CHAPTER 3: BUSINESS ENVIRONMENT.

This chapter contains following topics:

1. Meaning of business environment.
2. Features of business environment.
3. Importance of business environment.
4. Dimensions of business environment – Economic, Social, Technological, Political, Legal.
5. Economic environment in India and LPG.
6. Impact of government policy changes on business and industry.

MEANING OF BUSINESS ENVIRONMENT:

The success of any business depends not merely on their internal management but to a great
extent also on a number of external factors such as government policies, consumers' taste,
preference and fashion, competitors, courts, media etc.
Business environment is defined as the sum total of all individuals, institutions and other forces
that are outside the control of the business but may affect its performance. In other words,
Universe – Business unit = Business environment.
The various economic, technological, social, legal and political factors which are outside the
control of a business unit affect its performance. These are outside forces but have profound
affect on any business for example, technological changes, political uncertainty or disturbance,
tax rates etc.
FEATURES OF BUSINESS ENVIRONMENT:
The characteristics features of the business environment are as follows:
A. Totality of external forces.
Universe – Business unit = Business environment.
B. Specific or internal and general or external forces.
Specific forces are internal and affects the business directly like customers and competitors
whereas general forces affect indirectly.
C. Interrelatedness.

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Different elements are closely interrelated like aspirational society, women empowerment,
increased per capital income, technological advancement etc. They affect and get affected by
others.
D. Dynamic nature.
It keeps on evolving/changing like cold drinks in cans instead of bottles, eating out habit, home
delivery etc.
E. Uncertainty.
The dynamic nature makes it uncertain, what is good for today may not be so tomorrow.
F. Complexity.
It’s interrelatedness makes it dynamic and hence uncertain and therefore complex to decipher.
G. Relativity.
It is relative as it differs from country to country or from region to region as Maharashtra and
Gujarat are better as compared to Bihar and UP and south Bihar is better than North Bihar.
IMPORTANCE OF BUSINESS ENVIRONMENT:
A good grasp of the business environment helps managers to understand, identify and evaluate
forces external to their firms but also to react and respond to them as per the changing times. The
following factors highlight the significance of the business environment:
A. It enables firms to identify opportunities and getting the first moved advantage.
The fruits of the initiative of Sunil Mittal of Airtel in Telecom to move out of their family
business in cycle and the same of Azim Premji of Wipro from the family business of soaps and
chemicals to the software is there for anyone and everyone to see.
B. It helps the firm to identify threats and early warning signals:
The threat of Jio to Airtel was life threatening but it rose up to the occasion and gave it a tough
challenge and since it was an early bird it still remains a formidable force.
C. It helps in tapping useful resources:
Various resources such as finance, machines, raw materials, power, water, human capital etc have
to be assembled and put to optimal use to garner more outputs and better profitability.
D. It helps in copng with rapid changes:
Nowadays as we have seen earlier the business environment is closely interrelated, dynamic and
uncertain and therefore keeps on changing on a continuous basis. Managers have to keep their

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ears to the ground to keep Pace with the changing times or face the prospect of being out of
business like Nokia phones, Ambassador cars, Kodak cameras.
E. It helps in assisting in planning and policy formulation:
A good grasp of the business environment helps in designing appropriate strategies keeping in
view the evolving situations.
F. It helps in improving performance.
An organization that monitors its environment and adopt suitable business practices remain
stable in the business for example Haldiram which faced the tough competition of the MNCs and
is giving them a good run for their money.
DIMENSIONS OF BUSINESS ENVIRONMENT:
Dimensions of the business environment includes economic, technological, social, legal and
political forces which independently and together influence a business organisation. These are
general or external forces which affect one and all business.
1) Economic environment;
• Rates of interest.
• Tax rates.
• Per capital income.
• Disposable income.
• Inflation rates.
• Wages & salaries.
• Savings and investment.
All these economic factors impinge on the business of any organisation.
2) Social environment:
• Societal values.
• Customs and traditions.
• Social trends.
• Women empowerment.
• Individual freedom.
• Social justice.

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• Life expectancy.
• Birth rate and death rate.
• Literacy.
• Health and hygiene.
• Composition of family.
• Population shifts.
All these affect a business organisation.

3) Technological environment.
• Scientific improvements and innovations.
• Methods and techniques.
• Computerisation.
• Digitisation.
• Internet facilities and its speed.
• Artificial intelligence.
• Robotics.
• Biotechnology.
• Telecommunication.
• Electrification of railways.
All of these define the business practices adopted and adhered to by the business organisation.
4) POLITICAL ENVIRONMENT:
• The Constitution if the country and its governance model.
• Prevailing political system.
• Dominant ideologies and values of major political parties.
• The profile of political leadership & their thinking.
• The level of political morality.
• Political institutions and allied agencies

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• Political ideology and practices of the ruling party
• The extent and nature of government intervention in business.
• The foreign relations of the country.
These all affect the conductance of a business organisation in a given country.
5) LEGAL ENVIRONMENT:
• Legislations passed by the government.
• Administrative orders.
• Court judgements.
• Commissions and agencies.
• Regulatory bodies and mechanism.
• Rules and regulations framed by the government.
• Statutory provisions.
All these affect the performance of a business organization.
ECONOMIC ENVIRONMENT IN INDIA:
Various macro economic factors related to production and distribution of health impinge on the
performance of a business organization. Some of these are:
• Stage of economic development.
• The mixed economy economic system.
• Industrial, monetary and fiscal policies of the government.
• Various economic indices like rate of GDP growth, per capital income, disposable income, rate
of savings and investments, foreign trade, Balance of payments, inflation rate, rate of interest etc.
• State of financial infrastructure, transportation and communication.
All business organisations account for these figures when chalking out their future plans by
assessing their impact on the economy. The economic environment keeps on changing due to the
government policies.
Where did we stand when we got our freedom ?
• The Indian economy was mainly agricultural and rural.
• About 70% were engaged in agriculture.

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• About 85% lived in rural areas.
• Low and primitive technology.
• Communicable diseases struck regularly.
• High mortality rate.
• Inadequate public health system.
To chart out an independent economic course we opted for centrally planned economy, exclusive
category of industries reserved for the public sector, commanding heights to the economy. The
main objectives of economic development were:
• Reducing employment.
• Rapid economic growth.
• Alleviating poverty.
• Reduce inequality of income.
• Socialistic pattern of development.
• Limited role to the private sector.
• Plethora of rules and regulations leading to Inspector Raj or License Quota Permit Raj. All this
shackled the economic growth and development.

In 1991, the economy faced a severe crisis in the form of depleted foreign exchange reserves,
high fiscal deficit, and a rising price level, loss making PSUs etc. India has to mortgage a huge
cache of gold to Bank of England to raise foreign exchange. It approached IMF for loans which
put certain conditions to which we agreed as there was no other choice. These conditions asked
for structural reforms and stabilisation measures.
We came up with the New Economic Policy, 1991 leasing to LPG, liberalisation, privatisation
and globalisation. The broad features of this policy were as follows:
• The number of industries reserved for the PSU was reduced to 8 from 17 and then to only 3.
• The compulsory licensing system was done away with.
• Disinvestment of PSU was resorted to.
• Foreign investment was liberalised and FDI was promoted.
• FIPB was set up for foreign investment.

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This policy of LPG aimed at debunking licensing system through liberalization, drastically
reducing the role of the public sector through privatisation and integrating the domestic economy
with the world economy through globalisation.
LIBERALISATION:
Liberalisation aimed at removing unnecessary controls and restrictions. They unshackled the
Indian economy from the Licence-Quota-Permit Raj or Inspector Raj. Following decisions were
taken in this context:
• Abolishing licensing in all types of industries except the few.
• No limit or ceiling or quota on the scale of operations or expansion.
• Doing away with restrictions on the movement of goods and services.
• Market determined prices instead of state regulations.
• Reduction and rationalisation of tax rates.
• Simplifying procedures for foreign trade.
• Making foreign capital and technology easier to import.
PRIVATISATION:
Unlike the commanding role of the PSU in the earlier regime, the private sector was given lots of
freedom. The government redefined the role of the public sector in the New Industrial Policy,
1991. It opted for disinvestment of the PSUs and referring the loss making companies to the
BIFR, Board of Industrial and Financing Reconstruction. Disinvestment had two routes: part
shedding off of the shares to the private sector and outright sale of the ownership and
management to the private sector or strategic partners
GLOBALISATION:
Globalisation meant integrating the domestic economy with the international economy. Till then
the government controlled imports in value and volume terms. The restrictions were of three
types: licensing system, tariff and non tariff controls and quantitative restrictions. Foreign trade
was liberalised. India was no more shut up to the world. It led to the interdependence of the
various economy. It was akin to the Global Village.
IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY:
This NEP, 1991 and its components LPG made a significant impact on the working of business
and industry. This brought the Indian economy face to face with international competition. The
changes can be enlisted as:
A. Increasing competition.

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It’s visible in the choice available to the customers and customer oriented approach of the
business and industry.
B. More demanding customers.
Partly due to the above factors.
C. Rapidly changing technological environment.
As reflected in the areas like cars, bikes, mobiles and aviation besides many others.
D. Necessity for change.
It was necessary to keep Pace with the changing times and living up to them.
E. Need for developing human resources.
The new market conditions require higher competence and greater commitment in terms of
expertise and specialisation.
F. Market orientation.
Instead of production oriented operations there was now a shift towards market orientation to
study and analyse the market first and then produce accordingly.
G. Loss of budgetary support to the government.
The earlier policy of budgetary allocation of loss making PSUs was abandoned and they needed
to be more efficient and generate their own resources to survive, profit and then grow.
All these brought about a transformational change in the working of the Indian
business,
Industry and trading. Gradually, the enterprises rose up to the occasion to face the
international competition. They are now more customer friendly/oriented and aim for
greater customer satisfaction.

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