CHAPTER - 3

BUSINESS ENVIRONMENT

Business Environment
Sum total of all individuals, institutions and other forces that may affect the
performance of business enterprise but outside the control of business.

Features Dimensions/External forces Significance

Totality Economic Identifying opportunities and

Specific and general forces Social getting first mover advantages
Inter-relatedness Political Identify threats and early
Coping with warning signals
Dynamic nature Technological rapid changes
Uncertainty Legal Assisting in planning Tapping useful resources
Complexity and policy formation
Relativity Helps in improving performance.

BUSINESS ENVIRONMENT IN INDIA

Economic Impact of Govt. Policy changes Managerial Response to changes

Reforms on business and industry in Business Environment
in India
Increasing competition Mergers and acquisitions
Liberalisation More demanding customers administration measure
(Removing unnecessary Diversification
control and restriction Rapidly changing technological
Brand Building
from industry) environment
Necessity for change Customer oriented approach
Privatisation
(Reducing role of public Need for developing human Technological Developments
sector disinvestment) resources Better labour relations
Globalisation Market orientation
(Integration of Changes in capital structure
Loss of Budgetary
economies of the world) Mergers and acquisitions
support to public sector

Class XII : Business Studies 45

 Business environment means the sum total of the factors which influence the
business and over which the business has no control. The study of business
environment enables the managers to identify threats and opportunities.

Features of Business Environment

1. Totality of external forces: Business environment is the sum total of all

the forces/factors external to a business firm.

2. Specific and general forces: Business environment includes both specific

and general forces. Specific forces influence business firm directly while
general forces affect a business firm indirectly.
Components of Business Environment

Micro factors Internal/Specific External/General Macro factors

Affects all Factors Factors Affects all
business units Customers, Owners Economic, business units almost
differently and investors Environment Social in the same way.
e.g., Demand Suppliers, Creditors Environment Political e.g., General income
. the product
for Employees and trade Environment an employment
and employmentlevel
level
union, Competitors Technological in the economy.
Environment
Legal Environment

3. 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 and in turn changed
the life style of people.

4. Dynamic: Business environment is dynamic in nature which keeps on

changing with time. It may be change in technology, fashion and tastes etc.

5. Uncertainty: Business environment is uncertain as it is difficult to predict

the future environmental changes and their impact with full accuracy.

6. Complexity: Business environment is complex which is easy to understand

in parts separately but it is difficult to understand in totality.

7. Relativity:Business environment is a relative concept whose impact differs

from country to country, region to region and firm to firm. For example, demand

46 Class XII : Business Studies

 for ready to eat healthy food will be more in urban areas than in rural areas.

Q.1 Business Environment includes both specific and general forces. List any
two specific forces. (Any two- Investors, customers, owners, suppliers,
creditors, employees, trade unions.)
Q.2 Why is it said that business environment is dynamic in nature. (Because it
keeps changing with time)

IMPORTANCE OF BUSINESS ENVIRONMENT

1. Identification of opportunities to get first mover advantage:

Understanding of business environment helps an organisation in identifying
advantageous opportunities and getting their benefits prior to competitors,
thus reaping the benefits of being a pioneer.

2. Identification of threats and early warning signals: Correct knowledge

of business environment helps an organisation to identify those threats which
may adversely affect its operations. For example, Bajaj Auto made
considerable improvements in its two wheelers when Honda & other
multinational companies entered the auto industry.
3. Tapping useful resources: Business environment makes available various
resources such as capital, labour, machines, raw material etc. to a 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.
4. 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 by developing suitable course of action.
5. Assistance in planning and policy formulation: Understanding and analysis
of business environment helps an organisation in planning & policy
formulation. For example, ITC Hotels planned new hotels in India after
observing boom in tourism sector.
6. Helps in Improving performance: Correct analysis and continuous
monitoring of business environment not only helps an organisation in improving

Class XII : Business Studies 47

 its performance but also continue to succeed in the market for longer time.
DIMENSIONS/COMPONENTS OF BUSINESS ENVIRONMENT

1. Economic Environment: It represents the nature of an economy, its policy,

systems and all those forces that have bearing on business activities like.
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.

Examples :
• Decline in tax rates raises the disposable income of people leading to
increase in demand for products.

• Rise in inflation increases the cost of raw material, machine, payment

of wages and salaries.
• Demonetization implemented by RBI.

• Changes in economic and fiscal policies have encouraged NRI’s and

foreign investors to invest in India.
• Make in India was launched for job creation and skill enhancement.

• RBI allowed commercial banks to reduce interest rates on loans to

tackle recession.
• The banks offering loans at reasonable interest rates with minimum
required formalities because of banking sector reforms.

2. Social Environment:It includes various social forces such as customs,

beliefs, literacy rates, educational levels, lifestyle, values etc. Changes in
social environment affect an organisation in the long run. Example: Now a
days 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.

Examples :
• Festivals like Diwali, Eid, Christmas, etc. lead to increase in demand
for greeting cards, sweets, gifts etc.

48 Class XII : Business Studies

 • Equal pay/pay scales to male and female workers for equal work.
• Demand for reservation in jobs for minority and women.

• ‘Beti Bachao, Beti Padhao’ movement started for encouraging education

of girl child.
• Swachh Bharat Abhiyaan introduced for welfare of society.

3. Technological Environment:It implies using new and advanced 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, booking of railway tickets on internet etc.

Examples :
• Payments through e-wallets, Paytm etc.

• Change from fountain pens to ball pens.

• Dematerialization of securities.
• Cable TV adversely affected radio industry.

• Introduction of artificial intelligence, like Siri in iPhones.

4. Political Environment: It includes political conditions and factors related to

government affairs and their impact on business. 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.

Examples :

• Crash in share prices due to change in Vajpayee government in 1999.

• PM’s frequent visit to foreign countries for promoting business

relationships.

Class XII : Business Studies 49

 • Hyderabad has become the IT hub due to political support.
• Compensation given by government for acquiring property for building
infrastructure facilities, like metro construction.
• GST introduced and implemented in place of VAT.
5. Legal Environment:It constitutes the laws and legislations passed by the
Government, administrative orders, court judgements, decisions of various
commissions and agencies. Example: Advertisement of Alcoholic products
is prohibited and it is compulsory to give statutory warning on advertisement
of cigarettes.
Examples :
• Supreme Court issuing orders to seal unauthorised shops and
constructions.
• Law ensuring green dot for every vegetarian eatable products and red
dot for non-vegetarian products.
• Supreme Court passing an order to close the iron factories around Taj
Mahal to avoid air pollution affecting it.
Q.3 Identify the type of dimension of business environment related to the
following:
(i) Banks reducing interest rate on housing loans.
(ii) An increasing number of working women.
(iii) Booking of air tickets through internet.
(iv) Alcohol beverages are prohibited to be advertised on Doordarshan.
(v) A stable government has built up confidence among the firms to invest
in big project.
[(i)economic, (ii)Social, (iii)Technological, (iv)Legal, (v) political]
Economic Environment in India (Not to be covered for Session 2024-2025)
As a part of economic reforms, the Government of India announced New Economic
Policy in July 1991. This policy has sought to liberate industry from restrictions of
licencing system (liberationsation), drastically reduce the Govt. controls to accelerate
the role of private sector and to integrate India economy with world economics. It
main purpose was to bring India out of economic crises and to accelerate its

50 Class XII : Business Studies

economic growth.
The main objective of New Industrial Policy was to promote Liberalization, Privatization
and Globalization.

1. Liberalisation: 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.

2. Privatization: Giving greater role to private sector in the nation building

process and reduced role of public sector; Disinvestment in many Public
Sector undertaking which would result in converting public sector undertakings
to private sector hence diluting governemnt ownership by less than 51%., It
aimed at improving efficiency and performance of government undertakings,
reducing budgetary deficit & better utilization of national resources.

3. 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.

Q.4 State how business environment helps in coping with rapid change. (by
knowing in advance & developing suitable course of action)
Q.5 State any two reasons why managers should understand business
environment (Any two points of importance; starting with it helps the
managers....)
Q.6 Can the effect of various factors of business environment on business be
recognised separately? (No, as the factors are related to each other)

IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND

INDUSTRY (Not to be covered for Session 2024-2025)

Class XII : Business Studies 51

1. Increasing Competition:Delicencing and entry of foreign firms in Indian
market has increased the level of competition for Indian firms. It benefitted
consumers by availability of large variety of goods at reasonable prices.

2. 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.

3. Rapidly 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.

4. 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.

5. Need for Developing Human Resources:The changing market conditions

require people with higher competence and greater commitment. Hence
there is a need for developing human resources which could increase their
effectiveness and efficiency.

6. 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.

7. 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 utilising their own resources efficiently.
Managerial response to changes in business environemnt (Not to be covered
for Session 2024-2025) : The impact of changes in economic policy of government
has made managers aware of various areas where they have to focus to keep their
business environment help them to take decision regarding increasing competition,
the demands of customers and their expectations (consumer is the king), rapidly
changing technological environment, necessity to adapt to change and need for

52 Class XII : Business Studies

developing human resources.
1. Mergers and Acquisitions: Many firms are merging to take technological
and economic benefit of each other, Powerful business units are acquiring
small firms to reduce competition among themselves.
2. Diversification: Firms are diversifying into wide range of new product lines
to capture new market segments.
3. Brand Building: Aggresive marketing tools are exercised by firms to
establish the identity of their brands in the minds of consumers.
4. Customer Oriented Approach: Niche marketing concept is used and needs
of each and every consumers are adhered to.
5. Technological Developments: Firms are updating themselves
technologically to face competition.
6. Better Labour Relations: Relations with labour trade-unions are harmonious
to bring team effect.
7. Changes in Capital Structure: Debt Component is more used now
comparatively to take the benefit of trading on equity.

QUESTIONS FOR PRACTICE

Q.1 It is the process by which government control over the industry is being
loosened. Give the term to which this statement is trying- to indicate.
(Liberalisation) (1)

Q.2 “The understanding of business environment enables the firm to identify

opportunities.” What is meant by ‘opportunities’ here? (Possibility to start a
new venture or launch a new product to earn more than competitors.) (1)

Q.3 “It may be difficult to know the extent of the relative impact of the social,
economic, political, technological or legal factors on change in demand of a
product in the market.” Which feature of business environment is highlighted
by this point? (Complex) (1)

Class XII : Business Studies 53

 DEMONETIZATION

Concept

Demonetization is the withdrawal of a particular currency from circulation.

Demonetization refers to the process by which Govt. of a country withdraws some

currency (some specific currency like notes of 500 and 1000 in India) from the
circulation of economy. The demonetised notes cease to be accepted as legal
currency for any kind of transaction.

In India, it was introduced by the government on November 8, 2016, in which 1000

and 500 notes were no longer accepted as medium of exchange. A new 2000
note was introduced as a legal tender. It led to loss of liquidity in India for some time.

Its aim was to :

• Curb corruption

• Reduce accumulation of black money, and

• Counterfeit the use of high denomination notes for illegal activities

Features

1. Tax administration: People with black money had to declare their

unaccounted wealth and pay taxes at a penalty rate.

2. Channelizing savings: Banks offered new deposit schemes in which people

invested heavily. This led to increased liquidity in banks.

3. Cashless economy: It encouraged digital transactions or e-transactions,

thus leading to cashless economy.

4. Elimination of terror funding: It will help in fighting against terror funding

and smuggling by reducing the use of high value currency notes.

Conclusion

Though it created a temporary shortage of cash and rush at banks, but it will have
a positive impact on GDP in the long run.

54 Class XII : Business Studies