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CHAPTER – 3
BUSINESS ENVIRONMENT

Meaning of Business Environment:

The business environment means the sum total of all those factors which influence the business
and over which business has no control over it. Therefore, it is essential for the manager to
identify the threats and opportunities of the business to take advantage of opportunities and
tackle the threats.

Features of Business Environment

1. Totality of external forces: Business environment is the sum total of all the forces / factors
external to a business firm and business has no control over it.

2. Specific and general forces: Business environment includes both specific and general forces.
a) Specific forces include those forces who influence business firms directly such as: investors,
competitors, customers etc.
b) general forces include those forces which affect a business firm indirectly. Such as: social,
political, economic, legal and technological conditions which affect a business firm indirectly.

3. Inter-relatedness: All the forces / factors of a business environment are closely interrelated.
For example, increased awareness of health care has raised the demand for organic food and
roasted snacks.

4. Dynamic: Business environment is dynamic in nature which keeps on changing with the
change in technology, consumer’s fashion, and tastes etc.

5. Uncertainty: Business environment is uncertain as it is difficult to predict the future

environmental changes and their impact with full accuracy. For example, change in fashion,
change in technology, etc.

6. Complexity: Business environment is complex since it includes many factors which affects
the business. which is easy to understand in parts separately, but it is difficult to understand in
totality.

7. Relativity: Business environment is a relative concept whose impact differs from country to
country, region to region and firm to firm. For example, a shift of preference from soft drinks to
juices will be welcomed as an opportunity by juice making companies while a threat to soft drink
manufacturers.

IMPORTANCE OF BUSINESS ENVIRONMENT

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1. Identification of opportunities to get first mover advantage: Understanding of business
environment helps an organization in identifying advantageous opportunities and getting their
benefits prior to competitors, thus reaping the benefits of being a pioneer. For example, apple.

2. Identification of threats: Correct knowledge of business environment helps an organization

to identify those threats which may adversely affect its operations. For example, Bajaj Auto
made considerable improvements in its two wheelers when Honda & other companies entered
the auto industry.

3.Tapping useful resources: Business environment makes available various resources such as
capital, labour, machines, raw material etc. to business firms. In order to know the availability of
resources and make them available on time at economical price, knowledge of business
environment is necessary.

4. Coping with Rapid changes: Continuous study/scanning of business environment helps in

knowing the changes which are taking place and thus they can be faced effectively. For example,
Zara copied the change of fashion in Tokyo in 2015 of pink scarf and took the advantage of
selling the pink scarf due to more demand and less supply by studying business environment.

5. Assistance in planning and policy formulation: Understanding and analysis of business

environment helps an organization in planning & policy formulation. For example, ITC Hotels
planned new hotels in India after observing boom in tourism sector. Foreign capital/investment
policy was liberalized and in many sectors100% direct foreign investment was allowed.

6. improvement in performance: study of the business environment plays an important role in

every industry. Because those organizations who regularly get updated with the business
environment stays alive otherwise those who don’t adopt the change of business environment
becomes discarded, and lead to close of business. For example, Nokia didn’t change itself to the
smart phone, therefore it had to loss the market share of the phone market.

DIMENSIONS/COMPONENTS OF BUSINESS ENVIRONMENT

Components of Business environment

Internal environment External environment

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Micro Environment Macro environment

1.objectives Or Or
2.policies Operating environment General environment
3.organsiation
structure
4.management
information system 1.customers
5.production method 1.economic environment
2.suppliers
6.production capacity 2.social environment
3. competitors
3. technological environment
4.public
4. political environment
5. marketing
5.legal environment
intermediaries

A) Internal environment
The internal environment includes all those factors which influence the business and are
present within the business itself and under the control of business.
The factors of internal environment are:
1.objectives 2.policies 3.organsiation structure
4.management information system 5.production method
6.production capacity 7. management structure,
etc.
B) External environment
external environment includes all those factors which influence the business and present
outside the business and business has no control over it.

1) Micro-environment or operating environment:

It refers to all those external factors which are closely related to business and influence
each business (industry) differently.

i) Customer: there is a different target audience for each of the businesses, for
example a business which has a customer as a govt only: so, if there is any bad
relationship happening the business will automatically get shut down. Therefore,
the business should have different kinds of customers.
ii) Supplier: suppliers also influence the business. For example, if there is only one
supplier in the business, and any misunderstanding happens between them and the
supplier stops supplying the goods, so the business would shut down. Therefore, it
is advisable to have different suppliers.

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iii) Competitor: the competitor can also influence the business, therefore should have
a vision of the competitor that what he is doing and what he can do, so stay away
from the threat of the competitor.
iv) Public: public can also influence the business, basically public constitute local
public, media, etc. such as if the local public opposes the business due to pollution
or any other problem, so it can affect the business, similarly as if the media reports
any unfavorable report regarding the business so it can influence the business.
v) Market intermediary: market intermediaries include the middleman who reduces
the hindrance of the person, such as agent who works between the producer and
customer, if there is any conflict happen between the producer and the agent so this
can affect the business worse.

2) Macro-environment or general environment:

It refers to all those external factors which have a distant relation with business and
influence all business units almost in the same way. The dimensions of the macro
environment are:
1) Economic environment, 2) social environment, 3) technological environment
4)Political environment, 5) legal environment

However, the general environment can be classified as: economic environment and non-
economic environment which includes, social environment, technological environment, political
environment, and legal environment.

1. Economic Environment: it refers to the combination of economic systems, economic

policies, and economic conditions of a country. It has an immediate and direct economic impact
on a business. Rate of interest, inflation rate, change in the income of people, monetary policy,
price level etc. are some economic factors which could affect business firms. The economic
environment may offer opportunities to a firm, or it may put constraints.

Elements of an economic environment:

1) Economic systems: such as socialistic, capitalistic, and mixed economic systems.
2) Economic policies: such as export-import policy, taxation policy, industrial policy, etc.
3) Economic conditions: rate of interest, inflation rate, etc.

Impact of economic environment:

1) A decrease in the bank rate would lead to an increase in the demand of goods and
services.
2) An increase in the income of people would lead to an increase in the demand of goods and
services.

2. Social Environment: it refers to the combination of all the characteristics of the society in
which the organization exists. It includes various social forces such as customs, beliefs, literacy
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rate, educational levels, lifestyle, values etc. Changes in the social environment affect an
organization in the long run.

Elements of social environment:

1) Traditions: social practices which we follow, such as: Diwali, Christmas, etc.
2) Value: moral practices of the society, such as: freedom, social, justice, equality, etc.
3) Social trends: social trends running in society, such as: gym, health and fitness, etc.

Impacts of social environment:

1) Due to an increase in the diversity of people, the number of traditions has also increased,
that lead to increase in the demand of particular product used in that tradition, such as
increase of sales decorations items, and sculptures in Diwali.
2) Due to changes in the moral values of society, the business also get threat, such as trend of
boycott Bollywood led to lower sales of ticket of lal singh chadda (movie).
3) Social trends: due to an increase in the trend of gym and body, that lead to an increase in
the demand of proteins, mineral water, and equipment used in the gym.

3. Technological Environment: it refers to the innovations relating to various business

activities. It provides new and advanced ways/techniques of production. A businessman must
closely monitor the technological changes taking place in the industry as it helps in facing
competition and improving quality of the product.

Elements of technological environment:

1) Discover new methods of producing goods and services. (Methods means change of
technology)
2) Discover new ways of production of goods and services. (Ways means, such as: change
from employee to machine)

Impacts of technological environment:

1) Such as: with the arrival of neflix and spotify the dvd has been discarded.
2) Such as: with the arrival of digital watches the traditional watches sales has been reduced.

4. Political Environment: Changes in the political situation also affect business organizations, it
includes the political conditions and attitude of the govt towards business.

Elements of political environment:

1) Political stability
2) Attitude of the govt towards business.
3) Type of govt, i.e., single party or multi-party govt.
4) Ideology of govt.

Impacts of the political environment:

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1) Bangalore and Hyderabad have become the most popular locations for IT due to the
supportive political climate.
2) Political stability builds confidence among the business community while political
instability and bad law & order situations may bring uncertainty in business activities.
Such as: growth of adani enterprises.
3) Ideology of the political party, attitude of government towards business, type of
government-single party or coalition government affects the business. Such as Hindutva in
Uttar Pradesh.

5. Legal Environment: It constitutes the laws and legislations passed by the Government,
administrative orders, court judgements, decisions of various commissions and agencies.
Businessmen have to act according to various legislations and their knowledge is very necessary.

Elements of legal environment:

1) Acts or legislations passed by the govt.
2) Judgement of court.

Impacts of legal environment:

1) Advertisement of Alcoholic products is prohibited, and it is compulsory to give statutory
warning on advertisement of cigarettes.
2) Such as introduction of FDI, many multi-national companies have started their investment
in UP.

Demonetization: concept and features

Demonetization: demonetization refers to the withdrawal of the status of ‘legal tender’ to the
currency in circulation is called demonetization. Demonetization is not a new concept, it has
already happened in the past, such as demonetization of 10000 rupees note in 16, January 1978.
And now this time it happened on 8 November 2016, of demonetization of 500 and 1000 rupees
1 notes, that led to the massive loss of liquidity in the economy, since it valued 15.4 trillion
rupees which is valued to be 86.9% note. And now on19 May 2023, in which the RBI on Friday
announced the withdrawal of the 2000 of banknote from circulation.

Features of demonetization:
1) Tax administrative measures: since due to the demonetization, the legal tender of the 500-
and 1000-rupees currency withdrawal, so all the people had to deposit their savings, and
declare their income, so those who had black money, had to declare their unaccounted
income (black money) and pay tax on such money along with the penalty.
2) Tax evasion control measures: it is the govt measures to control the mal practices of tax
evasion.
3) Channelizing savings into formal financial systems: due to demonetization, people started
to deposit their savings into the bank, that lead to the increase in the money supply of the
country, so now the bank can provide more loan and launch more profitable schemes.
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4) Channelizing less cash economy: demonetization led to deposit the savings in the saving
account of the bank, that helps to create less cash economy since most of the funds are
deposited in the bank.

Impact of demonetization:
1) Money/interest rate: i) decline in cash transactions
ii) bank deposits increased
iii) increase in financial savings
2) Private wealth: decline, since some high demonetized notes were not returned, and real
state prices fell.
3) Public sector wealth: no effect
4) Digitization: digital transactions amongst new users increased.
5) Real estate: prices declined.
6) Tax collection: rise in income tax collection because of increased disclosures.

Economic reforms since 1991, or economic policy.

As a part of economic reforms, the Government of India announced New Economic Policy in
July 1991 for taking out the country out of economic difficulty and speeding up the development
of the country.
Main features of NEP, 1991 are as follows:
1. Only six industries were kept under licensing scheme.
2. The role of public sector was limited only to four industries.
3.Disinvestment was carried out in many public sector enterprises.
4.Foreign capital/investment policy was liberalized and in many sectors100% direct foreign
investment was allowed.
5. Automatic permission was given for signing technology agreements with foreign companies.
6. Foreign investment promotion board (FIPB) was setup to promote & bring foreign investment
in India.
7. Various benefits were offered to small scale industries.

The three main strategies adopted for the above may be defined as follows:

Globalisation:
• Integrating the economy of a country with the economies of other countries to facilitate free
flow of goods and services, capital, persons, and technology across borders. It leads to the
emergence of a cohesive global economy.

• Till 1991, the Government of India had followed a policy of strictly regulating imports in value
and volume terms. These regulations were with respect to (a) licensing of imports, (b) tariff
restrictions and (c) quantitative restrictions.
• NEP ‘91 advocated rapid advancement in technology and directed trade liberalization towards:
a. Import Liberalization
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b. Export promotion towards rationalization of the tariff structure and
c. Reforms w.r.t foreign exchange

Liberalization:
Liberalizing the Indian business and industry from all unnecessary controls and restrictions. That
is relaxing rules and regulations which restrict the growth of the private sector and allowing the
private sector to take part in economic activities that were earlier reserved for the government
sector. The steps taken for this were:
a. Abolishing licensing
b. Freedom in deciding the scale of operations.
c. Removal of restrictions on movement of goods and services.
d. Freedom in fixing prices.
e. Reduction in tax rates and unnecessary controls
f. Simplifying procedures for import and exports
g. Making it easy to attract foreign capital.

Privatization:
• Refers to the reduction of the role of the public sector in the economy of a country.
• Transfer of ownership and control from the public to the private sector (disinvestment) can be
done by:
a. Sale of all/some assets of the public sector enterprises.
b. Leasing of public enterprises to the private sector.
c. Transfer of management of the public enterprise to the private sector.

• To achieve privatization in India, the government redefined the role of the public sector and –
a. Adopted a policy of planned disinvestment of the public sector.
b. Refer the loss making and sick units to the Board of Industrial and Financial Reconstruction
(BIFR)

objectives of economic reforms:

1) Encouraging private placement
2) Attracting private investment
3) Eliminating unproductive controls
4) Connecting Indian economy with the world economy
5) Modernization of the industrial system of the country.

MAJOR STEPS IN ECONOMIC FORMS

1. New Industrial Policy – Under this the industries have been given freedom to a large extent
from licenses and other controls. Efforts have been made to encourage foreign investment.

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2. New Trade Policy – Foreign trade has been free from unnecessary control. The age-old
restrictions have been eliminated.

3. Fiscal Reforms. The policy of the govt connected with the income and expenditure is
called fiscal policy. The greatest problem confronting the Indian Govt. is excessive fiscal deficit.
(a) Fiscal Deficit – It means country is spending more than its income
(b) Gross Domestic Product (GDP) – It is the sum total of the financial value of all goods &
services produced in a year in a country.

4. Monetary Reform – It is a sort of control policy through which the central bank controls the
supply of money with a view to achieving the objectives of general economic policy.

5. Capital Market Reforms- The Govt. has taken the following steps for the development of
this market:
(1) SEBI has been established.
(2) The restriction in respect of interest on debentures has been lifted.
(3) Private Sector has been permitted to establish Mutual Fund.

6. Dismantling Price control – The govt. has taken steps to remove price control in many
products, especially in fertilizers, iron and steel, petrol products. Restrictions on the import of
these things have also been removed.

IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY

1. Increasing Competition: De-licencing and entry of foreign firms’ Indian market is increased
the level of competition for Indian firms.

2. More Demanding Customers: Now customers are more aware, and they keep maximum
information of the market as the result of which now the market is customer/buyer oriented,
Now, products are produced keeping in mind the demands of the customers.

3. Rapid Changing Technological Environment: Rapid Technological advancement has

changed/improved the production process as a result of which maximum production is possible
at minimum cost, but it leads to tough challenges in front of small firms.

4. Necessity for Change- After New Industrial. Policy the market forces (demand & supply) are
changing at a very fast rate. Changes in the various components of the business environment has
made it necessary for the business firms to modify their policies & operations from time to time.

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5. Need for Developing Human Resources: The changing market conditions of today require
people with higher competence and greater commitment, hence there is a need for developing
human resources which could increase their effectiveness and efficiency.

6. Market Orientation: Earlier the selling concept was famous in the market, now its place is
taken by the marketing concept. Today firms produce those goods & services which are required
by the customers. Marketing research, educational advertising, and after-sales services have
become more significant.

7. Reduction in budgetary Support to Public Sector: The budgetary support given by the
government to the public sector is being reduced, thus the public sector has to survive and grow
by utilizing their own resources efficiently. As a part of economic reforms, the Government of
India announced New Economic Policy in July 1991 for taking out the country out of economic.
difficulty and speeding up the development of the country.

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