Introduction - Business Environment CA Foundation Notes | EduRev

CA Foundation: Introduction - Business Environment CA Foundation Notes | EduRev

The document Introduction - Business Environment CA Foundation Notes | EduRev is a part of the CA Foundation Course Business and Commercial Knowledge.
All you need of CA Foundation at this link: CA Foundation

Learning Outcomes

After studying this chapter, you will be able to:

  • Understand the concept of the business environment with its characteristics and importance.
  • Understand what is the environmental analysis and why is it needed.
  • Know the environmental factors that influence a business.
  • Have a basic knowledge of various types of environments.
  • Have an understanding of different micro-economic factors that are affecting business.
  • Know the various macro-economic factors and how they are related to business.


  • A business is created to provide products or services to customers. If it can conduct its operations effectively, its owners earn a reasonable return on their investment in the firm. 
  • In addition, it creates jobs for employees. Thus, businesses can be beneficial to society in various ways.
  • A business (or firm) is an enterprise that provides products or services desired by customers. 
  • Along with the large, well-known businesses such as The Coca-Cola Company and IBM, there are many thousands of small businesses that provide employment opportunities and produce products or services that satisfy customers.
  • The world keeps changing. It always has and always will. The basic challenge for any company (or, for that matter, for any living thing) is survival. And to survive over the long term, a company must have two capabilities:
    • the ability to prosper and
    • the ability to change

What is most surprising is the amount of change going on around us! And we notice, at the same time, how some organisations change very little.

Charles Darwin in Darwinism says:

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” “Struggle for existence, survival of the fittest and origin of new species”.

  • Over any time period, say one, five, ten years, in any geographic region thousands upon thousands of new organizations are set up, and within the same time frame many thousands are dissolved, mostly small ones but sometimes very large ones too. 
  • An analysis says that approximately, 5,00,00,000 new firms are born every year across the globe or about 1,37,000 per day. And, similar number of firms are close as birth and death rates are about equal, the same number of active firms, say 1,30,000 probably terminate trading each day, worldwide.
  • Some organisations go on for a very long time. For instance, the Tata Group whose foundations were laid by Jamsetji Tata has been flourishing since 1868 whereas few commercial organisations have survived for more than a century. On an average, however, the lifespan of commercial organisations in our country is about 50 years.
  • Over the years, surviving organisations change their structures as well as the composition of their activities. As they do so they either threaten or create opportunities for others. Whole new industries appear as new technologies are developed, creating niches of new activities for both new and old organisations, while other industries disappear.
  • Each business organization operates in its unique environment. Environment influence businesses and also gets influenced by it. No business can function free of interacting and influencing forces that are outside its periphery. 
  • In the emerging economy the facets of business are rapidly changing as compared to earlier years. The developments in technology and faster communication have lead to evolvement of newer kinds of businesses. The concept of businesses such as online shopping were non-existent in yesteryears. Businesses are conducted through internet and have lead to virtual shrinking of physical boundaries between nations.

Meaning of Business Environment

The business environment represents all external forces, factors or conditions that exert some degree of impact on the business decisions, strategies and actions taken by the firm. The success of a business is generally dependent on its business environment. A successful business has to identify, appraise, and respond to the various opportunities and threats in its environment. To be successful, the business has to not only recognize different elements of its own environment but also respect/ adapt and manage and influence them. The business must continuously monitor and adapt itself to the environment if it is to survive and prosper.

According to Gluek and Jauch:

“The environment includes factors outside the firm which can lead to opportunities for, or threats to the firm. Although, there are many factors, the most important of the factors are socioeconomic, technological, suppliers, competitors, and government.”

#Modern authors include both Internal and external forces that influence business policies and actions as integral elements of the business environment.

Characteristics of Business Environment

The business environment exhibits many characteristics. Some of the important and obvious characteristics are briefly described here.


The environment consists of a number of factors, events, conditions and influences

arising from different sources. It is difficult

to comprehend at once the factors constituting a given environment.
All in all, environment is a complex that is somewhat easier to understand in parts

but difficult to grasp in totality

Mobile phones making music system, computers books obsolete


The environment is constantly changing

in nature. Due to the many and varied influences operating, there is dynamism in the environment causing it to continuously

change its shape and character.

The film industry generates revenue from ring tones / caller tunes rather

than sale of music CD


What shape and character an environment assumes depends on the perception of the observer. A particular change in the environment, or a new development,

may be viewed differently by different observers. This is frequently seen when

the same development is welcomed as an opportunity by one company while

another company perceives it as a threat.

LCD and Plasma TV’s giving way to LED and now LED’s giving way to 3D TV's



The environment has a far-reaching impact on organizations. The growth and profitability of an organization depends

critically on the environment in which it exists. Any environmental change has

an impact on the  organization in several

different ways

An organisation like Aditya Birla Group has moved from textile to cement to retail and to financial services as

well as telecom due to changing circumstances

UNCERTAINITYUncertainty is an inherent characteristic of the business environment because no one can predict what is going to happen in future. No one could have predicted the impact covid-19 had on each and every business.
RELATIVEThe notion of a business environment is relative since it varies from one location to another. Political conditions, religious beliefs, government rules and policies differ from one region to another. 

Importance of Understanding Business Environment

There is a close and continuous interaction between a business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively. It helps the business in the following ways:

  1. Determining Opportunities and Threats: The interaction between the business and its environment would bring out opportunities for and threats to the business.
  2. Giving Direction for Growth: The interaction with the environment enables the business to identify the areas for growth and expansion of their activities.
  3. Continuous Learning: The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in the realm of business.
  4. Image Building: Environmental understanding helps business organizations in improving their image by showing their sensitivity to the environment in which they operate. For example, in view of the shortage of power, many companies have set up Captive Power Plants (CPPs) in their factories to meet their own requirement of power. 
  5. Meeting Competition: It helps the firms to analyze the competitors’ strategies and formulate their own strategies accordingly.

Relationship Between Organisation and its Environment

In relation to the individual corporate enterprise, the external environment offers a range of opportunities, limitations, threats and pressures and thereby influences the structure and functioning of the enterprise.

The relationship between the organization and its environment may be discussed in terms of interactions between them in several major areas which are outlined below:

Exchange of information

  • The organization scans the external environmental variables, their behaviour and changes, generates important information and uses it for its planning, decision-making and control purposes. 
  • Much of the organizational structure and functioning is attuned to the external environmental information. 
  • Information generation is one way to get over the problems of uncertainty and complexity of the external environment. Information is to be gathered on economic activity and market conditions, technological developments, social and demographic factors political-governmental policies and postures, the activities of other organizations and so on. 
  • Both current and projected information is important for the organization. Apart from gathering information, the organization itself transmits information to several external agencies either voluntarily, inadvertently or legally. Other organizations and individuals may be interested in the organization and its functioning and hence approach the organization for information.

Reality Bite: Any data having commercial importance is information. For Example: change in the government law for new vehicles engine norms is data for a biscuit manufacturer but an information for an Automobile Manufacturer

Exchange of resources 

  • The organization receives inputs—finance, materials, manpower, equipment etc. from the external environment through contractual and other arrangements. 
  • The resources are often categorised as 5 M’s Men, Money, Method, Machine, Material. 
  • It sustains itself by employing the above inputs for involving or producing output of products and services. 
  • The organization interacts with the factor markets for purposes of getting its inputs; it competes sometimes and collaborates sometimes with other organizations in the process of ensuring a consistent supply of inputs.
  • The organization is dependent on the external environment for disposal of its output of products and services to a wide range of clientele. This is also an interaction process perceiving the needs of the external environment and catering to them, satisfying the expectations and demands of the clientele groups, such as customers, employees, shareholders, creditors, suppliers, local community, general public and so on.

Exchange of influence and power

  • Another area of organizational-environmental interaction is in the exchange of power and influence. The external environment holds considerable power over the organization both by virtue of its being more inclusive as also by virtue of its command over resources, information and other inputs. 
  • It offers a range of opportunities, incentives and rewards on the one hand and a set of constraints, threats and restrictions on the other. In both ways, the organization is conditioned and constrained. The external environment is also in a position to impose its will over the organization and can force it to fall in line.
  • Sometimes, organisations are also in position to wield considerable power and influence over some of the elements of the external environment by virtue of its command over resources and information. To the extent that the organization is able to hold power over the environment it increases its autonomy and freedom of action. It can dictate terms to the external forces and mould them to its will.

Reality Bite: FMCG company Patanjali endorsed by Baba Ramdev’s is now a big player in the industry and is giving a tough competition to the well-established FMCG players like HUL, Godrej, Dabur, P & G etc. Now people prefer ayurvedic products over chemical products.

Patanjali’s success has taken it to a position where it can influence the market surely.

Patanjali gathers the information from the market, competitors, etc. about the public

preferences and demands and then uses it to fulfil them through modification in the existing products or launching new products.

In defining the relationship between the organization and the environment, one has to be clear on the diversity of both these entities. The nature of relationship depends on the size of the organization, its age, the nature of business, the nature of ownership, degree of professionalization of management, etc.

Organisation’s Response to its Environment

Organizations must have the capacity to monitor and make sense of their environments if they are to respond appropriately. They must identify and attend to those environmental factors and features that are closely related to goal achievement and performance. Moreover, they must have the internal capacity to develop effective responses.
Three classes of responses are described below:

  1. Administrative Response: The most common organizational responses to the environment are administrative. These include the formation or clarification of the organization’s mission; the development of objectives, policies, and budgets; or the creation of scanning units. These responses can be either proactive or reactive and are aimed at defining the organization’s purpose and key tasks in relationship to particular environments.
  2. Competitive Response: Competitive ressponses to the environment typically are associated with for-profit firms but can also apply to non-profits and governmental organizations. Such actions seek to enhance the organization’s performance by establishing a competitive advantage over its rivals. To sustain competitive advantage, organizations must achieve an external position vis-à-vis their competitors or perform internally in ways that are unique, valuable, and difficult to imitate.
  3. Collective Response: Organizations can cope with problems of environmental dependence and uncertainty through increased coordination with other organizations. Collective responses help control interdependencies among organizations and include such methods as bargaining, contracting, co-opting, and creating joint ventures, federations, strategic alliances, and consortia. Contemporary organizations are increasingly turning towards joint ventures and partnerships with other organizationsto manage environmental uncertainty and perform tasks that are too costly and complicated for single organizations to perform.

Reality Bite: Pharmaceutical firms are forming strategic alliances to distribute non-competing medications and avoid the high costs of establishing sales organizations; firms from different countries are forming joint ventures to overcome restrictive trade barriers, and high-technology firms are forming research consortia to undertake significant and costly research and development

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