BUSINESS STUDIES Class XII UNIT 3

CLASS XII
BUSINESS STUDIES
Concepts by BHARAT SIR
[B.A.(H) ECONOMICS from DU, Pursuing M.A. ECONOMICS]
[4 YEARS of Teaching Experience]

“WHERE YOU LEARN TODAY AND LEAD TOMORROW”

CONTACT – bharatdhingra642@[Link] [8700823727, 7838603296]

ਸਭਿ ਆਏ ਹੁਕਭਿ ਖਸਿਾਹੁ ਹੁਕਭਿ ਸਿ ਵਰਤਨੀ ॥

All come by the Master’s command and his order extends over all.
- ਸ਼੍ਰੀ ਗੁ ਰੂ ਗਰੰਥ ਸਾਭਹਬ ਜੀ

UNIT 3 – BUSINESS ENVIRONMENT

Meaning of Business Environment
Business environment refers to forces factors individuals and institutions which are not under the control of
business enterprise but these may affect its performance.
• In simple words, the business environment is the surroundings in which business exist the
economic, social, political, technological, legal and other forces which operate outside business
enterprise are part of business environment.
• “Just take the universe, subtract from it the subset that represents the organisation, and the
remainder is environment”.
• So also, the individual consumers or competing enterprises as well as the governments, consumer
groups, competitors, courts, media and other institutions working outside an enterprise constitute
its environment.
• The important point is that these individuals, institutions and forces are likely to influence the
performance of a business enterprise although they happen to exist outside its boundaries.
• For example, increase in taxes by government can make things expensive to buy.
Technological improvements may render existing products obsolete.
Political uncertainty may create fear in the minds of investors.
Changes in fashions and tastes of consumers may shift demand in the market from existing products
to new ones.
Increased competition in the market may reduce profit margins of firms.

Importance of Business Environment

1. It Enables The Firm To Identify Opportunities And Getting The First Mover Advantage
• Opportunities refer to the positive external trends or changes that will help a firm to improve its
performance.
• Environment provides numerous opportunities for business success. Early identification of
opportunities helps an enterprise to be the first to exploit them instead of losing them to
competitors.

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• For example, Maruti Udyog became the leader in the small car market because it was the first to
recognise the need for small cars in an environment of rising petroleum prices and a large
middle-class population in India.

2. It Helps The Firm To Identify Threats And Early Warning Signals

• Threats refer to the external environment trends and changes that will hinder a firm’s
performance.
• Besides opportunities, environment happens to be the source of many threats.
• Environmental awareness can help managers to identify various threats on time and serve as an
early warning signal.
• For example, if an Indian firm finds that a foreign multinational is entering the Indian market
with new substitutes, it should act as a warning signal.
• On the basis of this information, the Indian firms can prepare themselves to meet the threat by
adopting such measures as improving the quality of the product, reducing cost of the production,
engaging in aggressive advertising, and so on.

3. It Helps In Tapping Useful Resources

• Environment is a source of various resources for running a business.
• To engage in any type of activity, a business enterprise assembles various resources called inputs
like finance, machines, raw materials, power and water, labour, etc., from its environment
including financiers, government and suppliers.
• They decide to provide these resources with their own expectations to get something in return
from the enterprise.
• The business enterprise supplies the environment with its outputs such as goods and services for
customers, payment of taxes to government, return on financial investment to investors and so
on.
• Because the enterprise depends on the environment as a source of inputs or resources and as an
outlet for outputs, it only makes sense that the enterprise designs policies that allow it to get the
resources that it needs so that it can convert those resources into outputs that the environment
desires.
• This can be done better by understanding what the environment has to offer.

4. It Helps In Coping With Rapid Changes

• Today’s business environment is getting increasingly dynamic where changes are taking place at
a fast pace.
• It is not the fact of change itself that is so important as the pace of change.
• Turbulent market conditions, less brand loyalty, divisions and sub-divisions (fragmentation) of
markets, more demanding customers, rapid changes in technology and intense global
competition are just a few of the images used to describe today’s business environment.
• All sizes and all types of enterprises are facing increasingly dynamic environment.
• In order to effectively cope with these significant changes, managers must understand and
examine the environment and develop suitable courses of action.

5. It Helps In Assisting In Planning And Policy Formulation

• Since environment is a source of both opportunities and threats for a business enterprise, its
understanding and analysis can be the basis for deciding the future course of action (planning)
or training guidelines for decision making (policy).

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• For instance, entry of new players in the market, which means more competition may make an
enterprise think afresh about how to deal with the situation.

6. It Helps In Improving Performance

• The final reason for understanding business environment relates to whether or not it really
makes a difference in the performance of an enterprise.
• The answer is that it does appear to make a difference.
• Many studies reveal that the future of an enterprise is closely bound up with what is happening
in the environment.
• The enterprises that continuously monitor their environment and adopt suitable business
practices are the ones which not only improve their present performance but also continue to
succeed in the market for a longer period.

Dimensions / Components of Business Environment

Dimensions of, or the factors constituting the business environment include economic, social,
technological, political and legal conditions which are considered relevant for decision-making and
improving the performance of an enterprise.
A brief discussion of the various factors constituting the general environment of business is given
below:

1. ECONOMIC ENVIRONMENT: Interest rates, inflation rates, changes in disposable income of people,
stock market indices and the value of rupee are some of the economic factors that can affect
management practices in a business enterprise.
• Short- and long-term interest rates significantly affect the demand for product and services.
• For example, in case of construction companies and automobile manufacturers, low longer-term
rates are beneficial because they result in increased spending by consumers for buying homes
and cars on borrowed money.
• Similarly, a rise in the disposable income of people due to increase in the gross domestic product
of a country creates increasing demand for products.

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• High inflation rates generally result in constraints on business enterprises as they increase the
various costs of business such as the purchase of raw materials or machinery and payment of
wages and salaries to employees.
• Demonetization and passing of GST amendment can be seen as recent examples in economic
environment.

2. SOCIAL ENVIRONMENT: The social environment of business includes the social forces like customs
and traditions, values, social trends, society’s expectations from business, etc.
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.
• In India, individual freedom, social justice, equality of opportunity and national integration are
examples of major values cherished by all of us.
• In business terms, these values translate into freedom of choice in the market, business’s
responsibility towards the society and non-discriminatory employment practices.
• Social trends present various opportunities and threats to business enterprises. These forces
may not be immediately seen but they affect the business in long run.
• For example, the health-and-fitness trend has become popular among large number of urban
dwellers. This has created a demand for products like organic food, gyms, bottled (mineral)
water and food supplements.
• Some other common examples in this context are change in quality of life, change in outlook of
the society, education and literacy rates, traditions, customs and habits of the people.

3. 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.
• For example, recent technological, advances in computers and electronics have modified the
ways in which companies advertise their products.
• Similarly, retailers have direct links with suppliers who replenish stocks when needed.
• Airline companies have Internet and World Wide Web pages where customers can look for flight
times, destinations and fares and book their tickets online.
• In addition, continuing innovations in different scientific and engineering fields such as lasers,
robotics, biotechnology, food preservatives, medicine, telecommunication and synthetic fuels
have provided numerous opportunities and threats for many different enterprises.
• Shifts in demand from vacuum tubes to transistors, from steam locomotives to diesel and electric
engines, from fountain pens to ballpoint, from propeller airplanes to jets, and from typewriters to
computer-based word processors, have all been responsible and creating new business.
• Introduction of Zomato and Swiggy makes the people to reduce their demand for dine in for
restaurant.

4. POLITICAL ENVIRONMENT: Political environment includes political conditions such as general

stability and peace in the country and specific attitudes that elected government representatives hold
towards business.
• The significance of political conditions in business success lies in the predictability of business
activities under stable political conditions.
• On the other hand, there may be uncertainty of business activities due to political unrest and
threats to law and order.

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• Political stability, thus, builds up confidence among business people to invest in the long-term
projects for the growth of the economy.
• Political instability can shake that confidence. Similarly, the attitudes of government officials
towards business may have either positive or negative impact upon business.
• The political environment affects the business in an immediate way, so it is very relevant for the
business to get a good performance.
• Some common examples in this context are Swachh Bharat Abhiyan and skill India movement
started by the government, government intervention in business, foreign policy of the
government, values and ideology of government towards other nations.

5. LEGAL ENVIRONMENT: Legal environment includes various legislations passed by the Government
administrative orders issued by government authorities, court judgments as well as the decisions
rendered by various commissions and agencies at every level of the government— centre, state or local.
• The management of every enterprise has to obey the law of the respective country.
• Therefore, an adequate knowledge of rules and regulations framed by the Government is a pre-
requisite for better business performance.
• Non-compliance of laws can land the business enterprise into legal problems.
• In India, Constitutional Provisions; Companies Act 2013; Industries (Development and
Regulations) Act 1951; Foreign Exchange Management Act and the Imports and Exports
(Control) Act 1947; Factories Act, 1948; Trade Union Act; 1926; Workmen’s Compensation Act,
1923; Industrial Disputes Act, 1947, Consumer Protection Act, 1986, Competition Act, 2002 and
host of such other legal enactments as amended from time to time by the Parliament, is
important for doing business. Impact of legal environment can be illustrated with the help of
government regulations to protect consumer’s interests.
• For example, the advertisement of alcoholic beverages is prohibited.
• Advertisements, including packets of cigarettes carry the statutory warning ‘Cigarette smoking is
injurious to health’.
• Similarly, advertisements of baby food must necessarily inform the potential buyer that mother’s
milk is the best. All these regulations are required to be followed by advertisers.

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