CHAPTER - 3

BUSINESS ENVIRONMENT

Business Environment

Environment refers to the surrounding in which a person or organization operates. 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.
economic, social, political, technological and other forces which operate outside a business
enterprise are part of its environment.

Features of Business Environment

Business environment, has the following features:

(i) Totality of external forces

(ii) Specific and general forces
(iii) Inter-relatedness
(iv) Dynamic nature
(v) Uncertainty
(vi) Complexity
(vii) Relativity

Importance of Business Environment

The significance of business environment includes:

1. It enables the firm to identify opportunities and getting the first mover advantage: -
Early identification of opportunities helps an enterprise to be the first to exploit them instead
of losing them to competitors.
2. it helps the firm to identify threats and early warning signals: - Environmental awareness
can help managers to identify various threats on time and serve as an early warning signal.
3. 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.
4. It helps in coping with rapid changes: - All sizes and all types of enterprises are facing
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.
5. It helps in assisting in planning and policy formulation: - Since 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).

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 6. It helps in improving performance: - 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.

Structure/ Dimensions of Business Environment

The structure of environment of an organization can be broadly classified as -

1. Economic Environment: Interest rates, inflation rates, changes in disposable income of

people, stock market indices and the value of rupee are some of the economic factors that can
affect management practices in a business enterprise. Short- and long-term interest rates
significantly affect the demand for product and services.
2. Social Environment: Social environment refers to the social and cultural factors that affect
the business. It includes the social forces like customs and traditions, values, social trends,
society’s expectations from business, etc.
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. Political ideology of govt., progress towards passage of
law, platforms of political parties, their relationship with other govt. etc. are the component in
political environment.
4. 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 comprises law relating to trade mark, intellectual property rights, human rights,
labour laws, etc.
5. Technical 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.

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 Economic environment in India:

The economic environment of business in India has been steadily changing since Independence
mainly due to government policies. In order to solve economic problems of our country at the
time of Independence, the government took several steps including control by the state of key
industries, central planning and reduced importance of the private sector. These steps delivered
mixed results until 1991 when Indian economy happened to face serious foreign exchange crisis,
high government deficit and a rising trend of prices despite bumper crops.

Liberalisation, Privatisation and Globalisation (LPG) became the guiding principles of the new
industrial policy.

1. Liberalisation:- The economic reforms that were introduced were aimed at liberalising the
Indian business and industry from all unnecessary controls and restrictions. They signalled the
end of the licence permit quota raj.

2. Privatisation:- 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. To achieve this,
the government redefined the role of the public 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.

3. Globalisation:- Globalisation means integrating the economy of a country with the world
economy. It views entire world as a single market. Globalisation means the integration of the
various economies of the world leading towards the emergence of a cohesive global economy. It
is also known as neo-liberalism.

L Liberalization
P Privatization
G Globalization

Demonetisation:

The Government of India, made an announcement on November 8, 2016 with profound

implications for the Indian economy. The two largest denomination notes, `500 `1,000, were
‘demonetised’ with immediate effect, ceasing to be legal tender except for a few specified
purposes such as paying utility bills.

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 Impact of Government policy changes on business and industry:

The government policy of liberalisation, privatisation and globalisation has made a definite
impact on the working of enterprises in business and industry in terms of

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 firms are 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: - The central government’s budgetary
support for financing the public sector outlays has declined over the years. Public sector units
realize that, in order to survive and growth they will have to be more equity than debt.

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