CHAPTER - 1

BUSINESS ENVIRONMENT
 MEANING
Macro environment refers to the general environment or remote
environment within which a business rm and forces in its micro
environment operate.
OR
Macro environment consists of those external forces which have
homogeneous / identical e ect on the working of business
organisations across business sectors.
OR
Macro environment refers to the major external and uncontrollable
factors that in uence an organization’s decision making and a ects
its performance and strategies. These factors include the Economic,
demographic, legal, political, social and technological changes and
natural forces.
 The main dimensions or elements of macro (external)
environment are as follows:
i) Economic environment
ii) Social environment
iii) Technological and physical environment
iv) Political environment
v) Legal environment
 1. Economic and Financial Environment
The economic environment comprises all those economic forces which
in uence the functioning of business enterprises. The main components
of economic environment are as follows:
❖ The nature of economic system – capitalist, socialist and mixed
economy.
❖ Economic structure – occupational distribution of labour force, structure
of national output, capital formation, investment pa ern, composition of
trade, balance/imbalance two sectors, ve year plans.
❖ Economic policies of the government: monetary policy, scal policy,
industrial policy, trade policy, foreign investment policy etc.
❖ Organisation and development of the capital market – banking system,
securities markets, etc.
❖ Economic indicies - gross national product, per capita income, savings
and investment, price level, balance of payment position, etc.
❖ Stage and pace of economic growth in the country
❖ Industrial infrastructure – transportation, Communication, power, etc.
❖ Market conditions – degree of competition
 2. Social and Cultural Environment
Social environment refers to the characteristics of the society in which
a business rm exists. Social and cultural environment consists of the
following:
❖ Demographic forces – size, composition, mobility and geographical
dispersal of population.
❖ Social a itudes, customs, traditions, rituals, culture, life styles, etc..
❖ Family Structure and values
❖ Educational levels, awareness of rights, work ethics.
❖ Social concerns regarding pollution, corruption, status of women and
minorities, role of media.
 3. Technological Environment
The technological segment of business environment
includes the institutions and activities involved in
creating new knowledge and translating it into new
products, processes, and materials. Technology has
pervasive and diversi ed scope. Hence, it a ects many
parts of a society. The main components of
technological environment are as follows:
❖ Level of technology: It may be manual, mechanized,
automated, computerized and robotized technology.
❖ Pace of change: It is the stage and speed of the
technological change.
❖ Technology transfer: It implies technology imported
from foreign countries.
❖ Research and development budget: It is the spending
by the government or business organizations for
technological adaptation, up-gradation and
4. Political Environment
Political environment comprises the elements relating to
management of public a airs and their impact on
business . The main constituents of a country’s political
are as follows:
❖ The constitutional framework of the country
❖ The political system- nature and ideology of political
parties and power centres.
❖ The political structure – centre-state relations.
❖ Political philosophy and stability of the government.
❖ Political process – party system, elections and their
funding.
❖ Degree of politicisation of economic and business
issues.
❖ Foreign policy and Defence policy of the country
❖ Relations of the country with other countries.
 5. Legal (Regulatory) Environment
Business has to Function within the framework of laws and
regulations of the country. Legal environment, therefore, exercises a
signi cant in uence on business activities. The main components of
the legal and regulatory environment are as follows:
❖ Rights and duties of citizens as speci ed in the constitution.
❖ Laws concerning promotion, operation and expansion of business.
❖ Flexibility and adaptability of laws
❖ Judicial system of the country and judicial decisions.
SWOT ANALYSIS
SWOT is an acronym for strengths, weaknesses, opportunities and
threats. While strengths and weaknesses can be identi ed by
analysing the internal environment (corporate appraisal),
opportunities and threats can be identi ed by analysing the external
environment. SWOT analysis can be modi ed into TOWS (Threats,
Opportunities, Weaknesses and Strengths).
Strength (S): A strength is an inherent capability of the company
which it can use to gain strategic advantage over its competitors
Weakness (W): A weakness is an inherent limitation or constraint
of the company which creates strategic disadvantage for it.
Opportunity (O): An opportunity is a favourable condition in the
company’s external environment which enables it to strengthen its
position.
Threat (T): A threat is an unfavourable condition in the company’s
external environment which causes a damage or risk to its position.
 Assignments:
1. Briefly explain any five external factors of micro-environment of business. [2014,
2016, 2019]
2. What is the meaning of business environment? [2014, 2019]
3. Explain any three internal factors of micro environment of a business organisation
[2015]
4. Explain features of business environment. [ 2015, 2018]
5. Enumerate the components of macro environment of a business concern. [2015]
6. State two components of legal environment of a business concern. [2016]
7. What is meant by Macro Environment? [2017]
8. Explain the importance of Business Environment in shaping the future of a business.
[2017]
9. What is social environment? Enumerate any three components of social
environment. [2017]
10. Name the two dimensions of business environment. [2018]
11. What is meant by Micro Environment. [2020]
12. With the reference to the various dimensions of business environment, state what
is meant by political environment. Mention any three components of Political
Environment. [2020]
 Some Case Studies
1. Just after declaration of Lok Sabha Elections 2014 results, the Bombay
stock exchange’s price index (Sensex) rose by 1000 points in a day. Identify
the environmental factor which led to this rise.
2. Which component of business environment requires that advertisements of
baby food
must necessarily inform the potential buyers that mother’s milk is the best?
3. The Court passed an order to ban polythene bags as
The bags are creating many environmental problems which a ect the life of
people in
general.
Society in general is more concerned about quality of life.
The Government decided to give subsidy to jute industry to promote this
business.
Innovative techniques are being developed to manufacture jute bags at low
rates.
Incomes are rising and people can a ord to buy these bags.
Identify the di erent dimensions of Business Environment