3.
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3.1 MEANING OF BUSINESS ENVIRONMENT
• Business Environment means the sum total of all individuals, institutions and other forces that
are outside the control of a business enterprise, but may affect its performance.
3.2 FEATURES OF BUSINESS ENVIRONMENT
1. Totality of external forces : Business environment is the sum total of al external forces that
directly or indirectly influence the working of a business system and is aggregate in nature
2. Specific & General Forces : Business environment includes both specific and general forces.
Specific forces (competition, investors, customers) affect individual enterprises directly and
immediately in their day to day workings. General forces (social, political, legal, technological)
have impact on all business enterprises and indirectly affect individual firms.
3. Inter-relatedness : The different elements of a business environment are closely inter-related.
Eg) The increased awareness for health care has raised the demand for organic food.
4. Dynamic in nature : The business environment is dynamic in nature as it keeps on changing,
whether in terms of technological improvement, shifts in consumer preferences or entry of new
competition in the market.
5. Uncertainty : Business environment is largely uncertain as it is very difficult to predict future
happenings, especially when environment is changing too frequently like in the case of
information technology and fashion industries.
6. Complexity : Business environment consists of numerous interrelated and dynamic sources
arising from different sources. So it becomes difficult to understand what exactly constitutes a
given environment. Environment is a complex phenomenon which is relatively easier to
understand in parts but difficult to grasp in its totality
7. Relativity : Business environment is a relative concept since it differ from country to country and
even region to region. For instance the political conditions in the USA differ from those in China or
Pakistan.
3.3 IMPORTANCE OF BUSINESS ENVIRONMENT
• To survive in this competitive world, every business enterprise has to systematically analyse and
diagnose the environment. A good understanding of the business environment by business
managers enables them not only to identify and evaluate, but also to react to the forces external
to their firm.
1. It enables them to identify opportunities and getting the first mover advantage :
▪ Knowledge of the business environment help managers spot positive trends and take first
mover advantages.
2. It helps the firm to identify threats and early warning signals :
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▪ Understanding of the environment allows managers to recognise possible threats early on and
act on them, serving as early warning signals.
3. It helps in tapping useful resources :
▪ A good understanding of the environment helps business access resources like finance and
raw materials, and effectively converting them into outputs for the society.
4. It helps coping with rapid changes :
▪ Rapid changes in the business environment, such as technological shift and market
turbulences etc require managers to stay informed and adapt suitable courses accordingly.
5. It helps in assisting in planning and policy formulation :
▪ Proper analysis of the business environment helps identifying opportunities and threats,
providing a foundation for effective planning and guides in policy formulation.
6. It helps in increasing performance :
▪ Monitoring the environment helps in improving both the present as well as future performances
of the business.
3.4 DIMENSIONS OF BUSINESS ENVIRONMENT
• Dimensions of Business Environment consists of factors like :
ECONOMIC SOCIAL TECHNOLOGICAL POLITICAL LEGAL
[A] ECONOMIC ENVIRONMENT :
• Economic environment consists of all those factors and forces concerning with means of
production and distribution of wealth in the country.
• It comprises of interest rate, rate of inflation, value of GDP, per capita income, tax rates etc. Eg]
With an increase in the inflation rate, there is a rise of cost in the production which effects the
profit of the business.
[B] SOCIAL ENVIRONMENT :
• Social environment represents all the social and cultural forces within which the business firm
operates. It comprises of customs and traditions, values, social trends etc.
• Traditions define social practices that have lasted for decades or even centuries, Values are the
concepts that a society holds in high esteem like freedom, social justice etc and Social Trends
includes changes as well as inclinations towards new products. Eg] Emerging trends of health
and fitness provide opportunities for sweets, gifts etc.
[C] TECHNOLOGICAL ENVIRONMENT :
• Technological environment includes forces elating to scientific improvements and innovations
which provide new ways of producing goods and services and new methods and techniques of
operating a business. Eg] Colour TV with remotes replacing black & white TV.
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[D] POLITICAL ENVIRONMENT :
• Political environment includes political conditions such as general stability and peace in the
country and specific attitudes that elected government representatives hold towards business. Eg]
In 1977, Janta Government followed a strict policy against MNC’s and forced companies like
Coca-Cola and IBM to move out of India.
[E] LEGAL ENVIRONMENT :
• Legal environment includes various legislations passed by the government, administrative orders
issued by government authorities, court judgements as well as decisions rendered by various
commissions and agencies at every level of the government. It is necessary for business
enterprise to have adequate knowledge of these legislations and are required to comply with
these laws
• Eg] The advertisement of alcoholic beverages is prohibited and advertisements of cigarettes carry
the statutory warning “Cigarette smoking is injurious to health”
3.5 DEMONETISATION
• Demonetisation is the act of removing a currency unit of a state as legal tender.
• The government of India, made an announcement on 8th Nov 2016, where the 500 & 1000 rupee
notes were demonetised with immediate effect ceasing to be the legal tender except for a few
specified purposes such as paying utility bills. This led to 86% of the money becoming invalid.
• The aim of demonetisation was to :
▪ Curb corruption
▪ Counterfeit the use of high denomination in notes for all illegal activities
▪ Accumulate black money generated by income that has not been declared to tax authorities.
FEATURES OF DEMONETISATION :
1. Demonetisation is viewed as a tax administration measure. Cash holdings arising from declared
income was readily deposited in banks and exchanged for new notes. But those with black money
had to declare their unaccounted wealth and pay taxed at a penalty rate.
2. It is also interpreted as a shift on the part of the government indicating no tolerance of tax evasion.
3. It is also led to tax administration, channelising savings into formal financial systems.
4. It also aimed to create a less-cash or cash-little economy e.i. channelising more savings through
the formal financial system and improving tax compliance.
IMPACT OF DEMONETISATION :
• There was a decline in cash transactions, bank deposits increased and there was an increase in
financial savings. Private wealth declined since some high demonetised notes were not returned and
public sector wealth had no effect. There was a decline in the real restate prices too.
• Digital transactions amongst new users and use of RuPay Cards and Aadhar Enabled Payment
System (AEPS) increased. And there was a rise in income tax collection due to increased disclosure.