Business Enruronmnent 93

INTRODUCTION PARTI

CONCEPT OF BUSINESS ENVIRONMENT

Rusiness environment consists ofall the internal and external forces
or factors that influence the vorking ofa business firm.

Theinternal factors comprises of firm's strategies and policies,

management- labour relations, resources like manpower, capital,
machines, etc.

The external environment comprises of the micro factors such as

customers, competitors, suppliers, etc., and the macro factors such
aseconomic, social, political, technical and other factors.

Analysis of the internal environment helps a firm to identify its

strengths and weaknesses, and the analysis of external environment
helps to identify opportunities and threats.. Thus, environmental
analysis helps to undertake the SWOT strengths, weaknesses,
opportunities and threats) analysis. Nowadays, SWOT is referred
as SWOC(C stands for Challenges).

Definitions
According to Keith Davis, "Environment of the business means
the aggregate of all conditions, events and influences that
"
Surround and affect it.
2. In the words of J. Kriz and C. Duggan, "Business environment

cOnsists of all external and internal factors that influence the

mplex interaction of the market, production and finance, the
r e e basic components of our business world."

Features of Business Environment

Ihe
following the characteristics of business environment:
are main

Dynamic in Nature:
nature. Change
is
dynamic
Business environment
external environment.
in

ges take place in the

94 Commerce 1
(E.Y.B.Com
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For example: SEM

. Competitors may introduce new product
desig gns,
change pricing, promotion and other
strategie gns, or m
o

Customers' tastes and preferences may

period of time. change over
Government may 1ntroduce policy changes in
taxation, foreign investment, foreign trade, etc. pect
A business firm needs to make changes in its
strategies to fa ta t

challenges of the dynamic environment.

FEATURESs

OF Dynamic
B
Direct Indirect Impact
U Internal/ External Factors
S Inseparable Part
Complex
N
Regulations
Opportunities/Obstacles
Proactive/ Reactive Decisions
ENVIRONMENT

2 Direct and Indirect Impact: Business environment nmayay have

direct and indirect impact on the working of a business tin
For example:

Themicro-external factors like competition, beed

policies, customer preferences, etc., can thavea fir
dired
immediate effect on the working of a firm
busines
The macro-external factors like social, e
e c o n o m i

wo
political factors may have indirect effect o
of the business firm.
RustnessE H 7 r o n m e n t
95
Activities of business firms
ernal and External Factors:
Internal a n d are

3 influenced by internal and external factors.

controllable in nature. It includes
The internalfactors are
machinery, manpower, management-labour relations, etc.
can replace old machinery with
For instance, a company
new, if so required.

control of a business
The extermal factors are beyond the
firm. External factors include Government policies,
etc. A
competitors' strategies, customer preferences,
business firm needs to adjust its strategies depending upon
the changes in external factors.

4.A Inseparable Part of BusinesS: Environment is an integral part

without
of business. Business firms cannot operate
environment. For, 1nstance, business firms cannot operate

without customers, suppliers and dealers.

natural environment for its
Also business firms depend upon
The technological and other
resources such as raw materials.
factorsalso influence the working of the business.
modern business is more
5 Complex in Nature: Environment of
olden days, business
complex and unpredictable. In few,
environment was stable customers preferences were
-

were stable, and

competition was limited, government policies
SO on.

business environment is more complex due to

Nowadays, the
customers' expectations, drastic
heavy comnpetition, growing
and so on.
changesin government policies,
Environment provides
CreatesOpportunities and Obstacles: the working of an
creates obstacles in
opportunities and
organisation.
situations
termed favourable
Opportunities may be
as

of the business.
which facilitates higher profits and growth
which
may
Obstacles are the unfavourable situations,
the organisation's profitability and
adversely affect
growth.
 96 Commerce I

Regulates Scope of Business: Environment

(EY.B.CCom:
om St
7
of business activities.
For instance, regulates the
Governmen
such as restrictions on advertising of
restricts advertising of socially undesirable
liquorand
able rproducts.
regulat
cigare
. Reactive and Proactive Decisions: Due to
business firms take proactive and reactive decicirOn
sions. Onme
Majority of the firms take reactive decisions, i.e. in
t odecisions taken by others or competitors. react
Few firms take proactive decisions to launch neve.
new mode
schemes, to introduce price changes, to resth
business, etc., before others do it. Such firm.
rms
competitive advantage in the market. Examples:
Motorcycles, TCS (software), Ultra Tech Cements. etc.He
9 Environment is Multi-dimensional: Changes in environn
may have positive and negative impact on the workin
business firms. Environmental changes may be favourable
some firms, and unfavourable to others.

For instance, Government of India has liberalised the entrv

foreigncompanies into India. A majority of Indian domest
firms consider the Govt.'s move as a threat because they hare
toface competition from the foreign firms. However, few d
theIndian firms consider it as an opportunity as they can hane
a tie-up with the foreign firms, and also they can lean
techniques from the foreign firms.
10. Environment Analysis and Planning: The relationshipbetve
planning and environment analysis is inseparable. The mal
purpose is to set the goals or objectives.
nesse
Environmental analysis indicates strengths, weaki
SHO
opportunities and threats (SWOT). Depending on the o
analysis, afirm sets its objectives.
Forinstance, if the SWOT analysis indicates opport nities
tarmcanset highertargets. However, if the threats are 1de
the firm may lower down its
targets.
 Business Environment
97

IMPORTANCE OF BUSINESS ENVIRONMENT

Environment analysis enables a business firm to identify its

strengths, weaknesses, opportunities and threats. Environmental
influences must be identified and analyzed individually and
collectively to determine their real and potential effects on an
organisation. An organisation is a part of a complex world; it does
not exist in isolation, and therefore, it needs to scan the environment
in which it operates. Proper environment analysis helps a firm to
formulate effective strategies in the various functional areas. The
importance or role of scanning business environment is briefly stated
as follows:

1. Identification of Strengths: The analysis of the internal

environment helps to identify the strengths of the firm. Every
organisation must strive to maintain and improve on its
strengths.
The following instances indicate the strength of a business firm:

Competent and dedicated employees.

Effective personnel policies (selection, training,
promotion,
etc.), which are employees-cum-organisation oriented.

Technology used by firm leads to lower cost of production.

Working conditions and welfare facilities, which generate
job satisfaction.
22 Identification of Weaknesses: The analysis of the internal
environnentindicates not only strengths but also weaknesses
ofthe firm. The firm needs to identify its weaknesses and correct
them as early as possible.
Forinstance,the machines used may be outdated, and therefore,
theymust be replaced with new ones. Also, employees may
lackcompetence and dedication; the firm may provide training
and motivate them.
ldentification of Opportunities: An analysis of the external
environment helps to identify the opportunities in the market.
 Commerce-1 (EY.B.Co
98 sible of
should make every possible
The businessfirm effort to SEM
opportunities,
a s and
when they come. grab the
that someone elco
else
Failure to do
so would mean
would
For instance, grab the
the government m
opportunities. uce
b u s i n e s s firms excise
ay 1e
se
duties
certain
on

reduce prices,
items.

which may generatehigher sales. opportunity t

of Threats:
Business may be s u h ct to threats
4.
Identification
and others. Therefore, enviro
to th
from
of
helps
competitors
threats
to identify
at the earliest
threats from
is beneficial
the environment.
to the firm,Tdentification
helps toanalysis
defuse the same.

may up with come inw

For instance, a competitor innovavatve
adversely affect the firm's bu
product. This may
Therefore, the business firm should take steps
introduce a new product or to enter into a new market
ket
5. Planning: Aproper study ofenvironmenthelps a businesesfim
5 it is necese
to plan its activities properly. Before planning,
to analyse the intermal as well as external enviroment,A
SWOT analysis, the firm lists out specific organisation
objectives. Based on the objectives, thefirm frames plansin
functional areas to achieve the objectives.
6.6. Organizing Resources: Proper analysis ofenvironmentena
a firm to set the objectives or targets. Depending upou t
activities to adha
objectives, the firm lists out the various
the objectives. To undertake activities, the firm makesprope
arrangement of resources such as:
Physical resources.

Capital resources
Manpower - managers and non-managers.

enable ai
7. Motivating Employees: Environmental analysis bu
to give right directions and guidance to its employ
emplovees

directions facilitate improvement in efficiency and pr

em
ie, the performance of the firm improves. Therefore,
Rusiness Environment 99
are rewarded with higher monetary and non-monetary
incentives.

Controlling: There is constant and continuous need to scan the

environment. Timely scanning of the environment enables a
firm to take corrective measures.

For instance, environmental scanning may indicate changes in

competitor's strategies. Therefore, the firm must take immediate
steps to correct or modify its strategies in order to counter the
moves of the competitor.

9 Survival and Growth: Environmental analysis is necessary to:

(a) Locate the areas of strengths and weaknesses of the firm.

(b) Identify factors that provide opportunities and pose threats

for the company's survival and growth.

The SWOT analysis helps the firm to improve its strengths,

overcome its weaknesses, grab opportunities, and defuse the
threats. Thus thefirmn would be in a better position to survive
and grow in the competitive business world.

10. Corporate Image: Due to environmental analysis, the overall

performance of the organisation improves. Therefore, the image
of the firm improves in the minds of various parties, i.e.,
customers, dealers, suppliers, etc.
11. Innovation: Environment analysis makes business firms
proactive. They come up with innovative ideas to gain
competitive advantage in the market. For instance, professional
business firms come up with innovative products and schemes
to face
competition in the market.
12 Efficiency: Environmental analysis helps to improve efficierncy
or business firms. To face competition in the market, business
firmsneed to be highly efficient. Therefore, business firms
undertake various activities such as:
Training and development
Research and developmernt
100 Commerce I (F. Y.B.Com.:
SEM-
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Technology upgradation, etc.

The above activities enable the firm to achieve
higher efficiency,
i.e., higher returns at lower costs.
Note: Students may write 8 points for 7% marks.
 , External Environnment
There is a Constant need to analyse the external
to find
out the and environment
opportunities threats, A proper analysis ofsotheas
external
environment will enable the firm to
grab the
andto defuse the
threats. opportunities
Theexternal environment can be
as shown below:
broadly divided into two groups

EXTERNAL ENVRONMENT

MICRO ENVIRONMENT MACRO ENVIRONMENT

Customers Demogruphic
Competitors Economic
Channel Intermediaries Socio-cuitural
Suppliers Natural
Society Technological, etc.
 106

A. Micro Environment Commerce-I(E(EY.YBCom.

B.Com SE
The microenvironment consists of all those factow
immediate environment. The micro environment t h e the fi
the working of firm. The
impact on a
micro have dine
include: nvironment facacto
1. The Customers: The consumers influenence
most
decisions. Therefore, the customers' requirementof the usi
behaviour must be studied. ts ,andebusbuiiness
Proper analysis of customer
requirements nd ans
behaviour would enable a business firm to fra
firm to
marketing-mix - in respect of product desio
frame buyin
the irig
promotion, and place of distribution. design, pricing
22 The Competitors: A firm has to analyse its comn
activities. Information about competitors mustt be competito
analysed
be analvsa
respect to their product designs, pricing, wit
promotioy
distribution, etc. Such analysis will enable the firm to d
effective production and marketing strategies. esi
33 The Suppliers: Suppliers provide raw
materials, and oth
supplies. The company has to keep a watch over
pricesa
quality of supplies.

The company needs to maintain good relations with

suppliers so that they supply quality items at the right pie
and at the right time.

4. Channel Intermediaries: Now-a-days, dealer

play an important role to convince buyers recommendati
to buy produd
especially in the case of consumer durables.
The firm has to motivate the dealers to
push and prom
products and also to obtain timely feedback about consun
tastes, preferences, etc.
5
Society: The society may also affect company' s deciss
society can either facilitate or make it difficult for a co
achieve its objectives,
Therefore, professional busine
Bhsiness wironment
Business 107
pusi maiaintain
ain public
public relations department to handle
ances
grie and suggestions from the
ievances and complaints,
general public.
The various memberS of the society include:

Financial institutions and banks -

affect firm's ability to
obtain funds.

Media affect the goodwill of the firm

-

favourable or unfavourable reporting aboutthrough

the firm.
their

Governmnent -affects firm's decisions through its policies,

rules and regulations.

Citizen action-groups who may question the firm's

-

Dricing, product and promotion

strategies.
General public who in future may become firm's
-

employees, shareholders, customers, etc.

B. Macro Environment

The macro environment consists of the broader

factors that socio-economic
influence the working of firm.
a It relates to
the
demographic, economic, natural, technological, political, cultural,
international and legal forces. The various macro environment
factors are briefly discussed as follouws:
1. Demographic Environment:
to human Demographic environment relates
population with reference to its size, density,
rate, life
expectancy, sex ratio, rural-urban literacy
Composition, occupation pattern, etc. divide, age
Business deals with
detail the various
people, business
firms have to study in
to frame demographic factors, which would help them
proper production and marketing strategies.
For
instance, automobile firms may take
income of middle class. Therefore, advantage of growing
promote cars that fit the they need to design and
budget of the middle class.
108
Environment:
Merce-1 (EY.BC.
A businessf
2 Economic firm clo0sel
its economic environment.
Economic environmen
elements:
ey ntetacke
consists of two major
Economic conditions ini the market.
oent h
Economic policies of the
governmer
Business firms should have a good
idea ab bout the
conditions in the market, i.e., demand
and PPlyf
ecsomeo
instance, business firm may adopt sta
recession and growth strategy during the
supply fac
tegy
boom period
The firms must also have good
knowled of go
policies in respect of taxation, foreign wledge
oo

capital markets, etc.

tradde, money
50Verh may
Tmatk
3 Natural (Ecological) Environment:
to natural resources like land, Natural environmentre
Natural env
water,
firms use natural resources Iike
water, minerals, et mentrea
land, iron ore, Bus
etc. In doing so, two things happen: Busne
crude
Erosion of natural resources, and
Pollution of resources like air,
water, etc.
Business firms should understand
take necessary measures to the above two
control effec
natural resources. They need to erosion and pollhuionan
such as solar search for
alternative resoun
energy, recycle the waste, install
devices, etc. anti-polluti
4 Technological Environment: The business
changes in the technological firms must monit
business firms to reduce costsenvironment. Technology enabla
and to
ifpossible, firms need to introduce improve
latest
quality. Thereto
operations. technology for thea
5. Political Environment: This
environment consists
government agencies, political parties,
influence and control the activities and pressure groups
organizations. Business firms need to ofaa trackindividuals and
individuals
ofall politial
keep track of alu p
 Environnment
Busaness
109
ants, anticipate changes in government policies and
ccordingly frame production and marketing strategies.

Caltural Environment: The socio-cultural environment consists

Cultural En
6feulture, traditions, beliefs, values, and lifestyles of a society.
The socio-cultural elements intluence the buying behaviour of
themembers of a society,
Western cultures are influencing Indian consumers, especially
the vouth in urban areas. The life styles, tastes, and preferences
are changing, and as such business firms should take a note of
such changes and accordingly design production and marketing
strategiesS.
For instance, youth in urban areas prefer stylish motorbikes,
and therefore, the motor-bike companies come up with new
models of motor bikes with stylish features.

Financial Environment: Nowadays, financial environment

greatly influences the working of the firm. For instance, poor
financial climate in the country dampens the spirit of stock
markets. Therefore, corporate firms find it difficult to raise funds
from the primary market. The non-availability of right funds
affects the growth prospects of corporate firms.

8 Legal Environment: Legal environment includes laws, which

define and protect the fundamental rights of individuals and
organisations. Business firms must have up-to-date and
complete knowledge of the laws governing various aspects of
business. In particular, corporate firms need to have good
knowledge of the Companies Act 2013, Competition Act 2002,
FEMA 1999, Sale of Goods Act 1930, and so on.

International Environment: Business firms engaged in foreign

trade are more affected by changes in the international
environment.Business firms, which cater to foreign trade, must
constantlymonitor implications of international environment
ontheirbusiness. They must keep in touch with developments
wTO conferences, developments in various regional
8roupings such as EU, NAFTA, ASEAN, etc.
 BusinessL n v i r o n m e n t 119

WTO

23
countries luding India signed the General
inclu Agreement
non 1947,
Tariffs and Trade (GATT). GATT was created to reduce global
i n194

depression a n d to
and liberalise and regulate the world trade by reducing
depression
barriers. WTO replaced GATT in 1995
ariff
GATT as it includes
widerin scope than but only regulation
not
WTOis
also it regulates trade in services,
f world trade of goods,
of world
and investment. It is concerned with not
intellectualproperty rights
only reducing or
elinminating tariff barriers but also non-tariff barriers
such asquotas. In July
2016, there were 164 member nations of WTO.
164th member nation.
(Afghanistan joined wIO as the

Functions of WTO
1995 by replacing GATT. The WTO
WTO came into existence in
member nations have signed a number of agreements to promote
international trade and development:

Trade Related Intellectual Property Rights (TRIPs)

Trade Related Investment Measures (TRIMs)
General Agreement on Trade in Services (GATS)

Agreement on Agriculture (AoA), etc.

the main objectives of WTO include:
increasing world trade and development
with the application of
Tade without discrimination (TWD)
MFN Clause
Optimum use of world resources
mployment generation in member nations
Raising standard of living of people of member nations, etc.
asing
Administration of WTO Agreements: WTO looks after
administration of WTO agreements:
TRIPs Agreement which gives protection to patent
copyrights, trade marks, etc.
TRIMs Agreement which treats foreign investmentatp
with domestic investment.

GATS Agreement which requires member nations

liberalise (open up) the services sector.

Agreement on Agriculture, which promotes the trade

agriculture by reducing tariff barriers, export subsidle5,
 NEGATIVE IMPACT:

Impact of TRIPs Agreement: TRIPs

The
Agreement
as compared to develonin favo
aVo
the developed countries
Under TRIPs Agreement, protection is given to
developing natione
copyrights, etc.
patents
The firms from developed nations hold large number of nat

Duetohuge financial resources, technology and skills, the f

from developed countries develop products and get thern
patented.
Firmsfrom developing countries have to pay huge royaltiesa
feesto use the patented products. For instance, Indian fame
have to pay high price for BT cotton seeds of Monsant
Chemicals.

2 Impact of TRIMs: Agreement on TRIMs provides for treatment

of foreign investment at par with domestic investment. Due
TRIMs Agreement, developing countries including India hare
withdrawn a number of restrictions on foreign investment
TRIMs Agreement favours the firms from developed naion
thei
Due to huge financial and technological resources at
disposal, the MNCs from developed countries invest
invest heavd
n
and play a dominant role in developing countries.
foreign firms are free
to remit and royalties to thepare
profits n g edrain
company, thereby, causing foreign exchange
developing nations.
 B u s i n e s s E n v i r o n m e n t

123
.nact of GATS: The Uruguay Round included trade in
npact o

vices
u n d e r WTC WTO. Under the GATS agreement, the member
serv

otions have
ations h a v e to open up the services sector for foreign

mpanies.
mpanies, The
Th developing countries including India have
opened up the services sector in respect of banking, insurance,
ammunication, telecom, transport, etc. to foreign firms. The
tomestic firms of developing countries may find it difficult to
ompete with
compete witl giant foreign firms due to lack of resources and
professional skills.

Tmpact of Reduction in Tariffs: As per the WTO agreement,

the developing countries have to reduce the tariff barriers. As
a
aresult of this, the developing countries have resorted to reduce
tariffs in a phased manner. For instance, India has reduced the
peak customs duty on non-agricultural goods to 10% (in 2008)
As the protection to domestic industry gradually disappears,
the firms in developing nations have to face increasing
competition from foreign goods.

5 Impact on Small Sector: WTO does not discriminate industries

on the basis of size. Small sector (micro and small enterprises
MSEs) has to compete with large sector. Therefore, as per WTO
agreement, India has withdrawn reservation of items for small
scale sector in a phased manner since 2000.

By February 2008, India has withdrawn reservation for small

sector of over 750 items. In April 2015, the remaining 20 items
reserved for MSEs are also dereserved.
Due to dereservation, the small units have to compete with
large
industries and also from cheaper imports. As a result, several
small firms have become weak or sick during the past
of years.
couple

6.mpacton Agriculture: The developing countries India and

China are among the largest producers of agricultural items
like vegetables, fruits, food
grains, etc. However, the agricultural
productivity is low as compared to other countries. Due to low
productivity, the farmers from developing countries stand to
lose in the world markets.
124 Commerce I (F. Y.B.Com.: SEM
-

The WTO
agreement on agriculture has onlyin theory favoured
the developing countries. But in practice, itsimplication has
affected agricultural exports of developing countries to worl
markets (as the developed countries provide lot ofsubsidies to
their exporters).
II. North American Free 'lrade Agreement (NAFTA
the USA, Canada and Mexico signed the Nor
In Sept. 1993,
which created the trading bile
American Free Trade Agreement,
into force on 1-1-1994. NAFTA was expected
NAFTA. It came
the members by 2009.
barriers among
all trade
remove

Objectives of NAFTA:
barriers on trade and facilitate movementu
Toeliminate trade
goods and services.

social relations.
T o develop cultural and membe
to
restrictions on transfer of technology
loremove
nationS.
 B u S t m e s s E H U r O n m e n t

133
negotiate collectively with non-members on certain foreign
To negotiate
trade matters.

tair competition in FTA.

To promote
Toprovide protection and entorcement of intellectual property

rights.
Todevelop industries in Mexico in order to create employment
and to reduce migration from Mexico to USA.
Toassist Mexico in earning additional foreign exchange to meet
it foreign debt burden.

Benefits to Member Nations

(Refer Positive Implications of Trading Bloc)

Special Achievements of NAFTA:

1 Increase in Trade among Member Nations:
Trade among the three NAFTA nations has increased by over 5
times between 1993 and 2009. In 1993, the trade was US $ 300
billion which increased to US $ 1600 billion in 2009.
2 Increase in FDI:
There is considerable increase in the growth of FDI among the
NAFTA nations. For instance, FDI by USA in Mexico and
Canada was nearly US$ 360 billion in 2009. Also, FDI by Canada
and Mexico in USA was US $ 240 billion in 2009
3 Agricultural Exports:
The agricultural exports of USA to Canada and Mexico have
ncreased considerably since the signing of NAFTA agreement.
At present, Canada is the number one importer of US

agricultural items, followed by Mexico.

Employment:
ne employment in USA has increased due to NAFTA. There
is increased
demand for manufactured items of USA from
 134
Mexico and Canada. Also, the
Commerce-I (F.Y.B.Com
employment in N
demand labourMexico ha
increased due to the increased for
products of Mexico from USA. intensi
ersive
55. Mexico Overcome Financial Crisis:
In1994, Mexico faced deep financial crisis. Due to the a
of NAFTA agreement, Mexico could overcome the
finar gring
crisis by 1997 due to economic growth and financial nadl
nancial package
by IMF.

6. Improved Political Relations:

The political relations between the NAFTA nations
haa
ave
improved considerably. Due to improvement in political
relations, there was considerably improvement on the economic
front.
1. Consumer Welfare:
There is considerable improvement in consumer welfare in the
member nations of NAFTA. The consumers get
quality goods
at right price due to technological developments and economies
of large scale for the firms of the member nations.

8. Increase in GDP of Member Nations:

There is considerable growth in GDP of the member nations
since 1993. The GDP of the three nations has increased
considerably due to increase in production of goods and
services. The increase is production is mainly on account or
increase in demand for goods and services by consumers of the
NAFTA nations.