CHAPTER – 3

BUSINESS ENVIRONMENT

• Business environment can be defined as those forces, individuals and institutions who have
the ability to influence the working of an organization.
• Features of Business Environment:
(a) Totality of external forces: Business environment is the sum total of all the
forces/factors external to a business firm.
(b) Specific and general forces: Business environment includes both specific and general
forces. Specific forces include investors, competitors, customers etc. who influence
business firm directly while general forces include social, political, economic, legal and
technological conditions which affect a business firm indirectly.
(c) Inter-relatedness: All the forces/factors of a business environment are closely
interrelated. For example, increased awareness of health care has raised the demand for
organic food and roasted snacks.
(d) Dynamic: Business environment is dynamic in nature which keeps on changing with
the change in technology, consumer’s fashion and tastes etc.
(e) Uncertainty: Business environment is uncertain as it is difficult to predict the future
environmental changes and their impact with full accuracy.
(f) Complexity: Business environment is complex which is easy to understand in parts
separately but it is difficult to understand in totality.
(g) Relativity: Business environment is a relative concept whose impact differs from
country to country, region to region and firm to firm. For example, a shift of preference
from soft drinks to juices will be welcomed as an opportunity by juice making
companies while a threat to soft drink manufacturers.
• Importance of Business Environment
(a) Identification of opportunities to get first mover advantage: Understanding of
business environment helps an organization in identifying advantageous opportunities
and getting their benefits prior to competitors, thus reaping the benefits of being a
pioneer.
(b) Identification of threats: Correct knowledge of business environment helps an
organization to identify those threats which may adversely affect its operations. For
example, Bajaj Auto made considerable improvements in its two wheelers when Honda
& other companies entered the auto industry.
(c) Tapping useful resources: Business environment makes available various resources
such as capital, labour, machines, raw material etc. toa business firm. In order to know
the availability of resources and making them available on time at economical price,
knowledge of business environment is necessary.
 (d) Coping with Rapid changes: Continuous study/scanning of business environment
helps in knowing the changes which are taking place and thus they can be faced
effectively.
(e) Assistance in planning and policy formulation: Understanding and analysis of
business environment helps an organization in planning &policy formulation. For
example, ITC Hotels planned new hotels in India after observing boom in tourism sector.

• Helps in Improving performance: Correct analysis and continuous monitoring of

business environment helps an organization in improving its performance.
• Economic Environment in India: As a part of economic reforms, the Government of India
announced New Economic Policy in July 1991 for taking out the country out of economic
difficulty and speeding up the development of the country.
Main features of NEP, 1991 are as follows:
1. Only six industries were kept under licensing scheme.
2. The role of public sector was limited only to four industries.
3. Disinvestment was carried out in many public sector enterprises.
4. Foreign capital/investment policy was liberalized and in many sectors100% direct
foreign investment was allowed.
5. Automatic permission was given for signing technology agreements with foreign
companies.
6. Foreign investment promotion board (FIPB) was setup to promote & bring foreign
investment in India.
7. Various benefits were offered to small scale industries.
The main objective of New Industrial Policy was to promote Liberalization, Privatization
and Globalization.
(a) Liberalization: It means freeing of Indian Industry from all unnecessary government
controls and restrictions. Abolishing licensing requirements; Freedom in deciding the
scale of business; removals of restriction on movements of goods and service; reduction
in tax rates; freedom in fixing prices; simplifying procedures; making it easier to attract
foreign investment.
(b) Privatization: Giving greater role to private sector in the nation building process and
reduced role of public sector; Disinvestment in many Public Sector undertaking etc.,
Setting up of BIFR to revive sick units in public sector enterprises suffering losses. It
 aimed at improving efficiency and performance of government undertakings, reducing
budgetary deficit & better utilization of national resources.
(c) Globalization: It means integration of various economies of the world leading to the
emergence of cohesive global economy. The measures taken by the Government include
trade liberalization which includes import liberalization; Export Promotion through
rationalization of tariff structure; Foreign exchange liberalization; increased interaction
among global economies under the aegis(protection/support) of World Trade
Organization. It resulted in addition of Export duty, Reduction of import.
• Dimensions/Components of Business Environment:
(a) Economic Environment: It has immediate and direct economic impact on a business.
Rate of interest, inflation rate, change in the income of people, monetary policy, price
level etc. are some economic factors which could affect business firms. Economic
environment may offer opportunities to a firm or it may put constraints.
(b) Social Environment: It includes various social forces such as customs, beliefs, literacy
rate, educational levels, lifestyle, values etc. Changes in social environment affect an
organization in the long run. Example: Now a day’s people are paying more attention
towards their health, as a result of which demand for mineral water, diet coke etc. has
increased while demand of tobacco, fatty food products has decreased.
(c) Technological Environment: It provides new and advance ways/techniques of
production. A businessman must closely monitor the technological changes taking place
in the industry as it helps in facing competition and improving quality of the product.
For Example, Digital watches in place of traditional watches, artificial fabrics in place of
traditional cotton and silk fabrics, booking of railway tickets on internet etc.
(d) Political Environment: Changes in political situation also affect business
organizations. Political stability builds confidence among business community while
political instability and bad law & order situation may bring uncertainty in business
activities. Ideology of the political party, attitude of government towards business, type
of government-single party or coalition government affects the business Example:
Bangalore and Hyderabad have become the most popular locations for IT due to
supportive political climate.
(e) Legal Environment: It constitutes the laws and legislations passed by the Government,
administrative orders, court judgements, decisions of various commissions and
agencies. Businessmen have to act according to various legislations and their knowledge
is very necessary. Example: Advertisement of Alcoholic products is prohibited and it is
compulsory to give statutory warning on advertisement of cigarettes.
• Major steps in Economic forms:
(a) New Industrial Policy - Under this the industries have been freed to a large extend
from licences and other controls. Efforts have been made to encourage foreign
investment.
(b) New Trade Policy - The Foreign trade has been freed from the unnecessary control.
The age old restrictions have been eliminated.
 (c) Fiscal Reforms. The greatest problem confronting the Indian Govt. is excessive fiscal
deficit.
Fiscal Deficit - It means country is spending more than its income
Gross Domestic Product (GDP) - It is the sum total of the financial value of all goods &
services produced in a year in a country.
(d) Monetary Reform - It is a sort of control policy through which the central bank controls
the supply of money with a view to achieving objectives of general economic policy.
(e) Capital Market Reforms- The Govt. has taken the following steps for the development
of this market:
(1) SEBI has been established.
(2) The restriction in respect of interest on debentures has been lifted.
(3) Private Sector has been permitted to establish Mutual Fund.
• Dismantling Price control - The govt. has taken steps to remove price control in many
products especially in fertilizers, iron and steel, petro products. Restrictions on the import
of these things have also been removed.
• Impact of Government Policy Changes on Business and Industry:
(a) Increasing Competition: De-licensing and entry of foreign firm’s Indian market is
increased the level of competition for Indian firms.
(b) More Demanding Customers: Now customers are more aware and they keep
maximum information of the market as the result of which now market is
customer/buyer oriented, Now, products are produced keeping in mind the demands of
the customers.
(c) Rapid Changing Technological Environment: Rapid Technological advancement has
changed/improved the production process as a result of which maximum production is
possible at minimum cost but it leads to tough challenges in front of small firms.
(d) Necessity for Change- After New Industrial. Policy the market forces (demand &
supply) are changing at a very fast rate. Change in the various components of business
environment has made it necessary for the business firms to modify their policies &
operations from time to time.
(e) Need for Developing Human Resources: The changing market conditions of today
requires people with higher competence and greater commitment, hence there is a need
for developing human resources which could increase their effectiveness and efficiency.
(f) Market Orientation: Earlier selling concept was famous in the market now its place is
taken by the marketing concept. Today firms produce those goods & services which are
required by the customers. Marketing research, educational advertising, after sales
services have become more significant.
(g) Reduction in budgetary Support to Public Sector: The budgetary support given by
the government to the public sector is reducing thus the public sector has to survive and
grow by utilizing their own resources efficiently.