Chapter 3: Business Environment

The sum of all the forces (external, institutions and individuals) that are outside the control of a business organisation is referred to as the business environment. The forces mentioned here can be of varied nature, such as social, economic, political, legal or technological. The organisation is unable to control such types of forces, but it can definitely have a positive or negative impact on their performance.

The following are the characteristics of the business environment:

1. Business environment is the sum total of all external forces, which includes individuals, government, and consumers. These have an impact on the business performance that is either positive or negative.

2. The different forces that have an impact on the business environment are interrelated. This interrelation has an effect on the business environment. For e.g., if there is an increase in the annual income of the consumers, they are more likely to purchase goods that fulfil all their demands, and this leads to an increase in demand for electric appliances, mobile phones, gadgets etc.

3. Business environment is constantly evolving and therefore is dynamic in nature. This can be explained as we see changing trends in consumer behaviour, technology and policies of the government.

4. The business environment is an uncertain territory. The changes in the market dynamics cannot be predicted easily. Due to this, there exists uncertainty.

5. Business environment is the sum total of all interrelated dynamic forces. Hence, it is somewhat complex and difficult to understand. All the factors like social, political, technological, etc., have an effect on the performance of the organisation. It can be easy to ascertain the individual impact of all the forces; it can be difficult to determine their cumulative effect.

6. Business environment varies with each region and hence is relative. The reason behind the variation in the business environment is that the forces that determine the nature of the business environment are dynamic in nature and therefore change as per region.

Specific environment is said to be the external forces that play a role in functioning of an organisation directly. These forces are specific to a particular organisation or an enterprise. Specific environment is unique to a industry and has an impact on how the day to day business is run. For example, change in price of a raw material required for production will result in less demand and abundant supply of raw materials has a direct impact on the production of the company.

General Environment comprises of all the forces that has an impact on all organisations irrespective of the type of industry. These forces do not differentiate between the industries or types of business. They have a cumulative effect on the organisation’s performance. For example, a new technology for communication will have a impact on the quality and quantity of production or if there is a change in government then it will have an effect on all organisations.

Any organisation is unable to function on its own. It is influenced by various political, legal, social, and technological forces. These forces form the business environment of an organisation. It is essential that an organisation has a good understanding of its business environment. It enables an organisation to identify those that help or those that obstruct the growth of organisation. Knowing them well will help in reacting better to these forces.

The success of a business is influenced by its environment in the following ways:

1. Whenever there is a change in the business environment, it provides the opportunity to start fresh. Careful observation of the business environment is helpful in identifying these opportunities. It also gives the first movers an advantage in the business. Organisations can reap the maximum benefit in comparison to their competitors.

2. Studying of business environment helps in identifying threats to the business. It helps take preventive measures in order to counter those negative forces.

3. Environment provides sources or inputs such as machinery, raw materials, labour, etc., which are essential for an organisation. Therefore, it makes sense for organisations to choose those resources from the environment and convert them into desired products.

4. Business environment is dynamic in nature. There is a constant change in the factors that make up the business environment. Having a good understanding of the business environment helps cope with the factors better and helps organisations derive benefits from them.

5. Various threats and opportunities are discovered during the analysis of the business environment. The business can thus formulate plans and policies that will be appropriate for the market in the existing scenario.

6. Knowing about the threats and opportunities helps one improve their performance by adapting to these changes in a more informed manner. Being prepared for the situation helps in providing the best performance.

The business environment has the following dimensions:

1. Economic: The economic dimension consists of economic variables such as income, stock markets, and interest rates that are directly related to the functioning of business enterprises. For example, if there is an increase in purchasing power of consumers, it automatically leads to an increase in demand for goods and services, whereas if purchasing power is low, there is a decrease in demand.

2. Social: The social dimension comprises various traditions, trends, social values, and cultures. For example, companies can use religious festivals to produce items that cater to the occasion.

3. Technological: This dimension comprises all the technological changes and improvements that are happening in the business. There can be many examples, like the introduction of computers which changed the way information was gathered to the more recent developments in mobile phones and the internet. Businesses not updating themselves in the technology field can find themselves in a spot of bother with competitors.

4. Legal: This dimension consists of the various legal rules and legislations that are passed by the government. Non-compliance can lead to legal trouble for the business. For example, the setting up of a company is governed by the Companies Act, and not acting according to the law will result in the company facing legal hassles.

5. Political: Political dimension consists of peace, law and order, and stability. If there is a change in the government, there will be a change in the rules and policies. Frequent changes in administration can result in a loss of interest of investors. Also, relaxing rules can encourage investment. Such an example is of forming of a new policy in 1991 that opened the Indian economy to the world.

a. The following dimensions of the business environment are seen to be highlighted here:

1. Political: The government announced the demonetisation of the ₹ 500 and ₹ 1,000 currency notes with effect from midnight of November 8, 2016. It is a step by the government to curb the illegal use of money by some entities.

2. Legal: 500 and ₹ 1,000 currency notes stopped being the legal tender, and ₹ 500 and ₹ 2,000 became the new legal tender.

3. Technological: As demonetisation happened, there was a shortage of cash, which encouraged the use of digital forms of payment in the form of e-wallets like Paytm and other modes of cashless transactions.

The following are the features of demonetization:

1. Demonetization was done with the intention of exposing black money holders and those who evade tax.

2. Increase in savings of people. Earlier more people used to keep money at home rather than at the bank, and this step resulted in savings in the bank.

3. It helped in reducing the interest rates in banks.

4. To popularize the use of digital payments and reduce fraud.

The Industrial policy was introduced in 1991. The following are the major highlights of the policy:

1. As per the new Industrial policy of 1991, the system of licensing was abolished. This helped the private players in starting a new venture without the need to obtain a license. Some industries were not exempt, such as those involved in the manufacture of cigarettes, liquor, defence equipment, pharmaceuticals and dangerous chemicals.

2. There was a considerable reduction in the number of industries that were marked for the public sector. The private sector was given the liberty to operate across industries. The government chose to keep only selected industries under direct control, which were atomic energy, railways and atomic minerals.

3. Before the new policy was introduced, companies needed to seek permission from the government to expand production. The new policy relaxed these norms for companies which were having an asset base of 100 crores. These companies can increase production as per the market requirements.

4. The new policy allowed the industrialists to import capital goods from foreign countries and even allowed 100% of FDI in such cases.

5. There was a reform in the definition of small-scale industries. The maximum limit of investment was increased from 5 lakhs to 1 crore. This step helped the industries to develop and contribute more to the GDP of the nation. Industries became more modern with new technologies that made work easier for small-scale industries.

6. This policy also introduced the disinvestment concept, which allowed the government to sell some stakes to the private sector in order to bring development and monetary benefits to the public sector industries.

7. A board was set up to encourage foreign investment in India. It was called Foreign Investment Promotion Board.

The following were the impact of these changes in business and industry:

1. By relaxing the licensing policy and reducing import duties, domestic firms face tough competition. More players will be in the field with their offerings which leads to more competition.

2. Due to the increase in competition, consumers are flooded with choices for goods and services. This led to an increase in consumers’ demand for better-quality goods and services.

3. Government policy changes result in changes in the business policies of the business enterprises for sustaining and making a profit while following the current policies set by the government.

4. With increasing competition, firms need to reach customers with products and hence they adopt more innovative ways to promote their products by using updated technology.

5. All the improvements in technology and product are possible with the help of trained manpower. Without proper skills, no organisation will be able to execute any plans properly. Therefore, improvements in human resources are very important in the current context.

6. Market orientation has become important as customers have become more demanding and hence businesses need to analyze the market before launching any product.

7. Public sector enterprises need to perform more efficiently in order to survive the competition and stop relying on government funds.

i. Liberalisation

Liberalisation is the process or means of the elimination of the control of the state over economic activities. It provides greater autonomy to business enterprises in decision-making and eliminates government interference.

The purpose of liberalisation is to increase competition between enterprises. It also encourages foreign trade between countries. It also helps the business expand its global footprint. The opening up of the economy improves the economic development of a nation through the inflow of funds from foreign resources.

Essential features of liberalisation are:

1. Liberalisation brought about the abolition of licensing policies. Only a handful of industries were retained, such as those involved in the manufacture of cigarettes, liquor, defence equipment, pharmaceuticals and dangerous chemicals.

2. Businesses can decide on the number of goods they want to produce as per market conditions. This is applicable for those companies which have an asset base of 100 crores.

3. Liberalisation helped in the removal of various trade restrictions, tariffs, and duties which helped in the easy movement of goods and services.

4. Liberalisation helped encourage foreign direct investment and increased the competition attracting foreign service providers.

ii. Privatisation

Privatisation can be explained as the process of transfer of ownership from the public sector to the private sector. It is also known as Disinvestment in business. Privatisation aims at reducing government ownership in industries.

It reduces the workload on public enterprises and also paves the way for economic development by encouraging foreign direct investment (FDI).

The essential features of privatisation are:

1. Government adopted two different methods for disinvestment. In this, the first method was selling a part of the equity in one of the PSUs and the second process was strategic selling of PSUs. With these methods, many of the firms were sold off. This includes major companies like Maruti Udyog, BALCO etc.

2. A board was established that was specially entrusted with the revival of companies that were sick or loss-making. It was known as the Board of Industrial and Financial Reconstruction.

3. In privatisation, the role of the public sector was reduced substantially, with only 8 companies under government control. In the present condition, only 3 industries are under government control, and these are atomic energy, railways and atomic minerals.

4. To improve efficiency among public sector companies and increase the level of professionalism, the government decided to honour the title of Navaratna to all the 9 high-performing PSUs (Public Sector Units).

iii. Globalisation

Globalisation can be understood as the integration of the national economy with the world economy. It represents a free flow of information, technology, goods and services, ideas, capital, and even people as a form of resources across different countries. Globalisation helps in improving cross-border connectivity between different markets in the form of investments, trade, and cultural exchanges.

The following are the essential features of globalisation:

1. It removed or reduced all the trade barriers such as tariffs, trade restrictions, customs duties, etc., which resulted in more business to and from India.

2. Export and Import duties were reduced, which helped in promoting free trade between India and the world.

3. The aim of globalisation was to encourage the setting up of foreign capital in the form of FDI (Foreign Direct Investment). It also resulted in the formation of SEZs (Special Economic Zones) and the creation of FEMA (Foreign Exchange Management Act).

This chapter in NCERT Solutions for Class 12 provides us with a brief introduction to the following concepts. It provides a clear picture of what and how the business environment operates.

• What is business environment? – It is a sum of all the external forces that influence enterprise and operation of business.
• Characteristics of business environment.