Business Environment: meaning and definition

The business environment refers to the external factors that influence the operations
and performance of a business. These factors include economic, social, political, legal,
technological, and ecological factors, and they can have a significant impact on the
success or failure of a business.

The business environment can be divided into two categories: internal and external.
The internal environment includes factors such as the company's organizational
culture, management practices, and internal resources, while the external
environment includes factors such as the economy, government regulations, social
and cultural factors, and technological advancements.

the concept of the business environment highlights the importance of understanding

the external factors that impact business operations and performance. By doing so,
businesses can adapt to changing conditions, position themselves for long-term
success, and achieve their goals.

Theoretical Framework of Business Environment:

The theoretical framework of the business environment refers to the various theories, concepts,
and models used to analyze and understand the factors that affect business operations and
performance in a given context.

There are several key components of the theoretical framework of the business environment,
including:

1. Environmental scanning: This involves systematically gathering and analyzing information

about external factors that may impact a business, including economic, social, political,
legal, technological, and ecological factors.
2. Competitive analysis: This involves examining the strengths and weaknesses of a
company's competitors and evaluating the opportunities and threats presented by the
competitive landscape.
3. Industry analysis: This involves analyzing the structure, dynamics, and trends within a
particular industry or market to identify key factors that may affect a company's
performance.
4. Resource-based view: This theory emphasizes the importance of a company's internal
resources and capabilities in determining its competitive advantage and long-term
success.
5. Stakeholder theory: This theory argues that businesses must consider the interests of all
stakeholders, including employees, customers, suppliers, and the broader community, in
their decision-making processes.
6. Institutional theory: This theory focuses on the broader social, cultural, and political
norms and institutions that shape business practices and outcomes.

By drawing on these and other theoretical perspectives, businesses can develop a deeper
understanding of the complex and dynamic environments in which they operate and make more
informed decisions about how to navigate them.
Business Environment: significance
The business environment plays a crucial role in the success or failure of a business.
Here are some of the key reasons why the business environment is significant:

1. Impact on operations and performance

The business environment includes a range of factors that can impact a
company's operations and performance. For example, changes in economic
conditions, consumer preferences, or technological advancements can all
affect a company's ability to compete and succeed in the marketplace.
2.Strategic planning
Understanding the business environment is critical for strategic planning. By
analyzing and monitoring the external factors that impact their operations,
businesses can make informed decisions about how to allocate resources,
develop strategies, and respond to changes in the marketplace.
3. Risk management
A thorough understanding of the business environment can help businesses
identify and manage risks more effectively. By monitoring the external factors
that impact their operations, businesses can anticipate potential risks and take
proactive steps to mitigate them.
4. Opportunity identification
The business environment also presents opportunities for companies to
innovate and grow. For example, advances in technology or changes in
consumer behavior can create new opportunities for businesses to develop
and market products and services.
5. Competitive advantage
A thorough understanding of the business environment can help businesses
develop a competitive advantage. By analyzing their external environment,
businesses can identify unique opportunities or challenges and position
themselves to succeed in a competitive marketplace.
6. Legal compliance
The business environment includes legal and regulatory factors that can impact a
company's operations. By staying up-to-date on the latest laws and regulations,
businesses can ensure that they remain in compliance and avoid legal issues that
can harm their reputation and bottom line.

Nature of Business Environment

The nature of business environment is as follows:
1. Complex: Business environment is compound in nature. Environment
consists of a number of factors, events, conditions and influences arising from
different sources which impact business thus making the business complex.

2. Interdependence: The environment of the business is made of social,

economic, legal, cultural, technological, and political factors. These factors of
the environment are inter-dependable. The economic status of a country
affects the development of technology. A rich country can make sufficient
expenditure on the research and development.

3. Dynamic: Business environment is constantly changing process. Business

environment is dynamic as it keeps on changing in terms of technological
improvement, shifts in consumer preferences or entry of new competition in
the market. The various forces in the environment keep on changing from time
to time thus making business dynamic and not static.

4. Inter-relatedness: The different factors of business environment are co-

related. For example, let us suppose that there is a change in the import-export
policy with the coming of a new government. In this case, the coming of new
government to power and change in the import-export policy are political and
economic changes respectively. Thus, a change in one factor affects the other
factor.

5. Impact: Business environment has both long term and short term impact.
Environment therefore has different effects on different firms in the same
industry, for example, drugs.

6. 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.

7. Relativity: It is a relative concept since it differs from country to country

and region to region. Political conditions in the USA, for example 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.
NITI Aayog was established on 1st Jan 2015. The headquarters of NITI Aayog is in New Delhi
and was established by the Indian government. Before NITI Aayog, there was a Planning
Commission formed on 15 March 1950.

The Planning Commission was non-constitutional. This commission had two major functions:
first, to formulate five-year plans, and second, to distribute money to states and ministries. The
first 5-year plan was formulated for 1951-56, and the final five-year plan was formulated for 2012-
17. When the Narendra Modi government came into power, it abolished the Planning
Commission, replacing it with NITI Aayog.

NITI Aayog is short for the National Institution for Transforming India. NITI Aayog is often

referred to as a think tank. It advises the government on different issues. There are many

issues that the country faces in the defense sector, in health education, in recrafting our

education policy. The Planning Commission follows a top-down approach, whereas NITI

Aayog follows a bottom-down approach.

Objectives NITI Aayog:

The objectives of the NITI Aayog are as follows:

• Shared vision: The implementation of strategies needs the participation of both central
and state governments for the national development of sectors. Through this, they can
create a shared vision for the development of communities

• Cooperative federalism: Cooperative federalism is a state government, central

government, and local government that stands shoulder to shoulder to achieve a
common aim. NITI Aayog has a multidirectional flow of policies that is from central to
state, state to central, and between ministries, etc

• Credible Planning: In NITI Aayog, they do credible planning for the development of
villages where the nation’s heart lies

• Weaker sections: It focuses on areas that are specially referred to as national security
areas. So, it also pays special attention to vulnerable sections of our society, i.e., women,
children, etc

• Strategies and long-term policies: It makes strategies and policies for more than five
years because it makes plans to achieve the objective, which can be achieved through a
long-term process
 • Innovation: NITI Aayog gives more importance to the innovation sector for creating
knowledge. It gives entrepreneurial support by collaborating with communities of national
and international experts and other partners

• Offer platforms: It offers a platform for the determination of inter-sectoral and inter-
departmental issues for the implementation of the planned objective

• Technology up-gradation: It focuses on technology upgrading and capacity building to

smoothly implement the planned programs

Economic elements that influence business and consumer behaviour are

referred to as the economic environment. The economy of a country has an
impact on investment decisions. There are several factors, both internal as
well as external that affect the economy.

Elements of Economic Environment

Several external factors have a significant influence on a country’s
economy. These factors play a huge role in deciding consumer behaviour
and financial flow of a country, thereby affecting its economic activities. All
these elements together constitute the economic environment definition.

These elements of economic environment are as follows –

• Gross Domestic Product (GDP)

Gross Domestic Product is the total value of all products and services
produced in a country. Therefore, the growth of GDP signifies that the
economy of a country is stable and improving. It also means that
people have more disposable income that, in turn, leads to increased
demand for products and services.

It evaluates the financial worth of final goods and services—those

that are purchased by the end user—produced in a country over a
specific time period (say a year). It includes all of the output generated
within the country. GDP also includes non-market production, for
example, education services which are provided by the government
itself.The GDP growth rate measures the economic reports and
amount of a country ’s economic growth (or contraction). Faster
growth in the gross domestic product (GDP) expands the overall size
of the economy and strengthens fiscal conditions.

• Unemployment
 A high level of unemployment in a country means that such an
economy is not using its resources to its full potential. At the same
time, it would negatively impact individual disposable income that will
result in lower demand. It affects the commercial aspect of an
economy significantly. This phenomenon is markedly noticed in the
existing economic environment in India.

The individuals not only lose income but also face other hurdles
financially as well as mentally. Government expenses extend further
than the provision of benefits to the loss of worker output,
which eventually reduces the gross domestic product (GDP) which in
turn leads to economic issues and then poverty. It will lead to lower
GDP growth and fall in tax revenue for the government.

• Inflation
When the overall prices of goods and services increase in a given
period, it is known as inflation. It happens when even though the
prices of goods and services are rising the general income level of
consumers stays the same. Therefore, individuals have less money at
their disposal. Small businesses and cottage industries are also
affected as prices of raw goods and labour increase, resulting in
smaller profit margins.

The propensity for the price level to rise over time is referred to as
inflation. Inflation boosts prices and has the potential to reduce the
purchasing power of consumers. People buy more than they need to
avoid paying higher costs tomorrow, which drives up demand for
products and services. Suppliers are unable to keep up. Worse still,
neither can salaries. As a result, most individuals are unable to afford
common products and services. Inflation reduces the value of
pensions and savings.

• Government Policy
Government policies also play a huge role in influencing the economy
of a country. Government policy can have a major influence on the
economic environment. This can include fiscal or monetary policy. An
example of monetary policy is a reduction in interest rates on bank
loans which encourages consumers’ demand for loans. An example
of fiscal policy would be when the government decides to reduce
 income tax. Both of these policies attempt to gradually increase
individual disposable income and encourage consumers to spend
more, thus boosting commercial activities.
It can influence interest rate, taxation and a rise, which tends to
increase the borrowing cost. Consumers will spend less if the interest
is higher but if the interest rate is lower it might attract investments.
In general, a government’s active role in responding to the economic
circumstances of a country is for the purpose of preserving important
stakeholders' economic interests.

• Reforms in the Banking Sector

The banks are considered to be one of the most crucial aspects of the
Indian economy. As a consequence, any reforms in this sector will
have a huge impact on the economy.

The banking sector plays a vital role in the betterment of the

economy. By boosting the quality of financial services and increasing
money accessible, banking sector openness may directly improve
growth.

• Role of the Public and Private Sector

India has a mixed economy where both the private and public sector
plays a significant role. While the public sector plays a valuable role in
carrying out plans and reforms, developing infrastructure and
building a strong industrial base, the private sector is responsible for
generating employment opportunities. About 80% of the population
is working in either organised or unorganised private sectors.

The public sector promotes economic development at a rapid pace

by filling gaps in the industrial structure. It reduces the disparities in
the distribution of income and wealth by bridging the gap between
the rich and the poor. Agriculture and other activities like dairying,
poultry come under the private sector. It plays an important role in
managing the entire agricultural sector.

• Balance of Trade and Balance of Payment

Briefly, Balance of Trade (BOT) is the difference between the money
value of a country's imports and exports of material goods only
whereas Balance of Payment (BOP) is the difference between a
 country’s receipts and payments in foreign exchange. When the
exports are greater than the imports, it leads to a favourable trade
balance. It means there is a high demand for its goods offshores, and
that increases the demand for its currency. On another hand, when
the outflow is greater than the inflow, there is a current account
deficit.

BOT records only merchandise and doesn’t record transactions of a

capital nature. BOP records transactions relating to both goods and
services. BOP is a true indicator of the economic performance of an
economy.

• Consumer Confidence
The consumer is confident about his purchasing habits or decisions
when they know they have income stability, and income is stable
when the overall economy of a country is. It also affects the markets.
For instance, if manufacturers and retail stores detect weak
consumer confidence, they have to manage their inventory and cut
back on production. Therefore, the economy will experience a slow
down and ultimately, recession. A stable and growing economy
usually boosts a consumer’s confidence.

The confidence of consumers impacts their economic decision and

hence is a key indicator for the overall shape of an economy.

Economic Trends: Savings and Investment,

Savings and investment are two crucial economic trends that affect the overall health of the
economy. Here's a closer look at each of these trends:

Savings: Savings refer to the portion of income that households, businesses, and governments set
aside for future use. Savings can be in the form of bank deposits, investments in stocks or bonds,
or holding cash.

High levels of savings can lead to several benefits for the economy. For example, when
households save more, they have more funds available to invest, which can lead to increased
economic growth. Moreover, savings can provide a safety net for individuals in case of
unforeseen expenses or economic downturns.

On the other hand, low levels of savings can lead to increased borrowing and debt, which can
negatively impact the economy. For instance, if households are unable to save enough for
retirement, it could result in a significant burden on government-funded programs such as social
security.
Investment: Investment refers to the purchase of goods that are not consumed today but are
used in the future to create wealth. Investment can be in the form of capital expenditures by
businesses, such as purchasing machinery or equipment, or investments in financial assets such
as stocks or bonds.

High levels of investment are crucial for economic growth, as it leads to the creation of new
businesses, expansion of existing ones, and increased employment opportunities. Moreover,
investment in research and development can lead to innovation and technological
advancements.

On the other hand, low levels of investment can lead to a lack of economic growth, reduced
employment opportunities, and a lack of innovation.

In conclusion, savings and investment are two key economic trends that have a significant impact
on the overall health of the economy. High levels of savings and investment are crucial for
economic growth and prosperity, while low levels can negatively impact the economy.

Industry,
2/2
An industry refers to a group of companies that produce similar goods or provide similar services.
Industries can be broadly categorized into primary, secondary, and tertiary industries.

Primary Industry: The primary industry refers to the sector involved in the extraction and
harvesting of natural resources, such as agriculture, fishing, mining, and forestry. These industries
are the basis for many other industries, and their products are used in the manufacturing of
finished goods.

Secondary Industry: The secondary industry refers to the sector involved in the manufacturing
and production of finished goods. This includes industries such as construction, manufacturing,
and energy production. The secondary industry plays a crucial role in the economy, as it provides
employment opportunities and generates revenue.

Tertiary Industry: The tertiary industry, also known as the service industry, refers to the sector
involved in the provision of services, such as healthcare, education, finance, and hospitality. This
industry has become increasingly important in recent years, as economies have shifted away from
traditional manufacturing and production.

Each industry is unique and faces its own set of challenges and opportunities. Some of the factors
that can impact industries include changes in consumer demand, government policies and
regulations, technological advancements, and competition.

In conclusion, industries are an essential part of the economy and play a crucial role in generating
employment opportunities, generating revenue, and contributing to economic growth.
Understanding the dynamics of different industries can help businesses and policymakers make
informed decisions to ensure the long-term sustainability and growth of the economy.
Growth of Infrastructure Balance of Payment
The growth of infrastructure and balance of payments are two critical aspects of a country's
economic development. Here's a closer look at each of these factors:

Growth of Infrastructure: Infrastructure refers to the physical and organizational structures and
facilities needed for the operation of a society or enterprise, such as transportation systems,
energy and communication networks, and water and sewage systems. Investment in
infrastructure is crucial for economic growth and development, as it enables businesses to
operate more efficiently, improves the quality of life for citizens, and attracts foreign investment.

Infrastructure development can also have a significant impact on employment opportunities, as it

creates jobs in construction, engineering, and maintenance. Moreover, a well-developed
infrastructure can help reduce the cost of doing business and increase productivity, which can
lead to increased economic growth.

Balance of Payments: The balance of payments (BOP) is a record of all financial transactions made
between a country and the rest of the world. The BOP includes the country's imports and exports
of goods and services, financial transfers, and investments. A positive balance of payments occurs
when a country's exports exceed its imports, while a negative balance of payments occurs when
imports exceed exports.

A positive balance of payments is generally considered a sign of a healthy economy, as it

indicates that a country is earning more from exports than it is spending on imports. This can
help boost the country's currency value, increase foreign investment, and support economic
growth.

On the other hand, a negative balance of payments can be a sign of economic weakness, as it
indicates that a country is spending more on imports than it is earning from exports. This can
lead to a decline in the value of the country's currency, increased borrowing and debt, and
reduced economic growth.

In conclusion, the growth of infrastructure and balance of payments are two essential factors that
can significantly impact a country's economic development. Investment in infrastructure can help
boost economic growth, create employment opportunities, and attract foreign investment, while
a positive balance of payments is generally considered a sign of a healthy economy.
Incentives for Make in India
Make in India is an initiative launched by the Indian government to promote manufacturing in
the country and to position India as a global manufacturing hub. To incentivize companies to
invest in manufacturing in India, the government has introduced several initiatives and incentives.
Here are some of the key incentives for Make in India:

1. Financial Incentives: The Indian government provides financial incentives such as tax
exemptions, subsidies, and low-interest loans to companies that invest in manufacturing
in India. For example, the government offers tax incentives for companies that set up
manufacturing units in Special Economic Zones (SEZs) and provides subsidies for research
and development activities.
2. Single Window Clearance: The Indian government has set up a single window clearance
system for companies looking to invest in manufacturing in India. This system streamlines
 the process of obtaining permits and approvals, making it easier for companies to start
operations in the country.
3. Intellectual Property Rights (IPR): The Indian government has taken several steps to
strengthen IPR laws and regulations to protect the rights of investors and encourage
innovation. This includes setting up specialized IPR courts, providing training and
awareness programs for investors, and developing a national IPR policy.
4. Skilled Workforce: The Indian government is investing in programs to develop a skilled
workforce to meet the needs of the manufacturing industry. This includes setting up
vocational training centers and collaborating with companies to provide on-the-job
training.
5. Investment in Infrastructure: The Indian government is investing heavily in infrastructure
development, such as building new highways, railways, airports, and ports. This is
expected to improve the ease of doing business in the country and attract more
investment in the manufacturing sector.

In conclusion, the Make in India initiative provides several incentives for companies looking to
invest in manufacturing in India. These incentives include financial incentives, single window
clearance, IPR protection, a skilled workforce, and investment in infrastructure. These initiatives
are expected to create a favorable business environment for companies to invest in
manufacturing in India and help position India as a global manufacturing hub.
PLI Scheme,
PLI stands for Production-Linked Incentive. It is a scheme launched by the Indian government to
promote the manufacturing sector and boost domestic production of certain products. Under the
scheme, companies are provided with financial incentives for increasing their production capacity
and achieving specific production targets.

The PLI scheme covers several sectors, including electronics, pharmaceuticals, textiles, food
processing, and automobile components. The scheme aims to boost the competitiveness of
Indian manufacturers and reduce the country's dependence on imports.

Here are some key features of the PLI scheme:

1. Financial Incentives: Under the PLI scheme, companies are provided with financial
incentives based on their production performance. The incentives are typically provided
as a percentage of the incremental sales revenue generated by the company. The
incentives are available for a specific period, typically ranging from three to five years.
2. Eligibility Criteria: To be eligible for the PLI scheme, companies must meet certain criteria,
including a minimum investment threshold, a minimum production capacity, and a
commitment to meeting specific production targets. The scheme also includes provisions
for monitoring and evaluating the performance of the participating companies.
3. Focus on Key Sectors: The PLI scheme is targeted at key sectors that have the potential to
contribute significantly to the Indian economy, such as electronics, pharmaceuticals, and
textiles. The scheme aims to attract investments in these sectors and promote domestic
production of critical products.
4. Strategic Importance: The PLI scheme is part of the Indian government's broader strategy
to promote economic growth and development. The scheme aims to create employment
opportunities, reduce import dependence, and enhance India's competitiveness in the
global marketplace.
In conclusion, the PLI scheme is a key initiative of the Indian government to promote domestic
manufacturing and reduce the country's dependence on imports. The scheme provides financial
incentives to companies for increasing their production capacity and achieving specific
production targets. The scheme is focused on key sectors that have the potential to contribute
significantly to the Indian economy and is part of the government's broader strategy to promote
economic growth and development.
Ease of doing business.
Ease of doing business refers to the level of simplicity and efficiency with which entrepreneurs
and businesses can operate and start new ventures in a particular country or region. It is a
measure of the regulatory environment, legal framework, and other factors that affect the ease
and cost of starting and operating a business.

The World Bank publishes an annual report called the "Doing Business" report, which provides a
ranking of countries based on the ease of doing business. The report measures various indicators
such as starting a business, dealing with construction permits, getting electricity, registering
property, getting credit, protecting minority investors, paying taxes, trading across borders,
enforcing contracts, and resolving insolvency.

Countries that rank high on the ease of doing business index tend to have a more business-
friendly regulatory environment, streamlined procedures, and efficient public services. This can
attract foreign investment and encourage local entrepreneurship, leading to economic growth
and job creation.
Problems of Growth: Unemployment, Inflation, Regional imbalances and Social Injustice.
Economic growth can bring about various benefits to a country, such as increased income,
improved standard of living, and enhanced economic competitiveness. However, there are also
some potential problems that can arise from rapid economic growth, including unemployment,
inflation, regional imbalances, and social injustice.

1. Unemployment: While economic growth can create new jobs, it can also lead to
unemployment if the growth is not inclusive or if there is a mismatch between the skills of
the workforce and the demands of the economy. For example, if growth is concentrated
in certain sectors, such as technology or finance, it may leave workers in other sectors,
such as manufacturing or agriculture, struggling to find employment.
2. Inflation: Economic growth can increase demand for goods and services, leading to
inflation if supply does not keep up with demand. Rapid economic growth can lead to
price increases, particularly for goods and services that are in high demand, such as
housing, healthcare, and education. This can make it more difficult for low-income
households to afford basic necessities.
3. Regional imbalances: Economic growth can lead to regional imbalances if it is
concentrated in certain areas, leaving other regions behind. This can create disparities in
income, employment opportunities, and access to services, such as healthcare and
education. For example, growth may be concentrated in urban areas, while rural areas
remain underdeveloped.
4. Social injustice: Economic growth can exacerbate social injustices if it benefits only certain
segments of the population, such as the wealthy or well-connected. This can lead to a
widening income gap and social inequality. For example, growth may benefit large
corporations and their shareholders, but not their workers or the local communities in
which they operate.
To address these problems, governments can implement policies that promote more inclusive
growth, such as investing in education and training programs to help workers develop the skills
needed for the changing economy, providing targeted support to disadvantaged regions and
populations, and implementing policies to reduce income inequality, such as progressive taxation
and social safety nets.

Problems of Growth
Economic growth can bring about a range of benefits, including higher income, improved living
standards, and increased competitiveness. However, it can also lead to various problems if not
managed properly. Some of the key problems associated with economic growth are as follows:

1. Environmental degradation: Rapid economic growth can lead to increased pollution,

deforestation, and other environmental problems. This can have negative impacts on
public health, wildlife, and ecosystems, and can ultimately undermine the sustainability of
the economy.
2. Resource depletion: Economic growth can also lead to the depletion of natural resources,
such as fossil fuels and minerals. This can result in higher prices for these resources, and
can ultimately limit future economic growth.