UNIT I – INTRODUCTION

Business Environment

Business environment refers to the sum total of all individuals, institutions and other forces that are
outside the control of a business enterprise but the business still depends upon them as they affect
the overall performance and sustainability of the business.

Characteristics of Business Environment

1. Complex: Business environment comprises many factors, events, conditions, etc which are
related to each other and their individual effect on the business cannot be recognised,
making it difficult for the business to face them.
2. Dynamic: Business Environment is a mixture of many factors and changes as some or the
other factors continue to take place. The various influences operating on an unabated
manner makes the environment continuously changing.
3. Multi-faceted: The environment is perceived differently by different observers.
4. Far- reaching impact: Business enterprise operates within a given environment and gets
affected by it. The growth and profitability of business depends critically on the
environment.

Importance of knowing the Business Environment

1. Development of broad strategies to ensure sustainability and success.

2. To foresee the impact of socio-economic changes at the national and international levels on
a firm's ability.
3. Analysis of competitor’s strategies and formulation of effective counter measures.
4. To keep oneself dynamic and responsive.

Components of Business Environment

1. Internal Environment
The internal component comprises factors within the organization that the management can
control. These factors include:
 Value system
 Mission and objectives
 Organizational (management) structure
 Corporate culture
 Quality of human resources
 Financial resources
 Labour unions
 Physical resources and technological capabilities

2. External Environment
The external environment consists of factors outside the organization that influence its
operations but are beyond its control. The external environment is classified into:
i. Micro Environment
 The micro component of the external environment is also known as the task environment. It
comprises of external forces and factors that are directly related to the business. These
include:

 Suppliers – This includes all the parties which provide resources needed by the
organization.
 Market intermediaries – This includes parties involved in distributing the product or
service of the organization.
 Partners – They are all the separate entities like advertising agencies, market
research organizations, banking and insurance companies, transportation
companies, brokers, etc. which conduct business with the organization.
 Customers – This comprises of the target group of the organization.
 Competitors – They are the players in the same market who targets similar
customers as that of the organization.
 Public – This is made up of any other group that has an actual or potential interest
or affects the company’s ability to serve its customers.

ii. Macro Environment

The macro component of the external environment is also known as the broad environment.
It constitutes the external factors and forces which affect the industry as a whole but don’t
have a direct effect on the business. The macro environment can be divided into:

 Economic Environment
The economic environment constitutes factors which influence customers’
purchasing power and spending patterns. These factors include the GDP, GNP,
interest rates, inflation, income distribution, government funding and subsidies, and
other major economic variables.

 Non-economic Environment
Non-economic environment refers to the social and cultural factors that influence
business operations and decisions but are not directly related to the economic
aspects.

Global Business Environment

Global business environment can be defined as the environment in different sovereign countries,
with factors exogenous to the home environment of the organization, influencing decision making on
resource use and capabilities. This concept includes a broad range of factors that can influence a
business, including geographic location, politics, technology, culture, and the economic status of the
global environment.

Globalization

Globalization refers to the shift towards a more integrated and interdependent world economy.
Globalization has several different facets including the globalization of markets and globalization of
production.

Implication of Globalization
1. Globalization of Markets

Globalization of markets refers to the merging of historically distinct and separate national markets
into one huge global market place. Falling barriers to cross border trade have made it easier to sell
internationally. For example, Coca-Cola soft drinks, Sony Play Station video games, IKEA furniture,
etc.

2. Globalization of Production

Globalization of production refers to the sourcing of goods and services from locations around the
globe to take advantage of national differences in the cost and quality of the factors of production
such as labour, energy, land, and capital, and by which companies hope to lower their overall cost
structure. For example, Boeing’s 777 aircraft – 30% of the total value is produced by foreign
companies, Boeing’s 787 aircraft – 65% of the total value is produced by foreign companies.

Drivers of Globalization

Two macro factors underlie the trend toward greater globalization, the first is the decline in barriers
to the free flow of goods, services, and capital that has occurred since the end of World War II. The
second factor is technological change, particularly the dramatic developments in recent years in
communication, information processing, and transportation technologies.

1. Free Trade: The free movement of products and services across international boundaries is
promoted by the removal of trade barriers including tariffs, quotas, and trade restrictions.
International commerce and investment are facilitated by free trade agreements, such as those
of the World Trade Organisation (WTO) and the North American Free Trade Agreement (NAFTA).

2. Technological Change: Globalisation has advanced substantially due to technological

improvements. Global corporate operations, communication, and collaboration have been
completely changed by advances in biotechnology, automation, robotics, and information
technology. Specifically, the internet has transformed communication and made it possible for
people to communicate instantly throughout the world.

3. Communication: Social media platforms, mobile phones, video conferencing, and the internet
are examples of communication technologies that have facilitated cross-border connections and
information sharing for individuals and companies. This makes cross-border market expansion,
cooperation, and information exchange easier.

4. Transportation Technology: Long-distance freight and passenger transit has become less
expensive and time-consuming because to advancements in transportation infrastructure,
including high-speed trains, air travel, and shipping containers. Supply chain management and
improved logistics have increased the effectiveness and accessibility of international trade for
companies of all sizes.

5. Global Economic Policies: Globalisation has been facilitated by economic policies such as
privatisation, deregulation, and capital market liberalisation. These policies support cross-border
labour and capital mobility as well as economic integration and investment flows.
6. Cultural Exchange: Through the spread of ideas, values, and cultural items like music, movies,
books, and food, globalisation promotes cultural interchange. This cross-cultural interaction
promotes cultural variety, intercultural understanding, and the development of an international
consumer culture.

Factors favouring Industry Globalization

1. Markets – Globalization offers access to larger and faster-growing markets, enabling

companies to expand their customer base. Increasingly, consumers worldwide seek similar
products and services, leading to standardized offerings that can be marketed globally.
Moreover, advances in communication and transportation technology facilitate global
market integration, making it easier for companies to operate across borders.
2. Costs – Globalization allows companies to achieve economies of scale by spreading fixed
costs over larger production volumes. Access to cheaper labour in certain regions enables
companies to reduce production costs. Moreover, globalization allows companies to optimize
their supply chains by sourcing inputs from low-cost regions and accessing global distribution
networks.
3. Governments – Bilateral and multilateral trade agreements facilitate cross-border trade by
reducing tariffs, quotas, and other trade barriers. Governments may liberalize Foreign Direct
Investment (FDI) policies to attract foreign investment and promote economic growth.
4. Competition – Industry globalization intensifies competition as companies face competition
not only from domestic rivals but also from global competitors. Rapid technological
innovation creates opportunities for disruptive competition and encourages companies to
expand globally to stay competitive. Moreover, globalization allows companies to build
global brands, leveraging brand recognition and loyalty to gain a competitive advantage in
multiple markets.

Overall, these factors interact to drive industry globalization, enabling companies to expand their
market research, reduce costs, navigate regulatory environments, and compete more effectively on a
global scale.

PESTEL Analysis

Pestel analysis is a strategic framework used to access the external macro-environmental factors
affecting a business or industry. It stands for Political, Economic, Social, Technological, Environmental,
and Legal factors. When applied to the global business environment, PESTEL analysis becomes even
more crucial due to the diverse range of influence that can impact businesses operating across
borders.

1. Political factors
Political factors can have a significant influence on businesses. In addition, political factors affect
consumer confidence and consumer and business spending. For instance, how stable is the
political environment? This is particularly important for companies entering new markets.
Government policies on regulation and taxation can vary from state to state and across national
boundaries. Tarde treaties such as NAFTA, ASEAN, EU, etc. tend to favour trade among the
member countries but impose penalties or less favourable trade terms on non-members.
For instance, Coca-Cola operates in numerous countries, each with its own political landscape.
Changes in government policies, such as tax regulations or trade agreements, can impact Coca-
 Cola's profitability and market share. Additionally, political tensions between countries may lead
to trade barriers or restrictions on imports and exports, affecting Coca-Cola's supply chain and
global sales.

2. Economic factors
Economic factors have near term and long-term effects on the success of their strategy. Inflation
rates, interest rates, tariffs, the growth of the local and foreign national economies, and
exchange rates are critical. Unemployment, availability of critical labour, and the local cost of
labour also have a strong bearing on strategy, particularly as related to the locations of disparate
business functions and facilities.
For example, Economic conditions such as GDP growth rates, inflation, and unemployment rates
influence consumer purchasing power and demand for Coca-Cola products. In regions
experiencing economic downturns, consumers may opt for cheaper alternatives or reduce
discretionary spending on beverages, affecting Coca-Cola's sales volumes.

3. Socio-cultural factors
Socio-cultural factors vary from country to country. Depending on the type of business, factors
such as the local languages, the dominant religions, the cultural views toward leisure time, and
the age and lifespan demographics may be critical. Local sociocultural characteristics also include
attitudes toward consumerism, environmentalism, and the roles of men and women in society.
For example, Coca-Cola and PepsiCo have grown in international markets due to the increasing
level of consumerism outside the United States.
For example, Coca-Cola’s success heavily depends on consumer preferences and societal trends.
With the rising awareness of health concerns associated with sugary drinks, Coca-Cola faces
challenges in addressing consumer demands for healthier alternatives or reducing sugar content
in its products.

4. Technological factors
New technology may make it possible for products and services to be made more cheaply and to
a better standard of quality. New technology may also provide the opportunity for more
innovative products and services, such as online stock trading and remote working. Such changes
have the potential to change the face of the business landscape.
For example, technological advancements play a crucial role in Coca-Cola’s operations, including
production, packaging, and distribution. Technological disruptions, such as shifts in consumer
behaviour towards online shopping or digital entertainment, may pose challenges for Coca-Cola
in adapting its distribution channels and marketing strategies.

5. Environmental factors
Environmental factors play a significant role in the firm’s strategy, primarily from the standpoint
of access to raw materials. Increasingly this factor is best viewed as both a direct and indirect
cost for the firm. Environmental factors are also evaluated on the footprint left by a firm on its
respective surroundings. For consumer-product companies like PepsiCo, for instance, this can
encompass the waste-management and organic-farming practices used in the countries where
raw materials are obtained. Similarly, in consumer markets, it may refer to the degree to which
packaging is biodegradable or recyclable.
For example, Coca-Cola faces increasing scrutiny and regulatory pressure regarding
environmental sustainability and resource conservation. Concerns over plastic pollution and
 carbon emissions have led Coca-Cola to invest in sustainable packaging initiatives, recycling
programs, and water stewardship projects.

6. Legal factors
Legal factors reflect the laws and regulations relevant to the region and organization. Legal
factors can include whether the rule of law is well established, how easily or quickly laws and
regulations may change, and what the costs of regulatory compliance are. For example, Coca-
Cola’s market share in Europe is greater than 50%, as a result, regulators have asked that the
company give shelf space in its coolers to competitive products in order to provide greater
consumer choice.
For example, Coca-Cola operates in a highly regulated industry, facing various legal
considerations related to food safety, labelling requirements, advertising standards, and
intellectual property rights.

In summary, analysing the PESTEL factors in the global business environment enables organizations
to identify opportunities, anticipate risks, and adapt their strategies to navigate the complex and
dynamic landscape of international markets.

VUCA Analysis

VUCA analysis refers to a framework for understanding the dynamics of the global business
environment. The acronym stands for Volatility, Uncertainty, Complexity, and Ambiguity. It was
originally introduced by the U.S. Army War College to describe the conditions of the post-Cold War
world, but it has since been widely adopted in the business world to describe the challenges and
uncertainties that organizations face.

1. Volatility
This refers to the speed and magnitude of changes in the business environment. Global
markets, technologies, and consumer preferences can all change rapidly, leading to volatile
conditions. Businesses must be prepared to adapt quickly to sudden shifts in order to remain
competitive.
For example, Apple operates in a highly volatile market characterized by rapid technological
advancements, changing consumer preferences, and intense competition. For instance, the
introduction of new smartphones or other devices by competitors can quickly impact Apple's
market share and profitability.

2. Uncertainty
Uncertainty refers to a lack of predictability or clarity about the future. Factors such as
geopolitical instability, regulatory changes, and economic fluctuations can all contribute to
uncertainty in the business environment. Organizations must learn to make decisions and
formulate strategies in the face of incomplete or ambiguous information.
For example, changes in trade policies or intellectual property laws can impact Apple's ability
to operate in certain markets or protect its innovations. Furthermore, consumer demand for
technology products can be unpredictable, influenced by factors such as economic
conditions, fashion trends, and emerging technologies like augmented reality or artificial
intelligence.

3. Complexity
 Complexity refers to the interconnectedness and interdependence of various factors in the
business environment. Globalization, advancements in technology, and the proliferation of
data have all contributed to increasing complexity in business operations. Managing this
complexity requires organizations to understand the relationships between different
variables and to adopt flexible, adaptable approaches to problem-solving.
For example, The global business environment for Apple is highly complex due to the
interconnectedness of various factors such as supply chain logistics, global manufacturing
operations, and distribution networks.

4. Ambiguity
Ambiguity refers to a lack of clarity or understanding about the meaning of events or
information. In a VUCA world, it can be difficult to determine cause-and-effect relationships
or to make sense of conflicting signals. Businesses must learn to tolerate ambiguity and to
develop processes for gathering and interpreting information in order to make informed
decisions.
For example, consumer preferences for features like screen size, battery life, or camera
quality can vary widely across different demographics and regions, making it challenging for
Apple to anticipate demand accurately.

In the global business environment, VUCA analysis can help organizations anticipate and respond to
challenges more effectively. By recognizing the presence of volatility, uncertainty, complexity, and
ambiguity, businesses can develop strategies that are more resilient and adaptable to changing
conditions. Ultimately, the goal of VUCA analysis is to help businesses thrive in an increasingly
dynamic and unpredictable world.

Advantages of Globalization

1. Helps to boost the long run average growth rate of the economy of the country through:
a. Improvement in the allocative efficiency of resources
b. Increase in labour productivity
c. Reduction in capital-output ratio
2. Paves the way for removing inefficiency in production system. Prolonged protective scenario
in its absence makes the production system careless about cost effectiveness which can be
attained by following the policy of globalisation.
3. Attracts entry of foreign capital along with foreign updated technology which improves the
quality of production.
4. Usually restructure production and trade pattern favouring labour-intensive goods and
labour-intensive techniques as well as expansion of trade in services.
5. Enhances the efficiency of the banking insurance and financial sectors with the opening up
to those areas to foreign capital, foreign banks, and insurance companies.
6. Facilitates consumer goods industries to expand faster to meet growing demand for these
consumer goods which would result faster expansion of employment opportunities over a
period of time.

Disadvantages of Globalization

1. Paves the way for redistribution of economic power at the world level leading to domination
by economically powerful nations over the poor nations.
2. Usually results greater increase in imports than increase in exports leading to growing trade
deficit and balance of payments problem.
3. Although globalisation promote the idea that technological changes occurring in some
developing countries have resulted more loss of jobs than they have created leading to fall in
employment growth rates.
4. Showing process to poverty reduction in some developing and underdeveloped countries of
the world and thereby enhances the problem of inequality.
5. Implementation of globalisation principle becoming harder in many industrially developed
democratic countries to ask its people to bear the pains and uncertainties of structural
adjustment with the hope of getting benefits in future.