Introduction and Feature & Importance of Business Environment

Business Environment: Means the external forces influencing the business decisions. They can be forces of economic, social, political and technological factors. These factors are outside the control of the business.


  1. Complexity:
  • Environment is  easier to understand in parts but difficult to understand as a whole
  • Easier to understand the fall in demand but difficult to explain the reasons for fall
  1. Relativity:
  • Differs from country to country and even region to region. Political conditions in Gujarat are, different from Kashmir
  • Demand for woolen is high in north India and not in south India
  1. Dynamic nature:
  • Keeps on changing in terms of technological improvement, consumer preferences, or entry of new competition in the market.
  • Urbanization has increased the demand for housing
  1. External forces:
  • Sum total of all things external to business firms and, as such, is aggregative in nature
  1. Specific and general forces:
  • Specific forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly.
  • General forces (such as social, political, legal and technological conditions) affect an individual firm indirectly.
  1. Inter-relatedness:
  • Different forces in a business environment are closely interrelated.
  • For example, health awareness has increased the demand for many health products like diet Coke, fat-free cooking oil, gyms, etc
  1. 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

Importance of Business Environment

  1. Recognize Opportunities To Get The First Mover Advantage

Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors.

    • Maruti Udyog became the leader in the small car market because it was the first to recognize the need for small cars in India.
  1. Assist In Improving Performance:
    • The enterprises continuously observing the environment can succeed in the market for a longer period. MCDONALS TIKKI CHTAT
    • A leading food service retailer with 155 restaurants in India, McDonald’s India caters to 3 lakh customers every single day
  2. Coping with rapid changes:
    •  All sizes and all types of enterprises are facing an increasingly dynamic environment.
    •  To cope with changes, managers must understand the environment and develop a suitable plan. Increasing traffic in Delhi led to the development METRO.
  3. Early Warning Signals And Threats
    • Threats refer to the external environment trends and changes that will hinder a firm’s performance.
    • Environmental awareness can help managers to identify various threats on time and serve as an

early warning signal

    • Indian firms can compete with foreign firms by improving the quality of the product, reducing the cost of production, engaging in aggressive advertising, and so on.

                                FMCG major GODREJ is competing with foreign giants like HUL, Pepsi

  1. Resources utilization
    • Environment is a source of various resources for running a business.
    • Business enterprise uses various resources called inputs like finance, machines, and raw materials
  2. Support In Planning And Policy Formulation
    • Environment brings both opportunities and threats for a business enterprise.
    • Its understanding can convert threats into opportunities.

Dimensions of Business Environment

Enterprises that continuously monitor the environment and adopt suitable business practices are the ones that not only improve their present performance but also continue to succeed in the market for a longer period. Businesses must get the resources to convert input into outputs.

Macro Business Environment

Economic environment

  • Consist of Interest rates, inflation rates, changes in disposable income of people; stock market indices and the value of rupee
  • For Example, in the 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.
  • Rise in the disposable income of people creates an 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.

Social environment

  • Include the social forces like customs and traditions, values, social trends, society’s expectations from business, etc.
  •  For example, the celebration of festivals provides opportunities for greetings card companies, sweets or confectionery manufacturers, etc
  • Social trends present various opportunities and threats to business enterprises.
  • For example, the health-and-fitness trend has become popular among a large number of urban dwellers. This has created a demand for products like organic food, diet soft drinks, gyms, bottled (mineral) water and food supplements.
  • This trend has, however, harmed business in other industries like dairy processing, tobacco and liquor.

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.
  • .Airline companies have Internet and World Wide Web pages where customers can look for flight times, destinations and fares and book their tickets online.
  • Shifts in demand for 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.

Political Environment:

  • Political conditions such as general stability and peace in the country and specific attitudes that elected government representatives hold towards business.
  • On the other hand, there may be uncertainty in business activities due to political unrest and threats to law and order.
  • Political stability, thus, builds up confidence among business people to invest in long-term projects for the growth of the economy.
  •  Similarly, the attitudes of government officials towards business may have either positive or negative impacts on business.
  • For example, even after opening up our economy in 1991, foreign companies found it extremely difficult to cut through the bureaucratic red tape to get permits for doing business in India.

Legal Environment:

  • Various legislation 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— center, state or local.
  • Adequate knowledge of rules and regulations framed by the Government is a requirement for better business performance.
  • Non-compliance with laws can land the business enterprise into legal problems.
  • Knowledge of Companies Act 1956 Consumer Protection Act, 1986, Competition Act, 2012-2013
  • For example, the advertisement of alcoholic beverages is prohibited. Advertisements, including packets of cigarettes, carry the statutory warning ‘Cigarette smoking is injurious to health’.


  1. Liberalizing the Indian business and industry from all unnecessary controls and ending the license-permit-quota raj.
  2. Freedom in fixing the prices of goods and services.
  3. Abolishing licensing requirements in most industries.
  4. Reduction in tax rates and lifting of unnecessary controls over the economy.
  5. Making it easier to attract foreign capital and technology to India.
  6. Simplifying procedures for imports and experts.


  • Giving a greater role to the private sector and a reduced role to the public sector.
  • To improve the efficiency of PSUs by giving them autonomy
  • Transferring the public sector enterprises to the private sector by disinvestment


  • Mixing the economy of the country with the world economy.
  • Creation of networks and activities to go beyond economic, social and geographical boundaries.
  • Increased level of interaction and interdependence among the various nations of the global economy.

Impact of Government changes on Business & Industry

Impact of Government Policy Changes on Business and Industry

  1. Market orientation
  • Earlier firms used to produce first and go to the market for sale later.
  • Now firms have to study and analyze the market first and produce goods according to customer needs
  • McDonald TIKKI Chat in Indian context
  1. Increasing competition:
  • New industrial licensing and entry of foreign firms have increase competition for Indian firms in service industries like telecommunications, airlines, banking, and insurance.
  • Maruti is facing competition from both Tata Motors and Hyundai
  1. Reduction of budgetary support to the public sector :
  • The central government’s budgetary support for financing the public sector  has declined
  • To survive and grow, PSU’s will have to be more efficient and generate their resources
  1. Important for change:
  • After 1991, firms have to continuously modify their operations through mergers, acquisitions, takeovers to grow
  • Understanding the needs of Indian customers CoKe takeover thumbs up, Limca from
  1. Need for developing human resources:
  • Need for developing human resources: Indian enterprises have suffered for a long with inadequately trained personnel.
  • The new market conditions require people with higher competence and greater commi­tment. Hence the need for developing human resources.
  1. Demanding customers:
  • With awareness and Increased competition in the market
  • Customers have a wider choice in purchasing better quality goods and services.
  • Price war in the telecom sector
  1. Adopt the 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, processes, products and services.
  • The rapidly changing technological environment creates tough challenges before a smaller firm



  • The Government of India, made an announcement on November 8, 2016 with thoughtful implications for the Indian economy.
  • The two largest denomination notes,   Rs 500 Rs 1,000, were ‘demonetized’ 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.

Aim of demonetization

  • To curb corruption,
  • Counterfeit 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.


  1. 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. Check on tax evasion: - Demonetization is also interpreted as a shift on the part of the government indicating that tax evasion will no longer be tolerated or accepted.
  3. 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 loan, at lower interest rates.
  4. Create a less-cash or cash-lite economy:-  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.

Impact of demonetization


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