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Chapter 3
BUSINESS ENVIRONMENT

and other forces that

Business environment' means the sum total of all individuals, institutions
are outside the control of a business enterprise but that may affect its performance.
.The individuals include consumers and competitors.
institutions.
Institutions include Government, consumer groups, courts, media and other
forces.
Other forces include the economic, social, political, tcchnological and legal
economic
Examples of environmental influence on the business are: changes in government's
and changes in fashions and
policies, rapid technological developments, political uncertainty,
tastes of consumers and increased competition in the market.

Features of business environment

external to
a) Totality of external forces: Business environment is the sum total of all things
business firms and, as such, is aggregative in nature.
b) Specific and general forces: Business environment includes both specific and general
forces. Specific forces (such as investors, customers, competitors and suppliers) affect
individual enterprises directly. General forces (such as social, political, legal and
technological conditions) have impact on all business enterprises and thus may affect an
individual firm indirectly.
c) Inter-relatedness: Different elements or parts of business environment are closely
interrelated. For example, increased awareness for health care have increased the demand
for many health products and services like diet Coke, fat-free cooking oil, etc.,.

d) Dynamic nature: Business environment is dynamic. It keeps on changing. For e.g.,

technological improvement, shifts in consumer preferences or entry of new competition in
the market.

e)Uncertainty: Business environment is largely uncertain. 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.

Complexity: Environment is a complex phenomenon that is relatively easier to understand

in parts but difficult to grasp in its totality.
8) Relativity: Business environment is a relative concept since it differs from
country and even region to region. Political conditions in the USA, for instance, differ from
those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas
it may be almost non-existent in France.

Importance of business environment: An individual firm is able to do little to change or

control these external forces. A good
understanding of environment by business managers
enables them not only to identify and evaluate, but also to react to the external forces.
(4) It enables the firm to identify
opportunities and getting the first mover advantage
Opportunities refer to the positive external changes that will help a firm to improve its
 helps to identify opportn:. ies
carlicst. Early Understanding business
environment
identification of opportunities helps an enterprise to be the firste
at the
performance.
to exploiu
Maruti Udyog becamePloj
them instead oflosing them to competitors.
For examplc,
class people.
the leader
understood thc
need of middle
in the small car market as it
early warning signals: Threats reffer to the
threats and
ii) It helps the firm to identify
hinder a ance.
firm's pertormance. Environhe
Environn
extemal cnvironment changes that will time and serve
various threats on ac
an early
awarcness can help managers to identify
foreign multinational is.
finds that a
warning signal. For example, ifan Indian firm
the Indian market with new substitutes it
can prepare itselfto
meet the threat by imnng entering
the quality of the product, reducing cost of the production, aggressive advertising. mproving
and
on.
ii) It helps in tapping useful resources: Environment is a source of various resourcec c
for
running a business. Better understanding of environment helps managers to asse
assemble
various resources such as finance, machines, raw materials, power, labour etc., from
om
environment.
iv) It helps in coping with rapid changes: Today's business environment is getina
increasingly dynamic where changes are taking place at a fast pace. Understanding businesc
environment helps to take suitable actions in situations like, turbulent market
less brand loyalty, more demanding customers, rapid changes in
conditions
technology and intense
global competition.
v) It helps in assisting in planning and policy formulation:
Understanding and analysis of
environment help in planning and formulation of
policies. For instance, during entry of a
competitor in the market, to think about how to deal with the situation.
vi) It helps in
improving performance: The enterprises that continuously monitor their
environment and adopt suitable business
practices will improve their performance and
achieve success.

DIMENSIONS OR ELEMENTS OF BUSINESS

Dimensions (factors) of the business environment ENVIRONMENT
include
political and legal conditions. These are considered relevant economic, social, technological,
the for decision and making improving
performance of an enterprise.

Economic Social
Environment Environment

Business
Legal Eavironmeat
Environment Technological
Environment
Political
Environment
 PRE UNIVERSITY COLLEGE

Chapter 3 Business Environment

-

i) Economic Environment: Economic

.Interest rates factors that affect
c.g., low
a business
enterprise are;
automobile manufacturcrs, longer-term rates are beneficial to construction
consumers.
as
they result in increase in
companies and
buying homes and cars by
Inflation rates, c.8, High inflation rates result in increase in thc
business. various costs of
Changes in
disposable income of
increasing demand for products. peoplc- e.g., rise in disposable income creates
Stock markct indices and
Value of rupce.
(ii) Social Environment: The social
customs and
environment of business include the social forces like
traditions, values, social trends, society's
Traditional celebration of expectations from business, etc.
Diwali, Eid, Christmas etc. in India
opportunities to sweets or provides business
confectionery manufacturers, tailoring outlets and others.
(i) Technological Environment:
which provide new methods and
Technological environment includes scientific innovations
techniques of operating a business. For
technological, advances in computers and electronics have modifiedexample, recent
the ways of
advertising. Airline companies have Internet and World Wide Web
customers book their tickets online. through which
Innovations in engineering fields such as lasers, robotics, biotechnology, food
preservatives, medicine, telecommunication etc., have provided numerous opportunities
and threats.

(iv) Political Environment: Political environment includes stability and attitudes that elected
government representatives hold towards business.
The stable political conditions build up confidence among business people to invest in the
long term projects. Political instability can shake that confidence. Similarly, the attitudes
of government officials towards business may have either positive or negative impact upon
business.
(v) Legal Environment: Legal environment includes various legislations passed by the
Government, orders issued, court judgments etc., at every level of the government-
center, state or local. The management of every enterprise has to obey the law of the land.
E.g., provisions in Companies Act 1956 and 2013; Industries (Development and
with.
Regulations) Act 1951, Consumer Protection Act 1986 etc., should be complied
Business enterprises also have to abide by government regulations to protect consumer's
interests. For example, the advertisement of alcoholic beverages is prohibited.
the statutory warning "Cigarette
Advertisements, including packets of cigarettes carry
smoking is injurious to health'. etc.

ECONOMIC ENVIRONMENT IN INDIA

of various macro-level factors which have
an
The economic environment in India consists
under public sector
Basic and heavy industries were set up
impact on business and industry.
of developing consumer goods industry during
and private sector was given the responsibility
post-independence period.
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 ST.CLARET Chapter 3 - Business Emvironment
PRE UNIVERSITV COLLEGE

But the government imposed several restrictions and regulations on the working of private
sector enterprises. In 1991 the economy faced a serious foreign exchange crisis, high
govemment deficit and inflation. So as a part of economic reforms, the Government of India
announced a new Industrial Policy in July 1991.
This policy has sought to liberate industry from the licensing system (liberalization). reduce
thc role of the publie sector (privatization) and encourage foreign private participation in
India's industrial devclopment (globalization).
Liberalization: I means liberalizing the Indian business and industry from all unnecessary
controls and restrictions. and thus to bring end of the licence-permit-quota raj.
Liberalization of the Indian industry has taken place with respect to:
(i) Abolishing licensing requirement in most of the industries.
(ii) Removal of restrictions on the movement of goods and services.
Privatization: Privatization means transfer of ownership and management of public sector
enterprises t1o private sector through disinvestment. It is to reduce the role of public sector and
to encourage private participation in public sector enterprises.
Globalization: Globalization implies a boundary less world where there is free flow of goods
and services. capital, technology and people across nations. It encouraged foreign private
participation in India's industrial development.
It encouraged foreign direct investrment.
tariff restrictions.
It aimed at liberalizing imports and promoting exports by reducing
DEMONETIZATION

legal tender. The current

Demonetization is the act of ceasing a currency from its status as

with new notes or coins.

forms of money is pulled from circulation and replaced
India demonetized the two largest denomination
On November 8, 2016 The Government of
to be legal
notes, 500 and 1,000 with
immediate effect. It means these notes were ceasing
the money in circulation invalid.
tender. This led to eighty six per cent of
invalid currency in the banks. There were restrictions
on
The people of India had to deposit the
aim of
of domestic money and bank deposits. The
cash withdrawals and convertibility
demonetization was:

to curb corruption,
the of high denomination notes for illegal
to curb counterfeiting (making fake notes) use

activities;
'black money' that has not been declared to the tax authorities.
to relcase accumulated

Features of Demonetisation

is viewed as a tax administration measure: Cash holdings arising from

1. Demonetisation
notes. But those
declared income was readily deposited in banks and exchanged for new

unaccounted wealth and pay taxes at a penalty rate.

with black money had to declare their
Demonetisation is also
To indicate that tax evasion will no longer be tolerated:
2.
evasion will no longer
of the government indicating that tax
interpreted as a shift on the part
be tolerated or accepted.

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 Chapter3- Business Environment

pemonetisation also led to

channelizing savings: Some of the new deposits schemes
offered by the banks
provided basc loans, at lower interest rates. It led to
savings into the financial system. channelizing
4. Demonetisation is to create a less-cash or cash-lite economy, i.e.,
savings through the formal
financial system and channeling more

encourage digital transactions. improving tax

compliance. It also to

Impact of Demonetisation

1. Money/ interest rates i. Decline in cash transactions

i. Bank deposits increased
ii. Increase in financial savings
2. Private wealth
Declined since some high demonetized notes were not
returned and real estate prices fell.
3. Public sector wealth No effect
4. Digitisation Digital transactions amongst new users (Rupay/AEPS)
increased.
5. Real estate
Prices declined.
6. Tax collection
Rise in income tax collection because of increased disclosure.

IMPACT OF GOVERNMENT POLICY CHANGES ON

BUSINESS AND INDUSTRY
The policy of liberalization, privatization and globalization of the Government has made a
significant impact on business and industry. The Indian corporate sector has to-face with
several challenges. These challenges are;
() Increasing competition: As a result of liberalized industrial licensing and entry of
foreign firms, competition for Indian fims has increased especially in service industries
like telecommunications, airlines, banking, insurance, etc. which were earlier in the public
sector.

(i) More demanding customers: Customers today have become more demanding because
they are well-informed. They expect better quality goods and services.

(i) Rapidly changing technological environment: Increased competition forces the firms to
develop new ways to survive and grow in the market. The rapidly changing technological
environment creates tough challenges before smaller firms.

(iv) Necessity for change: After1991, the market forces have become turbulent as a result of
which the enterprises have to continuously modify their operations.
(v) Need for developing human resource: The new market conditions require people with
higher competence and greater commitment. Hence there was need for developing human
resources.
(vi) Market orientation: Production oriented marketing operations shifted to market
orientation. The firms have to study and analyse the market first and produce goods
accordingly.

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 (vii) Loss of budgetary support to the public sector: The central government's budgetar
etary
support for financing the public sector has declined over the years. The public seca
ctor
undertakings have to be more efficient and generate their own resources for the purpose
e.
On the whole, the impact of Government policy changes particularly in respect oft
liberalization, privatization and globalization has been positive. Indian enterprises have
developed strategies and adopted business processes and procedures to meet the challenge of
competition.
EXERCISES
I Fill in the blanks:
1. An example
of specific forces of business environment
2. An
example of general forces of business environment
3. GST was introduced in
India on
4. Demonetization is the act of
5. There
ceasing a currency from its status as_
was a rise in the income tax
collection because of demonetization. (True/False)
II
Multiple choice questions:
1. Which of the
following does not
characterize the business environment?
(a) Uncertainty (b) Employees ()Relativity (d) Complexity
2. Which of the
following is not a dimension of environment
(a) Economic environment (b) Social environment
(c) Technological environment
(d) Natural environment.
3. Which of the
following is an example for social
environment?
(a) Money supply in the economy (6)
Consumer Protection Act
(c) The Constitution of the country (d)
Composition of family
4. Liberalization means
(a) Integration among economies
(6) Reduced government controls and
(c) Policy of planned disinvestments restrictions
(d) None of the above
5. Which of the
following does not explain the impact of Government
on business and industry? policy changes
(a) More demanding customers
(b) Increasing competition
(c) Change in agricultural prices (d) Market orientation
6. The removal of
entry and growth restrictions on the private sector
(a) Privatisation
(b) Liberalisation enterprises is
(c) Globalisation
(d) Disinvestment
7. RBI is akey regulator of the country's economic
(a) Influences the interest rates environment since it;
(b) Controls the flow of money in the
(c) Regulates the working of banks economy
8. (d) All of the above.
Impact of demonetization:
(a) Increase in digital transactions
(c) Rise in income tax collection (b) Bank deposits increased
(d) All of the above.

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24
 One word/
sentence a n s w e r type questions (1 mark)
L
Environment?
1. What is Business institutions and
total of all individuals.
Ans: Business environment' means the
sum

outside the control of a business but affect its performance.

other forces that arc

environment.
2. State any one feature of business
Ans: Business environment is dynamic.

3. State any one dimension of business environment.

one)
Ans: Economic environment, Social environment, Legal environment (Any
status to male and female workers "Which
4. An enterprise must give equal
environment is indicated in the given statement
Ans: Social environment.
the environment
5. "Each business is affected by policies of the government" Identify
Ans: Political environment.
6. Which policy of Indian government has moved India towards globalization?
Ans: The industrial policy of 1991

IV Short answer type questions (2 marks)

1 . Give the meaning of Globalization.

Ans: Globalization implies a boundary less world where there is free flow of goods and
services, capital, technology and people across nations. It encouraged foreign private
participation in India's industrial development.

2. What is Privatization?
Ans: Privatization is the process of transfer of ownership and management of public
sector enterprises to private sector through disinvestment. It is to reduce the role of
public sector and to encourage private participation in public sector enterprises.

3. What is Liberalisation?
Ans: Liberalising the Indian business and industry from all unnecessary controls and
restrictions is called liberalization. Liberalisation signaled the end of licensing system.

4. Give the meaning of demonetization.

Ans: Demonetization is the act of ceasing a currency from its status as legal tender. The
current forms of money is pulled from circulation and replaced with new notes or coins.

5. What was the aim of demonetization?

Ans: The aim of demonetization was:
-

to curb
corruption,
-

to curb
counterfeiting (making fake notes) the use of high denomination notes for
illegal activities;
to release accumulated "black money' that has not been declared to the tax
authorities.
 Chapter 3-Business onment
ST.CLARET
PRE UNIVERSITY COLLEGE

demonetization?
of
6. What was the impact
demonetization was;
Ans: The impact of
transactions increascd.
-

Digital
collection.
-
Rise in income tax

V Long answer type questions

of Business Environment.
1. any four features
Explain
how important the understanding of Business
any four points
to explain
2. Explain
Environment for managers is.
environment.
with examples, the various dimensions of business
3. Explain, faced by business and industry
due to
that to be
4. Explain any four challenges
were

changes in Government Policy.

5. Explain the features of Demonetisation.
6. What is the impact of Demonetization?

VI Practical oriented question (5 marks)

Environment that influence the
success
1. Show the different Elements of Business
of business enterprises with a neat diagram.
 est
st Your Un
hapter 3
Vhich of the following is not
INESS ENVIRONMENT Understanding
hnological conditions a (b)com
omponent of
(b)
growing awarenes: about Customers specifie
The
(c) forces of
healthcare products and healtheare Empl o yce business environ
(d)
describedservices
environment being in the
has led to Investors ment?
in the an
ta) Dynamic nature country. ldentifyincrease in the
(b) Uncertaintyabove case.
DigiLocker is the (c)
the
feature demand
of
for
and verific. an
country's first Rclativity business
of secured (d) Interrelacdness
Road Transport documents with the cloud-based
-based platform tforIntetherrelatcdness
the
Ministry.
Minis
DigiLocker since its unch The Driving Lieence &
last integration Vehicle storage, issuance
of
the troubl
carrying year is one of of a
Registration
the DigiLocker app. nces&vehiclethe
biggest ofgovernment System
its kind. department
of

(a) Ecoriomic dimension Identify the papers, which

related
will It with
can be accessed onspare 1 people
(b) dimension of
Technological dimension
d) Political dimension
business phones using
(c) Social environment.
Yo Tummy' beganiits
business by dimension
But over time, their ir
customers wanted offering the classic
combo of
began offering healt althy alternatives suchhealthier foods, so "Yo hamburgers and fries.
Taummy hadn't responded, as
salads, fruits, Tummy' responded and
foads. The above case they may have lost customers wraps and oatmeal. If
highlights of the points
environment and its understanding one that wanted to Yo
eat healthier
related to the
(a) It helps in coping with by managers. importance of busines
rapid changes. (5) It
Identify it.
(c) helps the firm to
It
identify threats
helps in improving
(d) enables the firm to
It and early warning signals. performance.
identify opportunities and
5. According to the getting the first mover
World Health advantage.
40 years, the
prevalence of Organization, 39% of adults are
obesity has tripled around the
consumers drinking at least one
overweight. Over
the last
world. With over half
sugary drink on a given of
beverage sector are likely to become day, regulations towards the
sugar tax was introduced in 2018 on increasingly onerous. In the U.K., for example, a
the related beverages
dimensions of business environment.containing more than 5% sugar. Identify
(a) Legal dimension and Social
dimension
(6) Social dimension and
Technological dimension
(c) Technological dimension and Legal dimension
(d) Political dimension and
Technological dimension
Spopulation is expected to grow under 0.5 per cent during 2031-41 due to decline
ertility rate and increase in life expectancy. These changes in India's demography wil
mplications such as the proportion of clementary sehool-going children vill
P sgnificant declines, lack of hospital beds and increase in retirement age. The
eature of business environment being described in the above lines is
a)
Totality of external forces (b) Dynamic nature (c) Interrelatedness
7.
dRelativity
The wholly
Union Cabinet has given in-principle' nod to divest stakes in Air India-substantiar
a

government owrOwned airline. This means

to shed
the government is willing
a

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Circulation Only
 PRE UNIVERSITY COLLEGE

standing
pOrtion of its stake and hand over the management ot the ailing airline above
to tho
ne private
sector. described in the
Identify the concept being
(a) Liberalisation (b) Privatisation (c) Globalisation (d) Demonetisation lines.
. The Government of India launched "Make in India" initiative
in September, 201
increase forcigr direet investment (FD) in 25 sectors. As of April, 2015, FDIinto
nda increased by 48% since the launch of "Make in India inflow in
inis
Identify the concept being deseribed in the above lines, with regard to inlow ofative.
(a) Demonetisation (b) Privatisation (c) Liberalisation (d) Globalisation FDI
9,Which of the following is a feature of demonetisation:
(a) Tax administration asure (b) Channclising savings into the formal fina
financial system
(C) Development of less-cash economy (d) All of the above
0. A business has to offer wider choice in purchasing enhanced quality goods and
n order to maintain an
of servico.
vices
edge over its competitors. The implementation of the neu
economic policy with ew
liberalisation, privatisation and globasaton nas posed various
challenges for the corporate sector. One of the important challenges is explained
above lines. in tho
Identify it
(a) Increasing competition (b) More demanding customers
(c) Necessity for change (d) Market orientation

Activity I Economic Environment: Read the

newspapers of the past fifteen days and note the
in
any five economic
policies made by the government. Analyse their impact on the
changes
enterprises. working business
of
Activity Social environment: Contact any ten families
I
known to you. Find out the
consumption habits over the last five years. changes in their
business enterprises. Analyse the impact of these changes on the
working of
Activity II Globalisation: Make a list of five Indian
Find out the major companies which have global operations
products they sell and the countries where they today.
Activity IV Select a business enterprise with which operate.
you are familiar. From your
events (events you may have read about in recollection of current
newspapers or magazines or have heard about on
or
radio) identify some of the important environmental television
force, which have had impact on this
enterprise.
Case Study: Lately many companies have
India. Several factors have planned for significant investment in organised retailing in
have developed a taste for
prompted their decisions in this
regard. Customer income is rising.
better quality People
products even
aspiration levels have increased. The government has also though they may have to pay more. The
and permitted even cent liberalised its economic
percent foreign direct investment in some policies in this regard
Questions sectors of retailing.
1. Identify
changes in business environment under
political and different heads-
legal that have facilitated the
organised retailing. companies' decisions to economic, social, technological,
plan significant investments in
2. What has been the
impact of these changes with
regard to globalisation and privatisation?

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170