Introduction

• Business Environment of a country is never static or

dynamic. It is always in a dynamic state and is affected
by a number of factors as discussed later on. Except in
the case of emergency or crises, changes in business
environment are not sudden but gradual.
• Many business organizations are able to predict or
forecast the changes on the basis of their wisdom and
experience with which they can analyze the existing
configuration of variables affecting the environment.
Such organizations are able to reposition themselves
and exploit the opportunities unfolded by changes
environment.
• Those business organizations who are not able to
understand environment and anticipate future changes
face the danger of being lack behind in competition
• Understanding a changing business environment
and predicting it at least in near future is not an
east task. The task requires the knowledge and
experience of professional business economist and
managers.
• Also, an appropriate understanding of different
layers of business environment is essential.
• Various facts, data and trends have to be carefully
studied and analyzed and reached to scan
• Unfortunately, most of the firms don’t have the
adequate resources and experience in this regard
and depend upon reports of rating agencies,
newspapers and journals or even on the intuitive
understanding of a few top- level managers in their
organizations
 Factors Producing changes in Business
Environment
1)Change in Government Policies:-
Government affect business environment in various
roles in terms of promoter regulator,entrepreneur,planner and
consumer. Some of the government policies are as follows-
 Fiscal Policy- Affect public expenditure levels and the structure
of taxation which affect cost and prices.
 Monetary Policy- Monetary Policy changes impact the cost
and availability of credit which influence the cost of capital of
business firms and financial environment in general which
impacts economic growth. Monetary policy includes-
 Bank Rate
 Statutory Liquidity Ratio(SLR)
 Prime Lending Rate(PLR)
 Cash Reserve Ratio(CRR)
 Public Debt Policy- Affect the supply of savings
and the aggregate level of demand for private
sector. Taxes alone are not sufficient for
economic development of a country.So,need for
Public Debt arises. It is of two types-
 Internal Debt:-Encourage
Debt small savings like in
post offices, commercial banks, saving
banks,Kisan Vikas Patra,etc.
 External Debt:-
Debt Government borrow it from
abroad in the form of foreign loans and of it is that
it has to be received in foreign currency.

 Direct Foreign Investment

 Export-Import Policy-

 Disinvestment Programme- In July 1991,New industrial

policy was announced by Government and this includes
Disinvestment Programme in the selected Public sector
undertakings in order to improve the performance of Public
sector enterprise.
 But PSUs stocks are undervalued and sold at below market
price. From April 1991 to January 2003,the aggregate annual
disinvestment target was 78,300crore but only 38% of this has
been achieved
 Under the present policy of Indian Government towards
Public sector undertakings to reduce govt. equity to 26% in all
non-strategic undertakings and in a no. of sectors including
telecommunication,transport,automobiles,tourism and hotels,
petroleum,etc.
2)Variations in Growth Performance:-
Performance of various sectors determines the growth
environment .A growth rate of about 7% or more causes
appreciable increase in national income and aggregate
demand. Variations in growth rate from year to year brings
about corresponding change in the business environment
and business firms adjust to the changing scenario.
The different sector of the economy are however, not
segmented or independent. Each sector has both forward and
backward linkage. Changing economic conditions in one
sector tend to affect conditions in related sector.

For example, a slump in automobile industry will reduce the

demand for steel. The excess of demand over supply of
electricity will increase the demand for power generators and
batteries. These interrelations are complex and widely
networked.
3)Corrective Policy Actions:-

Corrective actions are taken when actual performance

deviates from intended or planned performance. Government
as well as business firms take corrective actions when
performance does not proceed according to the objectives
and time and expenditure schedules.

Central banking authorities undertake monetary correction

under which they readjust money supply and credit growth
rates according to the output performance and liquidity
conditions in the market

Countries like India, undertakes mid-plan reviews and make

necessary corrections. Corrective actions are relatively less
smooth, as these are taken on a no. of occasions.

An ultimely,irrelevant or ill-found corrective action can

4)Changes in Market Structure and Competition:-
 In an economy, different product and industry groups face different
market structures depending upon the state of Competition. The
market structure basically depends upon such factors as the no. of
buyers and sellers in th market, freedom of entry and exit and
availability of market information to various participants.
 For examle,the no. of firms in soft drinks in India has gone down after
the entry of MNCs.Main points related to Changes in Market Structure
and Competition are-
Foreign Direct Investment(FDI)-
In the foreign Invt. Policy 1991,our govt. started encouraging the
of foreign Invt..But its negative effects are-
 Participates only in selected areas
 Fulfils the needs of only rich and middle class people.
 During 1991-02 FDI amount only Rs.2,84,812 crore were approved.
Against it, the actual inflow was Rs.1,29,838 crore.
 FDI negatively effect our local companies.
Competitive Environment:-
Competitiveness may be defined as the ability of a firm to
compete against each other. Its types are-
 Predatory Prices
 False Representation of Product
Delicensing- Reduces entry barriers, encourage the flow
of Private Invt. and encourage competition
 In 1991,18 industries would subject to compulsory licensing.
These were further reduced to 14.In 1997-98,again reduced
to 9 and later to 5.Now only 2 industries need licensing.
 License is needed for-Establishing new undertakings
Substantial growth in capacity
Change in location
 Now industries enjoy Broad banding facility, new industries
can enter the industry and existing firm can expand their
product lines and become more competitive
MRTP Act-
According to this, all those industries having
assets more than 100 crore used to be declared
MRTP firms and were subjected to several
restrictions.Now,this restriction is removed.
These firms are no longer required to obtain
prior approval of the Govt.Now,there would
be no restriction for setting up new
industries or expansion of industries and
amalgamation.
5)Future Expectations and Business Speculation-

 Corporate changing variables of business environment

generate future expectations and speculation. Both
individuals and firms, on the basis of past trends and current
scenario anticipate future changes in a no. of variables such
as rate of interest, exchange rate,advt. expenditure,
production in various sectors and market demand.
 When there are future expectations about inflation,
economic units tends to postpone their purchase to save
money.
 Similarly, an expected increase in rate of interest will
weaken the current demand for fixed-interest bearing
financial assets or investment.
 Current changes and future expectations lead to the
establishment of markets for futures and forwards in respect
of commodities and financial investment.
6)Changes in Consumer Attitudes, Tastes and
Preferences
 Consumer attitudes and tastes play a major role in product
designing, delivery and accompaying services. In competitive
markets, professionally managed firms are customer focused
and closely monitor any changes that takes place in
consumer perception attitude towards their product.
 The main factors that brings about changes are education,
fashion trends and compulsion seasonal factors.
 Due to the impact of LPG,tastes and preferences changes
over relatively shorter period of time
 Consumer perception, attitudes, and lifestyle are greatly
influenced by advertising and result in changing tastes and
preferences.
 The changes on the side of consumer induce changes in
product content and presentation(including packaging and
delivery) making the more environment and competitive.
 7)Imports and Foreign Investment Changes-
 Exposure to foreign products and foreign business firms can cause a sea
change in the nature of business environment. Within the framework of
WTO,most economies of the world are opening their borders for imports
and paying special attention to export development.
 Import not only add to competition but also create an environment in which
domestic firms learn about new products and technologies on which they
are based.
 Difference in the prices of imported and domestically produced goods
pose challenges to the domestic firms to become lean and efficient so that
they can stay in competition.
 MNCs not only brings Invt.,but also new mgt. philosophies, cultures and
performance standards.MNCs compete with domestic firms both in home
and foreign markets. So, domestic firms which are fat and lazy, are either
taken over or driven out of the market.
 8)External Economic Shocks
 Between economies with high degree of global linkages,
international economic changes get transmitted easily.
Conditions of recession in industrial market economies mean
reduced markets to a large no. of countries, which export to
them.
 The sep 11,2001 terrorist attacks on US caused economic
disruption in a no. of countries.
 Similarly, international wars affect international trade, tourism
and foreign Invt.which have good international economic
relations.
 Like the Taj Hotel Case
 Terrorist attack on Sri Lanka’s cricket players in Pakistan last
year are such examples.
 9)Non-Economic Factors
 There is a wide variety of non-economic factors, which can
destabilize the business environment. Business firms can do
very little with these factors. The best they can do is to
adjust to such changes.
 Similarly, political changes, existing or anticipated, have the
potential to disturb the business environment. Major
industrial accidents and natural calamities like
floon,earthquake or a spurt in crime rate over a wide region
can have a destabilizing effect on business environment.
 An earthquake in an urban lacation,For example, can halt
infrastructure projects and can make a no. of insurance Co’s
go bankrupt.
 Recent earthquake and communal violence in Gujarat have
caused tremendous damage to the economy of the State.
 Such factors are least predictable and prudent business
firms seek insurance against the most likely factors in this
group.
Corporate Response and Adjustment
 All the factors as we discussed earlier are capable of bringing
changes in the macroeconomic environment of business
firms,depnding upon the magnitude, direction and duration of
impact. These factors makes the business environment
business environment volatile, less comprehensible and
unpredictable. A large no. of firms are unable to understand the
current and dynamic of business environment, considerate as
black box
 Rational and professional firms always seek to build
projections, at least in the short run, basing their predictions on
past experience and current trends. Determining the right
direction is not an easy task.
 Over-reaction and under-reaction both can be expensive and
painful and deviate the firms from their planned goals.
 Firms that are able to make appropriate adjustment to business
environment changes reduce risk and uncertainty and gain
competitive edge over the rivals
 Failure to make timely adjustment may seriously erode
profitability, competitiveness and market share may putting the
industry several years in the back.
 Therefore, it is necessary to monitor the environment closely
and visualize the future at least in the short run.
 Environment monitoring and forecasting need appropriate
database, market intelligence and analytical skills for corporate
managers.
 The corporate policies must have sufficient flexibility to enable
the firm to adjust to the changing environment. Business
environment changes are sometimes like stormy currents. Firms
that bend and give away survive those that stand erect and are
gazed to the ground
 Firms prefer to restrategise or restructure when
changes in business environment are clear,
dominant and durable. They have to readjust their
goals, business plans and policies and
implementation designs.
 When environment changes takes place, the change
in relative market growth rate and market shares
may affect the profitability and cash generation
potential of products. These factors require to be
scanned carefully so that the adjustment and
response of the firms is appropriate.
 Role of Business Economist
Large and professional firms pay a special
attention regarding business economist who provide
valuable support to top management.
 Monitoring and scanning the different components
and layers of business environment requires careful
analysis and interpretations and a business
economist performs this task and advice the top
management on the kind of adjustment and market
response to be made.
 Large and diversified organizations maintain
separate economic research divisions to provide
input for managerial decision making.
• These professionals also perform the predictive
functions. On the basis of past and current trends,
they are involved in exercises of making short,
medium and long run projections to guide future
planning and strategy of business
• These professionals generally have good level of
skills in applications of managerial
economics,busines econometrics and forecasting.
• The firms which are unable or unwilling to employ
such caders,have to depend upon outside economic
consultancy and research services or on the
economic wisdom of their own tot managers.