Chapter 3 Business Environment

Business environment means the sum total of all the individuals, institutions and other factors that are outside the control of a company but that affect its performance.

Understanding of business environment help in improving performance of a business due to various reasons it helps to identify the various opportunities in the business, it helps in identification of threats or negative signals that affects the business, it helps in accumulation of useful resources for the business, it helps to adapt the change it in the business environment, and it also helps in formulation of new plans and polices and hence all these factors helps in improving the business environment.

Different elements and dimensions of the business environment are interrelated. For example: nowadays people are more focused toward health and fitness. So, people are spending more on organic foods, gyms and food supplements. This is an example of a social environment but it is also related to the economic environment because the disposable income of the people have increased that’s why they are spending more on health and fitness.

The impacts of changes in business environment on Krishna Furnishers Mart’s operations are:

1. Innovation Indesigns
2. Market Orientations

Specific forces of business environment that affects business are:                 

1. Strategies of competitors
2. Customer tastes and preferences

Understanding the business environment is important for the business enterprise because it provides a lot of benefits to the businessman. Following are the benefits of understanding business environment:

1. It enables the firm to identify opportunities and get the first mover advantage: Environment provides numerous opportunities for business success. Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors.

2. It helps the firm to identify threats and early warning signals: Threats means external environmental changes that hinder the performance of the firm. And proper awareness of the business environment helps the manager to identify the threats on time and then they can prepare themselves to meet the threats.

3. It helps in tapping useful resources: Environment is a source of various resources for running a business and it provides inputs to the business like finance, machines, raw materials, power, and water, labour etc. Every enterprise depends on the environment as a source of inputs or resources and in return the enterprise supplies outputs such as goods and services. And for that enterprise designs policies that allow it to get resources that it needs so that it can convert those resources into outputs that the environment desires.

4. It helps in coping with rapid changes: Business environment is dynamic in nature and changes are taking place at a fast pace. And to cope effectively with the changes managers must understand and examine the environment and develop suitable courses of action.

5. It helps in assisting in planning and policy formulation: Environment is a source of both opportunities and threats for the business enterprise. And its understanding and analyzing helps them to decide future course of action or training guidelines for making policies to deal with the present situation.

6. It helps in improving performance: The future of the business is bound with what is happening in the environment. And a continuous monitor to the environment helps to adopt suitable business policies and practices which not only improve the performance of the business but also continue to succeed in the market for long terms.

a) Liberalization

Liberalization means to liberate industry from the shackles of the licensing system. The economic reforms that were introduced were aimed at liberalizing the Indian business and industry from all unnecessary controls and restrictions. Liberalization signalled the end of the license permit quota and other restrictions that were put on the industries before 1991.

b) Privatization

Privatization means to drastically reduce the role of the public sector. It refers to transfer of ownership, management and control of the public sector to the private sector. And to achieve this government adopted disinvestment of the public sector and referred the loss making and sick enterprises to the Board of industrial and Financial Reconstruction.                  

c) Globalization                    

Globalization means to encourage foreign private participation in India’s industrial development. It refers to integration of the various economies of the world leading towards the emerging of a cohesive or interconnected global economy. It also implies reducing the restrictions on the import and export such as licensing and tariffs.

The policy of liberalization, privatization and globalization of the government has made a significant impact on the working of enterprises in business and industry. Following points highlights the impact of government policy changes on the business and industry.

1. Increasing competition: Changes in the rules of industrial licensing and entry of foreign firms, has increased the competition for Indian firms especially in service industries such as banking, communication, health, etc.

2. More demanding customers: Due to increase in competition, wider choices of products are available in the market. As a result, customers are becoming more chossy.

3. Rapidly changing technological Environment: The increased competition in the market forces the firms to develop new ways to survive and grow in the market. And due to this the small firms’ faces face tough challenges for transformations in processes, technology, machines and products.

4. Necessity for change: Frequent changes in the market, forces the enterprises to continuously modify their operations.

5. Need for developing human resources: The new market conditions need people with required skills and greater commitment. So, the need for developing human resources is increasing.

6. Market orientation: Earlier firms were production oriented; they produce first and then sell goods in the market. But now in the changing world production oriented technique is changed to market oriented where firms study and analyse the market first and produce goods accordingly.

7. Loss of budgetary support to the public sector: The budgetary support for financing the public sector has declined over the years. So the public sector undertakings have to realize that in order to survive, they will have to develop their own resources and be more efficient.

The dimensions of business environment highlighted in the above case are:

1. Technological dimension: They improve their technological dimension by developing a framework of virtual repository of learning resources with a single-window search facility. It provides new opportunities to the enterprise.

2. Social dimension: By providing support to all academic levels including researchers, life-long learners and differently-abled learners free of cost. By doing this it will benefit society and the company's social esteem also increases.

The impact of demonetization on interest rates, private wealth and real estate are as follow:

Interest rates:

i. There was a decline in cash transactions.
ii. The cash deposit in the bank increased.
iii. There was also an increase in the financial savings.

Private wealth: Public wealth declined because some high demonetized notes were not returned and real estate prices fell.

Real estate: The price of the real estate declined.

Business environment means all the external and internal forces that affect the performance of the organization directly or indirectly. Business environment ha the following features:

1. Totality of external forces: Business environment is aggregative in nature because it is the sum total of all the things external to business enterprise. One single factor does not make a business environment.

2. Specific and general forces: Business environment consists of both specific and general forces. General forces refers to social, political, economical, legal and technological conditions, which affects every organization indirectly. On the other hand specific forces are investors, customers, competitors and suppliers that affect individual organization directly.

3. Inter-relatedness: Every element of business environment are inter-related. For example an increase in the income of consumers (economic environment) will help in improving their living standard (social environment).

4. Dynamic Nature: Business environment is dynamic in nature because it keeps on changing in terms of technologies, consumer taste and preference, change in government policy or trend and traditions that is why it is important to monitor the environment continuously.

5. Uncertainty: Business environment is uncertain because it is difficult to predict future events such as technological changes, change in government policies etc, especially when the changes are taking place at a fast pace.

6. Complexity: Business environment is complex because it consists of numerous, inter-related factors affecting business enterprises at the same time. It is easier to understand the components in parts, but difficult to understand in totality.

7. Relativity: Business environment is a relative concept as it differs from country to country and region to region. For example government policy, regulations, consumers’ preference etc all differs from one region to another.

General environment and specific environment

General environment means that the forces that affect all the business enterprises indirectly. It does not only affect any particular organization but affects the performance of all the organizations. General environment consists of general forces that are economic, social, political, legal and technological conditions. For example change in any political condition affects all the organizations.

And on the other hand a specific environment means that the forces that affect an organization directly. Unlike the general environment it does not affect the performance of all organizations, it affects the performance of any particular organization. Specific environments consist of specific forces that are investors, customers, competitors and suppliers. For example, change in the taste and preference of the consumer will directly affect the demand of that product of that particular organization/company.

Business enterprises cannot work in isolation. Therefore, a good understanding of the environment not only helps the manager to deal with uncertain situations, but also helps the organizations to identify and benefit from opportunities that the environment offers. The following point highlights the importance of business environment for the success of a business enterprise:

1. It enables the firm to identify opportunities and get the first mover advantage: Environment provides numerous opportunities for business success. Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors.

2. It helps the firm to identify threats and early warning signals: Threats means external environmental changes that hinder the performance of the firm. And proper awareness of the business environment helps the manager to identify the threats on time and then they can prepare themselves to meet the threats.

3. It helps in tapping useful resources: Environment is a source of various resources for running a business and it provides inputs to the business like finance, machines, raw materials, power, and water, labour etc. Every enterprise depends on the environment as a source of inputs or resources and in return the enterprise supplies outputs such as goods and services. And for that enterprise designs policies that allow it to get resources that it needs so that it can convert those resources into outputs that the environment desires.

4. It helps in coping with rapid changes: Business environment is dynamic in nature and changes are taking place at a fast pace. And to cope effectively with the changes managers must understand and examine the environment and develop suitable courses of action.

5. It helps in assisting in planning and policy formulation: Environment is a source of both opportunities and threats for the business enterprise. And its understanding and analyzing helps them to decide future course of action or training guidelines for making policies to deal with the present situation.

6. It helps in improving performance: The future of the business is bound with what is happening in the environment. And a continuous monitor to the environment helps to adopt suitable business policies and practices which not only improve the performance of the business but also continue to succeed in the market for long terms.

Following are the dimensions of the business environment:

1. Economic Environment: The economic environment consists of the factors and forces concerned with means of production and distribution of the wealth. It comprises interest rate, rate of inflation, value of GDP, per capita income, tax rates, disposable income etc. For example a rise in the per capita and disposable income of the consumer will lead to an increase in the demand for goods and services.

2. Social Environment: The social environment consists of all the social and cultural forces within which business firms operate. It comprises customs and traditions, values, social trends etc. For example, the emerging trend of health and physical fitness provides opportunities to businesses like gyms, diet drinks, mineral water, food supplements etc.

3. Technological Environment: It refers to the changes taking place in the method of production and use of equipment to improve the quality of product.

In other words, the technological environment includes forces relating to scientific improvement and innovations, which provide new ways of producing goods and services and methods and techniques of operating a business. For example, innovation and improvement in the area of food preservation has not only provided vast opportunities to firms producing jams, jelly, pickles, ready to cook foods, etc but also increased the demand and consumption of such products in society.

4. Political Environment: The political environment consists of the forces concerning management of public affairs and their impact on business. It includes political conditions in the country and attitude of the government towards business and business policy. For example political unrest and threat to law and order adversely affect confidence of investors and reduce the level of investment in the economy.

5. Legal Environment: Business has to function within the framework of laws and regulations of the country. Non-compliance of these regulations can create legal problems for business enterprises.

A number of laws have been implemented by the government through the enactment of the companies Act, Foreign Exchange Management Act, Factories Act, competitions Act etc. For example, products like tobacco and cigarettes are required to carry a statutory warning on their packages, ‘smoking is injurious to health’.

a. Dimensions of business environment highlighted in the above case are:

1. Economic environment: Demonetization is highlighting the economic dimension as it happens due to change in the system that is because of changes made by the government in economic policies. That is RBI (Reserve Bank India) which is the regulator of economic development.

2. Political environment: It highlights the political dimension as the government involved in the above case because the government of india announced Demonetization of RS 500 and RS 100 currency notes with effect from the midnight of November 8, 2016.

3. Technological environment: It also highlights technological dimensions. As a result of the above case it increases the awareness and knowledge of technology among the citizens of India by introducing point sale machines, e-wallets, digital cash and other modes of online cashless payment.

b. Features of demonetization are:

1. Measure of tax administration: Demonetization is viewed as a tax administration measure. Because the cash holders with black money had to declare their unaccounted wealth and pay taxes at a penalty rate at the time of exchange of currency.

2. Measure to avoid tax evasion: Government indicating that tax evasion will no longer be tolerated or accepted.

3. Demonetization also led to tax administration channelizing savings into the formal financial system. As most of the cash has been deposited in the bank and is bound to be withdrawn. So new deposits schemes offered by the banks will continue to provide a base loan, at lower interest rate.

4) Create a cashless economy: Another feature of demonetization is to create a cashless or cash-lite economy by channeling more savings through the formal financial system and reducing tax evasion.

The government of India announced a new industrial policy in july1991. Highlights of the policy are as follow:

1. The Government reduced the number of industries under compulsory licensing to six and that industries are liquor, cigarette, defence equipment, dangerous chemicals, industrial explosives, and drugs and pharmaceuticals.
2. It provided a greater role to the private sector and reduced the role of the public sector. The role of the public sector was limited to only industries of strategic importance.
3. Disinvestment was carried out in case of many public sector industrial enterprises.
4. Policy towards foreign capital was liberalized. The share of foreign equity participation was increased and in many activities 100 percent foreign direct investment (FDI) was permitted.
5. Automatic permission was now granted for technology agreements with foreign companies.
6. Foreign investment promotion board (FIPB) was set up to promote and channelize foreign investment in India.

The impact have these changes made on business and industry are:

1. Increasing competition: Changes in the rules of industrial licensing and entry of foreign firms, has increased the competition for Indian firms especially in service industries such as banking, communication, health, etc.

2. More demanding customers: Due to increase in competition, wider choices of products are available in the market. As a result, customers are becoming more chossy.

3. Rapidly changing technological Environment: The increased competition in the market forces the firms to develop new ways to survive and grow in the market. And due to this the small firms’ faces face tough challenges for transformations in processes, technology, machines and products.

4. Necessity for change: Frequent changes in the market, forces the enterprises to continuously modify their operations.

5. Need for developing human resources: The new market conditions need people with required skills and greater commitment. So, the need for developing human resources is increasing.

6. Market orientation: Earlier firms were production oriented; they produce first and then sell goods in the market. But now in the changing world production oriented technique is changed to market oriented where firms study and analyse the market first and produce goods accordingly.

7. Loss of budgetary support to the public sector: The budgetary support for financing the public sector has declined over the years. So the public sector undertakings have to realize that in order to survive, they will have to develop their own resources and be more efficient.

a) Liberalization

Liberalization means to liberate industry from the shackles of the licensing system. The economic reforms that were introduced were aimed at liberalizing the Indian business and industry from all unnecessary controls and restrictions. Liberalization signalled the end of the license permit quota and other restrictions that were put on the industries before 1991.

The essential features of liberalization are:                 

1. It stresses freedom of business and industry from unnecessary controls and restrictions of the government.
2. Emphasis was laid on simplifying export and import procedures.
3. Restrictions on the movement of goods and services were removed. 4) Public sector enterprises were dereserved.

b) Privatization

Privatization means to drastically reduce the role of the public sector. It refers to transfer of ownership, management and control of the public sector to the private sector. And to achieve this government adopted disinvestment of the public sector and referred the loss making and sick enterprises to the Board of industrial and Financial Reconstruction.

The essential features of privatization are:

1. It stresses the induction of private ownership, management and control in the public sector.
2. There was a significant reduction in the role of public sector enterprises for economic growth.
3. BIFR (Board on Industrial and Financial Reconstruction) was established for revival of loss making and sick enterprises.
4. Disinvestment of the public sector took place at a significant rate. Disinvestment means the process of sale of public sector enterprises to the private sector.

c) Globalization

Globalization means to encourage foreign private participation in India’s industrial development. It refers to integration of the various economies of the world leading towards the emerging of a cohesive or interconnected global economy. It also implies reducing the restrictions on the import and export such as licensing and tariffs.

The essential features of Globalization are:

1. It stresses the integration of domestic economies into a cohesive or interconnected global economy.
2. Licensing was abolished for imports.
3. The share of foreign equity participation was increased.
4. Foreign Investment Promotion Board (FIPB) was set up to promote foreign investments in India.