Chapter – 3
Business Environment
Business environment means the sum total of all individual, institutions & other forces
that are outside the control of a business enterprise but may affect its performance.
For ex. – changes in govt. policies, political uncertainties etc
Features –
i)
Totality of External forces –
Sum total of all
things external to
firms
ii)
It is aggregative
in nature
Specific & general forces – It includes both
Specific forces
Investors, customers
& suppliers
General forces
Social, political, legal &
technological conditions
iii)
They affect a firm
They affect a firm
indirectly
directly – All the factors are inter-related
Inter-relatedness
iv)
Dynamic Nature – Business environment keeps on changing in terms of technological
improvement entry of new competition etc.
v)
Uncertainty – Business environment is highly uncertain. We cannot predict what
changes would take place in future.
vi)
Complexity – Environment is a complex phenomenon that is relatively easier to
understand in parts but difficult to grasp in totality.
vii)
Relativity – Business environment is a relative concept since it differs from country to
country.
Example - demand for saree in India is high whereas it is almost none existed in France.
IMPORTANCE OF BUSINESS ENVIRONMENT –
1)
It enables the firm to identify opportunities & 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 use them instead of their
competitors.
 For example – Maruti udyog became the leader in the small car market because it was
1st to recognize the need of it.
2)
It helps the firm to identify threats & early warning signals –
 Threats refer to the external environment trends & changes that will hinder a firm’s
performance.
 Environment awareness can help managers to identify various threats on time & serve
as an early warning signal.
 For example – If an Indian firm finds that a MNC is entering the international market, it
should take it as a warning signal.
3)
It helps in tapping useful resources –
 Environment is a source of various resources for running a business.
 The enterprises have to design policies that allow it to get the resources that it needs.
4)
It helps in coping with rapid changes –
 All sizes & all types of enterprises are facing dynamic environment.
 Managers must understand & examine the environment & develop suitable courses of
action.
5)
It helps in assisting in planning & policy formulation –
 Understanding & analysis can be the basis for deciding the future course of action.
 It sets guidelines for decision making.
6)
It helps in improving performances –
 Future of an enterprise is closely bound up what is happening in the environment.
DIMENSIONS OF BUSINESS ENVIRONMENT –
1)
ECONOMIC ENVIRONMENT –
 Interest rates, inflation rates, change in the disposable income of people are some of
the economic factors that can affect a firm’s performance.
 For example – In case of auto-mobile manufacturers, low longer-terms rates are
beneficial because they result in increased spending by consumers.
2)
SOCIAL ENVIRONMENT –
 Social factors like customs & values, social trends etc form social environment.
 Values refer to concept that a society holds in high esteem.
 Social trends present various threats as well as opportunities to business enterprises.
 For example – The health & fitness trend has become popular in urban region. This has
created high demand for gyms.
3)
TECHNOLOGICAL ENVIRONMENT –
 These include forces relating to scientific improvements & innovations which provide
new ways of production to a enterprise.
 For example – Lasers, robots, telecommunication has provided many new opportunities
to the firms.
4)
POLITICAL ENVIRONMENT –
 It includes political conditions like general stability & peace in the country.
 Political stability builds up confidence among business people to invest in long terms
projects for growth of the economy.
5)
LEGAL ENVIRONMENT –
 It includes various legislations passed by the govt.
 An adequate knowledge of rules & regulations framed by the govt. is necessary for
better business performance.
 For example – The advertisement of alcoholic beverages is prohibited.
ECONOMIC ENVIRONMENT IN INDIA
1)
LIBERALISATION –
 Liberalization refers to removal of all unnecessary restrictions.
 It has been taken place in Indian industry with respect to:
 Abolishing licensing requirements in most of the industries.
 Freedom in deciding the scale of business
 Removal of restrictions on the movement of goods & services.
 Freedom in fixing the prices of goods & services.
 Reduction in tax rates.
 Simplifying procedures for imports & exports.
 Making it easier to attract foreign capital to India.
2)
PRIVATISATION –
 Disinvestment took place in 1991.
 Disinvestment refers to transfer of public sector enterprises to the private sector.
 When 51% of the share capital is sold to private entrepreneur, it results in transfer of
ownership.
3)
GLOBALISATION –
 Globalization means the integration of various economies of the world.
 It involves increased level of interaction & interdependence among various nations.
IMPACT OF THE POLICY CHANGES ON BUSINESS & INDUSTRY –
The policy of liberalization, privatization & globalization has led to the following
challenges: i)
Increasing competition –
 Because of liberalization new foreign as well as local firms are entering the market.
 Competition for Indian firms has increased in industries like airlines, banking, insurance
etc.
ii)
More Demanding customers –
 Customers are now well informed & increasing competition gives the customer wider
choice & increased demand.
iii)
Rapidly changing technological environment –
 Increased competition forces the firms to develop new ways to survive & grow in the
market.
 It creates challenges too.
iv)
Necessity for change – The market forces have become turbulent because of which the
enterprises have to modify their operations.
v)
Need for developing human resources –
 The new market conditions require people with higher competence & greater
commitment.
 Thus, there is a need for developing human resource.
vi)
Market Orientation –
 There is a shift to market orientation as the firms study & analyse the market first &
produce goods accordingly.
vii)
Loss of budgetary support to public sector –
 The public sector undertakings have realized that in order to survive & grow, they will
have to be more efficient & generate their resources.