Business Environment
In this video series, I am covering the Business Studies subject from the CBSE Class XII syllabus. We will be following the standard NCERT textbook for the topics that we need to discuss. This is the third part of the series, and we will cover the third chapter—Business Environment.
Introduction
First of all, let us understand what is Business Environment.
Suppose a businessman is running a liquor shop somewhere in India. What are some of the factors that will affect the business?
- Customers: Ability to attract customers, preferred brands, location convenience.
- Suppliers: Availability of stock, discounts, delivery times, payment terms.
- Competitors: Offering discounts, effective marketing, advantageous locations.
- Government: Tax increases, sales regulations, price controls, restrictions on sales days.
- General Public: Public opinion, protests against the shop or liquor sales in general.
All of these factors are not under the control of the businessman. He can try to influence them but cannot control them. So, in simple words, everything that can affect the business in any way—but is not under the control of the business—is part of the Business Environment.
Definition of Business Environment
The textbook definition of Business Environment is:
“It is 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.”
In this chapter, we will be talking about two aspects of the business environment: Factors and Dimensions.
- Factors: Customers, suppliers, competitors, various institutions, the government, and the public.
- Dimensions: Economic environment, technological environment, political environment, legal environment, and social environment.
The same factors will be present in all the dimensions of the business environment, but they may affect the business in different ways under different dimensions.
Examples
- Economic Change: Demonetization or COVID lockdowns affecting customer behavior, supplier actions, and institutional support.
- Technological Change: Advances in artificial intelligence influencing customer demand, supplier capabilities, competitor products, and government regulation.
- Political Change: Elections leading to new government policies affecting customers, suppliers, and competitors.
Features of Business Environment
The textbook mentions seven important features:
- Totality of External Forces
- Specific and General Forces
- Inter-relatedness
- Dynamic Nature
- Uncertainty
- Complexity
- Relativity
1. Totality of External Forces
Business environment is the sum total of all external factors—customers, suppliers, competitors, institutions, government, and public—that affect the business.
2. Specific and General Forces
- Specific Forces: Affect a single business (e.g., individual customers, suppliers, investors, competitors).
- General Forces: Affect all businesses of the same type or all businesses in general (e.g., government policies, tax changes).
The different factors and dimensions of the business environment are interconnected. A change in one dimension can lead to changes in others.
Example
Advances in AI technology (technological environment) may lead to job losses (economic environment), prompting government regulation (legal environment).
4. Dynamic Nature
The business environment is always changing due to new technologies, competition, political shifts, and consumer trends. Businesses must adapt to these changes to stay relevant.
5. Uncertainty
The dynamic nature of the business environment brings a lot of unpredictability. Sudden events can drastically change market conditions.
Example
Companies like Nokia and BlackBerry failed to adapt to the smartphone revolution and lost their market share.
6. Complexity
The multitude of factors and their interrelations make the business environment complex. Predicting changes and their impacts is challenging.
7. Relativity
The business environment is relative and varies across businesses, regions, and countries. Factors like culture, economy, and customer perceptions differ.
Example
McDonald’s is considered a cheap, quick meal in the US but is relatively expensive in India.
Importance of Business Environment
The textbook mentions six points on why understanding the business environment is crucial:
- Identifying Opportunities and Getting the First Mover Advantage
- Identifying Threats and Early Warning Signals
- Tapping Useful Resources
- Coping with Rapid Changes
- Assisting in Planning and Policy Formulation
- Improving Performance
Examples
- First Mover Advantage: Reliance Jio identified the need for affordable 4G services and captured a significant market share.
- Early Warning Signals: Tata Motors invested in electric vehicles anticipating future demand and regulatory changes.
- Tapping Resources: Adani Group invested in renewable energy resources early on.
- Coping with Changes: IT companies adapting to AI technologies.
- Planning and Policy: ITC and Mahindra moving into premium market segments.
- Improving Performance: Hindustan Unilever’s Project Shakti improved rural market penetration.
Dimensions of Business Environment
The dimensions are areas where significant changes may happen:
- Economic Environment
- Social Environment
- Technological Environment
- Political Environment
- Legal Environment
1. Economic Environment
Includes factors like bank interest rates, inflation rates, income levels, stock market performance, currency value, exports, and imports.
Example
High inflation can lead to decreased consumer spending on premium products.
2. Social Environment
Encompasses social structure, norms, culture, customs, traditions, values, trends, demographics, public opinion, and media influence.
Example
Public opinion about a brand like Tata can significantly influence consumer trust and purchasing behavior.
3. Technological Environment
Covers research and development facilities, automation, robotics, regulations, standards, and intellectual property.
Example
Strong innovation and R&D can positively impact multiple business aspects.
4. Political Environment
Includes government stability, political parties and ideologies, regulatory framework, tax policies, trade policies, labor laws, corruption, and bureaucracy.
Example
High corruption and bureaucratic hurdles can negatively impact the ease of doing business.
5. Legal Environment
Consists of laws, rules, and regulations affecting the business, such as business laws, employment laws, environmental laws, judiciary effectiveness, and dispute resolution mechanisms.
Example
Effective legal systems ensure quick resolution of disputes, which is crucial for business continuity.
Economic Environment in India
This topic is discussed in five parts:
- Post-Independence Era (1947-1991)
- Liberalization of the Indian Economy (1991 onwards)
- Privatization
- Globalization
- Demonetization (2016)
1. Post-Independence Era
- Primarily agricultural and rural economy.
- Government followed a socialist pattern with centralized planning.
- License-Quota-Permit Raj: Extensive regulations and licenses required for almost every activity.
- Major industries were nationalized; private sector was restricted.
- Resulted in shortages, lack of competition, and outdated technologies.
Examples
- Long waiting periods for basic products like scooters.
- Lack of innovation due to absence of competition (e.g., Hindustan Motors’ Ambassador car).
2. Liberalization (1991 onwards)
An economic crisis in 1991 led to significant reforms:
- Reduction of fiscal deficit.
- Monetary and financial reforms in banking.
- Capital market reforms.
- Abolition of industrial licensing in most sectors.
- Trade policy reforms to encourage exports.
- Promotion of foreign investment.
- Rationalization of exchange rates.
The reforms aimed to reduce government control and promote private sector participation, leading to liberalization, privatization, and globalization.
3. Privatization
The government started reducing its stake in Central Public Sector Enterprises (CPSEs):
- Navratna, Maharatna, Miniratna: Profitable CPSEs given more autonomy.
- Disinvestment: Selling off CPSEs to private sector (e.g., Air India to Tata Group).
- Closure of Unviable Units: Loss-making companies like HMT were shut down or restructured.
4. Globalization
Restrictions on trade and foreign investment were reduced:
- Foreign Direct Investments (FDI): Encouraged through incentives and easier approvals.
- IT and BPO Services: Promoted through Special Economic Zones.
- Trade Agreements: Active participation in WTO and bilateral agreements.
- Global Supply Chains: Initiatives like Make in India and Production Linked Incentives.
- Tourism and Remittances: Promoted to increase foreign exchange earnings.
- Cultural Exchange: Programs like PIO and OCI schemes.
India’s foreign exchange reserves increased significantly, indicating the success of globalization efforts.
5. Demonetization (2016)
On November 8, 2016, the Indian government demonetized ₹500 and ₹1,000 banknotes:
- Objectives: Flush out black money and counterfeit currency.
- Impact: Immediate decline in cash transactions, increase in bank deposits, decreased real estate prices, stock market fluctuations, and increased digital transactions.
- Long-term Effects: Mixed opinions on effectiveness in curbing black money and fake currency; significant boost in digital payment adoption.
Conclusion
With that, we have come to the end of this chapter. If you have any questions or feedback, please post a comment below. I will see you soon in the next video.
