Business

Environment

B.N. Ghosh

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 Chapter 1

Business Environment:
An Overview

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 Learning Objectives
 The meaning of business environment
 The characteristics and components of business environment
 The features of micro environment (esoteric and exoteric)
 The features of macro business environment (domestic and
global)
 The policy interactions, contradictions, and coordination of
business environment

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 What is business environment
• Business environment is a conditioning and interactive
situation that a business house confronts in its micro
and macro operations.

• It may be internal, national, and international in

orientation.

• It is a type of relation that a business firm establishes

or has to negotiate with the whole complex of factors
and forces that affect its business activities, strategies,
and policies.

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 Characteristics of business environment
• Business environment comprises economic, social, political, legal,
cultural, and demographic environments.

• The effects of environmental factors are usually objective as they

will have some quantitatively definite impact on the business
world, and the direction of the impact is known on a priority
basis. However, in some cases, it could be subjective also.

• The real effect of the changes in business environment depends

on the nature of the business, the location of the business, the
destination of products, and many other paraphernalia.

(Contd.)
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 Characteristics of business environment
• Business environment is highly interactive with the involved
variables.

• In business environment, many factors and forces may be

exogenous and external, and some of them may involve risks, over
and above uncertainty.

• Uncertainty is a situation where there is no guarantee or certainty

of the anticipated outcome.

• Certainty is based on perfect knowledge, information, and

confidence about the working of the market.

• Business environment works at many empirical planes, and it has a

multi-level structure.
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 Micro environment
(esoteric and exoteric)
The distinction between the esoteric and exoteric relations depends
on the fact that some are extending inside support whereas
others are extending support from the outside, just like the
members of inner cabinet and those outside the cabinet of a
government.

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Micro economic environment

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 Value Premises
• The value premises of the company give an indication of what type
of business environment it is looking for.

• A company that is socialized takes social responsibility very

seriously and establishes goodwill in this regard.

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 Internal Power Structure
• The internal power structure is an embodiment of esoteric
environment.

• The style of functioning of different companies is different; some

companies take decisions very promptly and some others may
unnecessarily delay the decision-making process.

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 Command over Resources
• The command over all types of resources (including physical and
human resources) of a firm is an important determinant of its micro
environment.
• Resources include physical capital, assets, landed property, building,
machinery, human resources, technology, and so forth.
• Command over resources gives an idea of the type of business the
company should be able to handle in the domestic country and
abroad.

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 Firm-level Capability
• Capability includes the potentiality of its human resources,
managerial acumen, technological prowess, and the ability of the
firm to supply standard goods at the cheapest possible price.

• An optimal allocation of resources at its command makes the firm

economically successful and competitive in the long run.

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 Connectivity
 Connectivity with both the in-house people and stakeholders at the
periphery is a necessity and a strategy for a firm to reap many
advantages.

 It also reduces cost, saves time, and makes management of the firm
very efficient.

 It may also annihilate the distance and information asymmetry.

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National and Institutional Environment
 The natural factors that impact the micro environment are natural
endowments which include land resources, raw materials, rains,
climate, natural calamities, and so forth.

 Institutions have their influence on education, health, labour

market conditions, and so forth.

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 Practice of Kickbacks
 Bribery and corruption are both micro and macro behavioral traits.

 So long as greed exists, kickbacks can perhaps never be abolished

from the world.

 Therefore, the choice is more on the rate and the nature of

transaction involved.

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 Macro business environment
• There are basically two macro business environments for a firm –

 domestic macroeconomic environment, and

 global macroeconomic environment

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Macro business environment

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Domestic macroeconomic environment
• The major variables of domestic macro economic environment –

 Nature of the economic system

 Economic growth and income distribution
 Sociocultural and demographic environment
 Institutional environment
 Competitive environment
 Macroeconomic stability
 Political and legal environment
 Economic policies

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 Global Macroeconomic Environment
• Global macroeconomic environment affects the domestic
macroeconomic environment in many ways. The major ones –
 Influence on trade and capital inflows
 Positive windfall

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 Business environment
Business environment involves many types of policy interactions,
contradictions, and coordination.

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Business environment

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Determinants and Dimensions of Business
Environment
• The micro-macro dimensions of the economy: the size of the
economy and resources endowments (periphery)
• The size of the market (place)
• Possibilities of production (inputs and outputs)
• Participants in productive activities, suppliers, and other stakeholders
as well as consumers
• Risks and uncertainties of various types (predicaments)
• Government policies including fiscal and monetary policies
• Possibilities of future gains and benefits (prospects)

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Business environment

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