Chapter 3

BUSINESS ENVIRONMENT

Meaning of Business Environment

The term ‘business environment’ means the sum total of all individuals, institutions and other forces that are outside the
control of a business enterprise but that may affect its performance.

Features of Business Environment (DISTUR B C)

1) Totality of external forces: Business environment is the sum total of all things external to business firms and, as
such, is aggregative in nature.

2) Specific and general forces: Business environment includes both specific and general forces. Specific forces (such as
investors, customers, competitors and suppliers) affect individual enterprises directly and immediately in their day-
to-day working. General forces (such as social, political, legal and technological conditions) have impact on all
business enterprises and thus may affect an individual firm only indirectly.

3) Inter-relatedness: Different elements or parts of business environment are closely inter-related. For example,
increased life expectancy of people and increased awareness for health care have increased the demand for many
health products and services like diet Coke, fat-free cooking oil, and health resorts. New health products and
services have, in turn, changed people’s life styles.

4) Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms of technological
improvement, shifts in consumer preferences or entry of new competition in the market.

5) Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings, especially
when environment changes are taking place too frequently as in the case of information technology or fashion
industries.

6) Complexity: Since business environment consists of numerous interrelated and dynamic conditions or forces which
arise from different sources, it becomes difficult to comprehend at once what exactly constitutes a given
environment. In other words, environment is a complex phenomenon that is relatively easier to understand in parts
but difficult to grasp in its totality. For example, it may be difficult to know the extent of the relative impact of the
social, economic, political, technological or legal factors on change in demand of a product in the market.

7) Relativity: Business environment is a relative concept since it differs from country to country and even region to
region. Political conditions in the USA, for instance, differ from those in China or Pakistan. Similarly, demand for
sarees may be fairly high in India whereas it may be almost non-existent in France.

Importance of Business Environment (ITC Is Increasing Products)

1) 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. 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) 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, when Tata Motors announced the launch of small economy car it was a warning signal for
Maruti Udyog.
 3) 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.

4) 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 as 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. For e.g. Google a search engine has remained at the top because of innovative features.

5) 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). For instance, ITC entered into hospitality sector after knowing the
increase in India’s share in world tourism.

6) Improving performance: 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. For e.g. Flavoured curd introduced by Nestle increased the demand and maintain its
reputation in milk products

Dimensions of Business Environment (SLEPT)

(i) Economic Environment:
 Key economic factors serve either as an opportunity or as a threat to a business enterprise
 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, a rise in the disposable income of people due to increase in the gross domestic product of a
country creates increasing demand for products.
 Decrease in Interest on home loans has helped in solving the problem of recession.

(ii) Social Environment:

 Analysis and understanding of social environment is required to determine the standards of conduct that are
acceptable to the society
 The social environment of business include 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, Id, 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.
 Increased demand for nutritional products like organic foods, gym or bottled water due to fitness consciousness

(iii) 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. It is common now to see CD-ROM’s, and Internet/ World Wide Web
multimedia pages highlighting the virtues of products.
 Airline companies have Internet and World Wide Web pages where customers can look for flight times,
destinations and fares and book their tickets online. Smart watches will soon result in death of traditional
watches.
(iv) 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. Political stability, thus, builds up
confidence among business people to invest in the long term projects for the growth of the economy.
 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. Terrorism in J&K has badly
affected tourism industry.

(v) 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.
 It is imperative for the management of every enterprise to obey the law of the land. 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, a working knowledge of
Companies Act 1956; 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.
 Advertisements, including packets of cigarettes carry the statutory warning ‘Cigarette smoking is injurious to
health’.

Demonetization: In the recent times, on 8 November 2016, the central government, on the recommendation of the
Central Board of the Reserve Bank, declared the then existing series of the banknotes of the denominational value of Rs
500 and Rs 1,000 to cease to be legal tender and remonetized the currency with the notes of denomination of Rs 2,000
and Rs 200. The purpose was to fight black money, end corruption and promote cashless economy.

Meaning Of Demonetisation
It is the process through which the central government withdraws the approval of legal tender granted to existing
currency notes of certain denominated value from the circulation.
Central Bank strips (demonetises) existing currency notes of certain denominated value from the circulation. After
demonetisation, the currency cannot be used as money and ceases to perform the functions of a medium of exchange,
storage, deferred payment or any other function of money.

Features Of Demonetisation
(a) A monetary process: Demonetisation is a process of withdrawing the currency from circulation. A government
implements this process through its central bank, and it may take days to weeks depending upon the size of currency
demonetised and the size of its country and population.
(b) Long-term effects: A country may take long time to overcome from the shadow of the after-effects of this decision.
The real benefits or disadvantages of this policy can only be assessed over a longer period of time.
(c) Frequency to use: The policy to demonetise a currency cannot be used very frequently. It is rarely used and may
affect the population, its trade and day-today activities.
(d) Burden on revenue: Demonetisation adversely affects the government exchequer by increasing its expenditure in
terms of destroying the old currency, recruiting additional manpower for implementation of the policy and bringing the
additional or new currency in circulation to reduce the difficulties of the people.
(e) Monetary transmission and reduction in bank rates: During demonetisation, people deposit their physical currency in
banks and financial institutions. This increases supply of funds than demand and hence lending rates decrease.