You are on page 1of 9

Meaning: - The term Business Environment is composed of two words Business and Environment.

In simple terms, the state in which a person remains busy is known as Business. The word Business in its economic sense means human activities like production, extraction or purchase or sales of goods that are performed for earning profits. The word Environment refers to the aspects of surroundings. Therefore, Business Environment may be defined as a set of conditions Social, Legal, Economical, Political or Institutional that are uncontrollable in nature and affects the functioning of organization. Business Environment has two components: 1. Internal Environment 2. External Environment Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually within the control of business. Business can make changes in these factors according to the change in the functioning of enterprise. External Environment: Those factors which are beyond the control of business enterprise are included in external environment. These factors are: Government and Legal factors, GeoPhysical Factors, Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is of two 1.Micro/Operating 2. Macro/General Environment Types: Environment

Problems of external environment

. One problem is the scale at which we produce and consume. This is a direct consequence of more wealth and higher living standards. That is what being better off means. The environment is very good at absorbing and re-cycling even quite nasty waste if it is given time, and if the scale isnt too large. Unfortunately, the scale of waste production is always raising due to more consumption and (in some parts of the world) more people. The problem is worse if it is concentrated in certain areas, as it usually is around centres of high population.

2. Another part of the problem is the kinds of goods and services we demand. Some products create more environmental damage in their production and consumption than others. Some medical treatments, for example, produce radio-active waste. Using energy produces large amounts of CO2. In Germany, for example, businesses are now responsible for the packaging they use. So packaging is now returned instead of ending up as litter. We can change these choices to less damaging products if we choose to. 3. A third part of the problem is the way in which we choose, as a society, to produce goods and services. There is no good reason for animal-testing on cosmetics (as opposed to medical products) and businesses are stopping it more and more. There is no strict need for so much car travel as opposed to travel by less polluting trains, provided we chose, as a society, to make the necessary changes to the way we produce travel i.e. fewer roads and more trains. 4. A fourth part of the problem is the power and professionalism of pressure groups. Groups like Green Peace are very good at choosing their targets, and stimulating public sympathy. Combined with the world-wide spread of the media, they can soon put a business under enormous pressure to make

changes. Senior executives dont like being asked awkward questions, or contacted at home, and at a purely human level they may choose the quiet life and make the changes asked of them. 5. The science underlying an understanding of the environment is still disputed by scientists. For example, there is no doubt that global warming and climate change exists. However, some scientists say it is due to industrial pollution, and others are equally convinced it is all due to very long-term climate changes which are entirely natural and completely unstoppable. There are many examples like this.

Economic planning
Economic planning is a term used to describe the long term plans of an incumbent government to coordinate and develop the economy. Economic planning is commonly a feature of big government as it usually involves increased spending on things such as public work schemes and government programs. Given the economic woes due to the collapse of international trade on a vast scale in the early 1930s caused by tariff restrictions severally among nation states, economic planning became quite fashionable as a solution among what became the belligerent powers of World War II. Economic planning can include: Discussing the long term future of economic growth, and ways of achieving said growth. Meeting social partners such as trade Union leaders to co-ordinate government planning in relation to these partners. Organizing committees to create reports and offer recommendations for future economic expansion.

Critics, who generally tend to be pro Free-market, argue that the only economic planning that government should engage in is providing a framework for the economy to operate, such as sufficient infrastructure and the maintenance of law and order Planning without an objective is like driving without any destination. There are generally two sets of objectives for planning, namely the short-term objectives and the long-term objectives. While the shortterm objectives vary from plan to plan, depending on the immediate problems faced by the economy, the process of planning is inspired by certain long term objectives. In case of our Five Year plans, the longterm objectives are: (i) A high rate of growth with a view to improvement in standard of living. (ii) Economic self-reliance; (iii) Social justice and (iv) Modernization of the economy (v) Economic stability (i) High Rate of Growth All the Indian Five Year Plans have given primary importance to higher growth of real national income. During the British rule, Indian economy was stagnant and the people were living in a state of abject poverty. The Britishers exploited the economy both through foreign trade and colonial administration.

While the European industries flourished, the Indian economy was caught in a vicious circle of poverty. The pervasive poverty and misery were the most important problem that has to be tackled through Five Year Plan. During the first three decades of planning, the rate of economic growth was not so encouraging in our economy Till 1980, the average annual growth rate of Gross Domestic Product was 3.73 percent against the average annual growth rate of population at 2.5 percent. Hence the per-capita income grew only around 1 percent. But from the 6th plan onwards, there has been considerable change in the Indian economy. In the Sixth, Seventh and Eight plans the growth rate was 5.4 percent, 5.8 percent and 6.8 percent respectively. The Ninth Plan, started in 1997 targeted a growth rate of 6.5 percent per annum and the actual growth rate was 6.8 percent in 1998 - 99 and 6.4 percent in 1999 - 2000. This high rate of growth is considered a significant achievement of the Indian planning against the concept of a Hindu rate of growth. (ii) Economic Self Reliance Self reliance means to stand on ones own legs. In the Indian context, it implies that dependence on foreign aid should be as minimum as possible. At the beginning of planning, we had to import food grains from USA to meet our domestic demand. Similarly, for accelerating the process of industrialization, we had to import, capital goods in the form of heavy machinery and technical know-how. For improving infrastructure facilities like roads, railways, power, we had to depend on foreign aid to raise the rate of our investment. (iv) Modernization of the Economy: Before independence, our economy was backward and feudal in character. After attainment of independence, the planners and policy makers tried to modernize the economy by changing the structural and institutional set up of the country. Modernization aims at improving the standard of living of the people by adopting a better scientific technique of production, by replacing the traditional backward ideas by logical reasoning's and bringing about changes in the rural structure and institutions. These changes aim at increasing the share of industrial output in the national income, upgrading the quality of products and diversifying the Indian industries. Further, it also includes expansion of banking and non-banking financial institutions to agriculture and industry. It envisages modernization of agriculture including land reforms. (v) Economic Stability: Economic stability means to control inflation and unemployment. After the Second Plan, the price level started increasing for a long period of time. Therefore, the planners have tried to stabilize the economy by properly controlling the rising trend of the price level. However, the progress in this direction has been far from satisfactory. Thus the broad objective of Indian plans has been a non-inflationary self-reliant growth with social justice. Fiscal policy Fiscal policy is the use of government expenditure and revenue collection (taxation) to influence the [1] economy. , which attempts to stabilize the economy by controlling interest rates and spending. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact the following variables in the economy: Aggregate demand and the level of economic activity; The pattern of resource allocation; The distribution of income.

Fiscal policy refers to the use of the government budget to influence economic activity.
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives

oriented towards the growth and stability of the economy.[1] Monetary theory provides insight into how to craft optimal monetary policy.

Methods of funding Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits. This expenditure can be funded in a number of different ways: Taxation Seignior age, the benefit from printing money Borrowing money from the population or from abroad Consumption of fiscal reserves Sale of fixed assets (e.g., land)

Monetary policy Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals).
Therefore, monetary decisions today take into account a wider range of factors, such as:

short term interest rates; long term interest rates; velocity of money through the economy; exchange rates; credit quality; bonds and equities (corporate ownership and debt); government versus private sector spending/savings; international capital flows of money on large scales; Financial derivatives such as options, swaps, futures contracts, etc.

How does monetary policy affect inflation? Wages and prices will begin to rise at faster rates if monetary policy stimulates aggregate demand enough to push labor and capital markets beyond their long-run capacities. In fact, a monetary policy that persistently attempts to keep short-term real rates low will lead eventually to higher inflation and higher nominal interest rates, with no permanent increases in the growth of output or decreases in unemployment. As noted earlier, in the long run, output and employment cannot be set by monetary policy. In other words, while there is a trade-off between higher inflation and lower unemployment in the short run, the trade-off disappears in the long run. Policy also affects inflation directly through people's expectations about future inflation. For example, suppose the Fed eases monetary policy. If consumers and businesspeople figure that will mean higher inflation in the future, they'll ask for bigger increases in wages and prices. That in itself will raise inflation without big changes in employment and output.

Control Inflation: - One of the primary impacts of monetary policy is on inflation. The goal of monetary policy is to control inflation, or the value of currency, through changes in monetary policy tools. When inflation rises, the central bank typically raises interest rates. High inflation makes the costs of goods higher. Central banks want to keep inflation low to keep the prices of goods stable relative to the value of the currency. Interest Rates:-Monetary policy directly impacts interest rates. The central bank raises or lowers the prime rate, or interest rate the central bank loans money to other banks, as a tool to impact the economy. These actions have a trickledown effect on the interest rates charged on loans, credit cards and any other financial vehicle that is tied to the prime rate.

The new manufacturing economy (NME) describes the role of advanced manufacturing in the rise of the New Economy. The term describes manufacturing enabled by digital technologies, advanced systems and processes and [1] a highly trained and knowledgeable workforce. The new manufacturing economy integrates networks, 3D printers [2] and other proficiencies into business strategies to further develop manufacturing practices. The Pillars of the new manufacturing economy [edit]Technology Focus on geographic expansion, information technology and internet commerce are on the rise for industrial + + manufacturing companies according to the PricewaterhouseCooper Q4 2010 Manufacturing Barometer. Such conditions compel companies to incorporate new technologies into business plans and to concentrate on the application of open-source product development in the creation of physical goods as a form of competitive [2] advantage. New technologies influence various industries to emphasize innovation as a business tool. Advanced manufacturing is feasible due to continuous improvement investments and modernization of the workforce, technologies and supply chains in order to increase global competitiveness, environmental sustainability and product customization to meet consumer expectations. [edit]Workforce Incorporating modern CNC equipment in new manufacturing processes requires better trained employees with more [6] exacting skills than were previously required in heavy industry. Past manufacturing job consisted largely of physical labor and worker assembly line requirements, but in response to technological evolution are becoming tech-savvy and information intense with focus on creativity and resourcefulness. [edit]Strategy The new manufacturing economy is centered on "niche" businesses that satisfy the needs of small consumer markets [2] by offering what customers want, when they want it. The primary foundation of this strategy is selling less of [7] more. Adopting the efficiencies of digital and Web-based technologies into current business strategies is an [8] emerging trend in manufacturing practices. [edit]Industries Advanced technology in the manufacturing marketplace has led to growth in areas such as software development [9] [10] and biotechnology and to emphasis on numerous industries such as:
[5] [4]

Liquid and biofuels Solar energy Renewable resources Environmental sustainability Pharmaceutical manufacturing Logistics

Technological Environment means the development in the field of technology which affects business by new inventions of productions and other improvements in techniques to perform the business work. 1. Introduction Technology plays a key role in today's business environment. Many companies greatly rely on computers and software to provide accurate information to effectively manage their business. It is becoming increasingly necessary for all businesses to incorporate information technology solutions to operate successfully. One way that many corporations have adopted information technology on a large scale is by installing Enterprise Resource Planning (ERP) systems to accomplish their business transaction and data processing needs. The company named SAP Aktiengesellschaft (commonly known as SAP AG in the business press) is currently the world market and technology leader in providing ERP systems. As such, this paper primarily discusses information technology implications based on the SAP system. The remainder of this introduction provides an overview of ERP software in general, and a discussion of SAPs ERP software. Section 2 discusses major technological and accounting issues involved in the implementation of SAP and ERP systems. Section 3 discusses data and information integrity and audit issues in ERP systems. The final section provides a conclusion Political environment can affect a business either positively or negatively depending on the prevailing situation in a country. It mainly forms the external factors which are part of the macro-environment and whose control is beyond the ability of human beings. These factors touch on the way politics are conducted in a country, which directly reflects on what is happening within the government. This means that a democratic country will accord freedom to its people to vote in a government that has their interests at heart thus business will thrive owing to the good policies implemented. On the other hand, a dictatorial government will not earn the respect of its citizens leading to economic as well as political instability and uncertainty. Even though such a government will go, businesses suffer a lot since they are not sure of their future underlining the importance of a democratic government to a country and business. It is needless to say, that once a country is stable, more investment opportunities will be realised thus attracting more and more investors. This will reflect positively and directly to the local businesses, as even the citizens will have full confidence with them. In the politics of the day, business success depends on politics by a great percentage and in many ways. Politicians are usually the people controlling the operations of a government and will decide which countries to trade with as well as the trading conditions. This means that if a certain business or its owners are not in good terms with the politicians then they will have to suffer. Furthermore, the rules that govern and regulate the manner in which trade is conducted are enacted by the politicians thus it will call for good relations between stakeholders in the business sector and politicians even if it's impossible just for success.

The Foreign Exchange Management Act (1999) or in short FEMA has been introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA). FEMA became an act on the 1st day of June, 2000. FEMA was introduced because the FERA didnt fit in with post-liberalisation policies. A significant change that the FEMA brought with it, was that it made all offenses regarding foreign exchange civil offenses, as opposed to criminal offenses as dictated by FERA. The main objective behind the Foreign Exchange Management Act (1999) is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments. It was also formulated to promote the orderly development and maintenance of foreign exchange market in India.

FEMA is applicable to all parts of India. The act is also applicable to all branches, offices and agencies outside India owned or controlled by a person who is a resident of India. The FEMA head-office, also known as Enforcement Directorate is situated in New Delhi and is headed by a Director. The Directorate is further divided into 5 zonal offices in Delhi, Mumbai, Kolkata, Chennai and Jalandhar and each office is headed by a Deputy Director. Each zone is further divided into 7 subzonal offices headed by the Assistant Directors and 5 field units headed by Chief Enforcement Officers. Main Features - Activities such as payments made to any person outside India or receipts from them, along with the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the central government the power to impose the restrictions. - Restrictions are imposed on people living in India who carry out transactions in foreign exchange, foreign security or who own or hold immovable property abroad. - Without general or specific permission of the Reserve Bank of India, FEMA restricts the transactions involving foreign exchange or foreign security and payments from outside the country to India the transactions should be made only through an authorised person. - Deals in foreign exchange under the current account by an authorised person can be restricted by the Central Government, based on public interest. - Although selling or drawing of foreign exchange is done through an authorised person, the RBI is empowered by this Act to subject the capital account transactions to a number of restrictions. - People living in India will be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immovable property abroad if the currency, security or property was owned or acquired when he/she was living outside India, or when it was inherited to him/her by someone living outside India. - Exporters are needed to furnish their export details to RBI. To ensure that the transactions are carried out properly, RBI may ask the exporters to comply to its necessary requirements.

Designated areas in countries that possess special economic regulations that are different from other areas in the same country. Moreover, these regulations tend to contain measures that are conducive to foreign direct investment. Conducting business in a SEZ usually means that a company will receive tax incentives and the opportunity to pay lower tariffs. It is a geographical region that has economic laws that are more liberal than a countrys
typical economic laws. An SEZ is a trade capacity development tool, with the goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. Today, there are approximately 3,000 SEZs operating in 120 countries, which account for over US$ 600 billion in exports and about 50 million jobs. By offering privileged terms, SEZs attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure. Moreover SEZs provide a medium wherein it not only attracts foreign companies looking for cheaper and efficient location to setup their offshore business, but it also allows the local industries to improve their export through a proper channel and with the help of the new foreign partners to the outside world at a very competitive price. SEZs offer relaxed tax and tariff policies which is different from the other economic areas in the country. Duty free import of raw materials for production is one example. Moreover the Free trade zones attract big players who want to setup business without any license hassles and the long process involved in it. Most of the allotment is done through a single window system and which is highly transparent system. The bottom-line therefore is increased export and FDI (Foreign Direct Investments) enabling increased Public-private partnership and ultimately resulting in a development of world class infrastructure, boost economic growth, exports and employment. The biggest

challenges faced by SEZs in todays scenario are the taking away of agricultural land from the farmers. The farmers are being paid disproportionate money which is not in lieu of the current land prices.

Cash Reserve Ratio (CRR) is the amount which scheduled commercial banks have to keep with RBI (Reserve Bank of India).This ratio is decided by RBI and used to control liquidity. If RBI makes a decision to reduce CRR, then banks have to keep fewer amounts in form of cash with RBI. There will be more amounts available with commercial banks for lending and investment, now bank can reduce interest rates on various loans to utilize this excess fund. Thus this instrument is used by RBI and affects ecnomy, inflation and interest rates. This is also known as the liquidity ratio and cash asset ratio. It can be between three to twenty percent in India. SLRSLR (Statutory Liquidity Ratio) is a portion of banks Net Demand and Time liabilities (NDTL) that Scheduled Commercial Banks are required to maintain with themselves in form of Cash, Gold, Government Bonds or unencumbered approved securities at closing of any business day. It regulates credit growth in country. RBI can increase it up to 40% of NDTL .this monetary tool is used by the RBI to ensure sufficient liquidity with banks. an increase in SLR will restricts banks lending capacity. Difference between SLR and CRR SLR restricts the banks leverage of pumping money into the economy. CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the RBI. The other difference is that for SLR, banks can use cash, gold or unencumbered approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, whereas SLR is maintained in liquid form with banks themselves.
the fiscal multiplier is the ratio of a change in national income to the change in government spending that causes it. More generally, the exogenous spending multiplier is the ratio of a change in national income to any autonomous change in spending (private investment spending, consumer spending, government spending, or spending by foreigners on the country's exports) that causes it. When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending. In other words, an initial change in aggregate demand may cause a change in aggregate output (and hence the aggregate income that it generates) that is a multiple of the initial change. For example: a company spends $1 million to build a factory. The money does not disappear, but rather becomes wages to builders, revenue to suppliers etc. The builders will have higherdisposable income, and consumption may rise, so that aggregate demand will also rise. Suppose further that recipients of the new spending by the builder in turn spend their new income, this will raise demand and possibly consumption further, and so on.

What is corporate social responsibility? The term is often used interchangeably for other terms such as Corporate Citizenship and is also linked to the concept of Triple Bottom Line Reporting (TBL), which is used as a framework for measuring an organisations performance against economic, social and environmental parameters. The rationale for CSR has been articulated in a number of ways. In essence it is about building sustainable businesses, which need healthy economies, markets and communities. The key drivers for CSR are 1 Enlightened self-interest - creating a synergy of ethics, a cohesive society and a sustainable global economy where markets, labour and communities are able to function well together.

Social investment - contributing to physical infrastructure and social capital is increasingly seen as a necessary part of doing business. Transparency and trust - business has low ratings of trust in public perception. There is increasing expectation that companies will be more open, more accountable and be prepared to report publicly on their performance in social and environmental arenas Increased public expectations of business - globally companies are expected to do more than merely provide jobs and contribute to the economy through taxes and employment.