Ch – 3 Business Environment

Meaning of Business Environment

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.
Dimensions/Components/Elements of Business Environment
1. Economic Environment: It has immediate and direct impact on a business. Rate of
interest, inflation rate, change in disposable income of people, monetary policy, stock
market indices etc. are some economic factors, which could affect business firms. Increase
or decrease of the economic factors result in opportunities or constraints on abusiness
enterprise.
2. Social Environment: Social Environment includes social forces like: customs and
traditions,values ,social trends and society’s expectation from business.
3. 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. Attitudes of the government
officials may have either positive or negative impact upon business.
4. Legal environment: Legal environment includes various legislations passed by the
Government, administrative orders issued by government authorities,court judgments
and 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. Non-Compliance of laws can land the business
enterprises into legal problems.
5. 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.
Features/Characteristics of Business Environment
1. Business environment is totality of all external forces affecting a business. Therefore, it is
aggressive in nature.
2. It includes both specific and general forces. Specific forces (e.g. investors, customers,
competitors and suppliers) affect individual enterprises directly and immediately in their
day-to-day working. General forces (e.g. economic, social, political, legal and technological
conditions) have impact on all business enterprises and thus may affect an individual firm
only indirectly.
3. Its elements are closely inter-related. 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 diet Coke, fat-free cooking oil, and health resorts.
4. It is dynamic as it keeps on changing in terms of technological improvement,
shifts in consumer preferences or new competition in the market.
5. It is uncertain as it is difficult to predict future happenings (especially when environment
changes are taking place frequently as in the case of information technology or fashion
industries).
6. It is complex as it comprises of numerous interrelated and dynamic conditions which
arise from different sources.
Importance of Business Environment
1. It helps to identify opportunities and getting the first mover advantage instead of losing
them to the competitors.
2. It helps to identify threats on time which serves as an early warning signal.(‘Threats’ refer
to the negative external trends and changes that will hinder a firm’s performance. For
example, if an Indian firm finds that an MNC is entering the Indian market with new
substitutes, it can improve the quality of its products, reduce cost of production, etc.)
 3. It helps in assisting in planning and policy formulation. An understanding of business
environment can be the basis for deciding the future course of action (planning) or
training guidelines for decision-making (policy).)
4. It helps in tapping useful resources so that business can convert resources into output
that the environment desires. the enterprise depends on the environment as a source of
inputs or resources and as an outlet for outputs, it only makes sense that the enterprise
designs policies that allow it to get the resources that it needs so that it can convert those
resources into outputs that the environment desires.
5. It helps in coping with rapid changes in an 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
6. It helps in improving performance by continuously monitoring the environment and
adopting suitable practices. 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.

Demonetisation is the act of the government to cancel the legal tender status of a currency unit in
circulation. The aim of demonetisation was to curb corruption, especially the accumulation of
‘black money’ generated by income that has not been declared to the tax authorities.
Features of Demonetisation:
1. Demonetisation is a tax administration measures. People with black money had to declare
their unaccounted wealth and pay tax at a penalty rate.
2. Demonetisation is a measure to improve tax compliance as tax collection increased because of
increased desclosure.
3. Demonetisationledtochannelizingmoresavingsthrough the formal financial system. Bank
deposits increased.
4. Demonetisation aimed to create a less-cash or cash-lite economy. Cash transactions declined.
Digital transactions using Rupay cards and Debit Cards, etc. increased.