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Chapter -3: Business Environment

1. Meaning of Business Environment :
 It is the sum total of all the individuals forces, institutions that are outside the control of a business but
potentially affect its performance.
 It refers to the surroundings in which the business exist and has to deal with to achieve its objectives.
 Example – Increase in taxes by government make thing expensive to buy.

2. Dimensions of business environment

1. ECONOMIC ENVIRONMENT :
 It consist of all the forces having economic/monetary impact on the business.
 These factors have direct impact on all business.
 Example 1 : GDP of the Country.
Example 2: Per capita income.
Example 3 : Disposable income.
Example 4 : Propensity to consume and save.
Example 5: Banking facilities.
Example 6: Level of employment.
Example 7 : Level of export and import.

2. Social Environment :
 Social environment represent the customs, traditions, values, beliefs, norms and ethics in
which an enterprise operates.
 It has great impact on the business in long run.
 These forces do not have immediate impact on business.
 Example 1 : Birth rate
Example 2 : Death rate
Example 3 : Education rate
Example 4 : Consumption habit
Example 5 : Tradition and customs.
Example 6 : Women empowerment
Example 7 : Taste and preference
Example 8 : Family joint venture setup
Example 9 : Mc Donald started selling beef in India which was against our tradition so it had to
close the work.

3. POLITICAL ENVIRONMENT :
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 It refers to political conditions such as political stability, leadership, policies and practices of
ruling government nature and extent of intervention of government in business etc.
 Have immediate and great impact on the business.
 Example : In 1977 Government had banned all the MNCs like Coca-Cola. In 1991 in New
economic policy MNCs were again invited in India.
 Factors which influenced Indian political environment :
1. Ideology of current political parties.
2. Attitude of political leaders.
3. Foreign policy of the government.
Currently Indian government emphasis on : Digital India, Skill India, Make in India, Startup India.

4. LEGAL ENVIRONMENT :
 It refers to the laws of the country within which the business operates.
 So it is essential for every business enterprise to have adequate knowledge of rules and
regulations framed by government.
 Legal environment includes :
Various laws and legislative act
(ii) Administrative order issued by government authorities.
 To work successfully in India knowledge needed are :
Companies Act 1956, Industrial Act 1951, FEMA, Trade Union Act 1926, Factories Act, Industrial
Disputes Act, Consumer Protection Act 1986, Competition Act 2002 & Goods & services Tax 2017 etc.
 Example 1: Advertisement related to alcohol product is prohibited.
Example 2: Packets of cigarettes must hold warning.

5. TECHNOLOGICAL ENVIRONMENT :
 It refers to the scientific improvements and innovations that provides new ways of producing
goods and services, new methods, and techniques of operations.
 If the business doesn’t adapt itself to new technology may suffer heavy losses.
 Example 1: Development of IT and Software.
Example 2: Change in labor intensive techniques to capital intensive techniques
3. Features and Nature of business environment
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Collection of all the external forces : Business environment includes all the forces, institutions and
factors which are external to business organization and influence directly or indirectly working of an
enterprises.

Specific and General forces : Business environment include both specific and general forces.
Specific forces : These forces effect the business enterprises directly and immediately in their day to day
workings. Example – Supplier, investors and customers etc.

General forces : These forces indirectly influence the business enterprises. Example –Economic,
Social, political, legal, and technological environment.

3. Inter – relation : All the forces and factors of business environment are inter-related to each
other.

4. Uncertainty : It is very difficult to predict the business environment. As environment is

changing very fast. Example – In fashion industry frequent and fast changes are taking place.

5. Dynamic :
 Business environment is highly dynamic and keep changing.
 Business environment is not static or rigid so it is essential to scan changes continuously.

6. Complex :
 It is very difficult to understand the impact of business environment on enterprise.
 As it is easy to scan the environment but it is difficult to know the effect of changes on
individual firm.
 Some time changes may be minor but it may have large impact.
For Example : Change in government policy to increase the tax rate by 5%.

7. Relativity :
 Business environment differ from country to country, region to region, political condition,
cultures are different in different countries.
 For Example :There may be more demand for traditional clothes in India as compare to
USA.

4. Importance of business environment

Enables firm to identify opportunities and getting first mover advantage:

 Entrepreneur who are able to analyse business environment early get maximum benefit.
 They can capture a big share in the market through analysis.
 They can move ahead of their competitors.
For Example :
Maruti was the first company who analyzed the need of small cars in environment of rising petrol
prices and large middle class population and so they become leader of small car market.

Helps the firm to identify threats and early warning signal :

 Entrepreneur who are able to analyse business environment gets warning signals to deal
with the constraints .
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For Example –
 Through analysis Maruti Udhyog got information that more foreign car manufacturing
companies are going to setup there business in India. So they increased their production
to supply car.

3. Helpful in tapping useful resources :

 Goods are supplied according to demand in market for which input, raw materials are
needed.
 They select resources according to availability of raw material in market and demand for
output in market.
 Business analysis helps enterprises to assemble various resources, such as finance,
machines, raw material, power, water and labor etc.

Help in coping with rapid change :

 In today’s world changes are taking place very rapidly and these changes have great
impact on business.
 So it is essential to understand these changes as early as possible.

Assisting in planning and policy making :

 The major strategies, plans and policies in an 131lobalizatio are formed by keeping in
mind business environment.

Improvement in performance :
 With continuous analyses of business environment companies can improve their
performance.

5. Environment scanning

It refers to complete awareness and understanding of business environment. Business enterprises can
anticipate changes that can takes place.

6. Economic environment in India

1. Economic Factors Influencing Business Decisions :

(a) Stage of Economic Development : Country is developing, developed or underdeveloped.
India is developing Country.
(b) Economic Structure : Capitalist, Socialist or mixed. India is having Mixed Economic
system
(c) Economic Policies : Fiscal, monetary, and banking etc.
(d) Economic Planning : Five Year plan
(e) Economic Indicators : Investment GDP, Per capita income, National income.
(f) Infrastructure : transportation system

2. Stage of Indian Economy at Independence

(a) Agriculture dominated society
(b) 70% population occupied in agriculture.
(c) 85% population lived in villages
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(d) Poor health system

(e) Backward agriculture
(f) High growth rate of population
(g) Poverty & Unemployment rate were high.

3. Economic Crisis of 1991

a) High Fiscal Deficit
b) Rise in international growth
c) Reverse agricultural growth
d) High inflation
e) Low foreign exchange reserves
f) Fall in the value of rupees (26.6%)
g) Negative Balance of Payment

7. New Economic Policy 1991

(a) LIBERALISATION: It means the policy of removing unnecessary controls & removal of restrictions
on business. The major developments were-

i. Abolishing license requirement.

ii. No restriction on expansion & contraction.
Freedom to fix prices.
iv. Easy & Simplified procedures.
Reduction in tax rates.
vii. Removing unnecessary controls on movement of goods.
viii. Earlier all industries needed government license, now only 6 need license.

(b) PRIVATISATION: It means giving greater role to private sector.

This includes:- Shifting specific areas of economy from public to private sector through:-

i. Disinvestment
ii. Dilution of government state & giving 51% share to private Sector.
iii. Setting up BIFR (Board of Industrial & Financial Reconstruction)

(C) GLOBALISATION: It means integration of world economies. Till 1991, India had strict policy for
import and export, High tariff and discouraged foreign trade.
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After New economic polices, government adopted 133lobalization by implementing following:-

Import Liberalisation
ii. Abolition of export duty.
Reduction of tariff (125% to 10%)
Conversion of FERA (Foreign Exchange Regulation Act) to FEMA (Foreign Exchange
Management Act).

IMPACT OF New Economic Reforms 1991 :

a) Increasing competition.
b) More demanding customers
c) Rapidly changing technological environment.
d) Market orientation rather than seeing orientation.
e) Growth of human resources (BPO).
f) Loss of budgetary support to public sector.
g) Change has become a necessity for survival

PRACTICE QUESTIONS
CATEGORY- I

Q.1. Define business environment.

Ans. Business environment refers to all the forces, factors, institutions and conditions external to a
business unit under which it operates.
Q.2. List the major impacts of new industrial policy.
Ans. (i) Liberalisation (ii) Globalisation (iii) Privatisation.

Q.3. What were the reasons to implement new economic policy of India?
Ans. The main reasons to adopt new economic policy of 1991 were the following crises which Indian
economy had to face:
(i) Fiscal crisis.
(ii) Shrinking of foreign trade.
(iii) Rise in internal debt.

Q.4. Explain any five negative impacts of liberalisation and globalisation on business and industry in
India.
Ans. The negative impacts of globalisation and liberalisation are:
(i) Destabilisation of protected environment.
(ii) Threat from MNCs.
(iii) Past failures fail to guide.
(iv) Corporate vulnerability.
(v) Acquisitions and mergers.

Q.5. "Business environment is dynamic." Comment by mentioning these examples.

Ans. It is right to say that business environment is dynamic as every day new changes are taking
place in that business environment. These changes are so fast and effective that the companies,
which are able to scan them or recognise them on time, only survive in the market. Examples:
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(i) Rapidly changing technology has affected the business world. Large number of new
products are being introduced in market such as refrigerator with bio fresh technology or
door cooling technology, etc.
(ii) The spread of literacy and public consciousness has contributed in rousing the
aspirations of people and today companies give priority to customer's preference and
demands.
(iii) With new legislation and policies of deregulation of industries, there is increase in the
foreign direct investment in capital market.

CATEGORY- II
Q.1. List any two impacts of Government policy changes on business and industry.
Ans. (i) Increased competition, (ii) World class technology.

Q.2. Name the term/process under which reduction in tax rates and lifting of unnecessary control
over the economy was undertaken.
Ans. Liberalisation.

Q.3. If new products are introduced in market by new technique, which type of environment is
indicated by it?
Ans. Technological environment.

Q.4. The project of Nano car reestablished in Gujarat is indicated by which factor of environment?
Ans. Political factor.

Q.5. How would you argue that the success of a business enterprise is significantly influenced by its
environment?
Ans. It is correct to say that the success of business enterprises is greatly influenced by the force and
factors prevailing in environment by analysing and scanning the business environment.
Businessmen get the following benefits:
(i) First mover advantage.
(ii) Warning signal.
(iii) Helps in tapping business resources.
(iv) Assisting in planning and policy formation.
(v) Helps in image building.
(vi) Improvement in performance.
(vii) Helps to adopt rapid changes.

Q.6. Name the term/process which means integrating the economy with the rest of the world.
Ans. Globalisation.
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Q.7. The Finance Minister reduced the repo rate to overcome recession. This is related to which
dimension of business environment?
Ans. Economic environment.
Q.8. Increase in the use of mobile phones and i-pods instead of pagers and radio' refers to an example
of key component of general environment of business. Identify the component.
Ans. Technological Environment.

Q.9. What is L.P.G. in context of business environment?

Ans. In business environment L.P.G. stands for:
(i) L : Liberalisation,
(ii) P : Privatisation,
(iii) G : Globalisation.

Q.10. Easy Finance facilities on cars by different financers and banks have considerably increased the
demand for cars. Identify the type of environment highlighted in the given statement.
Ans. Economic Environment.

Q.11. Two Big Banner Movies were scheduled to be released on the same date. However, at the last
moment, release of one movie had to be postponed due to opposition by a group of people
because of some unethical content in the movie. The loss suffered by movie postponed, provided
opportunity for the released movie, to earn huge revenues.
(i) Which feature of business environment is highlighted in the given case?
(ii) Identify the component of business environment, which led to the postponement of
movie.
Ans. (i) Business Environment is a 'Relative Concept';
(ii) Social Environment.

Q.12. Parliament of India has made certain amendments in the Consumer Protection Act, 1986. As a
result, business enterprises will have to spend more to maintain quality standards of their
products.
(i) Which key component of the business environment is discussed in the given case?
(ii) Give one more example to show the effect of given environment on the working of
business enterprise.
Ans. (i) Legal Environment;
(ii) Cigarette Manufacturing companies are under legal obligation to give statutory warning
on cigarette packing "Cigarette smoking is injurious to health" along with its pictorial
presentation.
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Q.13. Attractive rate of interest on home loans have increased the demand for homes and has given a
boost to the business of builders and property dealers. Which aspect of business environment is
discussed in the given case?
Ans. Economic Environment.
Q.14. An unstable Government is one of the major causes of weak industrial base. Identify the key
component of business environment highlighted in the given statement.
Ans. Political Environment.

Q.15. "Business environment offers both opportunities as well as threats." Do you agree with the given
statement? Discuss it with the help of examples.
Ans. Yes, I agree with the given statement. Awareness about the environment helps an organisation
to identify opportunities and threats.

Q.16. Artificial fiber cloth has almost killed the pure cotton textile industries in many countries.
Which component of business environment is described here?
Ans. Technological Environment.

Q.17. Wages and salaries to be paid by the business enterprises must not be less than as prescribed
under The Minimum Wages Act, 1948'. Which aspect of business Environment is highlighted in
the given case?
Ans. Legal Environment.

Q.18. "Most of the big companies and MNCs are hesitant to invest in some of the north-eastern states
of India due to instability of government and lack of incentives by the government." Which
environment is referred here?
Ans. Political Environment.

Q.19. There has been tremendous growth in business process outsourcing (BPO) and knowledge
process outsourcing (KPO) services. Identify and state the economic reform responsible for this
trend?
Ans. Globalisation. Globalisation refers to integrating the national economy with the world economy
with the world economy through removal of barriers on international trade and capital
movements.

Q.20. "According to the Weights and Measures Act, every eatable product should explicitly bear a
green dot for vegetarian contents and brown dot for non-vegetarian ingredients." Which key
component of the business environment is discussed in the given case?
Ans. Legal Environment.
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Q.21. The RBI has reduced the bank rate to face the situation of inflation. Identify the dimension of
business environment?
Ans. Economic environment.

CATEGORY- III
Q.1. With changes in the consumption habits of people, Neelesh, who was running a sweet shop,
shifted to the chocolate business. On the eve of Diwali, he offered chocolates in attractive
packages at reasonable prices. He anticipated huge demand and created a website chocolove.
com for taking orders online. He got a lot of orders online and earned huge profits by selling the
chocolate.
Identify and explain the dimensions of business environment discussed in the above case.

Q.2. It is interesting to know that the menu items of the multinational food chains are customised to
suit the general palates of the local people in the region. When McDonald’s started its business in
India in the year 1996, the company went through a complete localisation strategy. McDonald’s
changed its product menu to accommodate the vegetable burger given the large vegetarian
population. It also altered its store design and even reduced the product price by close to fifteen
per cent. Also , the “McAloo Tikki burger” is not available anywhere but in the Indian outlets of
McDonalds.
Identify the relevant feature of business environment being discussed above.

Q.3. As a result of the decision by Britian to exit to European Union the new trade agreements will
come into force from the EU as it accounts for 35-40% of auto component exports from India.
Tata Motors owned Britain’s largest carmaker Jaguar Land Rover (JLR) has been in Britain for
three decades and makes 4,75,000 cars a year in the country of which most of them are exported
inside the European Union and beyond. JLR estimates that their annual profit could be cut by
one billion pounds ($1.47 billion) by the year 2020.
In the context of the above case:
(a) Explain why are all the elements of business environment considered to be closely
interrelated?
(b) Name any two related dimensions of the business environment.

Q.4. Gallant’ is a well known FMCG (Fast Moving Consumer Goods) company in India. However, for
the past few years its profitability is diminishing due to the presence of a new company
‘Prakritik’. ‘Prakritik’ has gradually acquired a reasonable share in a wide variety segments like
soaps, shampoos, detergents, dish wash and oral care. One of the key reason is that ‘Prakritik’
has positioned itself as a natural/Ayurvedic brand and this approach has worked well with the
Indian consumer. In order to compete with this threat ‘Gallant’ has acquired a premium
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Ayurvedic brand ‘Madhumita’ from another group. Moreover its likely to increase its advertising
budget to counter the threat from ‘Prakritik’.
In the context of the above case:
Identify the related component of the business environment which has contributed effectively
towards the success of Prakritik.
Also, state the two ways in which ‘Gallant’ has responded to the changes in its business
environment

Q.5. Bharat is running an ice cream parlour in a local market. Keeping in mind the changing
perceptions about health among the people, one of his employee Abhiraj suggests to him that
they should introduce a range a flavoured yogurt. Bharat accepts his suggestion as a result both
the image and the profitability of his business increases.
In the context of the above case:
(a) Identify the feature of management which is being highlighted.
(b) State the related dimension of the business environment.
(c) Name and explain the related principle of general management.

Q.6. Anurag, aspires to work with a socially and environmentally committed company as he does not
want to work just for monetary benefits but also the brand value of the company he works for in
the society matters a lot to him. Therefore, he has joined Cerebra Integrated Technologies a
Bengaluru-based Infotech company. The company has built India’s largest e-waste recycling
plant. The company strives to be one of the leading players in this business which has huge
potential not only in terms of generating huge revenues and profits but also wants to contribute
to the environment issues that have become crucial worldwide. The company sees big business
in the mountains of e-waste in Bengaluru which produces 200,000 tonnes of e-waste a year. The
company plans to make its millions by extracting metals such as gold and platinum from the e-
waste piling up in the city. As a mobile phone, for example, is made up of a combination of rare
earth and precious metals: it contains 250 mg of silver, 24 mg of gold and nine mg of palladium
while a laptop has 1,000 mg of silver, 220 mg of gold and 500 grams of copper. To start the
business, the company has obtained a licence from KSPCB ( Karnataka State Pollution Control
Board) .
In context of the above case:
Identify the various dimensions of business environment being referred to by quoting lines from
the paragraph.
Q.7. The organic food market in India is growing at 25-30 per cent which reflects a clear shift in
consumer tastes and preferences. The current growth in the organic food market is driven by
multiplicity of factors like rising health consciousness, changing lifestyles, increase in disposable
income and growing availability of organic food products in shopping malls, retail outlets and
online.
In context of the above case:
(a) Identify and explain the features of business environment being referred to here.
(b) By quoting phrases from the paragraph identify the various components of general forces
which have led to a growth in the organic food market.
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Q.8. Postage stamps have been unveiled to commemorate 140 years of existence of the country’s first
stock exchange the Bombay Stock Exchange (BSE). The setting up of BSE is considered to be the
greatest revolution that took place in the financial markets in India as it acts as a key driver for
economic growth of a country. This is due to the fact that there exists a strong corelation
between economic growth and capital accumulation.
In the context of the above case:
(a) Identify the dimension of business environment of India being referred here.
(b) State any three factors which broadly affect the dimension of business environment of
India as identified in part (a) of the question.

Q.9. Zero Defect Zero Effect” (ZED) is a slogan coined by the Prime Minister of India, Narendra Modi
with reference to the Make in India initiative launched by the government. The slogan reflects
the efficiency of production processes, i.e. the products have no defects and the process through
which the product is made has zero adverse environmental and ecological effects. The ZED
model aims to make India the manufacturing hub of the world and prevent the products
developed in India from being rejected by the global market. Moreover, before the initiative was
launched, the limits of foreign direct investment in various sectors had been relaxed. The
application for licences was made available online and the validity of licences was increased to
three years. Various other norms and procedures were also relaxed by the government. In the
light of the above paragraph, identify and explain the major component of New Economic Policy
of 1991 that are being referred to by quoting lines from the paragraph.

Q.10. Kapil Sharma is working as the Country Head of a company which owns a chain of malls under
the name of ‘Virtuoso’ in the various parts of India. Through an analysis report of the business
environment, it has been brought to his notice that in the coming years, shopping at a mall will
not be a necessity for the buyers as purchases can be made online from anywhere and at any
time with ease and at the consumer’s convenience. Hence, malls will have to provide much more
than shopping to be able to attract customers. So, he recommends that ‘Virtuoso’ malls should to
be restructured into recreation centres, offering more spaces to socialise, host events and
concerts, and provide ample Food and Beverages options. Consequently the share of
entertainment segment and Food and Beverages segment in the overall mall space is increased
by 20%. As a result, the company gains enormously by getting the first mover advantage.
In context of the above case :
(a) Define the term ‘Business Environment’.
(b) Explain the terms ‘Threats’ and ‘Opportunities’ by quoting lines from the paragraph.
CATOGRY-IV
(Read NCERT as Assignment)