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Lesson-3 Business Environment

:usin_es~ Environment: It can be defined as the sum total of all external forces and forces that influence the
uncti~ni~g 0 ~ a busine~s enterprise._ These factors may be social, economical, technological, political & legal, and
other mst1tut1ons constitute the business environment.

Impact of changes on Business Environment:

Changes in business Environment Effect on performance of business enterprise.

1. Tax rate enhanced Cost of production increases making things to be
purchased expensive
2. More competitors enter the market Profit margin shrinks
3. Consumer preferences in fashion and tastes changes Markets demands shifts from existing products to
newer ones -
4. New technological development Existing products are no longer demanded as they
become obsolete.
5. Uncertainty in political environment of a country Investors become apprehensive to 1nvest in long term
projects.
Characterrst1cs:

1. Totality of External Forces: Business environment is the sum totality of all external forces that influence the
functioning of the business, it is why it can be called as the comprehensive mega force consisting of all external
inputs.

2. Specific & General Forces: Business environment is made up of both specific & General forces . Specific forces
refer to the customers, competitors, investors etc. which effect directly on business & their day to day working.
Whereas general forces refer to social, political, legal, technological & economical forces which indirectly affect the
cfl:>erations of the business. ·

3. Inter-relatedness: Various elements of business environment_are very closely related to each other.

4 . Dynamic Nature: Business Environment is dynamic in nature i.e. keeps on changing.

S. Uncertainty: Business environment is very uncertain as one cannot predict as to what will happen in future when
environment changes are taking place too frequently. Its dynamic nature makes it all more challenging to handle
uncertainty.
6. Complexity: many forces constitute the business environment. Thus it becomes very difficult to know exactly the
relative influence of a particular force on the functioning of a business enterprise as all these factors are related to
one another and managers need to simplify this complexity as much as possible.

7 . Relativity: Different countries and different regions have different business environment. Thus, business
environment is a relative concept.

Importance:
1. It enables the firm to identify opportunities and getting the first mover advantage: Business environment
provides many opportunities to the firms to improve their performance. The firms which are able to scan these
opportunities at an early stage get maximum benefit and leave their competitors behind.

21'. It helps the firm to identify threats and early warning signals (Radar Effect): Environment understanding helps an
enterprise to recognize qualitative in advance, which can be used to prepare it for facing likely challenges .

3. It helps in tapping useful resources: Business requires many resources like raw materials, tools, equipments,
finance, labour etc. for performing their activities. These resources known as inputs. Business environment provides
all these inputs to the business firms for carrying out their activities and also expects something in return. The firms

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supply their output in their return. Thus, we can say business firms depend fully on the environment for supplying
the inputs and for receiving their outputs.

4. It helps in coping with the rapid changes: Business environment is very dynamic and one can see changes like
technologies, fragmented markets, more demanding customers frequently. Thus in order to efficiently cope with
these changes managers must understand the environment and should adopt appropriate courses of action at the
• right time, which helps management become more sensitive to ever changing needs of customer and respond
effectively & efficient!v.

5. It helps in assisting in planning and policy formulation: Business environment brings both threats and
opportunities to a business. That is why understanding of environment helps the management in future planning
and decision making.

6. It helps in improving performance: Environmental awareness provides a continuing, broad based education for
management and because of which the managers are able to generate qualitative information which provides a
strong base for strategic thi~king. The business who monitors the environment closely can adopt suitable business
practices not only to improve their performance but also to become leader in their sector.

Dimensions of Business Environment:

The dimension or factors constituting the business environment; which include political, social, economic,
technological, and legal factors which are cons idered important for taking decisions and for improving the
operations of the firm . They are the part of general environment which influences the performance of many firms at
the same time.

1. Economic Environruent: It consists of factors like inflation rates, interest rates, consumer's income, economic
policies, market condition, Gross Domestic Product, National Income, Per Capita Income, Monetary policies, Fiscal
policies, Profit earnings etc. which the,perform1:1 ~,c~,o{:a .?~~i~ess fjrm . ,
• _. ,, :1. , :.,,>,·,; S· f ·\i A ..... ,: I

2. Social Environment: This is another component or dimension of the business environment which includes and
consists of various social factors or forces like customs, beliefs, lit eracy rate, education, lifestyle, traditions, ethics,
values and etc. it also includes the society as a whole in which the business is existing. Changes in the social
environment may or can affect an organization in the long run .

3. Technological or Technical Environment: The technical or technological environment is that component or

dimension of the business environment which closely deals with the continuous changes that are taking place in the
techniques, ways or the methods of production . It is important to closely monitor the technical changes that are
taking place in the industry which helps the business to improve the quality of its products and competition from
others. For example, digitalisation .
4 . Political Environment: It consists of forces such as political stability and peace in the country and attitude of the
ruling party and its representatives towards business. These forces significantly affect the functioning of business.
Whenever there is political stability, it increases the confidence of businessmen whe reas political instabili~y,
adversely affects the business.
s. Legal Environment: It cons ists of rules and regulations, framed by the Parliament, under which business must
operate. To exist and grow, business is required to follow all the rules and regulations that constitute this

environment.
Impact of Government Policy Changes on Business (LPG):
During , the economy had faced a serious foreign exchange crisis, high government deficit and high rising tre nd
1991
in prices despite bumper crops. Hence, as a part of economic reforms, the Government of India announced a new
industrial policy in July 1991. The main aim of this policy was to save the industries from the clutches of licens ing
sy stem {i.e ., Liberalization), reduce the role of public sector (i.e., Privatization), and to encourage the entrance of
foreign compan ies in Indian Market ((i.e., Globalization) .

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1. Liberalization: It re f ers to the removal of all necessa control
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. . .
economy has gradually become more liberal & lobal si~ s ~nd r~stn_ct1ons on business and industry. Indian
1991
particularly income sectors . g ce · Liberalization ensures rapid industrial growth,

2. Privatisation: It refers to process reducin the role of . . .

nation building process in this policy I gd d' . public sector and increasing that of the private sector in the
(Board of Industrial and Fina . I R p anne . isinvestment were taken place in public sector, formation of BIFR
t t . . ncia econS t ruction) happened and sick industries were handed over to them for
s ra egIc
h' action. And reduce the stake of government In · t h e public
· sector enterprises by transferring more than Slo/c0
owners IP and management of public enterprises to the private enterprises.

~- Globalization: According to this strategy or policy which was adopted by the government it allowed
integration of the world or global economy with the ·national economy and also free interac~ion among
economies of the world in the field of trade, finance, production, technology, investments, education etc.
Our new economic policy has helped globalization through:

Devaluation of rupee
Raising foreign equity participation
Long-period trade policy
Convertibility of rupee

Impact of Government policy changes on Business & Industry: Following are the impact of Government Policy on
business & industry which are as follows:

1. Increasing Competition 2. More demanding customers

3. Rapidly changing Technological Environment 4. Necessity for Change.5. Need for Developing Human Resources
6. Market Orientation 7. Loss of Budgeting Support.to
,J
the Public Sector.
.:.

DEMONETIZATION:
Demonetisation is referred to as the process of stripping a currency unit of its status to be used as a legal tender. In
simple words, demonetisation is the process by which the demonetised notes cease to be accepted as legal currency
for any kind of transaction.
After demonetisation is done, the old currency is replaced by a new currency, which may be of the same
denomination or may be of a higher denomination .
The impact of changing the legal tender status of a currency unit has a huge impact on the economic transactions
that take place in an economy.
Demonetisation can cause unrest in an economy or it can help in stabilizing the economy from existing problem s.
Demonetisation is usually taken by a country for various reasons .

Demonetisation in India
De·monetisation in India has taken place three times till now, namely in the years of 1946, 1978 and 2016. Let us
have a look at all the three events.

Demonetisation 1946
The first demonetisation event happened in 1946, at that time the denominations of Rs.1000 and Rs .10000 were

r emoved from circulation.

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Th er e w as a visibly low impact of the demonetisation as the higher denomination currencies were not ava il abl e to
t he common people.

In 1954, these notes were again introduced with an additional denomination of 5000.

Demonetisation in 1978
The second demonetisation in India took place in 1978, at that time the Prime Minister was Morarji De sa i. During
th e second demonetisation the denominations of 1000, 5000 and 10000 were taken out of circulation.

Th e whole purpose of demonetisation was to reduce the circulation of black money in the country. Th e
announcement was made by Morarji Desai over the radio.

Demonetisation in 2016
Th e latest demonetisation was announced on 8' h of November, 2016 by the Prime Minister Narendra Modi.

During this demonetisation the notes that were taken out of circulation were the denomination s of 500 and 1000.

PM Modi also introduced new currency of denominations 500 and 2000 after demonetisation .

Objectives of Demonetisation

Th e objectives of demonetisation are as follows :

1. To stop the circulation of black money in the market.

2. To help in reducing the interest rates of the prevalent banking system
3. To help in creation of cashless economy
4. To formalise the informal Indian Econ omy.
5. To remove counterfeit notes from the market.
6. To help reduce anti-social activities and their finances .

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