Class 12

Business Studies
Chapter - 3

Business
Environment

Ajith Kanthi Wayanad

www.hssplustwo.blogspot.com
 Business Environment

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
 Business Environment

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

Suppliers Customers Govt.

 Business Environment

Business environment may sometimes provide

opportunities for growth as well it may constrain
(threat) the growth of an organisation

Opportunity and Threat

Opportunities: BPO reduces cost of production,
emerging demands for houses etc.
Threats: High cost of electricity, Government control
on using ground water etc.
 Features of
Business Environment
 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
 Features of Business Environment
2 Specific and general forces
● Factors which affect the business directly in the
day to day working are called specific forces, e.g.,
investors, customers, competitiors, suppliers etc.

● Factors which influence an enterprise indirectly are

called general forces, e.g., social, political, legal,
technological conditions etc.
Investors
Investors Social
Social

Customers
Customers Competitors Technological
Competitors Political
Political Technological

Suppliers
Suppliers Legal
Legal
 Features of Business Environment
3 Interrelatedness
Various elements of business environment are
closely related or interdependent

Eg: Technological development may result in lose of

employment opportunities
 Features of Business Environment
4 Dynamic Nature
The business environment is always changing

Eg: Technological improvement, entry of new

competitors, govt. policy etc.
 Features of Business Environment
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.
 Features of Business Environment
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
 Features of Business Environment
7 Relativity
Business environment is relative since it differs from
country to country or even from region to region
 Importance of
Business Environment

Ajith Kanthi Wayanad

www.hssplustwo.blogspot.com
 Importance of Business Environment
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.
 Importance of Business Environment
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

Eg: 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.
 Importance of Business Environment
3 Tapping useful resources

Environment provides various resources to the business

like materials, machinery, water, finance, electricity,
labour etc.
 Importance of Business Environment
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
 Importance of Business Environment
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)
Importance of Business Environment
6 Helps in improving performance

Those enterprises which continuously monitor their

environment and adopt suitable policies will improve
their performance
Dimensions or Factors
of
Business Environment
Factors of Business Environment
 Factors of Business Environment
1 Economic Environment
Economic policies of Government may favourably
affect the business whereas it may adversely affect
some others

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
 Factors of Business Environment
2 Social Environment
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 strategy which should
be suitable for social and cultural environment
 Factors of Business Environment
3 Technological Environment
Production methods and services are fast changing
New instruments and new procedures are
developing rapidly

Change in
Technology

Computer aided production system made a drastic

change in the business sector
Eg: CDs and DVDs wiped out Video Cassettes and
Tape recorders
 Factors of Business Environment
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.

Eg: 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
 Factors of Business Environment
5 Legal Environment
It includes the Acts that have been passed by the
Central and the State Governments

Income Tax Act Consumer Protection Act

Trade Mark Act

The laws related to business made by government

are of utmost importance
All members of business community must follow
these laws
Factors of Business Environment
Economic Environment in India
 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
 Economic Environment in India

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

Industrial policy 1991

Features of Industrial Policy
 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.
 Features of Industrial Policy

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.
 Major Programs of
Industrial Policy 1991
 Major Programs of
Industrial Policy 1991
 Liberalisation

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
 Liberalisation
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 de-

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

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
Main Features of Privatisation

Ajith Kanthi Wayanad

www.hssplustwo.blogspot.com
 Disinvestment

Passing of ownership, control and management

of Public Sector Undertakings to the private
sector

DIS
IN V ES
TM
EN
T
 De-reservation
This allows the private sector to enter
into new areas

DE
-RE
SE R
VAT
IO N

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.
 Globalisation

Globalization means free movement of goods,

capital and labour across the globe

This involves reduction of import duties and

encouragement of foreign investment
Demonetization
 Demonetization
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
 Demonetization

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
 Aims and Features of
Demonetization

Ajith Kanthi Wayanad

www.hssplustwo.blogspot.com
 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
 Aims and Features of Demonetization
2 To stop tax evasion

The Govt. implemented this policy to control

tax evasion
 Aims and Features of Demonetization
3 To channelize the savings

It was implemented to channelize the savings

into formal financial system by encouraging
bank deposits
 Aims and Features of Demonetization
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, e-wallets, PoS [Point of Sale] etc.)
 Impact of Demonetization
i. Decline in cash transaction
Money / Interest
1 ii. Bank deposits increased
rates
iii. Increase in financial savings

Declined since some high demonetized

2 Private wealth notes were not returned and real estate
prices fell
Public sector
3 No effect
wealth
Digital transactions among new users
4 Digitization
increased
5 Real estate Prices declined
Rise in income tax collection because of
6 Tax collection
increased disclosure
Impact of changes in
government policy
on business and
industry
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
Impact of changes in government policy on business and industry

1 Increasing competition

Liberal licensing and entry of foreign firms

made competition for Indian industries
Impact of changes in government policy on business and industry

2 More demanding customers

Customers have got a wider choice and

they are well-informed, hence they
become more demanding and go for better
quality
Impact of changes in government policy on business and industry

3 Rapidly changing technological

environment
Advanced technology provides improved
machinery and better quality

Technological change in
Printing Machines

Smaller firms find it difficult to cope with

these rapid changes in technology
Impact of changes in government policy on business and industry

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
Impact of changes in government policy on business and industry

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
Impact of changes in government policy on business and industry

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
Impact of changes in government policy on business and industry

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
Prepared by: Ajith Kanthi @ Ajith P P
SKMJ HSS Kalpetta Wayanad Kerala
Ph: 9446162771, 7907712665
HssVoice Blog: www. hssplustwo.blogspot.com