Business environment

Unit 1

Introduc on to business environment

Meaning

The word ‗business environment‘ indicates the aggregate total of all people, organisa ons and other
forces that are outside the power of industry but that may affect its produc on.

The business environment refers to the external and internal factors that influence a company's
opera ons, performance, and success. It comprises the condi ons, trends, and forces that affect a
business’s ability to compete, grow, and achieve its objec ves.

Nature/ Features of Business Environment

 The totality of External Forces : Business environment includes everything which is outside
the organisa on. If we add all these forces, they will form a business environment.
 Specific and General Forces Specific forces are those forces which directly affect the
opera onal ac vi es of the business enterprise. Example: Suppliers, Customers, Investors,
Compe tors, Financers etc. General forces are those forces which indirectly affect the
func oning of business enterprises.
 Dynamic: The business environment is constantly changing due to factors such as
technological advancements, policy changes, and shi s in consumer preferences. Businesses
must remain adaptable to survive and grow.
 Complex: the business environment consists of numerous interrelated elements. Changes in
one factor can influence others
 Uncertain: The business environment is unpredictable, with elements like market trends and
regulatory changes o en evolving unexpectedly. This uncertainty requires businesses to be
adap ve and flexible.
 Inter-relatedness: Different forces of business environment are interrelated to each other.
One component of the business environment affects the func oning of other components
 Rela vity : Business Environment differs from place to place, region to region and country to
country.

Scope of business environment

 Economic Environment: Includes economic condi ons, policies, and systems that influence
business ac vi es, such as infla on, interest rates, economic growth, and income levels.
 Poli cal and Legal Environment: Consists of government policies, regula ons, legal systems,
and poli cal stability. Changes in tax policies, labor laws, and foreign trade regula ons can
directly impact business opera ons, investment, and strategic decisions.
 Social and Cultural Environment: Encompasses societal values, beliefs, lifestyles,
demographics, and cultural norms. These factors influence consumer behavior and
expecta ons
 Technological Environment: Refers to technological advancements and innova ons that
affect produc on processes, product offerings, and compe ve advantage
 Global Environment: The global environment includes interna onal factors such as
globaliza on, foreign trade policies, and global market trends.
Importance of business environment

1 . It Helps in Iden fying Opportuni es and Making First Mover Advantage:-

 The environment provides numerous opportuni es, and it is necessary to iden fy the
opportuni es to improve the performance of a business. Early iden fica on gives an
opportunity to an enterprise be the first to iden fy opportunity instead of losing them to
compe tors.

2. It Helps the Firm Iden fy Threats and Early Warning Signals

 The business environment helps in understanding the threats which are likely to happen in
the future. Environmental awareness can help managers iden fy various threats on me and
serve as an early warning signal.

3. It Helps in Tapping Useful Resources

 Business and industry avail the resources (inputs) from the environment and convert them
into usable products (outputs) and provide to society. The environment provides various
inputs (resources) the like finance, machines, raw materials, power and water, labour, etc.

4. It Helps in Coping With Rapid Changes

 The business environment is changing very rapidly, and the industry is ge ng affected by
changing market condi ons. It helps in coping with the changes

5. It Helps in Assis ng in Planning and Policy Formula on

 The business environment brings both threats and opportuni es to a business. Awareness of
business environment helps in deciding future planning or decision making

6. It Helps in Improving Performance

 Environmental studies reveal that the success of any enterprise is closely bound with the
changes in the environment. The enterprises which monitor and adopt suitable business
prac ces not only improve their performance but become leaders in the industry also.

Types of business environment

Business Environment has two components:

1. Internal Environment

2. External Environment

INTERNAL ENVIRONMENT

Internal environment contains the owner of the business, the shareholders, the managing director,
the nonmanagers, employees, the customers, the infrastructure of the business organiza on, and
the culture of the organiza on.

It includes 5 Ms i.e. man, material, money, machinery and management, usually within the control of
business.

 Human resource (man) - The human resource is the important factor for any organiza on as
it contributes to the strength and weakness of any organiza on. The human resource in any
 organiza on must have characteris cs like skills, quality, high morale, commitment towards
the work, a tude, etc
 Financial Factors (MONEY) - Factors like financial policies, financial posi ons and capital
structure are another important internal factor which has a substan al impact on business
func oning and performance.
 Marke ng Resources - Resources like the organiza on for marke ng, quality of the marke ng
men, brand equity and distribu on network have direct impact on marke ng efficiency of
the company and thereby, affec ng the decision making component of the management.
 Physical Assets and Facili es - Facili es like produc on capacity, technology are among the
factors which influences the compe veness of the firm An organisa on invests money in
plant and machinery because it expects a posi ve rate of return over cost in future
 Management Structure and Nature - The structure of the organiza on also influences the
business decisions . The structure and style of the organiza on directly has an impact on the
decision making decisions of a firm. These need to be appropriately managed for smooth
func oning and opera ons

EXTERNAL ENVIRONMENT

Those factors which are beyond the control of business enterprise are included in external
environment. These factors are: Government and Legal factors, GeoPhysical Factors, Poli cal Factors,
Socio-Cultural Factors, Demo-Graphical factors etc

It is of two Types:

1. Micro/Opera ng Environment

2. Macro/General Environment

Micro/Opera ng Environment:

The environment which is close to business and affects its capacity to work is known as Micro or
Opera ng Environment. It consists of :-

(1) Suppliers: – They are the persons who supply raw material and required components to the
company. They must be reliable and business Environment must have mul ple suppliers i.e. they
should not depend upon only one supplier.

(2) Customers: - Customers are regarded as the king of the market. Success of every business
depends upon the level of their customer‘s sa sfac on. Types of Customers: (i) Wholesalers (ii)
Retailers (iii) Industries (iv) Government and Other Ins tu ons (v) Foreigners

3) Market Intermediaries: - They work as a link between business and final consumers. Types:- (i)
Middleman (ii) Marke ng Agencies (iii) Financial Intermediaries (iv) Physical Intermediaries

4) Compe tors: - Every move of the compe tors affects the business. Business has to adjust itself
according to the strategies of the Compe tors.

(5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media
and local public.

Macro/General Environment: – It includes factors that create opportuni es and threats to business
units. Following are the elements of Macro Environment:
(1) Economic Environment: - It is very complex and dynamic in nature that keeps on changing with
the change in policies or poli cal situa ons. It has three elements: (i) Economic Condi ons of Public
(ii) Economic Policies of the country (iii) Economic System

(2) Non-Economic Environment: - Following are included in non-economic environment:-

(i) Poli cal Environment: - It affects different business units extensively. Components: (a) Poli cal
Belief of Government (b) Poli cal Strength of the Country (c) Rela on with other countries

(ii) Socio-Cultural Environment: - Influence exercised by social and cultural factors, not within the
control of business, is known as Socio-Cultural Environment

(iii) Technological Environment: - Everyday there has been vast changes in technology, products,
services, lifestyles and living condi ons, these changes must be analyzed by every business unit and
should adapt these changes.

(iv) Natural Environment: - It includes natural resources, weather, clima c condi ons, port facili es,
topographical factors such as soil, sea, rivers, rainfall etc.

(v) Demographic Environment:- It is a study of perspec ve of popula on i.e. its size, standard of
living, growth rate, age-sex composi on, family size, income level, educa on level etc.

(vi) Interna onal Environment: - It is par cularly important for industries directly depending on
import or exports. The factors that affect the business are: Globaliza on, Liberaliza on, foreign
business policies, cultural exchange.

Environmental analysis

Environmental Analysis is described as the process which examines all the components, internal or
external, that has an influence on the performance of the organiza on.

Objec ves of Business Environmental Analysis

1. Help understanding Exis ng Environment

2. Provision of Data for Strategic Decision-making

3. Facilita ng Strategic Linking in Organiza ons

Environmental Analysis Process

The analysis consists of four sequen al steps:

1. Scanning - It involves general surveillance of all environmental factors and their interac ons in
order to: * Iden fy early signals of possible environmental change * Detect environmental change
already underway

2. Monitoring - It involves tracking the environmental trends, sequences of events, or streams of

ac vi es. It frequently involves following signals or indicators unearthed during environmental
scanning.

3. Forecas ng- Naturally, forecas ng is an essen al element in environmental analysis. Forecas ng is

concerned with developing plausible projec ons of the direc on, scope, and intensity of
environmental change.
4. Assessment - In assessment, the frame of reference moves from understanding the environment
to iden fy what the understanding means for the organiza on. Assessment, tries to answer
ques ons such as what are the key issues presented by the environment, and what are the
implica ons of such issues for the organiza on.

Assessing Risk in Business Environment

What is Business Risk?

 Business risk is a component of total risk. Business risk represents the no on that a firm may
experience events or circumstances that create a threat to its ability to con nue opera ng.
 A firm‘s management team is regularly tasked with making decisions about how to grow and
operate a business
 However, every new decision has the poten al to fail and put the company‘s ability to
operate at risk.

Understanding Risk – Business Risks vs. Financial Risks

Broadly speaking, risk can be split up into two main categories – financial risk and business risk

Financial risk

 Financial risk arises when a company relies heavily on debt for funding, also known as
leverage.
 This creates a need for careful management of cash flow, as the company must make regular
principal and interest payments on its debt.
 Financial risk means that the company's commitment to paying off debt, along with mee ng
specific requirements set by lenders, could lead to default if not managed properly.

Business risk

 Business risk, on the other hand, is about internal and external forces that converge to create
threats to a company and its management team

Social responsibility of business

Towards employee

 Fair Wages and Benefits: Providing compe ve and fair wages, benefits, and safe working
condi ons.
 Job Security and Growth: Offering job security, training, career development, and
opportuni es for promo on.
 Work-Life Balance: Encouraging policies that support work-life balance, such as flexible
working hours or leave op ons.
 Health and Safety: Ensuring a safe workplace, preven ng accidents, and addressing physical
and mental well-being.
 Equal Opportunity and Non-Discrimina on: Maintaining a workplace free from
discrimina on and providing equal growth opportuni es

Towards community

 Environmental Sustainability: Reducing pollu on, managing waste, conserving resources,

and suppor ng eco-friendly prac ces.
  Community Development: Inves ng in local infrastructure, suppor ng healthcare,
educa on, and promo ng social welfare.
 Employment Opportuni es: Crea ng jobs and priori zing local hiring to boost economic
growth within the community.
 Ethical Prac ces: Opera ng in a way that respects local customs, values, and complies with
local regula ons.

Towards shareholders

 Transparency and Accountability: Keeping shareholders informed about company

performance and making ethical decisions.
 Profitability and Returns: Ensuring sustainable profitability to provide a reasonable return
on shareholders’ investments.
 Risk Management: Managing business risks responsibly to safeguard shareholders’ interests.

Towards consumers

 Product Quality and Safety: Offering high-quality products that meet safety standards and
deliver what they promise.
 Fair Pricing: Se ng prices that provide value without exploi ng consumers or engaging in
unfair prac ces.
 Customer Service: Providing efficient support and addressing consumer grievances
responsibly.
 Privacy and Data Protec on: Safeguarding consumer data and respec ng privacy in all
transac ons and interac ons.

Compara ve analysis of business environment

Unit 2

Economic environment

The economic environment is the collec on of external economic factors that influence the
func oning of a business, organiza on, or economy as a whole.

It is very complex and dynamic in nature that keeps on changing with the change in policies or
poli cal situa ons

It has three elements:

(i) Economic Condi ons of Public

(ii) Economic Policies of the country
(iii) Economic System

Other Economic Factors: – Infrastructural Facili es, Banking, Insurance companies, money markets,
capital markets etc

Types of economies

Capitalist economy:

 In a capitalist economy, also known as a market economy, the means of produc on and
distribu on are primarily owned and controlled by private individuals and businesses.
Decisions about produc on and pricing are driven by supply and demand in the marketplace.
 the government typically plays a limited role, focusing on protec ng property rights,
enforcing contracts, and maintaining the rule of law. It intervenes only to prevent
monopolies or address market failures.
 In a capitalist system, the products manufactured are divided among people, not according
to what they want but on the basis of purchasing power, which is the ability to buy products
and services.

Socialist economy:

 In a socialist society, the government determines what products are to be manufactured in

accordance with the requirements of the society. It is believed that the government
understands what is appropriate for the ci zens of the country.
 The government concludes how products are to be created and how the product should be
disposed of.
 the government plans and regulates economic ac vity to achieve social goals like equal
access to resources, income equality, and provision of basic needs.

Mixed economy:

 A mixed economy combines elements of both capitalism and socialism, with a blend of
private and public ownership. The government and private sector coexist, with the
government intervening to correct market failures, provide public goods, and ensure social
welfare.
 Moderate to significant; the government regulates certain industries and provides social
safety nets, while the private sector is allowed to operate freely in other areas.
Characteris cs of Indian economy

(a) Indian economy is basically an agricultural economy. More than 60% of the popula on is engaged
in agriculture and allied ac vi es.

(b) Low per capita income is the second feature of Indian economy. It is one of the lowest in the
world.

(c) The occupa onal structure has not been changed during the last 100 years. In 1950-51 about 73%
of the workers were engaged in primary ac vi es, 11% in secondary and 16% in ter ary ac vi es. In
1999-2000 the share of different sectors in employment amounted to 60%, 17% and 23%
respec vely.

(d) Inequality of income and wealth is other important feature of Indian economy. In India the main
resources are concentrated in the hands of the few people. 40% of the total assets is concentrated in
the hands of top 20 percent people.

(e) There has been remarkable improvement in social sectors such as educa on, health, housing,
water supply, civic ameni es etc.

(f) Planning process is also an important feature. As the government has adopted planned
developmental economy. Five years plans are framed for economic development

The new economic policy

 The New Economic Policy, or the NEP, is a policy introduced in India in 1991 aimed at
restoring macroeconomic stability.
 The NEP consisted of several reforms, including the liberalisa on of the financial sector, the
reduc on of import du es, and the removal of subsidies on food, fuel, and fer lisers.
 The NEP aims to make India a global economic leader in sectors such as informa on
technology, innova on, and manufacturing
 The policy also aims to create jobs, reduce poverty, and improve the country‘s infrastructure
 The new economic policy of India, unveiled in 1991, was a dras c change from the socialist
policies that had been in place for decades.
 The goal of the NEP was to open up the Indian economy to foreign investment and promote
economic growth.

India‘s Industrial Policy

 Government ac on to influence the ownership & structure of the industry and its
performance. It takes the form of paying subsidies or providing finance in other ways, or of
regula on.
 It includes procedures, principles (i.e., the philosophy of a given economy), policies, rules
and regula ons, incen ves and punishments, the tariff policy, the labour policy,
government‘s a tude towards foreign capital, etc.

The main objec ves of the Industrial Policy of the Government in India are:

 to maintain a sustained growth in produc vity;

 to enhance gainful employment;

 to achieve op mal u lisa on of human resources;

 to a ain interna onal compe veness; and

 to transform India into a major partner and player in the global arena.

Policy with regard to MSME

 India’s policies regarding Micro, Small, and Medium Enterprises (MSMEs) are focused on
promo ng growth, enhancing compe veness, improving access to finance, and suppor ng
innova on in this vital sector.
 MSMEs are considered the backbone of the Indian economy, accoun ng for around 30% of
GDP and employing over 110 million people

In 2020, the government revised the classification criteria for MSMEs, now based on
investment in plant and machinery/equipment and annual turnover:

 Micro: Investment up to ₹1 crore and turnover up to ₹5 crore.

 Small: Investment up to ₹10 crore and turnover up to ₹50 crore.
 Medium: Investment up to ₹50 crore and turnover up to ₹250 crore.

Monetary and Fiscal Policy

The economic position of a country can be monitored, controlled and regulated by the
sound economic policies. The fiscal and monetary policies of the nation are the two
measures, which can help in bringing stability and developing smoothly.

Definition of Fiscal Policy

 When the government of a country employs its tax revenue and expenditure policies
to influence the overall demand and supply for commodities and services in the
nation‘s economy is known as Fiscal Policy
 It is a strategy used by the government to maintain the equilibrium between
government receipts through various sources and spending over different projects.
 If the revenue exceeds expenditure, then this situation is known as fiscal surplus,
whereas if the expenditure is greater than the revenue, it is known as the fiscal
deficit.
 The main objective of the fiscal policy is to bring stability, reduce unemployment and
growth of the economy

Fiscal policy instuments and their effects on business environment

Fiscal policy instruments are tools used by the government to influence economic activity,
primarily through government spending and taxation. These instruments affect the
business environment by impacting aggregate demand, investment, production costs, and
overall economic stability. Here’s a look at the main instruments and their effects on
businesses:

Fiscal policy instruments include government spending and taxation to influence economic
activity. They affect the business environment by impacting demand, investment, and costs.

Key Instruments:

1. Government Spending: Investments in infrastructure, public services, and industry-

specific incentives boost business growth and productivity.
2. Taxation: Corporate tax rates and consumption taxes affect business profits and
consumer demand. Lower taxes encourage investment, while higher taxes can
reduce demand.
3. Public Debt: Government borrowing can increase interest rates, raising business
borrowing costs.
4. Transfer Payments: Social welfare programs maintain demand even during
economic downturns.

Effects on the Business Environment:

1. Aggregate Demand: Increased spending and lower taxes boost demand, promoting
business expansion.
2. Investment: Tax incentives and reduced rates encourage business investment; high
taxes may deter it.
3. Cost of Doing Business: Fiscal incentives lower costs; higher taxes or duties increase
them.
4. Inflation: Excessive spending may lead to inflation, raising input costs for businesses.

Definition of Monetary Policy

 Monetary Policy is a strategy used by the Central Bank to control and regulate the
money supply in an economy.
 It is also known as credit policy. In India, the Reserve Bank of India looks after the
circulation of money in the economy
 The primary purposes of the monetary policy include bringing price stability,
controlling inflation, strengthening the banking system, economic growth, etc
 The monetary policy focuses on all the matters which have an influence on the
composition of money, circulation of credit, interest rate structure

Monetary policy instruments and transmission mechanism

Monetary policy instruments are tools central banks, such as the Reserve Bank of India
(RBI), use to control money supply, inflation, and interest rates, thereby influencing
economic activity. The transmission mechanism describes how changes in these
instruments impact the broader economy, including spending, investment, inflation, and
employment.
Key Monetary Policy Instruments

1. Policy Rates
o Repo Rate: The rate at which the central bank lends to commercial banks.
Lowering the repo rate reduces borrowing costs, encouraging lending and
spending; increasing it has the opposite effect.
o Reverse Repo Rate: The rate at which the central bank borrows from
commercial banks. Raising it encourages banks to park funds with the central
bank, reducing money supply.
2. Open Market Operations (OMOs)
o Involve the buying and selling of government securities in the open market.
Buying securities injects liquidity, while selling them absorbs liquidity,
impacting interest rates and credit availability.
3. Cash Reserve Ratio (CRR)
o The percentage of deposits that banks must hold as reserves with the central
bank. Raising CRR reduces banks' ability to lend, contracting money supply;
lowering it increases lending capacity.
4. Statutory Liquidity Ratio (SLR)
o The percentage of deposits banks must hold in government-approved
securities. A higher SLR reduces liquidity, restricting lending, while a lower
SLR boosts liquidity.
5. Other Tools
o Marginal Standing Facility (MSF): Allows banks to borrow overnight from the
central bank at a slightly higher rate than the repo rate.
o Bank Rate: The rate at which the central bank lends long-term funds to
commercial banks, affecting lending rates.

Inflation and its control

Inflation is the rate at which the general price level of goods and services in an economy
rises, leading to a decrease in purchasing power over time. In simpler terms, as inflation
increases, each unit of currency buys fewer goods and services.

Occurs when demand for goods and services exceeds supply, leading to price increases.

Happens when production costs rise (e.g., higher raw material or labor costs), leading
businesses to pass those costs onto consumers through higher prices.

Control of Inflation:

1. Monetary Policy: Central banks, like the Reserve Bank of India (RBI), use tools such
as interest rates, open market operations, and reserve requirements to control
inflation. Raising interest rates makes borrowing more expensive, reducing demand
and helping to cool inflation.
2. Fiscal Policy: The government can control inflation through taxation and public
spending. By reducing government spending or increasing taxes, aggregate demand
is reduced, helping lower inflationary pressures.
 3. Supply-Side Measures: Improving productivity and increasing the supply of goods
and services can help reduce cost-push inflation. Investments in infrastructure,
technology, and reducing barriers to trade can help achieve this.
4. Exchange Rate Management: In some cases, controlling the exchange rate can help
reduce inflation, especially in economies with high reliance on imports. A stronger
currency makes imports cheaper, reducing the cost of imported goods and services

Role of Foreign Investment

 Foreign investment plays a crucial role in the economic development of a country. It

brings in capital, technology, management expertise, and access to international
markets.
 Foreign investments contribute to infrastructure development, job creation, and
overall economic growth. They can also help improve the balance of payments by
increasing exports and reducing reliance on foreign debt.

Private Foreign Investment

 Private foreign investment refers to investments made by foreign individuals,

corporations, or entities in a country’s businesses, assets, or projects.
 These investments are typically driven by the goal of generating profits and gaining
control or ownership stakes in local businesses.
 Private foreign investment is crucial for economic growth, particularly in developing
countries, as it brings capital and expertise while also fostering competition.

Foreign Direct Investment ( FDI )