Important Questions : Business Environment | EduRev Notes

 Page 1


 
 
CHAPTER - 3 
BUSINESS ENVIRONMENT 
 
CONCEPT MAPPING 
 
 
Meaning : The totality of all individuals, institutions and other forces that are 
outside a business enterprise but that may affect its functioning and 
performance. 
 
Nature : (a) totality of external forces (b) specific and general forces  
  (c) Inter-relatedness (d) dynamic (e) uncertainty (f) complexity  
  (g) Relativity 
 
Importance : (a) first mover advantage (b) early warning signal (c) tapping useful 
resources (d) coping with rapid change (e) planning and policy 
formulation (f) improving performance 
 
Dimensions : (a) economic (b) social (c) technological (d) political (e) legal 
 
 
Liberalisation : Liberating industry from licensing and other regulations. 
 
 
Privatisation  : transferring ownership and management of public enterprises to 
private sector 
 
Globalisation : integrating different economies into a world economy by removing 
barriers to free flow of goods, services, capital, labour, etc. from one 
country to another. 
 
Impact of Policy Changes: (a) increasing competition (b) more demanding 
customers (c) rapidly changing technology (d) necessity for change 
(e) need to develop human resources (f) market orientation (g) loss of 
budgetary support to public sector. 
 
KEY CONCEPTS IN NUTSHELL 
 
1. MEANING: 
 
It is the sum total of all individuals or institutions comprising of 
consumers, competitors, suppliers government, courts, media and also the forces 
like economic, social, political, legal and technological that are outside the ambit 
and control of business enterprise but that which can affect its performance. 
2. FEATURES OF BUSINESS ENVIRONMENT: 
 
i. Constitutes totally of external forces - it comprises of the sum total of 
all forces that are external to the business firm which it must deal with. 
ii. Specific and general forces - the forces present outside can be divided 
Page 2


 
 
CHAPTER - 3 
BUSINESS ENVIRONMENT 
 
CONCEPT MAPPING 
 
 
Meaning : The totality of all individuals, institutions and other forces that are 
outside a business enterprise but that may affect its functioning and 
performance. 
 
Nature : (a) totality of external forces (b) specific and general forces  
  (c) Inter-relatedness (d) dynamic (e) uncertainty (f) complexity  
  (g) Relativity 
 
Importance : (a) first mover advantage (b) early warning signal (c) tapping useful 
resources (d) coping with rapid change (e) planning and policy 
formulation (f) improving performance 
 
Dimensions : (a) economic (b) social (c) technological (d) political (e) legal 
 
 
Liberalisation : Liberating industry from licensing and other regulations. 
 
 
Privatisation  : transferring ownership and management of public enterprises to 
private sector 
 
Globalisation : integrating different economies into a world economy by removing 
barriers to free flow of goods, services, capital, labour, etc. from one 
country to another. 
 
Impact of Policy Changes: (a) increasing competition (b) more demanding 
customers (c) rapidly changing technology (d) necessity for change 
(e) need to develop human resources (f) market orientation (g) loss of 
budgetary support to public sector. 
 
KEY CONCEPTS IN NUTSHELL 
 
1. MEANING: 
 
It is the sum total of all individuals or institutions comprising of 
consumers, competitors, suppliers government, courts, media and also the forces 
like economic, social, political, legal and technological that are outside the ambit 
and control of business enterprise but that which can affect its performance. 
2. FEATURES OF BUSINESS ENVIRONMENT: 
 
i. Constitutes totally of external forces - it comprises of the sum total of 
all forces that are external to the business firm which it must deal with. 
ii. Specific and general forces - the forces present outside can be divided 
 
into two parts Specific- these forces affect the firms of an industry 
separately 
e.g. Customers, suppliers, competitive firms etc. 
 
General - these forces affect all the firms of an 
industry equally e.g. Social, political. 
iii.  Inter- related - the different factors are co-related 
e.g. Change in the import- export policy is a political change that 
gives rise to economic change as well 
iv.  Uncertainty - business environment are susceptible to rapid changes, no 
one can predict with certainty the changes in the factors. 
e.g. change in technology and fashion. 
 
v. Dynamic - business environment keeps on changing. 
 
vi.  Complex - it is difficult to know the extent of impact of the changes that 
the factors can bring in. 
vii. Relative - business environment is a relative concept as it differs from 
country to country, region to region. 
 
 
3. IMPORTANCE OF BUSINESS ENVIRONMENT: 
 
i. Identify the opportunities and getting the first mover advantage - by 
being aware of the changes in business environment, enterprises can 
identify opportunity and strategize ways to capitalise on them. 
ii. Identify threats and early warning signals - environment scanning helps in 
detecting possible threats in future. 
iii. Basis for planning and policy for formulation - identification of 
threats and opportunity serves as basis for deciding the future course of 
action. 
iv. Tapping useful resources - the resources are required to carry on a 
successful business enterprise. These have to be procured from the 
business environment. 
v. Helps in coping with rapid changes - turbulent markets, less brand loyalty, 
divisions and  sub-divisions (fragmentation) of markets, more demanding 
customers, rapid changes in technology and intense global competition 
combined with complex business environment calls for a flexible planning to 
cope with the changes. 
vi. Improvement in organisation performance - continuous and constant 
monitoring and adapting suitable business practices result in improved 
business performance. 
 
4. DIMENSIONS OF BUSINESS ENVIRONMENT: 
 
The various dimensions of business environment in terms of general environment are: 
Page 3


 
 
CHAPTER - 3 
BUSINESS ENVIRONMENT 
 
CONCEPT MAPPING 
 
 
Meaning : The totality of all individuals, institutions and other forces that are 
outside a business enterprise but that may affect its functioning and 
performance. 
 
Nature : (a) totality of external forces (b) specific and general forces  
  (c) Inter-relatedness (d) dynamic (e) uncertainty (f) complexity  
  (g) Relativity 
 
Importance : (a) first mover advantage (b) early warning signal (c) tapping useful 
resources (d) coping with rapid change (e) planning and policy 
formulation (f) improving performance 
 
Dimensions : (a) economic (b) social (c) technological (d) political (e) legal 
 
 
Liberalisation : Liberating industry from licensing and other regulations. 
 
 
Privatisation  : transferring ownership and management of public enterprises to 
private sector 
 
Globalisation : integrating different economies into a world economy by removing 
barriers to free flow of goods, services, capital, labour, etc. from one 
country to another. 
 
Impact of Policy Changes: (a) increasing competition (b) more demanding 
customers (c) rapidly changing technology (d) necessity for change 
(e) need to develop human resources (f) market orientation (g) loss of 
budgetary support to public sector. 
 
KEY CONCEPTS IN NUTSHELL 
 
1. MEANING: 
 
It is the sum total of all individuals or institutions comprising of 
consumers, competitors, suppliers government, courts, media and also the forces 
like economic, social, political, legal and technological that are outside the ambit 
and control of business enterprise but that which can affect its performance. 
2. FEATURES OF BUSINESS ENVIRONMENT: 
 
i. Constitutes totally of external forces - it comprises of the sum total of 
all forces that are external to the business firm which it must deal with. 
ii. Specific and general forces - the forces present outside can be divided 
 
into two parts Specific- these forces affect the firms of an industry 
separately 
e.g. Customers, suppliers, competitive firms etc. 
 
General - these forces affect all the firms of an 
industry equally e.g. Social, political. 
iii.  Inter- related - the different factors are co-related 
e.g. Change in the import- export policy is a political change that 
gives rise to economic change as well 
iv.  Uncertainty - business environment are susceptible to rapid changes, no 
one can predict with certainty the changes in the factors. 
e.g. change in technology and fashion. 
 
v. Dynamic - business environment keeps on changing. 
 
vi.  Complex - it is difficult to know the extent of impact of the changes that 
the factors can bring in. 
vii. Relative - business environment is a relative concept as it differs from 
country to country, region to region. 
 
 
3. IMPORTANCE OF BUSINESS ENVIRONMENT: 
 
i. Identify the opportunities and getting the first mover advantage - by 
being aware of the changes in business environment, enterprises can 
identify opportunity and strategize ways to capitalise on them. 
ii. Identify threats and early warning signals - environment scanning helps in 
detecting possible threats in future. 
iii. Basis for planning and policy for formulation - identification of 
threats and opportunity serves as basis for deciding the future course of 
action. 
iv. Tapping useful resources - the resources are required to carry on a 
successful business enterprise. These have to be procured from the 
business environment. 
v. Helps in coping with rapid changes - turbulent markets, less brand loyalty, 
divisions and  sub-divisions (fragmentation) of markets, more demanding 
customers, rapid changes in technology and intense global competition 
combined with complex business environment calls for a flexible planning to 
cope with the changes. 
vi. Improvement in organisation performance - continuous and constant 
monitoring and adapting suitable business practices result in improved 
business performance. 
 
4. DIMENSIONS OF BUSINESS ENVIRONMENT: 
 
The various dimensions of business environment in terms of general environment are: 
 
 
 
Economic Environment : 
Refers to all those forces that have economic impact on the business 
activity 
 
Components of economic environment are GDP , Inflation rate, Interest rate, 
Rupee value, Stock exchange index, T ax rate 
 
Political Environment: includes political conditions such as political leadership, 
political stability, practices of the ruling party and the nature of the government in power 
and their level of interference 
 
Components of political environment are Constitution of the country, Political 
ideology of the ruling party, nature and extent of government interference, 
international relations. 
 
Legal Environment: refers to the framework of laws and various legislations within 
which the business activities take place 
 
Components of Legal Environment are Government legislations, court judgements, 
Decisions of various commissions. 
 
Social Environment: represents the customs and traditions, values, culture, social 
trends, beliefs, norms and ethics of a society in which business enterprises operate. 
 
Components of Social Environment are customs traditions, social expectations, 
lifestyles, values, literacy level 
 
Technological Environment: refers to the influence of the changes in the 
technology on the business environment. 
 
Components of Technological Environment: new methods and techniques of 
business operations, Scientific improvements and innovations, 
 
 
As a part of economic reforms the Government of India announced New Industrial 
Policy in July 1991 which emphasised on three major elements which were: 
 
• Liberalisation - from the clutches of licensing policy. Therefore, removal of 
entry and growth restrictions on the private sector enterprises. 
Page 4


 
 
CHAPTER - 3 
BUSINESS ENVIRONMENT 
 
CONCEPT MAPPING 
 
 
Meaning : The totality of all individuals, institutions and other forces that are 
outside a business enterprise but that may affect its functioning and 
performance. 
 
Nature : (a) totality of external forces (b) specific and general forces  
  (c) Inter-relatedness (d) dynamic (e) uncertainty (f) complexity  
  (g) Relativity 
 
Importance : (a) first mover advantage (b) early warning signal (c) tapping useful 
resources (d) coping with rapid change (e) planning and policy 
formulation (f) improving performance 
 
Dimensions : (a) economic (b) social (c) technological (d) political (e) legal 
 
 
Liberalisation : Liberating industry from licensing and other regulations. 
 
 
Privatisation  : transferring ownership and management of public enterprises to 
private sector 
 
Globalisation : integrating different economies into a world economy by removing 
barriers to free flow of goods, services, capital, labour, etc. from one 
country to another. 
 
Impact of Policy Changes: (a) increasing competition (b) more demanding 
customers (c) rapidly changing technology (d) necessity for change 
(e) need to develop human resources (f) market orientation (g) loss of 
budgetary support to public sector. 
 
KEY CONCEPTS IN NUTSHELL 
 
1. MEANING: 
 
It is the sum total of all individuals or institutions comprising of 
consumers, competitors, suppliers government, courts, media and also the forces 
like economic, social, political, legal and technological that are outside the ambit 
and control of business enterprise but that which can affect its performance. 
2. FEATURES OF BUSINESS ENVIRONMENT: 
 
i. Constitutes totally of external forces - it comprises of the sum total of 
all forces that are external to the business firm which it must deal with. 
ii. Specific and general forces - the forces present outside can be divided 
 
into two parts Specific- these forces affect the firms of an industry 
separately 
e.g. Customers, suppliers, competitive firms etc. 
 
General - these forces affect all the firms of an 
industry equally e.g. Social, political. 
iii.  Inter- related - the different factors are co-related 
e.g. Change in the import- export policy is a political change that 
gives rise to economic change as well 
iv.  Uncertainty - business environment are susceptible to rapid changes, no 
one can predict with certainty the changes in the factors. 
e.g. change in technology and fashion. 
 
v. Dynamic - business environment keeps on changing. 
 
vi.  Complex - it is difficult to know the extent of impact of the changes that 
the factors can bring in. 
vii. Relative - business environment is a relative concept as it differs from 
country to country, region to region. 
 
 
3. IMPORTANCE OF BUSINESS ENVIRONMENT: 
 
i. Identify the opportunities and getting the first mover advantage - by 
being aware of the changes in business environment, enterprises can 
identify opportunity and strategize ways to capitalise on them. 
ii. Identify threats and early warning signals - environment scanning helps in 
detecting possible threats in future. 
iii. Basis for planning and policy for formulation - identification of 
threats and opportunity serves as basis for deciding the future course of 
action. 
iv. Tapping useful resources - the resources are required to carry on a 
successful business enterprise. These have to be procured from the 
business environment. 
v. Helps in coping with rapid changes - turbulent markets, less brand loyalty, 
divisions and  sub-divisions (fragmentation) of markets, more demanding 
customers, rapid changes in technology and intense global competition 
combined with complex business environment calls for a flexible planning to 
cope with the changes. 
vi. Improvement in organisation performance - continuous and constant 
monitoring and adapting suitable business practices result in improved 
business performance. 
 
4. DIMENSIONS OF BUSINESS ENVIRONMENT: 
 
The various dimensions of business environment in terms of general environment are: 
 
 
 
Economic Environment : 
Refers to all those forces that have economic impact on the business 
activity 
 
Components of economic environment are GDP , Inflation rate, Interest rate, 
Rupee value, Stock exchange index, T ax rate 
 
Political Environment: includes political conditions such as political leadership, 
political stability, practices of the ruling party and the nature of the government in power 
and their level of interference 
 
Components of political environment are Constitution of the country, Political 
ideology of the ruling party, nature and extent of government interference, 
international relations. 
 
Legal Environment: refers to the framework of laws and various legislations within 
which the business activities take place 
 
Components of Legal Environment are Government legislations, court judgements, 
Decisions of various commissions. 
 
Social Environment: represents the customs and traditions, values, culture, social 
trends, beliefs, norms and ethics of a society in which business enterprises operate. 
 
Components of Social Environment are customs traditions, social expectations, 
lifestyles, values, literacy level 
 
Technological Environment: refers to the influence of the changes in the 
technology on the business environment. 
 
Components of Technological Environment: new methods and techniques of 
business operations, Scientific improvements and innovations, 
 
 
As a part of economic reforms the Government of India announced New Industrial 
Policy in July 1991 which emphasised on three major elements which were: 
 
• Liberalisation - from the clutches of licensing policy. Therefore, removal of 
entry and growth restrictions on the private sector enterprises. 
 
 
• Globalisation - encouragement of foreign private participation in industrial 
development. This step mainly intended at integrating the national economy with 
the world economy through the removal of barriers on international trade and 
capital movements. 
 
• Privatisation - drastic reduction in the role of public sector. Further it aimed at 
transfer of ownership ,management and control of the public sector enterprise 
to the private sector. 
 
The new industrial policy aimed at creating a more competent environment in the 
economy so as to strengthen the process of industrialisation. Its features are as 
follows 
 
• Delicensing of all projects except six industries 
 
• Decreased role of public sector to merely 4 industries 
 
• Disinvestment: selling of a part or whole of the shares of the public sector 
undertaking 
 
• Liberalisation of Foreign capital 
 
• Setting up of Foreign Investment board (FIPB) 
 
• Liberal policy for technical collaborations 
 
 
7. IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY: 
 
• Increase in competition 
 
• Demanding customers 
 
• Technical change and increased investment in R and D 
 
• Necessity of change 
 
• Development of human resource 
 
• Market orientation 
 
• Loss of budgetary support to the public sector. 
 
 
 
 
 
 
 
 
 
Page 5


 
 
CHAPTER - 3 
BUSINESS ENVIRONMENT 
 
CONCEPT MAPPING 
 
 
Meaning : The totality of all individuals, institutions and other forces that are 
outside a business enterprise but that may affect its functioning and 
performance. 
 
Nature : (a) totality of external forces (b) specific and general forces  
  (c) Inter-relatedness (d) dynamic (e) uncertainty (f) complexity  
  (g) Relativity 
 
Importance : (a) first mover advantage (b) early warning signal (c) tapping useful 
resources (d) coping with rapid change (e) planning and policy 
formulation (f) improving performance 
 
Dimensions : (a) economic (b) social (c) technological (d) political (e) legal 
 
 
Liberalisation : Liberating industry from licensing and other regulations. 
 
 
Privatisation  : transferring ownership and management of public enterprises to 
private sector 
 
Globalisation : integrating different economies into a world economy by removing 
barriers to free flow of goods, services, capital, labour, etc. from one 
country to another. 
 
Impact of Policy Changes: (a) increasing competition (b) more demanding 
customers (c) rapidly changing technology (d) necessity for change 
(e) need to develop human resources (f) market orientation (g) loss of 
budgetary support to public sector. 
 
KEY CONCEPTS IN NUTSHELL 
 
1. MEANING: 
 
It is the sum total of all individuals or institutions comprising of 
consumers, competitors, suppliers government, courts, media and also the forces 
like economic, social, political, legal and technological that are outside the ambit 
and control of business enterprise but that which can affect its performance. 
2. FEATURES OF BUSINESS ENVIRONMENT: 
 
i. Constitutes totally of external forces - it comprises of the sum total of 
all forces that are external to the business firm which it must deal with. 
ii. Specific and general forces - the forces present outside can be divided 
 
into two parts Specific- these forces affect the firms of an industry 
separately 
e.g. Customers, suppliers, competitive firms etc. 
 
General - these forces affect all the firms of an 
industry equally e.g. Social, political. 
iii.  Inter- related - the different factors are co-related 
e.g. Change in the import- export policy is a political change that 
gives rise to economic change as well 
iv.  Uncertainty - business environment are susceptible to rapid changes, no 
one can predict with certainty the changes in the factors. 
e.g. change in technology and fashion. 
 
v. Dynamic - business environment keeps on changing. 
 
vi.  Complex - it is difficult to know the extent of impact of the changes that 
the factors can bring in. 
vii. Relative - business environment is a relative concept as it differs from 
country to country, region to region. 
 
 
3. IMPORTANCE OF BUSINESS ENVIRONMENT: 
 
i. Identify the opportunities and getting the first mover advantage - by 
being aware of the changes in business environment, enterprises can 
identify opportunity and strategize ways to capitalise on them. 
ii. Identify threats and early warning signals - environment scanning helps in 
detecting possible threats in future. 
iii. Basis for planning and policy for formulation - identification of 
threats and opportunity serves as basis for deciding the future course of 
action. 
iv. Tapping useful resources - the resources are required to carry on a 
successful business enterprise. These have to be procured from the 
business environment. 
v. Helps in coping with rapid changes - turbulent markets, less brand loyalty, 
divisions and  sub-divisions (fragmentation) of markets, more demanding 
customers, rapid changes in technology and intense global competition 
combined with complex business environment calls for a flexible planning to 
cope with the changes. 
vi. Improvement in organisation performance - continuous and constant 
monitoring and adapting suitable business practices result in improved 
business performance. 
 
4. DIMENSIONS OF BUSINESS ENVIRONMENT: 
 
The various dimensions of business environment in terms of general environment are: 
 
 
 
Economic Environment : 
Refers to all those forces that have economic impact on the business 
activity 
 
Components of economic environment are GDP , Inflation rate, Interest rate, 
Rupee value, Stock exchange index, T ax rate 
 
Political Environment: includes political conditions such as political leadership, 
political stability, practices of the ruling party and the nature of the government in power 
and their level of interference 
 
Components of political environment are Constitution of the country, Political 
ideology of the ruling party, nature and extent of government interference, 
international relations. 
 
Legal Environment: refers to the framework of laws and various legislations within 
which the business activities take place 
 
Components of Legal Environment are Government legislations, court judgements, 
Decisions of various commissions. 
 
Social Environment: represents the customs and traditions, values, culture, social 
trends, beliefs, norms and ethics of a society in which business enterprises operate. 
 
Components of Social Environment are customs traditions, social expectations, 
lifestyles, values, literacy level 
 
Technological Environment: refers to the influence of the changes in the 
technology on the business environment. 
 
Components of Technological Environment: new methods and techniques of 
business operations, Scientific improvements and innovations, 
 
 
As a part of economic reforms the Government of India announced New Industrial 
Policy in July 1991 which emphasised on three major elements which were: 
 
• Liberalisation - from the clutches of licensing policy. Therefore, removal of 
entry and growth restrictions on the private sector enterprises. 
 
 
• Globalisation - encouragement of foreign private participation in industrial 
development. This step mainly intended at integrating the national economy with 
the world economy through the removal of barriers on international trade and 
capital movements. 
 
• Privatisation - drastic reduction in the role of public sector. Further it aimed at 
transfer of ownership ,management and control of the public sector enterprise 
to the private sector. 
 
The new industrial policy aimed at creating a more competent environment in the 
economy so as to strengthen the process of industrialisation. Its features are as 
follows 
 
• Delicensing of all projects except six industries 
 
• Decreased role of public sector to merely 4 industries 
 
• Disinvestment: selling of a part or whole of the shares of the public sector 
undertaking 
 
• Liberalisation of Foreign capital 
 
• Setting up of Foreign Investment board (FIPB) 
 
• Liberal policy for technical collaborations 
 
 
7. IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY: 
 
• Increase in competition 
 
• Demanding customers 
 
• Technical change and increased investment in R and D 
 
• Necessity of change 
 
• Development of human resource 
 
• Market orientation 
 
• Loss of budgetary support to the public sector. 
 
 
 
 
 
 
 
 
 
 
VERY SHORT ANSWER TYPE QUESTIONS (1 MARK) 
 
 
1. What is Business Environment? 
 
Ans. Forces affecting the performance of an organisation but outside its control are 
called as Business Environment. 
 
 
 
2. How have customers benefited by increased competition after 
liberalisation and globalisation? 
Ans. While purchasing they get a better quality and wider choice of goods and 
services. 
 
3. How can the firms cope up with changing technological environment? 
 
Ans. They have to develop new ways. 
 
 
4. What do you mean by Globalisation? 
 
Ans. When the various economies of the world integrate, it is known as 
Globalisation. 
 
 
5. Which policy of Indian Government has moved India towards 
globalisation? 
 
Ans. The Industrial Policy of 1991. 
 
 
6. What do you mean by disinvestment? 
 
Ans. When the private sector takes over public sector, it is called disinvestment. 
 
 
7. Give one measure taken by Indian Government to introduce liberalisation. 
 
Ans. Abolishing licensing requirements. 
 
 
8. What do you mean by first mover advantage? 
 
Ans. Early  identification of opportunities. 
 
 
9. What are Values? 
 
Ans. Concepts held by a society in high esteem are values. 
 
 
10. Which of the sector was given importance after independence? 
 
Ans. Public  sector. 
 
11. What was the responsibility given to private sector after 
independence? 
Ans. Developing consumer goods industry was the responsibility gives to private 
sector. 
 
12. What do you mean by Liberalisation?