Economic Environment of Business

BBA IISharda University

Prepared by : Neeraj Bhandari

Unit 1 : Introduction to Business Environment

The concept of Business Environment Significance of Business EnvironmentImpact of Environment on Business and

Strategic Decisions.

Business : Meaning, Characteristics & objectives

• Business refers to the buying or selling of goods or services or the activity of making money by producing and selling goods, or providing services.

• Modern business ,spans a vast and complex field of activity involving industry, trade and commerce as they relate to production, distribution and exchange of goods and services.

• According to F.C Hooper “ Business means the whole complex field of commerce and industry, the basic industries, processing and manufacturing industries and the network of services which service and inter – penetrate the world of business as a whole”.

Business has certain characteristic :1. Elements of Enterprise 2. Dealing in exchange of Goods and services3. Profit Motive4. Element of risk and Uncertainty5. Economic Activities related to production and Distribution6. Element of creation of utilities7. Element of continuity of Transaction

Characteristics of Modern Business

Modern Business

Large Size

Global Reach

Oligopolistic structure

Technology BasedDiversification

Government Control

Emerging Ethical

Consciousness

Environment• Environment refers to all external forces which have a bearing on the

functioning of business. ”Environment are largely if not totally external, and beyond the control of individual industrial enterprises and their management. These are essentially the givers within which firms and their managements must operate in a specific country and they vary, from country to country”.

• However, the term business environment refers to the External Factors. The external environment has two components ie business opportunities and threats to business.

• Simmilarly, the organisational environment has two components ie. strengths and weaknesses of the organisation. A SWOT analysis is thus the first step in strategy formulation

Business DecisionInternal Environment External Environment

Factors influencing Business Decision

Business Decision

Internal Environment

Mission / ObjectivesManagement StructureInternal Power RelationshipPhysical Assets & facilities

Company imageHuman resourcesFinancial CapabilitiesTechnological CapabilitiesMarketing Capabilities

FinanciersSuppliersCustomersCompetitorsPublicMktg Intermediaries

Micro Environment

EconomicTechnologicalGlobalDemographicSocio-CulturalPolitical

Macro Environment

BUSINESS ENVIRONMENT

• Internal Environment: Any business has certain vision, mission and objectives and a strategy to achieve them. Formulation of strategy is defined as establishing a proper firm-environment fit. Indeed the objectives should be based on an assessment of the external environment and the organizational factors (internal environment).

• The Micro environment consists of different types of stakeholders - customers, employees, suppliers, marketing intermediaries, competitors. It is also known as the Task Environment and Operating Environment and has a direct bearing on the operations of the firm. Changes in the micro environment will directly affect and impinge on the firm's activities.

• The Macro Economics : it consist of the factors which are beyond the control of the business.

Process of Environmental Analysis

The analysis consists of four steps:

Scanning : Detect early signals of possible environmental change and detect environmental change already underway.

Monitoring : Purpose of monitoring is to assemble sufficient data to discern whether certain trends are emerging, identification of the trends and identification of areas for further scanning.

Forecasting : It is concerned with developing projections of the direction, scope and intensity of environmental change.

Assessment : To determine implications for the organization's current and potential strategy.

Scanning

Monitoring

Forecasting

Assessment

Environmental Analysis and Strategic Management

Defining Business Mission and Objectives

SWOT AnalysisEnvironmental Analysis + Self Appraisal

Strategic Alternatives and Choice of Strategy

Implementation of Strategy

Evaluation and Control of Strategy

  POSITIVE/ HELPFUL

to achieving the goal 

NEGATIVE/ HARMFUL

to achieving the goal

 INTERNAL Originfacts/ factors of the

organization 

StrengthsThings that are

good now, maintain them, build on them

and use as leverage

WeaknessesThings that are bad

now, remedy, change or stop

them.

 EXTERNAL Originfacts/ factors of the

environment in which the

organization operates

 

OpportunitiesThings that are

good for the future, prioritize them, capture them, build on

them and optimize

ThreatsThings that are bad

for the future, put in plans to

manage them or counter them

SWOT Analysis of Indian Economy

Strengths• Huge pool of labor force• High percentage of cultivable land• Diversified nature of the economy• Availability of skilled manpower• Extensive higher education system• High growth rate of economy• Rapid growth of IT / ITes Sector• Abundance of natural resources

Weaknesses• High percentage of workforce involved

in agriculture• Approx a quarter of population below

the poverty line• High unemployment rate• Inequality in prevailing socio economic

conditions, rural – urban divide• Low productivity• Huge population leading to scarcity of

resources• Low level of mechanization• Red tapism, Bureaucracy• Low literacy rates

Opportunities• Scope for entry of private firms in various

sectors of business• Inflow of FDI• Huge foreign exchange prospects in IT / ITeS• Investment in R & D• Area of infrastructure• Huge domestic market : Opportunity for MNCs• Huge agricultural resources

Threats• High fiscal deficit• Threat of government intervention in

some states• Growing import bill• Population explosion, rate of growth of

population• Agriculture excessively dependent on

monsoon

Significance and Importance of Business Environment

• Firm to Identify Opportunities and Getting The First Mover Advantage: Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors. For example, Maruti Udyog became the leader in the small car market because it was the first to recognize the need for small cars in India .

• Firm to Identify Threats and Early Warning Signals: If an Indian firm finds that a foreign multinational is entering the Indian market it should gives a warning signal and Indian firms can meet the threat by adopting by improving the quality of the product, reducing cost of the production, engaging in aggressive advertising, and so on.

• Coping With Rapid Changes: All sizes and all types of enterprises are facing increasingly dynamic environment. In order to effectively cope with these significant changes, managers must understand and examine the environment and develop suitable courses of action.

• Improving Performance: The enterprises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.

• Basis of strategy: Strategists can gather qualitative information regarding business environment and utilizing them in formulating effective plants. 

• Intellectual stimulation: Knowledge of environment changes provides intellectual stimulation to planners and decision-making authorities. 

• Image building: Environmental understanding by the management builds image of the company in the minds of the people. They feel that the company is sensitive and responsive to their needs and problems.

• Activating management to changing needs: The knowledge of environmental changes sensitizes the management to make strategy to cope with the emerging problems.