Chapter 3

Business Environment
Content of This Chapter MEANING OF BUSINESS FEATURES OF BUSINESS
ENVIRONMENT ENVIRONMENT
(C U SIR DT)
1. Meaning of Business Environment The term ‘business environment’ means the sum
total of all individuals, institutions and other
2. Features of Business Environment forces that are outside the control of a (i) Totality of external forces: Business
business enterprise but that may affect its environment is the sum total of all things
3. Importance of Business performance. external to business firms and, as such, is
Environment aggregative in nature.
The important point is that these individuals,
4. Dimensions of Business institutions and forces are likely to influence (ii) Specific and general forces: Business
the performance of a business enterprise environment includes both specific and general
Environment
although they happen to exist outside its forces.
boundaries. Specific forces (such as investors, customers,
5. Economic Reforms in India In
competitors and suppliers) affect individual
1991 For example, changes in government’s economic enterprises directly and immediately in their
policies, rapid technological developments, day-to-day working.
6. Impact of Government Policy political uncertainty, changes in fashions and General forces (such as social, political, legal and
Changes on Business and Industry tastes of consumers and increased competition technological conditions) have impact on all
in the market - all influence the working of a business enterprises and thus may affect an
7. Managerial Responses to Changes business enterprise in important ways. individual firm only indirectly.
in Business Environment
Increase in taxes by government can make (iii) Inter-relatedness: Different elements or
things expensive to buy. Technological parts of business environment are closely
8. Demonetisation
improvements may render existing products interrelated. For example, increased life
obsolete. Political uncertainty may create fear expectancy of people and increased awareness
in the minds of investors. Changes in fashions for health care has increased the demand for
and tastes of consumers may shift demand in many health products and services like soft
the market from existing products to new ones. drinks, fat-free cooking oil, and health resorts.
Increased competition in the market may New health products and services have, in turn,
reduce profit margins of firms. changed people’s life styles.
(iv) Dynamic nature: Business environment is IMPORTANCE OF BUSINESS For example, if an Indian firm finds that a
dynamic in that it keeps on changing whether ENVIRONMENT (OTP ITC) foreign multinational is entering the Indian
in terms of technological improvement, shifts market with new substitutes, it should act as a
in consumer preferences or entry of new A good understanding of environment by warning signal. On the basis of this
competition in the market. business managers enables them not only to information, the Indian firms can prepare
(v) Uncertainty: Business environment is identify and evaluate, but also to react to the themselves to meet the threat by adopting
largely uncertain as it is very difficult to forces external to their firms. such measures as improving the quality of the
predict future happenings, especially when product, reducing cost of the production,
environment changes are taking place too (i) It enables the firm to identify engaging in aggressive advertising, and so on.
frequently as in the case of information opportunities and getting the first mover
technology or fashion industries. advantage: Opportunities refer to the (iii) It helps in tapping useful resources:
positive external trends or changes that will Environment is a source of various resources
(vi) Complexity: Since business environment help a firm to improve its performance. for running a business. To engage in any type of
consists of numerous interrelated and dynamic Environment provides numerous opportunities activity, a business enterprise assembles
conditions or forces which arise from for business success. Early identification of various resources called inputs like finance,
different sources, it becomes difficult to opportunities helps an enterprise to be the machines, raw materials, power and water,
comprehend at once what exactly constitutes first to exploit them instead of losing them labour, etc., from its environment including
a given environment. In other words, to competitors. For example, Maruti Udyog financiers, government and suppliers. They
environment is a complex phenomenon that is became the leader in the small car market decide to provide these resources with their
relatively easier to understand in parts but because it was the first to recognise the own expectations to get something in return
difficult to grasp in its totality. For example, need for small cars in an environment of from the enterprise. The business enterprise
it may be difficult to know the extent of the rising petroleum prices and a large middle supplies the environment with its outputs such
relative impact of the social, economic, class population in India. as goods and services for customers, payment
political, technological or legal factors on of taxes to government, return on financial
change in demand of a product in the market. (ii) It helps the firm to identify threats investment to investors and so on.
and early warning signals: Threats refer to
(vii) Relativity: Business environment is a the external environment trends and changes Because the enterprise depends on the
relative concept since it differs from country that will hinder a firm’s performance. Besides environment as a source of inputs or resources
to country and even region to region. Political opportunities, environment happens to be the and as an outlet for outputs, it only makes
conditions in the USA, for instance, differ source of many threats. Environmental sense that the enterprise designs policies that
from those in China or Pakistan. Similarly, awareness can help managers to identify allow it to get the resources that it needs so
demand for sarees may be fairly high in India various threats on time and serve as an early that it can convert those resources into
whereas it may be almost non-existent in warning signal. outputs that the environment desires.
France.
(iv) It helps in coping with rapid changes: (vi) It helps in improving performance: The For example, in case of construction companies
Today’s business environment is getting final reason for understanding business and automobile manufacturers, low longer-term
increasingly dynamic where changes are environment relates to whether or not it rates are beneficial because they result in
taking place at a fast pace. Turbulent really makes a difference in the performance increased spending by consumers for buying
market conditions, less brand loyalty, of an enterprise. The answer is that it does homes and cars on borrowed money. Similarly, a
divisions and sub-divisions (fragmentation) appear to make a difference. The rise in the disposable income of people due to
of markets, more demanding customers, enterprises that continuously monitor their increase in the gross domestic product of a
rapid changes in technology and intense environment and adopt suitable business country creates increasing demand for
global competition are just a few of the practices are the ones which not only products. High inflation rates generally result
images used to describe today’s business improve their present performance but also in constraints on business enterprises as they
environment. All sizes and all types of continue to succeed in the market for a increase the various costs of business such as
enterprises are facing increasingly dynamic longer period. the purchase of raw materials or machinery and
environment. In order to effectively cope payment of wages and salaries to employees.
with these significant changes, managers DIMENSIONS OF BUSINESS
must understand and examine the ENVIRONMENT (PESTLE) Components of Economic Environment
environment and develop suitable courses of
action. Dimensions of, or the factors constituting a. Existing structure of the economy in terms
the business environment include economic, of relative role of private and public sectors.
(v) It helps in assisting in planning and social, technological, political and legal b. The rates of growth of GNP and per capita
policy formulation: Since environment is a conditions which are considered relevant for income at current and constant prices
source of both opportunities and threats decision-making and improving the c. Rates of saving and investment
for a business enterprise, its understanding performance of an enterprise. d. Volume of imports and exports of different
and analysis can be the basis for deciding items
the future course of action (planning) or (i) Economic Environment: Interest rates, e. Balance of payments and changes in foreign
training guidelines for decision making inflation rates, changes in disposable income exchange reserves
(policy). For instance, entry of new players of people, stock market indices and the value f. Agricultural and industrial production trends
in the market, which means more of rupee are some of the economic factors g Expansion of transportation and
competition, may make an enterprise think that can affect management practices in a communication facilities
afresh about how to deal with the situation. business enterprise. Short and long term h. Money supply in the economy
interest rates significantly affect the i. Public debt (internal and external)
demand for product and services. j. Planned outlay in private and public sectors
(ii) Social Environment: The social Major Elements of Social Environment Manufacturers have flexible manufacturing
environment of business include the social systems. Airline companies have Internet and
forces like customs and traditions, values, a. Attitudes towards product innovations, World Wide Web pages where customers can
social trends, society’s expectations from lifestyles, occupational distribution and look for flight times, destinations and fares
business, etc. consumer preferences and book their tickets online. In addition,
b. Concern with quality of life continuing innovations in different scientific
Traditions define social practices that have c. Life expectancy and engineering fields such as lasers, robotics,
lasted for decades or even centuries. For d. Expectations from the workforce biotechnology, food preservatives, medicine,
example, the celebration of Diwali, Eid, e. Shifts in the presence of women in the telecommunication and synthetic fuels have
Christmas, and Guru Parv in India provides workforce provided numerous opportunities and threats
significant financial opportunities for f. Birth and death rates for many different enterprises. Shifts in
greetings card companies, sweets or g. Population shifts demand from vaccum tubes to transistors,
confectionery manufacturers, tailoring f. Educational system and literacy rates from steam locomotives to dieseland electric
outlets and many other related businesses. i. Consumption habits engines, from fountain pens to ballpoint, from
j. Composition of family propeller airplanes to jets, and from
Values refer to concepts that a society holds typewriters to computer based word
in high esteem. In India, individual freedom, (iii) Technological Environment: Technological processors, have all been responsible and
social justice, equality of opportunity and environment includes forces relating to creating new business.
national integration are examples of major scientific improvements and innovations which
values cherished by all of us. In business provide new ways of producing goods and (iv) Political Environment: Political
terms, these values translate into freedom services and new methods and techniques of environment includes political conditions such
of choice in the market, business’s operating a business. as general stability and peace in the country
responsibility towards the society and non- and specific attitudes that elected
discriminatory employment practices. For example, recent technological, advances in government representatives hold towards
computers and electronics have modified the business. The significance of political
Social trends present various opportunities ways in which companies advertise their conditions in business success lies in the
and threats to business enterprises. products. It is common now to see predictability of business activities under
computerised information kiosks, and World stable political conditions.
For example, the health-and-fitness trend Wide Web multimedia pages highlighting the
has become popular among large number of virtues of products. Similarly, retailers have On the other hand, there may be uncertainty
urban dwellers. This has created a demand direct links with suppliers who replenish stocks of business activities due to political unrest
for products like organic food, gyms, bottled when needed. and threats to law and order.
(mineral) water and food supplements.
Political stability builds up confidence among (v) Legal Environment: Legal environment Impact of legal environment can be illustrated
business people to invest in the long term includes various legislations passed by the with the help of government regulations to
projects for the growth of the economy. Government, administrative orders issued by protect consumer’s interests.
Political instability can shake that government authorities, court judgments as
confidence. Similarly, the attitudes of well as the decisions rendered by various For example, the advertisement of alcoholic
government officials towards business may commissions and agencies at every level of the beverages is prohibited. Advertisements,
have either positive or negative impact upon government— centre, state or local. including packets of cigarettes carry the
business. statutory warning ‘Cigarette smoking is
It is imperative for the management of every injurious to health’.
Major Elements of the Political enterprise to obey the law of the land.
Environment Therefore, an adequate knowledge of rules and Similarly, advertisements of baby food must
regulations framed by the Government is a pre- necessarily inform the potential buyer that
a. Prevailing political system requisite for better business performance. mother’s milk is the best. All these regulations
b. The degree of politicisation of business Non-compliance of laws can land the business are required to be followed by advertisers.
and economic issues enterprise into legal problems.
c. Dominant ideologies and values of major
political parties In India, Constitutional Provisions; Companies
d. The nature and profile of political Act 2013; Industries (Development and
leadership and thinking of political Regulations) Act 1951; Foreign Exchange
personalities Management Act and the Imports and Exports
d. The level of political morality (Control) Act 1947; Factories Act, 1948; Trade
e. Political institutions like the government Union Act; 1926; Workmen’s Compensation Act,
and allied agencies 1923; Industrial Disputes Act, 1947, Consumer
f. Political ideology and practices of the Protection Act, 1986, Competition Act, 2002
ruling party and host of such other legal enactments as
g. The extent and nature of government amended from time to time by the Parliament,
intervention in business is important for doing business.
h. The nature of relationship of our country
with foreign countries
ECONOMIC REFORMS IN INDIA IN PRIVATISATION: GLOBALISATION:
1991
The new set of economic reforms aimed at Globalisation means the integration of the various
LIBERALISATION: giving greater role to the private sector in economies of the world leading towards the
the nation building process and a reduced emergence of a cohesive global economy.
The economic reforms that were introduced role to the public sector.
were aimed at liberalising the Indian Till 1991, the Government of India had followed a
business and industry from all unnecessary This was a reversal of the development policy of strictly regulating imports in value and
controls and restrictions. They signalled the strategy pursued so far by Indian volume terms. These regulations were with respect
end of the licence-pemit-quota raj. planners. To achieve this, the government to (a) licensing of imports, (b) tariff restrictions
redefined the role of the public sector in and (c) quantitative restrictions.
Liberalisation of the Indian industry has the New Industrial Policy of 1991, adopted
taken place with respect to: the policy of planned disinvestments of The new economic reforms aimed at trade
the public sector and decided to refer the liberalisation were directed towards import
(i) abolishing licensing requirement in most of loss making and sick enterprises to the liberalisation, export promotion through
the industries except a short list, Board of Industrial and Financial rationalisation of the tariff structure and reforms
(ii) freedom in deciding the scale of business Reconstruction (BIFR). with respect to foreign exchange so that the
activities i.e., no restrictions on expansion or country does not remain isolated from the rest of
contraction of business activities, The term disinvestments used here means the world.
(iii) removal of restrictions on the movement transfer in the public sector enterprises
of goods and services, to the private sector. It results in dilution Globalisation involves an increased level of
(iv) freedom in fixing the prices of goods of stake of the Government in the public interaction and interdependence among the various
services, enterprise. If there is dilution of nations of the global economy.
(v) reduction in tax rates and lifting of Government ownership beyond 51 percent,
unnecessary controls over the economy, it would result in transfer of ownership Physical geographical gap or political boundaries no
(vi) simplifying procedures for imports and and management of the enterprise to the longer remain barriers for a business enterprise to
experts, and private sector. serve a customer in a distant geographical market.
(vii) making it easier to attract foreign This has been made possible by the rapid
capital and technology to India. advancement in technology and liberal trade
policies by Governments. Through the policy of
1991, the government of India moved the country
to this globalisation pattern.
As a part of economic reforms, the IMPACT OF GOVERNMENT POLICY (iv) Necessity for change: In a regulated
Government of India announced a new CHANGES ON BUSINESS AND environment of pre-1991 era, the firms could
industrial policy in July 1991. The broad INDUSTRY have relatively stable policies and practices.
features of this policy were as follows: After 1991, the market forces have become
This policy has made a significant impact on the turbulent as a result of which the enterprises
(a) The Government reduced the number of working of enterprises in business and industry. have to continuously modify their operations.
industries under compulsory licensing to six. The Indian corporate sector has come face-to
(b) Many of the industries reserved for the face with several challenges due to government (v) Need for developing human resource:
public sector under the earlier policy, were policy changes. These challenges can be explained Indian enterprises have suffered for long
dereserved. The role of the public sector as follows: with inadequately trained personnel. The new
was limited only to four industries of market conditions require people with higher
strategic importance. (i) Increasing competition: As a result of competence and greater commitment. Hence
(c) Disinvestment was carried out in case of changes in the rules of industrial licensing and the need for developing human resources.
many public sector industrial enterprises. entry of foreign firms, competition for Indian
(d) Policy towards foreign capital was firms has increased especially in service (vi) Market orientation: Earlier firms used
liberalised. The share of foreign equity industries like telecommunications, airlines, to produce first and go to the market for sale
participation was increased and in many banking, insurance, etc. which were earlier in the later. In other words, they had production
activities 100 per cent Foreign Direct public sector. oriented marketing operations. In a fast
Investment (FDI) was permitted. changing world, there is a shift to market
(e) Automatic permission was now granted (ii) More demanding customers: Customers orientation in as much as the firms have to
for technology agreements with foreign today have become more demanding because they study and analyse the market first and
companies. are well-informed. Increased competition in the produce goods accordingly.
(f ) Foreign Investment Promotion Board market gives the customers wider choice in
(FIPB) was set up to promote and channelise purchasing better quality of goods and services. (vii) Loss of budgetary support to the public
foreign investment in India. sector: The central government’s budgetary
(iii) Rapidly changing technological environment: support for financing the public sector
In essence, this policy has sought to Increased competition forces the firms to outlays has declined over the years. The
liberate industry from the shackles of the develop new ways to survive and grow in the public sector undertakings have realised that,
licensing system (liberalisation), drastically market. New technologies make it possible to in order to survive and grow, they will have to
reduce the role of the public sector improve machines, process, products and be more efficient and generate their own
(privatisation) and encourage foreign services. The rapidly changing technological resources for the purpose.
private participation in India’s industrial environment creates tough challenges before
development (globalisation). smaller firms.
MANAGERIAL RESPONSES TO 6. Sharply Improved compensation levels: Features
CHANGES IN BUSINESS With the entry of MNCs there is lot of 1. Demonetisation is viewed as a tax
ENVIRONMENT changes in compensation levels for managerial administration measure. Cash holdings arising
and technical services. Salaries have risen from declared income was readily deposited in
1. Diversification: The Corporate sector significantly and incentive schemes are banks and exchanged for new notes. But those
has been going for diversification. E.g. becoming common. with black money had to declare their
Reliance has diversified into textiles, unaccounted wealth and pay taxes at a penalty
petrochemicals, IT, communications etc. DEMONETISATION rate.
2. Demonetisation is also interpreted as a shift
2. Joint Venture/Consolidation of Multi- The Government of India, made an on the part of the government indicating that
nationals: Many multinationals enter India announcement on November 8, 2016 with tax evasion will no longer be tolerated or
through new Joint Ventures. E.g. Fords with profound implications for the Indian economy. accepted.
Mahindra and Mahindra, Vodafone and Idea The two largest denomination notes, ₹500 ₹
etc. 1,000, were ‘demonetised’ with immediate 3. Demonetisation also led to tax
effect, ceasing to be legal tender except for a administration channelizing savings into the
3. Brand Building: Expenditures were few specified purposes such as paying utility formal financial system. Though, much of the
increased and huge investments are made in bills. cash that has been deposited in the banking
building brands by the companies. Goodwill This led to 86 %of the money in circulation system is bound to be withdrawn but some of
and mage has become an important element invalid. The people of India had to deposit the the new deposits schemes offered by the
for promotion of company. invalid currency in the banks which came along banks will continue to provide base loans, at
with the restrictions placed on cash lower interest rates.
4. Use of Latest Technology: To get first withdrawals. In other words, restrictions were
mover advantage companies are using latest placed on the convertibility of domestic money 4. Another feature of demonetisation is to
technologies. Use of Latest Technology has and bank deposits. create a less-cash or cash-lite economy, i.e.,
become slogan of the successful companies. channeling more savings through the formal
E.g. Smart phones, laptops etc. The aim of demonetisation was to curb financial system and improving tax compliance.
corruption, counterfeiting the use of high Though there are arguments against this as
5. Customer Focus: The focus of market is denomination notes for illegal activities; and digital transactions require use of cell phones
totally shifted from producers to consumers. especially the accumulation of ‘black money’ for customers and Point-of-Sale (PoS)
Attention to customer needs and satisfaction generated by income that has not been machines for merchants, which will only work if
has been increased. Nature and quality of declared to the tax authorities. there is internet connectivity.
products have improved.