Meaning of Business Environment

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.

Dimensions/Components/Elements of Business Environment

1. Economic Environment: It consists of
 Change in disposable income
 Inflation rate
 Value of rupee
 Interest rates
 Stock market indices.

Components of Economic Environment: Rates of saving and investment,

Volume of imports and exports, Balance of payments and changes in foreign
exchange reserves, Money supply in the economy, etc.
Examples of Economic Environment affecting the functioning of a business
enterprise:

(i) In case of construction companies and automobile manufacturers,

low longer-term interest rates are beneficial because they result in
increased spending by consumers for buying homes and cars on
borrowed money.
(ii) High inflation rates generally result in constraints on business
enterprises as they increase costs of raw materials or machinery
and payment of wages and salaries.
2. Social Environment: Social Environment includes social forces like:
 customs and traditions
 values
 social trends and
 Society’s expectation from business.
Components of Social Environment: Attitudes towards product innovations,
Concern with quality of life, Life expectancy, Shifts in the presence of women in
the workforce, Birth and death rates, Educational system and literacy rates,
Consumption habits, Composition of family. Social trends present various
opportunities and threats to business enterprises.
For example, the health-and-fitness trend has created a demand for diet soft
drinks, bottled (mineral) water and food supplements but harmed tobacco and
liquor businesses. Customs and traditions, e.g. celebration of Diwali, Eid,
Christmas, and Guru Parv in India provides significant financial opportunities
for greetings card companies, sweets or confectionery manufacturers, tailoring
outlets, etc.

3. Political environment: Political environment includes

 political conditions such as general stability and peace in the country
and
 Specific attitudes that elected government representatives hold
towards business. Attitudes of the government officials may have
either positive or negative impact upon business.
Components of Political Environment: The Constitution of the country, Political
practices of the ruling party, etc. Example: Political stability builds up
confidence among business people to invest in the long term projects. Political
instability can shake that confidence.

4. Legal environment: Legal environment includes:

 various legislations passed by the Government,
 administrative orders issued by government authorities,
 court judgments and
 The decisions rendered by various commissions and agencies at every
level of the government— Centre, state or local.
It is imperative for the management of every enterprise to obey the law of
the land. Non-Compliance of laws can land the business enterprises into
legal problems.
For example, knowledge of Companies Act 2013; ConsumerProtection Act,
1986, etc. is important for doing business.
Examples of government regulations to protect consumer’s
interests:
(i) Advertisements for packets of cigarettes must carry the statutory warning–
‘Cigarette smoking is injurious to health’
(ii) Advertisement of alcoholic beverages is prohibited on Doordarshan
(iii) Advertisements of baby food must necessarily inform that mother’s milk is
the best.

5. Technological Environment: Technological Environment includes forces

relating to:
 scientific improvements and innovations which provide new ways of
producing goods and services and
 New methods and techniques of operating a business.
Examples: Airline companies have internet and www pages where customers
can look for flight times, destinations and fares and book their tickets online.
Innovations in different scientific and engineering fields such as lasers, robotics,
food preservatives, medicine,
Tele communication, etc. have provided numerous opportunities and threats
for many different enterprises.

Features/Characteristics of Business Environment

TUSI C DR
1. Totality of external forces :
Business environment is the sum total of all individuals, institutions and other
factors and forces external to business firms which are out of control
2. It includes both specific and general forces:
Specific forces (e.g. investors, customers, competitors and suppliers) affect
individual enterprises directly and immediately in their day-to-day working.
General forces (e.g. economic, social, political, legal and technological
conditions) have impact on all business enterprises and thus may affect an
individual firm only indirectly.
3. Its elements are closely inter-related. For example, increased life expectancy
of people and increased awareness for health care have increased the demand
for many health products and services like diet Coke, fat-free cooking oil.
4. It is dynamic as it keeps on changing (in terms of technological improvement,
shifts in consumer preferences or new competition in the market).

5. It is uncertain as it is difficult to predict future happenings (especially when

environment changes are taking place frequently as in the case of information
technology or fashion industries).

6. It is complex as it comprises of numerous interrelated and dynamic

conditions, which arise from different sources. It is relatively easier to
understand business environment 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.

7. It is a relative concept as it differs from region to region. For example,

political conditions in the USA differ from those in Japan or China. Similarly,
demand for sarees may be fairly high in India whereas it may be almost non-
existent in France.
Importance of Business Environment
CPT TOP
1) It helps the firm to identify opportunities and get the first mover
advantage:

Opportunities refer to the positive external trends or changes. Identification of

opportunities at an early stage helps the firm to be able to exploit them
without losing them to competitors. Eg: Maruti Udyog became the leader in
the small car market because it was the first to recognise the need for small
cars for middle class.

2) It helps a firm to identify threats and early warning signals:

Environmental awareness helps mangers identify various threats. It provides
the business early warning signals to plan its future course of action. For
example, if an Indian firm finds that a foreign multinational is entering the
Indian market with new substitutes, it should act as a warning signal.
3) It helps in tapping useful resources:
Environment is a source of various resources to business enterprises.
Environment scanning provides information about different sources of
resources. Therefore enterprise should design their policies making a provision
for getting resources they need and giving what the environment need.
4) It helps in coping with rapid changes:
Business environment is highly dynamic such as change in market condition,
technology, competition etc. To cope with these changes managers must be
dynamic. This is possible through proper environment scanning.

5) It helps in assisting in planning and policy formulation:

Environment scanning gives vital information which can be taken as the basis
for deciding future course of action (planning) or framing guidelines for
decision making (policy formulation).

6) Helps in improving performance:

The future of environment is very much linked with what is happening the
environment. Those enterprises which continuously monitor their
environment and adopt suitable policies will improve their performance.
Government Policy Changes
1) Liberalisation means removal of unnecessary controls and restrictions
on business. (e.g. Abolishing licensing requirement, Freedom in deciding
the scale of business, Freedom in fixing the prices, Reduction in tax
 rates, Simplifying procedures for imports and exports, Making it easier
to attract foreign capital, etc.)
2) Privatisation means giving greater role to the private sector in the
nation building process and a reduced role to the public sector.
(‘Disinvestments’ means transferring the public sector enterprises to the
private sector.)
3) Globalisation means integrating the various economies of the world
leading towards the emergence of a cohesive global economy. (e.g.
Removal of quantitative as well as tariff restrictions, Import liberalisation
and export promotion through rationalisation of the tariff structure and
foreign exchange reforms, etc.)

DEMONETIZATION:

Demonetisation is an act of cancelling the legal tender status of a currency unit

in circulation. The Government of India, made an announcement on November
8, 2016 with profound implications for the Indian economy. The two largest
denomination notes,'500' & '1000', were ‘demonetised’ .In simple words,
demonetized notes are no longer valid as legal currency. Usually, a new
currency replaces the old currency.
A look into the past will make you realise that India is no new to
demonetisation. Demonetisation has been implemented twice -1946 and 1978

Aim & Features of demonetisation

1) A tax administration tool(To control accumulation of ‘black money):

The people who have black money had to declare their unaccounted wealth
and pay taxes at a penalty rate.
2) Cash less economy:
Govt. announced demonetization with an aim of creating a digital economy
with the support of formal financial system / banks. (Internet banking, e-
wallets, etc.)
3) It is a method to check tax evasion:
Through this action, government indicating that tax evasion will no longer be
tolerated or accepted.
[ the illegal non-payment or underpayment of tax.]-Tax Evasion
4) To control corruption:
The aim of demonetisation was to control corruption.
5)To control use of high denomination notes for illegal activities.
To control use of high denomination notes for illegal activities.

Impact of Demonetization:
1)Decline in cash transaction.
2)Bank deposits increased.
3)Digital transactions RuPay/AEPS among new users increased(AEPS- Aadhaar
Enabled Payment System).
4)Real estate prices declined.
5)Rise in income tax collection because of increased disclosure.