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Business Environment

The business environment encompasses all external factors affecting a business's performance, including customers, competitors, and economic conditions. It features totality of external forces, inter-relatedness, and dynamic nature, while being important for first mover advantage and effective planning. Key dimensions include economic, social, technological, political, and legal environments, with significant impacts from government policy changes like liberalisation, privatisation, and globalisation.

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18 views3 pages

Business Environment

The business environment encompasses all external factors affecting a business's performance, including customers, competitors, and economic conditions. It features totality of external forces, inter-relatedness, and dynamic nature, while being important for first mover advantage and effective planning. Key dimensions include economic, social, technological, political, and legal environments, with significant impacts from government policy changes like liberalisation, privatisation, and globalisation.

Uploaded by

aryanbltr165
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Business Environment - Notes

Meaning of Business Environment

• The business environment means the sum total of all individuals, institutions, and forces
that are external to a business but affect its performance.

• It includes customers, competitors, suppliers, government, laws, technology, economy, and


social trends.

Features of Business Environment

1. Totality of External Forces

o It is a combination of everything outside the business affecting it.

2. Specific and General Forces

o Specific Forces: Directly affect the business (e.g., customers, competitors).

o General Forces: Indirectly affect the business (e.g., social, political, legal factors).

3. Inter-relatedness

o Different forces are connected to each other (e.g., new technology changes
consumer preference).

4. Dynamic Nature

o It keeps changing (e.g., tastes, policies, trends).

5. Uncertainty

o Changes are unpredictable (e.g., changes in government policies).

6. Complexity

o Difficult to understand impact of each factor separately.

7. Relativity

o It differs from country to country and region to region.

Importance of Business Environment

1. First Mover Advantage

o Firms that sense changes early can capture big opportunities.

2. Early Warning Signals

o Helps to identify threats early and take action.

3. Tapping Useful Resources


o Understanding the environment helps in getting resources (labour, capital, raw
material) better.

4. Coping with Rapid Changes

o Helps to adjust with the fast-changing world.

5. Assistance in Planning and Policy Formulation

o Good planning is possible if environment is understood.

6. Improving Performance

o Firms that adapt well to the environment perform better.

Dimensions of Business Environment

1. Economic Environment

o Income, inflation, interest rates, taxation policy, industrial policy.

2. Social Environment

o Customs, culture, traditions, literacy rate, population growth.

3. Technological Environment

o Innovations, R&D activity, technological advancement.

4. Political Environment

o Political stability, government ideology, tax laws.

5. Legal Environment

o Laws related to employment, safety, environment, consumer protection.

Impact of Government Policy Changes on Business and Industry

Examples like Liberalisation, Privatisation and Globalisation (LPG Policy 1991) affected business by:

• Increased Competition

• More Demanding Customers

• Rapidly Changing Technological Environment

• Necessity for Change

• Need for Developing Human Resource

• Market Orientation

• Loss of Budgetary Support to Public Sector


Important Terms

• Liberalisation: Removal of restrictions in industry and trade.

• Privatisation: Transfer of ownership from public to private sector.

• Globalisation: Integration of the world economy.

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