BUSINESS ENVIRONMENT

MEANING OF 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. Thus, the economic social, political
technological and other forces are part of its environment. Understanding all these factors,
persons and institution carefully is a must for every businessman.

No company can survive in market ignoring the effects of Business Environment. The
efficient management analyses the environment and makes changes in organisational
policies to integrate its activities with Business Environment. For e.g. Increase in taxes by
the government can make things expensive to buy. Technological improvements may render
existing products obsolete. Political uncertainty may create fear in the minds of investors.
Changes in fashions and tastes of consumers’ may shift demand in the market from existing
product to new ones. Increase competitions in the market may reduce the profit margins of
firms.

Features of the business environment.

1. Dynamic nature: The Business environment is highly flexible and keeps changing. It is
not static or rigid that is why it is essential to monitor and scan the business
environment continuously.
2. Uncertainty: The Business environment is largely uncertain as it is very difficult to
predict future happenings, especially when environmental changes are taking place too
frequently as in the case of information technology or fashion industries.
3. Complexity: Since the business environment consists of numerous interrelated and
dynamic conditions or forces which arise from different sources, it becomes difficult to
comprehend at once what exactly constitute a given environment. In other words, the
environment is a complex phenomenon that is relatively easier to understand in parts
but difficult grasp in its totality.

Importance of business environment:

1. It enables the firm to identify opportunities and getting the first mover advantage:
The study of the environment helps a firm to do identify the opportunity and to be the first
to exploit it to its advantage. Opportunities are those positive external changes and trends
that will help a firm to improve its performance. Those firms which are more conscious
about the changes of business environment can take more advantage of opportunities
rather than lose these to competitors. For e.g. Maruti Udyog became the leader in the 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:
These are those trends and changes in the external environment that will have an adverse
effect on a firm’s performance. A good knowledge and understanding of business
environment help an enterprise to identify threats and acts as early warning signals. Proper
and timely understanding of environment helps the managers to make suitable changes in
the enterprise. For e.g. when Maruti Udyog got the information that more foreign car
manufacturing companies are entering in the market, then they took it as a warning signal
and increased its production and also launched new models.

3. Help in tapping useful resources:

The environment is a source of various resources for running a business to supply the goods
according to the demand in the market; a business needs various resources and inputs like
men money material and machines etc. Business gets its resources from the environment
and in turn provides goods and services to the environment. The scanning of business
requirement environment helps in determining the requirements of the environment. As a
result, a business can arrange useful resources at the right time at economical prices from
the environment.

4. It helps in assisting in planning and policy formulation: Environment is a source of

both opportunity and threat for a business enterprise, its understanding and analysis can be
the basis for deciding the future course of action or guidelines for decision making. E.g.
entry of new players in the market, which means more completion, may make an enterprise
think freshly about how to deal with the situation.

DIMENSIONS OF BUSINESS ENVIRONMENT

ECONOMIC ENVIRONMENT
Economic environment refers to all those forces that have a stronger influence over
organisations’ policies and actions. Economic environment consists of profit earning rate,
Gross domestic product, interest rate, the price level, productivity and employment rate,
monetary and fiscal policy of the government, etc. Each of the economic environment
factors may offer opportunities or put constraints to a business enterprise. So, management
should scan the economic environment and take timely actions to deal with these
environments. E.g. changes in economic and fiscal policy of the country have encouraged
foreign investors to invest in Indian companies.

SOCIAL ENVIRONMENT:
Social environment consists of the customs and traditions, social trends, norms, values and
of the society`s expectations in which business enterprise exists. The businessman cannot
overlook the components of the social environment as these components may not have an
immediate impact on the business, but in the long run, the social environment has a great
impact on the business. So understanding and analysis of the social environment are
important. The nature of goods and services in demand depend on upon the tastes,
preferences, buying habits and buying capacities of the consumers.

TECHNOLOGICAL ENVIRONMENT:

The 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. The businessman must closely monitor the technological
changes taking place in his industry because he will have to implement these changes to
remain in the competitive market. Technological changes always bring quality improvement
and more benefits for customers.E.g shift in demand from vacuum tubes to transistors, from
the steam locomotive to diesel and electric engines, etc.

POLITICAL ENVIRONMENT:

Political environment includes political conditions such as general stability and peace in the
country and specific attitudes that elected government representatives to hold towards
business. The significance of political conditions lies in the predictability of business
activities under stable; political conditions. On the other hand, there may be the
uncertainty of business activity due to political unrest and threats to law and order.
Political stability thus builds up confidence among business people to invest in the long-term
projects for the growth the economy. Political instability can shake that confidence.
Similarly, the attitude of government officials towards business may have either positive or
negative impact upon business

LEGAL ENVIRONMENT:

The legal environment includes various legislations passed by the government

administrative orders issued by government authorities, court judgments as well as the
decisions rendered by various commissions and agencies at every level of the government.
It is imperative for the government management of every enterprise to obey the law of the
land. There for an adequate knowledge of rules and regulations framed by the government
is a prerequisite for better business performance. Non-compliance of laws can land the
business enterprise into legal problems. E.g. Workmen's compensation act, industrial
disputes, acts etc.

Features of Industrial policy 1991 (New Economic Policy)

1 The government reduced the number of industries under compulsory licensing to six.
2. Disinvestment was carried out in the case of many public sector industrial enterprises.
3 Policy towards foreign capital was liberalised. The share of foreign equity participation
was increased and in many actives 100 percent. Foreign Direct Investment was permitted.
4. Many of the industries reserved for the public sector under the earlier policy, were
reserved. The role of the public sector was limited only to four industries of strategic
importance.
. Autonomic permission was now granted for technology agreements with foreign
companies.
6. The foreign Investment promotion Board was set up to promote and channelize foreign
investment in India.
LIBERALISATION: The economic reforms that were introduced aimed at liberating the Indian
business and industry from all unnecessary controls and restrictions. They signalled the end
of the licence permit quota raj. Indian industry got liberated in the following way.

1. Abolishing licensing requirement in most of the industries except a few.

2. Freedom in deciding the scale of business activities.

3. Freedom deciding the prices of goods and services.

PRIVATISATION: Refers to the transfer of ownership and control from the public sector to
the private sector. It aims at giving the greater role of the private sector and reduce the role
of the public sector. This was a reversal of the development strategy pursued so far by
Indian planners. To execute the policy of privatising government to the following steps:

1. Disinvestment of public sector, i.e. transfers of public sector enterprises to the private
sector.

2. Setting up of the board of Industrial and Financial Reconstruction. This board was set up
to revive sick units in public sector enterprises suffering loss.

3. Dilution of Government ownership below 51%.

GLOBALISATION: Globalisation refers to the integration of our economy with the world
economy. It provided an opportunity for an organisation to expand globally. Till1991, the
Indian government was strictly regulating imports through licensing of imports. tariff
restrictions.quantitative restrictions etc. but the aim of the new economic policy was to
liberalise foreign trade through the policy of Globalisation. New economic policy
contributes towards globalisation in the following ways.

1 Raising foreign equity participation.

2 Abolition of import duty.

3 Abolition of Export duty.

IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY.

1. Increasing competition: After the new policy licensing and liberalised entry of foreign
firms increased the competition for Indian firms not only from domestic firms but also
from MNCs. The competition has increased, especially in the service sector such as
banking, insurance, telecommunications etc. Only those companies could survive and
face the competition which could adopt the latest technology and those companies
which could not face the competition, had to leave the market.

2. More demanding customers: Prior to the new economic policy the market was producer
oriented because of very few production units and a shortage of product in every sector.
But after new economic policy, many new businesses entered into the market and many
foreign companies established their production units in India. As a result, the
competition was increased and this increased competition in the market increased the
choice of customers because there was a surplus of products in every sector.

3. Rapidly changing technological environment: Rapidly changing technology creates

tough challenges before smaller firm. This made it compulsory for business firms to
adopt the latest technology in production. With the use of advanced technology, the
firms can produce better quality goods at lower cost. To adopt the advanced technology
the firms should increase their investment in Research and Development.

4. Market orientation: Earlier firms used to produce first and go to the market for sale
later. In other works they had production oriented marketing operations. In other
words, they had production oriented marketing operations. In a fast changing world,
there is a shift to market orientation in as much as the firms have to study and analyse
the market first and produce goods accordingly.