After reading this article you will learn about the micro and macro environment of business.

Constituents of Business Environment

Micro Environment of Business:

The micro environment consists of the factors of the firm’s immediate environment, (Fig. 37.2).

These include:


a. Suppliers,

b. Customers

c. Competitors,

d. The public, and


e. Marketing intermediaries.

a. Suppliers:

Suppliers or vendors are those persons or firms who supply inputs like new materials, certain parts, cutting tools etc., to the company. The vendor quality and reliability is a must for the smooth functioning of the business.

They should supply all imputes of right quality and stated quantity in time. In order to be on safe side, adequate stock of input elements should be preserved in the company and services should be taken of more than one vendor to supply the goods.

b. Customers:

Today with the advancement of technology and because of foreign collaborations, it has become easy to manufacture any product, but it is still very difficult to sell i.e., to create, increase and sustain the customers.


Every day we watch a new advertisement e.g., buy one tooth paste tube and take another free along with it or take two shampoo bottles at the price of one etc., to allure the customers. Monitoring the customer sensitivity is, therefore, a prerequisite for the business success. How many different categories of customers shall be there to buy a product, depends upon the product itself.

For example, an automobile tyre manufacturing concern, can sell their tyres to:

(i) Individual scooter or car owners,

(ii) Scooter, car, truck manufacturing industries,


(iii) Governments and other user institutions.

(iv) Public sector or private sector transport undertakings etc.

The choice of customer segment is made by considering the following factors:

(i) Relative profitability.


(ii) Stability of demand.

(iii) Sale growth prospects.

(iv) Extent of competition etc.

Customers should be many, because it is risky to depend upon a single customer, who tomorrow may shift to another competitor or press for reduction in price or may close his business to undertake another more profitable venture, etc.

c. Competitors:


Take an example of a firm ‘A’ making Televisions. Its competitors are not only the firms making and marketing T.V., but are all those firms who compete for the discretionary income of the customers. There are so many firms making T.V., scooters, refrigerators, cooking ranges, stereo sets etc.

The first is the desire competition amongst them. In other words, the primary task of firm ‘A’ here is to influence the basic desire of the customer to buy only T.V. and no other product. This desire can be created in the customer by giving festival discount or by introducing some installment scheme etc.

The second is the product form competition if once the customer decides to by a T.V. Product form competition implies, whether the customer should go for a black and white T.V. or a colour T.V., should he buy a T.V. with or without remote control.

Should he buy a 14″ TV or 21″ TV or still of bigger size.The firm ‘A’ may or may not be making all these models. So it has to attract, by its advertisement, the attention of the customers to go for a model being manufactured by them.


The third is the brand competition i.e., the competition between the different brands of the same product form. For example, there are a number of T.V. makes in the market, such as, Onida, BPL, Sony, Beltek, Videocon, Crown, Texla, etc. Now, the firm ‘A’ should work to create primary and selective demand for his T.V. sets, by alluring the customers by enchanting advertisements, and attractive schemes.

d. Public:

Public means a group of people. Public opinion can be a threat to a business firm whereas it can be an opportunity for another business firm. Public normally forms an opinion about different brands of the same product after using the same.

Opinion travels from friend-to-friend, neighbour-to-neighbour etc.,— Use this brand of washing powder or buy that brand of T.V. or refrigerator. They are using it for the last five years and it is working trouble-free etc. This is consumer publics which has an important effect on any companies business, can make or mar it.

The second is the Media publics where some newspaper tries to tarnish the image of a business firm by giving his own reasons or logic, and this adversely affects the business of the firm. Its share price may also come down. The third is Local publics.

The issue of environmental pollution caused from chimneys or waste liquid streams from the factories has often been taken up by local public and, at times, it has resulted in the suspension of production operations and/or take pollution abatement measures by the factories.

e. Marketing Intermediaries:

Marketing Intermediaries are those firms/individuals who help the company in promoting, selling and distributing its goods to final buyers.


Examples of marketing intermediaries are:

(i) Middlemen (agents/merchants) who help the company find customers.

(ii) Physical distribution firms who assist the company in stocking and moving goods from their origin to their destination, such as warehouses and transportation firms.

(iii) Marketing service agencies such as advertising agencies, market research firms etc., which assist the company in targeting and promoting its products to the right markets.

Macro Environment of Business:

The macro environment consists of larger societal forces that affect all the factors in the company’s micro environment, (Fig. 37.2).

These include:


a. Economic environment,

b. Technological environment,

c. Political environment,

d. Social environment, and

e. Legal environment.

a. Economic Environment:

Economic environment refers to all those economic factors which have a bearing on the functioning of a business unit. Some such factors have been discussed below:


(i) Growth Strategy:

The economic environment in our country is the result of the economic growth strategy pursued during the past five decades by the Government of India. The growth strategy followed was based on the Soviet Planning Model which believed that the saving rate in the economy and growth rate could be increased by investing heavily in the capital goods and heavy industry sectors at the expense of the consumer goods sector.

(ii) Economic System:

The economic system is a very important determinant of the scope of (private) business.

The economic system and policy are a very important external constraint on business.

There are three economic systems:


(a) Capitalism.

(b) Socialism.

(c) Communism.

Characteristics and comparison of the three systems have been given below in Table 37.1.

Comparison of Capitalism, Socialism and Communism

(iii) Economic Planning:


The Government prepares and implements a comprehensive economic plan integrating the private sector with the public sector. India has been doing economic planning since 1951, when First Five Year Plan was launched.

The objective of a Five Year Plan is:

(a) To increase production to the maximum possible extent to achieve a higher level of national and per-capita income.

(b) To achieve full employment.

(c) To reduce inequalities of income and wealth.

(d) To set-up a socialist society based on equality and justice and absence of exploitation.

(iv) Industry:

Around mid-1960s, India had a better industrial base and possessed more pre-requisites for industrial growth than South Korea, Malaysia, Taiwan etc.

But the country subjected all outputs and other factors to rigid price and quantity controls, investment was strictly rationed, there were multiple barriers to entry, and the objective of the financial system was to supply subsidised development funds irrespective of returns. As a result all the countries mentioned above are far ahead of India in industrial growth.

In 1970’s, Indian Government started believing that mini-plants constituted appropriate technology, notwithstanding strong evidence to the contrary. Such plants were encouraged through fiscal concessions and subsidised development finance.

Mini-cement, mini-paper, mini-steel, mini-sugar plants were set up. None of these were technically viable, so they fell short of economies of scales, and could only exist under a regime of subsidies, high tariffs, severe quotas and purchase preferences. In 1980’s as the financial situation worsened, all these mini-plants became sick units.

According to the Industrial Policy of the Government of India until July 1991, the development of 17 of the most important industries were reserved for the state.

In the development of another 12 major industries, the state was to play a dominant role. In the remaining industries, cooperative enterprises, joint sector enterprises and small-scale units were to get preferential treatment over large entrepreneurs in the public sector.

The government policy, thus limited the scope of private business. However, the new policy ushered in, since July 1991 has wide opened many of the industries for the private sector.

(v) Human Resource:

Human Resources play a crucial role (of people) in an economy. People work to produce goods and services. People provide markets for goods produced. Degree of economic prosperity depends on the quality and skill of the people.

People need economic growth just as prosperity demands services of people. Unluckily, our country has more number of people than the economy could afford. However it goes to the credit of the country that it was the first in the world to adopt family planning as a state policy.

(vi) National Income and Per Capita Income:

The aggregate flow of goods and services represents the total income earned by factors of production (such as) land and other natural resources, labour, capital and enterprise) employed during the year and this is popularly called national income. The rate of growth of the national income in an economy is an indication of the pace at which the economy has been growing.

A high growth rate indicates that the economy is a developed one. Low growth rate implies that the economy is a developing or a poor one. A high national income indicates that the economy is developed and the overall environment is favourable for business growth.

Given below is the data about national income and per capita income:

National Income and Per Capita Income

Other Economic Factors are:

(vii) Agriculture.

(viii) Financial and fiscal sectors.

(ix) Removal of regional imbalances.

(x) Price and distribution controls.

(xi) Economic reforms.

b. Technological Environment:

Science is a systematised body of knowledge and when this knowledge is put into practice (or to practical tasks) it becomes technology. Technology changes very fast and a firm which is unable to cope with the technological changes may not survive.

Further, changing technological environment call for product modification:

1. Electrical appliances and instruments in the U.S.A. are designed for 110 volts but they need to be converted into 220 volts if they have to be sold in India etc.

2. Voltage stabilizers or inbuilt voltage stabilizers have to be provided in refrigerators and televisions if certain markets (like India) are characterized by frequent voltage changes and fluctuations in power supply.

The fast changes in technologies also create problems for enterprises as their plants and products become obsolete quickly. Earlier VCP came, then VCR and now CD (Compact Discs). Video cassette tapes have no more demand as CDs are becoming popular because of their longer life and much better audio and video qualities (performance).

Impact of technology:

Impact of technology can be discussed under the following heads:

(1) Technology and Society:

It is a fact that practically every area of social life and the life of every individual has been, in some sense or the other, changed by the developments in technology.

(a) Technology reaches people through business in the form of goods and services.

(b) Technology has contributed to the emergence of affluent societies through production of new varieties of automatic products, superior in quality, more safe and comfortable.

(c) Technology has made the products more complex which if stop working, require the services of experts to repair them. Every electrician cannot repair a VCR or newer generation TVs.

(d) Setting up of a new factory as a result of technology advancements, makes people to move to new geographical locations.

(e) Besides uprooting population, advancement in technology may directly change the pattern of social life. For example, an invention (e.g. computers) may open new employment opportunities to women.

(2) Technology and Economy:

Technological advancements increase both production and productivity, thereby raising the wages of the employees and declining the prices of some products. Thus the beneficial economic effects of technology spread throughout the whole social system. Research and development (R & D) assumes considerable relevance in organisations as technology advances.

Firms are required to ponder over, decide and take action on following issues:

(i) Allocation of resources to R&D.

(ii) Technology transfer — the process of taking new technology from the laboratory to the market.

(iii) Time factor is important in R & D. The time between innovation and commercialisation should be reduced.

(iv) The R&D Manager must determine when to abandon the present technology to develop or adopt the new technology.

With advancement in technology, jobs tend to become more intellectual or upgraded. Services of an educated and competent worker may be required now, in place of an unskilled or semi-skilled worker previously doing the job. A clerical post in an office may now demand the services of an expert in computers etc.

Technocrats, also, need to be qualified in management education in addition to the proficiency they have acquired in chosen fields of specialisation. That is the reason that, today to fill up a factory manager’s post, the desired qualification stipulated is B.Tech + M.B.A. A by-product of technological advancement is the ever-increasing regulation imposed on business by the government of the country and at times, stiff opposition from the public.

For example, government banned certain meat products which hurt the feeling of a community and public opposed construction of plants that eject harmful affluent or setting up of hydro-electric plants in certain hilly areas etc.

(3) Plant Level Implications:

Technological changes demand a modification in organisation structure of the company, length of the line of command and the span of control. New technology may bring some changes and pose new problems which may not be to the liking of the workers, clerks or officers of the company.

They feel that the introduction of technological change may harm their interests. For example, the workers feel that if Time & Motion Study is introduced in the factory, they shall have to work more to get the same wages. Import of latest technology is not easy, because developed countries are not willing to lend it.

Whatever we get is somewhat older technology but still very much new for us. Even to obtain it there are difficulties in getting a right foreign collaborator and obtaining clearance from government. Even if a collaboration is obtained, at times, we are unable to absorb western technology in our firms. For example, a motor-cycle manufacturing firm, for a long time, could not change the side of the foot-brake lever from left to right.

Introduction of Total Quality Management (TQM), Business Process Reengineering (BPRE) and Flexible Manufacturing System (FMS) have further added several implications for employees and the organisations adopting these concepts.

TQM replaces the traditional beliefs about quality which are:

(i) High quality costs more.

(ii) Quality can be improved by inspection.

(iii) Defects cannot be eliminated completely.

(iv) Quality is the job of the quality control personnel.

The new principles of TQM are:

(i) Meet the customer’s requirement on time, the first time, and 100% of the time.

(ii) Strive to do error-free work.

(iii) Manage by prevention (of defects) and not by correction (of defective jobs).

(iv) Measure the cost of quality.

Employees become more and more involved in Quality improvement process.

Business Process Re-Engineering (BPRE):

BPRE helps an organisation to cut down its costs, eliminate waste and improve its quality. These factors are essential to compete in the modern world. BPRE essentially involves considering how things would be done if the organization were to start all over from scratch. Both TQM and BPRE search for excellence in serving customers.

TQM aims at (further) improving what is good, but BPRE seeks to reject what is irrelevant and starting afresh. TQM is essentially a bottom-up approach, where’s BPRE is driven by top management. BPRE has implications for employees. Many of them lose jobs, others who retain jobs find that they are not the same any longer.

The new jobs require a wider range of skills, include more interaction with customers and suppliers, offer greater challenge, have increased responsibilities and give higher wages.

Flexible Manufacturing System (FMS):

FMS integrates Computer aided design (CAD), engineering and manufacturing to produce low-volume products at a cost comparable to what had been previously possible through mass production. With FMS, when management wants to produce a new part, it does not change machines; it needs to change the computer programming. FMS needs trained and skilled workers. FMS needs decentralisation of authority into the hands of operating teams to make necessary decisions.

c. Political Environment:

Political environment is another important constituent of the business environment which can bring any business enterprise to the ground. A Political (and Government) Environment or system prevailing in a country decides, promotes, fosters, encourages, shelters, directs and controls the business activities of that country.

A political environment/system that is stable, honest, efficient and dynamic and which ensures political participation of the people, and assures personal security to the citizens, is a primary factor for economic development. Two basic political philosophies exist all over the world.

The first, known as Democracy refers to a political arrangement in which the supreme power is vested in the hands of people. They have got the right to rule and vote on every matter. But this form of pure democracy is not workable in a complex society. Hence the Republican form of government comes into the picture in which the people/public, in a democratic manner, elects their representatives who do the ruling.

The second system known as totalitarianism also called Authoritarianism is one in which individual (person’s) freedom is completely subordinated to the power of authority of the state and concentrated in the hands of one person (i.e., a Dictator) or in a small group which is not constitutionally accountable to the, people. Societies ruled by military or by a dictator, plus most oligarchies and monarchies belong to this category.

The political system under democratic dispensation, as in India comprises three vital institutions i.e.:

(1) Legislature.

(2) Executive or Government.

(3) Judiciary.

(1) Legislature:

i. Legislature being most powerful of the three does:

(a) Policy making

(b) Law making

(c) Budget approving

(d) Executive control

(e) Acting as a mirror of public opinion.

ii. Legislature decides:

(a) Type of business activities in the country

(b) Who should own them

(c) Size of operations

(d) What should happen to their earnings etc.

(2) Judiciary:

Judiciary settles legal disputes that affect the business considerably. The disputes could be between employees and employer, or employer and public or employer and government. Judiciary examines if the authority exercised by government is in accordance with the rules laid down by the legislature. Judiciary protects the public and business from unlawful acts passed by the legislature and arbitrary acts done by the government.

(3) Government:

Government/Executive/State is the centre of the political authority having the power to govern those it serves.

Responsibilities of business towards Government:

(a) To pay taxes.

(b) To assist government in voluntary programmes such as drought relief works, tree planting, training of unemployed and rural youths etc.

(c) To place their expert view points on business before the political leaders so that while taking decisions politically, the interests of business do not suffer unnecessarily.

(d) To bid and work for government contracts such as those of housing projects, oil pipelines, etc.

(e) To lead or accompany government delegations to foreign countries for exploring trade and industry prospects there.

(f) Political Activity. Political participation of business has arguments both for and against it. Whether business should stay out of politics or should it involve in politics, is not easy to reply.

Business involvement in politics can be in one of the following ways:

(i) Business can make money contributions to political parties, particularly at the time of elections.

(ii) Business leaders can contest elections.

(iii) Lobbying, which refers to the behaviour after the election to secure legislation in favour of business.

Responsibilities of Government towards Business

(a) To establish and enforce rules and regulations under which the business functions smoothly and which help maintain competition.

(b) To provide peaceful atmosphere by maintaining law and order in the country so that business persons and property can be protected.

(c) To provide a system of money and credit by means of which business transactions can be effected.

(d) To provide infrastructural facilities such as transportation, power, finance, manpower etc., for the effective functioning of business.

(e) To provide information about economic and business activity in general, specific lines of business, scientific and technological developments and many other things of interest to business.

(f) To encourage small scale sector to grow.

(g) To make available to business, the details of technologies developed by Government owned R&D units.

(h) To use Tariffs and Quotas to protect business from foreign competition.

(i) To issue licenses to competent business establishments to carry on different activities.

(j) To inspect foods, drugs etc., so that only quality products reach the customers.

Government Policy influences the business in a number of ways:

(1) For example, in India, the advertisement of alcoholic liquor is prohibited.

(2) Packets of cigarette must carry the statutory warning that Cigarette smoking is injurious to health.

(3) Certain changes in government policies such as the industrial policy, fiscal policy, tariff policy etc., may have profound impact on business.

(4) Government has an all-pervasive and predominantly restrictive influence over various aspects of business, e.g.:

a. Industrial licensing which decides location, capacity and process,

b. Import licensing for materials and machinery,

c. Size and price of capital issue.

d. Loan finance,

e. Pricing,

f. Managerial remuneration.

g. Expansion plans,

h. Distribution restrictions etc.

As a result, the chief executive and the managers of the business enterprise have to have continuous dialogue with various government agencies to ensure growth and profitability within the framework of controls and restraints.

And, not only must perceptive managers respond to social pressures, but they also have the problem of foreseeing and dealing with political pressures, as well as laws that might be passed. As can be readily understood, this is not an easy matter.

d. Social Environment:

The social environment is made up of the attitudes, desires, expectations, degrees of intelligence and education, beliefs, and customs of people in a given group or society. Social desires, expectations and pressures give rise to laws and laws, in turn, influence the business.

Social factors include:

(i) Attitude of people to work

(ii) Attitude to wealth.

(iii) Desires and expectations.

(iv) Family and customs.

(v) Religion and Marriage.

(vi) Values and beliefs.

(vii) Intelligence and education.

(viii) Ethics-personal conduct.

(ix) Tastes and preferences.

(x) Social responsibility of business.

For any business, the cost of ignoring the customs, traditions, taboos, tastes and preferences, etc., of individuals or of society can be very high. The buying and consumption factors, habits of people, their language, beliefs and values, customs and traditions, tastes and preferences, education, all these factors affect the business. In Thailand, Helene Curtis switched to black shampoo because Thai women felt that it made their hair look glossier.

Nestle, a Swiss multinational company, today brews more than 40 varieties of instant coffee to satisfy different national tastes. The differences in language sometimes pose a serious problem, even necessitating a change in the brand name. Prett was, perhaps, a good brand name in India; but it did not suit in the overseas market and hence it was changed to a new brand name — Prestige.

Social inertia comes in the way of the promotion of certain products, services or ideas e.g., use of bio-gas for cooking. Many demographic factors such as the age and sex composition of population, family size, habitat, religion, etc., also influence the business.

There is a marked difference between ladies-wear of Europe and Arabian countries. Earlier, telephone was not accepted in Muslim countries. Marketing personnel are at interface between company and society.

In this position, they have the responsibility not merely for designing a competitive marketing strategy but for sensitizing business to the social, as well as the product, demand of society. While dealing with the social environment, one must also consider the social environment of the business which encompasses its social responsibility and the alertness or vigilance of the consumers and of society at large.

e. Legal Environment:

Judiciary settles legal disputes between the employer and the employees, employer and public or employer and government and hence affects the business. Legal authority also sees to it that the exercise of government conforms to the general rules laid down by the legislature, it may declare that the particular order issued is, in fact, ultra vires.

The courts of justice protect the citizens from unlawful acts passed by the legislature and arbitrary acts done by the government. Many times, judiciary has ordered the closure of fume-emitting and other factories spreading pollution which became dangerous for society. Judiciary has also restrained and censored human rights violations etc. The legal environment has far-reacting consequences on business.

The consequences will become more intense and severe because:

(i) Judicial errors do occur, though infrequent.

(ii) Possibility of wrong assessment of penalty. Judges vary in the severity of punishment inflicted.

(iii) At times there are conflicting verdicts on the same or similar disputes.

(iv) In labour laws themselves, there is a lot of confusion.

It is said that particularly in the area of industrial relations, the role of judiciary has been more pronounced and unfortunately regressive.

By those whose horizons are limited, trifles are easily confused with technicalities. The result is that indiscipline in industry spreads like wildfire and saps the national production and productivity. Every manager in every kind of organization is encircled by a complete web of laws, commission and official regulations, and court decisions. Some are designed to protect workers, consumers, and communities. Some are designed to make contracts enforceable and to protect property rights.

Many are designed to regulate the behaviour of managers and their subordinates in business and other enterprises. There is relatively little that a manager can do in any organization that is not in some way concerned with, and often specifically controlled by, a law or regulation.

This is not to imply that many of our laws and regulations are unnecessary, even though, as noted above, many become obsolete. But they do comprise a complex environment for all managers. Managers are expected to know the legal restrictions and requirements applicable to their actions. Thus it is understandable that managers in all kinds of organizations, and in business and government especially, usually have a legal expert close at hand as they make their decisions.

Environmental Factors Affecting Managerial Functions