Business Environment

Business environment refers to 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.

It helps by enabling the firm to:

• Identify opportunities and get the first mover advantage.
• Identify threats and early warning signals.
• Tap useful resources.
• Cope with rapid changes.

Example: Increased awareness of health (Social Environment) has led to an increase in the demand for organic food and roasted snacks. This has, in turn, shifted demand away from fried snacks and soft drinks (Economic Environment), impacting the business of both industries differently.

The two impacts of the changing environment highlighted are:

1. Increasing Competition: Due to the entry of new players in the field.
2. Market Orientation: The firm shifted focus to studying market trends and designing products according to customer needs rather than just producing what they were efficient at.

1. Investors
2. Customers
3. (Others: Competitors, Suppliers)

Understanding the environment is crucial because:

• First Mover Advantage: Helps identify opportunities early (e.g., Maruti Suzuki in small cars).
• Early Warning Signal: Helps identify threats (e.g., Entry of MNCs alerts domestic firms to improve quality).
• Tapping Useful Resources: The enterprise designs policies to get resources (finance, labor) that the environment demands.
• Coping with Rapid Changes: Helps adapt to turbulent market conditions like technological shifts.

• a. Liberalisation: Removing unnecessary controls and restrictions on the economy (e.g., abolishing licensing, freedom in fixing prices).
• b. Privatization: Giving a greater role to the private sector and reducing the role of the public sector (e.g., disinvestment of PSUs).
• c. Globalisation: Integrating the national economy with the world economy through free flow of trade, capital, and technology.

Dimensions Highlighted:

1. Technological Environment: Development of a “virtual repository” and “digital library” framework.
2. Social Environment: Concern for “life-long learners” and providing equal access to “differently-abled learners” (social welfare/literacy).

• Interest Rates: Declined. (Bank deposits increased, leading to lower cost of funds and lower lending rates).
• Private Wealth: Declined. (Since some high-denomination notes were not returned/demonetized, and real estate prices fell).
• Real Estate: Prices declined. (Due to the cash crunch and curbing of black money often used in this sector).

[Image of components of business environment diagram]
Characterization (Features):

• Totality of external forces: It is the sum of all things external to the firm.
• Dynamic nature: It keeps changing (technology, consumer taste).
• Uncertainty: It is difficult to predict future events.
• Complexity: Easy to understand in parts but difficult in totality.

Difference:

Specific Environment	General Environment
Forces that affect individual enterprises directly and immediately.	Forces that affect all business enterprises indirectly.
Examples: Investors, Customers, Competitors, Suppliers.	Examples: Social, Political, Legal, Technological conditions.

A business does not exist in a vacuum; it is a part of a larger environment. Success depends on adapting to it because:

• Survival: Firms that fail to adapt to changes (e.g., Nokia failing to adopt Android/Smartphones initially) lose market share or close down.
• Growth: Identifying opportunities in the environment (e.g., increasing health consciousness) allows firms to launch new products (e.g., Diet Coke, Oats) and grow.
• Input-Output System: Business takes inputs (finance, labor) from the environment and gives outputs (goods, taxes) back to it. Without environmental support, operations stop.

[Image of PESTLE analysis diagram]

1. Economic Environment: Interest rates, inflation, GDP. Example: Lower interest rates boost demand for home loans and cars.
2. Social Environment: Customs, values, trends. Example: Celebration of Diwali increases demand for sweets and gifts.
3. Technological Environment: Scientific improvements. Example: Shift from typewriter to computer; booking tickets online.
4. Political Environment: Government stability and ideology. Example: “Make in India” campaign boosting manufacturing.
5. Legal Environment: Legislation and court judgments. Example: Mandatory warning on cigarette packets.

a. Dimensions Highlighted:

• Political Environment: Government announcement/decision to demonetize.
• Legal Environment: Ceasing the legal tender status of old notes.
• Technological Environment: Rise in use of PoS machines, e-wallets, and digital cash.
• Economic Environment: Impact on money supply, transparency, and tax revenue.

b. Features of Demonetization:

• Tax Administration Measure: Treated as a tool to catch tax evaders.
• Channelizing Savings: Savings moved from cash to the formal financial system (Banks).
• Cashless Economy: Promoting digital transfer of funds to reduce cash dependence.

Changes Initiated (LPG):

• Abolition of industrial licensing (except for a few hazardous industries).
• De-reservation of industries for the public sector (reduced to 3: Atomic energy, Railways, Defense).
• Liberalization of foreign capital (FDI) and technology.

Impact on Business and Industry:

1. Increasing Competition: From MNCs and new private players.
2. More Demanding Customers: Wider choice and better quality available.
3. Rapidly Changing Technology: Firms forced to upgrade to survive.
4. Necessity for Change: Enterprises have to continuously modify operations.
5. Need for Developing Human Resources: Demand for higher competence and skills.
6. Market Orientation: Shift from production-oriented to market-oriented approach.
7. Loss of Budgetary Support to Public Sector: PSUs have to generate their own resources to survive.