Chapter 3 : Business Environment

Meaning
It is the sum total of all individuals, institutions and other forces that are outside the
control of the organisation. They influence the performance of the business enterprise.
The features are as follows:
(a) Totality of external forces- All forces outside the firm.
(b) Specific and general forces – specific forces affects an organisation directly.
General forces affect indirectly
(c) Inter-relatedness- Different elements are integrated with each other.
(d) Dynamic: It keeps changing
(e) Uncertainity: We can’t predict the changes that take place in the
environment.
(f) Complexity: It consists of inter related and dynamic forces and therefore it
becomes difficult to understand it as whole. It will easy to understand it in
smaller parts.
(g) Relativity : The environment differs from country to country and region to
region
Importance of Business Environment
(1) Identify opportunities and get first mover advantage : Opportunities are
positive events which can improve the performance of a company. By being able
to identify this, the company will have an advantage of being the first to identify
its advantage.
(2) Identify threats and early warning signals : threats are negative events which
can hamper the performance of a company. By being able to identify this, the
company will be able to take precautionary measures.
(3) Helps in tapping useful resources : the company gets it s resources from the
environment so they have to how to frame policies so that they can efficiently
get the resources and at the same time use these resources to produce output
which the environment wants.
(4) Helps in coping with rapid changes : Business environment is extremely dynamic
and keeps changing at a fast pace. In order to manage this change the manager
has to understand his environment and take necessary steps.
(5) Assists in planning and Policy formulation: The analysis and understanding can
be the basis for deciding the future course of action.
(6) Helps in improving performance : the enterprise is closely connected to its
environment. Suitable practices are undertaken after monitoring the
environment.
Dimensions of Business Environment
1. Economic Environment : Economic Factors that affect the management practices
of an organisation. Examples are interest rates, inflation rates, value of the
rupee.
2. Social Environment : Social factors that affect the business functioning like
Customs and Traditions, Values, Social trends and Society’s Expectations.
Traditions define social practices that have been followed for a long time.
Values refer to concepts that are held with high esteem by the society.
Social trends are the current trends that can be opportunities and threats to the
business.
Society’s expectations are what the society expects from the business.
3. Technological Environment : This includes scientific improvements and
innovations that provide new ways of producing the goods and services.
4. Political Environment: It includes the political conditions and the specific
attitudes of the elected governments.
5. Legal Environment : It includes legislations passed, administrative orders, court
judgements and decisions by different commissions. They refer to the laws of the
land.

Economic Environment in India

A. Liberalisation : Economic reforms which focused on making Indian businesses
free from restrictions. It ended the licence permit quota raj. It resulted in the
following :
- Removing licencing requirements
- Freedom to decide the size of the business
- Removal of restrictions on the movement of goods and services
- Freedom in fixing prices
- Reduction in tax rates
- Making imports and exports easier
- Making it easy to bring foreign capital and technology
B. Privatisation : Increasing the role of the private sector by removing the public
sector’s role in Industry.
It was done through disinvestment, which is the dilution of the government
ownership by transferring it to the private sector.
C. Globalisation : It is the integration of different economies of the world. It
involves an increased level of interaction and interdependence among the
various nations of the world. Political boundaries were no longer barriers.
DEMONETISATION
Demonetization is the act of stripping a currency unit of its status as legal tender. It
occurs whenever there is a change of national currency: The current form or forms of
money is pulled from circulation and retired, often to be replaced with new notes or
coins. Sometimes, a country completely replaces the old currency with new currency.

Aim of Demonetisation
- Curb Corruption
- Counterfeiting the use of high denomination notes for illegal activities.
- Control the accumulation of ‘Black Money’.

Features of Demonetisation
1. It is viewed as a tax administration measure:
Money from declared sources could be directly deposited into the bank account
and exchanged for new notes.
But money from unaccounted sources had to pay tax at a penalty rate.
2. Demonetisation highlights the policy of the government that tax evasion will no
longer be tolerated or accepted.
3. Demonetisation allowed for proper tax administration by channelizing savings
into the formal financial system
4. Helped in creating a cash less or a cash lite economy.
Impact of Government Policy Changes on Business and Industry
(a) Increasing Competition : Due to change in policies, more companies have
entered the Indian market thereby increasing the level of competition faced by
Indian companies.
(b) More demanding customers : Customers have become more demanding as they
are very aware of what is available and have more choice available.
(c) Rapidly changing technological environment : New technologies have created
alot challenges to smaller firms as they are not able to meet the demands.
(d) Necessity for Change : After India became an open economy, there is major
changes in the market forces. This has forced companies to continuously modify
their operations.
(e) Need for developing human resources: Change in policy have resulted in the
need for new skills. More efforts have to be put in to train people so that the
required manpower is available.
(f) Market Orientation : The focus of the market is to first find out what the
consumer wants and then produce the products accordingly.
(g) Loss of budgetary support to the public sector : As the government has reduced
financial support to the public sector, they are forced to perform so that they
can survive.