BUSINESS ENVIRONMENT

Meaning – Environment refers to the surroundings in which a person or organization operates. Business
environment means the political, social, economic, technological and cultural forces outside a business firm with
which the entity deals. The environment also includes institutions like suppliers, customers, competitors,
financiers and the government with which the firm has to deal in order to achieve its goals.

Business environment is the aggregate of all conditions, events and influences that surround and affect it.

Business environment may sometimes provide opportunities for growth as well it may constrain (threat) the
growth of an organisation. The non availability of cheap electricity may be a constraint for firms depending on
power. Government control on use of ground water is a limiting factor for the manufacturers of soft drinks.
BPO is an opportunity to reduce cost of operations. The emerging demand for houses is an opportunity for
cement manufacturers. Manufacturers of conventional cameras, conventional tape recorders etc. realised the
threat of their product becoming obsolete due to change in technology.

Features of Business Environment

1. Totality of external forces – Business environment is the sum total of all individuals, institutions and other
factors and forces external to business firms which are out of control.
2. Specific and general forces
a. Factors which affect the business directly in the day to day working are called specific forces, e.g.,
investors, customers, competitors, suppliers etc.
b. Factors which influence an enterprise indirectly are called general forces, e.g., social, political, legal,
technological conditions etc.
3. Interrelatedness – Various elements of business environment are closely related or interdependent, for
e.g., Technological development may result in loss of employment opportunities.
4. Dynamic Nature - The business environment is always changing. E.g., technological improvement, entry
of new competitors, govt. policy etc.
5. Uncertainty – Business environment is uncertain as nobody can predict what will happen in future. This
is more true in case of information technology and fashion industries where changes are occurring too
frequently.
6. Complexity – Business environment is a complex phenomenon as nobody can predict the impact of a
minute change in the environment on a product or service.
7. Relativity – Business environment is relative since it differs from country to country or even from region
to region.

Importance of Business Environment

Modern business world is a world of competitions. Those who are incompetent to face this competition will be
out of the field. For this it is vital to adapt things according to the environment.
For adjusting the operations of an organization according to the environment, environment scanning is
essential. Environment scanning means monitoring the environment of each organization and identifying the
constraints and opportunities before them.

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The importance of business environment (Importance of Business Environment Scanning)

1. Identification of business opportunities and getting the first mover advantage – Identification of
opportunities at an early stage helps the firm to be able to exploit them without losing them to
competitors. E.g., Maruthi Udyog Ltd. became the leader in the segment of small car market.
2. Identifying threats and early warning signals – Environmental awareness helps the managers to identify
various threats; it provides the business early warning signals to plan its future course of action. E.g.,
Entry of multinational companies in Indian market gave a warning signals for the domestic industries to
make some preparations like cost reduction, improving quality, reducing wastages etc.
3. Tapping useful resources – Environment provides various resources to the business like materials,
machinery, water, finance, electricity, labour etc.
4. Coping with rapid changes – Business environment is highly dynamic such as change in market
condition, technology, competition etc. To cope with these changes managers must be dynamic. This is
possible through proper environment scanning.
5. Assisting in planning and policy formulation – Environment scanning gives vital information which can
be taken as the basis for deciding future course of action (planning) or framing guidelines for decision
making (policy formulation).
6. Helps in improving performance – Those enterprises which continuously monitor their environment
and adopt suitable policies will improve their performance.

Dimensions / Factors of Business Environment

1. Economic Environment - Economic

condition, economic system, economic policy, inflation
rates, interest rates, tax rates etc. are the main
components of economic environment. Some
economic policies of Government may favorably affect
the business whereas it may adversely affect some
others. For example, import restriction on some goods
may give advantage to home industries producing such
goods, while, liberalization on import attracts foreign
producers may create difficulties to home producers.

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2. Social Environment – The social environment greatly
influences the working of a business. A business gets
its inputs from society and returns the output again to
the society according to its needs. The social
environment is made up of population trends,
individual needs and cultural factors. The business
should adopt a business strategy which should be
suitable for social-cultural environment.

Examples of social environment affecting the

functioning of a business enterprise:

(i) Social trends present various opportunities and

threats to business enterprises. For example, the large number of urban dwellers. This has created a
demand for products like organic food, gyms, bottled (mineral) water and food supplements.

(ii) Customs and traditions define social practices that have lasted for decades or even centuries. For
example, the celebration of Diwali, Eid, Christmas, and Guru Parv in India provides significant financial
opportunities for greetings card companies, sweets or confectionery manufacturers, tailoring outlets and
many other related businesses.

(iii) Values refer to concepts that a society holds in high esteem. In India, individual freedom, social justice,
equality of opportunity and national integration are examples of major values cherished by all of us.

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 In business terms, these values translate into freedom of choice in the market, business responsibility
towards the society and non-discriminatory employment practices.

3. Technological Environment – It consists of new approaches to producing goods and services.

Production methods and services are fast changing. New instruments and new procedures are
developing rapidly. Computer aided production system made a drastic change in the business sector,
DTP facility increased the speed and quality of printing which wiped out the old printing machines, CDs
and DVDs adversely affected video cassettes and tape recorders, mobile phones with numerous
interactive features have affected many business segments.
Examples of technological environment affecting the functioning of a business enterprise
(i) Airline companies have Internet and World Wide Web pages where customers can look for flight
times, destinations and fares and book their tickets online.
(ii) Recent technological, advances in computers and electronics have modified the ways in which
companies advertise their products. It is common now to see computerized information kiosks, and
World Wide Web multimedia pages highlighting the virtues of products.
Retailers have direct links with suppliers who replenish stocks when needed. Manufacturers have
flexible manufacturing systems.

4. Political Environment – Political environment includes political parties and their ideology, type of
government (single or coalition-union of different parties), stability of the government, policy towards
business etc. All these factors have far reaching impact on the growth and profitability of business.
For instance, Coco-Cola Multi National Company discontinued its operations in India in the late seventies
due to government policy. Again in 1989 another government welcomed such multinational companies
to India.
Examples of political environment affecting the functioning of a business enterprise:
(i) Political stability builds up confidence among business people to invest in the long-term projects
for the growth of the economy. On the other hand, there may be uncertainty of business
activities due to political unrest and threats to
law and order.
(ii) The attitudes of government officials towards
business may have either positive or negative
impact upon business. For example, even after
opening up of our economy in 1991, foreign
companies found it extremely difficult to cut
through the bureaucratic red tape to get permits
for doing business in India. Sometimes, it took
months to process even their application for the
purpose. As a result, these companies were
discouraged from investing in our country.
However, the situation has improved over time

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 5. Legal Environment – It includes the Acts that have been passed by the Central and the State
Governments. The laws related to business made by government are of utmost importance. All
members of business community must follow these laws. In
India, business is regulated with the help of following legislations:

a. Trade Mark Act – 1969,

b. Essential Commodities Act – 1955,

c. Consumer Protection Act – 1986,

d. The Contract Act,

e. Companies Act – 1956,

f. Factories Act,

g. Industrial Disputes Act,

h. Workers Compensation Act,

i. Minimum Wages Act,

j. Income Tax Act – 1961,

k. Sales Tax Act etc.

Impact of legal environment can be illustrated with the help of the following government regulations to
protect consumer's interests:

(i) The advertisement of alcoholic beverages is prohibited.

(i) Advertisements, including packets of cigarettes carry the statutory warning Cigarette smoking is
injurious to health'.

(iii) Advertisements of baby food must necessarily inform the potential buyer that mothers milk is the
best.

All these regulations are required to be followed by advertisers as per the law.

Demonetization

The Govt. of India made an announcement on Nov 8, 2016 that the two largest denomination notes Rs.500 and
Rs.1000 were demonetized. This led to 86% of Indian currency in circulation invalid. The people had to deposit
invalid currency in the banks along with certain restrictions on withdrawals.

The aim of demonetization was to curb corruption, fake notes, use of currency for illegal activities like terrorism,
accumulation of black money generated by income that has not been declared to the tax authorities.

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Aims and Features of Demonetization

1. A tax administration tool – The people who have black money had to declare their unaccounted wealth
and pay taxes at a penalty rate.
2. To stop tax evasion – The Govt. implemented this policy to control tax evasion.
3. To channelize the savings – It was implemented to channelize the savings into formal financial system
by encouraging bank deposits.
4. Cash less economy – Govt. announced demonetization with an aim of creating a digital economy with
the support of formal financial system / banks. (Internet banking, ewallets, PoS [Point of Sale] etc.)

Impact of Demonetization
i. Decline in cash transaction
1 Money / Interest rates ii. Bank deposits increased
iii. Increase in financial savings
Declined since some high demonetized notes were not returned and real
2 Private wealth
estate prices fell
3 Public sector wealth No effect
4 Digitization Digital transactions among new users increased
5 Real estate Prices declined
6 Tax collection Rise in income tax collection because of increased disclosure

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Impact of changes in government policy on business and industry

The policy of liberalisation, privatisation and globalisation of the Government has made a significant impact on
the working of enterprises in business and industry which are as follows:

1. Increasing competition – Liberal licensing and entry of foreign firms made competition for Indian
industries.
2. More demanding customers – Customers have got a wider choice and they are wellinformed, hence
they become more demanding and go for better quality.
3. Rapidly changing technological environment – Advanced technology provides improved machinery and
better quality. Smaller firms find it difficult to cope with these rapid changes in technology.
4. Necessity for change – Because of economic reforms in 1991 and introduction of LPG, market forces
become turbulent (unstable) which necessitated firms to change or modify their operations
continuously.
5. Need for developing human resource – The new market conditions demand people with greater
competence and commitment, hence the need for developing human resources arises.
6. Market orientation – Earlier “production first and then go to market” was the strategy, but in this fast
changing business world first we should study about the market and then produce the goods
accordingly.
7. Loss of budgetary support to the public sector – Fund allotment from government revenue has declined
over the years. This made the public sector undertakings to become more efficient in the market.

Economic Environment in India

Till 1991 India followed an economic policy with a socialist bias. The policy was based on the primacy of public
sector and control and regulations on private sector. From 1991 onwards the Government started
implementing sweeping economic reforms. As part of economic reforms, the government of India announced a
new industrial policy in 1991.

Features of Industrial Policy

a. Reduced the number of industries to 6 which require compulsory licensing.

b. De-reserved many industries which were earlier reserved for the public sector.
c. Carried out disinvestment process in case of many public sector companies.
d. Liberalized foreign capital policy – 100% Foreign Direct Investment (FDI) in many segments.
e. Granted permission for technology agreement with foreign companies.
f. Set up Foreign Investment Promotion Board (FIPB) to promote foreign investment in India.

Liberalization, Privatization and Globalization (LPG) are the major programs of this new policy.

1. Liberalization – Liberalization means liberating the economy from the regulations and restrictions on
economic growth. The old policy of licenses, permits, quotas and controls discouraged private enterprises.
Import licensing, foreign exchange regulations, progressive taxes, price controls, etc. discouraged investments.
Acts like MRTP Act prevented large business houses from fresh investment, expansion and modernization. All
these policies adversely affected industrialization and economic growth. The new policy of liberalization through

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 de-licensing and decontrols frees the economy from restrictions. Licenses and permits have been replaced by
broad guidelines.

2. Privatization – The word “Privatization” was implemented by the management expert Peter Drucker. It is just
opposite to “Nationalization”. Privatization is a trend all over the world now, in India the priority given to the
public sector is gradually being reduced and the role of private sector is being encouraged. The main features
of privatization are as follows:
a. Disinvestment of a part of the shares held by the government in Public Sector Undertakings (PSUs). This
results in passing of ownership, control and management of PSUs to the private sector.
b. De-reservation of areas formerly reserved for the public sector. This allows the private sector to enter
into new areas.
The government is withdrawing from many economic activities like running business and is
concentrating more on areas like primary and secondary education, provision of basic health care,
development of infrastructure etc.

3. Globalization – Globalization means free movement of goods, capital and labour across the globe. This
involves reduction of import duties and encouragement of foreign investment.

It has to be remembered that while liberalization and privatization are policies, globalization is a fact. As
Amartya Sen (Nobel Prize winner) said, “Globalization is a not a policy, it is a phenomenon. There are gains
and pains from globalization. Appropriate policies have to be formulated to maximize the gains and minimize
the pains.

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