Business Environment

Learning Objectives

After studying this chapter, readers will be able to:

 Understand the concept of business environment

 Learn various features or characteristics of business environment
 know the importance of business environment
 learn various components of business environment
 Understand the concept of Demonetization
 Understand the New Economic Policy 1991
 Know the major components of New Economic Policy
 Learn the impact of Economic Policy on business or Effects of Liberalization and
Globalization

Introduction

Business is based on the concept of exchange of goods or services in the society. All such
business activities are significantly affected by the prevailing business environment. When it
goes in favour of business, business will go in to profit. Unfavorable business conditions may
have adverse impact on the health of any business firm. Hence, business environment becomes
an important aspect for the survival, growth and development of any given business.
Environmental factors possess substantial effect over the growth and development of the
business unit. Now, the question arises; what is this environment? What is its significance? Is
there any impact of environment over business? All these questions can easily be answered by
getting ideas about environment and its impacts on business. The word ‘Environment’ basically
represents the surroundings, external objects, influences or circumstances under which a business
unit performs and under goes several economic activities. The environment has a considerable
impact and influence on the operation and directions of various business activities. Both these
word business and environment constitutes a new concept termed as business environment.

Business environment refers to several factors including both external and internal affecting
smooth functioning of business and creating threats and opportunities for the firm. It can further
be defined as a portfolio of several factors and forces that influenced the operation of a business
concern. These factors may be social, economical, political, legal, technological, and other
institutions constitute the business environment. All these factors are regarded as an integral and
inherent part of the business. It is merely impossible for any business to survive by ignoring
these factors. For instance, if there will be change in the buying behavior of customer for a
product due to change in taste and preferences, the demand may shift from the old product to the
new one available in the market. Any alteration or amendment in the policies framed by the
government may have a direct impact on the business undertakings in the form of tax. This will
lead to increase or enhance the price level. Technological up gradation or advancement in several
fields help in developing new quality product but it may make some of the existing products
obsolete.

Meaning of Business Environment

Business environment contains multiple factors affecting business such as strength, weakness,
internal management, orientation of the enterprise, government policies, rules, regulations,
economic conditions, socio-cultural factors, legal issues, demographic factors, natural issues,
cross-border activities etc. These factors are generally classified in to two broad parts, External
and Internal. External factors are regarded as the uncontrollable factors by nature which directly
affects the operation, growth, development and most importantly the strategic decisions of a
business unit.

Definitions

The word ‘Business Environment’ has been defined by various authors as follows,

“Business Environment encompasses the climate or set of conditions, economic, social, political
or institutional in which business operations are conducted.” - Arthur M. Weimer

“Environment contains the external factors that create opportunities and threats to the business.
This includes socio-economic conditions, technology and political conditions.” - William Gluck
and Jauch.

‘‘Business environment is the aggregate of all conditions, events and influences that surround
and affect it.” - Keith Davis

“The environment of business consists of all those external things to which it is exposed and by
which it may be influenced directly or indirectly”. - Reinecke and Schoell.

“The total of all things external to firms and industries that affect the function of the organisation
is called business environment.”- Wheeler

“Civilizations require challenges to survive. Thus environment also contains hostilities and
dangers that may be overcome by individuals and organizations.” - Arnold J. Toynbee

From the above, it can be concluded that business environment is a blend of external and internal
factors directly or indirectly affecting the smooth functioning or operation of the business firm
and its decision making procedure. Some of these factors are controllable and some are not.
Characteristics of Business Environment

The main characteristics of a business environment are as follows:

1. External Forces

Business environment consists of several external forces that directly affecting or influencing the
operation of the business. So, it can otherwise be termed as aggregation of several forces
containing external factors. Such external forces may be economical, social, legal, political,
technological etc.

2. Specific and General Forces:

There are various forces or factors affecting the business operation. The forces that are external
in nature are classified in to two parts namely specific and general forces. Specific forces
involves customers, competitors, investors, vendors etc directly affects the day to day operation
of the business. On the other hand, general forces refers to several factors like social, political,
legal, technological that indirectly affects the smooth functioning of the business unit.

3. Inter-relation between business and environment

A business unit must have certain objectives or targets or goals to be accomplished. Business
environment directly affect the procedure adopted by the business to achieve the desired
objective. Hence, business and environment are treated as inter-related. For example,
formulation of business strategy may get influenced by several external and internal
environmental factors. Hence, SWOT (Strength, weakness, Opportunity and Threats) analysis
has to be made by all the business concerns before making any strategic move or decisions. In
other words, business dynamics is dependent on that of environmental dynamics.

4. Dynamic Nature:

The nature of business environment is dynamic. This title is best suited to the business
environment as it keeps on changing. It can be illustrated with the following example. Change in
government rules, regulations, policies, change in taste, preference, choice of the consumers,
technological up gradation etc. are the changes which can affect the business directly or
indirectly. Such changes could be exaggerated by both internal and external forces.

5. Uncertainty

Business environment keeps on changing from time to time. So, it is highly difficult to predict
the future of any business. These uncertain characteristics of business environment affect many
industries. For example, environmental changes occurred at quick intervals specifically in case of
fashion industries, film industries, information technology industries creates threats and
problems to the business houses. So, one can say that the environmental dynamics creates many
challenges for the business enterprises.
6. Difficulties in determining environmental effects

Business environment consists of several forces or factors such as internal and external. It leads
to a complex situation to identify or determine the effect of a specific force on the business. All
these forces are inter-related to each other. It is the foremost duty and responsibility of the
manager to simplify these complexities at the earliest. For example, in case of change in demand
for a specific product, it is not easy to determine the reasons of such fluctuations. It becomes
very difficult to determine various responsible factors causing the situation whether social,
political, economical, technological etc.

7. Relative Concept

Business environment prevails all over the universe irrespective of place. If there is business, it is
surrounded with business environment. Business environment prevails in different countries are
different. So, it is regarded as a relative concept. It can be illustrated with the following example:
Economic Conditions of India is different that of Pakistan, Nepal, China, Japan and many other
countries. Hence, a Multi National corporation has to consider this issue at the time of policy
formulation and business planning. Such an organization has to make plans and polices
differently for different countries best suited to their respective business environment.

Importance of Business Environment

In this world of globalization, business environment plays an integral part in almost all business
enterprises. Business enterprises can survive, grow and prosper in this competitive environment
by operating in relation with the changing business environment. The main importance of
business environment is described with the help of the following points:

(i) Help to understand internal Environment:

It is crucial for a business firm to understand its internal environment, such as business policy,
organisation structure etc. Every business requires an effective management information system
in order to predict various environmental changes.

(ii) Helps in identifying opportunities

Business environment helps the business firm to explore many possible business opportunities
and to take advantage of those. These opportunities provide a business firm an edge over its
competitive units. The business concerns which are able to identify these opportunities at an
early stage can avail maximum advantage.

For example, As a result of some qualitative scientific research, LED bulb comes out as an
output which is highly energy efficient in comparison with that of normal CFL bulbs. There are
some companies come in to market with the latest LED bulb such as Philips Electronics India
Limited, Syska LED, Havells India Ltd. etc. These companies may have an edge over the other
fellow competitors due to an early entrance in the market.

(iii) Enables the firm to identify threats

Business is always covered with risk and uncertainties. Business environment helps in indenting
various threats connected with the business. A better understanding of such environment helps a
business unit to take appropriate decisions to face the challenges or threats in a business.

For Example, when a new company enters in to the market, the business manager of the existing
business firms should get vigilant enough for facing the upcoming challenges and threats. He has
to take appropriate decisions in time for securing the market share.

(iv) Helpful in optimum utilization of resources

Business deals in production and exchange of goods or services. This production process
requires several resources like raw materials, labour, tools, equipments, adequate sources of
funds etc. Business environment helps in obtaining all these required inputs to the business
enterprises for performing business activities. In return, business firms provide the finished
products as per the customer’s requirement to the environment. For example, goods and services
provided to the consumers, payment of interest on investment, payment of wages to the workers
etc.

(v) Helpful in adopting the environmental changes

Business environment is dynamic in nature. It keeps on changing from time to time. These
changes may caused due to technological advancement, change in the consumer preferences,
fluctuate demand pattern for some products, heavy competition etc. A businessman has to take
all the relevant steps to cope up with the changing environments to survive, grow and develop.
This process of responding to the environmental changes enables the business to understand and
meet the need of customers in time effectively.

(vi) Helpful in making plans and formulate policy

Business environment generates several opportunities as well as number of threats. So, it

becomes essential for a business manager to take appropriate decisions at the right time to avail
the opportunities and face the challenges of the business.

For example: When a new business undertaking enters in to the market, the existing
organizations have to redraft their business plans and policies to give healthy competition to the
new entrant. Knowledge about business environment helps the manager in taking relevant and
effective decisions.

(vii) Helps in developing & improving the performance

A better understanding and knowledge of business environment helps in managing business
effectively. Such environmental awareness creates a strong platform for making appropriate
strategic move. The performance of the business can be developed by a close observation of
several environmental factors.

(viii) Helps in image building:

Knowledge of business environment helps the business firm to create goodwill and its brand
value. It facilitates image building of the business. This is possible by understanding the
prevailing business situations or environment surrounded. There are several companies stop their
production if fails to retain the top position in the market for maintaining image.

Box -1.1

Success story of Philips Electronics India in the field of LED Lighting

Philips is now considered as a leader in the field of LED lighting. It provides a number of
LED products in several categories such as Green LED, Professional Luminaries, Lighting
Electronics, Lifestyle modular switches with protective technology, Home Decorative
Lighting collection, etc. All of these products are designed and prepared according to the
latest advanced technology. This company became able to understand the business
environment properly and explore the opportunities perfectly in time. As a result of which,
in the year 2011, Philips bagged L-Prize competition and obtained $10 million cash prize
for manufacturing a high-efficiency, durable replacement for the standard 60-W
incandescent light bulb. The winning LED light bulb is currently available in the market
for sale. It produces around 900 lumens of light at an input power of just 10 W.

Philips is the global leader in the field of LED and sports lighting. Recently, the company
launched Philips Arena Vison LED – the first LED pitch lighting system to guarantee
flicker-free super-slow motion for HDTV – meeting the stringent broadcast criteria of
UEFA and FIFA. In Brazil, nine out of the 12 stadiums which will be used this summer for
the football tournament will feature lighting from Philips.
Philips LED Products Type:
Bulbs, Wall Lights, Ceiling Lights, Tube Lights, Spot Lights, Down lights, Desk/Table
Lights, Suspension Lights and Decor Lights

Source: http://www.ledlightsinindia.com
Components of Business Environment

Business environment consists of different factors such as economic, political, legal,

demographical, technological, social etc are uncontrollable by nature. These factors are affecting
the various aspects of a business concern like decision making, strategy formulation, planning
and operation. These specific forces affecting business are broadly classified in to two parts;
Internal Environment and External Environment.
 Business Environment

Internal Environment External Environment

Micro Macro
Environment Environment

Internal Environment

The internal business environment includes factors within the organization that impact the
approach and success of business operations. It refers to some specific forces or factors affecting
business directly. This is otherwise termed as controllable environment. Internal environment
comprises of all the basic requirements of a business without which no business can operate
namely man, material, tools, machineries, equipments, finance facility and effective management
procedure. These are regarded as some of the important forces which can have a direct impact on
the business operation. Business firms have the option to control and regulate these factors as per
the requirements of the business. Internal environment of any business functions within the
purview of the business. It also helps in exploring strength, weakness, opportunities and threats
of a business concern. Managing the strengths of the internal operations and recognizing
potential opportunities and threats outside the business operations are the main keys to achieve
success in a business.

Factors determining internal environment of a business

There are number of factors determining internal environment of a business firm discussed as
follows:

a) Value System:
The value system of an enterprise refers to the rules, regulations, code of conduct, ethics and
procedure followed to attain its organizational objectives. It helps in ascertaining organizational
behavior towards its employees, customers and society at large. The value system works as a
motivational force which induces or motivates the promoter of a business unit for taking various
business related decisions such as choice of the business, mission & objectives of the firm,
business policies and practices. For example, there are many companies rejected profitable offers
to produce or distribute liquor as it opposed to their ethical beliefs.

A successful business organization should possess a proper value system. In other words, the
value system of a business firm may lead the business towards success and image building. It is
clear from the instance of J.R.D. Tata, the founder of Tata group of industries. It was the value
system adopted by him forced to operate the business fairly and effectively by promoting and
safeguarding the interests of all the stakeholders. This value system adopted and implemented by
J.R.D. Tata was so effective and popular that it was incorporated in the articles of association of
TISCO, a premier Tata company. It is not only TATA group who has used the value system. Its
biggest competitor Infosys Technologies have also accepted the worth of a value system and
attributed its success to the system for guiding its culture. This is certified from one of its valued
statement, “our corporate culture is to achieve our objectives in environment of fairness, honesty,
transparency and courtesy towards our customers, employees, vendors and society at large”.
From the above, one can be concluded that the value system of a business organization may
affect its corporate culture, ethical beliefs, governance and its attitude towards all the
stakeholders.

b) Mission and Objectives:

Profit maximization is regarded as the primary objective of a business. There are some business
firms possess the intent to maximize profit by providing quality goods and services to the
society. It can be otherwise stated that every business concern require to maximize its profits for
their survival, growth and development. But on the other side, the word mission is completely
distinct from objective. Mission is considered as the primary purpose or reason for which a
business unit commenced. Its mission works as a guide in taking various business decision and
economic activities. Mission of an organization determines preference of a business domain,
prioritized sectors, strategy, policy, planning and path of its development. It can be clear from
the examples of the following big industries of the country.

Box - 1.2

Reliance Industries Limited

At Reliance, the focus on growth is continuous and relentless.”

Our motto “Growth is Life” aptly captures the ever-evolving spirit of Reliance. Our activities
span hydrocarbon exploration and production, petroleum refining and marketing, petrochemicals,
retail and telecommunications. In each of these areas, we are committed to innovation-led,
exponential growth. Our vision has pushed us to achieve global leadership in many of our
businesses – including our position as the largest polyester yarn and fibre producer in the world.
Reliance Industries Limited is a Fortune 500 company and the largest private sector corporation
in India.

Bharti Airtel
Mission
Hunger to win customers for life
Vision
Our vision is to enrich the lives of our customers. Our obsession is to win customers for life
through an exceptional experience.

c) Top Management

Top level management of a business concern consists of board of directors, the number of
independent directors, executives, managers and shareholders. The nature of the work of this top
management have a direct impact or a significant influence on the decision making process in an
organisation. The success of a business enterprise largely depends on the accuracy and frequency
of decision making procedure. Unwanted or unnecessary delays in decision making can prove
costly to a business firm at many times. In the management structure, the board of directors are
entrusted the work of decision making at the highest level. They have decided the direction of
development of a business concern and regulate the overall operation of the business. So, it
becomes highly essential for the board of directors to have adequate managerial capability to
regulate and operate a business firm. To ensure quality decision making at the top level, number
of independent directors are increased in the board of directors. Despite of all these efforts, there
are some private sectors in India regulated and controlled by family members of their promoters
which is not conducive to the efficient functioning of these firms. It emerges the need of
enhancement in the extent of professional management of private corporate.

The share holding pattern has also an important bearing in the management of business houses.
There are some Indian companies in which the majority of shares are held by the promoters of
the company themselves. On the other hand, there are some companies shareholders belong to
different fields of the society. In India, financial institutions such as UTI, LIC, GIC, IDBI, IFC
etc. have invested their funds for possessing majority of shares premier Indian companies. In
these cases, the nominees of such financial institutions play crucial part in several policy
decisions of the companies. As per company’s rules and regulations, shareholders have the right
to elect directors who will constitute the board of directors. It is the responsibility of the directors
to appoint company’s top managers who take various business decisions. However, most of the
shareholders are not exercising their rights and leaving the rest on the shoulder of the
management.

d) Corporate culture:

Corporate culture is considered as one of the most important factor affecting the internal business
environment of a company. Generally, corporate culture represents two shapes as either closed
and threatening or open and participatory. The business organization follows the concept of
closed and threatening type of corporate culture the business planning, policy and surgical
decisions are made by the top management people exclusively. Other levels of management do
not have any rights to participate or contribute in the process of decision making. It may create
conflicts, negative feelings, distrust, and morale hazards among the subordinate staff members
working in the organization. It may lead to demoralization of employees at the work place which
may result in less productivity.

On the other side, those business firms maintained an open and participatory culture reached
their goals and attain their objectives quickly. In this business culture, decision making are
undertaken with collaboration of all levels of management on the basis of mutual understanding
and utmost good faith. It also facilitates a free flow of communication in between the superior
and subordinate staff members of the concern. This culture promotes a values based system of
open participation in managerial assignments and decision making process.

e) Skilled Human Resources:

Human resources are the most important for any business organization. The skilled and efficient
human resources are the crucial factors affecting internal environment of a business firm. Every
business enterprise requires skilled, capable, efficient and committed employees. But the people
at work may differ from each other in terms of quality. They work on their own merits. It is
essential to regulate and monitor their work from time to time in order to extract the best from
them. This task can be performed by the skilled human forces. Human resources may cause
strength and weakness of a concern. There are some companies resisting to implement new
technology in the business just because of the limitations of its existing human forces. On the
other hand, the organization equipped with skilled and technically updated employees can easily
adopt the new innovative methods and technologies in the work place. Besides this issue, there
are a major issues which can affect the internal environment of the business is the attitude of the
employees and their involvement in the work. The ratio of involvement and initiatives in the
work may differ from person to person in the same work place. It can affect the business
adversely. So, in order to ensure an efficient management of human resources, employees are
divided into separate groups. The manager has to give attention towards the performance of the
workers in each team or group. He needs to motivate the employees to build or create proper
cooperation among themselves to work for the collective interests of the company.

f) Labour Unions:
Labour unions or Trade unions refer to the association of the workers. Such organizations can
affect the internal environment of a business undertaking. They can create problems for
management in the form of strike, lock out, disputes, riots etc. In such a situation, representatives
of the labour or trade unions may deal or negotiate with the top level management people on
various issues like wages, bonus, and better working environment at the work place etc. No
business can run smoothly without having adequate support from the workers. Therefore, it
requires having a healthy relation in between the management and the trade unions. In case of
any conflicts, both the sides should agree on a single issue. At the time of restructuring of a
business, the consent of trade unions should be taken.

g) Brand image of the company

The goodwill or brand value of a company may affect the internal environment of the business at
the time of taking decisions in relation to procurement of funds, establishing ventures, contract
for buying and selling of products, introduction of new products in the market etc. The effective
result of all the above mentioned decisions can be affected by the brand image of the business
organization.

h) Physical Resources and Technological Capabilities:

In a business organization, physical resources refer to physical assets and facilities such as
manufacturing capabilities, utilization of technology, optimum utilization resources available etc.
On the other hand, technological capabilities of a firm help in ascertaining its competitive
strength, efficiency level and cost of production. All these resources and capabilities may
influence the effectiveness and productivity of the business firm.

i) Research & Development Capabilities

Innovative and quality products are highly required for a business to survive in this globalized
business world. Innovation helps in enhancing the productivity of the workers. High end research
and development helps the corporate to bring new innovative ideas in to perfection. In the last
few years, quick technological advancement has increased the requirement of quality research
and experiments.

External Environment
Business contains full of risk and uncertainties. This is the term popular in relation to all the
business. One of the most important factors responsible for these risks and uncertainties is the
environment. Business environment contains large number of elements affecting the operation of
the business. The external forces influencing the business activities are basically termed as
external business environment. These factors are generally beyond the control of the business
unit. Therefore, external environment is otherwise termed as uncontrollable environment.
External environment is broadly classified in to two parts.
 a. Micro Business Environment
b. Macro Business Environment

Micro Business Environment

Micro business environment contains several forces closely related to the business. These forces
may affect the operation and even working capacity of the enterprise. Therefore, it is regarded as
operating environment. Micro environment consists of different players directly influencing the
operations of business like suppliers, customers, competitors, marketing intermediaries,
financiers and the general public. However, all micro environmental factors may not have equal
impact on all types of business units. For example, suppliers are treated as one of the most
important part of micro level business environment. They can offer the same product at different
prices to different business concerns based on personal relations or strategic move. In such a
situation, the business firms obtain the product at a cheaper price are more benefitted in
comparison with their competitors. In many cases, suppliers choose big business houses over
small units to improve their business. They may provide discount in prices for lumpsum sales
that can directly affect the small business owners. Such favored attitude of suppliers helps a big
business enterprise to commence a price war against its rival business units that is relatively
small. This may highly influence the business of the small business firm. So, it is required for a
business to understand the micro environment and its elements properly. The main elements of
the micro business environment are discussed below in detail.

a. Suppliers:

Suppliers play a key role in each and every business organization irrespective of the nature of
business. Supplier has to provide the materials and component parts and even services to
different business firms as per their requirement. An uninterrupted supply of materials,
components part and services is required for the smooth operation of a concern. In the absence of
a proper supply chain system, the enterprises have to maintain bulk quality of stock that may
increase the inventory carrying cost. This will ultimately increase the cost of production and
affect the profit volume. There are some organizations set up their own captive production plants
for producing input materials in order to avoid the problems associated with the suppliers.

For Example: Energy is the most important source of input material required in all the
manufacturing industries. No manufacturing organization operates without having adequate
energy sources. It becomes essential to have an uninterrupted supply of energy to the
manufacturing plant for ensuring a smooth production process. In order to avoid the problems
associated with supply and suppliers, many industries have established their own power
generating plants to ensure regular or continuous supply of electricity for their manufacturing
business. Reliance Industries is the leading company in adopting this strategy. But, this is not
possible for small business undertakings as they cannot afford to establish their own plants and
have to get dependent on suppliers for supply of required materials. Again, it is not at all
advisable to depend on a single supplier for supply of required input materials. The concept of
single supplier may cause many problems like disruption in supply of materials from the
supplier’s end due to his monopolistic attitude, price fixation policy, labour strike or lock-out,
riots, strike of Transportation Industries etc. These problems will adversely affect the production
process of a business organization firm. Therefore, business houses prefer to have number of
options for supply of materials to reduce the level of risk and uncertainty.

b. Customers:

Customers are defined as the people who participate in the process of exchange of goods or
services as a party. Therefore, it becomes essential for every business to target at enhancing the
number of customers for getting better sales and profits. The success of any business mostly
depends on its customer base. It is the primary target of any business to reach the heart of the
customers by providing quality products as per their requirements. Business organization
everyday deals with different type of customers belong to different field of the society. For
instance, a telephone service providers like Bharti Airtel, Reliance and Idea cellular may have
customers in the society of different class and categories such as individuals, corporate,
institution etc. So it becomes necessary for all these companies to provide quality services at
reasonable tariff rates or price to fulfill the requirements all these customer groups.

Apart from this, business houses generally looks forward to occupy majority of market share by
providing eye catching offers from time to time to their customers. Such policies adopted help
the firm to create demand in the market for its product. At present, advertisement and sales
promotion are used as a robust medium to create new customer base, maintain the existing
customers and build better image of the organization. In this era of globalization and e-
commerce, where plenty of options are available with the customers, it becomes essential for a
business firm to work towards the satisfaction of customers. It forces every business concern to
prepare quality products at reasonable price to cater the customer’s requirement.

c. Marketing Intermediaries:

Marketing intermediaries refers to the group of persons play the role of a bridge in between
customer and producer. They purchased the goods directly from the manufacturer and sold the
same to the customers at their door step. Otherwise, it may not be easy for all the consumers to
have direct contact with the producers and marketing intermediaries like agents and merchants
helps in selling and distributing its products to the final buyers. Agents and merchants are of
various types like carrying & forwarding agency, distributors, wholesalers and retailers. These
people are responsible for stocking and transporting goods from the place of producer to the
consumer. Besides, some market intermediaries namely marketing research units, consultancy
firms, advertising agencies which assist a business firms in targeting, promoting and selling its
products to the right markets. Marketing intermediaries are in direct touch with the marketing
environment. They can easily understand and predict the possible changes going to be happened
in the market and suggest the business firm accordingly for taking appropriate decisions. In this
way, marketing intermediaries proves their worth for the development of their business. Any
type of disruption in this process may affect adversely the future of the company. It is clear from
the case of a pharmaceutical company where the marketing intermediaries like distributors
association, wholesalers and retailers declared a boycott selling its products due to low profit
margin. However, they succeeded in raising this margin. This represents the value of
intermediaries in the success of any business in this competitive environment.

Box – 1.3

Impact of marketing Intermediaries on Business

Distributors' boycott threat looms over top pharmaceutical companies

Pharmaceutical companies have failed to arrive at an agreement with drug distributors and
retailers on the margins of price-controlled medicines, potentially jeopardizing the smooth roll-
out of the new pricing policy across the country. Domestic drug makers have alleged that
distributors and retailers are planning to boycott three leading companies — Sun Pharma, Cadila
Healthcare and Abbott — from Sunday.

"All India Organisation of Chemists and Druggists (AIOCD) has threatened to boycott products
of Sun Pharma, Cadila Healthcare and Abbott starting 15th of this month," said DG Shah,
secretary general of Indian Pharma Alliance, a grouping of leading domestic drug-makers. These
three companies collectively command 17 per cent market share in the highly fragmented Rs
72,000 crore of domestic drug market.

Similar threats of boycott have been hurled at Aristo Pharma, which gave into distributors'
demands by raising their margins early this week, Shah told ET. He added that the distributors
and retailers' association were using coercive means to extract higher margins by targeting
individual companies. ET reviewed a copy of the letter in which Aristo Pharma on Tuesday
agreed to hike margins for drugs till a 'final decision' was arrived at. The accusation came a day
after the trade body was penalized by Competition Commission of India in another matter and
asked not to indulge in unfair trade practices.

An AIOCD representative, however, denied the allegation, saying there was no such national call
to boycott select drug companies. "We have not given any national directive to boycott any
company but every trader is an independent entity with business considerations and we cannot
force them to sell something on which they are making losses," said Suresh Gupta, general
secretary, AIOCD. Vaijanath Jagushte, a member of AIOCD Drug Pricing Control Order
committee, added, "There are various agitations happening out there in the market as distributors
and retailers are fighting for their survival."

For every drug, there are several hundreds of formulations available and a national association
cannot be expected to control or take responsibility for each of the lakhs of retailers, if they
choose to promote a version which gives them better margins, he added.
Another stockist and a key member of AIOCD told ET on the condition of anonymity,
"Individual companies are coming forward and negotiating with us. We are putting forth our
demands; they agree or disagree. You cannot dub it as threat or boycott."

The crux of the issue is a sharp cut in margins of drug wholesalers and retailers from 10 per cent
and 20 per cent on maximum retail price (MRP) to 8 per cent and 16 per cent on price to retailer
(PTR) for new drug formulations which came under price net in the revised pricing policy.
Negotiations between the two sides began late October after top government officials mediated
and asked the industry and trade channels to mutually resolve the tussle. It was decided that
industry and trade channels would arrive at mutually agreeable 'loss figure', after which either
margins for traders would be calibrated upwards for drugs under price net to compensate the
losses of distributors or that amount would be offset by the pharmacy companies jointly.

Four meetings have followed since then. In the last meeting, on November 21, drug
manufacturers citing a commissioned study by IMS Health proposed that net loss for trade
channels stood at Rs 490 crore (4 per cent of retail sales of new formulations under revised
policy), those present in meeting told ET. AIOCD had earlier said that trade channels losses
stood at Rs 2,600 crore.

"We wanted to sort it through a dialogue but didn't get any response from retailers on the
proposal," Shah said. Gupta contested this version, saying drug manufacturers had been
conveyed that the proposal wasn't accepted by its members.

AIOCD is seeking compensation for 6 per cent of retail sales of new formulations under revised
policy, which is about Rs 750 crore according to an ET calculation.

Times of India, New Delhi, ET Bureau | Dec 13, 2013

d. Competitors:

One man is not authorized to carry out a single business in the society. Anyone can start any
business at any place without any restriction. So, it is very common to have rivals and
competitors in the field of business. All the business firms are competing with each other for
improving the volume of sales; create brand value, market base, and demand for their own
products. But there are some organizations enjoyed the monopoly in some specific business like
power distribution, telephone service, and gas distribution in some particular areas. Business
houses have adopted different methods to get an edge over the market in comparison with their
competitors such as effective pricing of products, advertisement campaign, sponsoring events
etc. The main motive is to prove the superiority of their products over its counter parts. There is a
long list of companies competing with each other from years to gain a major market share. It can
be illustrated with the example of Pepsi and Coca-Cola for soft drinks, Surf and Aerial for
detergent powder, Hindustan Unilever Limited & ITC limited for FMCGs, Samsung & LG for
electronic items, Airtel and Reliance for telephone services etc. This type of competition is
basically treated as brand competition due to its nature. Besides this, firms deal in manufacturing
diversified range of products to fulfill the desire and comfort of different income group people in
the society. For example, TV Set having the identical features like LED, IPS technology made
available in the market at various price range depending on the size of the screen i.e. 18 inch, 32
inch, 42 inch etc.

It is not always about the same brand dealership, there are some of the business units focusing on
production of different products to attract the disposable income of the customers. For example,
Samsung and LG are the companies deal in manufacturing different types of TV, Air
Conditioner, Freeze, Washing Machines etc. Such Competition among these diverse products is
termed as desire competition as all these goods basically designed and prepared to cater the
desires of the limited income group people in the society. The post effect of liberalization and
introduction of globalization concept affects the Indian economic condition positively. After the
economic reforms, the business environment in the country took a significant change. At present,
the Indian corporate are not competing with in land counter parts but also competing with big
industrial giants of foreign countries like China, Japan, South Korea, USA etc. These healthy
competition results in better productivity in the Indian industries in the form of qualitative
products at reasonable prices to suit all income group people in the country.

e. Consumers:

‘Reach the Consumers’, this is the most important slogan used in different types of business
firms to increase its business volume and to make profit. Customers are regarded as an integral
force affecting business environment. The response or feedbacks of customers about any product
in the market have a direct impact on its sale. All the people may be a potential customer of any
business firm or its product depending on the demographic factors. They may belong to different
categories like individuals, households, industries, commercial institutions, government,
protection, media houses, women associations, consumer protection groups, local groups;
citizens associations, foreign citizens, international business firms etc. These groups of people
have an important bearing on environment of the firms. For example, customers of Air
conditioner manufacturing company may include individual households, corporate sectors,
business houses, educational institutions, government undertakings etc. In case the company fails
to meet the expectations of customers they may be wiped out from the market. Business firms
have to prepare the products by considering the income level of different customers in the
society. With the introduction of globalization and promotion of e-commerce, the customer
environment is turned in to a global scenario. Evolution and growth of e-commerce companies
like Amazon, Flip Kart, Snap deal, Myntra, E-bay etc. provides multiple options to the customers
for a single product creates the customer environment more effective and important for all the
business houses.

Macro Business Environment

Macro business environment refers to the external factors or forces create many opportunities for
the business and pose threats to the business firm. Such opportunities can be used for promoting
and developing the business activities and the threats can become a warning signal for the firm in
several issues. The macro-environment may have dual effect on business, favorable and adverse.
External forces of a macro environment are generally uncontrollable by nature in comparisons
with that of micro environment. The uncontrollable characteristics of macro environmental
factors forced a business firm to adjust or adapt the environment quickly to survive and grow.
For example, when an imported product became costly due to the fluctuation in foreign
exchange, then the problem can be solved through domestic manufacturing of the same. In other
words, the local business firms should prepare the same products as per the customer
specification to grab the opportunity.

The dimensions of the macro forces constituting the environment contain economic, political,
legal, technological and social factors which can influence the operation of any business
enterprise. Therefore, macro environmental factors are classified into various segments such as:

(1) Economic Environment

(2) Social Environment

(3) Technological Environment

(4) Political Environment

(5) Legal Environment

(6) Demographic Environment

(7) Natural Environment

(8) Global Environment

All these segments of macro environment are discussed below:

1. Economic Environment:

There are several economic factors that influence the operation of a business undertaking. These
factors are beyond the control of individual business organizations. These forces affecting the
economy consists of inflation rate, interest rates, income pattern of people, economic policies,
market conditions, international trade aspects, foreign exchange reserve situation, FDI policy,
EXIM policy etc. which may affect the smooth functioning of any business unit. It creates both
opportunities as well as the threats for the business firms. It helps the business to explore the
opportunities available with preventive measures.
The economy followed in a country may be of socialist, capitalist or mixed type. Each and every
business has to work within the purview of the state of the economy. It can be illustrated from
the example of our country. In the pre-legalization era, (since 1991) the economic system
followed in India was mixed economy. In that period, public sectors were treated as the most
prioritized sector for operating business activities and on the other side, the role of private sector
was greatly restricted. The operation of private sectors was restricted only up to the consumer
goods manufacturing. Such organizations were also governed and regulated by the Industrial
Licensing System and Monopolistic and Restrictive Trade Practices (MRTP) Commission.

The economic reform in the year 1991 changed the entire picture of the Indian business. During
the period of 1991-1996, many reforms were made like abolition of Industrial Licensing System,
introduction of the concept of Privatization, Liberalization, industrial policy, new economic
policy etc. As a result of which, import duties were decreased significantly, incentives were
provided to promote export business, conversation of Rupee was made into foreign currencies.
All the above facts witnessed the contribution of the economic reform made in 1991 towards the
turnaround of the Indian economic environment. From the above, it is clear that economic
environment of a country can affect the business in both the way: positive or negative.

Economic Factors affecting Business Environment

There are number of economic forces or factors affecting business environment discussed below:

i) Interest Rates

Any fluctuation in the rate of interest basically affects or influences the demand for various
goods and services. For example, reduction or decrease in the interest rate of banks on different
loans like personal loan, Home Loan, Car Loan may create huge demand for the same. As a
result of which, both banks and customer will get benefitted.

ii) Income Pattern of Consumers

The trend of income level of the customers can influence the operation of the business especially
sales volume. If the income level of consumer rises, the purchasing power of the customer
increases simultaneously that creates ultimate demand for different products and services in the
market. On the other side, if the income pattern shows a declining trend, this may adversely
affect the sales volume of a concern. For Example, the introduction of 7 th Pay Scale for the
central Government Employees in 2016 increases the purchasing power of a group of people
specifically government employees. This will work as a major force for the public and private
sectors to enhance the salary of their employees. This may tend to increase in the demand of
various products and services.

iii) Inflation Rate

Inflation Rate if became high can increase the cost of production of a business undertaking. This
situation can be treated as a risk factor for any business unit. It may put many constraints on the
firm. Therefore, it is required to control and regulate the economic environment of a country
properly to protect the business from its adverse effects.

Major Components of Economic Environment

The basic components of economic environment are given as follows:

a) The contribution of both public and private sector towards the economic condition of the
state
b) The growth rate of Gross National Product, Gross Domestic Product, National Income
and per Capita Income both at current and constant prices
c) Rates of saving and investment in the state economy
d) Trend and Progress of Agriculture and Industrial sector and their production
e) Pattern of distribution in Income and wealth of people in the state
f) Quantum of Export and Import of different products among countries
g) Flow of funds from foreign trades and investments
h) Improvement in the communication and transport facilities available in the country
i) Foreign Exchange Reserve and policies
j) Planned expenditure in both private and public sector
k) Expenditure made by government towards infrastructure development
l) Budgetary allocations for prioritized sectors
m) Fiscal policy of the government
n) Monetary policy of the Government
o) Nature of money supply in the economy
p) Inflation Rate exist in the economy
q) Volume of public debt including both internal and external
r) Balance of Payment Position (BoP) of the country

Box –1. 4

India’s reforms and economic momentum could unlock corporate growth: Standard
& Poor’s
India’s reform drive and economic momentum could give plenty of growth opportunities to
India’s top corporate, according to three articles that Standard & Poor’s Ratings Services
published as part of a special report, titled “India Credit Spotlight.”

But many corporate are waiting for the government to put policy into action before investing
further.

“The key to corporate growth will be whether the government can deliver on its reform promises.
If it does, we believe the top players will be ready to capitalize,” said Standard & Poor’s credit
analyst Mehul Sukkawala.

“In the meantime, we believe the Indian corporate sector will maintain its conservative stance
toward growth rather than throw caution to the wind.”
In the article titled “Myth Busted: India’s Top Corporate Are Hardly Regional Weaklings,”
Standard & Poor’s analyzed the operating, cash flow, and leverage data of India’s top 100
corporate, whose members are based mostly on market capitalization. The article suggests that
on these parameters, the Indian corporate sector is by no means a laggard to its Chinese and
ASEAN neighbors.
“The issues identified with Indian corporate over indebted and underperforming companies–are
concentrated in just a handful of Indian sectors, albeit critical ones: utilities and infrastructure,
and metals and mining,” said Mr. Sukkawala. “Fixing the well-known problems within these
sectors will predominantly require government decision-making and execution of regulations;
the companies can’t do it themselves.”

Overall, we believe the view of India as a global bright spot for investing appears fully justified
from a credit risk perspective. However, in the article titled “India’s Private Sector Companies
Adopt A Wait-And-See Approach To Capital Spending,” Standard & Poor’s forecasts that
capital spending will take 12 more months to start recovering.

“Companies are likely to consider new projects only after they can sense the operating
environment in India is improving at the ground level. They would also need to be confident that
current investments are likely to generate good cash flows before committing fresh investments.

This is positive from a credit assessment perspective over the next 12 months, especially for
companies with weak financial ratios and liquidity,” said Mr. Sukkawala.

The new Indian government has promised to tackle some of India’s longest-festering problems
that have kept the country’s enormous economic potential in check. The country’s favorable
economic conditions and a strong central government give it the flexibility to pursue reforms.
Initiatives include auctions of energy resources, such as coal, simplified tax regimes, and
accelerated approval procedures to speed up the ease of doing business.

In the article titled “India’s Reform Push Is An Encouraging Start For Corporate,” Standard &
Poor’s suggests the government will need to turn its plans into actions, coordinate better with
states, and remove bottlenecks across sectors to implement reforms. The government may have
to dilute some of its reforms because of differing views of opposition parties and the hesitancy of
some of its allies.

“Overall, we are optimistic that the impact of government reforms will be positive in the next
few years. The cumulative effect is likely to result in an improved economic and business
environment for India’s corporate,” said Standard & Poor’s credit analyst Abhishek Dangra
.
Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating
Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or
CreditWatch action). This commentary and its subject matter have not been the subject of Rating
Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating
or Rating Outlook.

Source: The Financial Express, Dt. March 25, 2015

2. Social Environment:

The growth and development of any business firm depend on the social and cultural environment
prevailing in a country. People belong to different communities are leaving in a society. All these
members of the society can affect or influence the business firm differently. It becomes essential
for all types of business firms to take due care of the cultural and social issues of a country. At
present, there are many companies or industrial sectors performing various activities opposing
the social and cultural ethics of the society. For Example, Advertisement of different products
designed for the youth customers are presented in a vulgar and unethical manner to get more
viewer ratings. These steps taken by some of the business units may hurt the sentiments of many
people and spread a wrong message among the young minds in the society.

The society has also a large influence on the business and its operation. Social environment
refers to the traditions, literacy rates, educational levels, values, customs, life style, demographic
distribution and some other allied features of the society in which the organization operates. All
these features of the social environment may affect the growth and development of a business.
Tradition represents customs or rituals celebrated by people connected with several communities
over generations such as Diwali, Holi, X mas, Guru Purnima, Id etc. All these customs brings
huge opportunities to different business houses to improve their sales. For example, Sweets and
Gift Products manufacturing business units can improve their volume of sales during this festive
time. At present, there are number of big e-commerce companies taking the advantages of these
festivals and customs by providing different offers and services.

If there are any changes happened to the social environment, it may increase or decrease the
demand of a product, supply of labour and financing options. The survival and growth of the
business largely depends on their adoptability factors. If the business fails to adopt the changes in
social environment, this may push the firm in to a loss making concern or get abolished from the
market. A system of proper co-ordination and cooperation among the business and society can
create a profitable business environment.

In the globalized environment, a new concept evolves termed as ‘social responsiveness’. This
concept of social responsiveness refers to the ability of a corporate firm to relate its operations
and policies to social environment in way that are mutually beneficial to the company and
society at large. In other words, social responsiveness is otherwise termed as social
responsibility. It is related with ethical values like what is good and bad, or right and wrong or
morality, obligation etc. All the business houses should get prepared to understand the social
environment that may affect the operation of the business directly or indirectly.

Major components of Social Environment

The attitude and behavior of consumers towards various innovations, standard of leaving of
people, buying preferences, income distribution etc. are regarded as an integral part of the socio-
cultural environment.

 Better life style of people

 Life expectancy rate
 Expectations from the worker of the business firm
 Infant mortality rate
 Growth in population
 Education system prevails in the society
 Rate of literacy
 Buying behavior of the consumers
 Composition of family
 Distribution of equal remuneration between men and women workers

3. Technological Environment:

Technology is regarded as one of the most important aspect of the socio-economic development
of a country. The type of technology used in the process of manufacturing of goods and services
is an important factor responsible for the success of a business firm. Technology contains
different type of machines and innovative techniques for completing the task perfectly.
Introduction of advanced technology increases the productivity of a business unit and decreases
unit cost of output.

Innovative technology can be adopted by a business concern provides a competitive edge over its
rival business houses. It helps the business organization to grow and survive in the competition
both at the local and international market. In the globalized environment, industrial sectors are
looking forward to cover a major market share at international level. The firms operates with
outdated technologies may get eliminated from the global competition. Therefore, technological
up gradation is essential for improving the competitive strength of business firms.

Technological environment refers to the external forces related with various innovations and
scientific techniques used for improving the productivity of a business. It contains new
methodologies, processes, techniques, methods, equipments utilized for the purpose of
converting the input materials in to finished products. It helps in improving the effectiveness and
efficiency of a business firm up to a large extent. Technological environment helps some of the
business organization to earn more by exploring opportunities and create threats to some other
enterprises. For example, introduction of digital watches in the market eliminated the traditional
watch business in the country. Introduction of Computers abolishes the Type Writer market
completely.

Technological environment affects the business firm up to a large extent. In foreign or

international trade, business enterprises have to adopt latest and advanced technology to sustain
and develop. If they fail to do so, they may throw out of the competition. In the protected market
environment, technological innovations and implementations are not made regularly; still
business units are able to survive for a long period without making technological changes.

For example, Car manufacturing Companies like Ambassador and Fiat Cars did not bring any
significant changes in their technology, designs of the cars for decades because of their
monopolistic competition. During that period, customers did not have more options and have to
purchase cars from the available models. For this reasons, Ambassador and Fiat cars survived for
decades in the protected environment.

With the entrance of Maruti Udyog Ltd. in the automobile sector in India, the monopoly of other
car manufacturers was at risk. Maruti Udyog Ltd. started using undated and advanced technology
to design different attractive models. Economic reform in the year 1991 opened the automobile
sector for the private players. Abolition of industrial licensing system and introduction of
liberalization in the Indian economy helped the new car manufacturing firms to enter the
automobile industry and produced different types of cars with the help of improved technology.
Technological environment are the major forces which can make any product obsolete and
adversely affects the success of any business undertaking. Therefore, technological advancement
and its implementation in the business world can be considered as the ‘need of the hour’.
Major Components of technological Environment

 Innovative scientific techniques or methods

 Technological up gradation
 New techniques and methods adopted for smooth functioning of business firms
 New improved method of production of goods

4. Political Environment:

Political decisions taken by the government can affect the operation of any business
organization. These may influence both public and private sector in the society. It is quite
evident from the introduction of Industrial Regulation Act 1951; Industrial Policy Resolution
1956, Foreign Exchange Regulation Act (FERA), Monopolistic and Restrictive Practices
(MRTP) Act. These acts were passed to control and regulate the business activities of the private
sector. In the pre-liberalization period, foreign direct investment was restricted to limited
industrial sectors. The economic reform in the year 1991 brought a significant change in the
political thoughts and philosophy of the country. These reforms were basically intended to
support a free market economic condition in the country. During that period, socialism concept
of economy got collapsed in various developed countries like Soviet Russia, China and East
European countries. These issues worked as a force that changed the political school of thoughts
about the role of industrial sectors (both public & private) in the industrial development of the
country.

Political environment involves several forces such as political stability, harmony, vision of the
party in power and its representatives towards the business. All these factors may affect the
business firms directly or indirectly. Political stability and clear majority may be helpful in
building the confidence of the industrial sectors and vice versa. This situation may go in favor of
some industries and creates threats for others. In the last few decades, government took many
initiatives to promote private sector in India such as abolition of industrial licensing system,
foreign direct investment policy, monetary policies, industrial policies and other relevant acts. It
is clear from the above that with the change in political philosophy and ideologies, business envi-
ronment in the country can greatly influenced.

Major elements of Political Environment

The attitude and planning of the government towards development of the industrial sectors in the
country

 Political Intervention and pressure from the Ruling Party

 Political parties and their policies, thoughts, visions
 Nature or characteristics of ruling party and government
 Constitution of the country
 International relations of the country with foreign countries
 Profile of Political leadership

Box 1.5

Impact of Political Environment on Business

'Biz environment to be tough as govt wants to make drugs affordable'

Aurobindo Pharma has said the business environment is expected to remain challenging
for the next one or two years as governments intervene and regulate healthcare costs to
make it affordable to people. It also listed slowdown in global markets and currency
fluctuations as problem areas, but said the company will get ahead despite challenges.
Aurobindo is the second Pharma company from the city after Dr Reddy's Laboratories,
 which has expressed apprehensions on regulations of healthcare cost in developed
economies.

"I believe the business environment will continue to remain challenging for a year or two.
As economies in the advanced markets manage their pressure points and governments
intervene and regulate healthcare costs to make it affordable for their people, pricing will
be even more competitive," Aurobindo former Chairman Ramprasad Reddy said in his
message in the annual report of 2011-12.

He said, however, that despite the challenging environment the drug maker is expected to
do well in future. "We are witnessing a slowdown across Europe and currencies are
expected to remain volatile in relation to the dollar. Having said that, we at Aurobindo
believe in getting ahead despite challenges," Reddy added. He said raw material costs
were fairly correlated to the hardening global petroleum prices, impacting cost of
production and putting pressure on margins. India's second largest drug maker Dr
Reddy's Laboratory also expressed similar views recently in a filing with the Securities
and Exchange Commission of USA. DRL had said it may see some pressure on revenues
due to the cost cutting measures and mandatory discounts being followed by some
countries including India. The DRL filing said, "The existence of government-imposed
price controls and mandatory discounts and rebates can limit the revenues we earn from
our products.

"We expect these efforts to continue in the year ended March 31, 2013 as healthcare
players around the globe-in particular government-controlled health authorities, insurance
companies and managed care organizations step up initiatives to reduce the overall cost
of healthcare." Aurobindo said, meanwhile, that the current dollar-rupee situation is
impacting its financials.

Though a strong dollar adds to the income and cash, it also creates the need to provide for
a larger quantum of repayment of the company's debt borrowed in foreign currencies.

"This conundrum needs to be addressed. We shall aggressively drive up the revenues,

pare costs, enhance productivity, improve the business mix, lower the gearing and take
several other actions to improve the profit after tax," said Nityananda Reddy, Vice
Chairman, of Aurobindo in the annual report.

The company incurred Rs 123.5 crore net loss (consolidated) in the last financial year. At
the close of FY'12, the rupee had depreciated by 14.1 percent and this resulted in a forex
loss of Rs 248 crore as the rupee's weakness impacted foreign currency denominated
borrowings of Aurobindo.

www.Firstpost.com, Aug 8, 2012

5. Legal Environment
Legal environment contains number of rules and regulations passed in the floor of parliament
within which the business undertakings are to perform. All the business firms are to follow all
these rules and regulations framed by the government to grow and sustain in the society. There
are several authorities like government, court, commissions; committees constituted for some
specific purpose can make different laws. It becomes essential for the business firms to obey
these rules and operate accordingly. Violence or ignorance of these rules and regulations may
create legal issues for the business units. It is always important for the business houses to get up
dated with the laws related to business and other rules regulations framed from time to time. In
our country, there are different acts framed have some direct influence on the business concerns
such as Indian Contract Act 1872, Indian Companies Act 2013, The Negotiable Instruments Act,
1881, The sale of goods Act, 1930, The Partnership Act, 1932, The Limited Liability Partnership
Act, 2008, Consumer Protection Act, 1986, Industrial Disputes Act, 1947, The Information
Technology Act, 2000 etc. It is mandatory for the firms to work as per the rules without any
deviations. For example, it becomes mandatory or compulsory for the Tobaco and Alcohol
companies to mention the statutory warning ‘Smoking /Drinking is injurious to health’ on the
cover of the product or during the media advertisement.

Major parts of Legal Environment

 Number of laws and amendments passed through various legislations by the government
 Administrative Orders issued by various appellate government authorities
 Judgment given by the Courts
 Reports submitted by various commissions or committees and their recommendations

6. Demographic Environment:

Demographic environment refers to the population size, life expectancy rate of the people, age
and ethnic composition, rural-urban distribution on the basis of population, income pattern,
population density, family size, the technological skills and educational levels of labour force,
social class of people etc. All these forces can directly influence the operation and development
of business units. The demographic environment may differ from country to country. This
environment may differ from place to place in the same country. Demographic environment
changes at a quick succession with the passage of time. It affects the supply and demand pattern
in the society for different products. It forces the business units to improve the production and
the quality to cater the requirement of the customers. As a result, business organizations are
outsourcing skilled and unskilled workers from several places. The efficiency, skills and quality
of the labours helps the firm to achieve its desired goals. But the concerns with labour force in a
country are its changing nature. The business firms have to take due care of their employees. In
the form of child care services, labour welfare programmes etc. In a demographic environment,
the population size and its rural-urban distribution ratio helps in ascertaining the demand for
different products of industrial sectors. For example, increase in the agricultural income of the
farmers due to better production of crops may result in increase in demand for industrial
products. Demographic factors of a country may directly or indirectly affect the business and its
smooth functioning. Therefore, it is highly essential for any business firm to prepare business
plans and policies after considering various demographic factors.

Major components of Demographic Environment

 Population Size
 Age Structure
 Gender of People
 Income Pattern & Trend
 Family Size
 Family Life Cycle
 Occupation of people
 Education and Literacy
 Standard of Leaving
 Social Class
 Religion
 Nationality
 Migration and Ethnic Issues

7. Natural Environment:

The basic activities undertaken in a manufacturing organization are conversion of raw materials
into finished products. Input raw materials are regarded as the most important part in any
manufacturing process. Absence of materials may cause a complete stop in the production of any
firm. Natural environment is considered as the ultimate source of many inputs such as raw
materials, energy required for production. This environment consists of various geographical and
ecological factors like minerals and oil reserves, water and forest resources, weather and climatic
conditions, port facilities etc. All these forces of natural environment are of extreme importance
for undertaking various business related activities.

For example, the availability of minerals such as iron, coal etc. in a particular area influence the
location of certain industries in that region. Therefore, many industries established their plants in
several areas, where the chances of obtaining raw material are the most. For example, Industries
manufacturing Steel prefers to set up their plant near coal mines to reduce the transportation cost
of coal from the mines to the plant.

Apart from the above, environmental factors like weather and climatic conditions also affect the
location of some business firms. For example, in India cotton textiles industries are basically
situated in various places like Mumbai, Chennai and Kolkata where weather and climatic
conditions are conducive to the production of cotton textiles.

Natural environment may have a direct impact on the demand pattern for goods or products. For
example, during summer, regions where the temperature is high, there is huge demand for
dessert coolers, air conditioners. These factors motivate and enable business organizations to set
up industrial units producing these products. The same situation may create demand for some
products like clothes, building materials etc.

Natural environment facilitates growth and development of business in a society. but this is not
always enough to have a favorable environment providing natural ingredients required for
production activates. It is very much important to utilize the resources available effectively. It is
quite clear from the example of our country India. India is regarded as a country of possibilities
worldwide due to its natural resources. But all these resources are not duly utilized because of
many reasons. So, the availability of natural resources alone cannot solve the problems. It
requires ability and mindset of the government, people and industrial sectors to utilize these
resources effectively to determine the growth of business and the economy.

8. Global Environment

Global or international environment refers to various forces carrying due importance in the
business activities such as principles and agreements made as per the rules and principles of
World Trade Organization (WTO), World bank, International Monetary Fund (IMF), several
international conventions, treaties, declarations, protocols etc. All these factors may direct affect
the operation of any business. For example, if there are fluctuations in the crude oil prices in the
international market, it may directly influence the business firms belonging to different countries.
The principles laid down by WTO are to be accepted by the countries as it contains have wide
reaching effects and consequences. It is quite evident from the introduction of liberalization
process in import and investment sectors by WTO that affects the competitive environment in
India.
Besides, economic condition prevailing in trading countries may affect the business operations
significantly. For example, economic revision or black out situation of a country largely affects
its export and import business. There are some other factors like international political situation
can affect the business such as war between nations, strained political relations between
countries etc. Apart from these, technological advancement and a better means of
communication may lead to substantial growth in the foreign trade by influencing attitudes,
preferences, tastes, cultures, customs and ethical values of people belong to different countries.
Introduction of privatization, liberalization and globalization in the economy in India booms the
international trading activities up to a large extent. As a result the world is considered as a single
market operated under a single roof.

Demonetization
The word “Demonetization” pressed the panic button among the people of India on 08th
November 2016 with its official declaration. This word becomes popular with a very limited
period of time. Curiosity among the people increased significantly to know the meaning of this
word demonetization. There are different opinions provided by different experts about
demonetization. In a nutshell, demonetization is defined as an economic policy framed by the
government to cancel the legal tender status of a currency unit in circulation. It may come in to
effect as a precautionary measure to maintain balance in the economic conditions of the country.
There are countries used this concept of demonetization as a measure of controlling inflation and
to boost the economic conditions.

Demonetization in India
Demonetization remains in news in our country since last two years. But in reality, this is not the
first time, demonetization policy introduced by the Government of India. It was first time
introduced in the year 1946 in the form of cancellation of legal tender form of then issued
currency notes of Rs 1,000 and Rs 10,000 denomination by Reserve Bank of India. In the year
1954, government had introduced higher demonetization bank notes of Rs 1000, Rs 5000 and Rs
10000 in a new look. In the year 1978, during the Morarji Desai government, all these notes
issued in 1954 were demonetized again to handle the issues of black money economy. For this
purpose, a special act was framed in the same year termed as “The High Demonetization Bank
Note (Demonetization) Act, 1978.” As per the Act, all the ‘high denomination bank notes’
ceased to be legal tender after January 16,1978. People were asked to exchange the old notes
possessed within a week’s time, on or before 24th January, 2016. On 08th November, 2016, this
policy again comes in to picture with the declaration of demonetization of Rs 500 and Rs 1,000
old currency notes from immediate effect. By that time, the total currency in circulation was
around 17.77 Lakh crore (US$ 260 billion) as per the report of Reserve Bank of India. The main
objective of this step taken by the government was to restrict the counterfeiting of notes, black
money and to eliminate the corruption from the country. People were provided the option to
exchange the old currency with new one from banks, post offices or deposit the same in their
respective accounts on or before 31st December, 2016. Later, they were allowed to exchange the
same at the counters of RBI regional branches on or before 31 st March, 2017. As a replacement
of these notes, Government of India decided to issue new Two thousand rupee notes and notes of
Five hundred rupees which from 10th November 2016. All other notes of different
denominations like one hundred, fifty, twenty, ten, five, two and one rupee remain unaffected
and enjoyed the status of legal tender money.

Objectives of Demonetization in India

Following are the main objectives of demonetization policy adopted by the Government of India
in the year 2016.

 To control circulation of fake currency.

 To restrict and reduce the supply line money, arms and immunizations to terror funding.
 To reach the goal of cashless economy in the country.
 To reduce or eliminate tax evasion by the tax payers.
 To eliminate the threats of black money and market.
 To control illegal and unethical business activities like black marketing, food
adulteration, marketing of spurious goods, human trafficking, smuggling of gold and
drugs.
Anticipated Effects of Demonetization in India
Following are the major effects of the policy of demonetization anticipated by the Government
of India in the year 2016:

 It will have a substantial impact on parallel economy.

 It will affect the flow of money supply in the economy.
 It will eliminate counterfeiting of currency notes up to a considerable
 It will help in curbing the illegal business activities in the country.
 It may decrease in the demand for the consumer goods due to short term cash crunch.
 Price level of products in the market may show a down fall due to the short fall in
demand pattern.
 It may affect the GDP rate due to downsize demand pattern.
 It may lead to increase in digital payment system, payment by cards at POS and online
business transactions.

Business Environment in developed and developing countries

There is a sharp difference can be identified in between the business environment prevails in
developed and developing countries. The basic difference in between are given as follows:

Research and Innovation

There are number of research and experimentation undertaken in a business firm. These are
considered as an important aspect affecting business environment. In case of developed
countries, lot more emphasis has given on research and innovation. There is a separate
department has established for the said purpose. Most of the business firms of developed
countries invested sufficient funds for encouraging quality research in several fields to develop
innovative methods. On the contrary, the amount of funds invested in research in case of
developing countries is comparatively less than that of developed economies.

Authoritative Control of the Government

Government plays the role of ultimate authority in developing countries over various aspects
related to business such as financing, licensing, foreign direct investments etc. In these countries,
most of the business firms are regulated and controlled by the government as the ultimate
authority. Developed countries adopted the system of liberalization and not imposing restriction
on the business firms.

Advertising & Sales Promotion

In this world of globalization, it becomes inherent for any business to promote its products in the
market through various means of advertisement. But this system of endorsing product or services
is restricted in some of the developing countries. In these regions, media advertisements are
banned as per the government decisions. In case of developed countries, such restrictions are not
imposed on media advertisement or campaign.

Availability of Workers

Workers are the back bone of any organization. All the business activities and operations are
performed with the help of workers. It is important to maintain a proper labour force in the
organization to ensure smooth functioning and operation. For any types of business, scarcity of
labour could be a major concern. In developing countries, labour or workers are easily available.
But when it comes to the issue of skilled and efficient worker, developing countries are falls
back in comparison with developed countries. Lack of adequate funds may be a reason for such
problem in developing countries. On the other side, developed regions or nations have the option
to get adequate number of skilled and efficient workers in the business firms.

Changes in the monetary position

The monetary fluctuations in case of developing countries are more than that of developed
countries. In case of less developed or developing nations, government has to take various
control measures to regulate and maintain the monetary fluctuations. In developed economy,
money fluctuations are less.

Government Intervention

Intervention in the operation and functioning of business organization are initiated by the
respective government or ruling party of the developing nation. In case of developed countries,
government interferences or intervention in business issues are relatively less.

Better infrastructure and Communication

An effective and successful business largely depends on a proper transportation and

communication system. Apart from these, better infrastructure facility provides an edge to the
business houses over its counter parts. In developed countries, all the facilities are easily
available with advanced and modern feature. This is missing in developing countries due to
several constraints and requires huge improvement.

Cultural Differences

There are different cultures prevail in a developing country. It is a daunting task for any business
undertaking to cater the requirements of people related to different culture at a time. There are
some other factors like difference in taste, choice, preferences, language etc among people exist
in developing countries like India. On the other side, most of the developed countries have
homogeneous culture and language.

Effective management techniques

In developed countries, the management techniques adopted are scientific and flexible. These
management systems enjoy greater freedom, collective bargaining option and better industrial
relations. But in the developing countries like India, management techniques or methods are
labour intensive and controlled by the government (State or Central).

Industrial Disputes

Industrial disputes are relatively less in case of developed countries as they have always
maintained healthy business or trade relations with other countries. In case of any type of conflict
arises, it can be sorted put at a single international forum to resolve the issue quickly. On the
other side, developing countries suffers due to industrial or trade conflicts. These countries may
not have adopted the liberalization process effectively.

Impact of Government Policy on Business

(With special reference to Liberalization, Privatization and Globalization (LPG) in India)

Indian Economy has witnessed a drastic change in the year 1991 with the introduction of New
Economic Policy, 1991. It brought number of changes in the economic conditions of the country
by controlling the foreign exchange crisis, government deficit, price level fluctuations. The basic
objective of the new economic policy was to protect the industrial sectors from the rigid
licensing system. It facilitates liberalization, privatization and globalization.

Liberalization

Liberalization is an economic reform adopted to eliminate strict and rigid licensing system
followed in the industrial sector of the country. It comes in to effect in the year 1991. It leads in
removing old and outdated rules and regulations related to the industries in India. It formulated
easy and simple procedure to encourage export and import. The primary target of liberalization
was to increase the growth rate of industrial sector in the economy.

The process of Liberalization involves the following:

i) Eliminating or abolishing Licensing system

ii) No restrictions on development, expansion or contraction of business
iii) Providing liberty for price fixation
iv) Encouraging export and import
v) Attracting Foreign Investment in to country
vi) Ensuring free flow in production and distribution of goods and services
vii) Elimination of unwanted rules and regulations in the economy for developing free trade.

Privatization
Privatization is regarded as an economic reform used to improve the role of private sector and
reduce the role of public sector. There are number of steps taken for execution of the policy of
privatization in the economy discussed below:

(a) Diverting the investment from the public sector to the private sector otherwise termed as
disinvestment strategy
(b) Formation and establishment of a special institution known as Board of Industrial and
Financial Reconstruction (BIFR) for revival of sick units in public sector undertakings
from losses.
(c) Decreasing the stake holding percentage of Government from 51% in public sector
enterprises in the form of transfer of ownership and management to the private sector.

Globalization

The concept of globalization is now getting popular and familiar all over the universe in the field
of trade and industry. It refers the world is trading and transacting under a single roof. In simple
words, globalization refers to elimination or reduction of restrictions on export and import
transactions among countries all over the world. It helps a country to procure its desired goods
and services from the other country. It encourages foreign direct investment by abolishing the
rigid traditional system of licensing, international trade policy, tariff etc. Globalization comes in
to effect by taking the following steps by the government:

(a) Government eliminated or abolished number of restrictions imposed on international

trading activities.
(b) A new Act termed as Foreign Exchange Regulation Act (FERA) was introduced as a
replacement of Foreign Exchange Management Act in order to facilitate international
trade.
(c) Restructuring prevailing Tariff
(d) Elimination of Export Duty
(e) Decreasing of import duty

Impact of changes in Economic Policy formulated by Government on Business

Economic Policy formulated by the Government of India in the country had a direct influence or
impact on the business. The most common impact or influences on business are:

1. Increasing level of competition

At present, the levels of competition among business organizations are getting higher with the
introduction of liberalization and globalization concept. It leads to a situation where domestic
companies are to compete with the new entrants in the market along with multi-national
corporations, e-commerce companies, start ups etc. This increased level of competition affects
the quality and price of the product and provides number of options to the customers.
2. Affects Consumer behaviour

As stated in the above point, it is evident that increased level of competition provides lot more
options in the product line to the consumers. It encourages the companies to manufacture variety
of products to meet the consumer needs. There are different schemes introduced by these
companies to attract the customers.

3. Changing Technological Environment

The post liberalization era has witnessed rapid technological changes and its innovation from
time to time. It works as an essential tool for the business organizations to improve the quality
of their products and services. At present, companies are manufacturing high quality products by
using the most advanced and updated technologies for production and operation.

4. Requirement for Change

It is highly essential for the business firms to bring change in to their activities due to the
dynamic nature of business environment. Business firms have to adopt flexible approach with
regards to their plans and policies to cope up with the changing requirement of the market.

5. Human Resources Development

Human resources is an important resources each organization looking for. It is essential to have a
team of skilled, efficient, talented and qualified personnel in the enterprise to accomplish the
organizational objectives and to develop productivity. It becomes a common practice to spend a
huge amount in the process of recruitment, selection, training and development of the employees
at work.

6. Market Orientation

It is clearly evident from the present situation that market is customer driven or oriented. In order
to acquire a major share of the market companies have to study the market initially and then
manufacture goods as per the market demand. Hence, business enterprises are formulating plans
on the basis of market research, requirement of the consumers and as per the demand pattern.

7. Reduction in Government funding to public sector

With the introduction of new economic policy in the year 1991, government reduces and
curtailed its investment in the public sector up to certain extent. It develops the need for
arrangement of adequate level of finance to survive in the cut throat competitive environment for
these public sectors in the country. It helps the companies to get self sustained rather depending
exclusively on the funding from government through budget provisions. It all comes in to effect
as a result of the three major economic reforms i.e. Liberalization, Privatization and
Globalization.
Summary

Meaning

Business environment refers to several factors including both external and internal affecting
smooth functioning of business and creating threats and opportunities for the firm.

Characteristics of Business Environment

a) External Forces
b) Specific and General Forces
c) Inter-relation between business and environment
d) Dynamic Nature
e) Uncertainty
f) Difficulties in determining environmental effects
g) Relative Concept

Importance of Business Environment

a) Help to understand internal Environment

b) Helps in identifying opportunities
c) Enables the firm to identify threats
d) Helpful in optimum utilization of resources
e) Helpful in adopting the environmental changes
f) Helpful in making plans and formulate policy
g) Helps in developing & improving the performance
h) Helps in image building

Components of Business Environment

Business Environment can be classified into two broad categories:

1. Internal Environment and

2. External Environment

Dimensions

Business Environment is divided into following categories:

a) Economic Environment
b) Social Environment
c) Political Environment
d) Legal Environment
e) Technological Environment
f) Demographic Environment
 g) Natural Environment
h) Global Environment

The New Economic Policy 1991 – Its Features

a) Liberalization
b) Privatization
c) Globalization

Impact of changes in Economic Policy on Business

1. Increasing level of competition

2. Affects Consumer behaviour
3. Changing Technological Environment
4. Requirement for Change
5. Human Resources Development
6. Market Orientation
7. Reduction in Government funding to public sector

Objective Type Questions/MCQs

Multiple Choice Questions (MCQs)
1. Which of the following does not characterize the business environment? [NCERT]
(a) Uncertainty
 (b) Employees
(c) Relativity
(d) Complexity
2. Which of the following best indicates the importance of business environment?
[NCERT]
(a) Identification
(b) Improvement in performance
(c) Copying with rapid changes
(d) All of them
3. Which of the following is an example of social environment? [NCERT]
(a) Money Supply in the economy
(b) Consumer Protection Act
(c) The Consumption of the country
(d) Composition of Family
4. Liberalization means [NCERT]
(a) Integration among economics
(b) Reduced government controls and restrictions
(c) Policy of planned disinvestment
(d) None of them
5. Which of the following does not explain the impact of Government Policy changes on
business and industry? [NCERT]
(a) More demanding customers
(b) Increasing competition
(c) Change in agricultural
(d) market Orientation
6. Business environment consists several factors affecting the business
(a) Internal Management
(b) Economic Conditions
(c) Government Policy
(d) All of the above
7. Business environment consists of several external forces that directly affecting or
influencing the operation of the business. Here, external forces refer to
(a) Economic Conditions
(b) Internal Management System
(c) Financing Propositions
(d) None of the above
8. Business environment is a
(a) Dynamic Concept
(b) Relative Concept
(c) Rational Concept
 (d) Product Oriented Concept
9. Study and analysis of business environment helps in
(a) Understanding internal business environment
(b) Identifying possible opportunities
(c) Helps in Image Building
(d) All of the above
10. People who participate in the process of exchange of goods or services as the recipient
party for a consideration of money or money’s worth is known as
(a) Managers
(b) Entrepreneurs
(c) Merchants
(d) Customer
11. The group of persons play the role of a bridge in between customer and producer
(a) Wholesaler
(b) Retailer
(c) Marketing Intermediaries
(d) Consumers
12. The economic reform had taken place in India in the year
(a) 1981
(b) 1991
(c) 2001
(d) 1989
13. The basic components of economic environment are
(a) Foreign Exchange Reserve and policies
(b) Planned expenditure in both private and public sector
(c) Balance of Payment Position (BoP) of the country
(d) All of the above points
14. Name the type of environment which is based on traditions, literacy rates, educational
levels, values, customs, life style and demographic distribution etc. prevailing in a
country in which the business firm operates.
(a) Economic Environment
(b) Political Environment
(c) Social Environment
(d) Legal Environment
15. Name the type of environment which refers to the external forces related with various
innovations and scientific techniques used for improving the productivity of a business.
(a) Technological Environment
(b) Political Environment
(c) Social Environment
(d) Economic Environment
16. An economic reform adopted to eliminate strict and rigid licensing system followed in
the industrial sector of the country is termed as
(a) Privatization
(b) Modernization
(c) Globalization
(d) Liberalization
17. The process of Liberalization involves
(a) Eliminating or abolishing Licensing system
(b) No restrictions on development, expansion or contraction of business
(c) Providing liberty for price fixation
(d) All of the above
18. An economic reform used to improve the role of private sector and reduce the role of
public sector is termed as
(a) Privatization
(b) Modernization
(c) Globalization
(d) Liberalization
19. Business Environment is broadly classified in to how many parts?
(a) Three
(b) Two
(c) Four
(d) Five
20. Name the type of business environment which contains all those component parts
related with government affairs, political issues and decisions taken by the ruling party.
(a) Technological Environment
(b) Political Environment
(c) Social Environment
(d) Economic Environment
21. An analysis of the external environment helps a business enterprise to identify
(a) Strengths and opportunities
(b) Strengths and Weaknesses
(c) Threats
(d) Opportunities and Threats
22. External Environment of business is
(a) Physical
(b) Demographical
(c) Political
(d) All of these
23. Which of the following is not an essential feature of social environment?
(a) Better life style of people
 (b) Life expectancy rate
(c) Inflation Rate
(d) Infant mortality rate
24. FEMA represents
(a) Foreign Earning Management Act
(b) Foreign Exchange Management Act
(c) Foreign Exchange Mentoring Authority
(d) Foreign Export Management Act
25. Which of the following is not an essential feature of Economic environment?
(a) Internist Rates
(b) Inflation Rates
(c) Infant mortality rate
(d) Foreign Exchange Rates

26. Match the following:

List – I
a. Economic Environment
b. Social Environment
c. Political Environment
d. Legal Environment
List – II
1. Customs
2. Foreign Exchange Management Act
3. Industrial Disputes Act
4. Foreign Exchange Reserve and policies

Code:

(a) (b) (c) (d)

(A) 4 1 3 2

(B) 2 4 3 1

(C) 4 1 2 3

(D) 4 3 2 1

27. Match the following:

List – I
a. Business Environment
b. Internal Environment
c. Value System
d. Micro Environment
List – II
1. Internal Forces
2. External Forces
3. Specific Forces
4. Motivational Force

Code:
 (a) (b) (c) (d)

(A) 2 3 4 1

(B) 2 1 4 3

(C) 4 1 2 3

(D) 3 4 2 1

28. Match the following:

List – I List – II
a. Liberalization 1. Facilitates liberalization, privatization and globalization
b. Privatization 2. Encourages foreign direct investment
c. Globalization 3. Eliminate strict and rigid licensing system
d. New Economic Policy 4. Diverting investment from public sectors to private sectors

Code:

(a) (b) (c) (d)

(A) 2 3 4 1

(B) 3 4 2 1

(C) 3 1 4 2

(D) 4 3 2 1

Answers: 1. (b) Employees, 2. (d) All of them, 3. (d) Composition of Family, 4. (b) Reduced
government controls and restrictions, 5. (c) Change in agricultural prices, 6. (d) All of the
above, 7. (a) Economic Conditions, 8. (b) Relative Concept, 9. (d) All of the above, 10. (d)
Customers, 11. (c) Marketing Intermediaries, 12. (b) 1991, 13. (d) All of the above points,
14. (c) Social Environment, 15. (a) Technological Environment, 16. (d) Liberalization, 17.
(d) All of the above, 18. (a) Privatization, 19. (b) Two, 20. (b) Political Environment, 21. (d)
Opportunities and Threats, 22. (d) All of these, 23. (c) Inflation Rate, 24. (a) Foreign
Exchange Management Act, 25. (c) Infant mortality rate, 26. (c), 27. (a), 28. (b)]

State whether the following statements are TRUE or FALSE

1. The word ‘Business’ basically represents the surroundings, external objects, influences
or circumstances under which a business unit performs and under goes several economic
activities.
 2. Business management refers to several factors including both external and internal
affecting smooth functioning of business and creating threats and opportunities for the
firm.
3. Business environment prevails in different countries are different, hence regarded as a
relative concept.
4. Code of Conduct refers to the rules, regulations, code of conduct, ethics and procedure
followed to attain its organizational objectives.
5. Internal environment is broadly classified in to two parts i.e. Micro Business
Environment and Macro Business Environment
6. Macro environment consists of different players directly influencing the operations of
business like suppliers, customers, competitors, marketing intermediaries, financiers and
the general public.
7. The business has got two dimensional relationships with environment.
8. The business environment consists of internal, operational and general environment.
9. Economic, legal and technological situations constitute business environment.
10. Social factors include market situations, income levels, income tax rates etc.
11. Congenial business environment constitutes changes of rate of interest, source of capital etc.
12. Importance of business environment constitutes changes of rate of interest, source of capital
etc.
13. Environmental scanning provides broad based learning to its executives.
14. Consumers, debtors and creditors can affect business environment.
15. Knowledge of environmental changes provides intellectual stimulation to management.

Answer:

[1. False, 2. False, 3. True, 4. False, 5. False, 6. False, 7. True, 8. True, 9. True, 10. False, 11.
True, 12. False, 13. True, 14. True, 15. False]

Fill in the blanks

1. Business environment is a …………concept.

2. Business environment provides the …………framework within which the business firms a
micro unit.
3. Knowledge of environmental changes is very helpful in the formulation and …………….of
business plans.
4. ……………. is the process by which organizations monitor their relevant environment to
identify opportunities and threats.
5. The economic environment consists of the factors and forces concerning means of production
and distribution of ………….
6. External environment is influenced by …………factors.
7. Internal environment is under the control of …………
8. New industrial policy was announced in ………..
9. Liberalization is related to free economy from ……….
10. The business environment consists of internal, operational and …………. .
11. The business has got ……… dimensional relationship with the environment.
12. The competent and successful management must be capable of …….. to the environment.
13. Environment ……….. enterprises all the first to avail the existing and emerging
opportunities.
14. ………. of environmental changes sensitive’s of the management.
15. Environment understanding by the management ………. of the company in the minds of the
people.
16. ………. constitutes importance of business environment.
17. Congenial environment provides ……… to the country.
18. The major business environment is categorized as …………
19. Factors affecting economic dimension are ………….
20. ………… affecting the factors of social environment of business.
21. …………… consists of political environment.
22. ……… environment consists of legislation passed by central and state Government.
23. Economic, social and legal factors are the …….. of the business environment.
24. …….. and ………..technological changes take place due to globalization.
25. ………….. is regarded as an economic reform used to improve the role of private sector and
reduce the role of public sector.

Answers:
[1. Relative, 2. Macro, 3. Implementation, 4. Environmental scanning, 5. Wealth, 6.
External, 7. Enterprise, 8. 1991, 9. Licensing system, 10. External and general, 11. Two, 12.
Adopting, 13. Friendly, 14. Knowledge 15. Better image, 16. Activating management, 17.
Political stability, 18. Internal and operational, 19. Market situations, 20. Tradition and
beliefs, 21. Government in power, 22. Legal environment, 23. Components and dimensions,
24. Fast and quick, 25. Privatization]

Answer the following Questions in One Word

1. The overall surrounding under which an enterprise operates is known as –
2. The components of business environment which regulates various resources, factor of
production generation and distribution of income and wealth is known as –
3. The part of environment consists of all the social and cultural values within which firm
operates is –
4. The type of environment which affects various government affairs is known as –
5. The process which implies the induction of private ownership in a publicity owned enterprise
is called –
6. The technique or process adopted for freeing the economy from licence system and other
regulations is known as –
7. The method of integrating the economy of a country with the world economy is known as –
8. Environment consisting philosophy of the management, organizational objectives, structure,
work force, technology, work process is
9. The type of environment includes economic conditions social factors, political set up,
financial institutions suppliers, customers, competitors, government policies influence the
enterprises from outside is known as
10. The policy announced by the Government of India in July, 1991 for the industrial regulation
is
11. Name the concept which encompasses the climate or set of conditions, economic, social,
political or institutional in which business operations are conducted.
12. Under which environment, the taste and preferences of the consumers does change?
13. Name any two economic forces or factors affecting business environment.
14. What is the full form of LPG?
15. Name the economic reform measure integrates the economy of the country with the outside
world.
16. Name the factors or process in which business enterprises in the country are affected by some
of the political decisions taken by the government.
17. Governor of Reserve Bank of India announced to reduce the repo rate. This is related to
which dimension of business environment.
18. Name the economic reform adopted to eliminate strict and rigid licensing system followed in
the industrial sector of the country.

Answer:

[1.Business Environment, 2. Economic environment, 3. Social environment, 4. Political

environment, 5. Privatization, 6. Liberalization, 7. Globalization, 8. Internal Environment,
9. External environment, 10. New Industrial Policy, 11. Business Environment, 12. Social
Environment, 13. Interest Rate and Income Pattern of Consumers, 14. Liberalization,
Privatization and Globalization, 15. Globalization, 16. Political Environment, 17. Economic
Environment, 18. Liberalization]

Answer the questions in One Sentence each

1. Define the concept of Business Environment.

Business environment contains multiple factors affecting business such as strength, weakness,
internal management, orientation of the enterprise, government policies, rules, regulations,
economic conditions, socio-cultural factors, legal issues, demographic factors, natural issues,
cross-border activities etc.

2. What do you mean by Social Environment?

Socio-cultural environment is very comprehensive because it may include the social factors
within which an organization operate which includes people’s attitude to work and health, role of
family, marriage, religion and education, ethical issues, social responsibility of business etc.

3. Define the concept of Economic Environment.

Economic environment includes all those forces which regulate resources, factors of production,
generation and distribution of income and wealth in a social set up.

4. What is Natural Environment?

Natural Environment consists of both geographical and ecological factors which are relevant to
the business containing natural resources endowment, weather and climate conditions,
topographical conditions, location aspects, port facilities etc.

5. Define the concept of Demographic Environment.

Demographic environment refers to all those factors includes size growth rate, age composition
etc of the population, family size, economic stratification of population, educational level and
caste religion etc. affecting the demand for goods and services.

6. What is meant by Liberalization?

Liberalization is an economic reform adopted to eliminate strict and rigid licensing system
followed in the industrial sector of the country.

7. Define the concept of Privatization.

Privatization is regarded as an economic reform used to improve the role of private sector and
reduce the role of public sector.

8. Define the concept of Globalization.

Globalization refers to elimination or reduction of restrictions on export and import transactions

among countries all over the world and encourages foreign direct investment by abolishing the
rigid traditional system of licensing, international trade policy, tariff etc.

Guidelines to NCERT Questions

Multiple Choice Questions

2. Which of the following does not characterize the business environment?

 (a) Uncertainty
(b) Employees
(c) Relativity
(d) Complexity
2. Which of the following best indicates the importance of business environment?
(a) Identification
(b) Improvement in performance
(c) Copying with rapid changes
(d) All of them
3. Which of the following is an example of social environment?
(a) Money Supply in the economy
(b) Consumer Protection Act
(c) The Consumption of the country
(d) Composition of Family
4. Liberalization means
(a) Integration among economics
(b) Reduced government controls and restrictions
(c) Policy of planned disinvestment
(d) None of them
5. Which of the following does not explain the impact of Government Policy changes on
business and industry?
(a) More demanding customers
(b) Increasing competition
(c) Change in agricultural
(d) market Orientation

Answers: 1. (b) Employees, 2. (d) All of them, 3. (d) Composition of Family, 4. (b)
Reduced government controls and restrictions, 5. (c) Change in agricultural prices

Short Answer Type Questions

1. What do you understand by Business Environment?

2. Why is it important for business enterprises to understand their environment? Explain
briefly.
3. Mention the various dimensions of business environment.
4. Briefly explain the following:
a. Liberalization
b. Privatization
c. Globalization
Long Answer Type Questions

1. How would you characterize business environment? Explain, with example, the difference
between general and specific environment.
2. How would you argue that the success of a business enterprise is significantly influenced by
its environment?
3. Explain, with examples, the various dimensions of business environment.
4. What are the essential features of:
a. Liberalization
b. Privatization
c. Globalization

NCERT Case Problems

Lately many companies have planned for significant investment in organized retailing in
India. Several factors have prompted their decisions in this regard. Customer income is
rising. People have developed a taste for better quality products even though they may
have to pay more. The aspiration levels have increased. The government has also
liberalized its economic policies in this regard and permitted even cent percent foreign
direct investment in some sectors of retailing.

Questions

(i) Identify changes in business environment under different heads – economic,

social, technological, political and legal that has facilitated the companies’
decisions to plan significant investments in organized retailing.
(ii) What has been the impact of these changes with regard to globalization and
privatization?

Answer:

There are number of changes taken place in business environment are as follows:

Economic Environment: Customer income is rising

Social Environment: The aspiration levels have increased

Technological Environment: People have developed a taste for better quality products even
though they may have to pay more

Political Environment: The Government has also liberalized its economic policies in this regard
Legal Environment: Even cent percent foreign direct investment in some sectors of retailing has
been now permitted.

Impact of changes in Government Policies

Economic Policy formulated by the Government of India in the country had a direct influence or
impact on the business. The most common impact or influences on business are:

i) Increasing level of competition

At present, the levels of competition among business organizations are getting higher with the
introduction of liberalization and globalization concept. It leads to a situation where domestic
companies are to compete with the new entrants in the market along with multi-national
corporations, e-commerce companies, start ups etc. This increased level of competition affects
the quality and price of the product and provides number of options to the customers.

ii) Affects Consumer behaviour

As stated in the above point, it is evident that increased level of competition provides lot more
options in the product line to the consumers. It encourages the companies to manufacture variety
of products to meet the consumer needs. There are different schemes introduced by these
companies to attract the customers.

iii) Changing Technological Environment

The post liberalization era has witnessed rapid technological changes and its innovation from
time to time. It works as an essential tool for the business organizations to improve the quality
of their products and services. At present, companies are manufacturing high quality products by
using the most advanced and updated technologies for production and operation.

iv) Requirement for Change

It is highly essential for the business firms to bring change in to their activities due to the
dynamic nature of business environment. Business firms have to adopt flexible approach with
regards to their plans and policies to cope up with the changing requirement of the market.

v) Human Resources Development

Human resources is an important resources each organization looking for. It is essential to have a
team of skilled, efficient, talented and qualified personnel in the enterprise to accomplish the
organizational objectives and to develop productivity. It becomes a common practice to spend a
huge amount in the process of recruitment, selection, training and development of the employees
at work.

vi) Market Orientation

It is clearly evident from the present situation that market is customer driven or oriented. In order
to acquire a major share of the market companies have to study the market initially and then
manufacture goods as per the market demand. Hence, business enterprises are formulating plans
on the basis of market research, requirement of the consumers and as per the demand pattern.

vii) Reduction in Government funding to public sector

With the introduction of new economic policy in the year 1991, government reduces and
curtailed its investment in the public sector up to certain extent. It develops the need for
arrangement of adequate level of finance to survive in the cut throat competitive environment for
these public sectors in the country. It helps the companies to get self sustained rather depending
exclusively on the funding from government through budget provisions. It all comes in to effect
as a result of the three major economic reforms i.e. Liberalization, Privatization and
Globalization.

Review Exercises

Very Short Answer Type Questions

1. What do you mean by the concept Business Environment?

2. What are the major components of business environment?
3. Define the concept of Micro Environment.
4. What is meant by Macro Environment?
5. Explain various dimensions of business environment.
6. How is economic environment different from that of social environment?
7. What is meant by general and specific sources of business environment?
8. Define the concept of Liberalization.
9. What do you mean by Globalization?
10. Explain the concept of privatization.
11. What is the relevance of environment in the business?

Short Answer Type Questions

1. What is meant by business environment?

2. What do you mean by social environment?
3. Define the concept of political and legal environment.
4. What is the relevance of technological environment in the industrial sector?
5. Briefly explain the following:
a. Liberalization
b. Privatization
c. Globalization
6. What role does political environment play in the business?
 7. What do you mean by legal environment? How does change in the legal environment
affect a business?
8. Write a note on the concept of Economic Environment.
9. Explain the term demographic environment.
10. What is meant by micro environment?

Long Answer Type Questions

1. What do you mean by business environment? Discuss its major components.

2. Define Business Environment. Discuss its basic characteristics or features.
3. Discuss the importance of business environment.
4. Give a detail classification of business environment with suitable examples.
5. What is meant by Political Environment? Specify its impact or effects on business.
6. Write a note on the following:
a. Liberalization
b. Privatization
c. Globalization
7. “Success of any business organization is affected by prevailing business environment”.
Explain.
8. What do you meant by Economic Environment? Discuss its major components.
9. What is meant by social environment? Discuss how it affects the business concern.
10. What are the impacts or effects of new economic policy on the Indian business sectors
including both public and private players?

Previous Years’ Examination Questions

One Mark Questions

1. Define ‘Liberalization as a process of economic reforms’ in one sentence. [CBSE (D)

2009C]
2. Define ‘Privatization’ as a process of economic reforms. [CBSE (D) 2009C]
3. “The understanding of business environment enables the firm to identify opportunity”. What
is meant by ‘opportunities’ here? [CBSE (A.I.) 2011]
4. “The understanding of business environment helps the managers to identify ‘threats’. What is
meant by ‘threats’ here? [CBSE (A.I.) 2011]
5. Business Environment includes both ‘Specific and general forces’. List any four specific
forces. [CBSE (D) 2011]
6. Business Environment includes both ‘specific and general forces’. List any four general
forces. [CBSE (A.I.) 2011]
7. Give any one factor responsible for new economic policy of liberalization, privatization and
globalization. [CBSE (A.I.) 2012]
8. What is meant by ‘Globalization’? [CBSE (D) 2012C]
9. Explain by giving any five reasons why understanding of business environment is important
for managers. [CBSE (D & A.I.) 2010,2010C]
10. What is included in ‘Legal Environment’ of business? State. [CBSE 2014]
11. What is included in ‘Political Environment’ of business? State. [CBSE 2014]
12. What is meant by business environment? [CBSE 2015]

Three Marks Questions

1. What is meant by ‘Business Environment’? Explain ‘Dynamic Nature’ and ‘Uncertainty’ as

features of Business Environment. [CBSE (D) 2011, 2012C]
2. Explain ‘Increasing competition’ and ‘more demanding customers’ as impact of
Government policy changes on Business and Industry. [CBSE (A.I) 2011]

Four Marks Questions

1. Explain by giving any four points, why ‘in the present day competitive market, it is essential
for a business to remain alert and aware of its environment?’ [CBSE (D) 2009C]
2. “Management of every enterprise can be benefited from being aware of different dimensions
of Business Environment”. Explain any four such dimensions. [CBSE (D) 2009C]
3. Explain with examples the impact of legal environment of business performance. [CBSE (D)
2012C]
4. Why is the understanding of business environment important for managers? Explain with the
help of any four points. [CBSE 2014]

Five/Six Marks Questions

1. Explain by impacts of Government Policy changes on Business and Industry in India. [CBSE
(D) 2010, 2011C, 2012C]
2. State any two features of business environment. [CBSE (D) 2011C, 2012(A.I.), 2012]
3. The court passed an order that all schools must have water purifier for the school children as:
a. Society in general is more concerned about quality of life.
b. Innovative techniques are being developed to manufacture water purifier at
competitive rates.
c. Incomes are rising and children at home are also drinking purified water. The
government is also showing positive attitude towards the water purifier business.

Identify the different dimensions of business environment by quoting from the above details.
[CBSE (D) 2013]

4. The court passed an order to ban polythene bags as

a. These bags are creating many environmental problems which affect the life of people
in general.
b. Society in general is more concerned about quality of life.
The government decided to give subsidy to jute industry to promote this business. Innovative
techniques are being developed to manufacture jute bags at low rates. Incomes are rising and
people can afford to buy these bags.

Identify the different dimensions of Business Environment by quoting the lines from the above
particulars. [CBSE (A.I.), 2013]

5. A recent rate cut in the interest on loans announced by the Banks encouraged Amit, a science
student of Progressive School to take from State Bank of India to experiment and develop
cars to be powered by fuel produced from garbage. He developed such a car and exhibited it
in the Science fair organized by Directorate of Education. He was awarded first prize for his
invention.

Identify and explain the dimensions of business environment discussed in the above case.
[CBSE (D) 2016]

6. With change in the consumption habits of people, Neelesh, who was running a sweets shop
shifted to chocolate business. On the eve of Diwali he offered chocolates in attractive
packages at reasonable prices. He anticipated huge demand and created a website
chcolove.com for taking orders online. He got lot of orders online and earned huge profit by
selling chocolates.

Identify and explain the dimensions of business environment discussed in the above case. [CBSE
(A.I) 2016]

7. ‘Accent Electronics Ltd.’ was operating its business in Malaysia. The company started
exporting its products to India when the Prime Minister announced relaxation in import
duties on electronic items. The company appointed retailers in India who had direct online
links with the suppliers to replenish stocks when needed.

Identify and explain the dimensions of business environment discussed in the above case.
[CBSE (F) 2016]