Module 02

Business Environment

Concept Of Business Environment

We live in a dynamic environment that changes all the time. Businesses must understand the
changes in the environment and how these changes affect their performance.
The process of thinking strategically requires that managers understand how the structure
and competitive dynamics of their industry affect the performance and profitability of their
companies. Armed with an appreciation of the forces in their industry that give rise to
opportunities and threats, managers should be able to make better strategic decisions.

“Business environment is an aggregate of all conditions, events and influences that surround
and affect it. It is broad and ever changing as its separate elements interact. A single firm’s
environment is narrow in scope than the total environment of business. It is complicated and
continuously changing.” —Professor Keith Davis.

What is a business environment?

A business environment is the combination of internal and external factors that affect how a
business operates. It may involve social, economic or institutional conditions, such as
employees, customers, stakeholders, other organizations, policies or resources. While some
factors that contribute to a business environment may be outside an organization's control, it's
important for companies to understand their environments so they can adapt to changes.
Business managers and analysts can study business environments to help organizations
develop, grow and improve successfully.

Business Environment Meaning

No business can exist in a vacuum. The rapidly changing business environment might shorten
the life of a given strategy. The external changes might influence the activities and quality of
decisions of both the firm and its competitors. George Salk says, “If you’re not faster than
your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re
terminal.”
Hence, as Kenich Ohmae says that “environmental analysis is the critical starting point of
strategic thinking.” Charles Darwin has said, “It is not the strongest of the species that
survive nor the most intelligent, but the one most responsive to change.”

Business and its Environment:

A business depends on certain internal and external factors. These factors are treated as given
and business enterprise is expected to operate under a particular set of environmental system.
These factors are generally uncontrollable and beyond the control of business enterprises. But
progress, success and survival largely depend upon their capacity and ability to adapt
successfully to environmental changes available in surroundings of a business.
In its operational behaviour, an organization interacts with the various forces in its environ-
ment. It may be in terms of receiving inputs, returning outputs and using feedback to modify
inputs and the transformation process. Moreover, the organization does not operate in a
vacuum but must interact with its environment in order to function. However, level of
interaction may differ from organization to organization and the impact can vary overtime.
Business Environment: Meaning, Definition, Concept, Components, Significance
(economicsdiscussion.net)

Features Of Business Environment

A business environment is:

 Dynamic: The constant changing of the environment – be it socially,

politically, economically and technologically – results in the dynamic nature
of the business environment. A heavy interrelatedness of factors that
consequently lead to this ever-changing environment is witnessed.
 Unpredictable: Due to its dynamic nature, an air of uncertainty always
persists. Precognition is impossible, and hence, there is no way to foresee a
future event that might impact the business environment.
 Complex: The interrelatedness of factors and circumstances form a rather
tangled environment which is often difficult to analyse. It is an arduous task to
keep track of the sources and their impacts on conditions and forces that make
up the business environment. Hence, it is a complex task to measure the
relative impact a certain force may have on a business.
  Susceptible: It is difficult to foresee the impact a slight change in the
environment can have on a business. An insignificant change may influence a
company’s operations largely. It has the potential to impact a business’ entire
existence, its revenue and development.
 Relative: The business environment is not the same at all places. It varies from
place to place. The political crisis in one nation affects the business
environment only in that nation, not elsewhere. Hence, the business
environment is a relative concept.
 Multiple-angled: A social, political or economic occurrence may have different
impacts on different businesses. A political move that seems beneficial for one
business

Importance of Business Environment

The market is essentially flooded with competing businesses. It is, thus, integral for a
business to keep a lookout for the forces that affect it.

Emphasis is laid on maintaining continuous interaction with a company’s business

environment. Understanding this environment allows companies to –

 Plan For Long Term: A sound knowledge of the business environment helps
the company know its advantages and limitations, making it easier to choose
the better positioning and plan to stay in the market for the long term.
 Identify Opportunities and Trends – Timely analysis allows a company to
identify and consequently explore new opportunities and better performance
ideas. A business opportunity is a factor that, upon identifying, allows the
initiation of a business venture or aids the development of an existing
business. An example of this is Nokia, a company that has previously held a
whopping 49.9% of the global market share for mobile phones. However, the
company did not adapt to the market’s changing demands as it failed to
analyse new trends. Keeping a constant lookout for the new trends that rival
firms are setting allows the company to adapt accordingly.
 Identify threats – Identifying potential threats to the business is another reason
why a company needs to keep a watch on its environment. Threats are factors
 that have the potential to hurt a business. Steering clear of any possible threats
ahead of time is integral for the survival of a company. Staying updated and
adapting to the turbulent state of the overall business environment grants the
company better flexibility when it comes to coping when a sudden,
unexpected threat approaches the company. Understanding these conditions
and forces thoroughly allows analysts to determine what direction the
company should steer towards to stay relevant in the market.
 Gain First- Mover Advantage – A company gains the first-mover’s advantage
if it succeeds to identify market demands at the right time. This allows the
company to create its brand and gain brand recognition which benefits the
business in the long run. As time passes, competitors try to enter the market
after having examined the product’s expansive market demand. By that time,
the first mover has plenty of time to establish strong customer loyalty and
hence a significant market share which will be hard to compete with. A closer
look at the history of Amazon shows how Jeff Bezos had recognised the power
of the internet after having come across a statistic that claimed that the internet
would change the way businesses operate. Identifying the internet’s potential
ahead of time has made Amazon the world’s largest e-commerce company
today.

Components Of Business Environment

The business environment can be categorised into two types based on the factors within the
control or outside the control of a business.

Internal Environment

The internal business environment constitutes several internal forces or elements within the
control of a business that influences its operations. These include:

 Value System: It is the ethical belief that guides the business towards
achieving its mission and objective. The value system includes all components
 that form a business’s regulatory framework – organisational culture, climate,
work processes, management practices and organisational norms.
 Vision, Mission, and Objectives: The vision, mission, and objective of a
business relate to what it wants to achieve or accomplish in future. It is the
reason why the business exists.
 Organisational Structure: It outlines how the activities are directed within the
organisation to achieve its goals. It includes the rules, roles, and
responsibilities, along with how tasks are delegated and how the information
flows among the organisation’s levels.
 Corporate Culture: It is a powerful system of shared norms and attitudes that
works as a homogenising factor for an organisation’s employees and gets
appropriated by them.
 Human Resources: Human resources form all the employees and other
personnel associated with the business. It forms the most valuable asset of the
organisation as success or failure depends on it.
 Physical Resources and Technological Capabilities: It includes tangible assets
and the technical know-how that play an essential role in ascertaining the
business’s competitive capability and future growth prospects.
External Environment

External components are those factors that a business cannot control. These exist beyond a
business’ jurisdiction and supervision limit. External components influencing a business
environment are further classified into two categories:

 Micro Environment
 Macro Environment
Micro Environment

Micro environment is the business’s immediate external environment that influences its
performance as it has a direct bearing on the firm’s regular business operations.

It includes factors outside of the business’s control but can be analysed and worked upon by
managing the business to prevent any business losses.
Micro factors include:

 Customers comprise the target group of the business.

 Competitors are other market players who target a similar target group and
provide similar offerings.
 Media is the channel the business use to market its offering to the customer.
 Suppliers include all the parties that provide the business with the resources it
needs to perform its operations.
 Intermediaries comprise the parties involved in delivering the offering to the
final customers.
 Partners are all external entities like advertising agencies, market research
organisations, consultants, etc., who conduct business with the organisation
and satisfy customer needs.
 Public includes any group with actual or potential interest in the business’s
operations or a group that affects its ability to serve its customers.
Macro Environment: PESTLE

The macro environment includes remote environmental factors that influence an organisation.
The extent of influence a macro element can have on a business is significant as they usually
affect the industry as a whole.

These factors are classified under PESTLE: P – Political, E – Environmental, S – Social, T –

Technological, L – Legal, E – Economic
  Political Factors comprise government policies, political stability, corruption
in the system, tax policies, labour laws, and trade restrictions that affect the
business or the industry.
 Economical Factors relate to the economy of the country. They include
economic growth, exchange rate, interest and inflation rates, etc.
 Social Factors comprise the demographics of the country. They include
population growth rate, age distribution, career attitudes, health consciousness,
etc.
 Technological Factors pertain to innovation in technology that affects the
operations of the business. This refers to automation, research and
development activities, technological awareness, etc.
 Legal Factors are laws that affe0ct business operations. They include business-
specific, industry-specific, and even state-specific laws.
 Environmental Factors comprise of all those that influence or are determined
by the environment a business operates in. It includes the weather, climate,
environmental policies, and even pressure from NGOs to care for the
environment.
 Factor Affecting Business Environment
Economic Factors
Every facet of daily life, from employee well-being to a company’s growth, is influenced by
the state of the economy. Businesses may have to work harder to keep their employees and
adapt their operations to continue earning money if the economy declines and unemployment
grows. For instance, if the company makes products for retail sales, it can consider lowering
the price to boost sales and improve revenue.

Political Factors
Developments in politics and legislation may have an impact on a company’s ability to
operate freely. Government policies, such as changes in trade tariffs and tax policy, have a
significant impact on the operations of corporations.

For instance, a country with a stable government and uniform trade legislation typically
attracts more foreign business since this helps increase investor confidence. Companies
working within this framework may be less willing to conduct business in countries without
favourable policies.

Sociocultural Factors
Social demographics and socio-cultural settings, or a blend of social and cultural elements,
are other external factors of a business environment. Population size and cultural trends, as
well as demographics such as age, gender, and ethnicity, are sociocultural influences.
Businesses consider their target demographics when advertising to consumers to determine
the most effective ways to reach and engage with them.

The rise in health consciousness in the general public is one example of a socio-cultural
aspect that impacts businesses, causing corporations to promote certain items differently. As
a result of this increased consumer knowledge, several soda producers are now offering more
diet soda options and natural fruit flavours to appeal to health-conscious customers.

Demographic Factors
Successful businesses assess the demographics of their target market to ensure that their
products and services best suit the demand of the audience. This is one of the biggest types of
business environment factors that should be considered as it may significantly affect the
growth of any organisation. Consumer surveys are an excellent way to understand consumer
needs and predict trends in the market. This enables them to determine whether their target
market has changed and how they may improve their services to existing clients while also
attracting new ones.

Technological Factors
Automation: Many low-skilled operations can be automated, allowing corporations to replace
human-operated manufacturing lines altogether with machine-operated ones. Manufacturers,
wholesalers, supermarkets, and a variety of other industries can all benefit from this. This is
especially useful to increase the efficiency of repetitive manual tasks and reduce human error.
On the flip side, technological unemployment is a fast emerging threat to those employed to
do menial tasks.

Internet connectivity: Worldwide internet connectivity has increased manifold in the recent
past. With almost all businesses now having a digital footprint, the world is an open market.
On the other hand, a global increase in internet connectivity may lead to a drop in interest in
traditional communication methods, which could be a hindrance for some. Telephone service
providers will have to change their offerings to stay relevant, and brick and mortar stores too
are now adopting a hybrid model to sustain in the market.

Competitive Factors
By keeping track of their competition, businesses may expand their market share and remain
relevant to their customers. They can recognise and assess the strengths and weaknesses of
competitors, allowing them to learn what to include in their processes and how to avoid
income loss. They can also use the data they collect to develop new product ideas, such as
product revisions, relaunches, and new product development.

Legal Factors
The law that protects intellectual property rights is an example of a legal aspect that has an
impact on enterprises. This law prevents piracy, which may result in a movie studio losing
money if their latest film were to be sold illegally on rival streaming sites.

Financial Planning
Financial Planning is a vital part of Financial Management. In fact, planning is the first function
of management. Before embarking on any venture, the company must have a plan. Let’s
understand in detail what Financial Planning is

Financial Planning

Before initiating a new business, the organization puts an immense focus on the topic of
Financial Planning. Financial planning is the plan needed for estimating the fund requirements
of a business and determining the sources for the same. It essentially includes generating a
financial blueprint for company’s future activities. It is typically done for 3-5 years-broad in
scope and generally includes long-term investment, growth and financing decisions.

Objectives of Financial Planning

 Ensuring availability of funds: Financial planning majorly excels in the area of
generating funds as well as making them available whenever they are required.
This also includes estimation of the funds required for different purposes, which
are, long-term assets and working capital requirements.
  Estimating the time and source of funds: Time is a game-changing factor in any
business venture. Delivering the funds at the right time at the right place is very
much crucial. It is as vital as the generation of the amount itself. While time is an
important factor, the sources of these funds are necessary as well.

 Generating capital structure: The capital structure is the composition of the

capital of a company, that is, the kind and proportion of capital required in the
business. This includes planning of debt-equity ratio both short-term and long-
term.

 Avoiding unnecessary funds: It is an important objective of the company to make

sure that the firm does not raise unnecessary resources. Shortage of funds and the
firm cannot meet its payment obligations. Whereas with a surplus of funds, the
firm does not earn returns but adds to costs.
Process of Financial Planning
 Preparation of sales conjecture.

 Decide the number of funds – fixed and working capital.

 Conclude the expected benefits and profile ts to decide the number of funds that
can be provided through internal sources.

 This causes us to evaluate the requirement from external sources.

 Recognize the conceivable sources and set up the money spending plans
consolidating these variables.
Importance of Financial Planning
Financial Planning is the procedure of confining company’s targets, policies, techniques,
projects and budget plans with respect to the financial activities lasting for a longer duration.
This guarantees viable and satisfactory financial investment policies. The importance is as
follows-

 Guarantees sufficient funds.

 Planning helps in guaranteeing a harmony between outgoing and incoming of

assets with the goal that stability is kept up.

 Guarantees providers of funds to effortlessly put resources

into organizations which provokes financial planning.

 Financial Planning supports development and expansion programmes which

support in the long-run sustenance of the organization.

 Diminishes vulnerabilities with respect to changing business sector patterns which

can be confronted effortlessly through enough funds.

 Financial Planning helps in diminishing the vulnerabilities which can be a

deterrent to the development of the organization. This aids in guaranteeing
security and benefits of the organization.
What is Selling?

The selling theory believes that if companies and customers are dropped and detached, then
the customers are not going to purchase enough commodities produced by the enterprise.

The notion can be employed argumentatively, in the case of commodities that are not
solicited, i.e. the commodities which the consumer doesn’t think of buying and when the
enterprise is functioning at more than 100% capacity, the company intends at selling what
they manufacture, but not what the market requires.

In the sales process, a salesperson sells whatever products the production department has
produced. The sales method is aggressive, and customer’s genuine needs and satisfaction is
taken for granted.

Understand the difference between Customer and Consumer

What is Marketing?

The marketing theory is a business plan, which affirms that the enterprise’s profit lies in
growing more efficient than the opponents, in manufacturing, producing and imparting
exceptional consumer value to the target marketplace.
Marketing is a comprehensive and important activity of a company. The task generally
comprises recognising consumer needs, meeting that need and ends in customer’s feedback.

In between, activities such as production, packaging, pricing, promotion, distribution and

then the selling will take place. Consumer needs are of high priority and act as a driving force
behind all these actions. Their main focus is a long run of business ending up with profits.

It depends upon 4 elements, i.e. integrated marketing, target market, profitability customer
and needs. The idea starts with the particular market, emphasises consumer requirements,
regulates activities that impact consumers and draws gain by serving consumers.

Read More: What is the planning process of marketing?

This article is a ready reckoner for all the students to learn the difference between Selling and
Marketing.

Top 8 Difference Between Selling and Marketing

Selling Marketing

Definition

The selling theory believes that if companies and The marketing theory is a business plan,
customers are dropped detached, then the which affirms that the enterprise’s profit
customers are not going to purchase enough lies in growing more efficient than the
commodities produced by the enterprise. The opponents, in manufacturing, producing
notion can be employed argumentatively, in the and imparting exceptional consumer value
case of commodities that are not solicited. to the target marketplace.

Related to

Constraining customer’s perception of Leading commodities and services

commodities and services. towards the consumer’s perception.

Beginning point

Factory Marketplace

Concentrates on
 Product Consumer needs

Perspective

Inside out Outside in

Business Planning

Short term Long term

Orientation

Volume Profit

Cost Price

Cost of Production Market ascertained

What is a performance appraisal?

A performance appraisal is the periodic assessment of an employee’s job performance as
measured by the competency expectations set out by the organization.
The performance assessment often includes both the core competencies required by the
organization and also the competencies specific to the employee’s job.
The appraiser, often a supervisor or manager, will provide the employee with constructive,
actionable feedback based on the assessment. This in turn provides the employee with the
direction needed to improve and develop in their job.
Based on the type of feedback, a performance appraisal is also an opportunity for the
organization to recognize employee achievements and future potential.
The purpose of a performance appraisal
The purpose of a performance appraisal is two-fold: It helps the organization to determine the
value and productivity that employees contribute, and it also helps employees to develop in
their own roles.
Benefit for organization
Employee assessments can make a difference in the performance of an organization. They
provide insight into how employees are contributing and enable organizations to:
 Identify where management can improve working conditions in order to increase
productivity and work quality.
  Address behavioral issues before they impact departmental productivity.
 Encourage employees to contribute more by recognizing their talents and skills
 Support employees in skill and career development
 Improve strategic decision-making in situations that require layoffs, succession
planning, or filling open roles internally
Benefit for employee
Performance appraisals are meant to provide a positive outcome for employees. The insights
gained from assessing and discussing an employee’s performance can help:
 Recognize and acknowledge the achievements and contributions made by an
employee.
 Recognize the opportunity for promotion or bonus.
 Identify and support the need for additional training or education to continue career
development.
 Determine the specific areas where skills can be improved.
 Motivate an employee and help them feel involved and invested in their career
development.
 Open discussion to an employee’s long-term goals.
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