Class 12 Business Studies – Chapter 3:
Business Environment
1. 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."
These include customers, competitors, suppliers, government, and the social, political,
legal and technological factors.
2. Features of Business Environment
(i) Totality of external forces:
● Business environment is the sum total of all things external to business firms
and, as such, is aggregative in nature.
(ii) Specific and general forces:
● Specific forces (such as investors, customers, competitors and suppliers) affect
individual enterprises directly and immediately in their day-to-day working.
● General forces (such as social, political, legal and technological conditions) have
impact on all business enterprises and thus may affect an individual firm only
indirectly.
(iii) Inter-relatedness:
● Different elements or parts of business environment are closely interrelated.
● For example, increased life expectancy of people and increased awareness for
health care have increased the demand for many health products and services
like soft drinks, fat-free cooking oil, and health resorts. New health products
and services have in turn changed people’s lifestyles
(iv) Dynamic nature:
● Business environment is dynamic in that it keeps on changing whether in terms
of technological improvement, shifts in consumer preferences or entry of new
competition in the market.
(v) Uncertainty:
● Business environment is largely uncertain as it is very difficult to predict future
happenings, especially when environment changes are taking place too
frequently as in the case of information technology or fashion industries.
(vi ) Complexity:
● Since 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 constitutes a given environment.
● The complex environment can be more easily understood in parts rather than in
its totality
vii) Relativity:
● Business environment is a relative concept since it differs from country to
country and even region to region.
● eg. demand for sarees may be fairly high in India whereas it may be almost
non-existent in France.
● Political conditions may also vary from country to country
3. Importance of Business Environment
(i) It enables the firm to identify opportunities and getting the first mover advantage:
● Opportunities refer to the positive external trends or changes that will help a
firm to improve its performance.
● Early identification of opportunities helps an enterprise to be the first to exploit
them instead of losing them to competitors.
(ii) It helps the firm to identify threats and early warning signals:
● Threats refer to the negative external environment trends and changes that will
hinder a firm’s performance.
● Environmental awareness can help managers to identify various threats on time
and serve as an early warning signal.
(iii) It helps in tapping useful resources:
● Environment is a source of various resources for running a business like finance,
machines, raw materials, power and water, labour, etc.
● The business enterprise supplies the environment with its outputs such as
goods and services for customers, payment of taxes to government, return on
financial investment to investors and so on.
● Because the enterprise depends on the environment as a source of inputs or
resources and as an outlet for outputs, it only makes sense that the enterprise
designs policies that allow it to get the resources that it needs so that it can
convert those resources into outputs that the environment desires.
● This can be done better by understanding what the environment has to offer.
(iv) It helps in coping with rapid changes:
● Today’s business environment is getting increasingly dynamic where changes
are taking place at a fast pace.
● Turbulent market conditions, less brand loyalty, divisions and subdivisions
(fragmentation) of markets, more demanding customers, rapid changes in technology
and intense global competition are just a few of the images used to describe
today’s business environment.
● In order to effectively cope with these significant changes, managers must
understand and examine the environment and develop suitable courses of
action.
(v) It helps in assisting in planning and policy formulation:
● Since environment is a source of both opportunities and threats for a business
enterprise, its understanding and analysis can be the basis for deciding the
future course of action (planning) and guidelines for decision making (policy).
● For instance, entry of new players in the market, which means more competition
may make an enterprise think afresh about how to deal with the situation.
(vi) It helps in improving performance:
● Many studies reveal that the future of an enterprise is closely bound up with
what is happening in the environment.
● The enterprises that continuously monitor their environment and adopt
suitable business practices are the ones which not only improve their present
performance but also continue to succeed in the market for a longer period.
4. Dimensions of Business Environment
1. Economic environment: Components of economic environment include :
● Interest rates, inflation rates, changes in disposable income of people, stock
market indices and the value of rupee,rate of saving and investment,expansion
of transportation and communication facilities,public debts etc. (refer to table in
ncert)
● eg.a rise in the disposable income of people due to increase in the gross
domestic product of a country creates increasing demand for products.
● eg. in case of construction companies and automobile manufacturers, low
longer-term rates are beneficial because they result in increased spending by
consumers for buying homes and cars on borrowed money.
2. Social environment: Components are as follows:
● social forces like customs and traditions, values, social trends, society’s
expectations from business, life expectancy, birth and death rates,population
shifts. etc.
● eg. the celebration of Diwali, Eid, Christmas, and Guru Parv in India provides
significant financial opportunities for greetings card companies, sweets or
confectionery manufacturers, tailoring outlets and many other related business.
● eg. the health-and-fitness trend has become popular among large number of
urban dwellers. This has created a demand for products like organic food, gyms,
bottled (mineral) water and food supplements.
3. Technological environment:
● Components are as follows:forces relating to scientific improvements and ways
of producing goods and services and new methods and techniques of operating
a business.
● eg. recent technological, advances in computers and electronics have modified
the ways in which companies advertise their products. It is common now to see
computerised information kiosks, and World Wide Web multimedia pages
highlighting the virtues of products.
● eg.Airline companies have Internet and World Wide Web pages where
customers can look for flight times, destinations and fares and book their tickets
online.
● eg.Shifts in demand from vacuum tubes to transistors, from steam locomotives
to diesel and electric engines, from fountain pens to ballpoint, from typewriters
to computer etc.
4. Political environment:
● The significance of political conditions in business success lies in the
predictability of business activities under stable political conditions.
● There may be uncertainty of business activities due to political unrest and
threats to law and order.
● Components are as follows:
○ political conditions such as general stability and peace in the country
and specific attitudes that elected government representatives hold
towards business,the level of political morality.etc.
● Political stability, builds up confidence among business people to invest in the
long term projects for the growth of the economy.
● Political instability can shake the confidence. Similarly, the attitudes of
government officials towards business may have either positive or negative
impact upon business.
5. Legal environment: Components are as follows:
● 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— centre,
state or local.
● In India, a working knowledge of legal enactments as amended from time to
time by the Parliament, is important for doing business.eg.Companies Act 2013;
Industries (Development and Regulations) Act 1951; Consumer Protection Act,
1986 etc.
● eg. the advertisement of alcoholic beverages is prohibited. Advertisements,
including packets of cigarettes carry the statutory warning ‘Cigarette smoking is
injurious to health’.
● eg.advertisements of baby food must necessarily inform the potential buyer
that mothers milk is the best.
5. Economic Environment in India
The economic environment in India consists of various macro level factors related to the
means of production and distribution of wealth which have an impact on business and industry.
These include:
(a) Stage of economic development of the country.
(b) The economic structure in the form of mixed economy which recognises the role of both
public and private sectors.
(c) Economic policies of the Government, including industrial, monetary and fiscal policies.
(d) Economic planning, including five year plans, annual budgets, and so on.
(e) Economic indices, like national income, distribution of income, rate and growth of GNP, per
capita income, disposable personal income, rate of savings and investments, value of exports
and imports, balance of payments, and so on.
(f) Infrastructural factors, such as, financial institutions, banks, modes of transportation
communication facilities, and so on.
AT THE TIME OF INDEPENDENCE:
(a) The Indian economy was mainly agricultural and rural in character;
(b) About 70% of the working population was employed in agriculture;
(c) About 85% of the population was living in the villages;
(d) Production was carried out using irrational, low productivity technology;
(e) Communicable diseases were widespread, mortality rates were high. These was no
good public health system.
#The main objectives of India’s development plans were:
(a) Initiate rapid economic growth to raise the standard of living, reduce
unemployment and poverty;
(b) Become self-reliant and set up a strong industrial base with emphasis on heavy and
basic industries;
(c) Reduce inequalities of income and wealth;
(d) Adopt a socialist pattern of development — based on equality and prevent
exploitation of man by man.
6. New Economic Policy (1991)
The broad features of this policy were as follows:
(a) The Government reduced the number of industries under compulsory licensing to six.
(b) Many of the industries reserved for the public sector under the earlier policy, were
dereserved. The role of the public sector was limited only to four industries of strategic
importance.
(c) Disinvestment was carried out in case of many public sector industrial enterprises.
(d) Policy towards foreign capital was liberalised. The share of foreign equity participation was
increased and in many activities 100% Foreign Direct Investment (FDI) was permitted.
(e) Automatic permission was now granted for technology agreements with foreign companies.
(f) Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign
investment in India.
7. Demonetisation
On November 8, 2016, the Government of India announced the demonetisation of
currency notes of ₹500 and ₹1000 with immediate effect. These notes ceased to be
legal tender from that date. People were asked to deposit these notes in the banks by a
certain date. New currency notes of ₹500 and ₹2000 were introduced.
● The aim of demonetisation was to curb corruption, counterfeiting the use of
high denomination notes for illegal activities; and especially the accumulation of
‘black money’ generated by income that has not been declared to the tax
authorities.
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 their unaccounted wealth and pay
taxes at a penalty rate.
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.
● Though, much of the cash that has been deposited in the banking system is
bound to be withdrawn but some of the new deposits schemes offered by the
banks will continue to provide a base loans, at lower interest rates.
4. Demonetisation is to create a less-cash or cash-lite economy, i.e., channeling more
savings through the formal financial system and improving tax compliance.
● Though there are arguments against this as digital transactions require use of
cell phones for customers and Point-of-Sale (PoS) machines for merchants,
which will only work if there is internet connectivity.
● On the contrary, these disadvantages are counterbalanced by an understanding
that it helps people into the formal economy, thereby increasing financial saving
and reducing tax evasion.
