CH – 3
BUSINESS ENVIRONMENT
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.
The economic, social, political, legal and technological forces which operates outside a
business enterprise are part of its general environment.
The individual consumers or competing enterprises as well as the govt, consumer groups,
competitors, courts, media and other institutions working outside an enterprise constitute
its specific environment.
Changes in business environment Influence on performance of business
enterprise
Increase in taxes by Govt. Increased cost of production, hence things
become expensive to buy
Increased competition in the market Reduction in profit margins
Changes in fashion and tastes of consumers Shift in market demand from existing
products to new ones
Technological improvements and E.g : LCD TVs become obsolete with
innovations introduction of LED TVs
Political uncertainty Creates fear in the minds of investors to
invest in long-term projects
Features/Characteristics of Business Environment
1. Totality of External forces :
Business environment is the sum total of all things external to business firms and as such, is
aggregative in nature.
2. Specific and general forces :
Business environment includes both specific and general forces.
Specific forces (such as investors, customers, competitors and suppliers) affect individual
enterprises directly.
General forces (such as social, political, legal and technological conditions) have impact on
all business enterprises.
3. Inter-relatedness :
Different elements or parts of business environment are closely interrelated.
For example, increased awareness for health care have increased the demand for many
health products and services like soft drinks, fat-free cooking oils, and health resorts.
4. Dynamic nature :
Business environment is dynamic in nature as it keeps on changing in terms of technological
improvement, shifts in consumer preferences, entry of new competition in the market, etc.
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 as in the case of
information technology or fashion industries.
6. Complexity :
Environment is a complex phenomenon that is relatively easier to understand in parts but
difficult to grasp in its totality.
For example, it may be difficult to know the extent of the relative impact of the social,
economic, political, technological or legal factors on change in demand of a product in the
market.
7. Relativity :
Business environment is a relative concept since it differs from country to country and even
region to region.
For example, political condition in the USA differ from those in China or Pakistan.
Similarly, demand for sarees may be fairly high in India whereas it may be almost non-
existent in France.
IMPORTANCE OF BUSINESS ENVIRONMENT
A good understanding of environment by business managers enables them not only to
identify and evaluate , but also to react to the forces external to their firms.
1. It enables the firm to identify opportunities and getting the first mover advantage :
“Opportunities refer to the positive external trends or changes that will help a firm to
improve its performance.”
Environment provides various opportunities for business success. Early identification of
opportunities helps an enterprise to be the first to exploit them instead of losing them to
competitors.
For example,
Maruti Udyog became the leader in the small car market because it was the first to
recognise the need for small cars in an environment of rising petroleum prices and a large
middle class population in India.
2. It helps the firm to identify threats and early warning signals :
“Threats refer to the external environment trends and changes that will impact a firm’s
performance.”
Environmental awareness can help managers to identify various threats on time and serve
as an early warning signals.
For example,
If an Indian firm finds that a foreign MNC is entering the Indian market with new substitutes,
it should act as a warning signal. On the basis of this information, the Indian firm can
prepare themselves by adopting measures such as improving the quality of the product,
reducing cost of production, engaging in aggressive advertising, etc.
3. 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 for decision making policy.
For example,
Entry of new players in the market, which means more competition may make an enterprise
think about how to deal with the situation.
4. It helps in copying with rapid changes
Today’s environment is getting increasingly dynamic where changes are taking place at a
fast pace.
Turbulent market conditions, less brand loyalty, fragmentation of markets, more demanding
customers, rapid changes in technology and intense global competition are few of the
images used to describe today’s business environment.
In order to effectively cope with significant changes, managers must understand and
examine the environment and develop suitable course of action.
5. It helps in improving performance :
The enterprises that continuously monitor their environment and adopt suitable business
practices can not only improve their present performance but also to succeed in the market
for a longer period.
6. It helps in tapping useful resources :
A business environment gets various resources called inputs like finance, machines, raw
materials, power and water, labour, etc from its environment including financiers, govt. and
suppliers.
In return, the business environment supplies the environment with its output such as goods
and services for customers, payment of taxes to govt, return on financial investment to
investors and so on.
Case Study 1
Disco Ltd manufactures fashionable and designer clothes. Recently it finds that the demand
for its products has been declining. After market research it was discovered that fashion and
tastes of the consumers is changing at a fast pace. Customer’s demand is increasing. New
competitors have entered the market with new designs. It is very difficult for the company to
predict future happenings. Also, it is difficult to know the extent of the relative impact of the
social, economic and political factors on decrease in demand of its product in the market.
A. Identify any two features of business environment by quoting the lines from the above
case.
Ans Complexity, dynamic, uncertainty
DIMENSIONS OF BUSINESS ENVIRONMENT
Dimensions or factors constituting the business environment include economic, social,
technological, political and legal conditions which are considered relevant for decision-
making and improving the performance of an enterprise.
1. Economic Environment
Some of the factors that can affect management practices in a business enterprise are :
i. Interest rates
ii. Inflation rates
iii. Stock market indices
iv. Value of rupee
v. changes in disposable income of people
Components of economic environment
i. The rates of growth of GNP and per capita income at current and constant prices
ii. Rates of savings and investment
iii. Volume of imports and exports of different items
iv. Money supply in the economy
v. Balance of payments and changes in foreign exchange reserves
vi. Public debt (internal and external)
vii. Agricultural and industrial production trends
viii. Expansion of transportation and communication facilities
ix. Planned outlay in public and private sectors
Examples of economic environment affecting the functioning of a business enterprise :
i. High inflation rates generally result in constraints on business enterprise as they increase
the various costs of business such as purchase of raw materials or machinery and payment
of wages and salaries to employees.
ii. A rise in disposable income of people due to increase in GDP of a country creates
increasing demand for products.
iii. Short and long term interest rates significantly affect the demand for product and
services.
For example ,
In case of construction and automobile companies, low longer-term rates are beneficial
because they result in increased spending by consumers for buying homes and cars on
borrowed money.
2. Social Environment
The social environment of business include the social forces like :
i. Customs and traditions
ii. Values
iii. Social trends
iv. Society’s expectations from business
Components of Social Environment
i. Attitudes towards product innovations, lifestyles, occupational distribution and consumer
preferences
ii. Concern with quality of life
iii. Life expectancy
iv. Expectations from the workforce
v. Shifts in the presence of women in the workforce
vi. Birth and death rates
vii. Population shifts
viii. Educational system and literacy rates
ix. Consumption habits
x. Composition of family
Examples of social environment affecting the functioning of a business enterprise :
i. Social trends present various opportunities and threats to business enterprises.
For example,
The health and fitness trend has become popular among large number of urban dwellers.
This has created a demand for products like organic food, gyms, bottled (mineral) water and
food supplements.
ii. Customs and traditions define social practices that have lasted for decades or even
centuries.
For example,
The celebration of Diwali, Eid, Christmas, and Gurpurab in India provides significant financial
opportunities for greetings card companies, sweets or confectionery manufacturers,
tailoring outlets and many other related business.
iii. Values refer to concepts that a society holds in high esteem. In India, individual freedom,
social justice, equality of opportunity and national integration are some of the examples.
In business terms, these values translate into freedom of choice in the market, business
responsibility towards the society and non-discriminatory employment practices.
3. Technological Environment
Technological environment includes :
i. Scientific improvements and innovations which provide new ways of producing goods and
services
ii. New methods and techniques of operating a business
Examples of technological environment affecting the functioning of a business enterprise
are :
i. Airline companies have internet and World Wide Web pages where customers can look for
flight times, destinations and fares and book their tickets online.
ii. Recent technological advances in computers and electronics have modified the ways in
which companies advertise their products.
iii. Continuing innovations in different scientific and engineering fields such as lasers,
robotics, biotechnology, food technology, food preservatives, medicine, telecommunication
and synthetic fuels have provided numerous opportunities and threats for many different
enterprises.
4. Political Environment
Political environment includes political conditions such as :
i. General stability and peace in the country
ii. Specific attitudes that elected govt representatives hold towards business.
Components of Political Environment
i. Prevailing political system
ii. The constitution of the country
iii. The degree of politicisation of business and economic issues
iv. Dominant ideologies and values of major political parties
v. The nature and profile of political leadership and thinking of political personalities.
vi. The level of political morality
vii. Political ideology and practices of ruling party
viii. The extent and nature of govt intervention in business
ix. The nature of relationship of our country with foreign countries
Examples of political environment affecting the functioning of a business enterprise :
i. Political stability builds up confidence among business people to invest in the long term
projects for the growth of the economy. On the other hand, Political instability can shake
that confidence.
ii. The attitude of govt officials towards business may have either positive or negative impact
upon business.
For example, even after opening up of our economy in 1991, foreign companies find it
extremely difficult to cut through the bureaucratic red tape to get permits for doing
business in India. Sometimes, it took months to process even their application for the
purpose. As a result, these companies were discourage from investing in our country.
5. Legal Environment
Legal environment includes various :
i. Legislations passed by the Govt
ii. Administrative orders issued by govt authorities
iii. Court judgements
iv. Decision taken by various commissions and agencies at every level of govt. – Centre,
State or local.
It is important for every business enterprise to obey the law of land. Therefore, an adequate
knowledge of rules and regulations framed by the Govt is a pre-requisite for better business
performance. Non-compliance of laws can land the business enterprise into legal problems.
In India, a working knowledge of the following is important for doing business :
i. The Companies Act, 2013
ii. The Consumer Protection Act, 2019
iii. Factories Act, 1948
iv. Trade Union Act, 1926
v. Workmen’s Compensation Act, 1923
vi. Industrial Disputes Act, 1947
vii. Competition Act, 2002
viii. Industries (Development and Regulations) Act, 1951
ix. Foreign Exchange Management Act and the imports and Exports Act, 1947.
Impact of legal environment can be illustrated with the help of the following govt.
regulations to protect consumer’s interests :
i. The advertisement of alcoholic beverages is prohibited.
ii. Advertisements, including packets of cigarettes carry the statutory warning ‘Cigarette
smoking is injurious to health’.
iii. Advertisements of baby food must necessarily inform the potential buyer that mothers
milk is the best.
All these regulations are required to be followed by advertisers.
Case Study 2
The Govt of India has recently come up with an amendment to Section 6 of the Payment of
Wages Act, 1936 to allow employers of certain industries to make payment through various
electronics modes of payments. The amendments will be applicable to all the public sector
undertakings for wages disbursement using epayment options. This is another milestone to
the direction to further push to cashless economy.
Identify and explain any two dimensions of business environment which relate to the above
mentioned case.
Ans a. Political, Legal, Technological
GOVT. POLICY CHANGES AND THEIR IMPACT ON BUSINESS
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
license - permit - quota raj.
Liberalisation means removal of unnecessary controls and restrictions on business.
Features of Liberalisation
i. Abolishing licensing requirement in most of the industries except a few one.
ii. No restrictions on expansion or contraction of business activities.
iii. Removal of restrictions on the movement of goods and services.
iv. Freedom in fixing the prices of goods and services.
v. Reduction in tax rates and lifting of unnecessary controls over the economy.
vi. Simplifying procedures for imports and exports.
vii. Making it easier to attract foreign capital and technology to India.
PRIVATISATION
Privatisation means giving greater role to the private sector in the nation building process
and a reduced role to the public sector.
To achieve this, the govt 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 (BIFR).
The term ‘disinvestment’ means transferring the public sector enterprises to the private
sector. It results in dilution of stake of the govt. in the public enterprise.
If there is dilution of govt. ownership beyond 51%, it would result in transfer of ownership
and management of the enterprise to the private sector.
GLOBALISATION
Globalisation means integrating the various economies of the world leading towards the
emergence of a global economy.
Till 1991, the govt of India had followed a policy of strictly regulating imports in value and
volume terms. These regulations were with respect to
a. licensing of imports b. tariff restrictions c. quantitative restrictions
Aim
i. Removal of quantitative as well as tariff restrictions
ii. Import liberalisation and export promotion through rationalisation of the tariff structure
and foreign exchange reforms.
iii. Free flow of goods and services across nations
iv. Free flow of capital across nations
v. Free flow of information and technology
vi. Free movement of people across borders
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. This led to eighty-six per cent of the money in
circulation invalid. The people of India had to deposit the invalid currency in the banks,
which came along with the restrictions placed on cash withdrawals. In other words,
restrictions were placed on the convertibility of domestic money and bank deposits. The
main aim was to curb corruption, black money and illegal activities.
FEATURES OF DEMONETISATION:
1. Demonetisation is viewed as a tax administration measure. Cash holdings arising from
declared income was readily deposited in banks and exchanged for new notes. But those
with black money had to declare unaccounted income and pay tax penalty was imposed.
2. Demonetisation is also interpreted as a shift on the part of the government indicating that
tax evasion will no longer be tolerated or accepted.
3. Demonetisation also led to tax administration channelizing savings into the formal
financial system.
4. Another feature of demonetization is to create a less-cash or cash-lite economy, i.e.,
channeling more savings through the formal financial system and improving tax compliance.
IMPACT OF DEMONETISATION
1. Money/Interest rates i. Decline in cash transactions
ii. Bank deposits increased
iii. Increase in financial savings
2. Private wealth Declined since some high demonetised notes were not
returned and real estate prices fell
3. Public sector wealth No effect
4. Digitisation Digital transaction amongst new users (RuPay/AEPS) increase
5. Real estate Prices declined
6. Tax collection Rise in income tax collection because of increased disclosure
1. A business has to offer a wider choice in purchasing enhanced quality of goods and
services in order to maintain an edge over its competitors. The implementation of the new
economic policy with liberalisation, privatisation, and globalisation has posed various
challenges for the corporate sector. One of the important challenges is explained in the
above lines. Identify it.
(a) Increasing competition
(b) More demanding customers
(c) Necessity for change
(d) Market orientation
2. Which of the following is a feature of demonetisation?
(a) Tax administration measure
(b) Channelising savings into the formal financial system
(c) Development of less-cash economy
(d) All of the above
3. On 8th November 2016, with the announcement from the Government of India, all the
₹500 and ₹1,000 banknotes of the Mahatma Gandhi series have ceased to be legal tender.
The government also announced the issuance of new ₹500 and ₹2,000 banknotes in
exchange for the demonetised banknotes. Identify the concept being described in the above
lines.
(a) Globalisation
(b) Liberalisation
(c) Demonetisation
(d) Privatisation
4. In today’s world, the flow of goods and services is not only cheap and fast, but reliable
and secure. You can order anything you wish from any part of the world. The Internet has
been connecting people without any limitations or boundaries in the way of doing business.
Identify the concept being described in the above lines.
(a) Liberalisation
(b) Globalisation
(c) Demonetisation
(d) Privatisation
5. The Government of India launched the “Make in India” initiative in September 2014 to
increase foreign direct investment (FDI) in 25 sectors. As of April 2015, FDI inflow in India
increased by 48% since the launch of the “Make in India” initiative.
Identify the concept being described in the above lines, with regard to an inflow of FDI.
(a) Demonetisation
(b) Privatisation
(c) Liberalisation
(d) Globalisation
6. The Union Cabinet has given an ‘in-principle’ nod to divest stakes in Air India, a wholly
government-owned airline. This means the government is willing to shed a substantial
portion of its stake and hand over the management of the ailing airline to the private sector.
Identify the concept being described in the above lines.
(a) Liberalisation
(b) Privatisation
(c) Globalisation
(d) Demonetisation
7. According to a report by the India Staffing Federation (ISF), India has emerged as the
fifth largest market worldwide in Flexi-staffing in 2018, and the country would have a 6.1
million Flexi-workforce by 2021. It showed that Haryana, Gujarat, Karnataka, Madhya
Pradesh, and Telangana are the states with high growth potential for Flexi-staffing, but
Andhra Pradesh tops the list of states with favourable business environments. Identify the
features of the business environment being discussed above.
(a) Relativity
(b) Dynamic nature
(c) Uncertainty
(d) Interrelatedness
8. India continues to be a lower-middle-income country along with 46 others, while Sri
Lanka has climbed to the upper-middle-income group for the fiscal year (FY) 2020, according
to the World Bank’s classification of countries by income levels, released on July 1, 2019.
Identify the related dimensions of the business environment.
(a) Social dimension
(b) Technological dimension
(c) Economic dimension
(d) Political dimension
9. India’s population is expected to grow under 0.5 percent during 2031-41 due to a decline
in fertility rate and an increase in life expectancy. These changes in India’s demography will
also have implications such as the proportion of elementary school-going children will
witness significant declines, lack of hospital beds, and an increase in retirement age. The
related feature of the business environment is described in the above lines is________.
(a) Totality of external forces
(b) Dynamic nature
(c) Interrelatedness
(d) Relativity
10. According to the World Health Organisation, 39% of adults are overweight. Over the last
40 years, the prevalence of obesity has tripled around the world. With over half of
consumers drinking at least one sugary drink on a given day, regulations towards the
beverage sector are likely to become increasingly onerous. In the U.K., for example, a sugar
tax was introduced in 2018 on beverages containing more than 5% sugar. Identify the
related dimensions of the business environment.
(a) Legal dimension and Social dimension
(b) Social dimension and Technological dimension
(c) Technological dimension and Legal dimension
(d) Political dimension and Technological dimension
11. As a result of major government initiatives, more and more people are going ‘green’. In
order to keep in line with the trend, ‘Clapaway’ a carpet cleaning company, has advertised
that they only use natural cleaners that come from renewable resources and that all their
service vehicles are hybrid vehicles that use both gas and electricity. Identify one of the
points related to the importance of the business environment and its understanding by
managers, which is being highlighted in the above case.
(a) It helps in assisting in planning and policy formulation
(b) It helps in coping with rapid changes
(c) It helps in improving performance
(d) It enables the firm to identify opportunities and get the first-mover advantage
12. ‘Yo Tummy’ began its business by offering the classic combo of hamburgers and fries.
But over time, their customers wanted healthier foods, so ‘Yo Tummy’ responded and began
offering healthy alternatives such as salads, fruits, wraps, and oatmeal. If ‘Yo Tummy’ hadn’t
responded, they may have lost customers that wanted to eat healthier foods. The above
case highlights one of the points related to the importance of the business environment and
its understanding by managers. Identify it.
(a) It helps in coping with rapid changes
(b) It helps in improving performance
(c) It helps the firm to identify threats and early warning signals
(d) It enables the firm to identify opportunities and get the first-mover advantage
13. Electric vehicles with zero tailpipe emissions are emerging as a good alternative to
problems like climate change, surging pollution leading to ill health, crude import bill, and
energy security. Identify the related dimensions of a business environment.
(a) Economic dimension, Legal dimension, and Social dimension
(b) Social dimension, Political dimension, and Economic dimension
(c) Economic dimension, Technological dimension, and Social dimension
(d) Social dimension, Political dimension, and Legal dimension
14. The Economic Survey 2019 suggests that psychological biases can be used in the realm
of tax compliance. It is in favour of using religious norms such as “dying in debt is a sin” to
improve tax compliance. Identify the related dimensions of the business environment.
(a) Legal dimension and Social dimension
(b) Social dimension and Economic dimension
(c) Technological dimension and Political dimension
(d) Political dimension and Economic dimension
15. In order to boost and double India’s export of goods and services to over USD 1,000
billion by 2025, it is important to lower effective corporate tax rates, bring down the cost of
capital and simplify regulatory and tax frameworks. Identify the related dimension of a
business environment.
(a) Social dimension and Legal dimension
(b) Technological dimension and Political dimension
(c) Political dimension and Social dimension
(d) Economic dimension and Legal dimension
16. Which of the following is not a component of specific forces of business environment?
a. Technological conditions
b. Customers
c. Employees
d. Investors
17. The growing awareness about healthcare has led to an increase in the demand for
healthcare products and services in the country. Identify the feature of business
environment being described in the above case.
(a) Dynamic nature
(b) Uncertainty
(c) Relativity
(d) Interrelatedness
18. Since more number of people have become more beauty and health conscious, our
economy has witnessed an unprecedented surge in the number of health and beauty spas
and wellness clinics. Related feature of business environment being described in the above
lines is —
(a) Totality of external forces
(b) Dynamic nature
(c) Interrelatedness
(d) Relativity
19. ‘Twinkle Stars’ is a well-known resort for organising parties, especially for children.
However, in past 6 months its popularity has reduced considerably as a new resort with
better ambience and facilities has opened within its vicinity. Name the related feature of
business environment which has influenced the business of ‘Twinkle Stars’ adversely.
(a) Totality of external forces
(b) Dynamic nature
(c) Interrelatedness
(d) Uncertainty
20. Any kind of external devices, like compact discs (CD’s) for computer,
have become obsolete. Google, with its Google Drive service, Apple with
its iCloud offering, enables the users store documents, photos, music and
movies on web-based servers. Identify the feature of business
environment being described in the above lines
(a) Relativity
(b) Dynamic nature
(c) Uncertainty
(d) Interrelatedness
21. The Uttarakhand government has developed surveillance network using latest satellite
technology. Under this system, the state’s mining department would be in a position to
check illegal mining activities across the state. The state government is also considering the
use of drones in its proposed campaign against illegal mining. Identify the related
dimensions of business environment.
(a) Economic dimension and Legal dimension
(b) Social dimension and Economic dimension
(c) Technological dimension and Political dimension
(d) Political dimension and Economic dimension
ANSWERS
1a
2d
3c
4b
5c
6b
7a
8c
9c
10 a
11 c
12 a
13 c
14 b
15 a
16 a
17 d
18 c
19 b
20 c
21 c
Kartik
Sidak
Keshav
Deepu
Rakshit
Lakshita
Kavya
Harman
Harmanjot
