UNIT 3 - BUSINESS ENVIRONMENT

Meaning/Concept:

Business environment can be defined as those forces, individuals and institutions that are outside the
control of a business organization and have the ability to influence the working of an organisation.

Features/Nature/Characteristics of Business Environment:

(l) 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
 General forces include social, political, economic, legal and technological conditions which affect
a business firm indirectly.
Components of Business Environment

Internal/Specific Factors External/General Factors

Customers Economic Environment
Owners and investors Social Environment
Owners and investors Political Environment
Suppliers Technological Environment
Creditors Legal Environment
Employees and trade union
Competitors
(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.

 It keeps on changing with the change in technology, consumer's fashion and tastes etc.

(5) Uncertainty:

 Business environment is uncertain.

 It is difficult to predict the future environmental changes and their impact with full accuracy.
(6) Complexity:

 Business environment is complex.

 It is easy to understand in parts separately but it is difficult to understand in totality.

(7) Relativity:

 Business environment is a relative concept.

 Its 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

1. It enables the firm to identify opportunities and getting the first mover advantage:
 Opportunities refer to the positive external trends or changes that will help the firm to
improve its performance
 Understanding of business environment helps an organisation in identifying
advantageous opportunities.
 It helps in getting their benefits before the competitors.
2. It helps the firm to identify threats and early warning signals:
 Threats refer to the external environment trends and changes that will hinder a firm’s
performance.
 Correct knowledge of business environment helps an organisation to identify those
threats which may adversely affect the organisation.
 For example, Bajaj Auto made considerable improvements in its two wheelers when
Honda & other companies entered the auto industry.
3. It helps in 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.
4. It helps in coping with Rapid changes :
 Continuous study/scanning of business environment helps in knowing the changes
which are taking place.
 Changes such as changes in technology, global competition etc.
 It enables the organization to face these changes effectively.
5. It helps in assistance in planning and policy formulation :
 Analysis of business environment helps an organisation in identifying threats and
opportunities in the market.
 They serve as a basis for planning & policy formulation.
 For example, ITC Hotels planned new hotels in India after observing boom in tourism
sector.
 6. It helps in Improving performance :
 Correct analysis and continuous monitoring of business environment should be done.
 This helps an organisation in improving its performance.

Components/Dimensions of Business Environment

Internal / Specific Environment - Customers - Owners and investors - Suppliers - Creditors - Employees
and trade union - Competitors

External/ General Environment - Economic Environment - Social Environment - Political Environment -

Technological Environment - Legal 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 offers opportunities to a firm or it may put constraints.
Examples :
 Decline in tax rates raises the disposable income of people leading to increase in demand for
products.
 Rise in inflation increases the cost of raw material, machine, payment of wages and salaries.
 Demonetization implemented by RBI.
 Changes in economic and fiscal policies have encouraged NRI’s and foreign investors to invest in
India.
 Make in India was launched for job creation and skill enhancement.
 RBI allowed commercial banks to reduce interest rates on loans to tackle recession.
 The banks offering loans at reasonable interest rates with minimum required formalities
because of banking sector reforms.
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 organisation in the long run.
 For example: Now a 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.
Examples:
 Festivals like Diwali, Eid, Christmas, etc. lead to increase in demand for greeting cards, sweets,
gifts etc.
 Equal pay/pay scales to male and female workers for equal work.
 Demand for reservation in jobs for minority and women.
 ‘Beti Padhao, Beti Bachao’ movement started for encouraging education of girl child.
 Swachh Bharat Abhiyaan introduced for welfare of society.
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.
 For Example, Digital watches in place of traditional watches, booking of railway tickets on
internet etc.
Examples:
 Payments though e-wallets, PayTm etc.
 Change from fountain pens to ball pens.
 Dematerialization of securities.
 Cable TV adversely affected radio industry.
 Introduction of artificial intelligence, like Siri in iPhones.
4. Political Environment :
 Changes in political situation also affect business organisations.
 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.
Examples:
 Crash in share prices due to change in Vajpayee government in 1999.
 PM’s frequent visit to foreign countries for promoting business relationships.
 Hyderabad has become the IT hub due to political support.
 Compensation given by government for acquiring property for building infrastructure facilities,
like metro construction.
 GST introduced and implemented in place of VAT.
5. Legal Environment :
 lt 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.
Examples:
 Supreme Court issuing orders to seal unauthorised shops and constructions.
 Law ensuring green dot for every vegetarian eatable products and red dot for non-vegetarian
products.
 Supreme Court passing an order to close the iron factories around Taj Mahal to avoid air
pollution affecting it.
Economic Environment 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.
The Main objective of New Industrial Policy was to promote Liberalization, Privatization and
Globalization.
Liberalisation :
 It means freeing of Indian Industry from all unnecessary government controls and restrictions.
 Abolishing licensing requirements, Freedom in deciding the scale of business, removals of
restriction on movements of goods and service; reduction in tax rates; freedom in fixing prices;
simplifying procedures; making it easier to attract foreign investment.
Privatization :
 Giving greater role to private sector in the nation building process and reduced role of public
sector.
  Disinvestment in many Public Sectors undertaking etc, Setting up of BIFR to revive sick units in
public sector enterprises suffering losses.
 It aimed at improving efficiency and performance of government undertakings, reducing
budgetary deficit & better utilization of national resources.
Globalization :
 lt means integration of various economies of the world leading to the emergence of cohesive
global economy.
 The measures taken by the Government include trade liberalization which includes import
liberalization; Export Promotion through rationalization of tariff structure; Foreign exchange
liberalization; increased interaction among global economies under the aegis
(protection/support) of World Trade Organization.
 It resulted in addition of Export duty, reduction of import.

Demonetisation:

Concept:

 It is an economic policy where a certain currency ceases to be used as a legal tender.

 An announcement by The Government of India on November 8, 2016.
 500 & 1000 rupee notes were ceased to be legal tender except for organizations declared by the
Government.
 86% of money became invalid and people had to deposit this invalid currency in banks with
restrictions on withdrawals and deposits.

Features:
1. Tax administration: People with black money had to declare their unaccounted wealth and pay
taxes at a penalty rate.
2. Channelizing savings: Banks offered new deposit schemes in which people invested heavily. This
led to increased liquidity in banks.
3. Cashless economy: It encouraged digital transactions or e-transactions, thus leading to cashless
economy.
4. Elimination of terror funding: It will help in fighting against terror funding and smuggling by
reducing the use of high value currency notes.
Advantages:
1. It will help in fighting Black money, terrorist funding etc
2. It will help in getting fake currency out of circulation.
3. It will encourage digital payments to make a cashless society.
4. It will lead to increase in tax payment.
5. It will help people in increasing financial saving.
6. It will help in curbing corruption.
Impact of Demonetisation

1 Money/Interest rates i. Decline in cash transactions

ii. Bank deposits increased
iii. Increase in financial savings
2 Private wealth Declined since some high demonetised notes were not
returned and real estate prices fell
3 Public sector wealth No effect
4 Digitisation Digital transactions amongst new users (RuPay/AEPS)
increased
5 Real estate Prices declined
6 Tax collection Rise in income tax collection because of increased disclosure