Business Environment

Introduction

The term Business Environment refers to the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but may affect its performance. These include customers, competitors, suppliers, intermediaries, social, political, legal and technological conditions etc.

It is the surrounding conditions in which a business operates. Every business enterprise functions within a specific environment.

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Meaning Of Business Environment

The business environment is a broad concept. It includes factors specific to a particular firm (like customers, suppliers, competitors) and general factors (like social, political, legal, technological conditions) that affect all firms in an industry or the economy.

Key features of the business environment include:

1. Totality of external forces: It is the aggregate of all things external to the business firm.

2. Specific and general forces: Specific forces (investors, customers, competitors, suppliers) affect individual firms directly and immediately. General forces (social, political, legal, technological conditions) have an indirect impact but affect all firms.

3. Inter-relatedness: Different elements of the business environment are closely related. For example, a change in technology ($$ T \downarrow $$) might lead to changes in consumption patterns ($$ C \downarrow $$), affecting production methods ($$ P \downarrow $$) and requiring new laws ($$ L \uparrow $$).

4. Dynamic nature: The business environment is constantly changing, whether in terms of technological improvement, shifts in consumer preferences, or new government policies.

5. Uncertainty: It is difficult to predict future happenings in the business environment, especially when changes are taking place at a faster pace.

6. Relativity: The business environment differs from country to country and even region to region. For instance, political conditions in India are different from those in the USA.

7. Complexity: The business environment is difficult to understand in totality. Though individual factors may be simple to understand, their interaction creates complexity.

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Importance Of Business Environment

Understanding the business environment is crucial for a business firm for several reasons:

1. It enables the firm to identify opportunities and getting the first mover advantage: Environment provides numerous opportunities for business success. Early identification helps a firm to capitalise on them ahead of competitors.

2. It helps the firm to identify threats and early warning signals: Environmental analysis helps in identifying threats, which refer to negative changes or external trends that will hinder a firm's performance. Awareness of threats helps the firm take timely corrective action.

3. It helps in tapping useful resources: Business needs resources (finance, machines, raw materials, power, water, labour) from its environment. Environmental analysis helps the firm procure these resources efficiently.

4. It helps in coping with rapid changes: The business environment is dynamic. Businesses need to adapt to changes in technology, consumer preferences, competition, etc. Understanding the environment helps them develop suitable strategies.

5. It helps in planning and policy formulation: Understanding the environment and its analysis provides the base for planning and policy making. For example, if a fuel price hike is anticipated, the company can plan to use alternative sources of fuel or modify logistics.

6. It helps in improving performance: Firms that continuously monitor their environment and adopt suitable business practices are able to improve their present performance and continue to succeed in the market in the long run.

Dimensions Of Business Environment

The business environment is made up of various dimensions or types of forces that impact business operations. These are often categorised into PESTLE analysis (Political, Economic, Social, Technological, Legal, Environmental), but the main dimensions discussed here are Economic, Social, Technological, Political, and Legal.

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Economic Environment

The economic environment consists of forces that affect a firm's ability to obtain finance and affect customer purchasing power and spending patterns.

Key factors include:

1. Interest Rates: Affects the cost of borrowing for businesses and consumers. Higher interest rates typically reduce borrowing and spending ($$ B \downarrow, S \downarrow $$).

2. Inflation Rates: Measures the increase in the general price level. High inflation reduces purchasing power ($$ PP \downarrow $$) and creates uncertainty for businesses.

3. Changes in Disposable Income: The amount of money left with people after paying taxes. An increase in disposable income leads to higher spending on goods and services ($$ DI \uparrow \implies S \uparrow $$).

4. Stock Market Indices: Reflect the overall health of the economy and investor confidence. A rising market indicates a positive economic outlook.

5. Value of Rupee: Affects the cost of imports and the price of exports. A depreciating rupee makes imports expensive ($$ \text{Import Cost} \uparrow $$) and exports cheaper ($$ \text{Export Price} \downarrow $$).

6. Economic Policies: Fiscal policy (government spending and taxation) and monetary policy (central bank's control over money supply and interest rates) significantly impact business activity.

7. GDP (Gross Domestic Product) Growth Rate: Indicates the overall growth of the economy. A higher growth rate usually means more business opportunities.

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Social Environment

The social environment includes the customs, traditions, values, social trends, and living standards of the society in which the business operates.

Factors influencing the social environment are:

1. Customs and Traditions: Social practices that have been in vogue for decades, like celebrating festivals (Diwali, Eid, Christmas, etc.), which create opportunities for specific businesses (sweets, gifts, clothes).

2. Values: Ethical standards and beliefs held by the society. Example: Freedom of choice in the market, social justice, equality of opportunity.

3. Social Trends: General changes in social behaviour and consumer preferences. Examples: Increasing demand for health and fitness products, growing popularity of organic foods.

4. Literacy Rates and Educational Levels: Affects the quality of human resources available and the nature of consumer demand.

5. Demographic Factors: Population size, growth rate, age composition, gender distribution, income distribution, and geographical distribution of population. These influence the demand for various products and services.

6. Lifestyle: Changes in how people live, their hobbies, and leisure activities affect product demand (e.g., increasing demand for travel services, online entertainment).

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Technological Environment

This dimension 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.

Changes in the technological environment have a rapid impact. Examples:

1. New Methods of Production: Automation, computer-aided design and manufacturing (CAD/CAM), 3D printing.

2. New Equipment: High-speed machines, energy-efficient equipment.

3. New Materials: Development of synthetic fabrics, composite materials.

4. New Technologies: Digital technologies, artificial intelligence (AI), blockchain, renewable energy technologies, e-commerce.

5. Impact on Industries: Technological advancements can make existing products or technologies obsolete (e.g., rise of digital cameras made film cameras obsolete) and create new industries (e.g., internet led to e-commerce, social media).

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Political Environment

The political environment includes forces related to government affairs, such as the general stability and peace in the country and specific attitudes that elected government representatives hold towards business.

Key factors:

1. General Stability of Government: Political stability is essential for business confidence and investment. Frequent changes in government or political unrest can disrupt business operations.

2. Attitude of Government towards Business: The government's policies and approach towards different industries or sectors (e.g., liberal, restrictive, promotional) influence business decisions.

3. Specific Government Policies: Policies related to trade, industry, foreign investment, etc. (e.g., Make in India, Digital India initiatives).

4. Political Ideology and Practices: The dominant political ideology and the practices of political parties affect the economic policies implemented.

5. Law and Order Situation: A stable law and order environment is crucial for the smooth functioning of businesses.

6. Relationship with other Countries: Bilateral and multilateral agreements and relationships impact international trade and foreign investment.

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Legal Environment

The legal environment includes the various laws and legislative acts passed by the government, administrative orders, and judicial pronouncements.

Key factors:

1. Acts of Parliament and State Legislatures: Laws like the Companies Act, 2013, Consumer Protection Act, 2019, Competition Act, 2002, Environmental Protection Act, 1986, Industrial Disputes Act, 1947, Goods and Services Tax (GST) Act, 2017.

2. Administrative Orders: Directives and notifications issued by government and administrative authorities.

3. Judicial Pronouncements (Court Judgements): Decisions given by courts which set precedents or clarify the interpretation of laws. For example, consumer courts' judgments have influenced product packaging and labelling.

4. Regulatory Bodies: Institutions like the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), Competition Commission of India (CCI), which frame regulations and ensure compliance.

Compliance with legal regulations is mandatory for businesses. Failure to comply can lead to penalties, fines, or even closure.

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Economic Environment In India

The economic environment in India has undergone significant changes, particularly since the implementation of the New Economic Policy (NEP) in 1991. This policy brought about liberalisation, privatisation, and globalisation (LPG reforms).

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Liberalisation

Liberalisation means freeing the Indian economy from the shackles of unnecessary government controls and restrictions. The aim was to unlock the economic potential of the country by allowing greater participation of the private sector and foreign investors.

Key measures taken under liberalisation in India:

1. Abolishing Licensing: Except for a few strategic industries (like defence equipment, atomic energy, railway transport), industrial licensing was almost abolished.

2. Freedom to expand production: Freedom in deciding the scale of business activities, i.e., no restrictions on expansion or contraction.

3. Freedom to fix prices: Freedom in fixing the prices of goods and services.

4. Reducing Tax Rates: Significant reduction in tax rates and removal of unnecessary controls over the economy.

5. Simplifying Import-Export Procedures: Making import and export easier.

6. Facilitating Foreign Investment: Easing restrictions on foreign capital inflows.

7. De-reservation of many sectors: Previously reserved for the public sector, many sectors were opened up for private participation.

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Privatisation

Privatisation means transferring ownership, management, and control of public sector enterprises (PSEs) to the private sector. The objective was to improve the efficiency and performance of PSEs, reduce the government's financial burden, and introduce competition.

Methods of privatisation in India:

1. Disinvestment: Selling a part or whole of the equity shares of PSEs to the public or private sector.

2. Sale of PSEs: Complete transfer of ownership and management of PSEs to private entities.

3. Management Contracts: Allowing private players to manage PSEs without transferring ownership.

Reasons for Privatisation:

Many PSEs were running into losses, were inefficient, and were a burden on the government budget. Privatisation aimed to infuse capital, improve technology, and introduce professional management.

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Globalisation

Globalisation means integrating the economy of a country with the economies of the world. It involves the free flow of goods and services, technology, investment, and labour across national borders.

Measures taken under globalisation in India:

1. Reduction of Tariff and Non-Tariff Barriers: Lowering import duties and removing quantitative restrictions on imports.

2. Liberalisation of Foreign Investment Policy: Allowing higher limits of Foreign Direct Investment (FDI) in various sectors and simplifying approval processes.

3. Foreign Exchange Reforms: Making the Indian Rupee partially and then fully convertible on the current account.

4. Promotion of Exports: Encouraging Indian businesses to export by providing incentives and removing restrictions.

Implications of Globalisation:

It has led to increased competition for domestic firms, opened up opportunities for Indian companies to operate globally, facilitated the transfer of technology, and increased access to global markets.

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Demonetisation

Demonetisation was a significant step taken by the Government of India on November 8, 2016, wherein the circulation of all ₹500 and ₹1000 banknotes of the Mahatma Gandhi Series was declared illegal tender.

Key features:

1. Withdrawal of Legal Tender: The specified banknotes ceased to be legal tender for most transactions.

2. Exchange/Deposit Window: Citizens were given a limited time frame to exchange old notes for new ones or deposit them into bank accounts.

3. Limits on Withdrawal: Restrictions were placed on cash withdrawals from ATMs and bank counters.

Objectives of Demonetisation:

The stated objectives were to curb black money ($$ \text{Black Money} \downarrow $$), counterfeit currency ($$ \text{Counterfeit Currency} \downarrow $$), and corruption ($$ \text{Corruption} \downarrow $$), and to promote a cashless economy ($$ \text{Cashless Economy} \uparrow $$).

Impact:

It led to a short-term cash crunch, disruption in business activities reliant on cash, increased bank deposits, push towards digital payments, and initial slowdown in economic activity.

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Impact Of Government Policy Changes On Business And Industry

The economic reforms initiated in 1991 and subsequent policies have had a profound impact on business and industry in India. Some of the major impacts include:

1. Increasing Competition: Opening up the economy led to increased competition from global players and existing domestic players. Businesses had to become more efficient and innovative.

2. More Demanding Customers: Customers became more aware and demanding due to increased choices and access to global quality products. Businesses had to focus on customer satisfaction.

3. Rapidly Changing Technological Environment: Globalisation facilitated the inflow of new technology. Businesses needed to adopt and upgrade technology rapidly to stay competitive.

4. Need for Developing Human Resources: The new environment required employees with higher skills and competencies. Businesses had to invest more in training and development.

5. Market Orientation: Instead of focusing on production, firms had to shift their focus to the market, understand customer needs, and produce goods accordingly (selling what the market wants, not wanting what the market sells).

6. Loss of Budgetary Support to Public Sector: PSEs had to become more self-reliant and efficient due to reduced financial support from the government.

7. Exit Barriers: While entry became easier, exiting the market remained challenging due to labour laws and other regulations.

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