Dr Sakuntala Misra National Rehabilitation University, Lucknow

Faculty of Law

(Business Environment)

Assignment on:
“Why it is Necessary for Firms to analyze
Business Environment”

By :
Shailesh kumar
9th semester
Roll no:164140060

Under the guidance of:

Sushmita ma’am
 INDEX

S.NO TITLE PA TEACHER’S

. GE SIGN.
NO.
1 Introduction 1
2 Types of Business Environment 2-6
3 Why Analysis of Business 6-7
Environment is necessary
4 Conclusion 7
5 Bibliography 8
6
7
8
9
10
 Acknowledgement

This project is as result of dedicated effort. It gives me immense pleasure to prepare this project report
on “Why it is Necessary for Firms to analyze Business Environment”

I Would like to thank our project guide Sushmita ma’am for consultative help and constructive
suggestion on the matter in this project . I would like to thanks our parents and our colleagues who
have helped me in making this project a successful one.

Thanks
Introduction:
Business environment is composed of two words ‘Business’ and ‘Environment’. In economic sense
‘Business’ means human activities like production, purchase or extraction or sales of products or
services that are performed to earn money. Meanwhile ‘Environment’ means the aspect of
surroundings. Business environment is the set of conditions institutional, political, economical, legal
or social that is uncontrollable and affects the functions of the organization.

Business environment consists of two components: external environment and internal environment.
Internal environment includes of 5 M’s like management, money, machinery, material and man. On
the other hand, External environment consists of demo-graphical factors, socio-cultural factors,
political factors, geo-physical factors, government and legal factors.

Business environment refers to any kind of internal or external forces which have an effect on the
functioning of the business in a positive or negative way. The environment may affect the business to
the extent that there may be a need to modify or revamp the entire business.

The types of business environment are:

 Internal Business Environment

 External Business environment

Internal Business Environment

The internal business environment includes physical assets, human, financial and marketing
resources, technological supports, the management etc. Financial resources represent the financial
capabilities of the organization, while physical resources are an indicator of physical assets which
include machinery, production plant, and buildings etc which convert the input into output.

Human resources are a very crucial factor in the internal business environment. The managerial
decisions are taken by human resources while technological resources represent the technical
knowledge which is used in the manufacturing of goods and services. Internal environment consists of
the factors which are controllable and which can be changed according to the requirements of the
external environment. There’s been a drastic change in the internal environment in the last decade or
so. The contemporary work environment does not help the employees to be more productive and the
Internet is your organization that suffers.

That is the reason why organizations have started to adopt a more flexible way of working by making
necessary changes in the internal environment. Write from given liberty of wearing informal clothes
at the workplace to having Gyms and even work from home facilities, the internal environment has
become more employees friendly rather than work friendly because organizations have realized that
the true potential lies in the human factor. Google is the benchmark of one of the best companies
providing the best internal environment to their employees.

External Environment :

The external environment is relatively watched compared to the internal business environment. It is
composed of various organizations institutions and other forces which operate beyond the control of
the organization. It is further classified into external micro and external macro environment.
 External Micro Business Environment: Micro business forces have a major impact on the
operations of a business. For example, suppliers have a huge impact on the pricing of the
products. Also, a competitive firm will start a price war in an industry which is relatively small
but if the rival firm is a big one then the competitive firm will hesitate to initiate the price war.
Following are important factors of micro external environment:

 Suppliers of Inputs :

This is a very important part of the external type of business environment which include supplier of
its inputs such as components and raw materials. For the smooth functioning of an organization, it is
very essential that the inputs such as raw material should be regular. If the supply of the same is not
certain then it is recommended that organization should have a large stock of raw materials so that the
process is continued uninterrupted. This will result in an increase in the cost of production and a
reduction in profit margin or the customers will have to bear the increased price.

Many of the organizations have adapted to set up a phone production plant for procuring of raw
materials. Similarly, energy is also an important input in the business of manufacturing. Many
industries have adapted to set up their own power generating plants so as to ensure an uninterrupted
supply of electricity for their businesses. However small organizations cannot adopt the strategies and
have to depend on external sources for the supply of these inputs.

It is not recommended to depend on a single supplier for any of these inputs because of there is any
destruction due to workers strike or lockout or similar things on the supplier’s end, then it will affect
the production work of the organization negatively. Hence to reduce the risk and uncertainty it is
advised that organizations go ahead with multiple suppliers.

The entity who buys products or uses services of the organization in exchange for money is called a
customer. They form an important part of the external environment and of the business because all of
the profits depend on customers.

It is necessary that your organization focuses on sales and to cater the customers via customer service
which are two important factors for customer satisfaction. An organization may have different kinds
of customers. For example, Audi cars we have individual customers, government, companies,
institutions etc. Although all of them are separate entities and the deals with them will be on different
levels all of them can be classified as customers for the organization.

The organization will always be in competition with rival firms to get more customers thereby to
increase the market share of the organization. It does so by increasing the demand in the market by
spending on advertisements and promotions. The usual strategy of most of the organization is to get
new customers and retain the old ones.

 Marketing Intermediaries :

Marketing intermediaries play a very important role in distributing and sometimes of selling the
products to the final buyers. These include merchants and agents which are distribution firms,
retailers, wholesalers etc. They are responsible for transporting of goods from the production site to
the destination and to the final customer.
Organizations can take help of different agencies such as market research consultancies, advertising
agencies, management consultancies, which help the organizations in promoting targeting and selling
the products to the correct markets. Therefore marketing is considered an important link between
customers and organizations.

 Competition :

Absolute Monopoly is a concept which is long gone from the market. Competition is prevalent and
seen in every sector of business. Organizations compete with each other and not only to get customers
but also a lot of other aspects. Although the majority competition is on price there is a non-price
competition in advertising sponsoring in the event or even and recruiting the best talents in the
market.

A well known famous example of recruiting the best talent is that of Steve Jobs recruiting John
Sculley an executive from Pepsi. To get John onboard Steve Jobs sad the famous line, ‘Do you
want to sell sugar water for the rest of your life or do you want to come with me and change the
world?’ Google is known to pay millions of dollars to get the best of the talent.

Competition can also be seen in terms of CSR activities. Following the footsteps of Coca-Cola Pepsi
has started save water campaign which estimates about 30 million tones of water will be saved
because of manufacturing process changes of Pepsi.

Intense competition can also be seen in the procurement of raw materials from the suppliers. Since the
sources of raw materials are limited businesses often compete with each other. Competition is not
only limited itself to your competitors but the global competition is also on the rise. With
globalization, global competition and price wars not only disturb the economy is but also customers.
For example, an organization in the United States will compete with an organization from Japan or
China or India.

 Public :

These are a very important part of external microenvironment in the type of business environment.
Any group which has interest or impact on the ability of the organization to achieve its objective is
termed as public.

Associations of citizens, local groups, consumer protection organizations, environmentalists, Women

Associations, Media, groups of youth are few of the important examples of the public which have an
impact on the organization. Environmentalists have a huge impact on the working of the organizations
which pollute the environment. Many citizen groups actively campaign against cigarette
manufacturers and alcohol manufacturers for manufacturing in a false way to lure more and more
youth. Hence public as an important aspect which can make or break the organization.

 External Macro Business Environment :

The microenvironment factors are the environmental forces which are faced by the organization and
determine the opportunities to exploit in order to promote its business and also present a threat so that
it can put restrictions on the expansion of Business and its related activities.

The macro environment has both negative and positive aspects to it. A very crucial part of macro
environmental forces is that they cannot be controlled by the management of the organization and
because of its own controllability the firm or the organization has to adjust itself in order to adapt to
these external macro forces.

It is further classified into different types of business environment which will be discussed as follows:

 Economic Environment :

The economy that exists around the industry which is common for the business, as well as its
competition, is termed as economic environment. There can be different phases of the economy like
growth or decline which can impact the working of the organization. The economic environment is
largely affected by the government of the respective country and it may present opportunities and
threats are restrictions to the industries.

The framework within which the businesses have to work is provided by the economic system.
Largely there are two factors which affect the economic system that is the public sector and the
private sector. While Public sector is largely government influenced, Private sector is with private
firms and investors. Foreign exchange also forms an important part of the economic environment. The
fluctuations in the currency on a global scale can affect the economies of different countries
drastically. Also, import-export forms another important aspect of the economic environment. For a
positive economic environment, it is desired that the exports of a country should be more than the
imports.

 Social and Cultural Business Environment :

While we saw that Customers and Public affect Microenvironment of the organization, their social
and Cultural aspects affect the macro environment. This is true especially in case of multinational
firms which bring the culture from their own country in the countries of businesses. The organizations
have to understand the cultural aspects and social aspects of the country that the business is being
done in.

The products of businesses can have a large impact on society. For example, there are cultural
dimensions in Asian countries which prevent them from eating certain foods. Care should be taken by
the organization was introducing the food options and they should be customized for the customers in
the local areas. For example, McDonald’s has customized their menu for Asian markets because of
the religious factors by the communities from the Middle East and Asian countries.

Beef is not accepted in the Asian market and countries like India while pork is not accepted in Middle
Eastern countries. Hence McDonald’s and KFC and other food chains had to come up with
customized menu options respecting the local and cultural barriers. New concept code social
responsiveness has been developed by management science.

The ability of the organizations to get its businesses to the social environment in a way that is
mutually beneficial to both society and the organization is called social responsiveness. Social
responsibility and social responsiveness are a part of Business ethics. It is essential that every
business does its mode of operation within ethical limits.

 Political and Legal Environment :

Each and every business is closely related to the government in the operating country. The political
influence of the government affects business to a large scale in a positive or negative way. It is very
important to take the political and legal nature into consideration for operating any business.
Businesses come in constant clashes with these two and get affected from time to time.

For example, Facebook has always come under the constant radar over its data leaks in the US and
abroad. Going to the data leaks, many countries have banned Facebook in their countries. A similar
threat is eminent with Google which is why Google search engine is banned in China. Because of
social media rumors spread what is here and fast the news and that is why curbing social media has
become an important aspect in every country.

That is the reason why new and new laws are emerging to control social media and make it safer and
secure for the people. On the other hand, there are policies which affect companies and businesses in
a positive way.

For example in 2017, there was a demonetization in India as a part of the war against black money.
Due to the immediate and overnight Ban of currency, digital currency grew in a proliferative way.
Thus the political and legal aspect proved to be a boon for many businesses.

 Technological Environment :

Technology is evolving by leaps and bounds and is it is essential for the businesses to keep in touch
with the ever growing technology to update them and be in the race. New technology is now being
used for the production of goods and services.

Use of machines to standardize processes is now the regular way of doing things because it reduces
the cost as well as enhances productivity. The use of latest technology also gives the organization a
competitive advantage over the competition due to which it gets a better market share. Has
globalization has increased the organizations now compete with each other in international markets
for the sale of their products which is why they have to standardize themselves according to the
international standards.

 Demographic environment :

As the name suggests demography includes the growth of the population and the size of the
population along with life expectancy of the people, the distribution of population among rural and
urban settings and technological skills and education levels of the people.

These factors have an important impact on the functioning of organizations since many workers are
recruited from external sources; demographic factors are considered an important aspect. The skills of
the workers of the organization affect and determine how well the organization can achieve its targets.

The businesses we have to adjust the requirements so as to adapt themselves to the requirements of
the labor forces. For example,having a labor welfare programme or child care services for their
employees. The demographic environment impacts the supply and demand equality in any business.

The organizations get their labor force from external sources. The technical education skills of
employees are important for the functioning of the organization which is where the demographic
environment comes into the picture. Demography also comes into the picture when foreign investors
look to make the investment. For example, India is considered as one of the largest English speaking
countries in the world which is to its advantage and that is why the global economies like the US and
UK prefer to outsource work to India other than China which is cheaper but English is not a language
of choice over there.
The growth rate of the population age and even the composition of the population determine the
demand of the goods and services for a particular population. When the population of a country is
growing its child population will be on the higher side why the stable population will have a geriatric
population in higher side. This means that organization will have to plan their offerings accordingly.

For example, while China is the most populous country in the world, the growth rate of population in
India is the highest in the world. On the other hand, in countries like Japan and Norway, the
population is growing negatively. Which means that requirement for products related to infants and
childcare will be on higher demand in India .

Natural Environment :

The natural environment is the ultimate external environment which affects the business. Availability
of natural resources and the setting up of business depends largely on the natural environment. It is
desirable that the natural environment is to be kept relatively unharmed.

Natural resources include geographical and economic resources like oil reserves, mineral reserves,
water and forest resources, weather and climate, conditions, availability and facilities of Port,
connectivity to other countries and development of the surrounding areas. For example availability of
minerals influences certain industries in that area.

Why Analysis of Business Environment is necessary:

The purpose of the Business Environment Analysis is to identify the potential influence of particular
aspects of the general (economic, political, cultural, technological, natural, demographic, international
environments) and operating environments (company’s suppliers, customers, competitors, and public)
on business operation:

It is also important for:

 Identification of strengths

As mentioned above, strength of organizations are classified as an internal aspect. For instance, if an
organization possesses a solid HR policy, the job satisfaction and the performance of the employees
could be improved. Thus, a happy workforce will be expected to deliver more fruitful results to the
company. Therefore, satisfied employees can be seen as one of the strengths of that particular
company when compared with its rivals who do not have such HR policy and satisfied employees.
Once a company identifies its strengths, the company should take necessary steps to consolidate its
strengths by further improvements in its existing plans and policies.

 Identification of weaknesses

Like strengths, business organizations naturally have weakness as well. Therefore, identifying the
weaknesses of the organization also has an equal importance for an organization in order to move
forward by mitigating such weaknesses to an acceptable level.
 Identification of opportunities

Even an organization is solid in its business; it should not hesitate to seek further expansion in their
business. Therefore, analyzing the external environment will facilitate companies to identify the
opportunities that exist in the market.

 Identification of threats

When there is a severe competition in the market, companies have to face a number of threats from
their competitors; also, there will be a threat of substitution for their products and services as well.
Thus, proper environmental analysis could assist managers to identify the relevant threats from the
external environment in advance and it will enable them to find out appropriate remedial action to
encounter such threats from the outside in advance.

By doing a proper business environment analysis, organizations could achieve number of other
benefits as well. Such business analysis will enable companies to be flexible in their respective
business; will enable to make use of the limited resources of the company productively, predicting
probable future issues of the organization, company’s adoptability and company’s sustainability.

Conclusion:

There are many factors which affect the micro and macro business environment of companies.
Companies can take immediate actions with respect to internal factors and change them when
necessary (such as production, marketing strategy, etc.). However, companies cannot act directly on
external factors. But they can identify them with appropriate time in order to minimize their impact.
Many managers decision making can be based on the use of these tools and analysis therefore they
can get a general overview of the company and aspects which impact it such as politics, laws and
regulations, economy, environment, technology and so on.

Due to high competition nowadays companies are increasingly required to use tools such as PESTEL
or SWOT to develop a successful strategy and competitive with the market. Braskem is a company
has Development a variety of strategies with focus on customer always producing quality products in
order to market national and international trade and always doing a great job in conjunction with the
society, employees, and environment (green).
 Bibliography

 https://www.marketing91.com/types-of-business-environment/
 http://assignmenthub.blogspot.com/2014/04/assignment-on-business-environment.html
 https://www.dailynews.lk/2018/09/06/business/161760/importance-business-environment-
analysis#:~:text=The%20purpose%20of%20the%20Business,competitors%2C%20and%20public)
%20on%20business
 https://www.ukessays.com/essays/business/analysis-about-the-changing-business-
environment-business-essay.php