1.Business Environment ISC Class 11 Business Studies Syllabus for the year 2023-2024

1.Business Environment

CHAPTER OUTLINE

1.1 Meaning and Concept of Business Environment

1.2 Features of Business Environment 1.3 Importance of Business Environment

1.4 Components or Types of Business Environment

1.5 Dimensions or Elements of Business Environment

1.6 PESTLE Analysis

1.7 Porter's Five Factor Analysis

1.8 SWOT Analysis

1.8.1 Meaning and Components of SWOT Analysis 1.8.2 Importance of SWOT Analysis

Summary

Exercises

Question Bank

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A business enterprise exists and operates within an environment consisting of economic, social, cultural, political, legal and technological forces. All these forces influence the functioning of business in one way or the other. They constitute the environment of business.

1.1 MEANING AND CONCEPT OF BUSINESS ENVIRONMENT *Meaning: The term 'Business Environment' refers to all forces (factors and institutions) which

are internal or external to a business and beyond its control. These forces affect the working of the business firm and are uncontrollable to a large extent. The firm has to deal with these forces effectively to be successful in the long-run. For example, in line with its concern for the technological environment, The Industrial Credit and Investment Corporation of India (Now ICICI Bank) has set up the Technology Development Corporation (TDC) to finance ventures that have a high risk but possess growth resulting ideas coming from research associations The environment provides both constraints and opportunities. Constraints such as economic conditions, customers, government regulations, availabilities of natural resources, labour supply and so forth are obvious. Thus "the forces, factors and institutions with which the businessman has to deal with to achieve its objectives".

Concept: The term business environment means the sum total of all the forces, factors and institutions which are external to a business enterprise and beyond its control but which exercise tremendous influence on the working and growth of the business enterprise.

Definitions

• Business environment is "the aggregate of all conditions, events and influences that surround and affect business."

Keith Davis

• Business environment refers to "the total of all things external to firms and industries which

affect their organisation and operation." -Bayard O. Wheeler "Business environment encompasses the climate or set of conditions, economic, social,

political or institutional in which business operations are conducted."-Arthur M. Weimer

"The business environment, in fact, consists of all those conditions and forces in the surroundings of a business enterprise under which business operations are to be carried out effectively and efficiently"

-Anonymous

Conclusion: "Business environment may be defined as the set of external factors, geographical factors. These factors are uncontrollable and affect decisions of a firm or company,

1.2 FEATURES OF BUSINESS ENVIRONMENT The The main features of business environment are as follows.

1. Dynamic: Business environment is not static but keeps on changing from time to time, Most forces in the business environment are dynamic.

For example, demonetisation of high value currency notes of 1000 and 500 announced by the Prime Minister on 8th November, 2016 has caused a significant change in India's

business environment.

2. Relative: Business environment is a relative concept as it differs from country to country

and even from one region to another within the same country, For example, the Asian countries like India have a different environment than western countries like the USA and UK. Similarly, the environment in metropolitan cities like Mumbai and Delhi differs from the environment in villages and small towns in India. Sarees and suits are the normal dress for ladies in rural India whereas jeans and trousers are more popular among ladies in metropolitan cities.

3. Inter-related: Different elements of business environment are closely inter-related

and interdependent. A change in one element affects the other elements. Economic

environment influences the non-economic environment which in turn affects the

economic conditions. Most of the external forces in a business environment are inter-

related. Changes in general forces lead to change in specific forces.

For example, economic liberalisation in India since 1991 has opened up new opportunities for private sector and foreign entrepreneurs. Similarly, increasing awareness for healthcare has led to increase in demand for organic food, slimming centres, health spas, etc. New products and services meant for improving health in turn are causing changes in the lifestyle of people. Likewise, social pressures against pollution led to the enactment of anti-pollution laws. Therefore, managers should not consider environmental factors in isolation from one another. A wholistic approach is necessary for proper understanding of business environment.

4. Complex: Business environment is complex because it consists of several inter-related

components which keep on changing. A change in one component can have far reaching

impact on other components. Thus, it makes business environment complex. For example, the change of the central government in 2014 has caused several changes in economic policies and procedures in India. It is, therefore, quite difficult to understand business environment.

5. Uncertain: Business environment is largely uncertain because it is very difficult to forecast the future events. The environment is quite volatile particularly in a fast growing country like India.

For example, everyday a new application or a software is developed. Political, technological and social changes have gained momentum. Presidency of Donald Trump in the USA, Twitter, Smartphone, Paytm, BHEEM and other Apps and women empowerment are examples of recent changes in environment.

6. Totality of Internal and External Forces: Business environment is the sum total or aggregate of all the internal and external forces which influence the working and performance of a business enterprise. Internal forces include the top management team, mission and objectives, culture, and resources of an enterprise. These exercise a great influence, for example, the removal of Cyrus Mistry by Ratan Tata from the Chief Executive position in Tata Group Companies has caused a major change in the Tata Group. External forces consists of all the things external to a business organisation. They consist of economic, social, political, legal and technological forces. For example government, competitors, consumers, social organisations etc.

7. General and Specific Forces: Business environment consists of both general and specific forces. General forces such as economic, social, cultural, political, legal, natural and technological conditions indirectly influence all business enterprises. General forces usually affect the industry directly and business organisation indirectly.

For example, demonetisation has affected all business enterprises in India. But specific forces such as investors, customers, competitors, suppliers, etc. directly influence an individual enterprise. General forces are common to all enterprises but specific forces differ from one enterprise to another.

For example, people who do not own a vehicle are not customers of a petrol pump or

a tyre firm. General forces are called macro environment whereas specific forces are

called micro environment.

8. Universality: Business environment is universal or pervasive. Every enterprise, whether large or small, manufacturing or trading, has to face the environmental forces, at all times. Business conditions may be different at different locations but the basic environmental aspects are common and universally applicable. Every country and region has a particular business environment and no enterprise can function in isolation of its environment.

9. Various Stakeholders: Business environment consists of several stakeholders who have a stake (interest) in the functioning and performance of business enterprises. These stakeholders contribute to the success of an enterprise. In return, they have some expectations from the enterprise. The main stakeholders are given below:

(1) Customers: The people who buy a firm's products and services are its customers. A business exists to create and satisfy customers. A firm may have different types of customers like individuals, households, Government departments, commercial establishments, etc. For example, the customers of a paper company may include teachers, educational institutions, business firms and other users of

stationery. In order to be successful, a company must understand and meet the needs and expectations of its customers. A firm can select the target customer group or market segment on the basis of factors like profitability, elasticity of demand, dependability, degree of competition and growth prospects. It is generally risky to depend upon a single customer group. The customer environment is becoming global due to increasing globalisation and liberalisation of the economy. With the opening up of Indian market and foreign markets, the customer is becoming more global in the matter of shopping.

(ii) Competitors: A company may have both direct and indirect competitors. Direct competitors are the other firms which offer the same or similar products and services. For example, Sony TV faces direct competition from other brands like LG, Samsung. Onida, Videocon, BPL, etc. Indirect competition comes from firms vying for discretionary income. For example, a cinema house, faces indirect competition from Casino, and other firms marketing entertainment. Due to economic liberalisation and globalisation, Indian companies are now facing competition from both domestic firms and multinational corporations. In order to understand the full range of its competition, a company must look from buyers' viewpoint.

(iii) Suppliers: Suppliers refer to the people and groups who supply raw materials and components to the company. Reliable sources of supply enable the company to carry on uninterrupted operations and to minimise inventory carrying costs. Suppliers also influence quality levels and costs of manufacturing. It is very risky to depend on a single supplier. A strike or any other production problem of the supplier may cause interruptions in manufacturing. Therefore, it is advisable to develop and sustain multiple sources of supply. Some companies like Maruti Suzuki undertake vendor development to ensure timely and regular supply of materials and parts. The relationship between the suppliers and the firm reflects a power equation which is based on the extent to which each of them is dependent on the other.

(iv) Marketing Intermediaries or Dealers: Several marketing intermediaries help a company in promoting, selling and distributing its products to consumers. Middlemen 

like agents, wholesalers and retailers serve as a link between the company and its customers, Transportation firms and warehouses assist in the physical distribution of products. Advertising agencies, marketing research agencies and insurance companies are other types of marketing intermediaries. Countrywide retail distribution network has contributed significantly to the success of companies like Hindustan Unilever and Dabur India.

(v) Financiers or Investors: The shareholders, financial institutions, debentureholders and banks provide finance to a company. Financial capacity, policies and attitudes of financiers are important factors for the company. For example, the company cannot raise funds through shares if the financiers are not risk taking.

(vi) Government: Central and State Governments offer infrastructural facilities, funds, subsidies, tax incentives and other support to business enterprises for rapid economic growth of the country. In return, Governments expect business enterprises to abide by the country's laws, culture, policies and programmes, to pay taxes honestly and in time, to minimise pollution, to assist in export promotion, employment generation, development of backward areas, etc.

(vii) Publics: Publics include all those groups who have an actual or potential interest in the company or who influence the company's ability to achieve its objectives. Media groups, environmentalists, non-government organisations (NGOs), consumer associations and local community are examples of publics. These publics can have both positive and negative impact on a business firm. For example, media groups can be used to disseminate useful information. A company can cooperate with the local people to improve its image as well as to provide some benefit to the people. On the negative side, local community concerned with public health can force a company to suspend operations or to take pollution control measures: Non-government organisations often organise protests against firms suspected of being guilty for child labour, cruelty against animals and damage to nature. For example, one of the leading companies in India was attacked by the media for writing advertisements

on rocks near a famous hill station. Such activities of publics can tarnish the image

of business. (vill) Workers and Trade Union: Workers and their union are an important component of micro environment. A firm's relations with its workers and trade union have a significant impact on its functioning and performance. Company's work environment and industrial relations system must be conductive to efficient functioning.

According to Philip Kotler, "Companies must put their primary energy into effectively managing their relationships with their customers, distributors and suppliers. Their overall success will be affected by how other publics in the society view their activity. Companies would be wise to spend time monitoring all their publics, understanding their needs and opinions, and dealing

with them constructively" 1.3 NEED AND IMPORTANCE OF BUSINESS ENVIRONMENT

Business environment provides the macro framework within which the business firm (a micro unit) operates. The environmental forces are largely those given within which an individual

enterprise and its management must function. Business environment exercises tremendous influence on the working and success of business firms. Different elements of business environment have different types and degrees of influence on business. A factor that has a favourable impact on one firm may adversely effect another firm. Therefore, management of a business enterprise must have a deep understanding and appreciation of the environment. The changes taking place in environment must be continuously monitored to judge their impact on business. Appropriate and timely steps must be taken to face the environmental changes.

The survival and success of any enterprise depends upon its inherent capabilities (physical,

financial, human and other resources) and its ability to adapt to the changing environment. It is very important for business firms to understand their environment and changes occurring in it. Business enterprises which know their environment and are ready to adapt to environmental changes would be successful. On the other hand, firms which fail to adapt to their environment are unlikely to survive in the long run. For example, some Indian firms suffered considerably because they failed to appreciate the tightening regulations against environmental pollution. Knowledge of environmental changes is very helpful in the formulation and implementation of business plans. A business can obtain this knowledge through environmental scanning. Environmental scanning is the process by which organisations monitor their relevant environment to identify opportunities and threats affecting their business. With the help of environmental scanning, an enterprise can consider the impact of different events, trends, issues and expectations on its business operations. Firms which systematically analyse and diagnose the environment are more effective than those which do not.

Some of the direct benefits of understanding the environment are given below.

1. First Mover Advantage: Awareness of environment helps an enterprise to take advantage of early opportunities instead of losing them to competitors. For example, Maruti Suzuki became the leader in small car market because it was the first to recognise the need for small cars on account of rising petroleum prices and a large middle class.

2. Early Warning Signals: Environmental awareness serves as an early warning signal. It makes a firm aware of the impending threat or crisis so that the firm can take timely action to minimise the adverse effects, if any. For example, when new firms entered in the mid segment cars (threat), Maruti Suzuki increased the production of its Esteem threefold. Increase in production enabled the company to make faster delivery. As a result, the company captured a substantial share of the market and became a leader in this segment.

3. Business Strategies: In order to survive and succeed in a fast changing and competitive environment, a business enterprise must formulate and execute appropriate strategies. Monitoring of environmental changes provides relevant information which serves as the basis for strategy making. For example, ITC realised that there is a vast scope for growth in the travel and tourism industry in India and the Government is keen to promote this industry because of its employment potential. With the help of this knowledge, ITC planned new hotels both in India and abroad. Study of environment enables an organisation to analyse its competitors' strategies and thereby formulate effective counter strategies. All strategic decisions such as what business to do, whether to expand or reduce a business, and so on require a thorough understanding of the internal and external environment of the organisation.

TC

ITC Limited

4. Competitive Advantage: Business enterprises try to gain and sustain an edge over each other. As competition is increasing, gaining a sustainable competitive advantage has become necessary. For example, Reliance Communication has gained a competitive advantage by launching Jio. The data speed of Jio was almost double that of its rivals. The firm disrupted India's smartphone market with its low cost 4G voice over LTE or VOLTE feature phones and low cost tariff plan.

Jio

airtel

5. Customer Needs and Confidence: In order to gain confidence of customers, a business enterprise must accurately understand their needs, preferences and expectations. Such understanding will enable the enterprise to design and develop products/services that fully sutisfy the aspirations of customers. Customer satisfaction is the best way to create and retain customers. For example, Patanjali Ayurveda has won the confidence of customers who prefer products. It has achieved a sales turnover of 5,000 crore and aims at achieving 10,000 crore tumover within two years.

PATANJALI

6. Public Image: A good public image (goodwill) is an invaluable asset for a business

enterprise. A business firm can improve its image in public by contributing to the betterment of society and by helping social causes such as employment of disabled, women, pollution control, public health and education, etc. It must be sensitive to the needs and aspirations of people. Leading business houses such as the Tatas, Birlas, Ambanis and others have built good public image through their support to schemes of public welfare through Corporate Social Responsibility (CSR).

7. Coping with Change: Business leaders act as agents of change. They create a drive for change at the grass root level. In order to decide the direction and nature of change the leaders need to understand the aspirations of people and other environmental forces environmental scanning. For example, contemporary environment requires prompt decision-making and power to people. Therefore, business leaders are increasingly delegating authority to empower their staff and to eliminate procedural delays.

Environmental analysis serves as broad based and ongoing education for business executives. It keeps them in touch with the changing scenario so that they are never caught unaware. With the help of environmental learning managers can react in appropriate manner and thereby increase the success of their organisations. Knowledge of environment can keep the organisation dynamic in its approach.

8. Keeping Pace with Consumerism : Consumerism means the movement which seeks to increase the rights and powers of consumers. This movement has changed the maxim caveat emptor (let the buyer beware) to caveat venditor (let the seller beware). Consumer voluntary organisations, Non-government organisations (NGOs), media and Government have all contributed to consumerism. Consumerism requires business firms to be increasingly sensitive to the expectations of consumers. Otherwise their survival and success will be in danger. Study and understanding of the changing needs, preferences and aspirations of consumers helps a business enterprise to avoid this danger.

To sum up, the economic environment of business has reference to the macro-economic system, structure, policies rules and regulations, planning, resource availability and exploitation level of development etc. Various laws inacted by the Government to regulate the business also form. part of the economic environment of business.

At A Glance

Importance of Business Environment

. It enables the firm to identify opportunities and getting the first mover advantage. It helps the firm to identify threats and early warning signals.

It helps in tapping useful resources.

It helps in coping with rapid changes.

It helps in planning and also policy formulation.

It helps in improving performance.

It helps in providing their best efforts to obtain maximum market share and to have an

edge over its competitors. It helps the business firm to create goodwill and its brand value.

It represents the protests of consumers against unfair trade and marketing practices

adopted by business organisations.

1.4 COMPONENTS OR TYPES OF BUSINESS ENVIRONMENT

The environment may be of two types

Internal Environment

External Environment

Micro Environment or Operating Environment

Macro Environment or General Environment

Fig. 1.4: Types of Business Environment

Internal environment includes all those factors which influence business and which are present within the business itself. These factors are under the control of business. The study of internal factor is really important for the study of internal environment. These factors are: (1) Objectives and policies of business; (ii) Production methods and production capacity; (iii) Participation and management information system; (iv) Managerial attitudes; (v) Composition of Board of Directors; (vi) Organisational structure; and (vii) Features of Human Resources etc. No doubt all the above factors do influence the decisions of business, but since all these factors are usually under the control of business, they can not be wholly included in the environment of business.

External environment includes all those factors which influence business and exist outside the business. Business has no control over these factors. The information about these factors is very important for the study of the external environment of business. There are some factors which influence the entire business community while as there are some factors which a particular company has very close relationship. On this basis, the external environment can be divided to the following two parts-(1) Micro Environment, and (2)

Macro Environment.

1. Micro Environment or Operating Environment: Micro environment means that environment which included those factors with which business is closely related. These factors influence every industrial unit differently. These factors are: (i) Customers; (ii) Competitors; (iii) Suppliers; (iv) Public; and (v) Marketing Intermediaries.

(i) Customers: Customers of an industrial unit may be of different types. They include household, government, industry, commercial enterprises, etc. The number of different types of customers highly influence a firm. For example, suppose a firm supplies goods only to the government. It means that firm has only one customer. If because of some reason there relations get soured, the supply of goods will stop and in that case the closure of that firm is certain. This clearly indicates that the customers do influence business. Hence, a firm should make efforts to have different kinds of customers.

(i) Suppliers: Like the customers, the suppliers also influence the business. If a business has only one supplier and the annoyed because of some reason, the supply of goods can be stopped and the very existence of the business/industry can be threatened or endangered. Hence, efforts should be made to have various Suppliers

(i) Competitors: The competitive firms can influence business in a number of ways. They can do so by bringing new and cheap products in the market, by launching some sale promotion scheme or other similar methods,

(iv) Public: Public has different constituents like the local public, press or media, ete. The attitude or behaviour of these constituents can affect business units, For example, the local population can oppose some established firm whose business is excessively noisy. Similarly, if the media gives some favourable report about a particular company the price of its share can register an increase on account of this.

() Marketing Intermediaries: The marketing intermediaries play an important role in developing any business unit. They are those persons who reduce the distance between the producers and agents. For example, a company sells its goods with the help of agents and if because of some reason all the agents get annoyed with the company and refuse to sell its goods, on account of this, there can be a crisis

for the company. 2. Macro Environment or General Environment: Macro environment means that environment which includes those factors which have a distant relation with the business, A prominent feature of these factors is that they influence almost all the business units simultaneously.

After study of the above points we have seen that the internal environment are under the control of business and hence it can not be wholly included in the business environment. Similarly, micro environment has a very close relationship with business and, hence, it can be controlled to a large extent with in a short span of time. On the other hand, there is a remote relationship of macro environment with business and business has no control over it. On the contrary, macro environment is in reality the business environment and its factors are called dimension of business environment. We will now discuss in detail the study of these dimensions

5 DIMENSIONS OR ELEMENTS OF BUSINESS ENVIRONMENT

Two categories of business environment are: 1. Economic Environment: It consists of factors like the fiscal policy, the monetary policy,

the industrial policy, pace of economic development, etc. 2. Non-Economic Environment: It refers to social, political, legal, natural and technological factors etc.

Business Environment

Economic Environment

Non-Economic Environment

Fig. 1:5: Elements of Business Environment

Economic Environment: Among the various factors of Business Environment, the economic environment has a special significance. Economic environment can be divided into three parts. We shall now study their effect on business. They are (i) Economic Conditions; (ii) Economic Policies; and (iii) Economic Systems.

Economic Environment

Economic Conditions

Economic

Policies

Economic Systems

Capitalistic System

Socialistic System

Mixed System

Fig. 1.6: Economic Environment

Economic Conditions: Economic conditions are those conditions which are related with the possibilities of economic development of a country. On the basis of the economic conditions the Government starts various programmes for the welfare of the people. These programmes influence business, Businessmen are influenced by these programmes and they start their own programmes like the advertisement policy, opening of new market, bringing new products in the market, new techniques of production etc. Some of the examples of economic conditions are (a) Level of Economic Development, (b) Supply of natural resources, (c) Foreign Capital, (d) National Income, (e) Rate of Interest, (f) Foreign Trade, (g) Industrial Development, and (h) General Price Level.

(ii) Economic Policies: Economic Policies deeply influence the business of a country. The economic policies laid down to direct economic activities. Economic activities include import-export, employment, public expenditure, tax structure, public debts, foreign investment etc. In order to direct all these economic activities the following economic policies are framed (a) Import export policy, (b) Taxation policy, (c) Employment policy, (d) Industrial policy, (e) Public Expenditure policy, (f) Agriculture policy. (g) Public Debt policy, and (h) Foreign Investment policy.

(iii) Economic System: It is necessary to know about the economic system prevailing in the country in order to understand the economic environment prevailing in the country. Economic system influences the freedom of business. Economic system is mainly of three types

(a) Capitalistic System: Under this system, private ownership of business is given due importance. Consequently business gets boost.

(b) Socialistic System: Under this system, business is directed and controlled by the Government. In other words, individuals have no freedom to run their business. (c) Mixed System: Under this system, business is owned by the Government and by the individuals.

Examples of Impact of Economic Environment on Business : (1) Banking sector reforms have led to many attractive schemes of deposits and lending

money; (ii) Recent changes in economic and fiscal policy of the country have encouraged NRIs and foreign investors to invest in Indian companies; and

(iii) Lot of reforms are taking place, such as leasing and finance companies, public sector bonds, mutual funds, venture capital business, the entry of financial institutions and banks in stock trading in the capital market.

Non-Economic Environment:

Non-Economic Environment

Social

Political

Technological

Fig. 1.7: Non-Economic Environment

Global

Natural

Legal

(1) Social Environment: The social environment of a business consists of the class- structure and mobility, definition of the social roles, nature of the social organisation and development of social institutions. The class-structure in society depends upon the occupation of people and their income levels. Urban areas are inhabited by industrial workers, professional classes like lawyers, engineers, educationists, doctors, government servants as well as businessmen. Depending upon the income levels and available opportunities, people have a natural desire to move from one occupational category to another so as to rise in social status, have increased earnings and better standard of living. This process reflects social mobility. In rural, non-urban society the occupational groups comprise farmers, artisans and those engaged in traditional crafts. There is little scope of mobility among social classes in urban society. In the urban social roles of people also differ in the rural society as compared with those in urban society. In the urban social setting, business enterprises can count on the support of modem enlightened social groups and social institutions, for growth and development. On the other hand, the urban society is also more demanding as regards the social responsibilities of business. The traditional environment of rural society may not be congenial for the development and growth of modern business enterprises. There can be little support for a modern business from social institutions and social groups in a traditional society.

Every society develops its own culture over time and this culture determines in large measure how its members behave and interact with each other. The term 'culture' includes values, norms, artifacts, and accepted behaviour patterns. Since society is really a collection of organisations and institutions, it is evident that they are affected to a considerable degree by cultural forces in the environment. It is also important to note that every organisation develops its own internal culture

so that their members learn what is considered acceptable behaviour (or definition of

minimum ethic) for them in various roles that they play in the organisation. Just as organisations have cultures that managers generally create, so there are cultures that exist outside the organisation, which affect the way it (organisation) operates. The social values held by consumers, for instance, are determined to great degree by the values that society at large holds to be important. To the extent that society's values

change, the organisation must adjust its methods of operation.

Examples of Impact of Social Environment on Business: (i) Equal pay for equal work for male and female workers; (1) Demand for reservation in jobs for minorities and women: and (ii) Demand for automatic machines and luxury items in middle class families.

(i) Political Environment: All business firms are affected in greater or lesser degree by government programmes at central, state or local levels. Changes in such programmes are usually the result of shifts in the political weather arising from changes in the attitudes, preferences and objectives of voters and political leaders. Businessmen try to anticipate changes in government policies or in the political forces at the back of them so that they may be able to operate successfully. Several types of changes in the government and political area may be distinguished. These may be classified into: (a) Long-term changes, (b) Quick changes, (c) Cyclical changes, and (d) Regional factors.

(a) Long-term Changes: There are long-term political changes that to some degree resemble secular trends in business conditions. Usually, long-term political and governmental changes reflect basic shifts in attitudes and viewpoints of the public generally. Thus, there have been continuing trends toward programmes that will help to prevent depressions; to protect people against hazards of illness, unemployment or economic insecurity; to protect consumers; to establish minimum wages, etc.

The business manager who is able to identify long-term trends in political and governmental affairs may be able to use them as guides to his decisions and operations. For his purposes, these may in fact be more important than secular changes and trends in the economic field.

(b) Quick Changes: In contrast to long-term forces making for political change, sudden shifts in political and government attitudes may occur. For example, a sudden "scare"-fear of an outbreak of war or other national emergency-may bring quick political reactions that are almost impossible to anticipate. (c) Cyclical Changes: Something like cyclical changes may also be distinguished

in political and governmental The parliamentary elections every five years set up a sort of cycle of political activity. In election years, governments tend to be somewhat more responsive to popular opinion than in the 'off' years. Business managers do make use of this political cycle of changes in developing their plans and programmes. For example, years of general elections are often considered years of uncertainty for the business community, and a number of business managers may be reluctant to start new programmes at such times. On the other hand, some managers may try to anticipate the results of elections and develop programmes in advance of them, in the hope of gaining advantage over competitors.

(d) Regional Factor: In addition to the above types of changes factors often require special attention. For example, agricultural considerations may dominate the political scene in some states. Similarly, backwardness of an area may be given special attention by the government and certain concessions may be offered to the business world.

From the above discussion, it should be apparent that government and political factors play a major role in shaping the environment in which business firms operate. Thus, many business firms try to study and analyse this sector of their environment with a view of predicting probable developments, estimating the risks, opportunities, and dangers involved, and adjusting their decisions and operations to the anticipated changes.

However, this is not an easy task. While information about government and politcal affairs is presented in every daily newspaper, it is difficult to select the key information or to determine its implications. Moreover, business often do not have expert assistance readily in this field.

Examples of Impact of Political Environment on Business: Due to change in political scenario in 1977, a strict policy with regard to multinationals the Coca-cola, Pepsi Cola, IBM and some other multinational companies to move out of India but after new economic policy of 1991, Govt. allowed Coca-cola, Pepsi Cola and other multi-national companies to enter the Indian market to give a boost to the food processing industry.

(ii) Legal Environment: Our legal system is a part, and a very significant one, of business. Laws define and protect our rights and discipline those who interfere with legal rights. Business Law is the complex system of regulations that form the legal environment of business. Knowledge of business law is necessary for many management decisions. However, the legal environment is becoming so complex that many laws are only partially understood.

The more important laws and those that affect business substantially include: (i) Law of Contracts codified in Indian Contract Act, 1872, (ii) Capital Isues (Control) Act, 1947, (iii) Import and Export Control Act, 1947, (iv) Factories Act, 1948, (v) IDRA (Industrial Development and Regulation Act, 1951), (vi) Essential Commodities Act, 1955, (vii) Companies Act, 2013, (viii) MRTP Act, 1969 (Monopolies and Restrictive Trade-Practices Act), (ix) FERA (Foreign Exchange Regulation Act, 1973), (x) Taxation Laws.

Examples of the Impact of the Legal Environment on Companies: (i) Removal of controls over exchange and liberalisation of FDI in equity have added to the impetus of MNCs entry to India; and (ii) Delicencing policy of industries.

(iv) Technological Environment: It includes new approaches to producing goods and services: new procedures as well as new equipment. For example, the contemporary trend towards exploiting robots to improve productivity is closely monitored by many managers. Increasing use of robots in the next decade should vastly improve the efficiency of Indian industry. Installations of these computer controlled machines are expected to grow at an annual rate of 35-45 per cent for the next decade. Similarly. rising petrol prices have forced automobile manufacturers to emphasise fuel economy. The study of above components suggests that business cannot be conducted in vacuum and understanding of environment is in the interest of business.

Examples of Technological Changes and their Impact on Business: (i) Digital watches killed the business prospects of traditional watches; (ii) Television has adversely affected radio and cinema industries, (iii) With the arrival of the photostat machines in the market, the carbon paper industry suffered a setback, and (iv) With the entry of synthetic yarn in the market, the cotton cloth suffered a lot.

(v) Natural Environment: The main natural forces are as follows:

(a) Climatic and geographical conditions.

(b) Agricultural, commercial and other natural resources.

(c) Ecological system. (d) Levels of pollution.

(vi) Global Environment: International agencies (World Bank, IMF, WTO, EEC, etc.). international conventions, treaties and agreements, economic and business conditions in other countries, etc. Certain developments such as a hike in the crude oil price have global impact. Developments in information and communication technologies facilitate rapid spread of culture across countries. Economic conditions abroad affect Indian firms. For example, exports increase when markets expand abroad. International political factors can also affect business. For example, improvements in relations between India and Pakistan has led to higher trade between the two countries, WTO regulations have far reaching impact on business in India. Import and investment liberalisation by WTO has led to greater competition in India.

The main determinants of international environment are as follows:

(a) The state of the world economy and distribution of world output. (b) International economic cooperation.

(e) International market structure and competition.

(d) Barriers to international trade and investment.

(e) National economic policies of different countries.

(f) Role of multilateral economic institutions.

(g) International economic laws, treaties, agreements, codes and practices. (b) Political system and conditions in different countries.

(1) Cultural factors in different countries. (i) Growth and transfer of technology,

(k) Growth and spread of multinationals.

Political

1.6 PESTLE ANALYSIS

Economic

Changes in the business environment can create great opportunities for an organisation but can also cause significant threats. PESTLE Analysis is a simple and widely used tool that helps in analysing the Political, Economic, Social, Technological, Legal and Ecological changes in the business environment. We have already studied these dimensions of business environment in the topic 1.5, lets have a brief look of these with respect to PESTLE model.

Pestle Analysis

Social

1. Political (P): The political environment includes government policies (e.g. taxation foreign trade policy, etc.). stability of the government, ideology of political party in power, etc.

Techno- logical

2. Economic (E): The economic environment consists of disposable income, inflation, interest rates, business cycles, competition in the market, etc.

3. Social (S): The social and cultural environment covers size and

composition of population, social mobility, income distribution,

lifestyle, education levels, work habits, attitudes, beliefs, customs,

traditions, etc.

1.8: PESTLE Analysis

4. Technological (T): It includes nature of technology, rate technology transfer, new discoveries, expenditure on research, etc.

5. Legal (L): It consists of laws relating to taxes, labour, consumers, competition, environmental protection, etc.

6. Ecological (E): The ecological environment means natural forces like climate, effect of industry on environment, level of pollution, etc.

1.7 PORTER'S FIVE FACTOR ANALYSIS

The Five Forces Model was devised by Professor Michael Porter. It is a simple but powerful tool for understanding the competitiveness of the business environment, and for identifying the

strategy's potential profitability.

Porter identified five factors that act together to determine

the nature of competition within an industry. These are the:

Threat of new entrants to a market • Bargaining power of suppliers

Bargaining power of buyers • Threat of substitute products

Degree of competitive rivalry

Let's look at each one of the five forces in a little more detail to explain how they work. 1. Threat of New Entrants: If an industry is profitable it tends to attract new entrants. New entrants in an industry bring new capacity and the desire to gain market share. As

more firms enter in a market, rivalry increases, and profitability of firm will fall to that point where there is no incentive for new firms to enter the industry. It is essential for existing organizations to create high barriers to enter the market to deter new entrants. If to entry are low then the threat of new entrants will be high, and vice versa. Barriers to entry arise due to economies of scale, high capital requirement, brand loyalty, product differentiation, government policies, access to raw materials controlled by existing players, Cost advantages, distribution channels controlled by existing players etc.

Threat of New Entrants

Rivalry Among Existing Competitors

Five Forces Model

Bargaining

Suppliers Fig. 1.9: Porter's Five Factor M

2. Bargaining Power of Suppliers: The bargaining power of suppliers is very important in a market. Few suppliers can impose their conditions in terms of price, quality and quantity. On the other hand, if there are a lot of suppliers their influence is weaker. Thus, the concentration of suppliers and the availability of substitute suppliers are important factors in determining supplier power. The fewer they are, the more power they have. Supplier's bargaining power is likely to be high when-the market is by a few large suppliers, the suppliers' customers are fragmented resulting in their low bargaining power, the switching costs from one supplier to another are high, there are no substitutes for the particular input, the buying industry has low barriers to entry. product is easy to distinguish, etc. Power of

3. Bargaining Power of Buyers: If the bargaining power of customers is high, they influence the profitability of the market by imposing their requirements in terms of price, service, quality, etc. Thus, buyers have the power to demand lower price or higher product quality from industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs. Both the scenarios result in lower profits for producers. Buyers bargaining power is likely to be high when- buyers are few and they buy in large volumes, product is undifferentiated and can be replaced by substitutes, buyers have low margins and are price-sensitive, there is the possibility for the customer integrating backwards, product is not of strategical importance for the customer, supplying industry operates with high fixed costs, etc.

4. Threat of Substitutes: Substitute products can be considered as an alternative compared to the current supply on the market. This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. Profitability of the industry suffers if the threat of substitutes is high. Substitute products or services limit an industry's profit potential by placing a limit on prices. If an industry does not distance itself from substitutes through product performance, marketing, or other means, it will suffer in terms of profitability and often growth potential. The treat of substitutes is determined by factors like-switching costs for customers, brand loyalty of customers, close customer relationships, the extent to which the price and performance of the can match the industry's product, etc.

5. Rivalry among Existing Competitors: This force is the major determinant on how competitive and profitable an industry is. If there is an intense rivalry in an industry, it will encourage businesses to engage in price wars, investment in innovation and new products, sales promotion and higher spending on advertising. All these activities are likely to result in increased costs and low profits. Rivalry among competitors is MZ

strong when-there are many competitors, exit barriers are high, competitors are of

equal size, products are not differentiated and can be easily substituted, barriers for

exit are high, etc.

4.8 SWOT ANALYSIS OR STRENGTHS, WEAKNESSES

OPPORTUNITIES, THREATS ANALYSIS The basis of the environment analysis happens to be data collected from the environment. For

analysing environment, the Indian managers take the help of SWOT Analysis.

1.8.1 Meaning and Components of SWOT Analysis

SWOT is acronym for strengths, weaknesses, opportunities and threats. While strengths and weaknesses can be identified by analysing the internal environment (corporate appraisal), opportunities and threats can be identified by analysing the external environment. SWOT analysis can also be reversed (modified) into TOWS (Threats, Opportunities, Weaknesses and Strengths). SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and for identifying both the Opportunities open to you and the Threats you face. Thus, a SWOT analysis guides you to identify your organization's strengths and weaknesses (S-W), as well as broader opportunities and threats (O-T). Developing a faller awareness of the situation helps with both strategic planning and decision-making. With this type of analysis, a company can create new strategies to position itself better in the market. It can help the company to uncover opportunities that are well-placed to take advantage of. Also, by understanding the weaknesses of the business, a company can oversee and wipe out threats that would generally get it unawares.

Strengths

Weaknesses

Opportunities

Threats

Strength Strength is an inherent capability or resource of the company which it can use to gain strategic advantage over its competitors. Country-wide distribution network, for example, is a strength of Hindustan Unilever Limited.

Weakness: A is an inherent limitation or constraint of the company which creates strategic disadvantages for it. They are the areas where the business needs to improve to remain competitive, such as high levels of debt, an inadequate supply chain or lack of capital. Family

feud is today a weakness of Reliance Industries.

Opportunity: An opportunity is a favourable condition in the company's external environment which enables it to strength its position. Economic liberalisation and globalisation offers an opportunity to companies which want to enter banking, insurance, telecommunication sectors

Threat: A threat is an unfavourable condition in the company's external environment which causes a damage or risk to its position. Competition from multinational corporations is a threat for Indian firms. Despite the fact that these forces are beyond the controlling ability of the company. SWOT analysis might likewise help in preparing the company in the formation of an alternate arrangement that will empower you to rapidly and successfully address these issues if they crop up.

SWOT analysis is helpful in the formulation of an effective strategy that can capitalise on the opportunities and neutralise the threats faced by an organisation.

SWOT Analysis of Hindustan Unilever Ltd. (HUL)

Strengths

a strong brand portfolio

⚫ consumer understanding

R&D ability

⚫ distribution reach

high quality manpower

Weaknesses

⚫ increased consumer spends on education, consumer durable, entertainment, travel, etc. resulting in lower share of wallet for FMCG

⚫ limited success in changing the eating habits of people

⚫ complex supply chain configuration

⚫ unwieldy number of stock keeping units (SKUS)

dispersed manufacturing locations

•Opportunities

increased penetration especially in rural areas

brand growth through increased consumption depth

frequency of usage across all categories ⚫ upgrading consumers through innovation to new levels of quality and performance

⚫ emerging modern trade to be effectively used for introduction of more upscale

personal care products.

growing consumption in out of home categories

•Threats

.low-priced competition

.spurious/counterfeit products in rural areas

.changes in fiscal benefits .unfavourable prices of oils.

1.8.2 Importance of SWOT Analysis SWOT analysis is a very useful technique for

environment. Its main merits are as follows:

analysing and understanding the business

1. It is very simple to understand, prepare and use. 2. It provides a comprehensive picture of all the components of business environment.

3. It is inexpensive. 4. It does not require much time.

5. It is quite flexible and can be applied in all types of business enterprises.

6. It serves as the basis for strategy making. 7. It helps in reducing potential threats

SUMMARY

Meaning of Business Environment: Business environment is the aggregate of all the factors, forces and

institutions that influence the working and performance of a business enterprise.

Features of Business Environment: Dynamic, relative, interrelated, complex, uncertain, totality of internal and external forces, general and specific forces, universality and various stakeholders.

Importance of Business Environment: First mover advantage, early warning signals, business strategies, competitive advantage, customer needs and confidence, public image, coping with change and keeping pace

with consumerism.

or Types of Business Environment: (1) Interal Environment, and (2) External Environment.

External Environment may be () Micro Environment or Operating Environment (1) Macro Environment or General

Environment

Dimensions/Categories of Business Environment. There are two categories of Business Environment-

(1) Economic, and (2) Non-economic Environment. Non-Economic Business Environment: Social, Political, Legal, Technological, Natural and Global. PESTLE Analysis: An analysis of Political (P), Economical (E), Social (S). Technological (T). Legal

(L). Ecological (E) factors. Porter's Five Force Analysis: A simple but powerful tool for better understanding of business environment. SWOT Analysis: Analysis of the Strengths (S), Weaknesses (W). Opportunities (0) and Threats (T) of an

organisation. SWOT analysis is simple, inexpensive, comprehensive, time saving and flexible tool.

Importance of SWOT Analysis: Simple, inexpensive, less time consuming, flexible, basis of strategy making,

reduces potential threats

EXERCISES

Multiple Choice Questions (Select the best alternative)

1. Business environment does not have the following characteristic:

(a) Uncertainty

(b) Employees

(c) Relativity

(d) Complexity

2. Which of the following is an example of social environment?

(b) Consumer Protection Act

(a) Maney supply in the economy (c) The Constitution of the country

(d) Composition of family

3. Which of the following indicates the importance of business environment? (a) Identification of opportunities and threats (b) Improvement in performance

4.

(c) Coping with rapid changes External factors

are: (b) Social

(d) All of the above

(c) Technical

(a) Economic

(d) All of these

5. Which of the following is not the factor of external environmental analysis? (a) Technical (b) Competitive (c) Social

(d) Production

6. Which of the following (a) Opportunity

is not included in SWOT analysis

(b) Management

(c) Strength

(d) Threat

7. SWOT analysis includes: (a) Strengths

(b) Weaknesses does not characterise the

(c) Threats

(d) All of these

8.

Which of the following

business environment?

(a) Uncertainty (b) Employees (c) Relativity

(d) Complexity

9. Which of the following (a) Universality

is

not a feature of Business Environment?

(b) Stakeholders 10. effects the economic environment of business.

(c) Relative

(d) Operating

(a) Liberalisation 11. Which of the following is

(b) Economic system (c) Social system a factor of economic environment?

(d) None of these

(a) Economic conditions (b) Economic policies (c) Economic systems (d) All of the above 12. Business Environment is not static but keeps on changing from time to time. Which feature of Business Environment

is highlighted here?

(a) Dynamic

(b) Relative

(c) Complex

(d) Inter related

13. Business enterprise try to gain and sustain an edge over each other. Which importance of Business Environment

is highlighted here? (a) Public image

(b) Business strategies

(c) Competitive advantage

(d) Coping with change

14. What does "W" stands for in 'SWOT Analysis? (b) Wallet

(a) Weaknesses

(c) Watchful

(d) Waiting

15. A risk.

is an unfavourable condition in a company's external environment which causes a damage or

(a) Opportunity

(b) Threat

(c) Competition

(d) Weakness

16. Demonetisation of high value currency note is classified

in-

(a) Economic environment (b) Social environment (c)

Political environment

(d) Legal environment

17. Increasing urbanisation in India is classified in-

(a) Social environment (c) Political environment

(b) Technological environment

(d) Legal environment

18. strike by Indian forces against terrorist is classified in

(a) Legal environment (c) Political environment

(b) Social environment (d) Technological environment.

19. A simple but powerful tool for better understanding of business environment is? (b) SWOT analysis

(a) Pestle analysis

(c) Porter's five force analysis 20. The movement which seeks to increase the rights and powers of consumer,

(d) Business ethics

(a) SWOT

(b) PESTEL

(d) Competitive

advantage 8. (b)

(c) Consumerism

Ans. 1. (b)

2. (d)

3. (d)

4. (d)

5. (d)

6. (b) (a) 13. (c) 14. (a) 15. (b) 16. (a)

7. (d)

9. (d)

10. (b)

17. (a)

18. (c)

19. (c)

20. (c)

11. (d)

11. Fill in the blanks.

1. Business environment is of a business enterprises.

 3. is the process by which organisations monitor their relevant environment to identify opportunities and threats affecting their business.

2. Government, Suppliers, Competitors, etc. are the as one element affect the other elements.

environment

4. Composition of board of directors and production methods are a part of 5. External environment can be divided into and environment.

6. In

system, private ownership of business is given due importance

environment.

7. Removal of controls over foreign exchange and liberalisation of FDt is a component of analysis gives a bird's eye view of the whole environment from many different angles that one wants to check and keep a track of while contemplating a certain idea/plan.

9. The Five Forces Model was devised by

10. It is very difficult to accurately forecast the future events as business environment is

2. stakeholders

6.

3. Environmental 7. legal

Ans. 1 inter-related

5. micro and macro

capitalistic

10. uncertain

Scanning 4. internal 8. PESTLE

9. Professor Michael Porter

H. Short Answer Type Questions

1. State any two features of Business Environment. 2. What is meant by "Stakeholders?

3. Expand the acronym "SWOT 4. "Business environment Includes both general and specific forces." Comment.

5. List four dimensions of business environment. 6. Why is business environment called 'Dynamic"?

7. "The understanding of business environment provides a first mover advantage." Elucidate.

8. Give any two examples of a potential threat to a company. 9. What does the Political Environment in a business comprise of?

10. Expand the acronym "PESTLE".

IV. Long Answer Type Questions

1. What is meant by Business Environment? Explain its main features.

2. Explain by giving any eight reasons why business firms need to understand their business environment.

3. Describe by giving suitable examples any four dimensions of business environment.

What is SWOT Analysis? Give the SWOT analysis of a company with which you are familiar. 5. Discuss the importance of SWOT Analysis.

6. What is meant by Stakeholders? Explain in brief the Stakeholders in a Business Enterprise.

7. Discuss the Porter's five factor analysis.

QUESTION BANK

1. Very Short Answer Questions

1. Define the term 'Business Environment".

Ans. The term 'Business Environment' may be defined as the sum total of all individuals, groups, institutions and forces that influence the working and performance of a business enterprise. 2. The Consumers Act has forced business organisations to produce quality products and provide after sale

services. Identify the business environment affecting business enterprises.

Ans. Legal environment.

3. State how understanding of business environment helps to improve performance. itself to face the

Ans. If business is able to recognize challenges due to changes in external forces it can prepare change by modifying its policies, updating its products etc.

4. Name any two types of business environment.

Ans. () Economic and (i) Non-Economic Environment. 5. Describe the factors included in the Indian economic environment which have an impact upon trade and industry.

Ans. Macro components are linked with generation of wealth and means of distribution are the various factors

responsible for affecting trade and industry in economic environment in India. 6. Is there any difference between the general external environment and specific external environment?

Ans. Yes, general external environment refers to those forces which directly affect business and as against this specific

environment means those external forces which directly affect the firm.

7. What factors are included in the Micro-environment? Ans. Micro-environment comprises those factors which are closely related to business.

8. Does the change in environment affect the business decisions? Ans. Yes, change in environment affects the business decisions because for gaining success in business it is absolutely

essential that business decisions should be taken according to business environment. 9. Is the external environment having control over the business? Ans. Environment external to business has no control over the business.

10. Is the economic environment a part of the business environment? Ans. Yes, the economic environment is a major component of business environment.

11. Do you think that business environment is a relative concept?

Ans. Yes, business environment is a relative concept since it differs from country to country and even region to region.

12. Do you think business environment is dynamic?

Ans. Yes, business is dynamic as it keeps on changing in terms of technology, consumer behaviour, competition etc.

13. Why is business environment uncertain? Ans. Business environment is said to be uncertain as it is very difficult to predict its trend with full accuracy.

14. Does the business has control over the internal environment? Ans. Internal environment comprises only those factors which exist within the business and over which business

exercises control.

15. What is an economic environment? Ans. Economic environment refers to all such forces that have an economic impact on the business activities.

16. Explain the concept of Economic Environment. Ans. Economic Environment consists of all those factors affecting the economic condition of the country like rate of

interest, foreign exchange reserve, industrial policy, income pattern and inflation etc.

II. Short Answer Questions

1. What is SWOT Analysis? Ans. SWOT analysis is the analysis of an organisation's strengths, weaknesses, opportunities and threats. Strengths

and weaknesses can be identified by analysing the Internal environment. Analysis of external environment reveals opportunities and threats which an organisation is likely to face in future.

2. Explain with example how the effect of forces of business environment is relative. Ans. (i) Relative means the of impact of an external force differs from business to business. For example, ban on child labour will affect only those businesses who employ children in their factories.

(ii) Change in fashion affects European countries more than Asian countries. 3. Give two examples from today's business world which indicate that business environment is dynamic.

Ans. (1) Rapid changes in technology. Mobile companies frequently launch newer models of mobiles with additional features.

(ii) Change in consumers' tastes and preferences. With globalization consumers' have wider choice and higher

expectations. 4. State two reasons why it is important to understand the business environment.

Ans. (i) It enables business organisations to prepare themselves against any possible threats from external forces like

competitors, government, society etc. (ii) It helps organisations to cope with rapid changes in the environment.

5. Give two examples of environment may affect a business enterprise. Ans. (1) Increase in rate of interest may increase the cost of products leading to fall in demand.

(i) Fall in value of rupee may make imports more expensive forcing business organisation to either import at

higher cost or reduce imports. In both cases the business profits will fall.

III. Long Answer Questions

1. Describe the features of business environment.. Ans: (1) Business environment is dynamic because it always keeps on changing

(i) Business environment is a relative term because it differs from one place to another. (i) Business environment consists of several interrelated and interdependent elements,

(iv) Business environment is complex due to its wide scope and changing nature.

(v) Business environment is uncertain as it cannot be predicted with complete accuracy.

(vi) Business environment is the totality of internal and external forces. (vii) Business environment contains both general and specific forces.

(vili) Universality is another feature of business environment. It is present everywhere.

(ix) There are several stakeholders in business environment.

2. Why is it necessary for business firms to understand their environment?

Ans. Understanding of business environment is necessary due to the following reasons:

(1) To gain a first mover advantage.

(ii) To detect early warning signals. (iii) To formulate business strategies.

(iv) To cope with change.

(v) To secure a competitive edge.

(vi) To gain confidence of customers.

(vii) To improve public image.

(vill) To keep pace with consumerism and changing needs of customers.

3. Classify the following trends into economic, social, cultural, political, legal and technological environment.

(i) Demonetisation of high value currency notes.

(ii) Setting up of an International Exchange for securities, commodities and foreign currency in Gandhi Nagar,

Gujarat.

(i) Replacement of Planning Commission by NITI Ayog.

(iv) Surgical strike by Indian forces against terrorists.

(v) Introduction of GST in place of central and state level sales tax. (vi) Increase in the percentage of young persons in India's population.

(vii) Digital payments in place of cash payments.

(viii) Increasing urbanisation in India. (ix) Growth of E-commerce companies such as Amazon, Flipkart, Snapdeal.

(x) Empowerment of women, disabled, third gender and minorities. (iv) Political

Ans. (1) Economic

(ii) Economic

(iii) Political

(vi)

(vii) Technological (viii) Social

(v) Legal

(ix) Technological (x) Social

4. Classify the following into strengths, weaknesses, opportunities and threats. (i) Conflict between Ratan Tata and Cyrus Mistry.

(H) Baba Ramdev's Patanjali Ayurveda's wide distribution network.

(iii) Growing competition in the Fast Moving Consumer Goods (FMCG) industry.

(iv) Dabur's wide range of products.

(v) Liberalisation of laws and rules relating to starting of new ventures. (vi) Make in India movement.

(vii) Improvement of roads, railways and other infrastructural facilities.

(vii) Rising expectations of consumers. (ix) Increasing imports from China.

(x) Rising prices of petroleum products.

(i) Strength

(vii) Opportunity

(H) Threat

(viii) Threat

(v) Strength

(v) Opportunity

Ans. (1) Weakness (vi) Opportunity

5. State various importance of SWOT Analysis.

(ix) Threat

(x) Threat

Ans. SWOT analysis is a very useful technique for analysing and understanding the business environment. Its main merits are as follows:

(i) It is very simple to understand, prepare and use. (i) it provides a comprehensive picture of all the components of business environment.

(iii) It is inexpensive.

(iv) It does not require much time. (v) It is quite flexible and can be applied in all types of business enterprises.

(vi) It serves as the basis for strategy making. (vii) It helps in reducing potential threats.

6. How would you argue that the success of a business enterprises is significantly influenced by its environment? No business enterprise exists in isolation. Each business firm is not an island unto itself, it exists, survives and grows within the context of the elements and forces of its environment. A good understanding of environment by business managers enables them not only to identify and evaluate, but also to react to the forces external to their firms. Role of business environment in success of a business enterprise can be understood by following points:

Ans.

(1) It enables the firm to identify opportunities and getting the first mover advantage: Environment provides numerous opportunities for business success. Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors. (ii) It helps the firm to identify threats and early warning signals: Besides opportunities, environment happens

to be the source of many threats. Environmental awareness can help managers to identify various on time and serve as an early warning signal. (i) It helps in tapping useful resources: Environment is a source of various resources for running a business.

threats

To engage in any type of activity, a business enterprise assembles various resources called inputs like finance, machines, raw materials, power and water, labour, etc., from its environment including financiers, government and suppliers.

(iv) It helps in coping with rapid changes: Today's business environment is getting increasingly dynamic where changes are taking place at a fast pace. In order to effectively cope with these significant changes, managers must understand and examine the environment and develop suitable courses of action.

(v) It in planning and policy formulation: Since environment is a source of both opportunities and threats for a business enterprise, its understanding and analysis can be the basis for deciding the future course of action (planning) or framing guidelines for decision making (policy).

(vi) It helps in improving performance: Many studies reveal that the future of an enterprise is closely bound up with what is happening in the environment. And, the enterprises that continuously monitor their and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.

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