Lesson for MBA course on the Economic environment of business.

1. INTRODUCTION TO
BUSINESS ENVIRONMENT
Prof. Prabha Panth,
Osmania University

2. Microeconomics
• Pure Microeconomics assumes that a firm
works in the best possible environment
conducive to it.
• By assuming ceteris paribus, it keeps away all
non-economic factors that would affect the
firm’s behaviour.
• Assumes a ‘free market’ system, with no
government, social, or other pressures.
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3. • Perfect competition, in which the firm has full
knowledge about demand, production
factors, technology, prices, etc. But actual
market is usually an imperfect market.
• Micro economics assumes that the only
motive directing a firm is “profit motive”.
• Only ‘economic factors’ affect the working of a
firm – such as changes in costs
(wages, rent, interest, taxes), prices due to
change in demand and supply conditions.
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4. What is “Business Environment”
• But a Business firm does not work in a vacuum,
• It functions in a particular environment or setting.
• Many external factors affect its working and
strategies.
• This is known as “Business Environment”
• Business environment includes all the external
influences that a firm is subjected to, and which
affect its functioning.
• Pure Economic theory ignores these outside
influences on a firm’s behaviour.
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5. Why study Business Environment
• The success of every business depends on
how it can adapt itself to the environment
within which it functions,
• Working conditions, consumer
behaviour, technology, laws, behaviour of
other firms, etc may all change over time.
• A successful business cannot remain static, it
has to change its goals, its strategies, its
products, etc to meet the new challenges.
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6. External Environment:
Business environment refers to external forces, factors
and institutions that are beyond the control of the
business, but which affect its functioning.
Social and Legal
Religious
Political Demographic
Ecological
Technological
Business
Environment
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7. Political Factors
P
E Economic Factors
S
Social Factors
T
Technological Factors
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8. 1. Political Environment:
The political situation in a country affects the
working of firms.
a) Political ideology – capitalist, mixed economy, or
socialist. Any change in the ideology affects the
firm. E.g. Coca cola in former Soviet Union, China,
b) Political Stability – and peace, no
wars, unrest, agitations, e.g. in Iraq, Afghanistan –
not conducive for private business firms.
c) Relation with other countries, international bodies.
Burma isolated, earlier China, USSR. Are the
countries members of UN, WB, etc.
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9. a) Centre State Relationship in the country – clash in
Federal set up. Centre agrees, States do not, or vice
versa.
b) Trade union movements – strikes, agitations
encouraged by various political parties.
c) Level of political morality (corruption) – how much
and what type of bribes or kick backs to establish
and run the firms?
d) Opposition Parties towards Business Units – any
change in the ruling party, the opposition may not
agree to the earlier policies.
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10. 2. Economic Environment:
a) Economic Conditions:
(i) Level of economic development,
(ii) Size of the economy,
(iii) Growth
(iv) Population
b) Economic Policies of the country:
(i) Industrial policy,
(ii) Monetary and Fiscal policies,
(iii) International trade policy
c) Other Economic Factors:
i. Infrastructural Facilities,
ii. Banking, Insurance companies, money markets,
iii. capital markets
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11. 3. Socio-Cultural Environment:
• attitude of people to work, to consumption
• family system,
• caste system,
• Customs, religion, education, etc.
4. Technological Environment: -
• Changes in technology,
• Inhouse research and development,
• Changes in capital, inputs, labour
requirements, skills, training, etc.
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12. 5. Geographical and Natural factors:
- demand in hilly regions differ from the
plains,
- demand in tropical areas differ from cold
regions,
- input availability differs in different
geographical regions.
- Conservation policies of natural habitats,
- Pollution and other ecological problems.
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13. COMPONENTS OF BUSINESS
ENVIRONMENT
1. Microeconomic: Factors that affect the
individual firm. Internal environment.
These include:
– consumer behaviour, change in tastes, fashions,
– Supply and availability of inputs,
– Labour and employee behaviour,
– Financial stakeholders – behaviour in the stock
market,
– Competitors and their reactions.
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14. 2. Meso economic: Industry level factors
• lies between Micro and Macro levels.
• competition between firms within an industry,
• Change in price, product or technology strategy of
other firms,
3. Macro economic:
These include the “External environment”
discussed earlier – PEST. These cover:
Economic
, social, technological, legal, political, ethical, ecolo
gical factors that affect a firm’s behaviour.
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15. FEATURES OF BUSINESS
ENVIRONMENT
a) External: Business environment is the sum of all
factors external to the business firms that greatly
influence their functioning.
b) Dynamic: The business environment is dynamic
in nature, i.e. it keeps changing.
c) Unpredictable: The changes in business
environment are unpredictable.
d) Regional differences: Business Environment
differs from place to place, region to region and
country to country.
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16. IMPORTANCE OF BUSINESS
ENVIRONMENT
1. Determining Opportunities and Threats:
Firms would be able to identify opportunities
for and threats to their business, and to meet
the challenges successfully. “First mover
advantage”
2. Giving Direction for Growth: It enables the
business to identify the areas for growth and
expansion of its activities, by knowing the
customers’ tastes, government policies, etc.
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17. c) Continuous Learning: to update
knowledge, skills to meet the predicted
changes in business. E.g. latest computer
technology, or pollution control
measures, renewable energy
d) Image Building: CSR activities help to improve
firms’ image by showing sensitivity to the
environment within which they work.
Insensitivity to the public and the
environment works against the firm. E.g. Nano
project in Singur, or mining in
Orissa, pesticides in Coca cola and Pepsi cola.
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18. e) Meeting Competition: helps firms to analyse
the competitors’ strategies and formulate
their own strategies accordingly. In oligopoly
markets, firms have to be alert to changes in
business rivals’ schemes – new products, new
inputs, new ad schemes, or pricing policy.
f) Identifying Firm’s Strength and Weakness:
Business environment helps to identify the
individual strengths and weaknesses in view of
the technological and global developments. If
you can’t keep up, you drop down.
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19. Internal Environment: 5 Ms:
• Can broadly be classified under five factors:
– man, (labour)
– material, (inputs)
– money, (finance)
– Machinery (technology)
– Management.
Unlike External Environment, the Business
firm can make changes in these factors
according to its requirements.
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