The business environment is the surroundings in which a business works. This is one of the smallest chapters in business studies. Here are the business environment class 12 notes.
Topics Discussed
Business Environment
It refers to the totality of external forces, factors, individuals, and institutions that are outside the control of a business enterprise but that may affect its performance.
Features of Business Environment
1) Totality of External Forces
It includes all the forces, institutions, and factors that are external to business organizations.
2) Specific and General Forces
It includes both specific and general forces. Specific forces affect business enterprises directly and immediately in their day-to-day workings.
General forces have an impact on all business enterprises and thus, may affect an individual firm only indirectly such as social, political, legal and technological conditions.
3) Interrelatedness
All the forces and factors of the business environment are interrelated to each other. For example, with the indication of youth toward Western culture, the demand for fast food is increasing.
4) Uncertainty
It is very difficult to predict changes in the business environment as the business environment is changing very fast.
For example, in the IT, and fashion industries frequent and fast changes are taking place.
5) Dynamic
The business environment is dynamic as it keeps on changing in terms of technological improvement, a shift in consumer preferences, and the entry of new competition in the market.
It is not static and rigid i.e. why it is essential to monitor and scan the business environment continuously.
6) Complexity
It is very difficult to understand the impact of the business environment on companies. Although it is easy to scan the environment, it is very difficult to know how these changes will influence it.
For example, it may be difficult to know the extent of the relative impact of the social, economic, political, technological, or legal factors on the change in demand for a product in the market.
7) Relativity
Business environment differs from country to country, and region to region as a political condition, cultures are different in different companies.
For example, there may be more demand for sarees in India as compared to the USA. The same condition in the environment may have different effects on different enterprises.
Importance of Business Environment
1) Enables the firms to identify opportunities and get the first-mover advantages
Businesses who can understand and scan the opportunities of the business environment at an early stage get maximum benefit or they can capture a big share of the market.
For example, WhatsApp was the first application for mobile charts. Afterwards, many other applications came but still WhatsApp is number one in the mobile chat.
2) Helps the firms to identify the threats and early warning signals
A businessman who can scan and understand the business environment in time to get a warning signal to deal with the constraints of the negative policies of the business environment.
Timely scanning of business environments and qualitative information that business gets is taken as a warning signal and changes in the companies are made.
For example, on scanning the business environment, the Maruti Udyog company got the qualitative information that more foreign car manufacturing companies are going to set up their business in India.
They took it as a warning signal and started increasing their production capacity. The Maruti Company accepted the entry of foreign car companies as a warning signal and increased their production to supply the cars without any waiting period to compete with the new companies.
3) Helpful in tapping and assembling resources
Businesses have to supply the goods to the market according to the demand in the market. To supply outputs the needed inputs, raw materials, etc. They acquire raw materials and other resources keeping in mind the output demanded by the environment.
They select resources according to availability in the environment and the demand for output in the environment.
For example, with the demand for LED, 3D T.V manufacturers are collecting resources necessary to manufacture LED & 3D T.V rather than collecting resources for black and white T.V or flat screen, etc.
4) Helps to adjust and adapt to rapid changes
Today changes are taking place very fast and these changes have a great impact on business. So, it is essential to understand these changes as early as possible.
Businessmen make changes in their internal environment also to match the external environment.
For example, due to increasing competition, customers are becoming more demanding and it has become essential for business enterprises to adapt rapidly to the changing technology environment.
5) Assisting in planning and policy-making
The major strategies, plans, and policies in the organization are formed keeping in mind the business environment because the policies and strategies have to be implemented in the presence of environmental factors.
Scanning environmental factors helps in finding out the opportunities for business and strategies can be made to grab these opportunities.
For example, on scanning the Indian business environment we find there is great scope for the tourism industry in our country. So, businessmen are planning strategies to grab these opportunities.
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6) Performance improvement
With continuous scanning of the business environment companies can easily improve their performance.
By making changes in the internal environment matching to the external environment, organizations can properly improve their market share.
Dimensions of Business Environment
Dimensions or the factors constituting the business environment include economic, social, technological, political, and legal conditions that are considered relevant for decision-making and improving the performance of an enterprise.
1) Economic Environment
Economic environment refers to all the forces and factors which have a bearing on the functioning of a business enterprise.
It has an immediate and direct impact on a business. Rate of interest, inflation rate, change in disposable income of people, monetary policy, stock market indices, etc. are some economic factors, which could affect business firms.
An increase or decrease in economic factors results in opportunities or constraints on a business enterprise.
2) Technological Environment
It includes forces related to scientific improvements and innovations that provide new ways of producing goods and services.
New methods and techniques of operating business. A businessman must closely monitor the technological changes taking place in the industry as it helps in facing competition and improving the quality of the product.
For example, online sales of grocery items are becoming very common, use of artificial intelligence in various companies, etc.
3) Political Environment
It includes political conditions such as general stability and peace in the country and the attitude of the elected government representatives towards business. Political stability builds confidence in the business community.
Political unrest and threats to law and order situations may bring uncertainty to business activities.
For example, Bangalore is called the Silicon Valley of India due to the favorable political conditions provided by the state government to the IT industries.
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4) Legal Environment
It includes:
- Various laws and legislative acts
- Administrative orders issued by government authorities
- Court judgements, as well as decisions of various commissions and agencies at every level of the government centre, state or local
For example, advertisement of alcoholic beverages is prohibited.
5) Social Environment
The business environment includes various social forces such as customs, beliefs, literacy rate, educational levels, lifestyle, values, etc. Social trends present various opportunities and threats to business enterprises.
For example, the celebration of Diwali, Eid, and Christmas in India provides financial opportunities for confectionary manufacturers, garments businesses and many other related businesses.
Note: You can learn the names of dimensions of the business environment with the word ‘SLEPT’.
Demonetisation
Demonetisation is an act of cancelling the legal tender status of a currency unit in circulation.
The Government of India announced on November 8, 2016, with profound implications for the Indian economy. The largest denomination notes, Rs.500 and Rs.1000 were ‘demonetised’ with immediate effect, ceasing to legal tender except for a few specified purposes such as paying utility bills.
The people of India had to deposit invalid currency in the banks, which came along with the restrictions placed on cash withdrawals. In other words, restrictions were placed on the convertibility of domestic money and bank deposits.
Aim: The main aim was to curb corruption, black money and illegal activities.
Features of Demonetisation
- Demonetisation is viewed as a tax administrative measure: Cash holdings arising from declared income were readily deposited in banks and exchanged for new notes.
- Demonetisation also led to tax administrative channelizing savings into the formal financial system: Bank deposits increased, however, interest rates decreased.
- Demonetisation is to create a less cash or cash-lite economy: Cash transactions declined. Digital transactions using RuPay cards and Debit cards, Aadhar-enabled Payment systems (AEPS), etc. increased.
- Demonetisation is also interpreted as a measure to improve tax compliance: It indicates that tax evasion will no longer be tolerated or accepted.
Tax collection increased because of increased disclosure. Tax evasion decreases.