Nature and Purpose of Business || Part-1 || Business Study Class 11 ||

• Business means human activity which are performed with the objectives of
earning profit.
• Business means to create customers and to expand market share.
• The term Business Environment is composed of two words ‘Business’ and
‘Environment’. Business refers to an entity engaged in commercial,
industrial or professional activities. A business can be for profit or non-
profit motive. On the other hand, ‘Environment’ refers to the aspects of
surroundings.
• Business is like open systems which continuously interacts with environment,
i. e., Business enterprises exist in and are surrounded by an environment
called as business environment.
• Society and business enterprises are mutually dependent; i.e., Business
enterprises satisfy societal needs. Relationship between society and
business enterprises takes place in a dynamic environment.

Characteristics of Business
 Exchange of Goods and Services
 Profit Motive
 Continuity in dealings
 Creation of utility
 Customer Satisfaction
 Innovation and research
 Human activity
 Business is a part of Society
 Business is both Science and Art
 Wide scope

Business Environment has a far reaching impact on the survival and growth of the
business as mentioned below:
 Determining opportunities & threats
 Giving direction for Growth
 Continuous Learning
 Image Building
 Meeting Competition
 Identifying Firm’s strength & weakness

• Business Decisions are influenced by two sets of factors
 Internal Factors (Micro Environment)
 External Factors (Macro Environment)
• Business Environment presents two challenges to the enterprise
 The challenge to combat the environmental threats
 Exploit the business opportunities

Why study Business Environment?
• The success of every business depends upon adapting itself to the environment
within which it functions.
 For Example:
1. When there is a change in government policies, the business has to make the
necessary changes to adapt itself to the new policies.
2. Change in technology may render the existing products obsolete, introduction of
colour T.V television replaced the black and white T.V or introduction of
computers replaced type writers.
3. Introduction of Jeans affected traditional wear etc.
Ex: All these aspects are external factors that are beyond the control of business.
Hence it is very important to have a clear understanding of concepts of business
environment in order

Features of Business Environment
a) Business environment is the sum of all factors external to the business firm and
that greatly influence their functioning.
b) It covers factors and forces like customers, competitors, suppliers (micro) and
political, economic , socio-cultural, technological , natural and global conditions
(macro).
c) The business environment is dynamic in nature and it keeps on changing.
d) The changes of business environment are unpredictable. It is very difficult to
predict the exact nature of future happenings of environment.
e) Business environment differs from place to place, country to country. For
example political system in North Korea differs from that of South Korea
resulting in different business policies.

Nature and Purpose of Business || Part-1 || Business Study Class 11 ||

Economic factors relate to the general conditions of an economy where a firm /
business can operate.
These factors can be classified as below:
Inflation
Interest rates
Growth rates
Unemployment levels
Levels of disposable incomes
Whether it’s boom/recession/depression/recovery
Examples:
An increase in interest rates would mean increase in borrowing costs for both
consumers and firms. Therefore, investments would be postponed resulting in
lower growth rates for the entire economy.
Increasing disposable incomes would mean that people would have greater
demand for products. Therefore, firms would respond to such increasing incomes
by expanding their businesses in such areas.

Economic Environment
Major factors are:
Economic conditions
Economic policies
Economic systems
Economic condition
The economic conditions of a country –for example, the nature of the economy, the
stage of development of the economy, economic resources, the level of income, the
distribution of income and assets etc. are among the very important determinants of
business strategies.
In a developing country, the low income may be the reason for the very low demand
for the product.

Economic policies
Some types or categories of business are favourably affected by
government policy, some adversely affected, while it is neutral to
some others.
e.g. a restrictive import policy may greatly help the import
competing industries, while a liberalisation of the import policy
may create difficulties for such industries
Economic System
The scope of the private business depends on the economic
system.
The freedom of the private enterprise is the greatest in the free
market economy.

Socio-Cultural Environment
1. A set of customs, beliefs, behaviour and practices that exists within a society.
2. Companies often include an examination of socio-cultural environment before
entering their target markets.

Factors which affect Socio-Cultural Environment
1. Demographic factors
2. Attitude of people
3. Social responsibilities
4. Religion
5. Taste & Preference
6. Education
7. Family
8. Income & Lifestyle

Gender
Age
Education
Experience
Environment:
Living Conditions:
Daily Life:
FamilyWork
Health issues
Lifestyle
Social Conditions
Economy

Socio-cultural underpinnings of some global relevance
1.Language: Sometimes a firm faces language problems like ford faced
when they introduced their truck brand named ‘fiera’ which means ugly old
woman in Spanish.
2.Taste & Preference: Taste & preference of a consumer also affects a
product’s demand, so companies have to modify their product accordingly.
3.Dressing & Lifestyle: These factors also impact the demand for a product.
4.Religion: Religious aspects also play a important role in creating the
demand for a product.

 McDonalds made segment according to the demography of India.
McDonalds made their food according to religions in India.
Ex: McDonald’s served burger in 120 countries, is not served in India as
cows are considered sacred in Hinduism.
A company which benefited due to Socio-
Cultural Environment

Political factors affecting business environment
Political factors are the factors relating to policies and nature of the
government
Some of the factors are :
Taxation Policy
Regulatory framework
Governmental stability
Nature of government’s policies towards business- related to taxation
, regulation of business and industry

Natural & Ecological Environment
 Use of modern technology sometimes involves huge social cost in terms of
environmental pollution & ecological balance. So business environment should
also consider about natural resources, weather & climatic conditions as well as
natural disasters
 Environmentally conscious Business Practices
 Cutback on environmentally unsafe operations (Ex: South Korean Steel giant
Posco facing problem in Odisha due to strict environmental norms)
 Compensate for environmentally risky endeavours
 Promote new manufacturing technologies
 Recycle wastes, use of Bio-degradable packaging (Ex: The EU allows only
biodegradable packaging material to be used by companies if these companies
operate in its market)

Technological environment
 Business prospects demands of certain physical facilities Ex:
1. Demand for electrical appliances is affected by the extent of electrification and the
reliability of power supply.
2. Demand for LPG stoves depend on rate of growth of gas connections
 Differing technological environment of different markets may call for product
modifications
Ex: Many appliances are designed for 110 V in USA. They should be converted for
240v in India
 Technological developments may increase or decrease the demand for some existing
products
Ex: voltage stabilizers help increase in sale of electrical appliances in markets
characterised by frequent voltage fluctuations
Ex: Android cell phones are in demand due to advancement of technology
Introduction of TVs, Refrigerators, etc. with in-built stabilizers adversely affects the
demand for voltage stabilizers.

Global Environment
Being signatories, countries are required to fulfill their International/global obligations
Examples:
 WTO specifies that all member countries have to follow the policy of Non-
discrimination ; i.e; MFN & National Treatment.
 WTO members have to implement stronger IPR Policy to protect the companies’ and
individuals’ inventions.
 Being a member of any trade bloc, a country has to follow certain guidelines as specified
in the treaty. For example, 28 members of the EU follow same standardization norm for
products.
 A country, borrowing from IMF to solve its BOP crisis has to follow guidelines of IMF
for its economic reform programme (Ex: IMF package to Greece in 2013 and India in
1991)

Micro Environment
 Micro Environment is the environment that an organization can influence .It may not be able to
correct all flaws in the environment , but it has a much better control over macro environment.
Factors influencing micro environment :
 Consumers-needs , purchasing power and behavior
 Suppliers
 Market Intermediaries
 Competitors
 Micro Environment of Business
I . Suppliers
- Supply of raw materials and other components (Inputs)
Importance- Reliable supply –continuous supply for smooth functioning
II. Costumers
- Industrial Customers
- Wholesale Customers
- Retail Customers
- Government Costumers
- Foreign Costumers

III. Market Intermediaries
- Middlemen
- Physical Distribution Firms ( Warehouses and transport firms)
- Marketing Servicing Agencies ( Advertising agencies, market research firms,, media
firms , consulting firms
- Financial Intermediaries
IV. Competitors
- The threat of entry of new firms
- The power of Buyers
- The power of Suppliers
- The power of Substitutes
- The intensity of rivalry among existing firms
 These factors denote Porter’s Five forces model that forces an organization to develop
competitive strategy to survive in market place.

Nature and Purpose of Business || Part-1 || Business Study Class 11 ||

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