Chapter-3 Business Environment

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MEANING OF BUSINESS ENVIRONMENT

Business environment refers to all these forces that have an economic impact on business activities. We know that business is an economic organization. Therefore, its survival and growth are dependent on economic factors. The economic environment includes various factors, such as interest rate, price level change, money supply in the market, etc. These factors serve a business as an opportunity or as a threat to a business. Therefore, management always remains active to grab the opportunity and tries to change threats into opportunities.

For example, changes in government’s economic policies, rapid technological developments, political uncertainty, changes in fashions and testes of consumers and increased competition is the market – all influence the working of a business enterprise in important ways. Increase in taxes by governments can make things expensive to buy. Technological improvements may render existing products obsolete.

Features of Business Environment

Totality of external forces:-

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

Specific and general forces:-

Business environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and suppliers) affect individual enterprise 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.

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.

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.

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.

Complexity:-

Since business environment consists of numerous interrelated and dynamic conditions or forces which arise from different to comprehend at one 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 totally. 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.

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.

IMPORTACE OF BUSINESS ENVIRONMENT

Just like human beings, business enterprises do not exist in isolation. Each business firm is not an island unto itself; it exists, survives and grow within the context of the element and force of its environment.

It enable the firm to identify opportunities and getting the first move 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 losing them to competitors. For example, Maruti Udyog become the leader in the small car market because it was the first to recognize the need for small cars in an environment of rising middle class population in India.

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. Environment awareness can help managers to identify various threats on time and serve as an early 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 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, reducing cost of the production, engaging in aggressive advertising, and so on.

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 environment supplies the environment with its output such as goods and services for customer ,payment tax to government return on financial investment to investors .

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 it so important as the pace of change. Turburant 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.

It helps in assisting in planning and policy formulation:– 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.

It helps improving performance:–

The final reason for understanding business environment relates to whether or not it really makes a difference on 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 enterprise 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 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. In contrast to the specific environment, these factors explain the general environment which mostly influences many enterprises at the same time

1.ECONOMIC ENVIRONMENT: –

The economic environment of company operates in include both macroeconomic and microeconomic factors.

Microeconomic environment refer to factors that have an effect at the individual company or consumer level . they effect particular company. examples of microeconomic factors include competitors , demand, market size, supply, availability of employee, investors.

The macroeconomic environment concerns the economy and include large scale factors that ca effect many company Interest rates, inflation rates, unemployment rates, stock market and GDP growth.

For example,

A small shop, Raman Greengrocer, is a high street shop that sells fruits and vegetables to consumers. There are various macroeconomic factors that can affect their turnover and profit. For example, if another greengrocer opened on the next street and was able to sell their products cheaper because of lower rent or other factors, this would create competition for Raman Greengrocer and affect the company’s profit. This is an example of a microeconomic factor.
LML Security ,manufactures tapes for CCTV cameras and has several large contracts with national high -street chains. A change in the taxes the company was liable for would be an example of a macroeconomic factor that could affect Their profit and would also affect lots of other companies.

2.Social Environment:-

Social environment consist of the custom and tradition of the society in which business existing The social environment of business include the social forces like customs and traditions, values, social trends, society’s expectations form 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, sweets or confectionery manufactures, tailoring outlets and many other related business. Values refer to concepts that a society holds in high esteem. In India, individual freedom, social justice, equality of opportunity and national integration are examples of major values cherished by all of us.

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. In these time there is always a new innovation or better technology around the corner.

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 computerized information kiosks, and World Wide Web multimedia pages highlighting the virtues of products. Similarly, retailers have direct links with suppliers who replenish stocks when needed.

4.Political Environment: –

Political environment means that the action were taken by the government ,which potentially affect the routine activities of any business or company an a domestic or global level.it includes political conditions such as general stability and peace in the country and specific attitudes that elected government hold towards business.

For example 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.

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. 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, Constitutional provisions; companies Act 2013, Industrial Disputes Act, 1947, consumer protection Act, 1986, competition Act, 2002 and host of such other legal enactments as amended form 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 mothers milk is the best. All these regulations are required to be followed by advertisers.

Demonetization:-

Demonetization is a process of stripping a currency unit of its status as a legal tender.In simple word demonetized notes are no longer valid as legal currency. usually a new currency replace the old currency.

The Government of India, made an announcement on November 8, 2016 with profound implications for the Indian economy. The two largest denominations notes, 500, 1,000, were ‘demonetized’ with immediate effect. This led to eighty six per cent of the money in circulation invalid. The people of India had to deposit the invalid currency in the banks which came along with the restrictions placed on cash withdrawals. In other words, restrictions were placed on the convertibility of domestic money and bank deposits.

2016 is not the first instance of demonetization in India. In fact, demonetization happened in India even before 2016.

In 1946, the Reserve Bank of India had demonetized Rs. 1,000 and Rs. 10,000 currency notes which were then under circulation.

In 1954, the Government introduced new currency notes of Rs. 1,000, Rs. 5,000, and Rs. 10,000.

In 1978, the Moraji Desai Government demonetized Rs.1,000, Rs. 5,000, and Rs. 10,000 to curb illegal transactions and antisocial activities.

Features of Demonetization:-

Tax Administrative Measure: Demonetization is regarded as a tax administration measure. People who had cash on hand as a result of their declared income quickly deposited it in banks and exchanged it for new currency. Those who had unaccounted cash, on the other hand, had to come forward and declare it, as well as pay taxes and a penalty.

Tax Evasion Control Measure: tax evasion is an illegal activity in which person or entity deliberately avoid paying true tax liability. Demonetization is also known as the government’s measure to curb tax evasion.

Channeling Savings into the Formal Financial System:

Demonetization helps people channel their savings into the formal financial system. As a result, some of the new deposits can be used to launch new profitable schemes and offer lower-interest loans.

Creating a Less-Cash Economy: Demonetization aids in instilling in people a desire to channel more savings through the formal financial system, increasing the likelihood of a less-cash economy. As a result, despite the limitations of digitalization transaction.

Very Short Answer Type

1.What is meant by business environment?

Ans- Business environment refers to all these forces that have an economic impact on business activities. We know that business is an economic organization. Therefore, its survival and growth are dependent on economic factors.

2.How does understanding of business environment help in improving performance of a business?

Ans-

The business environment helps in the following ways in improving the performance of the business:

(i) Identification of opportunities and getting the first-mover advantage,

(ii) help the identification of threats and early warning signals,

(iii) coping with the rapid changes,

(iv) assisting in planning and policy and improving the performance.

3.Give an example to show that a business firm operates within numerous inter related factors constituting the business environment. (Hint: example highlighting the inter relatedness of dimensions of business environment).

Ans-

All the element of business environment including its various dimension of economic legal, political, social are closely interrelated of each other. 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.

4.Krishna Furnishers Mart started its operations in the year 1954 and emerged as the market leader in the industry because of their original and efficiency in operations. They had a steady demand for their products but over the year, they found their market share declining because of new entrants in the field. The firm decided to review their operations and decided that in order to meet the competition, need to study and analyze the market trends and then design and develop their products accordingly. List any two impacts of changes in business environment on Krishna Furnishers Mart’s operations. (Hint: increase in competition and Market orientation).

Ans-

The impacts of changes in business environment of krishna furnishers marts operation are

market orientation
innovation
necessity for change
increased competition

5.Name any two Specific forces of business environment affecting business.

Ans-

Taste of consumer
Competitors and suppliers

Short Answer Type

1.Why it is important for business enterprises to understand their environment? Explain.

It enable the firm to identify opportunities and getting the first move 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 losing them to competitors.

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.

It helps in tapping useful resources:–

D) 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 it so important as the pace of change.

e)It helps in assisting in planning and policy formulation:– 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).

f) It helps improving performance:– The final reason for understanding business environment relates to whether or not it really makes a difference on the performance of an enterprise. The answer is that it does appear to make a difference.

2.Explain the following terms:

Liberalization
Privatization
Globalization

Liberalisation

There were many hindrances in the way of the country’s economic growth. Liberalisation aimed to remove these hindrances. This economic reform helped loosen the government’s control in various sectors. Several restrictions were imposed on the private sectors, making them difficult to operate. Liberalisation allowed them to get the ease of expanding their sectors in the country.

Privatisation

Privatisation is the reduction in the domination of the public sectors. These economic reform policies make it easier for the private sector companies to increase their control.

The government-owned companies are transformed into private sector companies through this reform. This is done by disinvesting or by withdrawing government ownership.

Globalisation

Globalisation is the economic reform that ties the country’s economy with that of the world. The main focus of this reform is on foreign trade. Various strategic policies are set up that aim to integrate the world as a whole. This reform increases the cross- border exchange of social, cultural, and technological knowledge. There are several measures to pursue globalisation.

National Digital Library of India (NSDL India) is a pilot project initiated by the HRD ministry. It works towards developing a framework of virtual repository of learning resources with a single-window search facility. It provides support to all academic levels including researchers, life-long learner and differently-abled learners free of cost. State the dimensions of business environment highlighted above.

The dimension of business environment is Technological environment.it 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. In these time there is always a new innovation or better technology around the corner. National Digital Library of India also used technology for development of a learning frame work.

3State the impact of demonetization on interest rates private wealth and real estate.

Ans-

impact of demonetization on interest rates-

cash transaction will be declined bank deposit and financial saving increased

impact of demonetization on private wealth-

demonetized notes were not returned

impact of demonetization on real estate

property price were decline

Long answer type:-

1.How would you characterize business environment? Explain with example the inference between general and specific environment.

Ans-

Totality of external forces:-

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

Specific and general forces:-

Inter-relatedness:-

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.

Uncertainty:-

Complexity:-

Relativity:-

Specific environment refers to those external forces that affect an organisation direct way. These are specific to a particular organisation. For example, a delay in the supply of raw material from the supplier directly affects the production of the company.

General environment refers to those external forces which affect all the organizations. They do not have any effect on a particular organisation. For example, a change in the political condition that affect all the companies.

2.How would you argue that the success of a business enterprise is significantly influenced by its environment?

Any organisation cannot function in isolation. Rather, its working and actions are influenced by many external forces such as social and political conditions, technological changes, etc. Such external forces compose environment for an organisation. It is of main importance for any organisation to have an understanding of the business environment. A continuous study of the business environment enables an organisation to identify the forces that affects it functioning and helps it in reacting and coping with these forces in an appropriate manner. The following points highlight the importance of environment for the success of a business organisation.

It enable the firm to identify opportunities and getting the first move 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 losing them to competitors. For example, Maruti Udyog become the leader in the small car market because it was the first to recognize the need for small cars in an environment of rising middle class population in India.
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. Environment awareness can help managers to identify various threats on time and serve as an early 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 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, reducing cost of the production, engaging in aggressive advertising, and so on.
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 environment supplies the environment with its output such as goods and services for customer ,payment tax to government return on financial investment to investors

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 it so important as the pace of change. Turburant 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.
It helps in assisting in planning and policy formulation:– 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.
It helps improving performance:– The final reason for understanding business environment relates to whether or not it really makes a difference on 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 enterprise 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.

3.Explain, with examples, the various dimensions of business environment.

Economic environment

The economic environment of company operates in include both macroeconomic and microeconomic factors.

The macroeconomic environment concerns the economy and include large scale factors that ca effect many company Interest rates, inflation rates, unemployment rates, stock market and GDP growth.

Social environment

technology environment

Political change

Legal environment

4.The government of India announced Demonetization of 500 and 1,000 currency notes with effect form the midnight of November 8, 2016. As a result, the exiting 500 and 1,000 currency notes ceased t be legal tender from that date. New currency notes of the denomination of 500 and 2,000 were issued by Reserve Bank of India after the announcement.

The step resulted in a substantial increase in the awareness about and use of point of sale machines, e-wallets, digital cash and other modes of cashless transactions. Also, increased transparency in monetary transaction and disclosure led to a rise in government revenue in the form of tax collection.

Enumerate the dimensions of business environment highlighted above.

State the features of demonetization.

Ans- .

Dimensions of business environment are:

1. Political dimension’-The Government of India, made an announcement on November 8, 2016 with profound implications for the Indian economy. The two largest denominations notes, 500, 1,000, were ‘demonetized’ with immediate effect.

2. Legal dimension: ‘As a result, the existing 500 and ₹ 1,000 currency notes ceased to be legal tender from that date.’

3. Technological dimension: ‘The step resulted in a substantial increases in the awareness about and use of Point of Sale machines, e-wallets, digital cash and other modes of cashless transactions

b) Features of Demonetization:-

Tax Administrative Measure: Demonetization is regarded as a tax administration measure. People who had cash on hand as a result of their declared income quickly deposited it in banks and exchanged it for new currency. Those who had unaccounted cash, on the other hand, had to come forward and declare it, as well as pay taxes and a penalty.

Tax Evasion Control Measure: tax evasion is an illegal activity in which person or entity deliberately avoid paying true tax liability. Demonetization is also known as the government’s measure to curb tax evasion.
Channeling Savings into the Formal Financial System:

Creating a Less-Cash Economy: Demonetization aids in instilling in people a desire to channel more savings through the formal financial system, increasing the likelihood of a less-cash economy. As a result, despite the limitations of digitalization transaction.

5.What economic changes were initiated by the Government under the Industrial policy, 1991? What impact have these changes made on business and industry?

Ans-

As a part of economic reforms, the government of India announced a new industrial policy in July 1991.

The board features of this policy were as follows:

The government reduced the number of industries under compulsory licensing to six.
Many of the industrial reserved for the public sector under the earlier policy, were dereserved. The role of the public sector was limited only to four industries of strategic importance.
Disinvestment was carried out in case of many public sector industrial enterprises.
Policy towards foreign capital was liberalized. The share of foreign equity participation was increased and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted.
Automatic permission was now granted for technology agreements with foreign companies.
Foreign investment promotion board (FIPB) was set up to promote and channelize foreign investment in India.

6. What are the essential features of:

Liberalization,

Privatization

Globalization

Liberalization:- The economic reforms that ware introduced were aimed at liberalizing the Indian business and industry form all unnecessary controls and restrictions. They signaled the end of the licence-pemit-quota raj. Liberalization of the Indian industry has taken place with respect to :
Abolishing licensing requirement in most of the industries expert a short list,
Freedom is deciding the scale of business activities, I.e., no restrictions on expansion or contraction of business activities,
Removal of restrictions on the movement of goods and services,
Freedom in fixing the price of goods services,
Reduction in tax rates and lifting of unnecessary controls over the economy,
Simplifying procedures for imports and experts, and
Making it easier to attract foreign capital and technology to India.
1. Privatization:- 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. To achieve this, the government redefined the role of the sector in the new industrial policy of 1991, adopted the policy of planned disinvestments of the public sector and decided to refer the loss making and sick enterprises to the Board of Industrial and Financial Reconstruction.

The term disinvestments used here means transfer in the public sector enterprises to the private sector. It results in dilution of stake of the Government in the public enterprise. If there is dilution of Government ownership beyond 51 percent, it would result in transfer of ownership and management of the enterprise to the private sector.

C Globalisation:-

Globalisation means the integration of the various economics of the world leading towards the emergence of a cohesive global economy. Till 1991,the Government of India had followed a policy of strictly regulating imports in value and volume terms. These regulations were with respect to

licensing of imports
tariff restrictions and
quantitative restrictions

The new economic reforms aimed at trade liberalization were directed towards import liberalization, export promotion through rationalization of the tariff structure and reforms with respect to foreign exchange so that the country does not remain isolated from the rest of the world. Globalization involves an increased level of interaction and interdependence among the various nations of the global economy.

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