(Bea) 1

BUSINESS ENVIRONMENT
ANALYSIS
Learning Objectives
• After studying this chapter, you will be able to:
• Explain the concept of business environment
• Describe the nature and scope of business environment
• Describe the importance of business environment
• Explain the components of business environment
• Discuss the relationship between business
environment and strategic management
Business
• Business is an organization or enterprise engaged in
producing goods and services for profit motive.
• It is a collective effort where a firm is engaged in
commercial, industrial or professional activities.
• The main aim of business is to satisfy the needs of
customers.
• The success of every business depends on adapting itself
to the environment within which it functions.
Business Environment
• Business environment includes those external factors and
institutions over which it does not have any direct control.
• These factors affect the functioning of an organisation
directly or indirectly. These include customers,
competitors, suppliers, government, and the social,
political, legal and technological factors, etc.
Business Environment by various authors
• According to Keith Davis, Business environment is the
aggregate of all conditions, events and influences that
surround and affect it.
• According to Reinecke and Schoell, the environment of
business consists of all those external things to which it is
exposed and by which it may be influenced directly or
indirectly.
Business Environment
• Business environment is a combination or mixture of complex, dynamic and uncontrollable
external factors within which a business is to be operated
Scope of Business Environment
• Internal and external environment
• Specific and general environment
• Micro environment and macro environment
• Controllable and uncontrollable environment
Internal Factors
• Plans & Policies
• Value Proposition
• Human Resource
• Financial and Marketing Resources
• Corporate Image and brand equity
• Plant/Machinery/Equipments (or you can say
Physical assets)
• Labour Management
Internal Factors
Internal factors
• Inter-personal Relationship with employees
• Internal Technology Resources & Dependencies
• Organizational structure or in some cases Code of Conduct
• Quality and size of Infrastructure
• Task Executions or Operations
• Financial Forecast
• The founders relationship and their decision making power.
External Factors
• Micro factors:
– Customers
– Input or Suppliers
– Competitors
– Public
– Marketing & Media
– Talent
Customer or demand side
• Quality is customer’s preference than price
• Sales process is more and more under customer’s control
• Customer’s loyalty decrease
• The rise of middle-income customer spender
• Female consumption power
• Advancement of new technology
• Intergenerational consumption
External Factors
• Macro factors:
– Demographic
– Economic
– Political/legal
– Government
– Technology
– Social Culture and
– Natural
The importance of of business environment analysis
• Identification of business opportunities,
• Optimum utilization of resources,
• Identification of threat and early warning signal,
• Coping with the rapid changes
• Identifying firm’s strength and weakness
• Improve quality products and services,
• To improve performance,
• To improve Sales and Profit,
• Assisting in planning and decision-making.
The components of Business Envirionment
Environment
External Environment Internal Environment
Value System
Mission and Objectives
Macro Environment Organisation Structure
Micro Envirionment Economic Corporate Culture
Customers Political/legal Human Resources
Suppliers of inputs Government
Competitors
Physical Resources and
Technology Financial Capabilitie
Public or groups Social Culture
Marketing Intermediaries & Demographic and
Media
Natural
Micro environment
• Customers : They are the buyers of firm’s products and
services.
• Suppliers of inputs: Suppliers provide raw material and
resources to the firm.
• Competitors: Competitors are the rivalry in business.
• Marketing intermediaries: Marketing intermediaries
are an important link between a business firm and its
ultimate customers.
• Public: (Philip Kotler) is any group that has an actual or
potential interest in or impact on the company’s ability to
Macro environment
• Economic environment: All those forces which have an
economic impact on businesses, like Tax rate, Exchange
rate, Inflation, Labor, Demand/supply, Wages, Recession,
• Political-legal environment: The activities of legislature,
executive and judiciary that play a vital role in shaping,
directing, developing and controlling business activities.
Macro environment
• Technological environment: Systematic application of
scientific or other organised knowledge to practical tasks
or activities,
• Socio-cultural environment: People’s attitude towards
work and wealth, lifestyle, ethical issues, role of family,
marriage, religion and education and also social
responsiveness of business affect the business,
Macro
Macro environment environment
• Population size and growth, life expectancy of the people, rural-

urban distribution of population, the technological
• Demographic environment: Population size and growth, life
expectancy of the people, rural-urban distribution of population,
migration, ethnic, the technological skills and educational levels of
labour force
• Natural environment: Natural environment consists of geographical
and ecological factors a such as minerals and oil reserves, water and
forest resources, weather and climatic conditions and port facilities
Internal environment
• Value system: The values are the ethical
beliefs that guide the organisation in
achieving its mission and objectives.
• Mission and objectives: A mission guides
and influences an organisation’s decisions
and economic activities. The objective is the
end towards which business activities are
directed.
• Organisation structure: The organisational
structure is the hierarchy in business that
Internal environment
• Corporate culture: Shared values and
belief in an organisation which determine its
internal environment,
• Human resources: Human quality of a firm
like skills, qualities, capabilities, attitude,
competencies and commitment of its
employees,
• Physical resources and financial
capabilities: Physical resources, such as
plant and equipment, facilities and financial
STRATEGIC MANAGEMENT
• The set of decisions and actions that result in the formulation and
implementation of plans designed to achieve a company objectives
• Strategic management helps in defining the objectives and policies for the
business
RELATION BETWEEN BUSINESS ENVIRONMENT AND STRATEGIC
MANAGEMENT
• In formulating a strategy, the strategic decision makers must analyse internal

as well as external conditions in the environment
• Analysing internal and external environment will help managers determine what
goals and mission they can or should adopt, and the strategic options that are available.
Self Assessment
1................ is the aggregate of all conditions, events and influences that surround and affect
it.
2.All those factors which are governed by business come under controllable environment.
(True/False)
3.A business firm and its environment are mutually .
4. and are the two types of external environment.
5.Which among the following comes under economic environment?
– Education
– Population size
– GDP
– Lifestyle
6.Marketing intermediaries are an important link between a business firm and its ultimate
customers. (True/False)
Self Assessment
7.Strategic management does not help in defining the
objectives and policies for the business. (True/False)
8. are based on what a manager forecasts rather than
what he knows
Activity
• Choose any company of your choice and note the
internal and external factors affecting its business.

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BUSINESS ENVIRONMENT

External Environment Internal Environment

• Population size and growth, life expectancy of the people, rural-

• In formulating a strategy, the strategic decision makers must analyse internal

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