Business Environment

CONCEPT OF BUSINESS ENVIRONMENT

The term 'business environment' means the sum total of all individuals,
institutions and other forces that are outside the control of a business
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enterprise but that may affect its performance.

In order to understand the concept of business environment, let's take up

a very simple example. Say suppose, Rajat is running a garment shop in
a local market. The following table shows how the various components of
specific and general forces are likely to exert and influence on the working
of his business.
Understanding the effect Specific and general forces of business
environment exert on Rohan's business.
S.No. Decision Component Force

1. If the local residents of nearby areas Customers Specific

belong to lower income group, in that
case Rajat will not be able to sell very
expensive clothes.

2. If there is already a garment shop Competitors Specific

existing in that market, then Rajat will
have to take into consideration the kind
of marketing policies followed by his
competitor.

3. The amount of stock that Rajat should Suppliers Specific

maintain for each item also depends
upon the suppliers in terms of order
processing time taken by them to

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 replenish the stock, terms of payment,
etc.

4. Since the government has put a ban on Legal General

use of plastic, Rajat will have to either Page | 2
used jute bags, paper bags or any
other eco-friendly material for packing.

5. Rajat may decide to increase the price Economic General

of the product due to inflation in the
economy.

6. During festival time, Rajat maintains Social General

additional stocks as the sales are
higher.

7. Rajat kept his shop closed on certain Political General

days in support of a Bandh called by
the State Government to protest
against rising price of fuel.

8. Instead of giving a manual cash memo, Technological General

Rajat now offers an electronic bill to his
customers and also he places the
orders with the manufacturer online.
Some of the important definitions of business environment as propounded
by eminent experts are outline below:
"Business environment is the aggregate of all conditions, events
and influences that surround and affect it." - Keith Davis
"The total of all things external to firms and industries that affect the
function of the organisation is called business environment." -
Wheeler
"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."

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- William Gluck and Jauch
"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
FEATURES OF BUSINESS ENVIRONMENT Page | 3

The key features of business environment with highlight its nature are
described below:

(a) Totality of external forces:

• Business environment is a holistic concept, as it refers to an
aggregate or sum total of all the forces/factors which are external to the
business organisations.
• It includes individuals, institutions and other important forces.
(b) Specific and general forces:

• The different types of forces which influence the working of a business

firm can be broadly classified into two categories; general forces and
specific forces.

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 Page | 4

• The specific forces includes the owners, suppliers, creditors,

employees and trade union, competitors etc. which exert a direct and
immediate influence on the day-to-day working of a business firm.
• The general forces consist of economic, social, technological,
political and legal components which exert an indirect influence on the
working of a business firm.
Differences between specific forces and general forces
S.No. Basis Specific Forces General Forces

1 Meaning The specific force exert a The general forces exert an

direct and immediate influence indirect influence on the
on the working of a business functioning of a business firm.
firm.

2 Componen It consists of customers, It consists of the economic,

ts suppliers, competitors, social, technological, political
investors etc. and legal forces.

3 Examples Change in taste and An increase in the level of

preferences of the consumers, income of people, availability of
launching of a new product by a better technology, change in
competitior, withdrawal of the foreign policy of the
credit facility by a supplier etc. government, implementation of
new cyber laws etc.
(c) Inter-relatedness:
• The various components of business environment are very closely
interrelated and interdependent.
• For example, with an increase in the consumer consciousness
about health and hygiene the demand for the packed products have
increased tremendously. Likewise, a rise in life expectancy level of people

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along with a growing awareness about health care have led to a change
in the lifestyle of the people. These days there is a shift in the demand
towards organic foods, low fat foods, sugar free products, roasted and
baked snacks etc. An increase in the pollution levels and deteriorating
quality of air has lead to an increase in the demand for air purifier, masks Page | 5
etc.
d) Dynamic nature:
• The business environment is dynamic in nature, as it is constantly
in the process of transformation.
• The ever changing character of the various components of business
environment like, change in the government policy, availability of better
technology, entry of a new competitor, shift in the taste and preferences
of the consumers and so on does not allow the environment of the
business to be constant in nature.
(e) Uncertainty:
• Business environment is considered to be highly volatile as it
involves an element of uncertainty.
• It is very difficult for the business managers to anticipate future
events accurately.
• This is particularly more prominent in case of information technology
and fashion industries where the changes take place too frequently.
(f) Complexity:
• The business environment is considered to be complex in nature as
is made up of a number of interrelated and dynamic situations and forces.
• Most of the time it is difficult to demark clearly where the effect of
one component ends and the impact of another component starts.
• For example, it may be difficult to assess the exact reason for a
change in demand for a product in the market, as it may have happened
due to multiplicity of factors acting at the same time.
(g) Relativity:
• It is important to appreciate the fact that business environment is
relative in nature.
• For example if a person is operating a business in Northern India,
its business environment is likely to be in direct contrast to another
businessman who is operating a business in Southern India on certain
aspects. The difference in the very nature of the business environment

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may occur due to the differences in the policies of the different state
governments, the culture of the people, level of literacy etc.
• Thus, the business environment may vary from one country to
another or one region to another. For example the business environment
of India and Japan vary in many ways. Page | 6
IMPORTANCE OF BUSINESS ENVIRONMENT

(a) It enables the firm to identify opportunities and getting the first
mover advantage:
• Business environment not only provides opportunities for growth but
at the same time sometimes it may threaten the very existence of the
business firms as well.
• In context of business, the term opportunity refers to the positive
external trends or changes that will enable a firm to improve its
performance.
• If a business is able to identify a forth coming opportunity and of use
it to the best of its advantage it is said to have made the first mover
advantage.
• Like, for example, Tata Nano was the first car in the small car
segment, Pepperfry being the first online furniture, Eureka Forbes is the
pioneer in water purifiers segment etc.
(b) It helps the firm to identify threats and early warning signals:
• In the context of business, the term threat refers to those trends
and changes in the business environment which are likely to create
an adverse effect on the performance of an organisation.
• The knowledge of the approaching threats enables the business
managers to face it in the best possible manner by deciding upon the best
course of action in advance.
• Environmental threats may be considered to be an early warning
signal which if comprehended on time by the business managers, can
help to avert severe consequences.

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• For example, if the managers of an organisation come to know that
their competitor is in the process of launching a better quality product
equipped with higher technology, they may decide to either improve upon
its existing products in the required manner or clear of the excess
inventories rapidly by adopting various sales promotion techniques. This Page | 7
will for sure help the business to minimise its losses in the light of changing
equation with the competitors.
(c) It helps in coping with rapid changes:
• The present day business environment is marked by rampant
changes in the various spheres like, customers are more demanding,
there are frequent up gradations in technology, globalisation of the world
economy and so on.
• As a result, it is absolutely vital for the business managers to be able
to develop an understanding of different types of changes taking place in
its business environment and use it to serve the interest of the business
organisation in the best possible manner.
(d) It helps in assisting in planning and policy formulation:
• The various policies of business should be framed by taking into
consideration the future state of affairs that a business is likely to
encounter in terms of both opportunities and threats.
• If the business managers posses a complete understanding of
various aspects related to their business environment, it will provide the
basis for successful planning in the organisation.
• For example, in wake of growing preference of the government
towards digitalisation, many business firms have incorporated necessary
changes in their plans to promote in this approach of the government.
Like, a firm has introduced the techniques of providing cash back, if the
buyer chooses to make payments through a particular e-wallet.
(e) It helps in improving performance:
• In the absence of complete understanding of the business
environment it will be very difficult for the business managers to achieve
the desired goals.
• Therefore, the business managers need to make a conscious effort
to study and analyse its environment all the time, and initiate the
necessary changes in its functioning by adopting the best business
practices. This will not only its improve its present performance but also
envision success of the organisation in the long run.
DIMENSIONS OF BUSINESS ENVIRONMENT

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The dimensions of business environment refers to all the forces
which lie outside the business but have a capacity to influence its
working in many ways.

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Economic Social Political Legal Technologica

environment environment environment environment l
environment
Structure of the Customs and Constitution of
economy traditions the country

Economic Legislations
development

GDP and per Values Level of

capita income scientific
improvements
Interest rates Social trends Political and
stability innovations in
methods of
production

Inflation rates Society's and peace

Rates of saving expectations Administrative

and investment from business orders

Volume of Population Government

imports and shifts policy towards
exports

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Balance of Age business and
payments and composition industry
changes in
foreign exchange
reserves Page | 9

Agricultural and Birth rate and Ideologies and Court Methods and
industrial death rate values of judgements techniques of
production trends major political doing a
Expansion of parties business.
infrastuctural
facilities like
communication

Money supply in Education Decisions

the economy system and rendered by
level of various
literarcy commissions
and agencies
Changes in Career at every level
disposable attitudes of the
income of people government-
centre, state or
Stock market Health Relationship
local.
indices Value of consciousness with other
rupee countries
VARIOUS FACTORS CONSTITUTING THE GENERAL ENVIRONMENT
OF BUSINESS
(a) Economic environment: The economic environment comprises of
all those economic forces which are likely to exert an, influence the
functioning of an business enterprise like, the economic system whether
it is capitalist, socialist or mixed economy, level of economic development,
availability of economic resources, the level of income of people,
economic policies, rate of inflation, exchange rate balance of payment
position, gross national product, per capita income, rate of savings and
investment, changes in disposable income of people, stock market indices
and the value of rupee etc. Examples:
❖ Policies to promote foreign direct investment
❖ Changes in level of inflation

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❖ Fall in stock exchange index due to demonitisation
❖ Increase in the level of production and employment due to
implementation of Skill development programme and Make in India
program
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❖ Changes introduced in the direct tax influencing the disposable
income of people
❖ Availability of loan to small business with minimum formalities
❖ Devaluation of rupee
(b) Social environment: Social Environment includes the social forces
like, beliefs, customs and traditions, values, social trends, society's
expectations from business, etc. For example, the business environment
of a firm which operates in a cosmopolitan city will be different from a firm
which operates in a rural area. The demographic factors also have a great
influence on the social environment of a business like, size, growth rate,
composition of population, life expectancy of people, level of literacy and
so on.
Examples:
❖ Increase in demand for goods and services during festival time like
Holi, Diwali, Eid, Christmas, etc.
❖ Rise in demand for ready to eat food
❖ Growing demand for air purifiers, alternate fuel, hybrid cars due to
high levels of pollution
❖ Equal pay/pay scales to male and female workers for equal work
❖ Demand for reservation in jobs for minority and women
❖ Increase in demand for organic food
(c) Technological environment: Technological Environment includes
forces relating to scientific improvements and innovations which provide
new ways of producing goods and services and new methods and
techniques of operating a business.
Examples:
❖ Growing use of methods of e-payment like, Paytm, Google pay etc.
❖ Automation of stock exchanges
❖ Availability of public utility services online
❖ Growing inclination of people towards online shopping

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❖ Increasing use of artificial intelligence in manufacturing and use of
products and services
(d) Political environment: The various aspects relating to the
functioning of the government in the country where the business operates,
also have an important bearing on it smooth working. The main Page | 11
constituents of political environment are general stability and peace in the
country, organisation and philosophy of political parties, ideology of the
government, the image of the country and its leaders, foreign policies
pursued by the government in power, attitude of the government towards
various types of business organisations etc.
Examples:
❖ Implementation of new economic policy in 1991
❖ Frequent visits of Prime Minister to different countries for promoting
cordial business relationships
❖ Implementation of GST
❖ Demonetisation
(e) Legal environment: The legal environment serves as a regulatory
framework of business. It includes various legislations passed by the
Government, administrative orders issued by government authorities,
court judgements as well as the decisions rendered by various
commissions and agencies at every level of the government— centre,
state or local. Examples:
❖ Direction of Supreme Court that only green crackers will be available
for sale within the country
❖ Consumer Protection Act 1986
❖ Prevention of Corruption Act, 1988
❖ Ban on use of plastic
❖ Order of Supreme Court to seal unauthorised constructions in the
national capital of Delhi
❖ The Food Safety and Standards Authority of India (FSSAI)

Liberalisation, Privatisation and Globalisation at a glance

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LIBERALISATION PRIVATISATION GLOBALISATION

These economic reforms The new set of Globalisation means

signalled the end of the licence-
pemit-quota raj and were aimed
at liberalising the Indian
business and industry from all
unnecessary controls and
restrictions.
economic reforms the integration of the
aimed at giving greater various economiesPage |of
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role to the private the world leading
sector in the nation towards the emergence
building process and a of a cohesive global
reduced role to the economy.
public sector.

Liberalisation Privatisation Globalisation

Key initiatives of the Key initiatives of the Key initiatives of the

government: government: government:
• Abolishing licensing • Adopted the • Import
requirement in most of the policy of planned liberalisation and
industries except a short list. disinvestments of the export promotion
• Freedom in deciding the public sector. through rationalisation
scale of business activities. • Decided to refer of the tariff structure
• Removal of restrictions on the loss making and and reforms with
the movement of goods and sick enterprises to the respect to foreign
services. Board of Industrial and exchange.
• Freedom in fixing the Financial • Increased level of
prices of goods services. Reconstruction. interaction and
interdependence
• Reduction in tax rates and
among the various
lifting of unnecessary controls
nations of the global
over the economy.
economy.
• Simplifying procedures
for imports and experts.
• Making it easier to attract
foreign capital and technology
to India.

Demonetisation is the act of the government to cancel the legal tender

status of a currency unit in circulation. The aim of demonetisation was to
curb corruption, especially the accumulation of ‘black money’ generated
by income that has not been declared to the tax authorities.

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Features of Demonetisation:
1. Demonetisation is a tax administration measures. People with black
money had to declare their unaccounted wealth and pay tax at a penalty
rate.
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2.Demonetisation is a measure to improve tax compliance as tax
collection increased because of increased desclosure.
3. Demonetisation led to channelizing more savings through the formal
financial system. Bank deposits increased.

4.Demonetisation aimed to create a less-cash or cash-liteeconomy.

Cash transactions declined. Digital transactions using Rupay cards and
Debit Cards, etc. increased.

Impact on Business and Industry

1. Increasing competition: Competition has increased for Indian firms
due to the entry of foreign firms especially in service industries like
telecommunications, airlines, banking, insurance, etc.

2. More demanding customers: Customers have become more

demanding as they have a wider choice.

3. Rapidly changing technological environment: Technological

environment is rapidly changing creating tough challenges for smaller
firms.

4. Necessity for change: It has become necessary for enterprises to

change and modify their operations to cope with the turbulent market
forces.

5. Need for developing human resource: There is a need for

developing human resource as the new market conditions require
people with higher competence and greater commitment.

6. Market orientation: Enterprises are forced to adopt a market

orientation so that they could study the market and produce goods
accordingly.

7.Loss of budgetary support to the public sector: There is loss of

budgetary support to the public sector as the government felt that the
public sector needs to be more efficient in order to survive and grow

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