CHAPTER- 1 BUSINESS ENVIRONMENT - CLASS - XI (SESSION 2020 - 2021)
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CLASS – XI (SESSION 2020 – 2021)
i.e. CLASS – X Batch of (Session 2019 – 2020)
Subject – Business Studies
CHAPTER- 1
BUSINESS ENVIRONMENT
Scope of Syllabus
1. Business Environment
i. Introduction to the concept of business environment.
Meaning and definition of business environment
ii. Features and importance of business environment
Features: dynamic, relative, inter related, complex, uncertain, totality of internal and
external forces, general and specific forces, universality, various stakeholders;
Need to understand business environment: first mover advantage, early warning
signals, business strategies, competitive advantage, customer confidence and public
image, coping with change, customer needs, keeping pace with consumerism.
iii. SWOT Analysis
Meaning and importance of SWOT analysis. Components of SWOT.
CONCEPT OF BUSINESS ENVIRONMENT
Business is considered to be an economic activity which generates income by virtue of buying and
selling, manufacturing and rendering auxiliary services to trade. Business being the economic and social
organ of the society must achieve its economic goal. A businessman needs to deal with various forces,
factors, institutions and policies in the operation of his business. Thus, it may be inferred that economic,
social, legal, political and technological situations constitute the business environment.
“The term business environment may be defined as the sum total of all individuals, institutions
and other forces that are outside the control of a business enterprise which may affect its
performance.”
FEATURES/CHARACTERISTICS OF BUSINESS ENVIRONMENT
The following are the characteristics of the business environment:
1. Totality of external forces: As the environment of a business is the sum total of all things
external to the business firms, it is aggregative in nature.
2. Uncertainty: It is very difficult to predict the future events since it is especially uncertain when
frequent changes are taking place in the environment due to change in technology or fashion.
3. Complexity: Business environment comprises many inter-related and dynamic forces which
arise out of different sources and these forces are at times become very difficult to understand.
Managers continually need to simplify this complexity as much as possible all the time. For
example, if there is a change in the demand for a product, it becomes very difficult to determine
the separate influence of economic, technological, political, social or legal forces, etc. on such
a change.
4. Dynamic: Business environment is dynamic in nature or keeps on changing. The changes may
be in terms of technological improvement, shifts in the consumer’s taste and preference patterns
or new entry of competitors in the market.
5. Relativity: The concept of business environment is relative in nature since it differs from one
country to another country and even from one region to the other. In India, there is fairly high
demand for ghagra, saree and salwar among women whereas the demand for the same is very
negligible in the western countries.
6. Inter-related: The various elements of business environment are closely inter-related. In the
present social environment, it may be noted that there has been a health conscious and fitness
trend among people and as such demand for some products like low fat cooking oil, sugar free
products, etc. have gone up whilst demand for the spicy and oily foods, tobacco, etc. have
decreased to a great extent.
7. General and Specific forces: Business environment is made up of both general and specific
forces. General forces refer to social, political, legal and technological conditions, etc. which
have indirect impact on the working of all business enterprises. Specific forces refer to the
competitors, investors, consumers, suppliers, etc. who have direct impact on the day to day
functioning of individual business enterprises.
FEATURES/CHARACTERISTICS OF BUSINESS ENVIRONMENT AT A GLANCE
Totality of external forces
Uncertainty
Dynamic
Complexity
Relativity
General and Specific forces
Inter-related
IMPORTANCE OF BUSINESS ENVIRONMENT
Business enterprise cannot survive and perform its operation in isolation. It exists, survives and grows
within the various forces of the business environment. The business enterprises have insignificant or no
control on these affecting forces of the environment and has no other option but to adapt itself according
to these forces. Each and every business must adapt to the environmental changes in order to become
successful. On the contrary, if they fail to adapt then it might become difficult for them even to survive
also. It is very much essential for every business to have knowledge of the environmental changes which
in turn is helpful for formulation and implementation of business plans.
A business firm can obtain this knowledge through environmental scanning. Environmental scanning
may be defined as the process by which the business house monitors their relevant environment in order
to identify the opportunities and threats affecting their business. With the help of environmental
scanning, an enterprise can consider the impact of the different events, trends, issues and expectations
on its business operations. The environment provides both opportunities and constraints to business
organisation. Environmental forces create opportunities for expansion and growth through opening of
technological advancements, new markets, increase in population and incomes, etc. Environmental
forces may also act as constraints such as shortage of critical raw materials, labour supply, government
regulations, etc. Thus, it is essential for business firms to be aware of the forces and institutions that
exist in the environment. The same must be managed in harmony with these forces and institutions so
that they can achieve their designed objectives.
The importance of business environment can be derived from the following benefits:-
(a) Getting the first mover advantage: The environment provides various opportunities for the
success of the business. ‘Opportunities’ refers to the positive external changes or trends that
will help in improving the performance of the business organisation. Early identification of
environmental opportunities will help the enterprise to capitalize the opportunities as being the
first to exploit instead of losing the opportunities to its rivals or competitors.
Example: Tata Motors earned a huge amount of revenue since it was the first to recognize
the need for very low maintenance, high mileage small family car in an environment of
rising petroleum prices and increasing poor and middle class population, who instead of
affording a two wheeler will prefer its four wheeler ‘Tata Nano’ and that too at a price of
Rs. 1, 00,000 plus. It was later followed by other Automobile Manufacturers like Mahindra
and others but failed to reap the benefits of early mover advantage.
(b) Better Reputation or Building Corporate Image: An understanding of the business
environment helps the business manager to make realistic plans or policies and also ensure their
effective implementation. Business enterprises will succeed in achieving its goals smoothly and
this fact generates a feeling among people that the business enterprise is sensitive to its
environment. As a result, the reputation of the business enterprise gets enhanced.
Example: Earlier Samsung had various products including air-conditioners, computers,
etc. but it discontinued production of window A.C. since it could not achieve a
reasonable market share in this segment. Samsung believed that it should either capture
a major market share for their products, supplying the best to its customers and
consumers or else get out of the concerned business. It focuses on those issues which it
is best suited for.
(c) Provides useful resources: The business enterprise depends on the environment as a source of
inputs (like raw materials, water, labour, machines, finance, etc.) and as an outlet for its outputs
(i.e., goods and services). The business managers must design policies in such a way that it
allow the enterprises to get the resources that it needs to acquire so that it can convert the same
into outputs as per the taste and preference pattern of the consumers. The business arranges for
payment of taxes to the government, providing reasonable and fair return to its investors, fulfils
social responsibilities (C.S.R.) and so on. All this can be done better by understanding what the
environment has to offer and what it needs. The business takes up many activities and performs
them as a part of their C.S.R. initiative.
Example: Maruti Suzuki India Limited had join hands with the Government of Punjab to
train 10,000 people and helped them to learn the art of driving by setting up of a variety of
institutes. Once it becomes fully operational, the institutes in the first phase will be able to
train around 10,000 learners, including women, youth and underprivileged, annually as
reported by the Management. As part of the tie-up, Maruti Suzuki India Limited will
undertake the management of the institutes and will provide driving simulators, appropriate
training cars (with dual control accessories) and course curriculum. The company will invest
around Rs 3 crore in a phased manner under this CSR programme.
(d) Strategy formulation: The monitoring of the environment provides relevant information about the business environment which serves as the basis for planning and policy making. Each and every business must have and adopt a specific strategy which will give them a competitive edge over others. Example: Vistara Airlines, the new entrant in the Aviation sector by the Tatas formulated a strategy of introducing the concept of selling premium economy class seats and earning good revenue as it realized the existence of passengers who lie in between economy class and business class. This strategy is now being copied by its rivals. (e) Continuous Learning and Improving Performance: All types of business enterprises are facing increasingly dynamic business environment where changes are taking place at a fast pace. Rapid technological change, intense global competition, more demanding customers, less brand loyalty, fragmentation (division and sub-divisions) of markets are just a few of the images that portrays the present business environment. The future of the business enterprise is closely bound up with what is happening in the environment. Thus, the business enterprises that continuously monitor their environment and adopt suitable courses of action based on their environment learning experiences will be the ones which not only improve their present performance but also continue to succeed in the market for a longer period of time. Example: Indigo Airlines, a unit of Interglobe Aviation follows a policy of “On time Every time” and continues to take feedback from its fliers regarding their preferred time to fly. They try and adjust the timings of their flight in such a way so that they get maximum seats filled up and this in turn helps to improve its performance. Its early morning flight from Mumbai, Chennai, Delhi to Kolkata has given them good mileage.
(f) Customer focus: Understanding the environment makes the management sensitive to the changing needs and expectations of the consumers. For example, realizing the wishes of customers, several FMCG companies launched small sachets of shampoo and other products which helped the firms to increase sales. Example: Asian Paints realised the need for producing 50ml and 100ml paints long ago as people in the rural areas need very little paint in order to put paint on the horns of the cows and their cattles so that the owner can identify them easily. Thus, Asian Paints not only produce 1ltr or 4ltr or 10ltr tins of paints but also produce and sell 100 ml paints too. (g) Coping with change: Business leaders must decide the direction and nature of change which are expected to cope with the rapid changes in environment to understand the aspirations of people and other environmental forces through environmental scanning. Example: Maruti Suzuki, the leader in passenger car segment decided to cope up with the rapid changes in the aspirations of people and started manufacturing a car with both Petrol and LPG dual mode i.e., Wagon R Duo where both LPG and Petrol may be filled to run the car. The customers are now getting more choice for their products.
(h) Early warning signals: Besides the opportunities, business environment is also a source of
varied threats. ‘Threat’ refers to that trend or changes in the external business environment
which hinders the performance and growth of a business enterprise. A proper environmental
understanding and awareness can help business managers to recognize various threats on time
and serve as warning signals.
Example: Qatar Airways is introducing Dreamliner Boeing Service in its fleet to provide
more comfort and cater to the growing demand of air traffic. This should be taken as an
early warning signal for ‘Emirates’ and adopt various measures to sustain in the
competition.
IMPORTANCE OF BUSINESS ENVIRONMENT AT A GLANCE
Getting the first Early warning
mover advantage Customer focus
signals
Provides useful Strategy Coping with
resources formulation change
Continuous
Better Reputation
Learning and
or Building
Improving
Corporate Image
Performance
DIMENSIONS OF BUSINESS ENVIRONMENT
The dimensions of business environment involve Micro and Macro. ‘Micro’ means small or pertaining
to one item in the environment/system. It is the opposite of ‘macro’. ‘Macro’ refers to broad, large scale
or overall or that which is generally applicable to the environment/system. The environment of a
business enterprise is divided into three distinct levels. The levels are the general environment [macro],
the operating or specific environment [micro] and the internal environment of the business [micro].
Two main dimensions of business environment are micro and macro environment.
Micro Environment: It refers to the internal and external factors which exercises a direct influence on
the functioning and performance of an individual business enterprise. It is also known as Direct
Sensation Environment or Task Environment. This is classified into Internal and External factors.
a) Internal factors: Internal Factors refer to those elements and individuals who are involved
from within the organisation. The enterprise usually has control over these factors.
b) External factors: External factors are those individuals who get involved and come in direct
and frequent contact during the functioning of the company.
Macro Environment: Macro environment may be defined as the general environment or remote
environment within which a business firm operate. A company does not regularly interact with the
macro environment. Thus, macro environment is also known as Indirect Action Environment. Forces
in the macro environment, however, create opportunities for and pose threats to the company. The forces
of macro environment are less controllable than the micro forces. Hence, the success of an enterprise
depends on its ability to adapt to the macro environment.
Dimension of Business Environment
Micro Environment Macro Environment
(General Environment)
Internal Factors External Factors
→Organisational (Specific or Operating Environment) →Economic
→Financial →Suppliers →Social
→Personnel →Labourers →Technological
→Productivity →Customers →Political
→Marketing →Competitors →Legal
→Investors
MICRO ENVIRONMENT/TASK ENVIRONMENT
It refers to the internal and external factors that directly affect the working and performance of a
business enterprise. It may be classified into Internal factors and External factors as stated above.
INTERNAL FACTORS
It refers to all the factors existing within a business firm or business enterprise. These factors are within
the control of the enterprise. The internal environment will have strengths in some areas and weakness
in other areas. The enterprise must make fullest use of the strengths and try to overcome its weakness.
The internal structures of the business usually consists of the following departments:
Finance, Human Resource, Production, Marketing and Sales.
Some of the main factors that influence business enterprise are:
1. Corporate culture: An organisation grows with some ideology, beliefs and values which must
be shared with people connected with the organisation in order to become successful. For
example, the values and beliefs of Nagavara Ramarao Narayan Murthi, the founder of Infosys
Limited spread like wild fire which in turn helped the company to continue to maintain high
standard of ethics.
2. Human Resources: The morale, dedication, sincerity, loyalty, punctuality and competence of
the employees play a very vital role in the success of the business enterprise. It is a fact that
human resources need to be motivated with extra care and respect. If there is a harmonious
relationship between the employer and employee, resistance from the subordinates can be
prevented and congenial working environment can be established.
3. Corporate Image/ Public Image: The goodwill or public image of an organisation helps in
the day to day running of the business. The corporate image helps an organisation to explore
foreign market, select suppliers, raise business finance, etc.
4. Management Structure: The composition of the board of directors along with the degree of
professionalization in management coupled with leadership styles helps to business decisions
on time.
5. Objectives of the enterprise: Each and every business is formed for the achievement of some
organisational objectives. The objectives guide the priorities and strategies. For example, the
objective of any educational institute should be to give sufficient benefits to children in the
form of a huge playground, infrastructure facilities, excellent faculties so that the children feel
comfortable and happy in school. If the children bring good results for the school, admissions
will start pouring in.
MICRO ENVIRONMENT/TASK ENVIRONMENT INTERNAL FACTORS AT A GLANCE
Corporate culture
Human Resources
Corporate Image/ Public Image
Management Structure
Objectives of the enterprise
EXTERNAL FACTORS
These refer to those individuals or stakeholders who exist and operate in the organisation’s immediate
operating environment. Stakeholders are individuals who have financial interest in the functioning and
performance of the business enterprise. Micro environment of the business consists of the following
external elements: Suppliers, Customers, Competitors, Investors, Marketing Intermediaries,
Community, Public, etc.
(a) The Business enterprise and its Shareholders or Owners or Investors: The owner or
shareholders take risk and they must keep interest in the routine affairs of the company.
Business enterprises have to do the following:
• To provide a reasonable return on capital/ investment regularly.
• To ensure appreciation of their investments by proper utilization of resources.
• To ensure safety and security of investment.
• To give authentic information about the working of the business enterprise including the
financial position of the business.
• To provide opportunities for participation in decision making.
(b) The Business Enterprise and its Competitors: The business enterprise will have direct and
indirect competition from its rivals. Direct competition usually takes place amongst enterprises
producing similar or same products or services. This type of competition is very common.
Example: In the case of Indigo, Go Air, Spice Jet, Jet Airways and Air India are competitors.
The business enterprise must try to give a better service or more value for money than its rivals.
It must not make any unhealthy comments or engage in price wars. Recently, Spice Jet, Indigo
and Jet Airways have been sued by law for violating competition Act.(c) The Business Enterprise and its Customers/ Consumers: People who acquire the products
of the business enterprise are called customers. Business enterprises must meet the needs of
the customers and try to satisfy them. Business enterprises have to do the following-
• To adopt fair trade prices.
• To maintain smooth and uninterrupted supply of goods and services.
• To design and make products keeping in mind the requirements of the customers.
• To provide after sales services.
• To help in consumer grievance redressal.
• To educate consumers about the varied uses of the product by advertising truthfully.
(d) The Business Enterprise and the Public: Public are those groups who have interest in the
business enterprise and who influences the enterprise’s ability to achieve its mission or
objectives. E.g., NGO’s, Environmentalists, Media, etc.
• To take care of the environment by controlling pollution.
• To make optimum utilization of natural resources for the betterment of the people.
• To undertake research and development so as to improve quality and reduce costs.
• To provide assistance to educational institutions, hospitals, sports bodies etc.
• To provide for more employment. Ban on Child Labour must be ensured.
(e) The Business Enterprise and its responsibilities towards the Employees/ Labourers:
• To provide good healthy and safe working conditions.
• To provide opportunities for personal growth and development.
• To provide fair compensation and benefits.
• To offer reasonable opportunities for participation in management.
• To develop and inculcate a sense of belongingness.
(f) The Business enterprise and its Marketing Intermediaries/Middleman: Marketing
intermediaries help in the distribution of the products of the enterprise to ultimate consumers.
Marketing intermediaries not only distribute products but also collects market information and
undertakes market research on behalf of the producers. They also arrange for storage of goods.
In India, Hindustan Unilever Limited (HUL), Nestle and Parle have good distribution
network.
(g) The Business Enterprise and its Suppliers: Suppliers may be defined as those who people
who supply raw/basis materials to the business enterprise. The business enterprise tries to
minimise inventory or stock carrying costs so there must be reliable sources of uninterrupted
supply of raw materials. The quality of the materials must be good and the same should be
maintained. The business enterprise must seek multiple sources of supply of quality materials
so that production is not affected. At times, the business enterprises do not allow its suppliers
to supply raw materials to its competitors.
MICRO ENVIRONMENT/TASK ENVIRONMENT EXTERNAL FACTORS AT A GLANCEThe Business enterprise and its Shareholders or Owners or
Investors
The Business Enterprise and its Competitors
The Business Enterprise and its Customers/ Consumers
The Business Enterprise and the Public
The Business Enterprise and its responsibilities towards the
Employees/ Labourers
The Business enterprise and its Marketing
Intermediaries/Middleman
The Business Enterprise and its Suppliers
MACRO ENVIRONMENT
The dimensions of the general business environment [macro] are discussed as follows:
The dimension of the macro environment generally makes the acronym “SLEPT” – Social/Socio-
cultural, Legal, Economic, Political, and Technological. The existing acronym has become
“STEPPLE” with extra 2 E’s – Environmental and Ecological. By proper identification of the
environmental trends before time, the management can anticipate their likely effect on the enterprise
and react quickly. Otherwise, the management takes the risk of becoming a ‘market follower’, rather
than being a ‘market leader’.
ECONOMIC ENVIRONMENT
Economic environment of business enterprise may be defined as the broad economic features in
which a business enterprise operates.
FACTORS OF ECONOMIC ENVIRONMENT
Economic environment consists of factors such as -
(a) Consumer Income: An increase in the disposable income of the consumers will lead to
increase in their purchasing power. Thus, there will be increase in demand for various goods
and services. On the contrary, if there is a decrease in the disposable income of the consumers
then ultimately there will be decrease in the goods and services.(b) Economic policies of the Government: If the Government levies excise duties, fixes the price
of the commodities, provides subsidies to specific industries, then it portrays that the
government is controlling the business in the best interests of the public.
Economic environment have a stronger influence over organization’s policies and actions. It is
fully regulated by the Central Bank- The Reserve Bank of India (RBI). RBI influences the
interest rates of the country and has control on the entire flow of money in the economy. It also
regulates the working of all commercials banks in India. Thus, RBI is considered to be the key
regulator of the country’s economic development.
(c) Interest Rates: A change in the interest rate will have an impact in the demand for goods and
services. A low long term home loan interest rate will encourage many people to book flat in
an apartment which will not only benefit the consumer but also the real estate promoter,
developer, etc. Similarly, low interest for car loans will increase spending by consumers for
buying cars on borrowed money.
(d) Change in income tax rate: High rate of tax discourages the growth of the business whereas
low income tax rate promotes business activities.
(e) Inflation Rate: High rate of inflation increases the cost of production and creates constraints
on business enterprises. A high rate of inflation is usually detrimental to the individuals in the
society.
FACTORS OF ECONOMIC ENVIRONMENT AT A GLANCE• Consumer Income
• Economic policies of the
FACTORS OF ECONOMIC Government
ENVIRONMENT • Interest Rates
• Change in income tax rate
• Inflation Rate
MAJOR ELEMENTS OF ECONOMIC ENVIRONMENT
i. Economic indices-gross national product, per capita income, balance of payments position,
interest and tax rates, rate of inflation.
ii. Economic policies- industrial policy, monetary policy and fiscal policy.
iii. Industrial infrastructure-transportation, communication, power, etc.
iv. The nature of economic system of the country- property rights, economic planning, role of
public sector, production relations
v. Stage and pace of economic growth in the country.
vi. Structural anatomy of the economy-occupational distribution of labour, pattern of capital
investments, structure of national output, composition of trade, structural equilibrium between
different sectors (agriculture, industry, services).
vii. Development and organization of the capital market.
SOCIAL ENVIRONMENT
Social environment of business enterprises may be defined as the broad features of the
society in which a business enterprise operates.
The social environment of business takes into consideration the customs and traditions that have
lasted many years, values that the society holds in high esteem, the expectations of society from
the business, social trends and many others.
Any change in the social environment will affect the demand for a product of service, supply of
labour and capital. Business is a part of the society in which it operates. Cooperation between
business enterprises and society will help in the growth of the enterprise whereas any conflict
between them may be detrimental resulting in dissatisfaction amongst its customers and they might
reject its product. If the business enterprise fails to adapt to the change then its survival becomes
difficult. Business enterprises have to take care of the various needs and aspirations of the society.
All business economic activities must be linked with a sense of social responsibility. For example,
same basis of labour payment for male and female workers, demand for reservation in jobs for the
minorities and women.Social trends usually provide various opportunities and threats to the business
enterprises. In the present social environment, people have become more health
conscious especially among urban people and as such demand for some products or
services like diet soft drinks (Diet Coke or Diet Pepsi), packaged drinking water
(Aquafina, Kinley, Bisleri), low absorbtion cooking oil (Fortune), sugar free products,
etc. have increased whilst demand for the spicy and oily foods, tobacco, etc. have
decreased to a great extent.
MAJOR ELEMENTS OF SOCIAL ENVIRONMENT
❖ Attitude of people toward new products or improvements in old products, lifestyles, etc.
❖ Consumption habits of people.
❖ Presence of women workers.
❖ Composition of family.
❖ Educational systems and literacy rates.
TECHNOLOGICAL ENVIRONMENT
Technological environment of business enterprise may be defined as broad features of
technology in which a business enterprise operates.
Technological environment consists of forces relating to innovations and scientific
developments which provide new ways of producing goods and delivering services and also newer
methods and techniques of operating a business enterprise in order to provide full customer satisfaction.
Using internet, people can look for various flight timings, destinations and fares and book their tickets
online. The technological advancements has made possible to book railway ticket through internet on
the go through ‘App’ at convenient time instead of standing in queues at the railways booking counters.
Now a days one can even book a cab by taking the help of various app based taxi services like Uber,
Ola, Etc. All the commercial banks have started internet banking services where the accounts holders
can view their account at any point of time , arrange for fund transfers and enjoy host of other services
at their own convenience. Continuous innovations in different fields (Scientific and engineering fields
such as lasers, biotechnology, food preservatives, medicine, tele-communication) have provided
various opportunities and threats for many different enterprises. Thus, technological developments
bring rapid economic development but the business enterprises must be aware of the pollution and take
measures to curb it.
Example: LED desktop monitors replaced the LCD monitors. Smart mobile phones have
taken over the market of landline phones, new age cinema malls like INOX , Fame, PVR,
have been gaining popularity over traditional cinema halls.MAJOR ELEMENTS OF TECHNOLOGICAL ENVIRONMENT
i. New equipments.
ii. New approaches to provide goods and deliver services.
iii. New processes and procedures.
iv. Better control of the environmental pollution.
A SNAPSHOT OF AN E-TICKET
NEW TECHNIQUE OF PROVIDING TAXI SERVICES BY DOWNLOADING ITS ‘APP’
POLITICAL ENVIRONMENT
Political environment may be defined as the broad features of political system in which a
business enterprise operates.
Political environment includes political conditions such as general stability and peace in the
country and specific attitudes that the representatives of the elected government hold towards the
business enterprise. These forces significantly affect the day to day functioning of the business
enterprise. Political stability increases the confidence of business enterprise whereas political
instability adversely affects the business enterprise.Business enterprise functions within the framework of political environment. The business manager is
required to understand and follow the changes in the political environment in order to run the business
smoothly.
MAJOR ELEMENTS OF POLITICAL ENVIRONMENT
❖ The Indian Constitution.
❖ Dominant ideology and practices of the ruling party.
❖ Political ideology of the ruling party.
me LEGAL ENVIRONMENT
Legal environment of business enterprise may be defined as the broad features of legislation in
which a business enterprise operates.
Legal environment comprises various legislations which are passed by the government in the Parliament
or State Legislature. It also include administrative orders issued by government authorities, courts and
recommendations made by various commissions. It is imperative for the management to obey the law
of the land for proper and smooth functioning of the business. Non compliance of laws will attract
severe punishments and penalties as per the statutory norms. Thus, the business managers must have
adequate knowledge of the various rules and regulations.
In India, the managers of any business enterprises are required to have knowledge of –
1. The Companies Act, 1956.
2. The Consumer Protection Act, 1986.
3. The Workmen’s Compensation Act, 1923.
4. The Industrial Disputes Act, 1987.
5. The Foreign Exchange Management Act (FEMA).
6. The Standards of Weights and Measures Act, 1969.
and other legal enactments as amended from time to time by the government.
Example: In order to protect the interest of the consumer’s who smoke, advertisements
and packing of cigarettes must carry the statutory warning saying “Smoking Kills”.
Advertisements of baby food must necessarily inform that the mother’s milk is the best for
her baby. Advertisements of pan masalas have statutory warnings saying “Chewing of pan
masala may be injurious to health,” and “Not to minors.”
BOTH THE PICTURES SHOWING THAT THE COMPANY HAS TO ADHERE TO THE LAW
AND WRITE THAT THE MOTHER’S MILK IS BEST FOR THE CHILD.MAJOR ELEMENTS OF LEGAL ENVIRONMENT
MAJOR ELEMENTS OF LEGAL ENVIRONMENT
SOCIO-ECONOMIC LEGAL INSTITUTIONS
LEGISLATIONS
❖ Socio- Economic Legislations
Laws are enacted by the government not only to protect the interests of the consumers,
customers, workers, owners but also to maintain discipline in the industry.
❖ Legal Institutions like courts, departments of police, department of income tax, etc. have to
function efficiently otherwise it is not possible to reap the benefits of the various business
laws enacted.
Case Study
In the mid 2015, Maggi noodles, a unit of Nestle India was being sued and a
compensation worth Rs. 640 crore was charged. Nestle India was sued on charges of
using lead more than its prescribed limit which was found in few of the Maggi
samples. Maggi immediately went off the shelves for few months till such time it was
proved to be safe and healthy by the appropriate laboratories and testing agencies.
When Maggi case was on it was the time for its rivals to do a good business. Just like
Maggi, each and every company manufacturing food items must adhere to the norms
and use certain items as per the prescribed limits or else it needs to face legal issues.
SWOT ANALYSIS
A SWOT Analysis may be defined as a tool used by the management for formulation of a strategy
which helps to identify the Strengths, Weakness, Opportunities and Threats of a particular organisation.
SWOT involves identifying the favourable and unfavourable internal and external factors for
the achievement of organisational objectives. Strengths and weaknesses are considered to be the factors
which are internal to the organisation whereas opportunities and threats are considered to be the factors
which are external to the organisation.A strategic planning is one that capitalises on the environmental opportunities and neutralises the threats
with the help of its strengths.
Typical examples of factors in a SWOT analysis are as follows:
Strengths
• Patents and operating rights
• New innovative product or service
• Excellent location of the business organisation
• Exclusive access to natural resources
• Specialist marketing expertise
• Cost advantage through proprietary know-how
• Strong brand reputation
Weakness
• Poor location of the company
• Undifferentiated products and service (i.e., in relation to the competitors)
• Lack of marketing expertise
• Poor quality of goods or services
• Competitors having superior distribution network
• Damaged reputation
Opportunities
• Developing market
• Loosening of regulations
• Untapped international market
• Moving into new attractive market segments
• Mergers, joint ventures or strategic alliances
• Removal of international trade barriers
• A market lead by a weak competitor.
Threats
• A new competitor in the home market
• Price war with its rivals
• New rules and regulations
• Increased trade barriers
• A potential new taxation on the product
• Competitor launches innovative substitute product or service.SWOT ANALYSIS AT A GLANCE
Strengths
Weakness
SWOT
Opportunities
Threats
The theory of SWOT Analysis may be well understood with the help of the following matrix.
I
N
T SWOT ANALYSIS
E
R
N EXPLOIT COUNTER/
Strength A
CHALLENGE
L
V
A
R
I
A OVERCOME AVOID OR
B WEAKNESS
Weakness L RUN AWAY
E
S
EXTERNAL VARIABLES
Opportunities Threats
Thus, from the above chart we conclude that
Strength + Opportunities = Exploit
Strength + Threats = Counter or Challenge
Weakness + Opportunities = Overcome weakness
Weakness + Threats = Avoid or Run away.
SWOT ANALYSIS: EFFECTIVE MEANS OF FORMULATING STRATEGYS→ STRENGTH: It is an inherent capacity and pre-determined thought of an enterprise which allows
the same to take a strategic advantage over its competitors.
W→ WEAKNESS: It is the inherent constraint of the business enterprise which ultimately poses a
threat. The competitors will always try to capitalise on the situation and thus can exploit as much as
possible.
O →OPPORTUNITY: It is a situation which is favourable to the business enterprise. New techniques
of providing better products or services may be considered as an opportunity. Opportunities must be
well tapped for the success of the business enterprise.
T →THREATS: It is a situation which is not favourable to the external environment of the business
enterprise. Each and every company at some time or the other face potential threats from its competitors.
It needs to either avoid them or simply run away.
A LIVE EXAMPLE OF SWOT ANALYSIS
FACEBOOK
Strength
1. Top of the mind app among customers
2. High awareness and huge customer base
3. Ad free and hence higher customer satisfaction
4. Available in all platforms
5. Early mover advantage
6. Bug free compared to its competitors
(Works smoothly without any problems)
Weakness
1. Improvements needed in product development
2. Fear amongst the users that data might get leaked due to cloud
Opportunity
1. Increasing internet penetration especially in developing countries
2. Increasing smartphone users
3. Technological development
4. New options to link more people and bring them more closer.
Threats 1. Intense competition from the similar apps
(Viber, Skype and many others.)2. Similar applications are also available for free
ISC MODEL SHORT QUESTIONS AND ANSWERS CARRYING 2 MARKS EACH
1. Define the term business environment.
Or
What is the meaning of business environment?
Ans. The term business environment may be defined as “the sum total of all individuals, institutions
and other forces that are outside the control of a business enterprise which may affect its
performance.”
2. Mention the various dimensions of business environment.
Or
Enumerate the components of macro environment of a business concern.
Ans. The various dimensions of business environment are as follows:
• Economic Environment
• Social Environment
• Technological Environment
• Political Environment
• Legal Environment
3. State two components of legal environment of a business concern.
Ans. Components of legal environment of a business concern:
• Rights and duties of citizens as specified in the constitution.
• Laws concerning promotion operation and expansion of business
• Flexibility and adaptability of laws.
• Judicial system of the country
4. What is meant by Macro Environment?
Ans: The dimension of the macro environment generally makes the acronym “SLEPT” –
Social/Socio-cultural, Legal, Economic, Political, and Technological. The existing acronym
has become “STEPPLE” with extra 2 E’s – Environmental and Ecological. By proper
identification of the environmental trends before time, the management can anticipate their
likely effect on the enterprise and react quickly. Otherwise, the management takes the risk of
becoming a ‘market follower’, rather than being a ‘market leader’
5. How does change in social environment affect a business?
Ans. Any change in the social environment will affect the demand for a product of service,
supply of labour and capital. Business is a part of the society in which it operates. Cooperation
between business enterprises and society will help in the growth of the enterprise whereas any
conflict between them may be detrimental resulting in dissatisfaction amongst its customers
and they might reject its product. If the business enterprise fails to adapt to the change then itssurvival becomes difficult. Business enterprises have to take care of the various needs and
aspirations of the society. All business economic activities must be linked with a sense of social
responsibility.
6. Briefly explain the concept of technological environment.
Ans. Technological environment consists of forces relating to innovations and scientific
developments which provide new ways of producing goods and delivering services and also
newer methods and techniques of operating a business enterprise in order to provide full
customer satisfaction.
7. Why is it important for business enterprises to understand their environment?
Ans. The business enterprises have insignificant or no control on these affecting forces of the
environment and has no other option but to adapt itself according to these forces. A detailed
understanding of the environment by the business managers enables them not only to identify
and evaluate, but also to react to these changing external forces.
8. What is the role of political environment in shaping any business?
Ans. Political environment includes political conditions such as general stability and peace in
the country and specific attitudes that the representatives of the elected government hold
towards the business enterprise. These forces significantly affect the day to day functioning of
the business enterprise. Political stability increases the confidence of business enterprise
whereas political instability adversely affects the business enterprise.
9. How does environmental understandings help in image Building?
Ans. An understanding of the business environment helps business manager to make realistic
plans or policies and also ensure their effective implementation. Consequently, business
enterprises will succeed in achieving its goals smoothly and consistently and this fact generates
a feeling among people that the business enterprise is sensitive to its environment. As a result,
the reputation of the business enterprise gets enhanced.
ISC MODEL LONG QUESTIONS AND ANSWERS
Question 1.
a. Briefly explain any four external factors of micro-environment of business. [8]
b. Explain any four features of business environment. [4]
Question 2.
a. Elucidate the internal factors that affect the business enterprise. [8]
b. What is the significance of understanding environment in shaping the future of
business? Explain in any four points. [4]
Question 3.
a. List the main aspects of economic environment. [8]
b. Name the major aspects of technological environment. [4]
Question 4.
a. Explain the concept of SWOT analysis and State typical examples of factors in a
SWOT analysis. [8]
b. Discuss the meaning of SWOT. [4]
Answer 1.
a. Ans. These refer to those individuals or stakeholders who exist and operate in the organisation’s
immediate operating environment. Stakeholders are individuals who have financial interest in
the functioning and performance of the business enterprise. Micro environment of the businessconsists of the following external elements: Suppliers, Customers, Competitors, Investors,
Marketing Intermediaries, Community, Public, etc.
i. The Business enterprise and its Shareholders or Owners or Investors: The owner or
shareholders take risk and they must keep interest in the routine affairs of the company.
Business enterprises have to do the following:
• To provide a reasonable return on capital/ investment regularly.
• To ensure appreciation of their investments by proper utilization of resources.
• To ensure safety and security of investment.
• To give authentic information about the working of the business enterprise including the
financial position of the business.
• To provide opportunities for participation in decision making.
ii. The Business Enterprise and its Customers/ Consumers: People who acquire the
products of the business enterprise are called customers. Business enterprises must meet
the needs of the customers and try to satisfy them. Business enterprises have to do the
following-
• To adopt fair trade prices.
• To maintain smooth and uninterrupted supply of goods and services.
• To design and make products keeping in mind the requirements of the customers.
• To provide after sales services.
• To help in consumer grievance redressal.
• To educate consumers about the varied uses of the product by advertising truthfully.
iii. The Business Enterprise and its Competitors: The business enterprise will have direct
and indirect competition from its rivals. Direct competition usually takes place amongst
enterprises producing similar or same products or services. This type of competition is very
common. Example: In the case of Indigo, Go Air, Spice Jet, Jet Airways and Air India are
competitors. The business enterprise must try to give a better service or more value for
money than its rivals. It must not make any unhealthy comments or engage in price wars.
Recently, Spice Jet, Indigo and Jet Airways have been sued by law for violating competition
Act.
iv. The Business Enterprise and its Suppliers: Suppliers may be defined as those who people
who supply raw/basis materials to the business enterprise. The business enterprise tries to
minimise inventory or stock carrying costs so there must be reliable sources of
uninterrupted supply of raw materials. The quality of the materials must be good and the
same should be maintained. The business enterprise must seek multiple sources of supply
of quality materials so that production is not affected. At times, the business enterprises do
not allow its suppliers to supply raw materials to its competitors.
b. Ans. Following are the characteristics of the business environment:
i. Totality of external forces: As the environment of a business is the sum total of all
things external to the business firms, it is aggregative in nature.
ii. Uncertainty: It is very difficult to predict the future events since it is especially
uncertain when frequent changes are taking place in the environment due to change in
technology or fashion.
iii. Dynamic: Business environment is dynamic in nature or keeps on changing. The
changes may be in terms of technological improvement, shifts in the consumer’s taste
and preference patterns or new entry of competitors in the market.
iv. Complexity: Business environment comprises many inter-related and dynamic forces
which arise out of different sources and these forces are at times become very difficult
to understand. Managers continually need to simplify this complexity as much as
possible all the time. For example, if there is a change in the demand for a product, it
becomes very difficult to determine the separate influence of economic, technological,
political, social or legal forces, etc. on such a change.
Answer 2.
a. Ans. It refers to all the factors existing within a business firm or business enterprise. These
factors are within the control of the enterprise. The internal environment will have strengths insome areas and weakness in other areas. The enterprise must make fullest use of the strengths
and try to overcome its weakness.
The internal structures of the business usually consists of the following departments:
Finance, Human Resource, Production, Marketing and Sales.
Some of the main factors that influence business enterprise:
i. Corporate culture: An organisation grows with some ideology, beliefs and values which
must be shared with people connected with the organisation in order to become successful.
For example, the values and beliefs of Nagavara Ramarao Narayan Murthi, the founder of
Infosys Limited spread like wild fire which in turn helped the company to continue to
maintain high standard of ethics.
ii. Corporate Image/ Public Image: The goodwill or public image of an organisation helps
in the day to day running of the business. The corporate image helps an organisation to
explore foreign market, select suppliers, raise business finance, etc.
iii. Human Resources: The morale, dedication, sincerity, loyalty, punctuality and competence
of the employees play a very vital role in the success of the business enterprise. It is a fact
that human resources need to be motivated with extra care and respect. If there is a
harmonious relationship between the employer and employee, resistance from the
subordinates can be prevented and congenial working environment can be established.
iv. Objectives of the enterprise: Each and every business is formed for the achievement of
some organisational objectives. The objectives guide the priorities and strategies. For
example, the objective of any educational institute should be to give sufficient benefits to
children in the form of a huge playground, infrastructure facilities, excellent faculties so
that the children feel comfortable and happy in school. If the children bring good results
for the school, admissions will start pouring in.
v. Management Structure: The composition of the board of directors along with the degree
of professionalization in management coupled with leadership styles helps to business
decisions on time.
b. Ans. Environmental scanning may be defined as the process by which the business house
monitors their relevant environment in order to identify the opportunities and threats affecting
their business. With the help of environmental scanning, an enterprise can consider the impact
of the different events, trends, issues and expectations on its business operations. The
environment provides both opportunities and constraints to business organisation.
Thus, it is essential for business firms to be aware of the forces and institutions that exist in the
environment. The same must be managed in harmony with these forces and institutions so that
they can achieve their designed objectives.
The importance of business environment can be derived from the following benefits:-
i. Getting the first mover advantage: The environment provides various opportunities for
the success of the business. ‘Opportunities’ refers to the positive external changes or
trends that will help in improving the performance of the business organisation. Early
identification of environmental opportunities will help the enterprise to capitalize the
opportunities as being the first to exploit instead of losing the opportunities to its rivals or
competitors.
ii. Provides useful resources: The business enterprise depends on the environment as a
source of inputs (like raw materials, water, labour, machines, finance, etc.) and as an outlet
for its outputs (i.e., goods and services). The business managers must design policies in
such a way that it allow the enterprises to get the resources that it needs to acquire so that
it can convert the same into outputs as per the taste and preference pattern of the consumers.
The business arranges for payment of taxes to the government, providing reasonable and
fair return to its investors, fulfils social responsibilities (C.S.R.) and so on. All this can be
done better by understanding what the environment has to offer and what it needs. The
business takes up many activities and performs them as a part of their C.S.R. initiative.
iii. Better Reputation or Building Corporate Image: An understanding of the business
environment helps the business manager to make realistic plans or policies and also ensure
their effective implementation. Business enterprises will succeed in achieving its goalssmoothly and this fact generates a feeling among people that the business enterprise is
sensitive to its environment. As a result, the reputation of the business enterprise gets
enhanced.
iv. Continuous Learning and Improving Performance: All types of business enterprises are
facing increasingly dynamic business environment where changes are taking place at a fast
pace. Rapid technological change, intense global competition, more demanding customers,
less brand loyalty, fragmentation (division and sub-divisions) of markets are just a few of
the images that portrays the present business environment. The future of the business
enterprise is closely bound up with what is happening in the environment. Thus, the
business enterprises that continuously monitor their environment and adopt suitable courses
of action based on their environment learning experiences will be the ones which not only
improve their present performance but also continue to succeed in the market for a longer
period of time.
Answer 3.
a. Ans. Major elements/ aspects of economic environment are as follows:
i. Economic indices-gross national product, per capita income, balance of payments
position, interest and tax rates, rate of inflation.
ii. Economic policies- industrial policy, monetary policy and fiscal policy.
iii. Industrial infrastructure-transportation, communication, power, etc.
iv. The nature of economic system of the country- property rights, economic planning,
role of public sector, production relations
v. Stage and pace of economic growth in the country.
vi. Structural anatomy of the economy-occupational distribution of labour, pattern of
capital investments, structure of national output, composition of trade, structural
equilibrium between different sectors (agriculture, industry, services).
vii. Development and organization of the capital market.
b. Ans. Major elements/ aspects of technological environment are as follows:
i. New equipments.
ii. New approaches to provide goods and deliver services.
iii. New processes and procedures.
iv. Better control of the environmental pollution.
Answer 4.
a. Ans. A SWOT Analysis may be defined as a tool used by the management for formulation of
a strategy which helps to identify the Strengths, Weakness, Opportunities and Threats of a
particular organisation.
Typical examples of factors in a SWOT analysis are as follows:
Strengths
• Patents and operating rights
• New innovative product or service
• Excellent location of the business organisation
• Exclusive access to natural resources
• Specialist marketing expertise
• Cost advantage through proprietary know-how
• Strong brand reputation
Weakness
• Poor location of the company
• Undifferentiated products and service (i.e., in relation to the competitors)
• Lack of marketing expertise
• Poor quality of goods or services
• Competitors having superior distribution network
• Damaged reputation
Opportunities
• Developing market
• Loosening of regulations• Untapped international market
• Moving into new attractive market segments
• Mergers, joint ventures or strategic alliances
• Removal of international trade barriers
• A market lead by a weak competitor.
Threats
• A new competitor in the home market
• Price war with its rivals
• New rules and regulations
• Increased trade barriers
• A potential new taxation on the product
• Competitor launches innovative substitute product or service.
b. Ans. S→ STRENGTH: It is an inherent capacity and pre-determined thought of an enterprise
which allows the same to take a strategic advantage over its competitors.
W→ WEAKNESS: It is the inherent constraint of the business enterprise which ultimately
poses a threat. The competitors will always try to capitalise on the situation and thus can exploit
as much as possible.
O →OPPORTUNITY: It is a situation which is favourable to the business enterprise. New
techniques of providing better products or services may be considered as an opportunity.
Opportunities must be well tapped for the success of the business enterprise.
T →THREATS: It is a situation which is not favourable to the external environment of the
business enterprise. Each and every company at some time or the other face potential threats
from its competitors. It needs to either avoid them or simply run away.
CHAPTER EXERCISES
SHORT ANSWER QUESTIONS OF PART I
1. Define the term business environment.
2. What are general and specific forces of business environment?
3. Mention the various dimensions of business environment.
4. What is social environment?
5. How does change in social environment affect a business?
6. Briefly explain the concept of technological environment.
7. Why is it important for business enterprises to understand their environment?
8. What is the role of political environment in shaping any business?
9. What is legal environment of business?
10. Give two examples of legal regulations which protect consumer’s rights.
11. What is economic environment?
12. What does economic environment consist of?
13. “Environmental scanning helps in the identification of threats and early warning signals”
Briefly explain.
14. How does environmental understanding help in image building?
15. What is SWOT Analysis?
LONG ANSWER QUESTIONS OF PART II
1. Comment: “Environment provides both constraints and opportunities.”
2. Discuss the important characteristics of business environment.
3. List the main aspects of economic environment.
4. Give the major aspects of social environment.
5. State the major aspects of technological environment.
6. Give the major aspects of political environment.
7. Enumerate the major aspects of legal environment.
8. What is the significance of understanding environment in shaping the future of business?
9. Discuss the external factors or dimensions of business environment.
10. Explain the concept of SWOT Analysis.You can also read
