CHAPTER-3

BUSINESS ENVIRONMENT

Meaning of Business Environment:

The sum total of all individual consumers, institutions and other forces such as
competing enterprises, government, consumer groups, courts, media etc. that are outside
the control of a business enterprises but that may affect its performance constitute the
Business Environment.

Environmental Scanning
The complete awareness and understanding of all the factors, persons and other
institutions under which the business operate is called as Environmental scanning.

Features/Characteristics/Nature of Business Environment

The main features of Business Environment are given below:-
1. Totality of external forces: Business Environment includes all the forces,
institutions and factors which directly or indirectly affect the business
organization.
2. Specific and General forces: Business Environment includes specific forces such
as investors, customers, competitors and suppliers which affect the business
directly as well as general forces (Non-human) such as Economical, Social,
Political, Legal and Technological etc.
3. Inter-relation: All the forces and factors of Business Environment are inter-
related to each other. For example, Inclination of youth towards western culture,
the demand for fast food is increasing and Increase in health awareness increased
the demand for many health products.
4. Uncertainty: It is very difficult to predict the changes of Business Environment.
For example, Information technology, fashion products.
5. Dynamic: Business Environment is highly flexible and keeps changing.
Sometimes technology, sometimes competition, sometimes consumer preferences.
So, it is essential to scan continuously.
6. Relativity: The impact of Business Environment may differ from company to
company, region to region and country to country. For example, CES study on
pesticides in cold drinks resulting of decrease in sale of cold drinks but increase in
sale of juices and other drinks.
7. Complex: Although, it is easy to scan the environment in parts, but it is difficult
to know how these changes will influence the business in its totality.

Importance of Business Environment:

Proper understanding about the Business Environment brings lots of benefits for
the businessmen which are discussed below:
1. First mover advantage: The businessmen who are able to understand and scan
the opportunities of business environment at early stage get maximum benefits by
capturing a big share in the market. This can be understood from the following
example.
 By understanding, there will be great demand for car painting in near future,
Goodlace Nerolac company entered a contract very early with Kansai company,
Japan to import car painting technology. So, it has got 90% of car painting work
of Maruti Suzuki Company.
2. Warning Signal: The businessmen who are able to scan and understand the
business environment on time get a warning signal to deal with the negative
impacts of business environment. This can be understood from the following
example
The Maruti company accepted the entry of foreign car companies as
warning signal and increased their production three times to supply the cars
(Esteem) without any waiting period to compete with the new companies.
3. Helpful in tapping useful resources: By understanding what type of outputs
demanded in the environment in near future, the businessmen can acquire raw
materials, machines, finance, labour and finance according to that. They select
resources according to availability in environment and demand of output in
environment. This can be understood from the following example:
With the demand of flat screen colour T.V., Manufacturers are collecting
resources necessary to manufacture flat screen color T.V rather than collecting
resources of Traditional colour TVs.
4. Assisting in Planning and Policy making: The major strategies or plans and
policies in the organisaion are formed keeping in mind business environment.
Scanning of environmental factors helps in finding out the opportunities of
business and strategies can be made to grab these opportunities. Following
example will clear this point further
By understanding that there is great scope for tourism industry in our
country, various hotels and ITC group are making new strategies for tourists.
5. Helps to adjust and adapt with the rapid changes: Today changes are taking
place very fast and these changes have great impact on Business. Business
environment scanning helps the companies to scan and understand these changes
and the businessmen could make changes in their internal environment also to
match the external environment.
6. Improvement in performance: With continuous scan of business environment
companies can easily improve their performance. By making changes in the
internal environment matching to external environment, organizations can
improve their market share. This can be understood with the following example.
Weston Company which could not cooperate with the changing environment
started suffering loss and lost its name in TV market whereas BPL, Onida did
scan the environment well and are still competing successfully with many MNCs.

Dimensions of Business Environment

General Environment is the most important dimension of business environment
which has the following components
1. Economic Environment
2. Social Environment
3. Political Environment
4. Legal Environment
5. Technological Environment
1. Economic Environment
Economic Environment consists of Gross Domestic Product, National Income,
Per capita income, Employment rate, Industrial, Monetary and fiscal policy of the
government, Interest rates, Balance of payment, inflation rates etc.
 Recent changes in economic and fiscal policy of country have encouraged NRIs
and foreign investors to invest in Indian companies as well as private sector is
allowed to enter in financial institutions and insurance sectors
 Low rate of interest on long-term loans are beneficial to consumers for buying
homes and cars resulting in the growth of Constructing and Automobiles
industries.
 Increase in income level of people due to increase in GDP will result in increasing
demand for products.

2. Social Environment:
Social environment consists of the customs and traditions of the society, standard
of living, taste, preferences and education level of the people etc.
 The celebration of Diwali, Id, and Christmas in India provides financial
opportunities for greeting card companies, sweets manufacturers, textile business,
tailoring outlets and many other related businesses.
 Increase in health awareness has created a demand for products like organic food,
diet soft drinks, and bottled water.
 Increase in women employment increased the demand for products of domestic
appliances.

3. Political Environment
Political environment constitutes type of government in power (single majority or
alliance govt.), attitude of government towards MNCs, Foreign policy of govt., policy
changes implemented by different governments. The political environment has immediate
and great impact on the business transactions so the businessman must scan this
environment very carefully.
 In 1977 the Janata government sent back all the MNCs which led the closure of
Coca Cola Company. But in 1991, after the economic policy of globalization, the
Coca Cola Company came back to India.
 Due to the political unrest and law and order problems, businessmen hesitate to
start the industries as well as do trading in North Eastern states.

4. Legal Environment
Legal environment constitutes the various legislations passed in the parliament,
Court judgments, decisions rendered by carious commissions of Central or State
government. Non-compliance of laws can land the business enterprise into legal
problems. Therefore, an adequate knowledge of rules and regulations framed by the
government is very important for business performance.
 The Trade Mark Act, Essential commodity Act, Weighs and Measures Act etc
have affected the business transactions.
 Deregulation of capital market has made it easy for businessman to collect capital
from primary market.
  Liberalization in investment is encouraging foreign investors to invest in Indian
capital market.
 Compulsory statutory warning to be printed on Tobacco and Alcoholic products
 Prohibition of Alcoholic product advertisement
 FERA is replaced by FEMA

5. Technological Environment
Technological environment refers to changes taking place in the method of
production, use of new equipments and machineries to improve the quality of products.
The businessman must closely monitor and implement these factors in order to remain in
the competitive market.
 Digital watches have killed the business of traditional watches
 Flat LCD Television technology gradually decreasing the sale of traditional
colour televisions
 Xerox machines have led to the closure of carbon paper business.
 Shift from traditional telephones to modern mobile phones
 Booking railway tickets through internet affected travel agent business.

ECONOMIC ENVIRONMENT IN INDIA

General Economic Factors: Economic environment is the most important dimension of
Business Environment. The important factors of economic factors which have impact on
businessmen are briefly discussed below:
1. Stage of Economic Development: The business policies of a developed country
are different from the policies of developing countries. India is coming under the
stage of developing country.
2. Economic Structure: India is following the mixed economic structure in which
there is co-existence of Public and Private sectors. It is a mixture of capitalist
(profit motive) and socialist (motive of people welfare).
3. Economic Policies: Important economic policies of India which influence
business decisions are Industrial policy, Fiscal policy and monetary policy. India
has followed strict as well as liberal economic policies. Liberal policies offer
more opportunities to businessmen whereas strict policies put many constraints.
4. Economic indicators: The common economic indicators are National Income,
Per Capita Income, Balance of payment, GDP, GNP, Rate of saving and
investment, value of export and import etc.
5. Economic Planning: It includes five years plan, Annual budgets, Growth plan
etc.
6. Infrastructure: It refers to basic services necessary to carry on business activities
such as Transportation, Communication, Banking, Financial institutions etc.
Economic Environment at the time of Independence
The main features of Indian Economic Environment at the time of Independence
were given below:
1. Dominance of Agriculture sector in which three-fourth of total population was
occupied
2. 85% of the population was living in villages
3. Use of obsolete and outdated technology in production
4. Lack of good public health system resulted widespread communicable diseases
 Main objectives of Economic polices adopted by India to solve economic
problems:
1. Giving more importance to public sector and curtailing the role of private
sectors
2. Initiate rapid economic growth to raise the standard of living, reduce
unemployment and poverty
3. Become self-reliant and set up a strong industrial base with emphasis on
heavy and basic industries
4. Reduce regional imbalance as well as inequalities of income and wealth
5. Giving more emphasis to socialist pattern of development based on equality
and prevents exploitation.

Major crisis of 1991:

Indian government could not get very positive effects by making the above said
economic policy which gave more importance to public sector and imposing restrictions
on private sector. As a result, India faced the following crisis in 1991
 The fiscal deficit raised to 7% of GDP which was a warning situation
 Internal debt rose to 50% of GDP
 Inflation rate rose to 13-14% and depreciation in value of rupee
 India’s credit worthiness of international financial institutions fell down

Features of New Economic Policy 1991

To save country from the serious situation of crisis, Government of India
announced a new industrial policy in July 1991 as a part of economic reforms, the
features of which have been listed below:
1. De-licensing: Only six industries were kept under Licensing scheme
2. Entry to private sector: The role of public sector was limited only to four
industries and the rest all the industries were opened for private sector also.
3. Disinvestment: The shares of many public sector enterprises were sold to private
sectors
4. Liberal Foreign Policy: The share of foreign equity participation was increased
to large extend and in many activities 100% Foreign Direct Investment was
permitted.
5. Liberalization in technical area: Automatic permission was given to Indian
companies for signing technology agreements with foreign companies
6. Setting up of FIPB: Foreign Investment Promotion Board was established to
promote and canalize foreign investment in India.

Three dimensions of new economic policy 1991

In essence, the major changes subsequent to new economic policy can be
categorized into following three categories
1. Liberalization
2. Privatization
3. Globalization
 1. Liberalization: It refers to end of license, quota and many more restrictions and
controls which were put on industries before 1991. The consequences of
Liberalization are given below
(a) Abolition of license except in few
(b) No restrictions on expansion or contraction of business activities
(c) Freedom in fixing prices and movement of goods and services
(d) Liberalization in import and export and simplifying the procedure to
attract foreign capital in India.

2. Privatization: It refers to giving greater role to private sector and reducing the
role of public sector in the process of nation building. To execute this policy,
government took the following steps:
(a) Adopting of the policy of planned disinvestment of public sectors
(b) Setting up of Board of Industrial and Financial Reconstruction to revive
sick units in public sector enterprises suffering loss.
(c) Diluting the stake of the government by way disinvesting more than 51%
shares to the private sector

3. Globalization: It refers to integration of various economies of world with the aim

of breaking the geographical and political barriers in order to serve a customer
better. To adopt this policy, government had to take the following measures:
(a) Government removed many restrictions from import of capital goods as
well as reduction of import duty
(b) Foreign Exchange Regulation Act (FERA) was replaced by Foreign
exchange Management Act (FEMA).
(c) Rationalization of tariff structure and abolition of Export duty.

Impact of changes in Economic Policy on the Business and Industry (or) The Effects
of Liberalization and Globalization
The common influence and impact of new economic policy are explained below:
(1) Destabilization Protected Environment: After 1991, when the government de-
licensed the company and abolished the registration scheme for the industries then
more people entered in the business. There was no more protected environment
for license holders as the many people joined the race of competition. Eg.
Hindustan Motors company producing Ambassador cars lost its secured
environment after 1981 and Weston company (TV) having 38% market share
almost became unknown in 1995-96
(2) Threat from MNCs: After 1991, the MNCs got permission to establish
themselves in Indian market. It became more threat to Indian companies as the
MNCs were having large resources, world class technology and operate on large
scale. So, the Indian companies started entering into contract with foreign
companies to compete with MNCs. Eg. Indian sewing company joined Singer
company of USA and became Singer India LTD.
(3) All round development: After the new policy, Indian companies had to face all
round competition which means competition from the internal market and
 competition from the MNCs. The companies having latest technology and large
resources only could survive and face competition.
(4) Domination of Buyers market: Before 1991, there were few industries so that
there was shortage of product in every sector resulting produce oriented market.
After new economic policy many foreign companies established their production
units in India which resulted surplus of products in every sector due to which
buyers started dominating. The market became customer oriented. So, now a days
products are produced keeping in mind the demands of the customer
(5) Export a matter of survival: Due to the global competition and liberal external
trade policy, many Indian companies joined the export business to earn more
foreign exchange and increased their turnover more than double by starting export
division. Eg. MRF, Ceat Tyres, Reliance Company etc. got a great hold in the
export market.
(6) Need for developing human resources: Indian companies started suffering for
long with inadequately trained personnel. The new market conditions require
people with higher competence and greater commitment. Hence the need for
developing human resources became more importance.
(7) Rapidly changing technological environment: After the new economic policy,
Indian companies needed to adopt the world class technology to stand in the
global competition. For this purpose, the investment in Research and
Development (R&D) started increasing. Many Pharmaceutical companies
increased their in R&D from 2% to 12%
(8) Corporate Vulnerability: Indian business companies started facing threat of
being taken over by the big foreign companies. Because, the large companies
have lot of resources which help them to take over the small business houses. For
example, Daewoo Company first entered into contract with DCM Company to
start car manufacturing and later gradually Daewoo got complete hold over the
DCM Company.
(9) Loss of Budgetary support to Public sector: Prior to 1991, all the losses of
Public sector were used to be borne by the government by sanctioning special
funds from budgets. But today the public sectors have to survive and grow by
utilizing their resources efficiently otherwise these enterprises have to face
disinvestment.

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