 The business environment refers to all

those factors that can influence the

functioning of an organization. This
outcome can be positive or negative. It
is very essential for the organizations to
analyze the environmental influences
which will, therefore, assist them in
evaluating the market conditions. The
business environment can be further
segregated into -
 The internal environment consists of all
those factors that associated very closely to
the business activities and are, by and large,
controlled by the actions of top
management. It has to be noted that
although these internal environment factors
are very much in control of the company but
sill a lot of attention has to be devoted for
their appropriate management since they
can have an impact on the profitability of
the company.
 Brand Image
The image that is associated with the brand, to a
large extent, is in the hands of the company itself.
For instance, Infosys, a big name in the aura of IT,
is well known for its ethical standards whereas
Satyam computers – a company in the same
sector has lost the faith of the customers through
its deceptive actions. The love, trust, faith and
loyalty of the customers, more or less, are shaped
through the actions, policies and procedures of
the company. Even in the matters of financing of a
project or going public by raising of funds through
IPO’s, company’s brand image plays a vital role.
 Employees
The employees or the human resource of an
organization are an asset. A precise selection of
an efficient workforce can be a decisive factor in
the overall profitability of a company. A high
morale, skills, quality, attitude and commitment
of the employees towards the organization can
act as strength. By providing a good work
culture, the morale of the work force can be
boosted which in turn can lead to a positive
environment inside the organizations.
 Production facilities & quality
The establishment of production plants,
technology, supply chain network, production
capacity etc have a major influence on the quality
of the product. A customer buys a product when
he feels that it is a bundle of utilities for him. A
high quality can lead to a satisfaction and a poor
quality can lead to frustrations amongst the
consumers. Therefore, it is the ethical and moral
responsibility of an organization to provide
standardized products to its customers which can
enhance loyalty and increase satisfaction.
R &D
In a high tech era that is characterized by an
intense competition, it becomes imperative
for any firm to innovate and transform
according to the changing environment. The
R & D department of a firm is not only
responsible for innovating new ideas and
concept but also transforming these ideas
into new products with appropriate quality.
An efficient R & D department can act as a
sustainable competitive advantage for an
organization.
 The external environment of a
business is further divided into –

The Micro environment

The Macro environment
These are the factors close to the
company that have a direct impact
on the organizations strategy. These
factors includes
Organizations survive on the basis of
meeting the needs,  wants and
providing benefits for their
customers. Failure to do so will result
in a failed business strategy. The
customers contribute very heavily
towards the profitability of a
company.
Employing the correct staff and
keeping these staff motivated is an
essential part of the strategic
planning process of an organization.
Training and development plays an
essential role particular in service
sector marketing in-order to gain a 
competitive edge.  This is clearly
apparent in the all the industries.
 Increase in raw material prices will have a
knock on affect on the marketing mix
strategy of an organisation. Prices may be
forced up as a result. Closer supplier
relationships is one way of ensuring
competitive and quality products for an
organisation.  At the same time, the timely
supply of the raw materials is very essential
for an organisation.
 As organisation require greater inward investment
for growth they face increasing pressure to move
from private ownership to public.  However this
movement unleashes the forces of shareholder
pressure on the strategy of organisations.
Satisfying shareholder needs may result in a
change in tactics employed by an organisation.
Many internet companies who share prices
rocketed in 1999 and early 2000 have seen the
share price tumble as they face pressures from
shareholders to turn in a profit. In a market which
has very quickly become overcrowded many have
failed.
Positive or adverse media attention
on an organisations product or
service can in some cases make or
break an organisation.. Consumer
programmes with a wider and more
direct audience can also have a very
powerful and positive impact,
inforcing organisations to change
their tactics.
The name of the game in marketing is
differentiation. What benefit can the
organisation offer which is better then
their competitors. Can they sustain this
differentiation over a period of time from
their competitors?. Competitor anlaysis
and monitoring is crucial if an
organisation is to maintain its position
within the market. 
 There are many factors in the macro-
environment that will effect the decisions of
the managers of any organisation. Tax
changes, new laws, trade barriers,
demographic change and government policy
changes are all examples of macro change.
To help analyse these factors managers can
categorise them using the PEST model. This
classification distinguishes between:
 By using the PEST framework we can analyse the
many different factors in a firm's macro
environment. In some cases particular issues may fit
in several categories. For example, the creation of
the Monetary Policy Committee by the Labour
government in 1997 as a body that was
independent of government but had the ability to
set interest rates was a political decision but has
economic consequences; meanwhile government
economic policy can influence investment in
technology via taxes and tax credits. If a factor can
appear in several categories managers simply make
a decision of where they think it best belongs
 However, it is important not to just list PEST factors because
this does not in itself tell managers very much. What
managers need to do is to think about which factors are
most likely to change and which ones will have the greatest
impact on them i.e. each firm must identify the key factors
in their own environment. For some such as pharmaceutical
companies government regulation may be critical; for
others, perhaps firms that have borrowed heavily, interest
rate changes may be a huge issue. Managers must decide
on the relative importance of various factors and one way of
doing this is to rank or score the likelihood of a change
occurring and also rate the impact if it did. The higher the
likelihood of a change occurring and the greater the impact
of any change the more significant this factor will be to the
firm's planning.
 It is also important when using PEST analysis to consider
the level at which it is applied. When analysing
companies such as Sony, Coca Cola, BP and Disney it is
important to remember that they have many different
parts to their overall business - they include many
different divisions and in some cases many different
brands. Whilst it may be useful to consider the whole
business when using PEST in that it may highlight some
important factors, managers may want to narrow it
down to a particular part of the business (e.g. a specific
division of Sony); this may be more useful because it will
focus on the factors relevant to that part of the
business. They may also want to differentiate between
factors which are very local, other which are national
and those which are global.
 Political
factors. These refer to government
policy such as the degree of intervention in
the economy. What goods and services does
a government want to provide? To what
extent does it believe in subsidising firms?
What are its priorities in terms of business
support? Political decisions can impact on
many vital areas for business such as the
education of the workforce, the health of the
nation and the quality of the infrastructure of
the economy such as the road and rail
system.
For instance:
 consumer laws; these are designed to protect customers
against unfair practices such as misleading descriptions of
the product
 competition laws; these are aimed at protecting small firms
against bullying by larger firms and ensuring customers are
not exploited by firms with monopoly power
 employment laws; these cover areas such as redundancy,
dismissal, working hours and minimum wages. They aim to
protect employees against the abuse of power by managers
 health and safety legislation; these laws are aimed at
ensuring the workplace is as safe as is reasonably practical.
They cover issues such as training, reporting accidents and
the appropriate provision of safety equipment
The political environment includes –
 Stability of the political scenario
 Type of government
 How the government laws and regulations
influences the business.
 Government’s policy on economy
 FDI policy of the government
 Consumer protection act
 Labour laws
The government policies – The
government laws such as the zoning
laws, environmental laws, provisions
on Licensing and Franchising, Laws
on recycling & Packaging materials,
product safety laws, Warranties and
guarantees, Sales tax, Restriction on
pricing policies, minimum price laws,
price discrimination, Restriction on
lease agreements etc. can also
influence the decisions.
 Economic factors
These include interest rates, taxation changes, economic
growth, inflation and exchange rates. As you will see
throughout the "Foundations of Economics" book economic
change can have a major impact on a firm's behaviour.
For example:
                - higher interest rates may deter investment
because it costs more to borrow
               - a strong currency may make exporting more
difficult because it may raise the price in terms of foreign
currency
               - inflation may provoke higher wage demands from
employees and raise costs
               - higher national income growth may boost
demand for a firm's products
The economic environment includes –
 GDP of the country
 Rate of interest
 Inflation rate
 Past economic growth
 Future prospect of growth
 Monetary and Fiscal policy
 Level of taxes imposed
 Purchasing power
The World Bank has categorized the
economies into Low income (LIC),
lower middle income (LMC), upper
middle income (UMC), high income
OECD and other high income
countries. The LIC, LMC and UMC
countries comes under the
developing countries and the other
rests under the developed countries.
Developing nations – The following are
the characteristics of a developing
nation.
Widespread poverty
High unemployment
Lower productivity
Disparity between urban and rural
level of living
Dependence on overseas technology
Developed nations – The following are the
characteristics of a developed nation.
 High level of industrialization
 Supreme quality of life
 Sophisticated technology
 Good standard of living
 Excellent educational and health care facilities

Depending on kind of economy, the fluctuations in

the inflation rates, the living standards of the
people, the GDP, per capita income of the people
etc. have an impact on the retail business.
 Social and cultural factors. Changes in social trends
can impact on the demand for a firm's products and
the availability and willingness of individuals to
work. In the UK, for example, the population has
been ageing. This has increased the costs for firms
who are committed to pension payments for their
employees because their staff are living longer. It
also means some firms such as Asda have started to
recruit older employees to tap into this growing
labour pool. The ageing population also has impact
on demand: for example, demand for sheltered
accommodation and medicines has increased
whereas demand for toys is falling.
 Culture is the set of values and attitudes that are
acknowledged by a group of people and transferred from
one generation to another.
 Characteristics of culture
 Culture is learned
 Transferred from one generation to another
 Different culture forms different perceptions about the same
thing
 Culture is socially shared
 It is flexible and changes with the changing times. For
instance, In 1980s the culture did not allowed the females to
wear skirts. However, with changing times, today wearing
skirts among girls is a fashion and is extensively accepted in
the urban areas.
 The cultural factors mould the consumption
patterns, dressing styles, eating habits and
purchasing decisions of a country. They have
to be analyzed very carefully for being
competitive. For instance, in 1996, the Indian
markets were flooded with a large number of
fast food retailers like McDonalds from other
countries. However, it was very surprising for
them to know that a majority of the Indian
people are vegetarian.
 Technological factors: new technologies
create new products and new processes.
MP3 players, computer games, online
gambling and high definition TVs are all
new markets created by technological
advances. Online shopping, bar coding and
computer aided design are all
improvements to the way we do business
as a result of better technology. Technology
can reduce costs, improve quality and lead
to innovation. These developments can
benefit consumers as well as the
organisations providing the products.
 The contribution of technology is enormous in
building a dynamic society. Today the people want
advanced products with superior quality which are
safe to use. For instance, when mobile phones were
launched in India, they were mainly used as a
medium of communication. But with the
technological advancements, it is also used as a
medium of entertainment. With MP3 & MP4 players,
Quality cameras, Video recording, MMS and Games,
a cell phone is a live example of technology.
 In most of the areas, technology has replaced
human beings and the work is done in a lesser time
with more accuracy.
 Technology has also positively affected the economic status
of several countries. It is generally observed that the
countries employing a high level technology is a well
advanced nation. It has increased productivity and has
contributed enormously in producing more quantity with
quality. Some benefits of technology in production process
are –
• Reducing the inventory wastage
• Less waiting time
• Decreased over production
• Reduced shrinkage level
• Reduce costs on documentation
• Assists in production planning
• Reduces unnecessary movements of employees
• Reduce stock outs and ensures product availability
 The impact of technology is on all fields including
education. The use of laptops, electronic sharing
of notes and the popularity of multimedia boards
etc. has provided a new direction to the field of
education.
 The increased utilization of e-commerce has
transformed the world in a small market. Today
people from different countries can trade with
each other by a click of the mouse.
 Technology has played a vital role in developing
the transportation system. The jet aircrafts and
super freights have enabled transportation
without any obstacle.
An organisation has to answer the following
questions to verify the viability of technology.
 What is the level of technology?
 What are the prospects of producing
innovative products through sophisticated
technology?
 What is the impact of technology on the
distribution channel?
 How technology can improvise the process of
product standardization?
 Environmental factors: environmental factors include
the weather and climate change. Changes in
temperature can impact on many industries including
farming, tourism and insurance. With major climate
changes occurring due to global warming and with
greater environmental awareness this external factor
is becoming a significant issue for firms to consider.
The growing desire to protect the environment is
having an impact on many industries such as the
travel and transportation industries (for example,
more taxes being placed on air travel and the
success of hybrid cars) and the general move
towards more environmentally friendly products and
processes is affecting demand patterns and creating
business opportunities.