UNIT II

ORGANIZATIONAL
ENVIRONMENT
 What is Business Environment
The business environment refers to all
internal and external factors that affect an
organization’s performance. It plays a
crucial role in determining how businesses
operate, compete, and grow in a market.
India, being one of the fastest-growing
economies, has a complex and dynamic business
environment, which includes various factors such
as government policies, market trends, social
changes, and technological advancements.
 The business environment refers to all the external and
internal factors that influence a company's operations,
decision-making, and overall success. It includes economic
conditions, government regulations, market trends, social
influences, technological advancements, and environmental
concerns that shape the way businesses function.
Businesses do not operate in isolation;
they must interact with various
elements in their environment. These
factors can create opportunities or
pose threats, requiring businesses to
adapt their strategies accordingly.
 Characteristics of Business
Environment
Dynamic: The business environment is constantly changing due to
advancements in technology, shifting market trends, and policy
changes.
Uncertain: Businesses must deal with unpredictable factors such as
economic fluctuations, political instability, or global pandemics.

Complex: The environment consists of multiple interrelated factors,

making decision-making challenging.

Interdependent: Different factors influence each other, such as how

technological changes impact consumer behavior and regulatory
policies.
 Importance of Business
Environment
A. Helps in Identifying Opportunities and Threats
• A favorable business environment provides growth opportunities (e.g., expansion
in new markets).
• Unfavorable conditions present threats (e.g., economic recession affecting
demand).
• Example: During the COVID-19 pandemic, food delivery companies like Swiggy
and Zomato identified opportunities in grocery delivery due to increased online
shopping.

B. Assists in Planning and Decision-Making

• Helps businesses develop strategies for success.
• Ensures better risk management by anticipating external changes.
• Example: Automobile companies like Tata Motors and Mahindra shifted to
electric vehicles (EVs) after government policies promoted sustainable
transportation.
C. Facilitates Adaptability to Market Changes
• Businesses that monitor trends can stay ahead of competitors.
• Helps organizations modify products and services based on customer
preferences.
• Example: Traditional banks in India expanded their digital banking services
due to the increasing use of UPI (Google Pay, PhonePe).

D. Enhances Competitive Advantage

• Understanding competitors and external factors helps businesses improve
performance and customer engagement.
• Helps companies innovate and remain market leaders.
• Example: Amazon India provides same-day delivery services to gain an
advantage over Flipkart and other competitors.

E. Ensures Compliance with Government Regulations

• Businesses must follow laws and policies to avoid legal issues and penalties.
• Regulatory changes can impact pricing, marketing, and product development.
• Example: The Goods and Services Tax (GST) in India replaced multiple indirect
taxes, simplifying compliance for businesses.
 Components of Business
Environment
The business environment is divided
into three categories:
• Macro Environment (Broad external factors
analyzed using the PESTEL framework)
• Micro Environment (External factors directly
affecting business operations)
• Internal Environment (Factors within a
business that can be controlled)
 A. External/Macro Environment:
PESTEL Analysis
The macro environment consists of external forces that influence a
business but are beyond its direct control. These factors impact
industries, economies, and markets as a whole. Since businesses cannot
control these external factors, they must analyze and adapt to remain
competitive.

The PESTEL framework helps businesses evaluate macro-

environmental forces
T– E–
P – Political E – Economic S – Social L – Legal
Technological Environmental
Factors Factors Factors Factors
Factors Factors
 1. Political Factors (Government Influence on Business)

Political factors include government stability, policies, taxation, and trade

regulations, which influence business operations.

Key Political Factors Affecting Businesses in India:

• Government Stability & Policies

• Stable governments encourage business investment and expansion.
• Political instability can create uncertainty for businesses.
• Example: The Indian government’s "Make in India" initiative promotes local manufacturing,
attracting foreign companies like Samsung, Apple, and Tesla to set up plants in India.

• Tax Policies & Tariffs

• India’s GST (Goods and Services Tax) has simplified the taxation system, benefiting businesses.
• High import duties on luxury goods affect industries like electronics and automobiles.
• Example: The government’s higher import duties on Chinese electronic goods have encouraged
domestic production of smartphones by companies like Micromax and Lava.
Key Political Factors Affecting Businesses in India:

• Government Regulations & Bureaucracy

• Complex licensing and bureaucratic procedures can delay business expansion.
• Regulatory bodies like SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of
India) oversee financial stability.
• Example: The FDI (Foreign Direct Investment) cap in retail affects companies like Walmart and
Amazon, limiting their ability to open large-format stores.

• Trade Policies & Agreements

• India’s trade agreements with other countries impact businesses.
• The Regional Comprehensive Economic Partnership (RCEP) affects global trade.
• Example: India withdrew from RCEP to protect domestic industries like agriculture and dairy
from foreign competition.

• Political Pressure Groups & Lobbying

• Farmers' unions, labor unions, and environmental groups influence government policies.
• Example: The 2020 Farmers' Protests led the government to reconsider its agricultural laws,
impacting businesses like ITC and Adani Agri.

Business Strategy: Companies should monitor government policies,

taxation laws, and trade agreements to navigate political challenges.
 2. Economic Factors (Market Conditions & Growth)

Economic conditions, economic policies (Industrial policies, monetary and

fiscal policy etc) and the economic system are the important factors that
constitute economic environment of the business.

Key Economic Factors Affecting Businesses in India:

• Economic Growth & Recession
• India is one of the fastest-growing economies, providing business expansion opportunities.
• Economic downturns (like the COVID-19 pandemic) reduce demand and profits.
• Example: The 2020 lockdown led to a massive decline in industries like aviation (IndiGo,
SpiceJet) and hospitality (OYO, Taj Hotels).

• Inflation & Interest Rates

• High inflation increases costs for businesses and reduces consumer purchasing power.
• Interest rate hikes by RBI (Reserve Bank of India) affect business loans.
• Example: High fuel prices due to inflation impact transport-based businesses like Ola and
Uber.
Key Economic Factors Affecting Businesses in India:

• Unemployment & Wage Levels

• Rising employment leads to increased demand for goods and services.
• Government schemes like MGNREGA provide rural employment.
• Example: The rise of the gig economy has created more jobs in companies like
Swiggy, Zomato, and Flipkart.

• Currency Exchange Rates

• A weak Indian Rupee (INR) increases import costs but benefits export industries.
• Example: The fall of INR against USD benefits Indian IT companies like TCS and
Infosys, which earn in dollars.

• Consumer Confidence & Spending Patterns

• High consumer confidence boosts demand for luxury and branded goods.
• Example: With rising disposable incomes, premium car brands like Mercedes-Benz
and BMW have expanded in India.

Business Strategy: Companies should track inflation rates, economic

growth, and employment trends to make informed financial decisions.
 3. Social Factors (Cultural and Demographic Trends)

It consists of human relationship and the development.

Some of the important factors in the social environment
are the buying and consumption habit of people, their
languages, beliefs and values, custom and traditions, etc.
that affects the business.

Key Social Factors Affecting Businesses in India:

• Demographics & Population Growth
• India has a young population, driving demand for technology,
fashion, and entertainment.
• Example: The increasing youth population has led to the success of
BYJU’s, Unacademy, and Vedantu in the EdTech sector.
Key Social Factors Affecting Businesses in India:
• Changing Consumer Lifestyles & Behavior
• Growing preference for organic, sustainable, and healthy products.
• Example: Demand for Patanjali Ayurvedic products has increased due to
rising health consciousness.

• Social Media & Digital Influence

• Indian consumers are highly influenced by social media trends.
• Example: Nykaa and Mamaearth use Instagram influencers for brand
promotions.
• Business Strategy: Companies must align marketing strategies with
social trends and digital engagement.
 4. Technological Factors (Innovation & Digital Growth)

Technological environment comprises both machines (hard

technology) and scientific thinking (soft technology) used
to solve problems and promote progress. It also represents
the degree of advancement of goods and services that are
prevalent in a country or a region.

Key Technological Trends in India:

• Digital Payments & UPI Growth
• UPI transactions have replaced cash payments in India.
• Example: Apps like Google Pay, Paytm, and PhonePe dominate
India’s digital payments sector.
Key Technological Trends in India:

• E-commerce & Online Shopping

• The growth of Amazon India, Flipkart, and Meesho is driven by
changing shopping habits.

• AI & Automation in Businesses

• Many industries are using AI to improve efficiency.
• Example: HDFC Bank uses AI chatbots for customer support.

Business Strategy: Companies should invest in

automation, AI, and digital transformation.
 5. Environmental Factors (Sustainability & Climate Change)

Geographical factors such as natural resources endowments,

weather and climatic conditions, location aspects in the global
context, port facilities etc., are all relevant to business Businesses
must follow sustainability practices and environmental laws.

Key Environmental Factors in India:

• Climate Change & Pollution
• Government policies like BS-VI emission norms regulate vehicle pollution.
• Example: Tata Motors and Mahindra are investing in electric vehicles (EVs).
Key Environmental Factors in India:

• Sustainable Business Practices

• Consumers prefer eco-friendly brands.
• Example: FabIndia and Forest Essentials promote sustainable and ethical sourcing.

Business Strategy: Companies should invest in renewable energy

and reduce their carbon footprint.
 6. Legal Factors (Regulatory & Compliance Laws)

Every country follows its own system of law. The companies

operating in the global market have to take into account the
provisions with respect to the legal environment prevalent in
the countries which thy do business. These law and
regulations affect the day-to-day operations of business.

Key Legal Factors Affecting Businesses in India:

• Consumer Protection Laws
• Example: The Consumer Protection Act, 2019 ensures transparency in
e-commerce companies like Flipkart and Amazon.
Key Legal Factors Affecting Businesses in India:

• Employment & Labor Laws

• Example: The New Labor Codes impact companies like Wipro,
Infosys, and Accenture by changing wage structures.

• Data Privacy Laws

• Example: The proposed Personal Data Protection Bill will impact
businesses like Google, Facebook, and Twitter.

Business Strategy: Companies must comply with

labor, data, and consumer laws to avoid legal penalties.
 B. Micro/Task Environment
(Partially Controllable Factors)
The micro environment consists of external stakeholders who directly interact
with a business. These factors are not fully controllable but can be influenced
through business strategies.

Key Elements of the Micro Environment:

• Suppliers
• Provide raw materials and resources for production.
• Delays or poor quality can affect business performance.
• Example: Maruti Suzuki relies on Indian auto-parts suppliers like Motherson Sumi for its car
production.

• Customers
• Customer preferences shape demand and product offerings.
• Businesses must constantly adapt to changing needs.
• Example: Swiggy and Zomato expanded to smaller Indian cities due to growing food delivery
demand.
Key Elements of the Micro Environment:
• Competitors
• Companies must analyze competitors to stay ahead.
• Example: Airtel and Jio compete on data pricing and service quality in the telecom
sector.

• Intermediaries (Distributors & Retailers)

• Help companies reach customers.
• Example: Reliance Retail depends on Kirana store partnerships to expand its
grocery business.

• Other Stakeholders (Investors, Regulators, Media)

• Investors provide funding, regulators impose policies, and media affects public
perception.
• Example: LIC IPO got massive media coverage, influencing investor interest.
C. Internal Environment(Controllable
Factors)
The internal environment consists of factors within the
company that directly impact its decisions and operations.
These factors are controllable by management.

Key Elements of the Internal Environment:

• Production & Operations
• Includes manufacturing, supply chain management, and resource
optimization.
• Businesses must focus on cost-effective and high-quality production to
compete.
• Example: Tata Motors’ factories in Pune and Gujarat use automation to
improve car production efficiency.
Key Elements of the Internal Environment:
• Finance & Accounting
• Businesses need proper financial planning, cost management, and
investment strategies.
• Poor financial management can lead to losses and bankruptcy.
• Example: Reliance Industries strategically invests in telecom (Jio)
and retail to diversify income sources.
• Example: Amul’s "Utterly Butterly Delicious" campaign made it a
household name in India.

• Research & Development (R&D)

• Innovation is key to staying competitive in fast-growing industries.
• Indian companies are increasing R&D investment to enhance
technology.
• Example: Bajaj Auto invests in electric vehicles (EVs) to compete
with global players.
Key Elements of the Internal Environment:
• Human Resources (HR) & Organizational Culture
• Skilled employees, good workplace culture, and training programs boost
productivity.
• Example: Infosys and TCS provide continuous skill development programs
for IT professionals.

• Marketing & Branding

• Strong branding and advertising strategies help businesses grow.
 Management in a Global
Environment
Managing businesses in a global environment means handling
operations across multiple countries, dealing with diverse markets,
cultures, economic conditions, and government regulations.
Globalization has increased the interconnectedness of economies,
requiring companies to adapt to different external environments.

Why Global Management is Important?

• Expands business reach and market share.

• Access to cheaper labor, raw materials, and production facilities.
• Encourages innovation and technology transfer.
• Helps businesses diversify risks across multiple markets.
 Key Challenges in Global Management: Managing
businesses in a global environment requires dealing with:

Cultural Differences – Understanding and adapting to diverse

consumer preferences.
Economic Variations – Inflation, exchange rates, and GDP
differences across countries.
Legal & Political Factors – Trade regulations, labor laws, and
government policies.
Technological Advancements – Adopting global innovations
to stay competitive.
Supply Chain Issues – Managing global logistics and
distribution networks.
 Factors Influencing the International Business Environment

The international business environment is shaped by external

factors that affect how companies operate in different countries.
These factors can be analyzed using PESTEL Analysis, which
examines:

A. Political Factors (Government Influence on Business)

• Trade policies, tariffs, and import-export regulations.

• Political stability and business-friendly governance.
• Taxation policies affecting international trade.
Example: India’s FDI policy reforms allow more foreign investments in sectors
like retail and defense.
B. Economic Factors (Global Financial Conditions)
• Currency exchange rates impact pricing and profitability.
• Economic growth rates affect consumer purchasing power.
• Inflation and interest rates influence investment decisions.
Example: The global recession in 2008 affected exports from India due to reduced demand
in Western markets.
• Example: The GDPR law in Europe affects how companies like Google and Facebook handle
user data worldwide.

C. Social & Cultural Factors (Consumer Preferences & Workforce Diversity)

• Cultural differences impact marketing and branding strategies.
• Language barriers affect communication and negotiations.
• Consumer lifestyles and preferences vary across countries.
Example: McDonald's menu differs worldwide – offering vegetarian options in India, beef
burgers in the US, and seafood in Japan.
D. Technological Factors (Innovation & Digital Transformation)
• Adoption of new technologies for production and operations.
• Digital marketing and e-commerce trends in global business.
• Cybersecurity laws affecting data management.
Example: India’s IT sector (Infosys, TCS) benefits from outsourcing due to technological
advancements.
E. Environmental Factors (Sustainability & Climate Change Regulations)
• Countries impose different environmental laws on businesses.
• Corporate Social Responsibility (CSR) and green business practices.
• Natural disasters affecting supply chains and logistics.
Example: Tesla's focus on electric vehicles (EVs) aligns with global sustainability efforts.
F. Legal Factors (Regulatory & Compliance Frameworks)
• International labor laws and employment rights.
• Intellectual property rights and patent laws.
• Consumer protection regulations in different markets.
 Strategies for Managing Business in a Global
Environment

Understand Cultural Differences – Adapt marketing and HR policies based on

local customs.
Monitor Economic Trends – Adjust pricing and production strategies as per
economic conditions.
Comply with Legal Requirements – Ensure adherence to global trade
regulations and labor laws.
Adopt Technological Innovations – Use AI, automation, and digital tools to
improve operations.
Develop Strong Supply Chain Management – Optimize logistics and inventory
across different regions.
Engage in International Partnerships – Collaborate with local businesses to
expand market reach.