Business Environment

 

3. Business Environment

 

INTRODUCTION

 

This part highlights the concept and importance of business environment, dimensions of business environment on the economic, social, technological, political Sand legal front. It also brings to the forefront the impact of government policy changes on business with special reference to liberalisation, privatization and globalization in India.

 

Chapter at a glance

 

MEANING OF BUSINESS ENVIRONMENT

 

The term "business environment" means 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.

 

FEATURES OF BUSINESS ENVIRONMENT

 

(i) Totality of external forces: Business environment is the Sum total of all things external to business firms and, as such, is aggregative in nature.

(ii) Specific and general forces:

(a) Business environment includes both specific and general forces.

(b) Specific forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly and immediately in their day-to-day working.

(c) General forces (such as social, economic, political, legal arid technological conditions) have impact on all business enterprises and thus may affect an individual firm only indirectly.

(iii) Inter-relatedness:

(a) Different elements or parts of business environment are closely inter-related.

(b) For example, increased life expectancy of people and increased awareness for health care have increased the demand for many health products and services like diet Coke, fat-free cooking oil, and health resorts. New health products and services have, in turn, changed peopled lifestyles.                                               

(iv) Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market.

(v) Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings, especially when environment changes are taking place too frequently as in the case of information technology or fashion industries.

(vi) Complexity:                                                                     

(a) Since business environment consists of numerous interrelated and dynamic conditions or forces which arise from different sources, it becomes difficult to comprehend at once what exactly constitutes a given environment.

(b) In other words, environment is a complex phenomenon that is relatively easier to understand in parts but difficult to grasp in its totality.

(c) For example, it may be difficult to know the extent of the relative impact of the social, economic, political, technological or legal factors on change in demand of a product in the market.

(vii) Relativity: Business environment is a relative concept since it differs from country to country and even region to region. Political conditions in the USA, for instance, differ from those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.

 

IMPORTANCE OF BUSINESS ENVIRONMENT

 

(i) It enables the firm to identify opportunities and getting the first mover advantage:

(a) Opportunities refer to the positive external trends or changes that will help a firm to improve its performance.

(b) Environment provides numerous opportunities for business success. Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors.

(c) For example, Maruti Udyog became the leader in the small car market because it was the first to recognise the need for small cars in an environment of rising petroleum prices and a large middle class population in India.

 

(ii) It helps the firm to identify threats and early warning signals:

(a) Threats refer to the external environment trends and changes that will hinder a firm's performance.

(b) Besides opportunities, environment happens to be the source of many threats.

(c) Environmental awareness can help managers to identify various threats on time and serve as an early warning signal.

(d) For example, if an Indian firm finds that a foreign multinational is entering the Indian market with new substitutes, it should act as a warning signal.

(e) On the basis of this information, the Indian firms can prepare themselves to meet the threat by adopting such measures as improving the quality of the product, reducing cost of the production, engaging in aggressive advertising, and so on.

 

(iii) It helps in tapping useful resources:

(a) To engage in any type of activity, a business enterprise assembles various resources called inputs like finance, machines, raw materials, power and water, labour, etc., from its environment including financers, government and suppliers.

(b) They decide to provide these resources with their own expectations to get something in return from the enterprise. The business enterprise supplies the environment with its outputs such as goods and services for customers, payment of taxes to government, return on financial investment to investors and so on.

(c) Because the enterprise depends on the environment as a source of inputs or resources and as an outlet for outputs, it only makes sense that the enterprise designs policies that allow it to get the resources that it needs so that it can convert those resources into outputs that the environment desires. This can be done better by understanding what the environment has to offer.

 

(iv) It helps in coping with rapid changes/sensitise the management:

(a) Today's business environment is getting increasingly dynamic where changes are taking place at a fast pace.

(b) Turbulent market conditions, less brand loyalty, divisions and sub-divisions (fragmentation) of markets, more demanding customers, rapid changes in technology and intense global competition are just a few of the images used to describe today's business environment.

(c) All sizes and all types of enterprises are facing increasingly dynamic environment. In order to effectively cope with these significant changes, managers must understand and examine the environment and develop suitable courses of action.

 

(v) It helps in assisting in planning and policy formulation:

(a) Since environment is a source of both opportunities and threats for a business enterprise, its understanding and analysis can be the basis for deciding the future course of action (planning) or training guidelines for decision making (policy).

(b) For instance, entry of new players in the market, which means more competition may make an enterprise think afresh about how to deal with the situation.

 

(vi) It helps in improving performance:

(a) The final reason for understanding business environment relates to whether or not it really makes a difference in the performance of an enterprise.

(b) Many studies reveal that the future of an enterprise is closely bound up with what is happening in the environment.

(c) And, the enterprises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.

 

DIMENSIONS OF BUSINESS ENVIRONMENT

 

(i) Economic Environment:

(a) Economic environment of business refers to the broad economic characteristics in which a business enterprise operates.

(b) Interest rates, inflation rates, changes in disposable income of people, stock market indices and the value of rupee are some of the economic factors that can affect management practices in a business enterprise.

(c) Short and long term interest rates significantly affect the demand for product and services.

(d) For example, in case of construction companies and automobile manufacturers, low longer-term rates are beneficial because they result in increased spending by consumers for buying homes and cars on borrowed money.

(e) Similarly, a rise in the disposable income of people due to increase in the gross domestic product of a country creates increasing demand for products.

(f) High inflation rates generally result in constraints on business enterprises as they increase the various costs of business such as the purchase of raw materials or machinery and payment of wages and salaries to employees.

 

(ii) Social Environment:

(a) Social Environment of a business refers to the broad characteristics of the society in which a business enterprise operates.

(b) The social environment of business include the social forces like customs and traditions, values, social trends, society's expectations from business, etc. Social values and attitudes are changing very fast. For example, Indian women are increasingly engaging themselves in business, profession and employment.

(c) For example, the celebration of Diwali, Id, Christmas, and Guru Parv in India provides significant financial opportunities for greetings card companies, sweets or confectionery manufacturers, tailoring outlets and many other related businesses.

(d) Social trends present various opportunities and threats to business enterprises. For example, the health-and-fitness trend has created a demand for products like organic food, diet soft drinks, gyms, bottled (mineral) water and food supplements. This trend has, however, harmed business in other industries like dairy processing, tobacco and  

liquor.

 

(iii) Technological Environment:

(a) Technological environment of a business refers to the broad characteristics of technology in which the business enterprise operates.

(b) Technological environment 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.

(c) For example, recent technological, advances in computers and electronics have dified the ways in which companies advertise their products. It is common now to see CD-ROM's, computerised information kiosks, and Internet/ World Wide Web multimedia pages highlighting the virtues of products.

 

(iv) Political Environment:

(a) Political environment refers to the broad characteristics of political system in which the business enterprise operates.

(b) Political environment includes political conditions such as general stability and peace in the country and specific attitudes that elected government representatives hold towards business.

(c) The significance of political conditions in business success lies in the predictability of business activities under stable political conditions. On the other hand, there may be uncertainty of business activities due to political unrest and threats to law and order.

(d) Political stability, thus, builds up confidence among business people to invest in the long term projects for the growth of the economy. Political instability can shake that confidence.

(e) For example, even after opening up of our economy in 1991, foreign companies found it extremely difficult to cut through the bureaucratic red tape to get permits for doing business in India. Sometimes, it took months to process even their application for the purpose. As a result these companies were discouraged from investing in our country.

The situation has improved over time.

 

(v) Legal Environment:

(a) Legal environment of a business refers to the broad characteristics of the legislation in which a business enterprise operates.

(b) Legal environment consists of legislation that has been passed by the Parliament and state legislatures (Consumer Protection Act, 1986, Competition Act, 2002). Administrative orders, issued by government authorities, court judgements as well as the decisions rendered by various commissions and agencies at every level of the government—centre, state or local.

(c) Every management is required to obey the law of land. Non-compliance of laws can leads into legal problems.

(d) For example, the advertisement of alcoholic beverages is prohibited. Advertisements, including packets of cigarettes carry the statutory warning "Cigarette smoking is injurious to health'. Similarly, advertisements of baby food must necessarily inform the potential buyer that mother's milk is the best. All these regulations are required to be followed by advertisers.

 

FEATURES OF NEW INDUSTRIAL POLICY IN JULY 1991

 

(i) The government reduces the number of government industries under compulsory licensing to six.

(ii) The role of public sector was limited only to four industry of strategic importance.

(iii) Disinvestment was carried out in case of many public sector industrial enterprises.

(iv) Policy towards foreign capital was liberalised (in many activities 100% FDI was permitted).

(v) Automatic permission was now granted for technology agreements with foreign companies.

(vi) Foreign Investment Promotion Board (FIPB) was set up to promote and channelize foreign investment in India.

 

LIBERALISATION

 

Economic reforms aimed at liberating the industry and trade from all unnecessary restrictions and removing all impediments in their growth arising from licences, permits, quotas, bureaucratic delays etc. is known as liberalization.

Measures of Liberalisation

(i) Abolishing licensing requirement in most of the industries except a short list.

(ii) Freedom in deciding the scale of business activities, i.e., no restriction on expansion or contraction of business activities.

(iii) Removal of restrictions on the movement of goods and services.

(iv) Freedom in fixing the prices of goods services.

(v) Reduction in tax rates and lifting of unnecessary controls over the economy.

(vi) Simplifying procedures for imports and exports.

(vii) Making it easier to attract foreign capital and technology to India.

 

PRIVATISATION

 

(i) Economic reforms aimed at giving greater role to private sector in country's economic development.

(ii) Various policies were introduced to limit the area of public sector and give way to expansion of private sector.

(iii) These measures included the following:

(a) Significant reduction in role of public sector.

(b) Public sector's area of operation has been reduced to four sectors i.e. atomic energy, railway transport, minerals used in atomic energy and defence production; rest area being thrown open to private sector.

(c) Disinvestment (The term disinvestments used here means transfer in the public sector enterprises to the private sector) in public enterprises as a way to reduce financial burden of government and improve efficiency of these enterprises.

(iv) To achieve this, the government redefined the role of the public sector in the New Industrial Policy of 1991, adopted the policy of planned disinvestments of the public sector and decided to refer the loss making and sick enterprises to the Board of Industrial and Financial Reconstruction (BIFR).

 

GLOBALISATION

 

(i) It means integration of domestic economy of a country with the international economy. It involves free interaction with rest of the world in matter of production, trade, capital movement, exchange rates, etc.

(ii) Till 1991, the Government of India had followed a policy of strictly regulating imports in value and volume terms. These regulations were with respect to (a) licensing of imports, (b) tariff restrictions and (c) quantitative restrictions.

(iii) The New Economic Policy seeked to achieve the objective of Globalisation through following measures:

(a) Licencing regulations for most of the imports had been abolished. Most imports were put under Open General Licence (OGL)

(b) Rationalisation of tariff structure

(c) Rupee had been made convertible on current account only.

(d) Foreign Exchange Management Act (FEMA) 1999 replaced FERA

(e) Reduction of import duty.

 

IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY

 

(i) Increasing competition/ Threat from MNC: As a result of changes in the rules of industrial licensing and entry of foreign firms, competition for Indian firms has increased especially in service industries like telecommunications, airlines, banking, insurance, etc. which were earlier in the public sector.

(ii) More demanding customers: Customers today have become more demanding because they are well-informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services.

(iii) Rapidly changing technological environment: Increased competition forces the firms to develop new ways to survive and growth in the market. New technologies make it possible to improve machines, process, products and services. The rapidly changing technological environment creates tough challenges before smaller firms.

(iv) Necessity for change: In a regulated environment of pre-1991 era, the firms could have relatively stable policies and practices. After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.

(v) Need for developing human resource: Indian enterprises have suffered for long with inadequately trained personnel. The new market conditions require people with higher competence and greater commitment. Hence the need for developing human resources.

(vi) Market orientation: Earlier firms used to produce first and go to the market for sale later. In other words, they had production oriented marketing operations. In a fast changing world, there is a shift to market orientation in as much as the firms have to study and analyse the market first and produce goods accordingly.

(vii) Loss of budgetary support to the public sector: The central government's budgetary support for financing the public sector outlays has declined over the years. The public sector undertakings have realised that, in order to survive and grow, they will have to be more efficient and generate their own resources for the purpose.

 

Managerial Responses to Changes in Business Environment

(i) Almost all Indian industrialists are adopting the policy of diversification and modernization. They are entering into new fields and areas to keep pace with the requirements of market.

(ii) Amalgamation and Absorption schemes are gaining more and more popularity. A number of big companies have amalgamated with the view to capture the market (Purchase of 'thums Up' by 'coca- cola', purchase of ‘Kisan’ and 'dalda' by Hindustan Liver etc.).

(iii) Joint ventures with foreign companies are becoming more and more companies. A large number of companies have entered into collaborations with foreign companies (Hindustan motors with General motors, Godrej with General electronics etc.).

(iv) Large companies are incurring heavy expenditure on building their brands popular (LG, Samsung, Coca cola etc.)

(v) Important changes have been taken place in the capital structure of many countries. Some companies have procured their capital from national and international market. Reliance industries was the first Indian company to move to global market for raising equity and debt capital.

 

Demonetization

(i) Demonetization occurs when a particular type of currency is withdrawn from circulation. In such a situation, the demonetized currency ceases to be recognized as a legal tender.

(ii) Demonetization means stopping a form of currency from being legal tender. That means that this currency can no longer be legally used. It cannot be used to, buy things and if it is paid into the bank, your bank manager should not accept it.

(iii) Demonetization can be applied to coins, bank notes and all other forms of currency. After a certain cutoff date, it is not possible to use those notes and coins to pay for things. Usually, demonetization is part of a wider process, which involves the old currency being replaced by a new one.

Advantages of Demonetization

Below are some of the key advantages that are often associated with demonetization.

(i) Getting fake currency out of circulation: Demonetization can also be used to get fake currency out of circulation in a country's economy since such currencies cannot be deposited in banks and other financial institutions.

(ii) Controlling inflation: Demonetization can control inflation by taking certain notes out of circulation can help the government to control public spending.

(iii) Tax Collection: Money deposited in the bank during demonetization can be taxed especially if the affected parties were trying to evade taxation by keeping hard cash.

(iv) The move to digital currency: Some commentators argue that in the future, we will all be using digital currency, such as bit coins. If this is true, then one advantage of demonetization is that it will help to propel us into the future.

(v) Improved deposits and savings in financial institutions: Parallel economies make it difficult for banks and other financial institutions to raise deposits. Demonetization reduces the size of the parallel economy and boosts savings and deposits.

(vi) Stopping fraudsters: When a new currency is introduced, this can also be a great opportunity to halt the activities of fraudsters who had been making money illegally by counterfeiting coins and notes.

(vii) Reducing illegal activities: Money used to fund illegal activities such as terrorism and drug trafficking will be rendered useless. Hence, the government can use demonetization policy to trace money that has been made from illegal activities such as drug trafficking and theft since such individuals are faced with only two options: either deposit the money with the bank or be left with currency that has no value.

(viii) Growth in a country’s GDP: Due to low lending rates, improved revenue collection, and growth in savings and deposits, a country that has demonetized is likely to see an improvement in the growth of its GDP.

(ix) Introducing new bank note designs: Demonetization is also a good opportunity to redesign bank notes. This might involve making them more durable, for example. Several countries have switched from paper notes (which tore or got worn very quickly) to more durable plastic notes, which has made their monetary system more secure in several ways.

(x) A measure of good governance practices: Some experts claim that demonetization policies improve the ease of doing business and is also a measure of good governance.

(xi) Good income management habits: People will opt to invest their money in properties such as real estate or deposit cash in banks to safeguard against some negative effects of demonetization.

(xii) Reduction of lending rates: Availability of cheap deposits in financial institutions means that people can borrow money at low interest rates.

Disadvantages of Demonetization

Demonetization is not all beneficial and even proponents of demonetization acknowledge that it does have its disadvantages. A few of them are outlined below.

(i) Little cash in circulation: Cash crunch is a major disadvantage of demonetization due to the unavailability of small currency denominations, an issue which makes it difficult to make small purchases.

(ii) Inconvenience and annoyance to the public: Sometimes, demonetization can be very inconvenient. For example, sometimes the government will remove certain denominations of bank notes from circulation but keep others. It can be annoying when smaller coins are removed from circulation and you do not have enough change. Further, queuing up in banks to deposit money or exchange currency can be inconveniencing.

(iii) Slowdown in Economic Growth: Economic growth will experience a period of lull due to business disruptions, at least in the short term.

(iv) Panic: Not everyone understands the essence of demonetization and, therefore, such an exercise is likely to result in panic among a section of the population.

(v) An avenue for fraud and corruption: Some people are likely to take advantage of lapses in the financial system to engage in fraud and corruption when exchanging currencies.

(vi) Disruption of Trade: The normal trading activities may be disrupted by this process since it takes time for consumers and suppliers to adjust to the new monetary policy.

(vii) Loss of tradition: People can feel attached to their old bank notes and coins as they can feel that they constituted part of their tradition.

(vii) Problems with paying bills: If someone has sent some bank notes in the post in order to pay a bill, or if there is any substantial delay in processing a bill payment, and demonetization hits in the meantime, the money set aside to pay the bill can become invalid. This is more common that you might think in highly bureaucratic systems.

(ix) ATMs have to be re-calibrated: ATM machines have to be re-calibrated to accommodate the new currencies. It will result in additional costs for banks and also inconvenience customers.

(x) Short term financial crisis for poor people: If people adopt a new currency and this currency is not a successful one, then it can cause a financial crisis for everyone who is involved. Even a small change in the value of everyday items, or even a small amount of confusion about whether a currency is valid can mean a lot of hardship. As such, demonetization can increase and exacerbate inequalities within society, at-least in the short term.

(xi) Confusing: Demonetization can be confusing and annoying - especially for people who are not able to get rid of their old notes in time.

Conclusion

Demonetization is a beneficial process even though it has some demerits that may render it unfavorable in various ways. However, before any demonetization program is carried out, it should be carefully though through and its impact on the poor should be considered. In this way, demonetization can be a chance for a fresh new start, or it can be something that causes unnecessary confusion for a country.

 

Words that Matter

1.            Business environment: The term 'business environment' means 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.

2.            Specific forces of business environment: Specific forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly and immediately in their day-to-day working.

3.            General forces of business environment: General forces (such as social, political, legal and technological conditions) have impact on all business enterprises and thus may affect an individual firm only indirectly.

4.            Economic environment: Economic environment of business refers to the broad economic characteristics in which a business enterprise operates.

5.            Social environment:  Social environment of a business refers to the broad characteristics of the society in which a business enterprise operates.

6.            Technological environment: Technological environment of a business refers to the broad characteristics of technology in which the business enterprise operates.

7.            Political environment: Political environment refers to the broad characteristics of political system in which the business enterprise operates.

8.            Legal environment: Legal environment of a business refers to the broad characteristics of the legislation in which a business enterprise operates.

9.            Liberalization: Economic reforms aimed at liberating the industry and trade from all unnecessary restrictions and removing all impediments in their growth arising from licences, permits, quotas, bureaucratic delays etc. is known as liberalization.

10.          Privatisation: Economic reforms aimed at giving greater role to private sector in country's economic development.

11.          Globalisation: It means integration of domestic economy of a country with the international economy. It involves free interaction with rest of the world in matter of production, trade, capital movement, exchange rates etc.

12.          Demonetization it means: Demonetization means stopping a form of currency from being legal tender. That means that this currency can no longer be legally used. It cannot be used to buy things and if it is paid into the bank, your bank manager should not accept it.