Lecture 8 - Business Environment An Introduction | Business Environment - Business Basics PDF Download

 Page 1


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paper: Business Environment 
Lesson: Business Environment: An Introduction 
Lesson Developer: Ms. Romila Aggarwal,  
                         Mr. Anurag Maurya 
College/Dept: Bharati College   
 
Reviewer: Prof. K.M. Upadhyay 
 
 
 
 
 
 
 
 
 
 
 
Page 2


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paper: Business Environment 
Lesson: Business Environment: An Introduction 
Lesson Developer: Ms. Romila Aggarwal,  
                         Mr. Anurag Maurya 
College/Dept: Bharati College   
 
Reviewer: Prof. K.M. Upadhyay 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: Business Environment: An Introduction 
Table of Contents: 
1. Learning Outcomes 
2. Introduction 
3. Relationship between Environment and Business 
4. Characteristics of Modern Business Environment 
5. Business Environment in India 
6. Concept of Environment Analysis 
6.1: Approaches of Business Environment Analysis 
6.2: Objectives/Importance of Environment Analysis  
6.3: Process of Environment Analysis 
6.4: Limitations of Environment Analysis 
7. Competitive Structure of Industry  
8. Role of Environment Analysis in Strategic Management 
9. Role of Government: Monetary and Fiscal Policies 
Summary  
Exercises 
Glossary 
References 
1. Learning Outcomes: 
After reading this lesson, you will be able to: 
? understand the meaning and relationship of environment and business, 
? know the characteristics of modern business, 
? explain the competitive structure of an industry, 
? understand the fiscal and monetary policies and their impact on business.  
2. Concept of Business Environment:  
The term business environment refers to the combination of various factors and forces 
which have direct and indirect influence on the functioning and growth of individual 
business. These factors may be internal or external to a business unit. 
According to Keith Davis, “Business environment is aggregate of all conditions, events 
and influences that surround and affect the business”. 
Bayord O. Wheeler defines business environment as „the total of all the things, external 
to a business firm, which affect the organisation and its operations?. 
Arthur M. Weimer explains, “Business environment encompasses the climate or set of 
conditions- economic, social, political, or institutional- in which business is conducted”. 
Thus, business environment can be explained as a combination of internal and external 
factors that have an impact on business.  
Nature of Business Environment: 
Business environment has the following features: 
Page 3


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paper: Business Environment 
Lesson: Business Environment: An Introduction 
Lesson Developer: Ms. Romila Aggarwal,  
                         Mr. Anurag Maurya 
College/Dept: Bharati College   
 
Reviewer: Prof. K.M. Upadhyay 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: Business Environment: An Introduction 
Table of Contents: 
1. Learning Outcomes 
2. Introduction 
3. Relationship between Environment and Business 
4. Characteristics of Modern Business Environment 
5. Business Environment in India 
6. Concept of Environment Analysis 
6.1: Approaches of Business Environment Analysis 
6.2: Objectives/Importance of Environment Analysis  
6.3: Process of Environment Analysis 
6.4: Limitations of Environment Analysis 
7. Competitive Structure of Industry  
8. Role of Environment Analysis in Strategic Management 
9. Role of Government: Monetary and Fiscal Policies 
Summary  
Exercises 
Glossary 
References 
1. Learning Outcomes: 
After reading this lesson, you will be able to: 
? understand the meaning and relationship of environment and business, 
? know the characteristics of modern business, 
? explain the competitive structure of an industry, 
? understand the fiscal and monetary policies and their impact on business.  
2. Concept of Business Environment:  
The term business environment refers to the combination of various factors and forces 
which have direct and indirect influence on the functioning and growth of individual 
business. These factors may be internal or external to a business unit. 
According to Keith Davis, “Business environment is aggregate of all conditions, events 
and influences that surround and affect the business”. 
Bayord O. Wheeler defines business environment as „the total of all the things, external 
to a business firm, which affect the organisation and its operations?. 
Arthur M. Weimer explains, “Business environment encompasses the climate or set of 
conditions- economic, social, political, or institutional- in which business is conducted”. 
Thus, business environment can be explained as a combination of internal and external 
factors that have an impact on business.  
Nature of Business Environment: 
Business environment has the following features: 
 
 
1. Aggregative: Business environment is an aggregate of various internal and 
external forces which influence operations and decision making of a business. 
2. Inter-related: Different elements of business environment are interdependent. A 
change in one element causes change in other element of the environment. For 
example, a change in political environment, due to change in government, leads to 
change in economic environment through the new fiscal and monetary policy of the 
government. 
3. Dynamic: Business environment is dynamic in nature as it keeps on changing over 
the period of time. 
4. General and Specific Forces: Business environment consists of various general 
and specific forces. General forces, such as, economic, political, natural forces affect 
all the business enterprises in the economy in the same manner; while specific 
forces, such as, competition, availability of raw material, customers, etc., influence 
only a particular business unit. 
5. Relative: Business environment is a relative concept. It differs from country to 
country and region to region. The effect of environment on business depends on type 
of economic system and governmental set up of the country. 
3. Relationship between Environment and Business: 
 
As we know, business is a transformation process which converts inputs into outputs. As 
per complementary approach, business does not work in isolation. It interacts with 
environmental factors in two different ways. It takes inputs, such as, capital, labour, 
material etc., from the environment, converts these inputs into finished goods and 
returns these goods to the environment, in the form of goods and services, profits etc. 
Figure 1: Relationship between Business and Environment 
 
INTERACTIVE 1 
4. Characteristics of Modern Business Environment: 
The environment is ever changing and dynamic in nature. In last few decades, the 
modern business environment has changed drastically and shaped entirely, in a very 
different manner. Now, it has become a challenge for business managers to understand 
their business environment and formulate business plans and policies accordingly. 
The following characteristics of new modern business environment have emerged: 
 
 
Page 4


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paper: Business Environment 
Lesson: Business Environment: An Introduction 
Lesson Developer: Ms. Romila Aggarwal,  
                         Mr. Anurag Maurya 
College/Dept: Bharati College   
 
Reviewer: Prof. K.M. Upadhyay 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: Business Environment: An Introduction 
Table of Contents: 
1. Learning Outcomes 
2. Introduction 
3. Relationship between Environment and Business 
4. Characteristics of Modern Business Environment 
5. Business Environment in India 
6. Concept of Environment Analysis 
6.1: Approaches of Business Environment Analysis 
6.2: Objectives/Importance of Environment Analysis  
6.3: Process of Environment Analysis 
6.4: Limitations of Environment Analysis 
7. Competitive Structure of Industry  
8. Role of Environment Analysis in Strategic Management 
9. Role of Government: Monetary and Fiscal Policies 
Summary  
Exercises 
Glossary 
References 
1. Learning Outcomes: 
After reading this lesson, you will be able to: 
? understand the meaning and relationship of environment and business, 
? know the characteristics of modern business, 
? explain the competitive structure of an industry, 
? understand the fiscal and monetary policies and their impact on business.  
2. Concept of Business Environment:  
The term business environment refers to the combination of various factors and forces 
which have direct and indirect influence on the functioning and growth of individual 
business. These factors may be internal or external to a business unit. 
According to Keith Davis, “Business environment is aggregate of all conditions, events 
and influences that surround and affect the business”. 
Bayord O. Wheeler defines business environment as „the total of all the things, external 
to a business firm, which affect the organisation and its operations?. 
Arthur M. Weimer explains, “Business environment encompasses the climate or set of 
conditions- economic, social, political, or institutional- in which business is conducted”. 
Thus, business environment can be explained as a combination of internal and external 
factors that have an impact on business.  
Nature of Business Environment: 
Business environment has the following features: 
 
 
1. Aggregative: Business environment is an aggregate of various internal and 
external forces which influence operations and decision making of a business. 
2. Inter-related: Different elements of business environment are interdependent. A 
change in one element causes change in other element of the environment. For 
example, a change in political environment, due to change in government, leads to 
change in economic environment through the new fiscal and monetary policy of the 
government. 
3. Dynamic: Business environment is dynamic in nature as it keeps on changing over 
the period of time. 
4. General and Specific Forces: Business environment consists of various general 
and specific forces. General forces, such as, economic, political, natural forces affect 
all the business enterprises in the economy in the same manner; while specific 
forces, such as, competition, availability of raw material, customers, etc., influence 
only a particular business unit. 
5. Relative: Business environment is a relative concept. It differs from country to 
country and region to region. The effect of environment on business depends on type 
of economic system and governmental set up of the country. 
3. Relationship between Environment and Business: 
 
As we know, business is a transformation process which converts inputs into outputs. As 
per complementary approach, business does not work in isolation. It interacts with 
environmental factors in two different ways. It takes inputs, such as, capital, labour, 
material etc., from the environment, converts these inputs into finished goods and 
returns these goods to the environment, in the form of goods and services, profits etc. 
Figure 1: Relationship between Business and Environment 
 
INTERACTIVE 1 
4. Characteristics of Modern Business Environment: 
The environment is ever changing and dynamic in nature. In last few decades, the 
modern business environment has changed drastically and shaped entirely, in a very 
different manner. Now, it has become a challenge for business managers to understand 
their business environment and formulate business plans and policies accordingly. 
The following characteristics of new modern business environment have emerged: 
 
 
 
 
 
Figure 2: Characteristics of Modern Business 
 
 
1. Bulk Size of Business: The mass production has become an integral part of modern 
business. As volume with expected lower costs rises, it helps to attain higher rates of 
output at low unit cost. It has become a common strategy to cope up with competition 
and earn higher profits. 
2. Diversification: presently, every businessman invests his capital in diversified 
economic activities so that he can avoid negative effects of market fluctuations. Many 
firms invest their funds in different market locations and foreign economies in order to 
avoid the impact of adverse business situations, such as, recession, high inflation, 
lockout, strikes etc. 
3. Change in Consumers’ Taste and Preference: The tastes and preferences of 
modern consumers have completely changed because of change in standard of living, 
consumption pattern, technology advancement etc. Now, people spend more money on 
services. A large proportion of consumers? income has been spent on entertainment, 
electronic gadgets, and luxuries. Modern customer prefers quality products rather than 
cheap one.  
4. Change in Distribution Channel: The revolutionary change in technology has 
drastically changed the conventional distribution system. Introduction of e- commerce 
has narrowed down the distribution channel. Nowadays, firms offer their product 
directly to the consumer through the websites or their own outlets.  
5. Globalisation of Business: Modern business has now become global. MNC?s are 
dominating the global markets. The Government of different countries are also 
liberalising their economies by allowing foreign countries to enter their domestic 
markets. The mergers and acquisitions across the national boundaries have also been 
increasing the presence of business firms in international market.  
6. Emergence of International Organisations: With the increase in cross border 
trade, the role of various international institutions, such as, WTO, IMF, World Bank, 
and regional organisations, like, SAARC, EU, and NAFTA has also increased. These 
organisations set rules and regulations for international trade. 
7. Intense Competition: Globalisation of economies has increased the competition in 
international as well as domestic markets. In present business scenario, no firm wants 
to remain within the regional boundaries of a country. They enter international market 
to explore new business possibilities.  
5. Business Environment in India: 
The characteristics of each dimension of Indian business environment are as follows:    
Page 5


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paper: Business Environment 
Lesson: Business Environment: An Introduction 
Lesson Developer: Ms. Romila Aggarwal,  
                         Mr. Anurag Maurya 
College/Dept: Bharati College   
 
Reviewer: Prof. K.M. Upadhyay 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: Business Environment: An Introduction 
Table of Contents: 
1. Learning Outcomes 
2. Introduction 
3. Relationship between Environment and Business 
4. Characteristics of Modern Business Environment 
5. Business Environment in India 
6. Concept of Environment Analysis 
6.1: Approaches of Business Environment Analysis 
6.2: Objectives/Importance of Environment Analysis  
6.3: Process of Environment Analysis 
6.4: Limitations of Environment Analysis 
7. Competitive Structure of Industry  
8. Role of Environment Analysis in Strategic Management 
9. Role of Government: Monetary and Fiscal Policies 
Summary  
Exercises 
Glossary 
References 
1. Learning Outcomes: 
After reading this lesson, you will be able to: 
? understand the meaning and relationship of environment and business, 
? know the characteristics of modern business, 
? explain the competitive structure of an industry, 
? understand the fiscal and monetary policies and their impact on business.  
2. Concept of Business Environment:  
The term business environment refers to the combination of various factors and forces 
which have direct and indirect influence on the functioning and growth of individual 
business. These factors may be internal or external to a business unit. 
According to Keith Davis, “Business environment is aggregate of all conditions, events 
and influences that surround and affect the business”. 
Bayord O. Wheeler defines business environment as „the total of all the things, external 
to a business firm, which affect the organisation and its operations?. 
Arthur M. Weimer explains, “Business environment encompasses the climate or set of 
conditions- economic, social, political, or institutional- in which business is conducted”. 
Thus, business environment can be explained as a combination of internal and external 
factors that have an impact on business.  
Nature of Business Environment: 
Business environment has the following features: 
 
 
1. Aggregative: Business environment is an aggregate of various internal and 
external forces which influence operations and decision making of a business. 
2. Inter-related: Different elements of business environment are interdependent. A 
change in one element causes change in other element of the environment. For 
example, a change in political environment, due to change in government, leads to 
change in economic environment through the new fiscal and monetary policy of the 
government. 
3. Dynamic: Business environment is dynamic in nature as it keeps on changing over 
the period of time. 
4. General and Specific Forces: Business environment consists of various general 
and specific forces. General forces, such as, economic, political, natural forces affect 
all the business enterprises in the economy in the same manner; while specific 
forces, such as, competition, availability of raw material, customers, etc., influence 
only a particular business unit. 
5. Relative: Business environment is a relative concept. It differs from country to 
country and region to region. The effect of environment on business depends on type 
of economic system and governmental set up of the country. 
3. Relationship between Environment and Business: 
 
As we know, business is a transformation process which converts inputs into outputs. As 
per complementary approach, business does not work in isolation. It interacts with 
environmental factors in two different ways. It takes inputs, such as, capital, labour, 
material etc., from the environment, converts these inputs into finished goods and 
returns these goods to the environment, in the form of goods and services, profits etc. 
Figure 1: Relationship between Business and Environment 
 
INTERACTIVE 1 
4. Characteristics of Modern Business Environment: 
The environment is ever changing and dynamic in nature. In last few decades, the 
modern business environment has changed drastically and shaped entirely, in a very 
different manner. Now, it has become a challenge for business managers to understand 
their business environment and formulate business plans and policies accordingly. 
The following characteristics of new modern business environment have emerged: 
 
 
 
 
 
Figure 2: Characteristics of Modern Business 
 
 
1. Bulk Size of Business: The mass production has become an integral part of modern 
business. As volume with expected lower costs rises, it helps to attain higher rates of 
output at low unit cost. It has become a common strategy to cope up with competition 
and earn higher profits. 
2. Diversification: presently, every businessman invests his capital in diversified 
economic activities so that he can avoid negative effects of market fluctuations. Many 
firms invest their funds in different market locations and foreign economies in order to 
avoid the impact of adverse business situations, such as, recession, high inflation, 
lockout, strikes etc. 
3. Change in Consumers’ Taste and Preference: The tastes and preferences of 
modern consumers have completely changed because of change in standard of living, 
consumption pattern, technology advancement etc. Now, people spend more money on 
services. A large proportion of consumers? income has been spent on entertainment, 
electronic gadgets, and luxuries. Modern customer prefers quality products rather than 
cheap one.  
4. Change in Distribution Channel: The revolutionary change in technology has 
drastically changed the conventional distribution system. Introduction of e- commerce 
has narrowed down the distribution channel. Nowadays, firms offer their product 
directly to the consumer through the websites or their own outlets.  
5. Globalisation of Business: Modern business has now become global. MNC?s are 
dominating the global markets. The Government of different countries are also 
liberalising their economies by allowing foreign countries to enter their domestic 
markets. The mergers and acquisitions across the national boundaries have also been 
increasing the presence of business firms in international market.  
6. Emergence of International Organisations: With the increase in cross border 
trade, the role of various international institutions, such as, WTO, IMF, World Bank, 
and regional organisations, like, SAARC, EU, and NAFTA has also increased. These 
organisations set rules and regulations for international trade. 
7. Intense Competition: Globalisation of economies has increased the competition in 
international as well as domestic markets. In present business scenario, no firm wants 
to remain within the regional boundaries of a country. They enter international market 
to explore new business possibilities.  
5. Business Environment in India: 
The characteristics of each dimension of Indian business environment are as follows:    
 
 
1. Demographic Environment: With the population growth rate of 1.2% (on 2013) 
and about 127 billion people, India is second most populous country of the world. It 
provides a huge market to the business firms for their products. In India, 56.9 % 
population lies between the age group of 15 to 59 years, with a literacy rate of 
74.04% (2011 census). It signifies that India is a large potential source of cheap and 
efficient workforce. The urban population in the country is also increasing at a fast 
rate i.e. 2.4% (census 2011). The 31.3% (census 2011) share of total population 
lives in urban areas. 
2. Cultural & Social Environment: The cultural and social environment is a very 
important aspect of business environment. It influences all the 4P?s of marketing (i.e. 
product, price, promotion and place) which play a crucial role in the success of a 
business firm.  
     In India, there is huge diversity in terms of caste and religion. There is a great 
linguistic heterogeneity as more than 200 languages are spoken by different groups 
in the country.  
3. Economic Environment: After opening up the FDI in different sectors, India has 
become one of the attractive investment destinations of the world. India holds 6.43% 
(in 2011) share of world GDP. According to the World Bank report, it is third biggest 
economy in terms of purchase power parity (PPP). The present Industrial growth rate 
of India is 3.4%. As per the latest report of PwC (Price water house coopers), India 
will become third largest economy of the world by 2030. 
4. Technological Environment: The technological growth rate of India lies between 
0.7%- 1.1%, which is comparatively 3% lower than other economies. The per capita 
R&D expenditure was also very low as $9.5 in 2009-10. It was 2.4% of World Gross 
Expenditure on R&D in 2009-10. As per the study of US based National Science 
Foundation, India is far behind in term of technology competitiveness from its Asian 
compatriots. India scored only 33 points out of 100 points scale as against 83.7 
points for Japan and 42.6 points for South Korea. 
5. Political Environment: India has a parliamentary system of government that 
decides the regulatory and legal framework of the country. In India, a business is 
regulated by different bodies, such as, SEBI, IRDA, CBDT, FIPB, etc. Recently, the 
government has replaced 56 years old Companies Act with new Companies Act 2013. 
The government is also planning to adopt uniform direct tax system i.e. called Direct 
Tax Code (DTC). The new NDA government has changed the 64 years old Planning 
Commission with a new body. Since the independence, GOI has signed more than 50 
trade agreements with other countries in order to facilitate foreign trade. 
Value Addition1: Search and Learn 
Regulatory Environment 
The World Bank Group has ranked all the economies of the world on their ease of 
doing business from 1-189. A high rank means the environment is more conducive 
for setting up and running a business. The rankings of the countries are based on 10 
different parameters. In the list, India stands at 134
th
 place after its neighbouring 
countries china, Nepal and Bangladesh. As per the ranking, Singapore is the most 
favourable place for doing business. The whole list of 189 countries is available at 
following link: 
http://www.doingbusiness.org/rankings 
 
Value Addition 2: Do You Know? 
Economic Reforms 
In India, The reforms were initiated in 1991 with the objective to save the economy 
from crisis and accelerate economic growth. Under this policy, most of the quotas and