Business EnvironmentClass 12 Business Studies Part 1 Notes

How a Rickshaw Puller became an entrepreneur

The story of Dharamveer Kamboj is a powerful example of how a person can respond to their environment to create a successful business. Originally a rickshaw puller in Delhi, a serious accident forced him to return to his village in Haryana. With limited education and no technical skills, his employment options were few.

However, his desire to do something different led him to an important observation while visiting Rajasthan. He saw women from self-help groups making gooseberry laddoos. The process of grating the gooseberries by hand on stone slabs was incredibly difficult and painful. While machines existed, they were too expensive for these small-scale producers.

This is where Dharamveer saw an opportunity. He realized that various food processing tasks like cutting, grating, and juicing used similar techniques. This insight led him to develop an affordable, safe, and multipurpose processing machine. Despite his lack of formal education, his determination to solve a real-world problem turned him into an innovator and an entrepreneur. His story shows how social, economic, and technological factors can inspire business ideas that improve people's lives.

Meaning of Business Environment

The business environment is the sum total of all individuals, institutions, and other forces that are outside the control of a business but can affect its performance and success. Think of it as everything that surrounds a business, influencing its decisions and operations.

These external forces can include customers, competitors, government policies, social trends, and technological changes. A business has little to no control over these factors, but it must adapt to them to survive and grow.

Features of Business Environment

The business environment has several key characteristics:

• Totality of external forces: It includes everything outside the business, making it a very broad and aggregate concept.
• Specific and general forces:
  • Specific forces affect an individual business directly and immediately. These include its investors, customers, competitors, and suppliers.
  • General forces have an indirect impact on all businesses in an industry or economy. These include social, political, legal, and technological conditions.
• Inter-relatedness: Different parts of the business environment are closely connected. For instance, increased health awareness (a social trend) has boosted demand for health products like fat-free cooking oil (an economic impact).
• Dynamic nature: The business environment is constantly changing. Technology improves, consumer tastes shift, and new competitors enter the market.
• Uncertainty: It is very difficult to predict future changes in the environment, especially in fast-moving industries like technology or fashion.
• Complexity: The environment consists of many different interrelated forces, making it hard to understand in its entirety. It's easier to understand individual parts (like a new tax law) than to grasp the combined effect of all social, economic, and political factors at once.
• Relativity: The business environment is a relative concept because it varies from country to country and even from region to region. The political conditions in the USA are different from those in China, and the demand for sarees is high in India but almost non-existent in France.

Importance of Business Environment

Understanding the business environment is crucial for managers. A business does not exist in a vacuum; it must interact with and adapt to its surroundings. A good understanding of the environment helps a business in the following ways:

• It enables the firm to identify opportunities and getting the first mover advantage: Opportunities are positive external trends that can help a firm improve its performance. By identifying these early, a company can be the first to take advantage of them. [!example] Maruti Udyog became the leader in the small car market because it was the first to recognize the need for small cars in India, driven by rising fuel prices and a large middle-class population.
• It helps the firm to identify threats and early warning signals: Threats are negative external trends that could harm a firm's performance. Environmental awareness acts as an early warning, allowing managers to prepare for challenges. [!example] If an Indian firm learns that a foreign competitor is entering the market, it can prepare by improving product quality, reducing costs, or increasing its advertising.
• It helps in tapping useful resources: A business gets all its inputs—like finance, machines, raw materials, and labor—from the environment. In return, it provides outputs like goods, services, and taxes. By understanding the environment, a business can better acquire the resources it needs and design products that the environment desires.
• It helps in coping with rapid changes: Today's business environment is changing faster than ever. To cope with turbulent markets, demanding customers, and intense competition, managers must constantly examine their environment and develop suitable plans.
• It helps in assisting in planning and policy formulation: Understanding the opportunities and threats in the environment provides a basis for future planning and decision-making. For example, the entry of new competitors might force a company to rethink its pricing and marketing strategies.
• It helps in improving performance: Studies show that companies that continuously monitor and adapt to their environment not only improve their current performance but also succeed in the market for a longer period.

Dimensions of Business Environment

The general environment of a business can be broken down into five key dimensions: economic, social, technological, political, and legal.

Economic Environment

The Economic Environment consists of economic factors that can affect business practices. This includes:

• Interest rates
• Inflation rates
• Changes in people's disposable income
• Stock market indices
• Value of the rupee

Social Environment

The Social Environment includes social forces like customs, traditions, values, and trends in society.

• Traditions: These are long-standing social practices. For example, the celebration of festivals like Diwali, Eid, and Christmas creates huge business opportunities for greeting card companies, sweet manufacturers, and clothing stores.
• Values: These are concepts that a society holds in high regard, such as social justice and equality of opportunity. In business, these values translate into non-discriminatory employment practices and social responsibility.
• Social Trends: These present new opportunities and threats. [!example] The recent health-and-fitness trend has created a demand for products like organic food, gyms, and bottled mineral water.

Technological Environment

The Technological Environment includes forces related to scientific improvements and innovations that provide new ways of producing goods and services or new methods of operating a business.

Political Environment

The Political Environment includes political conditions, such as general stability and peace in the country, and the specific attitudes of the elected government towards business.

Political stability builds confidence among business people, encouraging them to invest in long-term projects. Political unrest, on the other hand, can create uncertainty and discourage investment. The government's attitude—whether it is supportive or hostile towards business—can also have a major impact.

Legal Environment

The Legal Environment includes the various laws, government regulations, administrative orders, and court judgments that businesses must follow. It is essential for every business to have adequate knowledge of the rules and regulations of the land.

Economic Environment in India

The economic environment in India has been steadily changing, largely due to government policies.

At the time of Independence, the Indian economy was primarily agricultural and rural. To solve the country's economic problems, the government took several steps, including:

• State control of key industries.
• Central planning through Five Year Plans.
• A reduced role for the private sector.

The main goals were to achieve rapid economic growth, become self-reliant, and reduce inequality. The public sector was given the lead role in developing infrastructure, while the private sector focused on consumer goods. However, this system of controls and regulations delivered mixed results.

By 1991, the Indian economy faced a severe crisis, marked by:

• A serious foreign exchange crisis.
• A high government deficit.
• Rising prices.

New Industrial Policy, 1991

To deal with the 1991 crisis, the Government of India announced a New Industrial Policy in July 1991. This policy introduced major economic reforms and aimed to create a more competitive and efficient economy. Its main pillars were Liberalisation, Privatisation, and Globalisation (LPG).

Liberalisation

Liberalisation refers to the process of freeing Indian business and industry from unnecessary controls and restrictions. It marked the end of the "licence-permit-quota raj."

Key measures of liberalisation included:

• Abolishing licensing requirements for most industries.
• Giving businesses freedom to decide their scale of operations without restrictions.
• Removing restrictions on the movement of goods and services.
• Allowing businesses freedom in fixing prices.
• Reducing tax rates and simplifying import-export procedures.
• Making it easier to attract foreign capital and technology.

Privatisation

Privatisation refers to giving a greater role to the private sector and a reduced role to the public sector. To achieve this, the government adopted a policy of planned disinvestment of public sector enterprises.

Disinvestment means transferring public sector enterprises to the private sector. When the government's ownership in a public enterprise is diluted beyond 51 percent, the ownership and management are transferred to the private sector.

Globalisation

Globalisation means the integration of the Indian economy with the world economy. Before 1991, India had strict regulations on imports. The new economic reforms aimed at trade liberalisation by promoting exports and liberalising imports.

A truly global economy implies a boundaryless world with:

• Free flow of goods, services, and capital across nations.
• Free flow of information and technology.
• Free movement of people across borders.

Globalisation has been made possible by rapid technological advancements and liberal trade policies by governments.

Demonetisation

On November 8, 2016, the Government of India announced the demonetisation of the two largest currency notes, ₹500 and ₹1,000. These notes immediately ceased to be legal tender. This move made 86% of the money in circulation invalid. People had to deposit the old notes in banks, and restrictions were placed on cash withdrawals.

The main aim of demonetisation was to curb corruption, counterfeiting, and the use of high-denomination notes for illegal activities, especially the accumulation of "black money."

Features of Demonetisation

1. Tax Administration Measure: People with declared income could easily exchange their old notes. Those with "black money" had to declare it and pay taxes at a penalty rate.
2. Signal of Tax Evasion Intolerance: The move signaled that the government would no longer tolerate or accept tax evasion.
3. Channelizing Savings: Demonetisation pushed savings into the formal financial system (banks), which could provide a base for more loans at lower interest rates.
4. Creating a Less-Cash Economy: It aimed to promote digital transactions and improve tax compliance, moving India towards a "cash-lite" economy.

Impact of Demonetisation

• Money/Interest rates: Cash transactions declined, bank deposits increased, and financial savings grew.
• Private wealth: It declined as some old notes were not returned and real estate prices fell.
• Digitisation: Digital transactions among new users saw a significant increase.
• Tax collection: Income tax collection rose due to increased disclosure of income.

Impact of Government Policy Changes on Business and Industry

The policies of liberalisation, privatisation, and globalisation since 1991 have had a major impact on the working of businesses in India.

• Increasing Competition: The removal of licensing and the entry of foreign firms have increased competition for Indian businesses.
• More Demanding Customers: With more choice available, customers have become more demanding.
• Rapidly Changing Technological Environment: Increased competition has forced companies to adopt new technologies to improve their products and processes.
• Necessity for Change: After 1991, businesses have had to continuously modify their policies and operations to adapt to the new environment.
• Need for Developing Human Resource: The new market conditions require employees with higher competence and skills, leading to a greater need for training and development.
• Market Orientation: Earlier, firms focused on production. Now, they have to focus on the market, studying customer needs and producing goods accordingly.
• Loss of Budgetary Support to the Public Sector: Public sector enterprises have had to become more efficient and generate their own resources to survive and grow, as government support has declined.