Q1 What is business environment ?
The term 'business environment' refers to all the factors outside a business's control that can
impact its performance. Imagine the entire universe, then exclude the part that represents
the organization; what's left is the environment.
This includes economic, social, political, technological, and other external forces. The
environment comprises individual consumers, competing enterprises, governments,
consumer groups, competitors, courts, media, and other institutions.
These factors, even though outside the business boundaries, can significantly influence its
performance. For instance, changes in government economic policies, rapid technological
advancements, political uncertainties, shifts in consumer preferences, and increased market
competition all play a crucial role in shaping how a business operates.
For example, if the government raises taxes, it can increase the cost of goods. Technological
improvements may make existing products outdated. Political uncertainties can create
hesitations among investors. Changes in consumer preferences may shift market demand.
Increased competition might reduce profit margins for companies.
Q2 What are the characteristics of business environment?
The business environment can be understood through the following features:
1. Totality of External Forces: The business environment encompasses all external
factors affecting business firms. It is an aggregate or sum total of these external
influences.
2. Specific and General Forces:
• Specific forces (like investors, customers, competitors, and suppliers) directly
and immediately impact individual enterprises in their daily operations.
• General forces (such as social, political, legal, and technological conditions)
affect all businesses, influencing individual firms indirectly.
3. Inter-relatedness: Different elements of the business environment are closely
connected. For example, the increased life expectancy and health awareness have
raised the demand for health products like soft drinks and fat-free cooking oil,
leading to changes in people's lifestyles.
4. Dynamic Nature: The business environment is dynamic, constantly changing due to
technological advancements, shifts in consumer preferences, and the entry of new
competitors in the market.
5. Uncertainty: Business environment is highly uncertain, making it challenging to
predict future events, especially with frequent changes, as seen in industries like
information technology or fashion.
6. Complexity: Due to numerous interrelated and dynamic conditions, the business
environment is complex. While it's easier to understand its parts, grasping the entire
phenomenon can be challenging. For instance, determining the relative impact of
social, economic, political, technological, or legal factors on changes in market
demand can be complex.
7. Relativity: Business environment is relative, varying from country to country and
region to region. Political conditions, for instance, differ between the USA, China, and
Pakistan, and the demand for products like sarees may vary significantly between
India and France.
Q3 what is the importance of business environment?
importance of the business environment is crucial for firms, and here's why:
1. Identifying Opportunities for First Mover Advantage: Recognizing opportunities,
which are positive external trends or changes, allows a firm to enhance its
performance. The business environment offers various chances for success. Early
identification of these opportunities gives an enterprise the advantage of being the
first to capitalize on them, preventing competitors from taking the lead. For instance,
Maruti Udyog became a market leader in small cars by recognizing the need for them
amid rising petroleum prices and a growing middle-class population in India.
2. Detecting Threats and Early Warning Signals: Threats are external trends or changes
that can impede a firm's performance. In addition to opportunities, the environment
presents numerous threats. Being aware of the environment helps managers identify
potential threats early on, acting as a warning signal. For example, if an Indian firm
learns that a foreign multinational is entering the market with new substitutes, it
serves as a warning. Armed with this information, Indian firms can prepare by taking
measures such as improving product quality, reducing production costs, and
engaging in aggressive advertising.
3. Tapping Useful Resources: The environment serves as a valuable source of resources
essential for running a business. To conduct any business activity, an enterprise
gathers various inputs like finance, machines, raw materials, power, water, and labor
from its surroundings, including financiers, government, and suppliers. These entities
provide resources with expectations of receiving something in return from the
enterprise. In turn, the business enterprise supplies goods and services to customers,
pays taxes to the government, and provides a return on financial investment to
investors. To ensure a smooth flow of inputs and outputs, the enterprise designs
policies that align with the resources available in the environment.
4. Coping with Rapid Changes: Today's business environment is highly dynamic, with
changes occurring rapidly. The speed of change is crucial in navigating this
environment. Turbulent market conditions, reduced brand loyalty, market
fragmentation, demanding customers, swift technological advancements, and
intense global competition characterize the current business landscape. Enterprises
of all sizes and types are confronted with this dynamic environment. To effectively
manage these significant changes, managers need to understand, assess, and adapt
to the environment, developing suitable courses of action to stay competitive.
5. Assisting in Planning and Policy Formulation: The business environment, being a
source of both opportunities and threats, serves as the foundation for determining
future actions (planning) and establishing guidelines for decision-making (policy). For
example, if new competitors enter the market, signaling increased competition, an
enterprise may reconsider its approach to the situation.
6. Improving Performance: The ultimate reason for grasping the business environment
is its impact on enterprise performance. Studies consistently show a strong
connection between an enterprise's future and the dynamics of its environment.
Enterprises that consistently monitor their environment and adopt appropriate
business practices not only enhance their current performance but also sustain
success in the market over a longer period.
Q4 Explain the various dimensions of business environment?
Exploring the various aspects of the business environment involves understanding
dimensions or factors such as economic, social, technological, political, and legal conditions.
These factors play a crucial role in decision-making and enhancing the performance of an
enterprise. Unlike the specific environment that affects individual enterprises, these factors
constitute the general environment, influencing many enterprises simultaneously. Let's
delve into some key dimensions:
1. Economic Environment: Economic factors like interest rates, inflation rates, changes
in people's disposable income, stock market indices, and currency value impact
management practices in a business. Short and long-term interest rates play a
significant role in influencing product and service demand. For instance, construction
companies and automobile manufacturers benefit from low long-term rates, leading
to increased consumer spending on homes and cars with borrowed money.
Additionally, rising disposable income due to a country's increased gross domestic
product stimulates demand for products. Conversely, high inflation rates pose
challenges for businesses as they increase various costs such as raw material
purchases, machinery acquisition, and employee wages.
2. Social Environment: The social environment in business encompasses social forces
such as customs, traditions, values, and societal expectations. Customs and traditions
represent longstanding social practices, enduring for decades or even centuries. For
instance, celebrations like Diwali, Eid, Christmas, and Guru Parv in India generate
significant financial opportunities for businesses like greeting card companies,
confectionery manufacturers, tailoring outlets, and related industries.
Values, on the other hand, are concepts highly esteemed by society. In India, values such
as individual freedom, social justice, equality of opportunity, and national integration are
examples cherished by the population. In business terms, these values translate into
concepts like freedom of choice in the market, a business's responsibility to society, and
non-discriminatory employment practices.
Social trends bring both opportunities and threats to businesses. For example, the
increasing popularity of the health-and-fitness trend among urban dwellers has created
a demand for products such as organic food, gyms, bottled (mineral) water, and food
supplements. Understanding and adapting to these social factors is crucial for businesses
to navigate and thrive in their environment.
3. Technological Environment: The technological environment involves forces related
to scientific improvements and innovations that introduce new ways of producing
goods, services, and operating a business. Recent advancements in computers and
electronics, for instance, have transformed how companies advertise their products.
We now commonly see computerized information kiosks and multimedia web pages
on the World Wide Web showcasing product virtues.
Retailers now have direct links with suppliers to efficiently replenish stocks when
needed. Manufacturers utilize flexible manufacturing systems, and airline companies
offer online platforms for customers to check flight times, destinations, fares, and book
tickets. Ongoing innovations in scientific and engineering fields like lasers, robotics,
biotechnology, food preservatives, medicine, telecommunication, and synthetic fuels
present both opportunities and threats to various enterprises.
Historically, shifts in demand from vacuum tubes to transistors, from steam locomotives
to diesel and electric engines, from fountain pens to ballpoints, from propeller airplanes
to jets, and from typewriters to computer-based word processors have played a
significant role in creating new business opportunities and shaping industries.
Understanding and adapting to these technological shifts are crucial for businesses to
stay relevant and competitive.
4. Political Environment: The political environment involves the political conditions
prevailing in a country, encompassing general stability, peace, and the attitudes of
elected government representatives towards business. The impact of political
conditions on business success is closely tied to the predictability of business
activities under stable political circumstances. In contrast, political unrest and threats
to law and order can introduce uncertainty into business operations.
Political stability fosters confidence among business people, encouraging long-term
investments for economic growth. On the flip side, political instability can erode this
confidence. Additionally, the attitudes of government officials toward business can have
either a positive or negative impact on business operations. Recognizing and navigating
these political factors is vital for businesses to make informed decisions and thrive in
their operating environment.
5. Legal Environment: The legal environment involves various laws and regulations
established by the government, including legislations, administrative orders, court
judgments, and decisions by government commissions and agencies at different
levels—central, state, or local. It is crucial for every enterprise's management to
comply with the laws of the land. Thus, having a good understanding of the rules and
regulations set by the government is essential for achieving optimal business
performance.
Failure to comply with laws can lead a business into legal troubles. In India, knowledge of
Constitutional Provisions, Companies Act 2013, Industries (Development and
Regulations) Act 1951, Foreign Exchange Management Act, Imports and Exports
(Control) Act 1947, Factories Act 1948, Trade Union Act 1926, Workmen’s Compensation
Act 1923, Industrial Disputes Act 1947, Consumer Protection Act 1986, Competition Act
2002, and other legal enactments amended by the Parliament over time is vital for
conducting business.
Understanding the impact of the legal environment is exemplified through government
regulations aiming to protect consumer interests. For instance, advertising alcoholic
beverages is prohibited, and cigarette packets must carry the statutory warning
'Cigarette smoking is injurious to health.' Similarly, advertisements for baby food must
inform potential buyers that mother's milk is the best. Adherence to these regulations is
essential for advertisers to operate legally and responsibly.
Q5 What is demonetisation? What are its features?
Demonetisation: On November 8, 2016, the Government of India made a significant
announcement that deeply impacted the country's economy. The two largest
denomination notes, ₹500 and ₹1,000, were rendered 'demonetised' immediately,
meaning they were no longer considered legal tender except for specific purposes like
paying utility bills. This move invalidated eighty-six percent of the money in circulation.
People were required to deposit the discontinued currency in banks, and restrictions
were imposed on cash withdrawals, affecting the convertibility of domestic money and
bank deposits.
The primary goal of demonetisation was to address issues like corruption, counterfeiting,
and the illicit use of high-denomination notes for illegal activities, particularly the
accumulation of 'black money' that remains undisclosed to tax authorities.
Key Features:
1. Tax Administration Measure: Demonetisation is seen as a tax administration
measure. Cash holdings from declared income were easily deposited in banks and
exchanged for new notes. Those with 'black money' had to disclose their
unaccounted wealth and pay taxes at a penalty rate.
2. Shift in Government Approach: Demonetisation is also interpreted as a shift in the
government's stance, signaling that tax evasion will no longer be tolerated or
accepted.
3. Channelizing Savings into Formal Financial System: Demonetisation directed tax
administration towards channelizing savings into the formal financial system. While
much of the deposited cash is likely to be withdrawn, some new deposit schemes
offered by banks will continue to provide a base for loans at lower interest rates.
4. Transition to a Less-Cash Economy: Another aspect of demonetisation aims to create
a less-cash or cash-lite economy by encouraging more savings through the formal
financial system and improving tax compliance. Despite arguments against this due
to the reliance on digital transactions requiring cell phones and Point-of-Sale (PoS)
machines, the understanding is that it helps bring people into the formal economy,
increasing financial savings and reducing tax evasion.
