ASHOKA HALL SENIOR SECONDARY SCHOOL

SESSION 2021-22
CLASS – XII
SUBJECT – BUSINESS STUDIES
CHAPTER -3 Business Environment

Meaning

 Business Environment is sum or collection of all internal and external factors such as employees,
customer’s needs and expectations, supply and demand, management, clients, suppliers, owners,
activities by government, innovation in technology, social trends, market trends, economic changes,
etc.
 These factors affect the function of the company and how a company works directly or indirectly.
 Sum of these factors influences the companies or business organisations environment and situation.

Features of Business Environment

 Totality of external forces: Business environment is the sum total of all the forces/factors external to a
business firm.

 Specific and general forces: Business environment includes both specific and general forces. Specific
forces include investors, competitors, customers etc. who influence business firm directly while general
forces include social, political, economic, legal and technological conditions which affect a business
firm indirectly.

 Inter-relatedness: All the forces/factors of a business environment are closely interrelated.

 Dynamic: Business environment is dynamic in nature which keeps on changing with the change in
technology, consumer’s fashion and tastes etc.
  Uncertainty: Business environment is uncertain as it is difficult to predict the future environmental
changes and their impact with full accuracy.

 Complexity: Business environment is complex which is easy to understand in parts separately but it is

difficult to understand in totality.

 Relativity: Business environment is a relative concept whose impact differs from country to country,
region to region and firm to firm.

IMPORTANCE OF BUSINESS ENVIRONMENT

  Identification of opportunities to get first mover advantage: Understanding of business environment

helps an organization in identifying advantageous opportunities and getting their benefits prior to
competitors.

  Identification of threats and early warning signals: Correct knowledge of business environment helps
an organization to identify those threats which may adversely affect its operations

 Tapping useful resources: Business environment makes available various resources such as capital,
labour, machines, raw material etc. to a business firm. In order to know the availability of resources
and making them available on time at economical price, knowledge of business environment is
necessary.

 Coping with Rapid changes: Continuous study/scanning of business environment helps in knowing the
changes which are taking place and thus they can be faced effectively.

  Assistance in planning and policy formulation:  Understanding and analysis of business environment
helps an organization in planning &policy formulation.

 Helps in improving performance: Correct analysis and continuous monitoring of business environment

helps an organization in improving its performance.

DIMENSIONS/COMPONENTS OF BUSINESS ENVIRONMENT

1. Economic Environment:
 It has immediate and direct economic impact on a business. Rate of interest, inflation rate, change in the
income of people, monetary policy, price level etc. are some economic factors which could affect business
firms. Economic environment may offer opportunities to a firm or it may put constraints.

2. Social Environment:
 It includes various social forces such as customs, beliefs, literacy rate, educational levels, lifestyle, values etc.
Changes in social environment affect an organization in the long run. Example: Now day’s people are paying
more attention towards their health, as a result of which demand for mineral water, diet coke etc. has
increased while demand of tobacco, fatty food products has decreased.

3. Technological Environment:
 It provides new and advance ways/techniques of production. A businessman must closely monitor the
technological changes taking place in the industry as it helps in facing competition and improving quality of
the product.

4. Political Environment: 
Changes in political situation also affect business organizations. Political stability builds confidence among
business community while political instability and bad law & order situation may bring uncertainty in business
activities. Ideology of the political party, attitude of government towards business, type of government-single
party affects the business.

5. Legal Environment: 
It constitutes the laws and legislations passed by the Government, administrative orders, court judgements,
decisions of various commissions and agencies. Businessmen have to act according to various legislations and
their knowledge is very necessary.

Economic Reforms in India

As a part of economic reforms, the Government of India announced New Economic Policy in July 1991 for
taking out the country out of economic difficulty and speeding up the development of the country.

Main features of NEP, 1991 are as follows:

1. Only six industries were kept under licensing scheme.

2. The role of public sector was limited only to four industries.
3. Disinvestment was carried out in many public sector enterprises.
4. Foreign capital/investment policy was liberalized and in many sectors100% direct foreign investment was
allowed.
5. Automatic permission was given for signing technology agreements with foreign companies.
6. Foreign investment promotion board (FIPB) was setup to promote & bring foreign investment in India.
7. Various benefits were offered to small scale industries.

(a) Liberalisation
Liberalisation is the process or means of the elimination of the control of the state over economic activities.
 It provides greater autonomy to the business enterprises in decision-making and eliminates government
interference.
The purpose of liberalisation is to increase competition between enterprises.
It also encourages foreign trade between countries.
It also helps the business expand its global footprint.
The opening up of the economy improves the economic development of a nation by the inflow of funds from
foreign resources.

(b) Privatization
Privatisation can be explained as the process of transfer of ownership from the public sector to the private
sector.
Privatisation aims at reducing government ownership in industries.
It reduces the workload on the public enterprises.

(c) Globalisation
Globalisation can be understood as the integration of the national economy with the world economy.
It represents a free flow of information, technology, goods and services, ideas, capital, and even people as a
form of resources across different countries.
Globalisation helps in improving cross border connectivity between different markets in the form of
investments, trade, and cultural exchanges.

IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY

1. Increasing Competition: 
De-licencing and entry of foreign firms Indian market is increased the level of competition for Indian
firms.
2. More Demanding Customers:
 Now customers are more aware and they keep maximum information of the market as the result of
which now market is customer/buyer oriented, Now products are produced keeping in mind the
demands of the customers.
3. Rapid Changing Technological Environment:
 Rapid Technological advancement has changed/improved the production process as a result of which
maximum production is possible at minimum cost but it leads to tough challenges in front of small
firms.
4. Necessity for Change:
After New Industrial Policy the market forces (demand & supply) are changing at a very fast rate.
Change in the various components of business environment has made it necessary for the business
firms to modify their policies & operations from time to time.
5. Need for Developing Human Resources: 
The changing market conditions of today requires people with higher competence and greater
commitment, hence there is a need for developing human resources which could increase their
effectiveness and efficiency.
6. Market Orientation:
 Earlier selling concept was famous in the market now its place is taken by the marketing concept.
Today firms produce those goods & services which are required by the customers. Marketing research,
educational advertising, after sales services have become more significant.
7. Reduction in budgetary Support to Public Sector: 
The budgetary support given by the government to the public sector is reducing thus the public sector
has to survive and grow by utilising their own resources efficiently.