B.E.

3rd Sem
2016

Unit-1
Introduction
 Business and its environment
 Types of Business environment
 Environmental Analysis- Process and techniques, Scanning
methods, use of environmental analysis in strategic
management

Business and its environment

Business is the act of being busy. It refers to the human activities directed
towards satisfying costumer needs through production and distribution of
goods and services. Environment means surrounding, external object,
influences or circumstances under which someone or something exists. So
combining these two words, business environment is the set of all the
conditions and events that are directly or indirectly related to the operation
and development of business. It is a complex entity which is guided,
regulated and affected by economic, socio-cultural, political events,
technological advancement and entrepreneurial skills of the business
personalities.

According to Keith Davis- Business environment may be

defined as,“The aggregate of all conditions and influences that
surround and affect a business.”

-Keith Davis

According to S.P. Robbins, “Business environment refers to

institutions or forces that affect the business organization’s
performance”

-S.P.Robbins

In conclusion, we can say that business environment is the combination of

the conditions and events prevalent inside and outside the business and

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affects it significantly. It is the result of a number of interacting and
constantly changing social, legal, and economic forces. It is a multi-
dimensional and multi-layered structure and it is possible that some layers
and dimensions are favorable and others adverse for business firm.

Business takes place in a dynamic environment so constant changes do

take place in the system, structure, policies and strategies of a business
firm and the failure of a manager to understand, assess, predict and
manage these environmental forces ultimately affects the business and its
operations.

Business environment can be elaborated into two main segments:

i. Domestic Business Environment- This environment is guided

by the uncontrollable external forces like socio-cultural, economic,
legal, political and technological advancement of the domestic
country and this environment is most familiar to managers.
ii. International Business Environment- This environment deals
with the relationship of different countries of the world in the cut-
throat competition. International bodies such as UN, European
Commission, SAARC etc are part of the international environment.

The entire analysis help us to conclude that business environment refers to

the physical and the business surroundings which are guided and regulated
by the business activities through the social, political, economic, legal,
technological, inter-regional business activities of the global economy.

Types of Business environment OR

Classification of Business Environment OR

Components of Business Environment

Business environment may be broadly classified into internal and external

environment as under:-

A) Internal Business Environment- This environment is also called

firm or resource environment. This environment is controllable to the
firm in the long run. A sound internal environment helps to create

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competitive advantage that leads a business towards the way of goal
achievement. The components of internal business environment are
listed below:-
i) Employees- Employees are the life-blood of any organization. A
business firm is able to promote its business activities at a healthy
scale through a skilled and dedicated employee groups.
Organizations need to motivate their employees in order to increase
their productivity and to achieve expected goals.
ii) Shareholders- Shareholders have the direct interest in the
performance of the organization. They are the owners of businesses
with the positive mind framework for the development of a business
firm.
iii) Corporate culture- A business organization should run according
to the system and role of business law. Any unnecessary intentions
should not be reflected in the activities of any shareholder of a
business firm. This culture has powerful influence on the process of
organizational change and decision making.
iv) Organizational structure- It is the overall framework for
organizational roles, rules, hierarchy, relations and authority. It also
includes individuals, groups, units and their interrelationships. It
keeps on changing and this changes the internal working of the
organization.
v) Labor unions- The union of skilled and unskilled workers also
affect the quality of business activities. Here the labor and
management interact with each other on various issues such as
wages, working conditions, hours of work, and so on. A destructive
union always damages business and vice-versa.
B) External Business Environment
The business and economic relation of the different countries of the
world guide external business environment. If the business perception
of the country matches with the business activities of another country
then it is a healthy indicator of external business environment.
However, due to the growing business, economic and political tension
among the different countries of the world, the external business
environment is very delicate even the context of the competitive nature
of global economy. Moreover external environment is guided by SWOT
entity of business activities in which opportunities and threat (OT)

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perform the vital role in shaping the business environment of a firm and
a country as well.
Due to the external forces, the business environment is micro in
character and macro dimension for the environment of global economy.
C) General Business Environment
This environment is also known as remote environment and is
composed of a set of forces that are outside the organization and beyond
the control of organization. The elements of general environment are
listed below:-
i) Economic environment- The business environment is guided,
regulated, infected and promoted by the economic environment
of a business firm and a country. Its major elements are the
system of economic planning and control, fiscal, monetary and
industrial policies, the conditions prevailing in agriculture,
industrial and service sectors and others. Poor economic
conditions make the environment more complex and manager’s
job more difficult and demanding.
ii) Socio-cultural environment- The socio-cultural environment
also affects the business environment of a country and of a firm
as well. The tradition, convention, rituals and such other
components of cultural elements manage to push up the business
environment at a healthy scale similarly unwanted socio-cultural
component naturally damage the level of business environment.
Managers must be responsive to changes in the social structure
and national cultures of the country in which they operate.
iii) Political environment- This environment refers to the
government actions which affect the operations of a business.
Managers should pay close attention to the political environment
to measure how government actions will affect their company.
The degree of political risks existing in a country determines the
investment climate in that country. If the political stability is
lacking, the business environment is naturally damaged in an
economy.
iv) Legal environment- The legal environment refers to the
framework of laws, regulations and court decisions intended to
encourage, guide and control business activities. The legislative
framework of a country provides both opportunities and threats

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to the business. Some legislations are designed to protect
workers, consumers and communities and others are designed to
regulate the behavior of managers and their subordinates in
business and other enterprise.
v) Technological environment- The modern business activities
are directly connected with the technological advancement. Thus,
if big business houses and micro business houses have adopted
the technological advancement then it supports the business
environment within the country. An important point to note is
that the business without technology cannot survive in
appropriate manner for a long period of time.
vi) Global environment- This environment includes relevant
global markets, international political events, and critical cultural
characteristics of global markets. Globalization may create
opportunities to enter new markets as well as threats that new
competitors may pose. Firm competing in global markets should
recognize the different sociocultural and institutional attributes
of global markets.
D) Task Environment- Task environment is also known as competitive
environment or operating environment. The various components of task
environment are:-
i) Customers- All the business activities are directed towards
satisfying customer needs and retaining them effectively.
Customer may be an individual, family or business. The positive
reaction of a customer helps the producer and the seller to
produce and sell their products in the market. In fact the
customers create a favorable or unfavorable both type of business
environment for the entrepreneurs in the market.
ii) Suppliers- Suppliers are those people and business organization
which can offer the product in market for the sale. When a part of
production is brought to the market by a business firm for sale to
common consumers then the quantity of commodity offered to
the market is known as supply and the business organization
which supplies the commodity is known as supplier. The business
environment is seriously affected by the activities of suppliers in
the market.

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iii) Distributors- When the supplied volume of commodity is
brought up to the consumer by a business organization or an
individual then such organization and individuals are known as
distributor. The wholesale and retail distributors perform their
activities of marketing management, which builds up the
favorable or unfavorable business environment in an economy.
iv) Special task group- The common and innocent customers are
generally deceived in the market, the special task group makes a
survey about the weighing, measurement, quality control,
minimization of the problem of adulteration and others. The
special task force also determines the quality of business
environment in an economy.
v) Financial institutions- These institutions are very important
for a business, since they provide fund for short as well as olong
term financial requirements. If the “micro credit” is given by
the financial institutions to the needy business organization on
easy terms and conditions then it helps to promote strong
business foundation in the market and vice-versa. Thus, the
financial institution play the vital and supporting role in
increasing appropriate business environment in the market.
vi) Media- Medial is known as very important business organ for
the economic prosperity of the country. The fact of the events
must be brought on the surface by the media houses. If it is being
done, the unwanted exploitation of the consumers and
unnecessary problems of the producer, distributor of the business
organization can be minimized in the country. Media can
promote and maintain discipline in the society and also develops
business and economic justice within the country.
vii) Competitors- A business firm faces competition in the market.
Competition is therefore inevitable. Managers work out strategies
to deal with the competitors and the competing products. If the
fair competition is developed in the market among the business
firm then such a situation increases the efficiency of producers,
suppliers, distributors and consumers in the market.

Environmental Analysis- Process and techniques,

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Environmental Analysis is a process for identifying all external and
internal elements that can affect the performance of the organization
evaluating the level of threat or opportunity they present. Later on, these
evaluations are translated into decision-making process.

According to William F Glueck, “Environmental analysis is the

process by which strategists monitor the economic, legal,
competitive, geographic, technical and social setting to
determine opportunities and threats to their firm.”

It is the study of the organizational environment to pinpoint environmental

factors that can significantly influence organizational operations. It
involves identifying the present and future opportunities and threats to
and from the organization.

Environmental analysis is made up of the process, which scan, monitor,

analyze, and forecasts the situations which the organization can face and
variables of the environment. It helps managers better understand what is
happening both inside and outside the organization and to increase the
possibility that the organizational strategies managers develop will
approximately reflect their organizational environment.

Environmental analysis is an ongoing process and it involves following:-

1. Scanning- This step involves gathering information from the

environment to assess its nature. It involves monitoring changes and
developments in the environment that have potential impact on the
business of an organization. It provides a guideline of the business
activities through which the realities of the business houses in the
production and marketing can be detected properly. To sum up,
scanning process helps to indicate:-
a. The transparent situation of production and marketing management
of business activities
b. It helps to detect the strength and weaknesses of business organization
on the basis of which the policy is adopted by the business houses to
minimize the business problems.
2. Monitoring- Monitoring is auditing the environment. This involves an
observation by a monitoring team of the business expert visiting

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different corners of the market. On the basis of the experience of
monitoring, the business environment is properly analyzed by the
leading thinkers of the business community. It unwanted profits is
attempted to earn and if the consumers are victimized then the
monitoring team provides suggestive guidelines to minimize the
exploitation of consumer. The business community should maintain the
professional ethics. Thus, the monitoring component of environmental
analysis focuses on:-
a. Prevention of occupational diseases and maintenance of professional
ethics.
b. Reducing the socio-economic environment of pollution to save the
interest of consumers and sellers in the market.
3. Forecasting- On the basis of scanning and monitoring process, the
experts of market can project and forecast the leading components of
business activities. It assesses what is likely to happen in future. It
involves developing feasible projection of what might happen and how
quickly. Thus the forecasting component focuses on:-
a. The volume of business on the basis of the political, socio-cultural,
legal and economic environment of the country.
b. Understanding the influences on the producer and the consumers in
producing, selling and purchasing the business and commercial
goods in the market
c. Projection of the path of business activities
4. Assessment- It determines the timing and significance of the effects of
environmental changes and trends that have been identified. It also
connects the data and information with competitive relevance and
further interprets the data and information to determine the trend as
opportunity or threat for organization. Thus it help to focus on:-
a. The assessment of revenue generation of the government
b. Assessment of profit and loss of the business community
c. Assessment of income employment generation of the society

Techniques of Environmental Analysis

Different tools, methods, and techniques are used for environmental

analysis. Some of the major methods of analysis are:-

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i) Environmental scanning- Environmental scanning is the
method or technique of acquiring information and analyzing the
trends emerging in the environment. It is a continuous process by
which organizations monitor their relevant environment to identify
opportunities and threats affecting their business for the purpose of
taking strategic decisions.

ii) SWOT analysis- SWOT, which stands for strengths, weaknesses,

opportunities and threats, is an analytical framework that can help
your company face its greatest challenges and find its most
promising new markets. The method was created in the 1960s by
business gurus Edmund P. Learned, C. Roland Christensen,
Kenneth Andrews and William D. Book in their book "Business
Policy, Text and Cases" (R.D. Irwin, 1969). In a business context, the
SWOT analysis enables organizations to identify both internal and
external influences. SWOT's primary objective is to help
organizations develop a full awareness of all the factors involved in a
decision.
iii) Business or Market Intelligence System- Marketing
intelligence (MI) is the everyday information relevant to a
company’s markets, gathered and analyzed specifically for the
purpose of accurate and confident decision-making in determining
market opportunity, market penetration strategy, and market
development metrics. Marketing intelligence is necessary when
entering a foreign market.Marketing intelligence determines the
intelligence needed, collects it by searching environment and
delivers it to marketing managers who need it. Marketing
intelligence software can be deployed using an on-premises
or software as a service (SaaS, or cloud-based) model. These systems
take data from disparate data sources, like web analytics, business
intelligence, call center and sales data, which often come separate
reports, and put them into a single environment. In order to collect
marketing intelligence, marketing managers must be in constant
touch with relevant books, newspapers and trade publications. They
must talk to various stakeholders like customers, distributors and
suppliers. In addition to this they must also monitor social media
and carry out online discussions.

iv) Formal Research Studies- Market research is any organized

effort to gather information about target markets or customers. It is

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a very important component of business strategy. Formal research is
one of the key factors used in maintaining competitiveness
over competitors. Formal research provides important information
to identify and analyze the market need, market size and
competition.
v) Benchmarking- Benchmarking is the process of finding the best
standards in an industry and comparing the strengths and
weaknesses of the firm with these identified standards. It is a
continuous process in which organizations continually seek to
improve their practices. Benchmarking is used to measure
performance using a specific indicator (cost per unit of measure,
productivity per unit of measure, cycle time of x per unit of measure
or defects per unit of measure) resulting in a metric of performance
that is then compared to others.

vi) Scenario building- Scenario building gives an overall picture of

the total system with the factors which affect it. Scenario planning,
also called scenario thinking or scenario analysis, is a strategic
planning method that some organizations use to make flexible long-
term plans. It is in large part an adaptation and generalization of
classic methods used by military intelligence.The original method
was that a group of analysts would generate simulation
games for policy makers. 
vii) Network methods- The network method is used to assess
organizational systems and its external environment to find the
strengths, weaknesses, opportunities and threats faced by an
organization.
viii) Business Forecasting- Forecasting is the process of making
predictions of the future based on past and present data and most
commonly by analysis of trends. A commonplace example might
be estimation of some variable of interest at some specified future
date. Business forecasting is very useful for businesses, as it allows
them to plan production, financing and so on.

Scanning Methods

Environmental scanning can be defined as ‘the study and interpretation

of the political, economic, social and technological events and trends
which influence a business, an industry or even a total market’. The

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factors which need to be considered for environmental scanning are
events, trends, issues and expectations of the different interest
groups. Environmental scanning not only helps the business find its
strengths in its current environment but it also finds the weakness of
competitors, identifies new markets, potential customers and up and
coming technological platforms and devices that can be best used to
sell/market the product or service. Environmental Scanning helps a
business improve their decision-making process in times of risk to the
external and internal environments the business is in.

Scanning methods OR

Methods of Environmental scanning

Some leading scholars like Ungson and Mowday (1988) presented the
techniques of environmental scanning which can be listed as follows:-

i. Extrapolation method- In this method, the past information is

used to predict the future. The future is assumed to be some
function of the past. Different methods used to extrapolate the
future are time series, trend analysis and regression analysis.
ii. Historical Analogy- It is a judgmental forecasting technique.
Under this, the environmental trends are analyzed with the help of
other trends which are parallel to historical trend. For example,
sales history of similar product.
iii. Intuitive Reasoning- Under this, rational and unbiased intuition
is used for environmental scanning. Intuitive thinking requires
freethinking unconstrained by past experience and personal biases.
Individual judgment is typically used to provide the ‘best guess’.
However, the validity and reliability of such judgments cannot be
evaluated.
iv. Scenario Building- A scenario is a picture of possible future.
They are built on the basis of time ordered sequence of events that
have logical cause and effect relationship with each other. Scenarios
are built to address future contingencies.
v. Cross-impact matrix- In this, forecasts derived by means of
various methods may be combined into a well-integrated and
internally consistent description of the future. It also injects the
productive idea in the business houses now to decline the cost of
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production without compromising or declining the quality of
commodity.
vi. Network Methods- The business scenario essentially demands to
develop networking method of business activities from producer to
wholesaler, wholesaler to retailer and retailer to consumers etc.
However, all these stakeholders of market such as producer,
wholesaler, retailer and consumer are connected with the
government policy and the business law of government. On the basis
of “top-down approach” and “Bottom-up approach”, the networking
can properly be maintained in the market and it protects the interest
of all the stakeholders of the market.
vii. Model Building- This approach is similar to network methods but
relies more on developing mathematical representations of the
environmental phenomena in question. Simulations are good
examples of model-building techniques.
viii. Delphi Technique- This technique is the symmetric collection of
experts opinion for business and economic environment of the
country. The Delphi method motivates the rational and leading
business entrepreneur to know about their strength and
weaknesses. In fact SWOT analysis can only help the business
organization through the Delphi technique all over the world.

Use of environmental analysis in strategic management

An environmental analysis in strategic management plays a crucial role in

businesses by pinpointing current and potential opportunities or threats
outside the company in its external environment. The external
environment includes political, environmental, technological and
sociological events or trends that can affect the business directly or
indirectly. An environmental analysis is generally conducted as part of an
analysis of strengths, weaknesses, opportunities, and threats (SWOT) when
a strategic plan is being developed. Managers practicing strategic
management must conduct an environmental analysis quarterly, semi-
annually, or annually, depending on the nature of the business's industry.
Being able to identify events or conditions in the external environments
helps businesses achieve a competitive advantage and decrease its risk of
not being prepared when faced with oncoming threats.

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The purpose of an environmental analysis is to help in strategy
development by keeping decision-makers within an organization informed
on the external environment. This may include changing of political
parties, increasing regulations to reduce pollution, technological
developments, and shifting demographics. If a new technology is developed
and is being used in a different industry, a strategic manager would see
how this technology could also be used to improve processes within his
business. An analysis allows businesses to gain an overview of their
environment to find opportunities or threats.
A SWOT analysis is done as part of a business's strategic planning process.
The internal analysis reviews the business's strengths and weaknesses,
while the external environmental analysis takes a look at the opportunities
and threats. The role of environmental analysis in strategic management is
to find any potential opportunities and threats, and to create a plan to take
advantage of opportunities or to avoid threats. If a threat cannot be
avoided, such as a shifting demographic that is causing a decline in sales,
then a plan should be created to minimize its effects. For instance, the
business could develop a product to target the new demographic majority.
How often this type of analysis should be conducted depends on the nature
of the industry. If the industry is fast-paced or susceptible to changing
legislation, then the business should consider doing its analysis quarterly
or semi-annually. An industry that does not face constant changes or is not
sensitive to changes in the external environment may only need an annual
analysis. A business that conducts an environmental analysis often is more
aware of opportunities opening and can take advantage of them quicker
than can its competitors. Increasing how often an environmental analysis
is conducted can also help the business see potential risks sooner, allowing
it additional time to develop a strategic plan to avoid or decrease its
potential affects.

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