Chapter-3

Business Environment

1. Meaning of Business Environment?

Ans. 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. Thus,
the economic, social, political, technological and other forces which
operate outside a business enterprise are part of its environment.

2. Explain the features of business environment?

Ans.The features of Business Environment are:
(i) Totality of external forces: Business environment is the sum
total of all things external to business firms and, as such, is
aggregative in nature.
(ii) Specific and general forces: Business environment includes
both specific and general forces. Specific forces affect
individual enterprises directly and immediately in their day-
to-day working. General forces have impact on all business
enterprises and thus may affect an individual firm only
indirectly.
(iii) Inter-relatedness: Different elements or parts of business
environment are closely interrelated. For example, increased
life expectancy of people and increased awareness for
health care have increased the demand for many health
products and services like soft drinks, fat-free cooking oil,
and health resorts. New health products and services have,
in turn, changed people’s life styles.
(iv) 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.
(v) 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.
(vi) 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.
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.
(vii) 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.

3. Importance of Business Environment?

Ans. A good understanding of environment by business managers
enables them not only to identify and evaluate, but also to react to
the forces external to their firms. The importance of business
environment and its understanding by managers can be appreciated
if we consider the following facts:
(i) 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.
(ii) 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.
(iii) 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. This can be
done better by understanding what the environment has to
offer.
(iv) 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. 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.
(v) 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). 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.
(vi) 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. And, 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.

4. Explain the dimensions of Environment?

Ans. A brief discussion of the various factors constituting the general
environment of business is given below:
(i) 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.
(ii) (ii) Social Environment: 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. Values refer to concepts that a society holds in high
esteem. Social trends present various opportunities and
threats to business enterprises.
(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.
(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. 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.
(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.Rules and regulations
framed by the Government is a pre-requisite for better
business performance.
 5. What is Liberalisation?
Ans. The economic reforms that were introduced were aimed at
liberalising the Indian business and industry from all unnecessary
controls and restrictions.

6. What is Privatisation?
Ans. The new set of economic reforms aimed at giving greater role to
the private sector in the nation building process and a reduced role
to the public sector. This was a reversal of the development strategy
pursued so far by Indian planners.

7. What is Globalisation?
Ans.It means the integration of various economists of the world
loading towards the emergence of a cohesive global economy.

8. What is Disinvestment?
Ans. Transfer in the public sector enterprises to the private sector. It
results in dilution of stake of the Government in the public
enterprise.

9. What is Demonetization?
Ans. The Government of India, made an announcement on
November 8, 2016 with profound implications for the Indian
economy. The aim of demonetisation was to curb corruption,
counterfeiting the use of high denomination notes for illegal
activities; and especially the accumulation of ‘black money’
generated by income that has not been declared to the tax
authorities.