Meaning of Business Environment:

The word ‘business environment’ indicates the aggregate total of all people, organisations and other
forces that are outside the power of industry but that may affect its production. According to an
anonymous writer- “Just like the universe, withhold from it the subset that describes the system and the
rest is environment”. Therefore, the financial, cultural, governmental, technological and different forces
which work outside an enterprise are part of its environment. The individual customers or facing
enterprises as well as the management, customer groups, opponents, media, courts and other
establishments working outside an enterprise comprise its environment.

Features of Business Environment:

Totality of external forces: Business environment is the sum total of all the forces/factors external to a
business firm.

Specific and general forces: Business environment includes both specific and general forces. Specific
forces include investors, competitors, customers etc. who influence business firm directly while general
forces include social, political, economic, legal and technological conditions which affect a business firm
indirectly.

Inter-relatedness: All the forces/factors of a business environment are closely interrelated. For example,
increased awareness of health care has raised the demand for organic food and roasted snacks.

Dynamic: Business environment is dynamic in nature which keeps on changing with the change in
technology, consumer's fashion and tastes etc.

Uncertainty: Business environment is uncertain as it is difficult to predict the future environmental

Complexity: Business environment is complex which is easy to understand in parts separately but it is
difficult to understand in totality.

Relativity: Business environment is a relative concept whose impact differs from country to country,
region to region and firm to firm. For example, a shift of preference from soft drinks to juices will be
welcomed as an opportunity by juice making companies while a threat to soft drink manufacturers.

Importance of Business Environment

On the basis of the foregoing discussion, it can be said that the Business Environment is the most
important aspect of any business. To be aware of the ongoing changes, not only helps the business to
adapt to these changes but also to use them as opportunities.

Business Environment presents threats as well as opportunities for any business. A good business
manager not only identifies and evaluates the environment but also reacts to these external forces. The
importance of the business environment can be neatly understood if we consider the following facts:

1. Enables to Identify Business Opportunities

All changes are not negative. If understood and evaluated them, they can be the reason for the success
of a business. It is very necessary to identify a change and use it as a tool to solve the solve the problems
of the business or populous.
2. Helps in Tapping Useful Resources

Careful scanning of the Business Environment helps in tapping the useful resources required for the
business. It helps the firm to track these resources and convert them into goods and services.

3. Coping with Changes

The business must be aware of the ongoing changes in the business environment, whether it be changes
in customer requirements, emerging trends, new government policies, technological changes. If the
business is aware of these regular changes then it can bring about a response to deal
with those changes.

4. Assistance in Planning

This is another aspect of the importance of the business environment. Planning purely means what is to
be done in the future. When the Business Environment presents a problem or an opportunity, it is up to
the business to decide what plan would it have to come up with in order to address the future and solve
the problem or utilise the opportunity. After analysing the changes presented, the business can
incorporate plans to counteract the changes for a secure future.

5. Helps in Improving Performance

Enterprises that are thoroughly scanning their environment not only deal with the changes presented
but also flourish with them. Adapting to the external forces help the business to improve the
performance and survive in the market

Dimensions of Business Environment:

The dimensions or the components of the business environment consist of economic, social, legal,
technological, and political factors. These factors need to be thoroughly analyzed for decision-making
and improving a business's performance. Unlike the specific environment, these factors represent the
general environment, impacting multiple businesses simultaneously. However, every business's
management can benefit by being aware of these dimensions rather than being indifferent to them.

The various dimensions of business environment has been stated below.

Economic Dimension:

Macroeconomic Factors: Factors such as GDP growth, inflation rates, and employment levels impact
business operations and consumer behavior.

Micro-Economic Factors: Market structures, competition, and the supply and demand for goods and
services influence individual businesses.

Political Dimension:

Government Policies: Regulations, taxation policies, and trade policies set by governments have a
significant impact on businesses.

Political Stability: The stability of the political environment affects investor confidence and business
planning.
Social and Cultural Dimension:

Demographics: Population characteristics, such as age, gender, and income levels, influence consumer
preferences and market trends.

Cultural Values: Social and cultural norms shape consumer behavior and impact marketing strategies.

Technological Dimension:

Innovation: Advances in technology drive innovation, affecting product development, operational

Digital Transformation: The integration of digital technologies influences how businesses operate,
interact with customers, and adapt to market changes.

Legal Dimension:

Laws and Regulations: Legal frameworks, including contract law, employment law, and intellectual
property laws, shape business operations and compliance requirements.

Ethical Considerations: Adhering to ethical principles and corporate social responsibility is increasingly
important in the legal dimension.

Environmental Dimension:

Sustainability: Growing awareness of environmental issues requires businesses to consider sustainable

Regulatory Compliance: Environmental regulations impact industries, particularly those with potential
environmental impacts

Economic environment definition:

The economic environment relates to all the economic determinants that influence commercial and
consumer compliance. The term economic environment indicates all the external economic
circumstances that affect the purchasing practices of customers and markets. Hence, it influences the
production of the business.

As a component of economic reformations, the government of India declared a new industrial system in
July 1991. The extensive characteristics of this system were as follows:

The government decreased the number of enterprises below mandatory licensing to six.

Many of the businesses held for the public sector under the initial policy were justified. The purpose of
the public sector was defined only to four industries of vital importance.

Disinvestment was conducted in case of many public sector industrial companies.

The policies towards foreign funds were expanded. The percentage of foreign equity partnerships was
extended. In many ventures, 100 percent of foreign direct investment (FDI) was allowed.

The automatic approval was now given for technology transactions with foreign firms.
Foreign investment promotion board (FIPB) was established to support and channelise the foreign
financing in India.

Liberalisation

The economic reforms that were presented were directed at liberalising the Indian business and trade
from all the redundant restrictions and limitations. They indicated the end of the licence-permit-quota
raj. The liberalisation of the Indian business has taken place with respect to the following:

By eliminating the licensing terms in most of the industries, excluding a shortlist

By providing freedom in determining the range of marketing activities, i.e., no constraints on the
development or consolidation of business pursuits

By dismissing the restraints on the transportation of commodities and services

By providing freedom in deciding the cost prices of commodities and services

Privatisation

The new set of economic changes intended at proffering a prominent position to the private sector in
the nation-building rule and a diminished role to the public sector. This was a withdrawal of the growth
policy attempted so far by the Indian directors. To accomplish this, the administration redefined the role
of the public sector in the new industrial policy of 1991, approved the policy of proposed disinvestments
of the public sector, and determined the loss-making and weak industries to the Board of Industrial and
Financial Reconstruction (BIFR).

Also, check: What are the objectives of privatisation?

Globalisation

Globalisation implies the combination of different economies of the world heading towards the
development of a united (closely-knitted) global marketplace. Till 1991, the government of India had
followed a course of stringently controlling imports in terms of price and quantity. These laws were with
respect to the following:

Licensing of imports

Tariff limitations

Quantitative constraints

The new economic reforms directed at business liberalisation were focused towards import
liberalisation, export improvement through rationalisation of the tax structure, and changes with respect
to the foreign exchange so that the nation does not remain separate from the rest of the world.

IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY:

The policies of liberalisation, privatisation and globalisation by the government affect the functioning of
the business enterprises. The following points highlight the impact of government policy changes on the
business and industry.
i. Increased Competition: As a result of the policies such as relaxation of the licensing policy and
reduction of import duties, the competition faced by the domestic firms increases. India companies
experienced competition in service industry such as telecommunication, banking, insurance, etc.

ii. Increased Demand: As competition increases, the choice of goods and services for the consumers also
increases. Thus, consumers also gain from quality products and greater variety.

iii. Change in Business Policies: The government policies directly impact the functioning of the business
enterprises. As a result, they have to alter their policies appropriately.

iv. Technological Changes: As competition increases firms tend to find new and innovative ways to
survive in the market. In such a scenario, technological improvements become imperative.

v. Need for Trained Personnel: Innovations and improvement in product, application of improved
technologies requires skilled and trained personnel. Thus, there arises a need for the development of
human resources.

vi. Greater Market Orientation: With increased competition, the production has become market
oriented. That is, the enterprises produce as per the demand market.

vii. Less Reliance on Budgetary Support by Public Sector Enterprises: To survive the increased
competition, the public sector enterprises must improve efficiency and productivity rather than relying
on budgetary support to cover their losses.