MEANING OF BUSINESS ENVIRONMENT

• Business may be understood as the organized efforts of an enterprise to supply

consumers with goods and services for a profit. Businesses vary in size, as measured
by the number of employees or by sales volume etc.
• But, all businesses share one common purpose that is to earn profits.
The purposes of business that goes beyond earning profits are:
– an important institution in society
– for the supply of goods and services
– creating job opportunities
– offering better quality of life
– contributing to the economic growth of the country.
• Hence, it is understood that the role of business is crucial from the point of view of
individuals and national society as well. Society cannot do without business.
Similarly, it requires no emphasis that business needs society as much. Modern
business is dynamic. If there is any single word that can best describe today’s
business, it is ‘change’. It is ‘change’ that makes the companies spend substantially on
Research and development (R&D) to survive in the market. Environment refers to all
forces, which have a bearing on the functioning of business. They can be forces of
economic, social, political, and technological factors, apart from internal forces of the
organisation.
• Environment factors are largely if not totally, external and beyond the control of
individual industrial enterprises and their managements. The business environment
poses threats to a firm or offers immense opportunities for potential market
exploitation.
• The success of every business depends on adapting itself to the environment within
which it functions. For example, when there is a change in the government policies,
the business has to make the necessary changes to adapt it to the new policies.
Similarly, a change in the technology may render the existing products obsolete, as
we have seen that the introduction of computer has replaced the typewriters; the color
television has made the black and white television out of fashion. Again, a change in
the fashion or customers’ taste may shift the demand in the market for a particular
product, e.g., the demand for jeans reduced the sale of other traditional wear. All these
aspects are external factors that are beyond the control of the business. So the
business units must have to adapt themselves to these changes in order to survive and
succeed in business.
• Hence, it is very necessary to have a clear understanding of the concept of business
environment and the nature of its various components.
FEATURES OF BUSINESS ENVIRONMENT
Understanding environment within which the business is to operate is very important for
successful business. Some of the features of business environment are as follows:
(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: Business environment includes both 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 indirectly only.
(iii) Dynamic Nature: Business environment is dynamic in nature. It keeps on changing
whether in terms of technological improvement, shifts in consumer preferences or entry of
new competition in the market.
(iv) 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.
(v) Relativity: Business environment is a relative concept since it differs from country to
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.
(vi) Multi-faceted: Business environment changes are frequent and depend on knowledge
and existence of business person. Changes may be viewed differently by different
individuals. It may be an opportunity for some or a threat for others.

IMPORTANCE OF BUSINESS ENVIRONMENT

There is a close and continuous interaction between the business and its environment. This
interaction helps in strengthening the business firm and using its resources more effectively.
As stated above, the business environment is multifaceted, uncertain, and dynamic in nature
which has a far-reaching impact on the survival and growth of the business. To be more
specific, proper understanding of various aspects of business environment such as social,
political, legal and economic helps the business in the following ways:
(i) First Mover Advantage: Early identification of opportunities helps an enterprise to be the
first to exploit them instead of losing them to competitors. For example, Maruti Udyog
became the leader in the small car market because it was the first to recognize the need of
small cars in India.
(ii) Identification of Threats: Identification of possible threats helps in taking corrective and
improving measures to survive the competition. For instance; if an Indian firm finds that a
foreign multinational is entering the Indian market, it can meet the threat by adopting
measures like, by improving the quality of the product, reducing cost of the production,
engaging in aggressive advertising, and so on.
(iii) Coping with Rapid Changes: All types of enterprises are facing increasingly dynamic
environment. In order to effectively cope with these significant changes, firms must
understand and examine the environment and develop suitable course of action.
(iv) Improving Performance: 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.
(v) Giving Direction for Growth: The interaction with the environment leads to opening up
new frontiers of growth for the business firms. It enables the business to identify the areas for
growth and expansion of their activities.
(vi) Meeting Competition: It helps the firms to analyse the competitors’ strategies and
formulate their own strategies accordingly in order to cope with the rapidly increasing
competition.
(vii) Image Building: Environmental understanding helps the business organisations in
improving their image by showing their sensitivity to the environment within which they are
working. For example, in view of the shortage of power, many companies have set up
Captive Power Plants (CPP) in their factories to meet their own requirement of power and
saving to loss of energy in transmission.
(viii) Continuous Learning: Environmental analysis makes the task of managers easier in
dealing with business challenges. The managers are motivated to continuously update their
knowledge, understanding and skills to meet the predicted changes in realm of business.

EXTERNAL ENVIRONMENT

The external environment of an organisation comprises of all entities that exists outside its
boundaries, but have significant influence over its growth and survival. An organisation has
little or no control over its external environment but needs to constantly monitor and adapt to
these external changes. A proactive or reactive response leads to significantly different
outcomes.
There are two types of external environment
– Micro/Operating Environment
– Macro/General Environment

MICRO ENVIRONMENT
The micro environment is also known as the task environment and operating environment
because the micro environmental forces, though are external factors, still have a direct
bearing on the operations of the firm. The micro environment consists of the factors in the
company’s immediate environment that affects the performance and working of the company.
The micro environmental factors are more intimately linked with the company than the macro
factors. The micro forces need not necessarily affect all the firms in a particular industry in
the similar ways.

MACRO ENVIRONMENT
Macro environment is also known as general environment and remote environment. Macro
factors are generally more uncontrollable than micro environment factors. When the macro
factors become uncontrollable, the success of company depends upon its adaptability to the
environment. This environment has a bearing on the strategies adopted by the firms and any
changes in the areas of the macro environment are likely to have a far-reaching impact on
their operations.
The macro environment is primarily concerned with major issues and upcoming changes in
the environment.
ELEMENTS OF MACRO ENVIRONMENT
Macro environment is that part of external environment which is largely external to the
enterprise and thus beyond the direct influence and control of the organization, but which
exerts powerful influence over its functioning.
The external environment of the enterprise consists of individuals, groups, agencies,
organizations, events, conditions and forces with which the organization comes into frequent
contact in the course of its functioning. It establishes interacting and interdependent relations,
conducts transactions, designs and administers appropriate strategies and policies to cope
with fluctuations therein and otherwise negotiates its way into the future.

1. Demographic Environment

The term demographics denotes characteristics of population in a area, district, country or in

the world.
It includes factors such as race, age, income, educational attainment, asset ownership, home
ownership, employment status and location.
Data with respect to these factors within a demographic variable, and across households, are
of interest, to businessmen in addition to economists.
Marketers and other social scientists often group populations into categories based on
demographic variables.
Business Organizations need to study different demographic factors. Particularly, they need
to address following issues:
1. What demographic trends will affect the market size of the industry?
2. What demographic trends represent opportunities or threats?
The business, as such, is concerned with a population's size, age structure, geographic
distribution, ethnic make-up, and distribution of income. While each of the major elements of
discussed below, the challenge for strategists is to determine what the changes, that have been
identified in the demographic characteristics or elements of a population, imply for the future
strategic competitiveness of the company. We will briefly discuss a few factors that are of
interest to a business.
(i) Population Size: While population size itself, large or small, may be important to
companies that require a "critical mass" of potential customers, changes in the specific make-
up of a population's size may have even more critical implications. Many foreign companies
find India lucrative on account of its size. Among the most important changes in a
population's size are:
• Changes in a nation's birth rate and/or family size;
• Increases or declines in the total population;
• Effects of rapid population growth on natural resources or food supplies.
• Changes in a nation's population growth rate and life expectancy can have important
implications for companies.
(ii) Geographic Distribution: Population shifts from one region of a nation to another or
from non- metropolitan to metropolitan areas may have an impact on a company's strategic
competitiveness. Issues that should be considered include:
• The attractiveness of a company's location may be influenced by governmental
support.
 • Companies may have to consider relocation if population shifts have a significant
impact on the availability of qualified workforce.
• The concepts of working-at-home and commuting electronically on the information
highway have also started in India. These may imply changes in recruiting and
managing the workforce.
(iii) Ethnic Mix: This reflects the changes in the ethnic make-up of a population and has
implications both for a company's potential customers and for the workforce. Issues that
should be addressed include:

• What do changes in the ethnic mix of the population imply for product and service
design and delivery?
• Will new products and services be demanded or can existing ones be modified?
• Are the managers prepared to manage a more culturally diverse workforce?
• How can the company position itself to take advantage of increased workforce
heterogeneity?

(iv) Income Distribution: Changes in income distribution are important because changes in
the levels of individual and group purchasing power and discretionary income often result in
changes in spending (consumption) and savings patterns. Tracking, forecasting, and assessing
changes in income patterns may identify new opportunities for companies.

2. Economic Environment

Economic environment refers to the nature and direction of the economy in which a company
competes or may compete. It includes general economic situation in the region and the
nation, conditions in resource markets (men, money, material, machine, method) which
influence the supply of inputs to the enterprise, their costs, quality, availability and reliability
of supplies.
Economic environment determines the strength and size of the market. The purchasing power
in an economy depends on current income, prices, savings, circulation of money, debt and
credit availability. Income distribution pattern determines the marketing possibilities. The
important point to consider is to find out the effect of economic prospect and inflation on the
operations of the firms.
Factors that Affect the Economic Environment
1. Economic Systems
(i) Capitalism: A capitalist economy is an economy where the laws of demand and supply
operate freely. The capitalist system is one which is characterized by private ownership of the
means of production, individual decision-making, and the use of market mechanisms to carry
out the decision of individual participants and facilitate the flow of goods and services in
market. Examples: USA, UK, Hong Kong, Australia, Canada, etc.
(ii) Socialism: Socialism is generally understood as an economic system where the means
of production are either owned or controlled by the state and where the resources allocation,
investment pattern, consumption, income distribution, etc. are directed and regulated by the
state. Examples: Cuba, China, North Korea, etc.
(iii) Mixed economy: Mixed economy is the outcome of compromise between two
diametrically opposing schools of thought. In a mixed economy, private, public and joint
sectors and the like all have some say in the major decisions that influence the functioning
of the economy. These are followed by the four important economic roles played by the
government in a mixed economy viz. regularity role, promotional role, entrepreneurial role
and planning role. Example: India
USA: https://www.investopedia.com/ask/answers/031815/united-states-considered-market-
economy-or-mixed-
economy.asp#:~:text=The%20U.S.%20has%20a%20mixed,intervention%20for%20the%20p
ublic%20good.

2. Economic Conditions or Factors

The economic conditions of a nation refer to a set of economic factors that have great
influence on business organizations and their operations. These include gross domestic
product, per capita income, markets for goods and services, availability of capital,
foreign exchange reserve, growth of foreign trade, strength of capital market, interest
rates, disposable income, unemployment, inflation, etc.

Economic Policies

1. Monetary Policy
This policy in India majorly deals with the monetary authority of this country and it includes
the central bank. It handles the allocation and also the supply of money, rate of interest in order
to present the high growth of the economy in India.

2. Fiscal Policy
This policy controls taxation and the decision of expenditure from the perspective of the
government of India. This government takes strong steps to strengthen the control of the
expenditure of this country. Through the initiative of this government, the contribution of the
resources and the principles of the market have been improved.

3. Foreign Trade Policy

https://www.dgft.gov.in/CP/?opt=ft-policy
What are the instruments of monetary policy?
Some of the following instruments are used by RBI as a part of their monetary policies.

1. Open Market Operations: An open market operation is an instrument which involves

buying/selling of securities like government bond from or to the public and banks. The RBI
sells government securities to control the flow of credit and buys government securities to
increase credit flow.

2. Cash Reserve Ratio (CRR): Cash Reserve Ratio is a specified amount of bank deposits
which banks are required to keep with the RBI in the form of reserves or balances. The
higher the CRR with the RBI, the lower will be the liquidity in the system and vice versa.
The CRR was reduced from 15% in 1990 to 5 % in 2002. As of 9th September 2022, the
CRR is at 4.5 %.

3. Statutory Liquidity Ratio (SLR): All financial institutions have to maintain a certain
quantity of liquid assets with themselves at any point in time of their total time and demand
liabilities. This is known as the Statutory Liquidity Ratio. The assets are kept in non-cash
forms such as precious metals, bonds, etc. As of 9th September 2022, SLR stands at 18%.

4. Bank Rate Policy: Also known as the discount rate, bank rates are interest charged by the
RBI for providing funds and loans to the banking system. An increase in bank rate increases
the cost of borrowing by commercial banks which results in the reduction in credit volume
to the banks and hence the supply of money declines. An increase in the bank rate is the
symbol of the tightening of the RBI monetary policy. As of 9th September 2022, the bank
rate is 5.65%.
5. Repo Rate: Repo Rate is the loan rate at which RBI grants loans to banks when the latter
provides some securities. Banks sell off these securities with an agreement to repurchase
them. It is bought back when the banks pay the interest at the rate of ‘REPO’. REPO refers
to ‘Repurchase Option’ (5.40%).

6. Credit Ceiling: With this instrument, RBI issues prior information or direction that loans to
the commercial bank will be given up to a certain limit. In this case, a commercial bank will
be tight in advancing loans to the public. They will allocate loans to limited sectors. A few
examples of credit ceiling are agriculture sector advances and priority sector lending.

7. Reverse Repo Rate: Reverse repo rate is the rate at which the central bank of a country
 (Reserve Bank of India in case of India) borrows money from commercial banks within the
country. It is a monetary policy instrument which can be used to control the money supply
in the country.

Fiscal Policy

What is Fiscal Policy?

Fiscal Policy deals with the revenue and expenditure policy of the Govt. The word fiscal has
been derived from the word ‘fisk’ which means public treasury or Govt funds.

Objectives of Fiscal Policy

The following are the objectives of the Fiscal Policy:

• Higher Economic Growth

• Price Stability
• Reduction in Inequality

The above objectives are met in the following ways:

• Consumption Control – This way, the ratio of savings to income is raised.

• Raising the rate of investment.
• Taxation, infrastructure development.
• Imposition of progressive taxes.
• Exemption from the taxes provided to the vulnerable classes.
• Heavy taxation on luxury goods.

What are the components of Fiscal Policy?

There are three components of the Fiscal Policy of India:

• Government Receipts
• Government Expenditure
• Public Debt