BUSINESS, ENVIRONMENT & SOCIETY

(BES)
 Module-I

Concept of Business Environment

Business environment may be considered as asset of factors that influence the functioning and
effectiveness of a business. Interacting and transacting with the environment is the basic need
of every business organisation. Thus there is a mutual interdependence between business and
the environment.

According to Keith Davis, “Business environment is the aggregate of all conditions, events and
influence that surrounds and affect it”.

Business environment means all of the internal and external factors that affect how the
company functions including employees, customers, management, supply and demand and
business regulations.

Nature of Business Environment:

1. Environment is Inseparable from business: the most essential element of any business is
the environment. No business can function without its environment- legal, political,
social, cultural and economicenvironment.
2. Environment is Dynamic: it is difficult for any business environment to remain constant
for a long period of time. Thus, environment considered dynamic in nature. The
environmental factors undergo changes according to the tastes and preferences of the
customer.
3. Business lack control over environment: business environment keeps on changing
continuously. Business can influence the internal environment not the external
environment.
4. Internal and external factors: there are internal and external factors which influence the
business environment. The factors such as business objective, policies, staff members
etc. Combine to form the internal environment. Whereas, the external environment
comprise of micro and macro factors. The micro factors involve consumers, competitors,
suppliers, society, etc.

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Importance of business environment

• First mover advantages: Garb the early opportunity in the market which allow the
enterprise to stay ahead from their competitors. Ex- MarutiUdyog(need of the middle
class people-smallcar)

• Early warning signal: Its all about environmental awareness. early signal for the
enterprise against upcoming threat. (Maruti proved itself against the new entrant by
tripling its production--- esteem to provide quick customerdelivery).

• Customer focus: facilitates the company to cater the changing tastes and preferences of
the customer. (ex- introduction of HUL – small sachet ofshampoo)

• Strategy formulation: environmental analysis- provide various relevant information –

for future plan .(ITC – recognise – scope in travel and tourism- opened newhotel)

• Image building: build company’s positive image in the mind of the customer. BigBazzar

Classification:

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Internal environment:

Environment that has a direct influence on the business is termed as internal environment. The
internal factors which influence the business environment are controllable in nature. Hence,
the factors like physical facilities, and organisation and functional means can be revised and
transformed as per the requirements of theenvironment.

The internal factors basically include the inner strengths and weaknesses. Internal factors can
affect how a company meets its objectives. Some examples of areas which are typically
considered in internal factors are:

• Financial resources like funding, investment opportunities and sources ofincome.

• Physical resources like company’s location, equipment, andfacilities
• Human resources like employees, target audiences, andvolunteers
• Access to natural resources, patents, copyrights, andtrademarks
• Current processes like employee programs, software systems, and department
hierarchies

The strategy and decision of internal organisation is determined by the following key internal
factors:

Value system: the selection of business, its mission, vision, and objectives, business policies and
practices are all elements of value system in an organisation.

Mission and Vision and objectives: vision is a broader view to define the future prospects of
the business. Vision aids I meeting the objectives of the businessorganisations.

Management structure and nature: generally, business decisions are persuaded by the
organizational structure. This structure comprises f board of directors, mangers, executives. The
number of members in an organizational structure determines the durations of decision
making.

Internal power relationship: the coordination between the levels of organizational structure is
vey important. The three levels,i.e. top, middle, bottom level must have mutual relationship
among them. This helps to organisationt function smoothly.

Human resource: human resource is the key component of any organisation. They define the
strength and weakness of an organisation. The essential requirement of human resource
include skills, quality commitment, sincerity, rightattitude.

Company image and brand equity: the internal environment of the enterprise is affected by
the image that it carries in the outside market. The image of the organisation helps in raising
capital, mergers and other allianceetc.

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Internal factors affect the business in various ways:
• Organizational andoperational
• Operational and administrativeprocedures.
• This includes disorganized or inaccurate recordkeeping.
• Interruptions to your supply chain and outdated or faulty IT systems arealso factors
you shouldevaluate.
• If the company do not overcome these, customers might see you as unreliable. You can
also lose all yourdata.
• Example: on line purchase, or any retail out late, payment throughNEFT

Strategic risks
• These affect the firm’s ability to reach the goals in thebusinessplan.
• They could be due to the impacts of changes in technological evolutions orcustomer
demand.
• These factors could pose as threats as they can alter how customers perceiveyour
product. Based on these, customers might think a product is overpriced, dull and
outdated.
• Example- Voltas Stabilizer

Innovation
• business needs innovation in order to keep up with competitors. It is essential to get
one step ahead.
• Innovation could come in the form ofmarketing. It could also be through promotional
initiatives in the marketing plan, staff training, andwelfare.
• A lack of innovation can pose a serious risk to a growingbusiness.
• Example: Motorola, Nokia, Kodak (failed in communicationtechnology)

Financial
• The financial risks depend on the financial structure of thebusiness.
• It is also dependent on the business transactions and the financial systems. For
example,changesininterestratesorbeingoverlyreliantononecustomercouldaffect
business.
• Example: car loan, house loan, study loanetc.

Employee risks
• Employees are vital to businesssuccess.
• But, there are risks associated withthem.
• For an industry, strike action could lead to a lot ofproblems.

External environment:

Those factors which are beyond the control of business enterprise are included in external
environment.
• 1. microenvironment
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 • 2. macroenvironment

Micro factors are closely related to the company.

• Example- the micro environment of a restaurant can be its customers,other
restaurants, suppliers of raw material, human resourcesetc.

Suppliers: suppliers are those who supply raw materials components and machines to the
business enterprise. The suppliers are an important micro factor in the business environment.
They should be trustworthy and cordial with business enterprise. This will help the enterprise to
attain the customer expectation and companies will become free from the burden of keeping
heavy stocks.

Customer: customers are the most important element of the business enterprise. The main aim
of any business is to attract and retain its customers. This helps the business to attain long term
survival and profitability. Therefore, to increase the level of loyal customers, business
enterprise should carefully observe the needs and wants of the customers and fulfil them
effectively. The business enterprises must also analyses the changing tastes and preference of
the customers and make changes in its product and servicesaccordingly.

Marketing Intermediaries:

Intermediaries are those who act as a mediator between the manufacturer and final consumer.
The number of marketing intermediaries varies according to size and type of distribution
network. Market intermediaries are beneficial to the organisation only when there is a proper
coordination between channel without any hurdle.

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Competitors: the organisation which manufacture similar products and try to conquer over the
market share are termed as competitors. To earn more profit and stay competitive, the
company needs to monitor the competitor’s activities and then prepare its future plan.

General public: the general public is also an indispensable part of business environment. The
positive and negative responses of the public directly influences company’s image. This can also
affect the sales and revenue of the company.

Macro Environment:

Macro environment prevails outside the business enterprise. If company has to change on the
basis of macro environment, then it has to change many areas like production, marketing,
management.

Macro environment are

1. Economicenvironment:
It relates to production and distribution of wealth of the country/ region. It also pay
with the word demand and supply of a business of an organisation. It also said that
from financial perspective of a business firm. These also determine the feasibility of a
country or a region for the conduct of a particular business from a financial perspective.
The economic conditions of a country include the nature of the economy, the stage of
development of the economy, economic resources, the level of income, the distribution
of income and assets.
The purchasing power of consumers and consumer confidence or insecurities strongly
influences and impact the demand for the products and services of an organisation.it is
an important element of the economic environment. In management decisions of all
businesses, the economic environment comes up for prime consideration.

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2. Socio-culturalenvironment:

Socio- cultural environment is a collection of social factors affecting a business and

includes social traditions, values and beliefs, level of literacy and education the ethical
standards and state of society, the extent of social stratification, conflict and
cohesiveness and so forth.

3. Demographicenvironment:

It refers to the population that constitutes population size,

• growth rate ofpopulation,

• age,

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 • composition of thepopulation,
• education level,
• caste,
• religion,
• race, income, assets ownership, home ownership, employment status, location.
It is the customer group for the businessprocess.
• Demographic variablesare:
• Age and life-cyclestage
• Gender
• Martialstatus
• Income
• Social classes
• Familysize
For example, premium products such as high-end womens' clothing usually appeal to women
with higher incomes. Conversely, people with comparatively lower incomes are more senitive
to price and, therefore, may prefer purchasing discount products. People with lower incomes
have less disposable income. Value is a major determinant in the products theypurchase.
Hence, a company may best reach lower-income people through discount retailers and
wholesalers and attract higher-income buyers in specialty retail shops.
Younger people under 35 are often the first consumers to purchase high-tech products like cell
phones, electronic books and video games. Certain buying groups also have more buying power
than others.
For example, there are about 76 million baby boomers in the United States, according to
"Entrepreneur" online.
This is the single largest population segment. Baby Boomers spent $400 billion more thanany
other age group, according to aa June 2009 report by "Entrepreneur." Small business owners
have much to gain by selling products to thispopulation.
4. legal Politicalenvironment:

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 5. Technicalenvironment:

Technology is knowledge of methods to perform certain tasks or solveproblems

pertaining to product andservices.

The basic elements oftechnology:

• information on productdesign
• Productiontechniques
• Quality assurance measures
• Human resourcedevelopment

Provide opportunities for businesses to adopt new breakthroughs, innovations, and

inventions to cut costs and develop new products. A business producing confectionery
like Cadbury, Schweppes examines SLEPT factors in designing new products.
Technological change is particularly important today, for example, the development of
new technologies that have enabled variations on chocolate bars to be produced in an
ice cream format.

6. Natural environment:

Here the term is applies to ecological complex, include plants, animals, micro-organism,
minerals, rock, water bodies. The natural environment is the set of living and non-living
things on earth which occur in a state sustainably not influenced by humans. The term is
most often applied to an ecological complex, which includes all of the plants; animal;
microorganism; abiotic factors such mineral; rocks and magma; water bodies and
atmosphere layers. There are extremely complex interaction between the living organisms
and abiotic elements as well as meteorological influences.

Components of natural environment are:

• Land resources: of all natural resources, land is certainly the important. Man and
other living beings use it for theirhabitation.
• Water resources: water is a prime natural resource. It is required for satisfying one
of the basic needs of humans. Thus, water has become a precious nationalasset.
• Forest resources: forests occupy an important place among natural resources of a
country.
• Mineral resources: availability of mineral has a unique distinction of influencing the
course of economic development of acountry.

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Technical analysis and diagnosis:

While analyzing the environment, the strategies should remembers to select those techniques
only that match the needs of organisation from every aspect. There are many techniques for
analyzing the environment, among which some of the important techniques are as follows:

Technical analysis and diagnosis

SWOT ANALYSIS ETOP ANALYSIS

SWOT analysis:

It is the acronym for strength weakness opportunity threat, which outlines the current position
of an organisation. It identifies that whether a company is in a good or bad market position.
While the strengths and weakness re internal factors, the opportunities and threats are
external to the organisation. Analyzing all these give a complete perspective to the managers
regarding the external factors that influence the organisation or may influence in future.

It has two steps:

1. Identifying the internal and external factors of theorganisations.

2. Formulating strategies to exploit the opportunities and defending the threat with the
help of internal strength, as well as eliminating the internalweakness.

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What do you mean by Environmental?

Surroundings, external objects, influences or circumstances under which someone or

something exists.

Why ETOP is needed?

1. Helps organisation to identify opportunities andthreat.

2. To consolidates and strengthen organisation position.

3. Find out which sector is favorable impact on theorganisation.

Preparation ETOP

1. Dividing the environment into differentsector.

2. Analyzing the impact of each sector on theorganisation.

3. Sub-dividing each environmental factor into subfactors.

4. Impact of each sub-factor on organisation in the form ofstatement.

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ETOP (Environmental threat and opportunityprofile)

Environmental Impact of each sector

Sectors

Social (↑) Customer preference for motorbike, which are fashionable, easy to ride
and durable.

Political (→) No significant factor.

Economic (↑) Growing affluence among urban consumers; Exports potential high.

Regulatory (↑) Two Wheeler industry a thrust area for exports.

Market (↑) Industry growth rate is 10 to 12 percent per year, For motorbike growth
rate is 40 percent, largely Unsaturated demand.

Supplier (↑) Mostly ancillaries and associated companies supply parts and
components, REP licenses for imported raw materials available.

Technological (↑) Technological up gradation of industry in progress. Import of machinery

under OGL list possible.

India’s New Economic Policy 1991

The former Finance Minister of India Dr. Manmohan Singh under the stalwardship of then
Prime Minister Mr. P. V. NarsimhaRao, initiated the NEW ECONOMIC POLICY (NEP), in 1991, to
integrate the Indian economy with the Worldmarket.

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Since then, structural changes of various dimension and intensity brought in by Globalization
and Liberalization processes have been experienced in different industries and enterprises in
die country.

Some of the major effects of new economic policy (NEP) as follows:

1. Emergence of KnowledgeWorkers

2. Dwindling Trade UnionLeadership

3. Emergence of ConsumerEconomy.

The main characteristics of new Economic Policy 1991 are:

1. De-licencing. Only six industries were kept under Licensingscheme.

2. Entry to Private Sector. The role of public sector was limited only to fourindustries;
rest all the industries were opened for privatesector.

3. Disinvestment. Disinvestment was carried out in many public sectorenterprises.

4. Setting up of Small Scale Industries. Various benefits were offered to small scale
industries.

5. Liberalization of Foreign Policy. The limit of foreign equity was raised to 100% inmany
activities, i.e., NRI and foreign investors were permitted to invest in Indiancompanies.

6. Liberalization in Technical Area. Automatic permission was given to Indian companies

for signing technology agreements with foreigncompanies.

7. Setting up of Foreign Investment Promotion Board (FIPB). This board was set upto
promote and bring foreign investment inIndia.

Three Major Components or Elements of New Economic Policy:

There are three major components or elements of new economic policy- Liberalisation,
Privatisation, Globalisation. (LPG)

1. Liberalization:

Liberalization refers to end of licence, quota and many more restrictions and controls
which were put on industries before 1991.

Indian companies got liberalization in the following way:

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 (a) Abolition of licence except infew.

(b) No restriction on expansion or contraction of businessactivities.

(c) Freedom in fixingprices.

(d) Liberalization in import and export.

(e) Easy and simplifying the procedure to attract foreign capital inIndia.

(f) Freedom in movement of goods andservices

(g) Freedom in fixing the prices of goods andservices.

2. Privatization:

Privatization refers to giving greater role to private sector and reducing the role of
public sector. To execute policy of privatization government took the following steps:

(a) Disinvestment of public sector. i.e., transfer of public sector enterprise to privatesector.

(b) Setting up of Board of Industrial and Financial Reconstruction (BIFR). This boardwas
set up to revive sick units in public sector enterprises sufferingloss.

(c) Dilution of Stake of the Government. If in the process of disinvestmentsprivate

sector acquires more than 51% shares then it results in transfer of ownership and
management to the privatesector.

3. Globalization:

It refers to integration of various economies of world. Till 1991 Indian government was
following strict policy in regard to import and foreign investment in regard to licensing
of imports, tariff, restrictions, etc. but after new policy government adopted policy of
globalisation by taking following measures:

(i) Liberal Import Policy. Government removed many restrictions from import ofcapital
goods.

(ii) Foreign Exchange Regulation Act (FERA) was replaced by Foreign ExchangeManagement
Act (FEMA)

(iii) Rationalization of Tariffstructure

(iv) Abolition of Export duty.

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(v) Reduction of Importduty.

As a result of globalization physical boundaries and political boundaries remained no

barriers for business enterprise. The Whole world becomes a global village.

Globalization involves greater interaction and interdependence among the various

nations of global economy.

Impact of Changes in Economic Policy on the Business or Effects of Liberalisation and

Globalisation:

The factors and forces of business environment have lot of influence over the business.
The common influence and impact of such changes in business and industry are
explained below:

1. IncreasingCompetition.

After the new policy, Indian companies had to face all round competition which means
competition from the internal market and the competition from the MNCs. The
companies which could adopt latest technology and which were having large numberof
resources could only survive and face the competition. Many companies could not face
the competition and had to leave themarket.

2. More DemandingCustomers:

Prior to new economic policy there were very few industries or production units. As a
result there was shortage of product in every sector. Because of this shortage the
market was producer-oriented, i.e., producers became key persons in the market.

But after new economic policy many more businessmen joined the production line and
various foreign companies also established their production units in India.

3. Rapidly Changing TechnologicalEnvironment:

Before or prior to new economic policy there was a small internal competition only. But
after the new economic policy the world class competition started and to stand this
global competition the companies need to adopt the world class technology.

To adopt and implement the world class technology the investment in R & D
department has to increase. Many pharmaceutical companies increased their
investment in R and D department from 2% to 12% and companies started spending a
large amount for training the employees.

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4. Necessity forChange:

Prior to 1991 business enterprises could follow stable policies for a long period of time
but after 1991 the business enterprises have to modify their policies and operations
from time to time.

5. Need for Developing HumanResources:

Before 1991 Indian enterprises were managed by inadequately trained personnel’s.

New market conditions require people with higher competence skill and training. Hence
Indian companies felt the need to develop their human skills.

6. Market Orientation:

Earlier firms were following selling concept, i.e., produce first and then go to market but
now companies follow marketing concept, i.e., planning production on the basis of
market research, need and want of customer.

7. Loss of Budgetary Support to PublicSector:

Prior to 1991 all the losses of Public sector were used to be made good by government
by sanctioning special funds from budgets. But today the public sectors have to survive
and grow by utilizing their resources efficiently otherwise these enterprises have to face
disinvestment.

On the whole the policies of Liberalisation, Globalisation and Privatisation have brought
positive impacts on Indian business and industry. They have become more customer
focus and have started giving importance to customer satisfaction.

8. Export a Matter ofSurvival:

The Indian businessman was facing global competition and the new trade policy made
the external trade very liberal. As a result to earn more foreign exchange many Indian
companies joined the export business and got lot of success in that. Many companies
increased their turnover more than double by starting export division.

Example, the Reliance Group(RIL), Videocon Group, MRF Tyres, CeatTyres, etc. got a
great hold in the export market.

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Industrial Policy

It is an strategic attempt to influence the growth of various sectors. For the industrial
development, specific roles are allocated to the different types of industrial organisation like
public, private, joint and cooperative sectors.

What are the roles of industrial policy?

• Formulation olabourpolicy

• Tariffpolicy

• fiscalpolicy

• Monetarypolicy

According to world bank, “Industrial policy comprises government efforts to alter industrial
structure to promote productivity basedgrowth”.

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Importance of industrial policy
• Establishes co-ordination: industrial policy helps to establish co-ordination between
various areas such as industry and agricultural development, public and private sector
and capital and physicalresources.
• Directs national resources: national resources has to direct the areas where there is
scarceresources.
• Prevent economic power concentration: it prevents from monopoly capitalism, the
wealth and economicpower.
• Proper control: industrial policy enables different to have proper control over the
establishment and development of private sector enterprises in compliance with the
nationalobjectives.
National level industrial policies:
• Industrial policy resolution 1948: after the independence, India was going through the
issue related with the partition of the country like scarcity of food, loss and land and
property, rehabilitation of people, reformation ofstates.
• Labour leaders are realisebut , Indian capitalists were not in power. In order to get rid
of this situation, government formulate industrial policy resolution1948.
Industrial policy resolution 1956
• Industrial policy became socialist –oriented with the resolution of 1956 which helped
the public sector to wider theirscope.
• This resolution was based on the mahalanobis model. This model said that the long term
growth can only be achieved by dealing in heavyindustries.
Industrial policy resolution 1973:
• In this resolution joint sector idea suggested by the Duttcommittee.licensing was made
strict and it had a strong favouritism for the large and heavyenterprises.
Industrial policy resolution 1977:

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 This resolution passed by Janta party, the ruling government at that time. the main aim
was to improve the living conditions of the policy were as follows:
• 1. prevention of economic power concentration andmonopoly.
• 2. Production of consumer goods at maximum level.
• 3. enabling industries to respond towards the needs of thesociety.
Industrial policy resolution 1980
After defeating Janta party, congress government introduced new industrial policy.
The main aim was to benefit masses of the society by fast and reasonable
industrialisation.
Policy includes:
1. Creation of employment at large scale.
2. Maximise theproduction.
3. Supporting industrially weak areas for theirdevelopment.
4. Development inagriculture.
5. focusing on import and export orientedbusiness.
6. Protection of consumers against costly and poor qualityproduct.
State level industrialpolicies:
Economic reforms adopted in the 1990s deeply modified India’s macro-economic
environment, as well as the trade and investment regimes. By rewriting the rules of
economic governance in India’s federal democracy, reforms have had far-reaching
consequences on the relations between the union and the states.
In post-reform India, state government have grater policy space and more scope for
influencing social and economic outcomes. In this context, state level policies are
starting to receive garter attention than in the past.
Below mentioned some important state level policies of some major state:
1. Andhra Pradesh: thrust awarded to development of the projects by desalination
power purchase agreements with privatedeveloper.
2. Gujarat:
Strong encouragement to private sector participations development of ports, power
stations, desalination of water supply.
3. Haryana: an industrial model township with Japanese assistance Indo-German
industrial park, a software technology park and export promotion industrial park are
coming up in thestate.
4. Kerala: steps have already been taken to initiate private participation in selected
areas like power, ports and roaddevelop.
5. Orissa: the FDI in the industrial promotion and investment corporation of Orissa will
act as a single window for investment by non- resident Indians and foreigninvestors.

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