Chapter 3

BUSINESS ENVIRONMENT

How a Rickshaw Puller became an entrepreneur

The above example shows how a machine invented by Dharamveer Kamboj made life easier for women workers in unorganised sector. This innovation resulted in a positive impact on food processing business i.e., social, economic and technological in addition to enhancing quality
of life.

Meaning of Business Environment

The term ‘business environment’ means the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance. As one writer has put it– “Just take the universe, subtract from it the subset that represents the organisation, and the remainder is environment”. Thus, the economic, social, political, technological and other forces which operate outside a business enterprise are part of its environment. So also, the individual consumers or competing enterprises as well as the governments, consumer groups, competitors, courts, media and other institutions working outside an enterprise constitute its environment. The important point is that these individuals, institutions and forces are likely to influence the performance of a business enterprise although they happen to exist outside its boundaries. For example, changes in government’s economic policies, rapid technological developments, political uncertainty, changes in fashions and tastes of consumers and increased competition in the market — all influence the working of a business enterprise in important ways. Increase in taxes by government can make things expensive to buy. Technological improvements may render existing products obsolete. Political uncertainty may create fear in the minds of investors. Changes in fashions and tastes of consumers may shift demand in the market from existing products to new ones. Increased competition in the market may reduce profit margins
of firms.

On the basis of the foregoing disc­ussion, it can be said business environment, has the following features:

(i) Totality of external forces: Business environment is the sum total of all things external to business firms and, as such, is aggregative in nature.

(ii) Specific and general forces: Business environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and supp­liers) affect individual enterprises directly and immediately in their day-to-day working. General forces (such as social, political, legal and technological conditions) have impact on all business enterprises and thus may affect an individual firm
only indirectly.

(iii) Inter-relatedness: Different elements or parts of business environment are closely inter-related. For example, increased life expectancy of people and increased awareness for health care have increased the demand for many health products and services like soft drinks, fat-free cooking oil, and health resorts. New health products and services have, in turn, changed people’s life styles.

(iv) Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms of technological imp­rovement, shifts in consumer preferences or entry of new competition in the market.

(v) Uncertainty: Business envir­onment is largely uncertain as it is very difficult to predict future happenings, especially when environment changes are taking place too frequently as in the case of information tech­nology or fashion industries.

(vi) Complexity: Since business env­ironment consists of numerous interrelated and dynamic conditions or forces which arise from different sources, it becomes difficult to comprehend at once what exactly constitutes a given environment. In other words, environment is a complex phenomenon that is relatively easier to understand in parts but difficult to grasp in its totality. For example, it may be difficult to know the extent of the relative impact of the social, economic, political, technological or legal factors on change in demand of a product in the market.

(vii) Relativity: Business environment is a relative concept since it differs from country to country and even region to region. Political conditions in the USA, for instance, differ from those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.

Importance of Business Environment

Just like human beings, business enterprises do not exist in isolation. Each business firm is not an island unto itself; it exists, survives and grows within the context of the element and forces of its environment. While an individual
firm is able to do little to change or control these forces, it has no alternative to responding or adapting according to them. A good understanding of environment by business managers enables them not only to identify and evaluate, but also to react to the forces external to their firms. The importance of business environment and its understanding by managers can be appreciated if we consider the following facts:

(i) It enables the firm to identify opportunities and getting the first mover advantage: Opportunities refer to the positive external trends or changes that
will help a firm to improve its performance. 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. For example, Maruti Udyog became the leader in the small car market because it was the first to recognise the need for small cars in an environment of rising petroleum prices and
a large middle class population in India.

(ii) It helps the firm to identify threats and early warning signals: Threats refer to the external environment trends and changes that will hinder a firm’s performance. Besides oppor­tunities, environment happens to be the source of many threats. Environmental awareness can help managers to identify various threats on time and serve as an early warning signal. For example, if an Indian firm finds that a foreign multinational is entering the Indian market with new substitutes, it should act as a warning signal. On the basis of this information, the Indian firms can prepare themselves to meet the threat by adopting such measures as improving the quality of the product, reducing cost of the production, engaging in aggr­essive advertising, and
so on.

(iii) It helps in tapping useful resources: Environment is a source of various resources for running a business. To engage in any type of activity, a business enterprise assembles various resources called inputs like finance, machines, raw materials, power and water, labour, etc., from its environment including financiers, government and suppliers. They decide to provide these resources with their own expectations to get something in return from the enterprise. The business enterprise supplies the environment with its outputs such as goods and services for customers, payment of taxes to government, return on financial investment to investors and so on. Because the enterprise depends on the environment as a source of inputs or resources and as an outlet for outputs, it only makes sense that the enterprise designs policies that allow it to get the resources that it needs so that it can convert those resources into outputs that the environment desires. This can be done better by understanding what the environment has to offer.

(iv) It helps in coping with rapid changes: Today’s business envir­onment is getting increasingly dynamic where changes are taking place at a fast pace. It is not the fact of change itself that is so important as the pace of change. Turbulent market conditions, less brand loyalty, divisions and sub-divisions (fragmentation) of markets, more demanding customers, rapid changes in technology and intense global competition are just a few of the images used to describe today’s business environment. All sizes and all types of enterprises are facing increasingly dynamic environment. In order to eff­ectively cope with these signifi­cant changes, managers must understand and examine the environment and develop suit­able courses of action.

(v) It helps in assisting in planning and policy formulation: Since environment is a source of both opportunities and threats for a business enterprise, its understanding and analysis can be the basis for deciding the future course of action (planning) or training guidelines for decision making (policy). For instance, entry of new players in the market, which means more competition may make an enterprise think afresh about how to deal with the situation.

(vi) It helps in improving performance: The final reason for underst­anding business environment relates to whether or not it really makes a difference in the performance of an enterprise. The answer is that it does appear to make a difference. Many studies reveal that the future of an enterprise is closely bound up with what is happening in the environment. And, the enter­prises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.

Dimensions of Business Environment

Dimensions of, or the factors cons­tituting the business environment include economic, social, techno­logical, political and legal conditions which are considered relevant for decision-making and improving the performance of an enterprise. In contrast to the specific environment, these factors explain the general environment which mostly influences many enterprises at the same time. However, management of every enterprise can benefit from being aware of these dimensions instead of being disinterested in them. For instance, scientific research has discovered a technology that makes it possible to produce an energy efficient light bulb that lasts at least twenty times as long as a standard bulb. Senior managers in the lighting divisions at General Electric and Phillips recognised that this discovery had the potential to significantly affect their unit growth and profitability, So they have carefully followed the progress on this research and profitably used its findings. A brief discussion of the various factors constituting the general environment of business is given below:

(i) Economic Environment: Int­erest rates, inflation rates, changes in disposable income of people, stock market indices and the value of rupee are some of the economic factors that can affect management practices in a business enterprise. Short and long term interest rates significantly affect the demand for product and services. For example, in case of construction companies and automobile manufacturers, low longer-term rates are beneficial because they result in increased spending by consumers for buying homes and cars on borrowed money. Similarly, a rise in the disposable income of people due to increase in the gross domestic product of a country creates increasing demand for products. High inflation rates generally result in constraints on business enterprises as they increase
the various costs of business such as the purchase of raw materials or machinery and payment of wages and salaries to employees.

Dimensions of Business Environment

(ii) Social Environment: The social environment of business include the social forces like customs and traditions, values, social trends, society’s expectations from business, etc. Traditions define social practices that have lasted for decades or even centuries. For example, the celebration of Diwali, Eid, Christmas, and Guru Parv in India provides significant financial opportunities for gree­tings card companies, sweets or confectionery manufacturers, tailoring outlets and many other related business. Values refer to concepts that a society holds in high esteem. In India, individual freedom, social justice, equality of opportunity and national integration are examples of major values cherished by all of us. In business terms, these values translate into freedom of choice in the market, business’s responsibility tow­ards the
society and non-discriminatory employ­ment practices. Social trends present various opportunities and threats to business enterprises. For example, the health-and-fitness trend has become popular among large number of urban dwellers. This has created a demand for products like organic food, gyms, bottled (mineral) water and food supplements.

(iii) Technological Environment: Technological environment
includes forces relating to scientific improvements and innovations which provide new ways of prod­ucing goods and services and new methods and techniques of operating a business. For exa­mple, recent technological, adva­nces in computers and electro­nics have modified the ways in which companies advertise their products. It is common now to see computerised inform­ation kiosks, and World Wide Web multimedia pages highlighting the virtues of products. Similarly, retailers have direct links with suppliers who replenish stocks when needed. Manufacturers have flexible man­ufacturing systems. Airline com­panies have Internet and World Wide Web pages where customers can look for flight times, desti­nations and fares and book their tickets online. In addition, cont­inuing innovations in different scientific and engineering fields such as lasers, robotics, biotech­nology, food preservatives, medi­cine, telecommunication and synthetic fuels have provided numerous opportunities and threats for many different enterprises. Shifts in demand from vaccum tubes to transistors, from steam locomotives to die­seland electric engines, from fou­ntain pens to ballpoint, from propeller airplanes to jets, and from typewriters to computer based word processors, have all been responsible and creating new business.

(iv) Political Environment: Political environment includes political conditions such as general stability and peace in the coun-try and specific attitudes that elected government representatives hold towards business. The significance of political conditions in business success lies in the predictability of business activities under stable political conditions. On the other hand, there may be uncertainty of business activities due to political unrest and threats to law and order. Political stability, thus, builds up confidence among business people to invest in the long term projects for the growth of the economy. Political instability can shake that confidence. Similarly, the attitudes of government officials towards business may have either positive or negative impact upon business.

(v) Legal Environment: Legal envi­ronment includes various legis­lations passed by the Government administrative orders issued by government authorities, court judgments as well as the decisions rendered by various commissions and agencies at every level of the government— centre, state or local. 

Major Elements of Social Environment

Activity II

SOCIAL ENVIRONMENT

Contact any ten families known to you. Find out the changes in their consumption

habits over the last five years. Analyse the impact of these changes on the working

of business enterprises

Indian Railway Catering and Tourism Corporation ltd.

(A Government of India Enterprise)

E-TICKET BOOKING ON THIS WEBSITE - A GUIDE

•  Register as an individual. Registration is FREE.
  
•  Login by entering your user name and password.
  
• The ‘Plan my travel and Book tickets’ page appears.
  
• Use ‘HELP’ option for any help required to book tickets.

•  Fill in the details, by followingthe guidelines given below
  

Because of technological advancement, it has become possible to book

railway tickets through Internet from home, office etc..

Economic Environment in India

The economic environment in India consists of various macro-level factors related to the means of production and distribution of wealth which have an impact on business and industry. These include:

(a) Stage of economic development of the country.

(b) The economic structure in the form of mixed economy which recognises the role of both public and private sectors.

(c) Economic policies of the Govern­ment, including industrial, mone-tary and fiscal policies.

(d) Economic planning, including five year plans, annual budgets, and so on.

(e) Economic indices, like national income, distribution of income, rate and growth of GNP, per capita income, disposal personal income, rate of savings and investments, value of exports and imports, balance of payments, and so on.

(f) Infrastructural factors, such as, financial institutions, banks,
modes of transportation commu­nication facilities, and so on.

Business enterprises in India do realise the importance and impact of the economic environment on their working. Almost all annual company reports presented by their chairpersons devote considerable attention to the general economic environment prevailing in the country and an assessment of its impact on their companies.

The economic environment of business in India has been steadily changing mainly due to the government policies. At the time of Independence:

(a) The Indian economy was mainly agricultural and rural in character;

(b) About 70% of the working population
was employed in agriculture;

(c) About 85% of the population was living in the villages;

(d) Production was carried out using irrational, low productivity technology;

(e) Communicable diseases were widespread, mortality rates were high. These was no good public health system.

In order to solve economic problems of our country, the government took several steps including control by the State of certain industries, central planning and reduced importance of the private sector. The main objectives of India’s development plans were:

(a) Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty;

(b) Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries;

(c) Reduce inequalities of income and wealth;

(d) Adopt a socialist pattern of development — based on equality and prevent exploitation of man by man.

In accordance with the economic planning, the government gave a lead role to the public sector for infrastructure industries whereas the private sector was broadly given the responsibility of developing consumer goods industry. At the same time, the government imposed several restrictions, regulations and controls on the working of private sector enterprises. India’s experience with economic planning has delivered mixed results. In 1991 the economy faced a serious foreign exchange crisis, high government deficit and a rising trend of prices despite bumper crops.

As a part of economic reforms, the Government of India announced a new industrial policy in July 1991.

The broad features of this policy were as follows:

(a) The Government reduced the number of industries under compulsory licensing to six.

(b) Many of the industries reserved for the public sector under the earlier policy, were dereserved. The role of the public sector was limited only to four industries of strategic importance.

(c) Disinvestment was carried out in case of many public sector industrial enterprises.

(d) Policy towards foreign capital was liberalised. The share of foreign equity participation was increased and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted.

(e) Automatic permission was now granted for technology agree­ments with foreign companies.

(f) Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign investment in India.

Appropriate measures were taken to remove obstacles in the way of growth and expansion of industrial units of large industrial houses. Small-scale sector was assured all help and accorded due recognition.

In essence, this policy has sought to liberate industry from the shackles of the licensing system (liberalisation), drastically reduce the role of the public sector (privatisation) and encourage foreign private participation in India’s industrial development (globalisation).

Liberalisation: The economic reforms that were introduced were aimed at liberalising the Indian business and industry from all unnecessary controls and restrictions. They signalled the end of the licence-pemit-quota raj. Liberalisation of the Indian industry has taken place with respect to:

(i) abolishing licensing requirement in most of the industries except a short list,

(ii) freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities,

(iii) removal of restrictions on the movement of goods and services,

(iv) freedom in fixing the prices of goods services,

(v) reduction in tax rates and lifting of unnecessary controls over the economy,

(vi) simplifying procedures for imports and experts, and

(vii) making it easier to attract foreign capital and technology
to India.

Privatisation: The new set of econo­mic reforms aimed at giving greater role to the private sector in the nation building process and a reduced role
to the public sector. This was a reversal of the development strategy pursued so far by Indian planners. To achieve this, the government redefined the role of the public sector in the New Industrial Policy of 1991, adopted the policy of planned disinvestments of the public sector and decided to refer the loss making and sick enterprises to the Board of Industrial and Financial Reconstruction. The term disinvestments used here means transfer in the public sector enterprises to the private sector. It results in dilution of stake of the Government in the public enterprise. If there is dilution of Government ownership beyond 51 percent, it would result in transfer of ownership and management of the enterprise to the private sector.

Globalisation: Globalisation means the integration of the various eco­nomies of the world leading towards the emergence of a cohesive global economy. Till 1991, the Government of India had followed a policy of strictly regulating imports in value and volume terms. These regulations were with respect to (a) licensing of imports, (b) tariff restrictions and (c) quantitative restrictions. The new economic reforms aimed at trade liberalisation were directed towards import liberalisation, export promotion through rationalisation of the tariff structure and reforms with respect to foreign exchange so that the country does not remain isolated from the rest of the world. Globalisation involves an increased level of interaction and interdependence among the various nations of the global economy. Physical geographical gap or political boundaries no longer remain barriers for a business enterprise to serve a customer in a distant geographical market. This has been made possible by the rapid advancement in technology and liberal trade policies by Governments. Through the policy of 1991, the government of India moved the country to this globalisation pattern.

Demonetisation: The Government of India, made an announcement on November 8, 2016 with profound implications for the Indian economy. The two largest denomination notes, `500 `1,000, were ‘demonetised’ with immediate effect, ceasing to be legal tender except for a few specified purposes such as paying utility bills. This led to eighty six per cent of the money in circulation invalid. The people of India had to deposit the invalid currency in the banks which came along with the restrictions placed on cash withdrawals. In other words, restrictions were placed on the convertibility of domestic money and bank deposits.

The aim of demonetisation was to curb corruption, counterfeiting the use of high denomination notes for illegal activities; and especially the accumulation of ‘black money’ generated by income that has not been declared to the tax authorities.

Features

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 taxes at a penalty rate.

2. Demonetisation is also interpreted as a shift on the part of the government indicating that tax evasion will no longer be tolerated or accepted.

3. Demonetisation also led to tax administration channelizing savings into the formal financial system. Though, much of the cash that has been deposited in the banking system is bound to be withdrawn but some of the new deposits schemes offered by the banks will continue to provide a base loans, at lower interest rates.

4. Another feature of demonetisation is to create a less-cash or
cash-lite economy, i.e., channeling more savings through the formal financial system and improving tax compliance. Though there are arguments against this as digital transactions require use of cell phones for customers and Point-of-Sale (PoS) machines for merchants, which will only work if there is internet connectivity. On the contrary, these disadvantages are counterbalanced by an understanding that it helps people into the formal economy

Impact of Government Policy Changes on Business and Industry

The policy of liberalisation, privati­sation and globalisation of the Gover­nment has made a significant impact on the working of enterprises in business and industry. The Indian corporate sector has come face-to-face with several challenges due to government policy changes. These challenges can be explained as follows:

(i) Increasing competition: As a result of changes in the rules of industrial licensing and entry of foreign firms, competition for Indian firms has increased especially in service industries like telecommunications, airlines, banking, insurance, etc. which were earlier in the public sector.

(ii) More demanding customers: Customers today have become more demanding because they are well-informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services.

(iii) Rapidly changing technological environment: Increased com­petition forces the firms to develop new ways to survive and grow in the market. New technologies make
it possible to improve machines, process, products and services. The rapidly changing technological environment creates tough challe­nges before smaller firms.

(iv) Necessity for change: In a regulated environment of pre-1991 era, the firms could have relatively stable policies and practices. After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.

(v) Need for developing human resource: Indian enterprises have suffered for long with inadequately trained personnel. The new market conditions require people with higher competence and greater commi­tment. Hence the need for developing human resources.

(vi) Market orientation: Earlier firms used to produce first and go to the market for sale later. In other words, they had production oriented marketing operations. In a fast changing world, there is a shift to market orientation in as much as the firms have to study and analyse the market first and produce goods accordingly.

(vii) Loss of budgetary support to the public sector: The central government’s budgetary support for financing the public sector outlays has declined over the years. The public sector undertakings have realised that, in order to survive and grow, they will have to be more efficient and generate their own resources for the purpose.

On the whole, the impact of Government policy changes particularly in respect of liberalisation, privatisation and globa­lisation has been positive as the Indian business and industry has shown great resilience in dealing with the new economic order. Indian enterprises have developed strategies and adopted business processes and procedures to meet the challenge of competition. They have become more customer-focused and adopted measures to improve customer relationship and satisfaction.

Key Terms

Exercises

Very Short Answer Type:

1. What is meant by business environment?

2. How does understanding of business environment help in improving performance of a business?

3. Give an example to show that a business firm operates within numerous inter related factors constituting the business environment.(Hint: example highlighting the inter relatedness of dimensions of business environment).

4. Krishna Furnishers Mart started its operations in the year 1954 and emerged as the market leader in the industry because of their original designs and efficiency in operations. They had a steady demand for their products but over the years, they found their market share declining because of new entrants in the field. The firm decided to review their operations and decided that in order to meet the competition, they need to study and analyze the market trends and then design and develop their products accordingly. List any two impacts of changes in business environment on Krishna Furnishers Mart’s operations. (Hint: increase in competition and Market orientation).

5. Name any two Specific forces of business environment affecting business.

Short Answer Type:

1. Why it is important for business enterprises to understand their environment? Explain.

2. Explain the following terms:

a. Liberalisation

b. Privatization

c. Globalisation

3. Briefly discuss the impact of Government policy changes onbusiness and industry.

4. National Digital Library of India (NDL India) is a pilot project initiated by the HRD ministry. It works towards developing a framework of virtual repository of learning resources with a single-window search facility. It provides support to all academic levels including researchers, life-long learners and differently-abled learners free of cost. State the dimensions of business environment highlighted above.

5. State the impact of demonetization on interest rates, private wealth and real estate.

Long Answer Type:

1. How would you characterize business environment? Explain with examples, the difference between general and specific environment.

2. How would you argue that the success of a businessenterprise is significantly influenced by its environment?

3. Explain, with examples, the various dimensions of businessenvironment.

4. The government of India announced Demonetization of ` 500 and ` 1,000 currency notes with effect from the midnight of November 8, 2016. As a result, the existing ` 500 and
` 1,000 currency notes ceased to be legal tender from that date. New currency notes of the denomination of ` 500 and ` 2,000 were issued by Reserve Bank of India after the announcement.

This step resulted in a substantial increase in the awareness about and use of Point of Sale machines, e-wallets, digital cash and other modes of cashless transactions. Also, increased transparency in monetary transactions and disclosure led to a rise in government revenue in the form of tax collection.

a. Enumerate the dimensions of business environment highlighted above.

b. State the features of Demonetization.

5. What economic changes were initiated by the Government under the Industrial Policy, 1991? What impact have these changes made on business and industry?

6. What are the essential features of:

a. Liberalisation,

b. Privatization and

c. Globalisation?