Chapter 3: Business Environment
Meaning:
Business environment means the sum total of all individuals or
institutions and other forces that are outside the control of a business
enterprise but that may affect its performance.
S.L.E.P.T.
General
Technological Environment
Investors
Political Social
Suppliers Business Customers
Competitors
Economical
Legal
Specific
Environment
Features of business
environment
Totality of External Forces
Specific and General Forces
Inter-relatedness
Dynamic Nature
Uncertainty
Complex term
Relativity
1. Totality of External Forces:
Business environment is the sum total of all the forces/factors external to
a business firm.
2. 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.
3. Inter-relatedness:
All the forces/factors of a business environment are closely interrelated.
For example, increased awareness of health care has raised the demand
for organic food and roasted snacks.
4. Dynamic Nature:
Business environment is dynamic in nature which keeps on changing
with the change in technology, consumer’s fashion and tastes etc.
5. Uncertainties:
Business environment is uncertain as it is difficult to predict the future
environmental changes and their impact with full accuracy.
6. Complex term:
Business environment is complex which is easy to understand in parts
separately but it is difficult to understand in totality.
7. Relativity:
Business environment is a relative concept whose impact differs from
country to country, region to region and firm to firm. For example, a shift
of preference from soft drinks to juices will be welcomed as an
opportunity by juice making companies while a threat to soft drink
manufacturers.
Importance of Business
environment
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Helps in Helps in
getting Plannin
Early Tapping Coping Improvi
First g and
Warning useful with ng
Mover Policy
Signals Resources Rapid Perform
Advanta Formula
Changes ance
ge tion
1. Helps in Identifying Opportunities and Taking First Mover
Advantage:
Understanding of business environment helps an
organization in identifying advantageous opportunities
and getting their benefits prior to competitors, thus
reaping the benefits of being a pioneer.
For example: Goodlass Nerolac Paints was the first
company to identify that the demand for industrial paint
is going to increase in India with a joint venture
between Maruti and SuZuki . Hence it imported car
painting technique from Kansai, a Japanese Company,
and acquired car painting contract from Maruti Suzuki.
2. Helps in Identifying Threats and Early Warning Signal:
Correct knowledge of business environment helps an
organization to identify those threats which may adversely
affect its operations. For example, Bajaj Auto made
considerable improvements in its two wheelers when
Honda & other companies entered the auto industry.
3. Helps in Tapping Useful Resources:
Inputs Production Output
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.
4. Helps in 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.
For example, Google search engine, is continuously
Improvised upon its management by adding some
innovative features to remain ahead of the changes made by other competing
search engines.
5. Helps in Planning and Policy Formation:
Understanding and analysis of business environment helps an
organization in planning & policy formulation. For example, ITC Hotels
planned new hotels in India after observing boom in tourism sector.
6. Helps in Improving Performance:
Correct analysis and continuous monitoring of business environment helps an
organization in improving its performance.
For example Hindustan Uniliver and other FMCG companies sells small
sachets of shampoo and other products according to the needs of customers.
First mover advantage
Improves Performance
Warning Signals
Helps in Coping up with
rapid changes
Components/ dimensions/ elements of
business environment
S l e p t
1. 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 a days 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. Legal environment
• It constitutes the laws and legislations passed by the Government,
administrative orders, court judgments, decisions of various
commissions and agencies.
• Businessmen have to act according to various legislations and
their knowledge is very necessary. Example: Advertisement of
Alcoholic products is prohibited and it is compulsory to give
statutory warning on advertisement of cigarettes.
3. Economical 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. For example: Decrease in interest rate by the
central bank may boost the sale of automobile companies as the
loan for purchasing the automobile will be available at lower
interest rate
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 or coalition government
affects the business Example: Bangalore and Hyderabad have
become the most popular locations for IT due to supportive
political climate.
5. 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.
• For Example, Digital watches in place of traditional watches,
artificial fabrics in place of traditional cotton and silk fabrics,
booking of railway tickets on internet etc.
Demonetization
Meaning:
Demonetization is the act of stripping a currency unit of its status as
legal tender. The current form or forms of money is pulled from
circulation and retired, often to be replaced with new notes or coins.
On November 8, 2016, Indian Government
demonetized ₹ 500 and ₹ 1000 currency notes withdrawing their
legal tender status.
This led to 86% of the money in circulation invalid.
History of demonetization in india
▪ In 1946, the Reserve Bank of India had demonetized Rs. 1,000
and Rs. 10,000 currency notes which were then under circulation.
▪ In 1954, the Government introduced new currency notes of Rs.
1,000, Rs. 5,000, and Rs. 10,000.
▪ In 1978, the Moraji Desai Government demonetized Rs. 1,000, Rs.
5,000, and Rs. 10,000 to curb illegal transactions and anti-social
activities.
Aim of demonetization
➢ To curb corruption
➢ Stop the use of high denomination currency notes which facilitates illegal
transaction.
➢ To avoid hoarding of high currency notes as ‘Black Money’.
➢ To curb counterfeit notes in circulation.
➢ To plug financing to terrorists.
Features of demonetization
➢ Tax Administration Measure:
Those with undeclared income (black money) had to declare their
unaccounted wealth and had to pay tax at a penalty rate.
➢ Strong Message against Tax Evasion:
Demonetization is taken as the shift on the part of the government
indicating that tax evasion will no longer be tolerated or accepted.
➢ Channelizing savings into the formal financial system:
Demonetization also led to tax administration channelizing into
the formal financial system. The new deposits schemes offered by
the bank will provide base for loan at lower interest rates.
➢ Creates less cash economy:
Through demonetization , one more step has been taken towards
less cash or cash – lite economy giving boost to digital transaction .
Impact of demonetization
