BE Unit 1

The different environmental factors that affect the business can be broadly categorized as internal ands
has its own external factors.

INTERNAL FACTORS : Internal factors are those factors which exist within the premises of an
organization and directly affects the different operations carried out in a business. These internal factors
are :

A. VALUE SYSTEM : It implies the culture and norms of the business. In other words, it means the
regulatory framework of a business and every member of the organization has to act within the limits of
this framework.

B. MISSIONS AND OBJECTIVES : Different priorities, policies and philosophies of a business is guided by
the mission and objectives of a business.

C. FINANCIAL FACTORS : Financial factors like financial policies, financial position and capital structure
also affects a business performance and its strategies.

D. INTERNAL RELATIONSHIP : Factors like the amount of support the top management enjoys from its
shareholders, employees and the board of directors also affects the smooth functioning of a business.

The EXTERNAL FACTORS include all those factors which exists outside the firm and are often regarded
as uncontrollable.. These external forces can further be categorized as MICRO
ENVIRONMENT and MACRO ENVIRONMENT.

MICRO ENVIRONMENT includes the following factors.

1.SUPPLIERS : Suppliers are those people who are responsible for supplying necessary inputs to the
organization and ensure the smooth flow of production.

2.COMPETITORS : Competitors can be called the close rivals and in order to survive the competition one
has to keep a close look in the market and formulate its policies and strategies as such to face the
competition.3.MARKETING INTERMEDIARIES : Marketing intermediaries aid the company in promoting,
selling and distribution of the goods and services to its final users. Therefore, marketing intermediaries
are vital link between the business and the consumers.

MACRO ENVIRONMENT includes the following factors.

1.ECONOMIC FACTORS : Economic factors includes economic conditions and economic policies that
together constitutes the economic environment. These includes growth rate, infation, restrictive trade
practices etc. Which have a considerable immpact on the business.

2.SOCIAL FACTORS : Social factors includes the society as a whole alongside its preferences and
priorities like the buying and consumption pattern, beliefs of people their purchasing power,
educational background etc.

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 3.POLITICAL FACTORS : The political factors are related to the management of public affairsAnd their
impact on the business. It is important to have a political stability to maintain stability in the trade.

4.TECHNOLOGICAL FACTORS : Latest technologies helps in improving the marketablity of the product
plus makes it more consumer friendly. Therefore, it is important for a business to keep a pace withv the
changing technologies in order to survive in the long run.

According to Keith Davis, “Business environment is the aggregate of all conditions, events and influence
that surrounds and affect it”.
According to Andrews, “The environment of a company as the pattern of all external influences that
affect its life and development”.

The business environment is always changing and is uncertain. It is because of dynamism of

environment. As it is already said that the business environment is the sum of all the factors outside the
control of management of a company, the factor, which are constantly changing, and they carry with
them both opportunities and risks or uncertainties which can, make or mark the future of business.
Business environment encompasses all those factors that affect a company’s operations and includes
customers, competitors, stakeholders, suppliers, industry trends, regulations other government
activities, social and economic factors and technological developments. Thus, business environment
refers to the external environment and includes all factors outside the firm, which lead to opportunities
and threats of a firm.
Nature of Business Environment
The nature of business environment is as follows:
1. Complex: Business environment is compound in nature. Environment consists of a number of factors,
events, conditions and influences arising from different sources which impact business thus making the
business complex.
2. Interdependence: The environment of the business is made of social, economic, legal, cultural,
technological, and political factors. These factors of the environment are inter-dependable. The
economic status of a country affects the development of technology. A rich country can make sufficient
expenditure on the research and development.
3. Dynamic: Business environment is constantly changing process. Business environment is dynamic as it
keeps on changing in terms of technological improvement, shifts in consumer preferences or entry of
new competition in the market. The various forces in the environment keep on changing from time to
time thus making business dynamic and not static.
4. Inter-relatedness: The different factors of business environment are co-related. For example, let us
suppose that there is a change in the import-export policy with the coming of a new government. In this
case, the coming of new government to power and change in the import-export policy are political and
economic changes respectively. Thus, a change in one factor affects the other factor.
5. Impact: Business environment has both long term and short term impact. Environment therefore has
different effects on different firms in the same industry, for example, drugs.

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6. Uncertainty: Business environment is largely uncertain as it is very difficult to predict future
happenings, especially when environment changes are taking place too frequently as in the case of
information technology or fashion industries.
7. Relativity: It is a relative concept since it differs from country to country and region to region. Political
conditions in the USA, for example differ from those in China or Pakistan. Similarly, demand for sarees
may be fairly high in India whereas it may be almost non-existent in France.

Significance of Business Environment

Some of the direct benefits of understanding the business environment are given below:
1. Customer Focus: Environmental understanding makes the management sensitive to the changing
needs and expectations of consumers. For example: Hindustan Lever and several other FMCG
companies launched small sachets of shampoo and other products realising the wishes of customers.
This move helped the firms to increase sales.
2. Strategy Formulation: Environmental monitoring provides relevant information about the business
environment. Such information serves as the basis for strategy making. For example: ITC realised that
there is a vast scope for growth in the travel and tourism industry in India and the government is keen to
promote this industry because of its employment potential. With the help of this knowledge ITC planned
new hotels both in India and abroad.
3. Public Image: A business firm can improve its image by showing that it is sensitive to its environment
and responsive to the aspirations of public. Leading firms like Reliance Industries, ICICI Bank and others
have others have built good image by being sensitive and responsive to environmental forces.
Environmental understanding enables business to be responsive to their environment.
4. Continuous learning: Environmental analysis serves as broad based and ongoing education for business
executives. It keeps them in touch with the changing scenario so that they are never are caught
unaware. With the help of environmental learning managers can react in an appropriate manner and
thereby increase the success of their organisations.
5. Giving Direction for Growth: The interaction with the environment leads opening up new frontiers of
growth for the business firms. It enables the business to identify the areas for growth and expansion of
their activities.

6. Change Agent: Business leaders act as agents of change. They create a drive for change at the grass
root level. In order to decide the direction and nature of change, the leaders needs to understand the
aspirations of people and other environmental forces through environmental scanning. For example:
contemporary environment requires prompt decision-making and power to people. Therefore, business
leaders are increasingly delegating authority to empower their staff and to eliminate procedural delays.
10 Most Important Business Objective
Productivity

Employee training, equipment maintenance and new equipment purchases all go into company
productivity. Your objective should be to provide all of the resources your employees need to remain as
productive as possible.

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Customer Service

Good customer service helps you retain clients and generate repeat revenue. Keeping your customers
happy should be a primary objective of your organization.

Employee Retention

Employee turnover costs you money in lost productivity and the costs associated with recruiting, which
include employment advertising and paying placement agencies. Maintaining a productive and positive
employee environment improves retention, according to the Dun and Bradstreet website.

Core Values

Your company mission statement is a description of the core values of your company, according to the
Dun and Bradstreet website. It is a summary of the beliefs your company holds in regard to customer
interaction, responsibility to the community and employee satisfaction. The company's core values
become the objectives necessary to create a positive corporate culture.

Growth

Growth is planned based on historical data and future projections. Growth requires the careful use of
company resources such as finances and personnel, according to Tim Berry, writing on the
"Entrepreneur" website.

Maintain Financing

Even a company with good cash flow needs financing contacts in the event that capital is needed to
expand the organization, according to Tim Berry, writing on the "Entrepreneur" website. Maintaining
your ability to finance operations means that you can prepare for long-term projects and address short-
term needs such as payroll and accounts payable.

Change Management

Change management is the process of preparing your organization for growth and creating processes
that effectively deal with a developing marketplace. The objective of change management is to create a
dynamic organization that is prepared to meet the challenges of your industry.

Marketing

Marketing is more than creating advertising and getting customer input on product changes. It is
understanding consumer buying trends, being able to anticipate product distribution needs and
developing business partnerships that help your organization to improve market share.

Competitive Analysis

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A comprehensive analysis of the activities of the competition should be an ongoing business objective
for your organization. Understanding where your products rank in the marketplace helps you to better
determine how to improve your standing among consumers and improve your revenue.

Here we detail about the thirteen significant features of Indian business environment.

1. Co-Existence of Public and Private Sector:

Indian business environment is characterized by the co-existence of both public and private sector in
respect of its participation in various economic activities in the country. Accordingly, the various
economic policies of the country can promote the development of both the sectors in different spheres
of activities.

2. Low Income Level:

Another features of Indian business environment is that it has to face low income level of the people in
general as an important economic parameter for determining its economic activities.

3. Poor Rate of Capital Formation:

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Capital deficiency is one of the important features of the Indian business environment. Both the amount
of capital available per head and the present rate of capital formation in India is very low. Moreover, this
low level of capital formation in India is also due to weakness of the inducement to invest and also due
to low propensity and capacity to save. Thus under this present feature, the business environment of
the country never faces adequate incentive towards faster development of the country.

4. Low Level of Technology:

Prevalence of low level of technology is another important feature of Indian business environment. The
business environment of the country is thus suffering from technological backwardness. Obsolete
techniques of production are largely being applied in both agriculture and industrial sector of the
country.

Sophisticated modern technology is being applied in production units at a very limited scale as it is very
much expensive. Moreover, the huge unskilled and untrained labour force is also an important
impediment towards technological modernization of the country.

5. Under-Utilization of Capacity:

Under-utilization of productive capacity of Indian industries is another important feature of Indian

business environment. As a result of this under utilization, the industries in India are suffering from
higher unit costs and low profitability syndrome.

6. Lack of Diversification:

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The business environment of the country is also subjected to the problem of lack of diversification in its
industry, trade and other related activities.

7. Financial Market:

Indian business environment is also supported by under developed financial market. Financial market is
suffering from lack of buoyancy and there is also the problem of lack of adequate and free
uninterrupted flow of institutional credit towards industrial and other business units.

8. Industrial Dispute and Slow Pace of Labour Reforms:

Another important feature of business environment is the growing industrial dispute leading to strikes
and lock-outs in growing number of units as a result of irrational trade union activities. Moreover, the
slow pace of labour reforms introduced by the Government has affected the business environment of
the country.

9. Government Interference:

Business environment in the country is also affected by unwanted government interference in various
spheres of business and industrial activities. There is lack of single window clearance and lack of
administration efficiency in respect of industrial licensing. Thus the business enterprises have to face the
problem of red-tapism, harassment, corruption, undue delay etc. which ultimately interrupts the
promotion of smooth business environment in the country.

10. Extent of Market:

Another feature of business environment of India is the poor extent of market in the after math of
globalization and international competition faced by the country. The business enterprises of the
country is also suffering from lack of diversification of its export market.

However, considering the natural advantage available in the country, the country would be able to
diversify its export market particularly in respect of its agro-processed industries, services sector,
information technology sectors etc.

11. Transportation Bottle Neck:

Another important feature of business, environment of the country is that it is subjected to frequent
transport bottle-neck. Although the country has developed a wide network of transportation system
throughout the country but its frequent interruption as a result of natural calamities like flood,
landslides etc. and insurgency has been resulting a serious blow to the business environment of the
country.

12. Trady Flow of Foreign Investment:

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Promotion of business environment also depends on the smooth flow of foreign investment in various
sectors. But the country is suffering from trady flow of foreign investment, which goes against the
promotion of business environment in the country.

13. Disturbed Law and Order Conditions:

Another important feature of business environment in India is its disturbed law and order conditions in
some particular regions leading unbalanced growth where smooth flow of business is interrupted. Thus
the business environment in a vast country like India is subjected to its diversified features.