UNIT-1

What is a business?
 Business is derived from ‘busy-ness,’ i.e. keeping oneself occupied with one or the
other work, but it is much more than just being busy.
 A business is defined as an organization or enterprising entity engaged in
commercial, industrial, or professional activities. Businesses can be for-profit entities
or they can be non-profit organizations that operate to fulfill a charitable mission or
further a social cause.
or
 Business may be defined as an activity involving regular production or purchase of
goods and services for sale, transfer and exchange with an object of earning profit.

Nature and Scope of Business:

 Regular Process: It is an activity which is performed repeatedly to generate profit.
 Economic Activity: The whole sole purpose is maximising wealth.
 Creates Utility: The goods or service must be such that it creates form utility –
conversion of products in a consumable form, time utility – making the goods and
services available when needed; and place utility – availability of goods or services
wherever required, for the consumers.
 Capital Requirement: Any venture requires fund depending on the size and its type.
 Deals in Goods and Services: It is related to manufacturing and offering goods for
sale or catering services.
 Risk: All businesses have a risk factor or uncertainties of failure and loss.
 Profit Earning Motive: The initial motive of a businessman is making a profit out of
his venture.
 Satisfaction of Consumer’s Need: It is concerned with the fulfilment of the
customer’s demands and needs.
 Involves Buyer and Seller: There are majorly two parties involved, the customer and
the merchandise.
 Social Obligations: It has some social responsibilities, like creating job opportunities,
dealing with licensed products, etc.

Importance of Business:

 Revenue Generation: It is the key to revenue generation for the business owner
since it brings in profit and proves to be a source of income for the owner.
 Economic Growth: It is essential for the economic growth of a country since high
revenue means higher tax collection.
 Improves Standard of Living: A country with more industrial units and companies
experience a higher rate of employment and better living standards.
 Bulk Production: Manufacturing units involve large-scale production, which
ultimately reduces the cost of production, and people get a continuous supply of
goods at a reasonable price.
  Innovation: It involves brainstorming and generation of new ideas which opens up
the way for innovation and creativity.
 Generates Employment: It is a long-term process which requires the human
resource to function correctly. Therefore, it creates job opportunities.
 Market Expansion: A good strategy and high customer satisfaction lead to a strong
customer base aiming at market expansion.

Objectives of Business:
Success in business depends on proper formulation of its objectives. Objectives must
be clear, and attainable. Thus, the objectives of business may be classified as :
(a) Economic objectives
(b) Social objectives
(c) Human objectives
(d) National objectives
(e) Global objectives
Now let us discuss these objectives in detail.
(a) Economic objectives of a business refer to the objective of earning profit and those
which have a direct impact on the profit-earning objective of business.
Some of the main economic objectives of business are:
(i) Earning of adequate profits;
(ii) Exploring new markets and creation of more customers;
(iii) Growth and expansion of business operation;
(iv)Making innovations and improvements in goods and services; and
(v) Making use of available resources in the best possible manner.
(b) Social objectives of business are those, which are desired to be achieved for the benefit
of the society.
Some of the major social objectives are:
(I) production and supply of quality goods and services to the society;
(ii) Making goods available at reasonable prices;
(iii) Avoidance of unfair practices like hoarding, black-marketing, over-charging, etc.;
(iv) Contributing towards the general welfare and upliftment of the society;
(v) Ensuring fair return to the investors;
(vi) Taking steps in the direction of consumer education; and
(vii) Conserving natural resources and wild life and protecting the environment.
(c) Human objectives of business primarily refer to the objectives aimed at safeguarding the
interest of its employees and their welfare.
Some of the major human objectives are:
(i) providing fair remuneration and incentives to the employees;
(ii) arrangement of better working conditions and proper work environment for the
employees;
(iii) providing job satisfaction by making the jobs interesting and challenging, putting the
right persons in right job;
(iv) providing the employees with more and more promotional opportunities;
(v) organizing training and development programs for the growth of the employees; and
(vi) providing employment to the backward classes of the society and people who are
physically and mentally challenged.
(d) National objectives of business are the objectives of fulfilling the national goals and
aspirations.
Some of the National objectives are:
(i) creation of employment opportunities;
(ii) promotion of social justice;
(iii) produce and supply goods in accordance with the national interest and priorities;
(iv) payment of taxes and other dues honestly and regularly;
(v) helping the state in maintaining law and order by promoting good industrial relations;
and
(vi) implementing government’s economic and financial policies framed from time to time.
(e) Global objectives of business are the objectives of facing the challenges of global
market.
Some of the global objectives are:
(i) making available globally competitive goods and services; and
(ii) reducing disparities among rich and poor nations by expanding its operations.

Types of Business Organisations:

There are 4 main types of business organization: sole proprietorship, partnership,
corporation, and Limited Liability Company, or LLC. Below, we give an explanation of each of
these.
(a) Sole Proprietorship:
The simplest and most common form of business ownership, sole proprietorship is a
business owned and run by someone for their own benefit. The business’ existence is
entirely dependent on the owner’s decisions, so when the owner dies, so does the business.
Advantages:
 All profits are subject to the owner.
 There is very little regulation for proprietorships.
 Owners have total flexibility when running the business.
 Very few requirements for starting—often only a business license.
Disadvantages:
 Owner is 100% liable for business debts.
 Equity is limited to the owner’s personal resources.
 Ownership of proprietorship is difficult to transfer.
 No distinction between personal and business income.
 Limited managerial expertise.
(b) Partnership:
These come in two types: general and limited. In general partnerships, both owners
invest their money, property, labour, etc. to the business and are both 100% liable for
business debts. In other words, even if you invest a little into a general partnership, you are
still potentially responsible for all its debt. General partnerships do not require a formal
agreement—partnerships can be verbal or even implied between the two business owners.
Limited partnerships require a formal agreement between the partners. They must
also file a certificate of partnership with the state. Limited partnerships allow partners to
limit their own liability for business debts according to their portion of ownership or
investment.
Advantages:
 Shared resources provides more capital for the business.
 Each partner shares the total profits of the company.
 Similar flexibility and simple design of a proprietorship.
 Inexpensive to establish a business partnership, formal or informal.
 In partnership firm each partner has a right to take part in the management of the
business.
Disadvantages:
 Each partner is 100% responsible for debts and losses.
 Selling the business is difficult—requires finding new partner.
 Partnership ends when any partner decides to end it.
(c) Corporation:
A corporation is a group of people united in one body for a specific purpose. A
corporation operates as a separate, legal body led by an elected board of directors. The
board is elected by shareholders, otherwise known as the owners of the corporation.
Depending on the size of the company, one person can simultaneously be an officer,
director and shareholder. Aside from the ability to vote and a few other personal rights,
corporations have the same legal rights of an individual.
Or
Corporations are, for tax purposes, separate entities and are considered a legal
person. This means, among other things, that the profits generated by a corporation are
taxed as the “personal income” of the company. Then, any income distributed to the
shareholders as dividends or profits are taxed again as the personal income of the owners.
Advantages:
 Limits liability of the owner to debts or losses.
 Profits and losses belong to the corporation.
 Can be transferred to new owners fairly easily.
 Personal assets cannot be seized to pay for business debts.
Disadvantages:
 Corporate operations are costly.
 Establishing a corporation is costly.
 Start a corporate business requires complex paperwork.
 With some exceptions, corporate income is taxed twice.
(d) Limited Liability Company (LLC):
Similar to a limited partnership, an LLC provides owners with limited liability while
providing some of the income advantages of a partnership. Essentially, the advantages of
partnerships and corporations are combined in an LLC, mitigating some of the disadvantages
of each.
Advantages of an LLC:
 Limits liability to the company owners for debts or losses.
 The profits of the LLC are shared by the owners without double-taxation.
 Separate legal entity.
Disadvantages:
 Ownership is limited by certain state laws.
 Agreements must be comprehensive and complex.
 Beginning an LLC has high costs due to legal and filing fees.
Business Environment:
 Business Environment can be defined as sum or collection of all internal and external factors
such as employees, customers needs and expectations, supply and demand, management,
clients, suppliers, owners, activities by government, innovation in technology, social trends,
market trends, economic changes, etc.
 These factors affect the function of the company and how a company works directly or
indirectly. Sum of these factors influences the companies or business organisations
environment and situation.
 Business environment helps in identifying business opportunities, tapping useful resources,
assists in planning, and improves the overall performance, growth, and profitability of the
business. There are various types of Business Environment like Micro Environment and
Macro Environment.

Characteristics of Business Environment:

Following are the chief characteristics of the business environment:
(a) Totality of External Forces: Business environment is the sum totals of all those
factors/forces which are available outside the business and over which the business has no
control. It is the group of many such forces that is why, its nature is of totality.
(b) Specific and General Forces: The forces present outside the business can be divided into
two parts – specific and general.
 Specific: These forces affect the firms of an industry separately, e.g., customers,
suppliers, competitive firms, investors, etc.
 General: These forces affect all the firms of an industry equally, e.g., social, political,
legal and technical situations.
(c) Interrelatedness: 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.
(d) Dynamic Nature: As is clear that environment is a mixture of many factors and changes
in some or the other factors continue to take place. Therefore, it is said that business
environment is dynamic.
(e) Uncertainty: Nothing can be said with any amount of certainty about the factors of the
business environment because they continue to change quickly. The professional people
who determine the business strategy take into consideration the likely changes beforehand.
But this is a risky job. For example, technical changes are very rapid. Nobody can anticipate
the possibility of these swift technical changes. Anything can happen, anytime. The same is
the situation of fashion.
(f) Complexity: Environment comprises of many factors. All these factors are related to each
other. Therefore, their individual effect on the business cannot be recognised. This is
perhaps the reason which makes it difficult for the business to face them.
(g) Relativity: Business environment is related to the local conditions and this is the reason
as to why the business environment happens to be different in different countries and
different even in the same country at different places.

Scope & Significance of Business Environment:

(a) Identifies Business Opportunities And Threats: Business environment helps business in
identification of various opportunities and threats. When business is able to detect market
opportunities timely, they can easily take advantages of such opportunity at earliest. They
can earn maximum returns by availing such opportunity before the competitors. By proper
interaction between business and its environment all threats can be easily detected. It will
enable business in taking corrective measures timely.
(b) Helps In Planning And Policy Formulation: Proper understanding of business
environment helps in formulating better policies and strategies. It conveys all current
information regarding market conditions to business. All opportunities and threats are
scanned through the study of the business environment. Businessmen are properly aware of
environment and thereby take all decisions according to it.
(c) Provides Useful Resources: Business depends on the environment in which they operate
for several resources. Business environment supplies several inputs like raw materials,
capital and labour which are used by the business for its operations. These inputs are
converted into goods and services for satisfying the needs of the market. Without proper
supply of inputs, business cannot continue its operations. It is fully dependent upon
environment for taking inputs and delivering the required goods or services.
(d) Improves Performance: Business environment has an effective role in accelerating the
overall performance of business organisations. Through continuous environmental
awareness, managers update their knowledge and skills. Environmental study serves as the
medium of educating management. Monitoring of environment provides qualitative
information which helps in developing strategic thinking. It enables managers to adopt
suitable management practices to control and improve the performance of business.
(e) Helps In Coping With Rapid Changes: Factors which constitute business environment are
dynamic in nature. They keep on changing continuously from time to time. These changes
include changes in customer’s preferences, fashion, technology, economic conditions etc.
Proper understanding of the business environment helps business in detecting all these
frequently occurring changes easily. It enables them in dealing with these changes
efficiently by taking appropriate actions at right time. Managers through continuous
monitoring of environment are sensitive to such changes and respond effectively.
(f) Enhances Business Image: Business through proper understanding of its environment are
able to improve its public image. They are more responsive and sensitive to the
environmental needs through proper knowledge of business environment. Study of
environment provides them information for making realistic plans and implementing them
effectively. Businesses are able to provide better service and serve the interest of entire
society. People are happy with the business and develop confidence towards it. This enables
in developing a better image in market.
(g) Assist In Facing Competition: Business environment communicates all details about
competitors in market to business. Awareness regarding the actions and strategies of
competitors is crucial for every business for meeting competition effectively. It helps
business in formulating plans and policies in accordance with the competitor’s actions.
Businesses are able to face challenges and competition in market through systematic
planning in an efficient way.

Components of Business Environment:

(a) Economic Environment: There are economic factors in the economic environment that
affect the functioning of a business entity. These factors include economic systems,
economic policies, business cycles, economic resources, gross national product, corporate
profitability, inflation rate, employment, balance of payments, interest rates, consumer
income, etc. The economic environment is dynamic and complex in nature. A business firm
closely interacts with the economic environment.
 The economic situation in the market i.e. demand and supply factor
 Government’s economic policies: monetary policy, fiscal policy, industrial policy,
trade policy, foreign investment policy, etc.
(b) Social Environment: Social forces connect with factors that affect the core values,
priorities and behaviour of society. The basis of these factors is formed by the fact that
people are a part of a society and cultural group that shape their beliefs and values. There
are many cultural blunders due to the failure of businesses to understand foreign cultures.
For example, symbols can take a negative meaning in another culture.
(c) Political Environment: The political environment in any country affects legislation and
government rules and regulations, under which a firm operates. The effect of the political
environment, affected by:
 Legislature: This includes Parliament, Legislative Assemblies. They are law-making
bodies that enforce rules and regulations.
 Executive: They include the government enforcing the government’s decision.
 Judiciary: It includes the Supreme Court, the High Court, who see whether the
decisions taken by the executive are within the constitutional framework or not.
They are also known as dispute settlement bodies.
(d) Legal environment: The state determines the formal rules, laws and rules for the
country’s operating system. It creates a structure of rules and regulations within which a
business has to operate. To run a business effectively, the business should have full
knowledge of laws and policies. Some laws are as follows:
 Consumer Protection Act-1986
 Act of factories -1948
 Workers’ Compensation Act-1923
 FEMA Act-1999
 Company Act-1956
 Environment Protection Act-1986
(e) Technological Environment: Technology has brought far-reaching changes in production,
quality of goods, productivity and packaging methods. Continuous technical development is
happening. The business firm should constantly monitor the changes in the technical
environment, which can have a great impact on the business’s business practices. It also
indicates the speed of research and development and progress made in introducing modern
technology in production.

Technology provides fundamental but cost-effective options for traditional labour-

intensive methods. Technology is the key to technology development in a competitive
business environment. Technology helps businesses run better and faster.

Introduction to Micro-Environment:
Micro Environment, refers to the environment comprising of all the actors of an
organization’s immediate environment which influences the performance of the company,
as they have a direct bearing on the firm’s regular business operations. It is connected to a
small area in which the firm works.

Micro- Environmental Factors

Internal Environment:
(a) Value System: The value system of an organization is also known as the philosophy of an
organization. The value system of an organization contains work processes, culture, norms
and climate. The employees should perform the activities within the purview of this
framework.
(b) Mission and Objectives: Mission defines the company’s business and the reason for its
existence and objectives implies the ultimate aim of the company and the ways to reach
those ends. The business plan is developed and resources are used to achieve the objectives
of the organization’s internal environment.
(c) Organisational Structure: The structure of the organization determines the way in which
activities are directed in the organization so as to reach the ultimate goal. These activities
include the delegation of the task, coordination, the composition of the board of directors,
level of professionalization, and supervision. It can be matrix structure, functional structure,
divisional structure, bureaucratic structure, etc.
(d) Company Image: Company image means the reputation of an organization in the
market. A company with a positive Company image attracts the right talent in the
organization.
(e) Brand Equity: It refers to the popularity which the company has and the proportion of
customer which they receive due to this popularity.

External Environment:
(a) Customers: The goal of business enterprises is to make a profit by meeting the
customer’s demand. Today, a firm’s marketing starts and ends with customers. To be
successful, a business firm must search for customers for their products. This is the reason
why the customers thus form the most important element in the microscopic environment
of the business. Sales of the product mainly depend on the degree of consumer satisfaction.
(b) Suppliers: Suppliers are either individuals or business houses. Suppliers are the one who
provides inputs such as material, components, labour and other stock of goods to the firm,
which is required to undertake manufacturing activities. when there is uncertainty as to the
supply constraints, it usually builds pressure on the firms and they are required to maintain
high inventories, which leads to cost increases.
Suppliers have the power to change the firm’s position in the market and its capabilities.
(c) Competitors: In a competitive environment, there are some basic things that every firm
has to pay attention to. Any company, no matter how big, is monopolized. In the world of
basic business, a company faces different forms of competition. The most common
competition that a company faces is that it deals with differentiated products from other
companies.
(d) Society/Public: Literally word ‘public’ refers to people in general. According to Philip
Kotler, “A public is any group that has an actual or potential interest in or impact on a
company’s ability to achieve its objectives.”
The company has a duty to satisfy the people at large along with competitors and the
consumers. It is an exercise which has a larger impact on the well-being of the company for
tomorrow s stay and growth. Create goodwill among public, help to get a favourable
response for a company.
(e) Media: The attention of positive media can create an organization (or its products) and
the attention of negative media can “break” an organization. Organizations need to manage
the media so that the media can help in promoting positive things about the organization’s
products and services and reduce the impact of negative events on their reputation.
Introduction to Macro-Environment:
Macro environment can be defined as the collection of those factors and conditions,
which has the capability of influencing the business positively or negatively.
Macro environment is the type of external business environment in which the firm
and its micro environmental forces exists, which gives opportunities or pose threats to the
firm. It comprises of the elements which are uncontrollable, dynamic and unpredictable.

Macro- Environmental Factors

(a)Natural: Resource availability like land, water and minerals is the root cause of the
business organization’s development. It includes natural resources, weather, climatic
conditions, port facilities, topographical factors such as soil, sea, rivers, rain, etc.
Each business unit should look for these factors before choosing a place for its business.
The natural environment determines the functioning of a business firm to a large extent.
The natural environment has a great effect on the functioning of the business. The business
organization should consider natural factors before starting its operations.
Natural disasters such as floods, droughts, cyclones, tsunamis, etc. can also affect
the business environment.
(b) Cultural: Culture includes knowledge, value, faith, ethics, law, customs, traditions, etc.
Culture goes through institutions like family, school and college from one generation to the
next. Business is an integral part of social order. Society is largely influenced by culture and
in turn, culture influences the business firm. Culture shapes the attitude and behaviour of
society. Any change in the cultural factor affects the business on a large scale. Businesses
should be organized and governed keeping in view the various values and norms of society.
(c) International: International managers have to face intensive and ongoing challenges,
which require training and understanding of foreign environments. In order to manage a
business in a foreign country, managers need to deal with a large number of cultural and
environmental differences.
(d)Economical
(e) Political
(f Social
(g) Technological
(h) Legal
Difference Between Micro and Macro Environment:
BASIS FOR
MICRO ENVIRONMENT MACRO ENVIRONMENT
COMPARISON

Meaning Micro environment is defined as the Macro environment refers to the

nearby environment, under which general environment, that can
the firm operates. affect the working of all business
enterprises.

Elements COSMIC, i.e. Competitors, PESTLE, i.e. Political, Economic,

Organization itself, Suppliers, Socio-cultural, Technological,
Market, Intermediaries and Legal and Environmental.
Customers.

Dynamic hence difficult to

Nature Uniform hence easy to control
control
Are these Yes, but to some extent only No
factors
controllable?

Influence Directly and Regularly Indirectly and Distantly

Lasting Period Short life impact Longer life impact

Other names Internal environment External environment