Concept and features of business environment
Business environment means the sum of all individuals, institutions and other forces that are outside a business and can affect how it works. The firm cannot control them; it can only adjust to them.
Features
- Totality of external forces: it is everything outside the firm, taken together.
- Specific and general forces: specific forces (customers, suppliers, rivals, investors) affect a firm directly; general forces (economic, social, political, legal, technological) affect all firms indirectly.
- Inter-relatedness: the parts are linked; a change in one affects others.
- Dynamic: it keeps changing.
- Uncertainty: future changes are hard to predict.
- Complexity: many forces act at once, so it is hard to understand fully.
- Relativity: it differs from country to country and region to region.
Importance of business environment
- Identifies opportunities and gives first-mover advantage: the first firm to spot a chance gains the market before rivals.
- Identifies threats and early warning signals: the firm can prepare in time.
- Helps tap useful resources: money, raw material, people and technology come from the environment.
- Helps cope with rapid changes: firms that watch change can respond quickly.
- Helps in planning and policy making: plans are based on what is happening outside.
- Helps improve performance: firms that keep up with the environment do better over time.
Dimensions of business environment
Economic environment
Interest rates, inflation, people's income, stock market, tax rates, and the government's economic policies. For example, lower interest rates make loans cheaper, so people buy more cars and homes. India's 1991 reforms of liberalisation, privatisation and globalisation are a major economic change.
Social environment
Customs, traditions, values, lifestyle, population trends and education. Examples: growing health awareness raises demand for fitness products; festivals raise demand for sweets and gifts; more working women raise demand for ready-to-cook food.
Technological environment
New scientific methods and inventions. Examples: smartphones hit the demand for cameras and music players; online banking changed how banks work. Technology creates new products and makes old ones outdated.
Political environment
Political stability and the government's attitude towards business. A stable government that supports business builds confidence; frequent changes of policy create fear.
Legal environment
Laws passed by the government, court decisions and rules. Examples: the Companies Act, the Consumer Protection Act, the Competition Act, rules on labelling tobacco and food products. Firms must know and follow them.
Demonetisation
Demonetisation means cancelling the legal-tender status of a currency note, so it can no longer be used as money. On 8 November 2016, the Government of India demonetised the old ₹500 and ₹1000 notes. People could deposit or exchange them in banks for a limited time. New ₹500 and ₹2000 notes were issued.
Features and aims
- A tax administration step to fight black money (income hidden from tax).
- To stop fake notes and cut funding of crime.
- To move towards a less-cash economy with digital payments.
- To bring more savings into the formal banking system and widen the tax net.
Impact
- Short-term shortage of cash; long queues at banks and ATMs.
- Small traders, farmers and daily-wage workers who used cash were hit.
- Bank deposits rose sharply; banks could lend more cheaply.
- Digital payments (UPI, cards, wallets) grew fast.
- More people filed income tax returns.
Key formulas and definitions
- Business environment = all outside forces a firm cannot control.
- Specific forces (customers, suppliers, rivals, investors) + general forces (PESTL).
- Features: totality, specific & general, inter-related, dynamic, uncertain, complex, relative.
- Dimensions: Economic, Social, Technological, Political, Legal.
- Demonetisation: 8 Nov 2016, old ₹500 and ₹1000 notes cancelled.
Worked examples
1. Banks cut home loan interest rates. Which dimension, and who gains?
Economic. Home buyers, builders, and cement and steel makers gain because more people buy houses.
2. More families want organic food. Which dimension?
Social (change in lifestyle and values). It is an opportunity for organic food firms.
3. A new law requires a warning on every packet of a harmful product. Which dimension?
Legal. Firms must change their packaging to obey the law.
4. A firm launches e-scooters first, before rivals, when fuel prices rise. Which importance of the environment does this show?
Identifying opportunities and getting the first-mover advantage.
5. Why did UPI use grow fast after November 2016?
Demonetisation took most high-value notes out of use for some time, so people turned to digital payments.
Common mistakes
- Including things inside the firm (its own workers' skill, its machines) in the business environment. The environment is outside the firm.
- Thinking a firm can control the environment. It can only adjust to it.
- Mixing political (government stability and attitude) with legal (actual laws and court rulings).
- Getting the demonetisation date or notes wrong: 8 November 2016, old ₹500 and ₹1000.