CHAPTER – 3

BUSINESS ENVIRONMENT
MEANING:
Business environment refers to all the external forces that affect the performance of a
business organisation. Such forces can be economic, social, political, technological or legal.
Thus, individuals, consumers, government, legal matters all compose business
environment. For example, change in taste and preferences of the consumers, change in
government policies, change in political scenario, change in legal polices, all make up
business environment. An organisation cannot control such forces but they affect its
performance either positively or adversely. For example, a change in consumer’s tastes in
favour of a firm’s product, increases demand for its product. Similarly, an introduction of a
new technology leaves the technology used by the firm obsolete and its products
comparatively inferior. Thus, it can be said that everything that is outside the purview of an
organisation but affects its performance composes business environment.
FEATURES OF BUSINESS ENVIRONMENT:
Business environment refers to all the external forces such as economic, social, political,
technological or legal that affects the performance of a business organisation. In other
words, everything that is outside the purview of an organisation but affects its performance
composes business environment.
Business environment has the following characteristics.
 Aggregate of External Forces: Business environment is the total of all the external forces
such as individuals, consumers, government, legal matters that affect the performance of
an organisation either positively or negatively.
 Interrelation: Different forces of business environment are closely related to each other.
For example, an increase in the income of the consumers increases the demand for
consumer durables such as television, refrigerator, etc.
 Ever Changing: Business environment is dynamic and ever changing in nature. For
example, consumer tastes and preferences, technology, government rules and policies
keep changing continuously.
 Uncertainty: Business environment is uncertain. Changes in different forces of the
environment cannot be predicted easily. In addition, dynamism of the forces makes it
even more uncertain.
 Complex: Business environment is the aggregate of different interrelated and dynamic
forces. Thus, it becomes difficult and complex to understand. For example, all political,
social, economic, technological and legal matters affect the performance of organisation
simultaneously. While, it may be easy to understand the individual affect of these forces,
their cumulative effect is quite difficult to understand.
 Relative: Business environment is relative in nature. It differs from region to region. For
example, political conditions, religious beliefs, government rules and policies differ from
one region to another.
SPECIFIC ENVIRONMENT AND GENERAL ENVIRONMENT
Specific environment refers to those external forces that affect an organisation directly.
That is, they are the forces that are specific to a particular organisation or a company. For
example, a change in tastes and preferences of consumers towards the products of a
company, directly affects its demand. Similarly, a delay in the supply of raw material from
the suppliers directly affects the production of a company.
On the other hand, general environment refers to those external forces that affect all the
organisations. As against specific forces, general forces do not pertain to a particular
organisation, rather they affect the performance of all the organisations. Thus, such forces
affect a particular organisation only indirectly. For example, a change in technology affects
the quantity and quality of production of all the organisations. Similarly, a change in
political conditions affects all companies simultaneously.
IMPORTANCE OF BUSINESS ENVIRONMENT:
Understanding of business environment is of vital importance for successful functioning of
an organisation. Any organisation cannot function independently. It’s functioning and
performance depends on several external forces as well. A continuous evaluation and
understanding of the business environment helps a firm to take account of these forces in a
better manner and thereby, improve its functioning. The following points highlight the
importance of understanding of environment for business enterprises.
 Identification of Opportunities: Changing business environment offers many positive
opportunities for business. A careful analysis of the environment enables an enterprise to
identify these positive opportunities and take first hand advantage in competition. That is,
it enables the organisation to gain maximum benefit and move ahead of its competitors.
For example, Tata recognised the demand for a small and economical car in India and
thereby, launched the popular Tata Nano at a price of just one lakh. Thus, it became the
leader in low cost car in India.
 Identification of Threats: Besides positive opportunities, certain changes in the
environment may also affect the functioning of an environment adversely. A study of
business environment helps an enterprise in the identification of these threats or negative
signals. Thereby, it enables it to take appropriate preventive measures. For example, if a
mobile manufacturing company finds that another company is coming up with new and
improved features in its product, then it acts a competition for it. An identification of the
threats can enable the organisation to take appropriate measures such as improving the
quality and features of its mobile, advertising, etc.
 Tapping/Accumulating Useful Resources: Environment acts a source of inputs or
resources such as raw material, machinery, labour, etc. required for the functioning of an
organisation. On the other hand, environment also acts a source of demand for goods and
services produced by the organisation. Thus, it is rational for the organisations to take up
those resources from the environment that can be converted into the desired output. This
is possible only if the enterprises have an understanding of what the environment desires
and what it can offer. For example, with a rise in demand for the touch screen technology
in mobile phones, manufacturers are accumulating resources required for manufacturing
touch screen phones.
 Adjusting to Changes: Business environment is dynamic in nature. Technology, consumers
taste and preference, government policies, political conditions change continuously. A
careful analysis and understanding of the environment helps an enterprise in dealing with
 these changes in a better manner and take appropriate actions. For example, by a study of
business environment many bakery enterprises have realised the growing demand for
sugar-free products and are increasing the production of such bakery products.
 Formulating Plans and Policies: With a continuous study of the environment an
organisation can identify various threats and opportunities for its business. Accordingly, it
can frame suitable plans and policies in view of the current scenario. For example, if on
analysing the market for clothes in India, it is found that there is an increasing demand for
western wear, then a cloth manufacturing company can frame policies and strategies to
incorporate western wear in its production.
 Improving Performance: An analysis of the business environment helps the enterprises in
identifying various threats and opportunities that affect its performance. It helps the
organisation in dealing with these changes in an appropriate manner. Thereby, it helps it
in improving its performance.
DIMENSIONS/ELEMENTS OF BUSINESS ENVIRONMENT:
The various dimensions of business environment in terms of general environment are:
 Economic Environment: It comprises of the economic variables such as interest rates,
income, stock market indices that affect the functioning of the enterprises. For example,
an increase in the income of the consumers increases the demand for goods and services
of the enterprises. Similarly, a fall in the interest rates for loans for consumer durables
increases the spending capacity and thereby, increases the demand for such products.
Components of Economic environment:
a. Structure of economy.
b. Rate of growth of GNP.
c. Per Capita Income.
d. Rates of savings and investments.
e. Balance of Payments.
f. Value of exports and imports.
g. Agricultural and industrial production.
h. Money supply in the economy.
i. Role of public and private sector.
Significant effect of Economic environment on business firms:
The economic elements affect the business firm in the following ways:
 With an increase in the rates of taxation, business expenses increase. This cause a rise
in the prices of goods, leading to fall in demand of such goods.
 With an increase in the inflation rates, there is a rise in the cost of production. This
affects the profits of the business adversely.
 A rise in the per capita and disposable income will lead to an increase in the demand for
goods and services.
 Social Environment: Social environment refers to the social forces such as customs,
traditions, social values, social trend etc. For example, religious celebrations provide
business opportunities to many enterprises such as those producing sweets, decoration
items, etc. Similarly, in India a change in social trend towards western lifestyle has
increased the demand for western wear, fast food, etc.
 Components of Social environment:
a. Concern with quality of life.
b. Life expectancy.
c. Birth and death rates.
d. Population shifts.
e. Educational system and literacy rates.
f. Consumption habits.
g. Composition of family.
h. Attitudes towards product innovations, lifestyles, consumer preference, etc.
Significant effect of Social environment on business firms:
The social elements affect the business firm in the following ways:
 Traditions refer to such social practices that are followed since decades. Traditions like
celebrations of festivals provide greater opportunities to businesses like confectionary,
sweets, greeting cards, gift galleries, etc.
 Trends refer to changes and inclination towards new products. Emerging trend of
health and physical fitness provide opportunities to businesses like gyms, diet drinks,
mineral water, food supplements, etc.
 Values refer to concepts that a society holds in high esteem, such as freedom, social
justice, equality, etc. values affect business enterprises by making it more responsible
towards society, enforcing non-discriminatory employment practices and providing
freedom of choice to its customers.
 Technological Environment: Technological environment comprises of the technological
changes and improvements. For example, introduction of computers, internet, have
changed the way organisations work today. Similarly, continuous improvement and
innovations in the technology used in the production improves the quality of production.
While on one hand, improvement in technology provides new business opportunities for
the enterprises, on the other hand, is a threat for the enterprises using obsolete
technology.
Components of Technological environment:
a. Spirit of invention and innovation among people.
b. Facilities for research and development.
c. Incentive and concessions for development and application of new technology.
d. Legal protection for intellectual property rights.
e. Access to foreign technology.
Significant effect of Technological environment on business firms:
The technological elements affect the business firm in the following ways:
 With recent imporveme3nts in technology and computerization, marketing and selling
of products is now possible online. This has increased the turnover and profits of many
business concerns.
 Similarly, firms engaged in tours and travels and ticket booking are growing because of
online system of ticket and hotel booking.
  Innovation in the area of good preservation has not only provided vast opportunities to
firms producing jams, jellies, pickles, ready to cook foods, etc, but has also increased
the demand and consumption of such products in the society.
 Legal Environment: It refers to the legislation and rules passed by the government such as
the Companies Act, Trade union Act, etc. Knowledge of these legislation is essential for
enterprises as their non-compliance can lead to legal trouble for them. For example, an
export-import company in India has to follow the rules and regulations as stated under the
EXIM policy and the Foreign Trade (Development and Regulation) Act, 1992. Similarly, the
refining, processing, distribution, sale of petroleum, petroleum products is governed by
the Petroleum and Natural Gas Regulatory Board Act, 2006.
Components of Legal environment:
a. Legislation passed by the government.
b. Court judgements.
c. Decisions of various commissions and agencies at every level of administration.
d. Administrative orders.
Significant effect of Legal environment on business firms:
The legal elements affect the business firm in the following ways:
 The advertisement of alcoholic beverages is prohibited, which affects the marketing of
such products.
 Products like tobacco and cigarettes are required to carry a statutory warning on their
packages, ‘Smoking is injurious to health’.
 Political Environment: Political environment comprises of political conditions such as
peace and stability, law and order, etc. For example, a situation of political unrest such as
frequent change in the ruling government implies a change in the rules and policies of the
government regarding production and manufacturing. Such a frequent change in the
regulations regarding production discourages investment. Similarly, the opening up of our
economy under the New Economic Policy in 1991, provided business opportunity to many
foreign companies
Components of Political environment:
a. The constitution of the country.
b. Political stability.
c. Prevailing political system.
d. Political outlook on business sectors.
e. Extent and nature of government intervention in business.
f. Degree of politicization of business and economic issues.
Significant effect of Political environment on business firms:
The political elements affect the business firm in the following ways:
 Political unrest and threat to law and order adversely affect confidence of investors and
reduce the level of investment in the economy.
 Decisions regarding offering subsidy to the producers gives a boost to such industries.
DEMONETISATION:
MEANING:
Demonetization is a process of stripping a currency unit of its status as a legal tender. In
simple words, demonetized notes are no longer valid as legal currency. 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 problems.
The Government of India, made an announcement on November 8, 2016 with profound
implications for the Indian economy. The two largest denomination notes, Rs.500 Rs.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.,
channelising more savings through the formal financial system and improving tax
compliance.