Chapter-3

BUSINESS ENVIRONMENT
 INTRODUCTION
The word Environment is derived from the
French word “Environ” which means
“surrounding”. Every business organisation
operates in a distinctive environment, as it cannot
exist in isolation. Business environment is the
surroundings in which business exists. Business
environment refers to all forces and conditions
external to a business under which it operates.
 Time line: Coke vs Plachimada
1999: Hindustan Coca-Cola Beverages Private
Limited, a subsidiary of the Atlanta-based Coca-
Cola company, established a plant in Plachimada.
Coca-Cola drew around 5,10,000 litres of water
each day from boreholes and open wells.

2002:Local communities complained that water

pollution and extreme water shortages were
endangering their lives.
 The term ‘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”.
 Features of Business Environment
1. Totality of external
forces :
Business environment is the
sum total of all individuals,
institutions and other factors
and forces external to
business firms which are out of
control.
2. Specific and general
Forces:
Business Environment consists of
both specific and general forces.
Specific forces have direct impact on
individual enterprises. Eg: investors,
suppliers, competitors etc.

Whereas general forces have

indirect impact on all the business
enterprises. For eg: social, political,
legal, technological condition
3. Interrelatedness :
Various elements of business environment are
closely related or interdependent, for e.g.,
Technological development may result in lose of
employment opportunities.
4. Dynamic nature:
The business environment is flexible as it keeps
on changing in terms of technological
improvement, changes in consumers taste, and
fashion.
5.Uncertainty:
Business environment
is largely uncertain as it
is very difficult to predict
future happenings,
especially when
environment changes are
taking place too
frequently
6. Complexity :
Business environment
is a complex
phenomenon as
nobody can predict the
impact of a change in
the environment on a
product or service.
7.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.
IMPORTANCE OF BUSINESS ENVIRONMENT(Importance
of Business Environment Scanning)
Environment scanning:
Environment scanning means monitoring the environment
of each organization and identifying the opportunities &
threats before them. or adjusting the operations of an
organization according to the environment, environment
scanning is essential.

The importance of the environment is

discussed under the following heads-
1) It helps the firm to identify opportunities
and get the first mover advantage:
Opportunities refer to the positive external trends or
changes. Identification of opportunities at an early stage
helps the firm to be able to exploit them without losing them to
competitors. Eg: Maruti Udyog became the leader in the small
car market because it was the first to recognise the need for
small cars for middle class.
2) It h e l p s a firm to identify t h r eat s a n d
early w a r n i n g s i g n a l s :
Environmental awareness helps m ang e rs identify
various threats. It provides the bu siness early
warning signals to plan its future course of action.
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.
3 )It h elp s in ta p p in g
us eful res ources :
Env ironm ent is a s ource of
v arious res ources to bus ines s
enterprises. Env ironm ent
scanning provides inform ation
about different s ources of
resources. Therefore enterpris e
should design their policies
m aking a prov is ion for g etting
res ources they need and g iv ing
what the environment need.
4 )It h elp s in co p in g w ith
rapid c h a n g e s :
Busi ne ss environment is highly
dynamic su ch as change in
market condition, technology,
competition etc. To cope with
these ch ang es m an ag e rs must
be dynamic. This is possible
through proper environment
scanning.
5 )It h elp s in a s s is tin g in p la n n in g a n d
policy f o r m u l a
Environment scanning gives vital information
which can be taken as the basis for deciding
future course of action (planning ) or fram ing
guidelines for decision making (policy
form ulation.)
6) H e l p s in i m p r o v i n g p e r f or manc e:
The future of en viron men t is very mu ch
linked with what is happening the
en viron m ent. Th os e enterprises which
continuously monitor their en vironment and
a dopt s uita ble policies will improve their
performance.
 DIMENSIONS / FACTORS / ELEMENTS OF
BUSINESS ENVIRONMENT
Dimensions of business environment means all the factors,
forces and institutions which have direct or indirect influence
over the business activities.
The various factors constituting the general environment of
business is given below-
1. Economic Environment
2. Social environment
3. Technological Environment
4. Political Environment
5. Legal Environment
1. Economic Environment:
Economic condition, economic system,
economic policy, inflation rates, interest rates, tax
rates,foreign Investments, Corporate profits,
Inflation rates, employment rates, foreign trade
balances, etc. are the main components of
economic environment. Economic environment
refers to all factors which have an economic
impact on business.
2.Social Environment:
Social environment include attitude of people
cultural heritage, life style, customs and belief of
people, literacy rate, birth and death rate,
education system demographic
distribution,society’s expectations from
business,Composition of family etc .Social
environment means social and cultural factors
that affect business directly or indirectly.
3.Technological Environment:
It includes forces relating to scientific improvements and
innovations, which provide new products, new production
method and new methods of operating a business etc. New
instruments and new procedures are developing
rapidly.Eg:CDs and DVDs adversely affected video cassettes
and tape recorders
4.Political Environment:
Political and government
environment includes political parties
& their ideology, attitude of
government towards business,type of
government(single or union of different
parties),relation of state and central
government,The level of political
morality etc .All these factors have far
reaching impact on the growth and
profitability of business.
5. Legal Environment:
It includes the Acts passed by the Central and the
State Governments,administrative orders, court
judgement etc. All members of business community must
follow these laws. Eg Advertisements for packets of
cigarettes-Cigarette smoking is injurious to health,Act
Like Consumer Protection Act-1986,Trade Mark Act –
1969,Essential Commodities Act – 1955
ECONOMIC ENVIRONMENT IN INDIA
 The year 1991 marks a turning point in India‘s
economic history. Till 1991 India followed an
economic policy with a socialist bias.From 1991
onwards the Government started implementing
sweeping economic reforms. As part of economic
reforms, the government of India announced a
New Industrial Policy in 1991.
 The broad features of this policy were as follows:

a)The Government reduced the number of industries under compulsory

licensing to six.

b) De-reserved many industries which were earlier reserved for the public
sector.

c) Carried out disinvestment process in case of many public sector companies.

d)Liberalized foreign capital policy – 100% Foreign Direct Investment (FDI) in

many segments.

e)Set up Foreign Investment Promotion Board (FIPB) to promote foreign

investment in India.
 Liberalization, Privatization and Globalization
(LPG) are the major programs of this New
Economic Policy 1991.
 1. Liberalization :

Liberalization means liberating the economy from

unnecessary controls and regulations through delicencing
and decontrol. The old policy of licenses, permits and
controls discouraged private enterprises. Import licensing,
foreign exchange regulations, progressive taxes, price
controls, etc. discouraged investments. Liberalisation
removed all unnecessary controls & restrictions through
delicencing and decontrol.
Features of Liberalization:
>Abolishing licensing in most of the industries.
>Freedom in fixing the price of products
>Reduction in tax.
>Export & Import simplified.
>No restriction on expansion.
2.Privatization:
Privatisation means transfer of ownership and
management of enterprise from public sector to private
sector. Privatization is a trend all over the world now,in India
the priority given to the public sector is gradually being
reduced and the role of private sector is being encouraged.
To achieve this Govt. adopted the policy of planned
disinvestment & de-reservation.
Disinvestment:
Passing of ownership, control and management of Public
Sector Undertakings to the private sector.
De-reservation
This allows the private sector to enter into new areas.
 SOME EXAMPLES:
1.Maruti Udyog Limited was founded by the government of
India in 24 February 1981.On 14th May 2002, the
Government approved disinvestment in Maruti Udyog Ltd.
3.Globalisation:
Globalisation means integrating the economy of a
country with the world economy. In globalization entire world
is considered as a single market. Globalization means free
movement of goods, capital and labour across the world.
Globalization is a not a policy, it is a phenomenon.
Globalisation has four parameters

>Free flow of goods and services across nations

>Free flow of capital among nations
>Free flow of technology between nations
>Free flow of Labour among different nations
IMPACT OF GOVERNMENT POLICY CHANGES
ON BUSINESS AND INDUSTRY:
The policy of Liberalization, Privatization
and Globalization (LPG) made a significant
change on the working of Indian business
firms. The following are the main impacts-
1. Increasing competition:
As a result of change in the rules of industrial
licensing and entry of foreign firms, competition for Indian
firm has increased especially in service industries like
banking, Insurance.
2. More demanding customers:
Increased competition in the market gives
the customers wide choice in purchasing
better quality of goods and services.
Customers demanding more as they are
well informed.
3.Rapidly changing technological environment:-
Increased competition forces the firms to
develop new ways to survive and growth the
market. Rapidly changing technological
environment creates tough challenges before
smaller firms.
4. Need for developing human resources:
The new market conditions require people
with higher competence and greater
commitment. Hence the need for developing
human resources is very essential.
5. Market Orientation:
Earlier companies followed production
oriented marketing operations. but now, there
is a shift to market orientation., where the
firms have to study and analyses the market
first and produce goods accordingly.
6.Loss of budgetary support to the public
Sector:
Fund allotment from government revenue
has declined over the years.
 DEMONETIZATION

November 8, 2016
A look into the past will make you realise that India is no new to demonetisation.
Demonetisation has been implemented twice -1946 and 1978
 DEMONETIZATION
Demonetisation is an act of cancelling the legal tender
status of a currency unit in circulation .

The Government of India, made an announcement on

November 8, 2016 with profound implications for the
Indian economy. The two largest denomination
notes,'500' & '1000', were ‘demonetised’ .In simple
words, demonetized notes are no longer valid as legal
currency. Usually, a new currency replaces the old
currency.
Aim & Features of demonetisation
1)A tax a dm in i st rat ion tool(To control
a c c u mu la ti on of ‘black m o n e y ):
The pe o pl e wh o h a ve b lack m o n e y h a d to
declar e their un ac cou nt e d wea lth a n d pay ta x e s
a t a p e n a l t y rate.
2)Cas h less economy :
G ov t. a n n o u n c e d d em o n et i z a t i o n with a n
a i m o f c r ea t i n g a di g i t al ec o n o m y w it h t h e
s u p p o r t of f o r m a l financial s y s t e m / b a n k s .
(Internet b a n ki n g , e- wallets, etc.)
3)It is a m e t h o d to check t a x e v a s io n :
Th rou g h th is a c tio n , g o v ern m e n t
indicating th a t ta x e v a s io n w ill n o
l o n g e r b e tolerated or accepted.
TAX EVASION:
The illegal non-payment or underpayment of tax.
4)To control corruption:
An o t h er a i m of dem o n et i s a t i o n w a s t o
control corruption
5)To control illegal activities:
To control use of high denomination notes for
illegal activities.
Impact of Demonetization:
1)Decline in cash transaction.
2)Bank deposits increased.
3) Digital transactions RuPay/AEPS among new
users increased(AEPS- Aadhaar Enabled
Payment System).
4) Real estate prices declined.
5)Rise in income tax collection because of
increased disclosure.