1. M.COM(PREVIOUS) II SEMESTER
BADRUKA COLLEGE P.G. CENTRE

2. BUSINESS ENVIRONMENT
Business Environment – Concept:
Business environment refers to all the forces
which have a bearing on the functioning of a
business. It includes all those aspects of the
surroundings of a business enterprise and
circumstances of a business unit that affect
or influence its activities and operations and
decide its effectiveness.


3. Business environment is aggregative as it
includes the totality of all internal and
external forces that influence the working
and decision making of an enterprise.
Different elements of business environment
are closely interrelated and interdependent.
A change in one element affects the other
elements. It is a relative concept as it differs
from country to country and region to region.

4. 
Business environment changes over time and
so it is inter-temporal. It is largely uncertain,
as it is difficult to forecast the future
environment. It is contextual and provides
the macro framework within which the
business firm operates. The environment in
which a business operates exerts a great deal
of influence on its the success and working.

5. 
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Long-run survival: Knowledge of Business environment is
necessary for the long-run survival of business units.
First Mover Advantage: Awareness of the environment
helps an enterprise to take advantage of early
opportunities instead of losing them to competitors.
Early Warning Signal: Environmental awareness serves as
an early warning signal and it makes a firm aware of the
impending threat or crisis so that it can take timely action.
Customer Focus: Environmental understanding makes the
management sensitive to the changing needs and
expectations of the customers

6. 
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Strategy Formulation: Environmental monitoring provides the
relevant knowledge about business environment and this
information is useful for strategy making.
Helps Change Agents: In order to decide the direction and nature
of change, business leaders, who are the change agents, need to
understand the environmental forces through environmental
scanning.
Public Image: A business firm which is sensitive to its
environment and responsive to the aspirations of the public has
a better public image
Continuous Learning: Firms which analyze the environment of
business continuously are never caught unawares, can react in
the right way and thereby can increase the success of their
organizations.

7. 
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Business environment can be broadly divided
into internal environment and external
environment.
Internal Environment refers to the factors
existing within a business firm. These factors
are controllable because the enterprise has
control over these factors.

8. 
The internal environmental factors are: the
culture and the objectives of the
organization, the top management structure,
the power relationship between the board
and the chief executive, the image of the
company and the quality and quantity of
human resources of an organization.

9. 
External Environment consists of forces and
factors outside an enterprise. These factors
are beyond the control of a firm and are
therefore uncontrollable.

10. 
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The external environment of business can be
divided into Micro and Macro environment.
Micro Environment: Micro environment
consists of the groups in the company’s
immediate operating environment which have
a direct bearing on the company.

11. 
It includes those individuals, groups and
agencies with which the organization comes
into direct and frequent contact in the course
of its functioning. The micro environment of
a firm in an industry may be different from
that of another. Players in the micro
environment do not affect different players in
the same way. For example, suppliers give
more concessions to big firms than to small
firms.

12. 1.Customers: Customers are the most important
element in the micro environment of a business.
The present day customer is educated and aware
of his rights. To be successful, a company must
understand and meet the needs of its customers.
After the opening of the economy, the customer
environment is becoming global in India. To
sustain the demand for a product, it is better for
a company to have a diversified customer base in
terms of geographical areas and customer
groups such as individuals, corporates and
government.

13. 2.
Competitors: Business firms face direct
competition from other firms that produce
similar products (competition among brands)
and also indirect competition from firms that
try to make the consumer buy one product
rather than another.
For ex., a refrigerator
manufacturing firm faces competition from a
washing machine manufacturing firm. With the
opening up of the Indian economy, Indian
companies are facing competition from both
domestic firms and multinational corporations.

14. 3.Suppliers: For a firm to be profitable, it must have
uninterrupted supply of raw materials and components
of good quality at reasonable prices. Otherwise,
production may get disrupted and the company may lose
some of its customers permanently. It is risky to depend
on a single supplier. So a company must have more
than one source of supply of materials.
4.Marketing Intermediaries: Marketing intermediaries like
wholesalers, retailers, distribution firms, agents and
advertising companies help a company in promoting its
sales. A good distribution network goes a lot way in
increasing the sales of a company and hence it is
necessary for a company to have an efficient distribution
system.

15. 5.Financiers: The financial capacity, policies and
attitude towards risk of the financiers affect the
availability of finances for a firm in terms of quantity
and type of finance. The shareholders, debenture
holders, banks and financial institutions are the
various financiers of businesses.
6.Publics: Publics include all the groups that have an
actual or potential interest in the company or who
influence the company’s ability to achieve its
objectives. Environmentalists, media groups, nongovernmental organizations and the local community
are examples of the publics. These publics can have
both a positive and a negative impact on a business
firm.

16. Macro Environment: Macro environment refers to
the general environment within which a business
firm and the elements in its micro environment
operate. Although a firm does not directly
interact with the macro environment, macro
environmental factors create opportunities for
and pose threats to the company. A firm has no
control over the macro environmental factors and
it has to take them as given. The success of an
enterprise depends on its ability to adapt to the
macro environment.

17. 1. Political and Legal Environment: These
factors include the constitution of the
country, the ideology of the government,
nature and extent of bureaucracy,
relationship of business with political parties,
political stability, election system, law and
order, foreign infiltrations, brand image of
the country and its leaders , foreign policy,
laws governing business, flexibility and
adaptability of laws and the judicial system.

18. 2. Social and Cultural Environment: The
characterizes of the society in which a
business firm exists influence its functioning.
These factors are: the demographic forces
such as the size, composition, mobility and
geographical dispersal of the population,
social institutions and groups, caste structure
and family organization, educational system
and literacy rates, customs, beliefs, values
and life styles and tastes and preferences of
the people.

19. 3. Economic Environment: The main components of the
economic environment are: the nature of economic
system – capitalist, socialist or mixed economy;
occupational distribution of labour force, structure of
national output, capital formation, investment
pattern, composition of trade and balance/imbalance
between different sectors, economic policies such as
industrial policy, EXIM policy, monetary policy, fiscal
policy etc. The organization and development of the
capital market and banking system, economic indices
such as gross national product, per capita income,
rate of savings and investment, price level, balance of
payments position etc. The economic infrastructure
and the state of the factor market and product
market also influence the environment of business.

20. 4.Technological and Physical Environment:
These elements are: the rate of technological
change, new processes and equipment,
research and development systems.
5.Natural Environment: The climatic
conditions, availability of natural and other
resources, ecological system and levels of
pollution affect the environment of business.

21. 
Policy Environment: Economic policies of the
government play a very significant role in
determining the economic environment of
business in a country. Broadly, these policies
are classified under four heads: 1. industrial
policy 2. trade policy 3. monetary policy and
4. fiscal policy.

22. Industrial policy refers to the government policy
towards the establishment, working and management
of industries in a country.
It covers all those
principles, procedures and regulations which control
the industrial undertakings of a country. It reflects
the government’s attitude towards public and private
sectors, foreign capital, technology etc. It defines the
respective roles of the public and private sectors and
influences the location, size and technology of
business undertakings. Industrial policy shapes the
pattern of industrialization in a country. A liberal
industrial policy is helpful in the development of
industries as per the needs of the economy whereas a
restricted policy may hamper the establishment and
growth of industries.

23. Trade Policy: Foreign trade policy (trade policy)
refers to the policy concerning imports and
exports. Therefore, it is also known as EXIM
policy. The policy has an important influence
on a country’s foreign trade and balance of
payments.

24. Monetary Policy: Monetary policy refers to the
policy regarding money supply and bank credit in
the country and it is formulated by the central
bank of the country. The monetary policy affects
the money supply and the volume of bank credit
and thereby influences the volume of demand for
goods and services and the price level in the
economy. The central bank makes use of various
quantitative and qualitative techniques to control
the volume of credit. The monetary policy has to
reconcile the twin objectives of economic growth
and price stability. It also aims at full
employment and equilibrium in the balance of
payments.

25. 
Fiscal Policy:
Fiscal policy refers to the
government policy which is concerned with
raising public revenue through taxation and
other means and deciding on the level and
pattern of public expenditure. Fiscal policy
aims at price stability, economic growth, full
employment and equilibrium in the balance
of payments. Fiscal policy operates as a tool
of economic stabilization through income and
expenditure of the government.

26. 
The first industrial policy of India was enunciated
in 1948 and the main thrust of the policy was to
lay the foundation of a mixed economy in which
both the private and public enterprises would
work together to accelerate industrial
development in the country. Necessitated by the
adoption of the Indian constitution in 1950,
initiation of the first five year plan in 1951 and
the adoption of the ‘Socialistic Pattern of Society’
as the basic goal of social and economic policy,
the government of India came up with a new
industrial policy in 1956.

27. 
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to reduce disparities in income and wealth
to prevent monopolies and concentration of
economic power
to build a large and growing public sector
to develop heavy and machine making
industries and
to accelerate the rate of industrialization and
economic growth

28. 
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Classification of industries: All the industries
were classified into three broad categories.
Schedule A – State owned industries. The list
includes 17 industries whose future development
was the exclusive responsibility of the state.
These 17 industries are grouped into five classes:
(1) defense industries (2) heavy industries (3)
minerals (4) transport and communication and
(5) power. Of these, four industries - arms and
ammunition, atomic energy, railways and air
transport
were
to
be
the
government
monopolies. In the remaining 13 industries, all
the new units were to be set up by the state.

29. 
Schedule B – Mixed sector to be progressively
owned by the state. In this list 12 industries
were included. In these industries, the state
would increasingly establish new units and
the private sector can also set up or expand
units.

30. 
Schedule C – industries left to the private
sector. Even here the state could start any
business unit in which it was interested. The
main role of the state was to provide facilities
to the private sector to develop itself.

31. 
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The focus of the policy was on cottage and small
scale industries, industrial corporates,
development of backward areas, education and
training of managerial and technical personnel
for the growing public sector.
The chief criticisms of the Resolution were that
the private sector was pushed to the background,
the right of the state to acquire any industrial
undertaking hampered the enthusiasm of the
private sector to expand and grow, the state was
overburdened and its financial and administrative
resources were strained and the private sector
took advantage of the loopholes and obtained
licenses to set up units in those industries which
were the domain of the public sector.

32. 
New Industrial Policy, 1991: In tune with the
liberalization measures announced during the
1980s, the government announced a New
Industrial Policy on July 24, 1991. The major
policy changes are as follows:

33. 
Abolition of Industrial Licensing: The policy
abolished industrial licensing for 12 of the
18 industries which required licensing. Now
licensing is required for only six industries
namely
alcohol,
cigarettes,
hazardous
chemicals, electronic aerospace, defense
equipment
and
drugs
and
pharmaceuticals(except bulk drugs).
No
government approval is necessary for starting
a unit in the delicensed industries.

34. 
Public Sector’s Role Diluted: This policy reduced
the number of industries reserved for the public
sector from 17 to eight. Namely (1) arms and
ammunition, (2) atomic energy (3) coal and
lignite, (4) mineral oils, (5) mining of iron ore,
certain other ores, gold and diamonds (6) mining
of copper, lead, zinc and certain other metals (7)
minerals specified in the schedule to Atomic
energy and (8) rail transport. Over the years,
five industries were from this list and now the
industries that are reserved for the public sector
are only three namely, atomic energy, minerals
specified in schedule to atomic energy and rail
transport.

35. 
MRTP Limit Removed: Under the MRTP Act,
all firms with assets above a certain limit (Rs.
100 crores since 1985) were termed as
monopoly houses. These firms were
permitted to enter select industries only and
proposals for expansion required separate
approvals. The new policy scrapped the
threshold limit of assets in respect of
monopoly houses and dominant undertakings
as it was coming in the way of the growth of
these undertakings.

36. 
Free Entry to Foreign Investment and Technology:
The policy specified a list of high technology and
high-investment priority industries wherein
automatic permission was to be given for foreign
direct investment upto 51 per cent foreign
equity. These industries mainly included capital
goods industries, metallurgic industries, food
processing and certain service sector industries
having high export potential. The duties on
imports of most capital goods were
removed/drastically reduced.

37. 
Other Liberalization Measures: The other
liberalization measures are liberalization of
the industrial location policy, abolition of
phased manufacturing programme and the
removal of the mandatory convertibility
clause whereby banks and financial
institutions had the right to convert loans
into equity, if necessary.

38. 
The benefits expected from the policy include
the reduction in project cost, time and labour
involved in getting licenses, increase in the
efficiency of industries because of foreign
technology, freeing the resources locked up
in sick public sector units for more
productive uses and improved efficiency of
the public sector because of the stock market
discipline and curbing anti-competitive
behaviour by large undertakings.

39. 
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The down side of the policy includes the following
aspects:
No evidence of positive impact on industrial growth
Decline in the growth rate of capital goods industries
threat from foreign investment
Dangers of business colonization
MNCs operating more as traders and not as
manufacturers and not investing in Research in India
and MNCs sending obsolete technology to India
Personalistic relationships with the government
influencing the operations of businesses.