent of competition that a business faces in the market is
one major factor affecting growth, income distribution & consumer
6. Businesses have to consider their competitors’ strategies, profit levels,
costs, products & services when preparing & implementing their business
7. While formulating strategies, organizations have to separately identify &
concentrate on the competitors who are significantly affecting the
8. Lesser attention may be given to small competitors who have a little
impact or no impact on the business.
9. There can be several competitors trying to satisfy same needs of
10. Competition is not necessarily restricted to same product or
11. An organization can understand the nature & extent of competition
by answering the following questions :
(Key: P C C F M Notes)
i. Who are the competitors?
ii. What are their product & services?
iii. What are their market shares?
iv. What are their financial positions?
v. What gives them cost & price advantage?
vi. What are they likely to do next?
vii. Who are the potential competitors?

Q. 19) Kieretsus
1. In Japan, large co-operative networks of businesses are known as
2. These are formed in order to enhance the abilities of individual member
businesses to compete in their respective industries.
3. A kieretsus is a loosely-coupled group of companies, usually in
related industries.
4. A kieretsus differs from an association, as the primary purpose of a
kieretsus is not to share information or agree industry standards, but to
share purchasing, distribution or any other functions.
5. In kieretsus members remain independent companies in their own right &
theonly strategy they have in common is to prefer to do business with
other kieretsu members, both when buying & selling.

Q. 20) Porter’s Five Forces Model – Competitive Analysis

This model holds that the state of competition in an industry comprises of
competitive pressures operating in five areas of the overall market.
1. Competitive pressures associated with the market changing for buyer that
goes on among rival sellers in the industry.
2. Competitive pressures associated with the threats of new entrants into
the market.
3. Competitive pressures coming from the other industry companies to win
buyers over to their own substitute products.
4. Competitive pressures from supplier bargaining power & supplier-seller
5. Competitive pressures from buyer bargaining power & seller-buyer
The above five points are explained in detail in five forces model of Competition.
One should use the five forces model in three steps :
Step 1 : Identify the specific competitive pressures associated with each of the
five forces.
Step 2 : Evaluate how strong the pressures comprising each of the five forces
are, that is, fierce, strong, moderate to normal, or weak.
Step 3 : Determine whether the collective strength of the five competitive
forces is conducive to earning attractive profits.
The Five Forces Model of Competition consists of the following :
1. Rivalry among current players :
• This is an idea that can be easily understood as competition.
• For any player, the competitors influence prices as well as the costs,
advertising, sales force, etc.
2. Threats from new entrants :
• New entrants are always a powerful source of competition.
• Bigger the new entrant, the more severe the competition.
3. Threats from substitutes :
• Substitute products are latent source of competition in an industry.
• Substitute products offering a price advantage and/or performance
improvement to the consumer can alter the competition of an industry.
• And they can bring it about all of a sudden.
4. Bargaining power of suppliers :
• Quite often supplier exercise considerable bargaining power over

• And if there are limited suppliers, there is a better chance to exhibit

their bargaining power.
5. Bargaining power of customers / buyers :
• This is another force that influences the competitive condition of the
• This force becomes heavier depending on the possibilities of the buyers
forming groups or cartels.
• This is mainly seen in industrial products.
Thus, the Five Forces together determine industry attractiveness/profitability.
The collective strength of these five competitive forces determines the scope to
earn attractive profits. The strength of the forces may vary from industry to