NCERT Textbook - Business Environment Commerce Notes | EduRev

Business Studies (BST) Class 12

Commerce : NCERT Textbook - Business Environment Commerce Notes | EduRev

 Page 1


3
BUSINESS ENVIRONMENT BUSINESS ENVIRONMENT
CHAPTER
After studying this 
chapter you will be able 
to: 
n Explain the meaning of 
business environment;
n Discuss the 
importance of 
business environment;
n Describe the various 
elements of business 
environment; and
n Examine the 
economic 
environment in India 
and the impact of 
Government policies 
on business and 
industry.
LEARNING 
OBJE CT I VE S
The soft-drinks giants, Pepsico and Coca-Cola, 
suffered a decline in sales of colas in India in the 
beginning of the year 2006 after an environmental 
group, Centre for Science and Environment (CSE) 
claimed to have found pesticides in their drinks 
upto 50 times the permissible health limits. These 
companies issued a number of press statements and 
conducted many publicity compaigns in India claiming 
that their beverages were perfectly safe. The Union 
Health Ministry’s expert committee also observes that 
Coke and Pepsi were safe. CSE, in turn, criticised the 
expert committees findings and said that 11 of Coke 
and Pepsi drinks contained average pesticide levels 
that were 24 times higher than the limits agreed by 
the Indian government. Despite health ministry’s 
clean chit to colas, several States continue to ban 
or restrict Coke and Pepsi. However, the pesticide 
controversy adversely affected the sales of both Coke 
and Pespi as consumers started watching their diet 
more closely . Organic food products suddenly became 
popular as the healthier option. By definition, organic 
means fruits, vegetables, foodgrains and processed 
products that have been produced with no pesticide 
or inorganic fertilisers. Meanwhile the soft drinks 
giants have been continuously advertising and trying 
to convince the consumers about the safety of their 
products. 
The Pepsi Cola controversy raises 
an interesting question: Why are 
soft drinks giants, Coca-Cola and 
Pepsico putting in so much effort on 
publicity campaigns in India after the 
decline in their sales? The answer 
lies in the fact that their success 
is dependent not merely on their 
internal management, but also on 
many external forces as, for example, 
2015-16(21/01/2015)
Page 2


3
BUSINESS ENVIRONMENT BUSINESS ENVIRONMENT
CHAPTER
After studying this 
chapter you will be able 
to: 
n Explain the meaning of 
business environment;
n Discuss the 
importance of 
business environment;
n Describe the various 
elements of business 
environment; and
n Examine the 
economic 
environment in India 
and the impact of 
Government policies 
on business and 
industry.
LEARNING 
OBJE CT I VE S
The soft-drinks giants, Pepsico and Coca-Cola, 
suffered a decline in sales of colas in India in the 
beginning of the year 2006 after an environmental 
group, Centre for Science and Environment (CSE) 
claimed to have found pesticides in their drinks 
upto 50 times the permissible health limits. These 
companies issued a number of press statements and 
conducted many publicity compaigns in India claiming 
that their beverages were perfectly safe. The Union 
Health Ministry’s expert committee also observes that 
Coke and Pepsi were safe. CSE, in turn, criticised the 
expert committees findings and said that 11 of Coke 
and Pepsi drinks contained average pesticide levels 
that were 24 times higher than the limits agreed by 
the Indian government. Despite health ministry’s 
clean chit to colas, several States continue to ban 
or restrict Coke and Pepsi. However, the pesticide 
controversy adversely affected the sales of both Coke 
and Pespi as consumers started watching their diet 
more closely . Organic food products suddenly became 
popular as the healthier option. By definition, organic 
means fruits, vegetables, foodgrains and processed 
products that have been produced with no pesticide 
or inorganic fertilisers. Meanwhile the soft drinks 
giants have been continuously advertising and trying 
to convince the consumers about the safety of their 
products. 
The Pepsi Cola controversy raises 
an interesting question: Why are 
soft drinks giants, Coca-Cola and 
Pepsico putting in so much effort on 
publicity campaigns in India after the 
decline in their sales? The answer 
lies in the fact that their success 
is dependent not merely on their 
internal management, but also on 
many external forces as, for example, 
2015-16(21/01/2015)
Business Environment 73
decisions and actions of governments, 
consumers, other business firms and 
even non-government organisations 
(NGOs) like CSE. In this chapter, 
we shall identify certain important 
external forces (or environmental 
conditions) and their impact on the 
operations of business enterprises.
Meaning of Business Meaning of Business 
e nvironMent e nvironMent The term ‘business environment’ 
means the sum total of all individuals, 
institutions and other forces that 
are outside the control of a business 
enterprise but that may affect its 
performance. As one writer has put 
it– “Just take the universe, subtract 
from it the subset that represents 
the organisation, and the remainder 
is environment”. Thus, the economic, 
social, political, technological and 
other forces which operate outside 
a business enterprise are part of its 
environment. So also, the individual 
consumers or competing enterprises 
as well as the governments, consumer 
groups, competitors, courts, media 
and other institutions working 
outside an enterprise constitute its 
environment. The important point is 
that these individuals, institutions 
and forces are likely to influence the 
performance of a business enterprise 
although they happen to exist outside 
its boundaries. For example, changes 
in government’s economic policies, 
rapid technological developments, 
political uncertainty, changes in 
fashions and tastes of consumers 
and increased competition in the 
market — all influence the working 
of a business enterprise in important 
ways. Increase in taxes by government 
can make things expensive to buy. 
Technological improvements may 
render existing products obsolete. 
Political uncertainty may create fear 
in the minds of investors. Changes 
in fashions and tastes of consumers 
may shift demand in the market 
from existing products to new ones. 
Increased competition in the market 
may reduce profit margins of firms.
On the basis of the foregoing 
disc ussion, it can be said business 
environment, has the following 
features: 
 (i) Totality of external forces: 
Business environment is the 
sum total of all things external 
to business firms and, as such, 
is aggregative in nature.
 (ii) Specific and general forces: 
Business environment includes 
both specific and general forces. 
Specific forces (such as investors, 
customers, competitors and supp-
liers) affect individual enterprises 
directly and immediately in their 
day-to-day working. General 
forces (such as social, political, 
legal and technological conditions) 
have impact on all business 
enterprises and thus may affect 
an individual firm only indirectly.
 (iii) Inter-relatedness: Different 
elements or parts of business 
2015-16(21/01/2015)
Page 3


3
BUSINESS ENVIRONMENT BUSINESS ENVIRONMENT
CHAPTER
After studying this 
chapter you will be able 
to: 
n Explain the meaning of 
business environment;
n Discuss the 
importance of 
business environment;
n Describe the various 
elements of business 
environment; and
n Examine the 
economic 
environment in India 
and the impact of 
Government policies 
on business and 
industry.
LEARNING 
OBJE CT I VE S
The soft-drinks giants, Pepsico and Coca-Cola, 
suffered a decline in sales of colas in India in the 
beginning of the year 2006 after an environmental 
group, Centre for Science and Environment (CSE) 
claimed to have found pesticides in their drinks 
upto 50 times the permissible health limits. These 
companies issued a number of press statements and 
conducted many publicity compaigns in India claiming 
that their beverages were perfectly safe. The Union 
Health Ministry’s expert committee also observes that 
Coke and Pepsi were safe. CSE, in turn, criticised the 
expert committees findings and said that 11 of Coke 
and Pepsi drinks contained average pesticide levels 
that were 24 times higher than the limits agreed by 
the Indian government. Despite health ministry’s 
clean chit to colas, several States continue to ban 
or restrict Coke and Pepsi. However, the pesticide 
controversy adversely affected the sales of both Coke 
and Pespi as consumers started watching their diet 
more closely . Organic food products suddenly became 
popular as the healthier option. By definition, organic 
means fruits, vegetables, foodgrains and processed 
products that have been produced with no pesticide 
or inorganic fertilisers. Meanwhile the soft drinks 
giants have been continuously advertising and trying 
to convince the consumers about the safety of their 
products. 
The Pepsi Cola controversy raises 
an interesting question: Why are 
soft drinks giants, Coca-Cola and 
Pepsico putting in so much effort on 
publicity campaigns in India after the 
decline in their sales? The answer 
lies in the fact that their success 
is dependent not merely on their 
internal management, but also on 
many external forces as, for example, 
2015-16(21/01/2015)
Business Environment 73
decisions and actions of governments, 
consumers, other business firms and 
even non-government organisations 
(NGOs) like CSE. In this chapter, 
we shall identify certain important 
external forces (or environmental 
conditions) and their impact on the 
operations of business enterprises.
Meaning of Business Meaning of Business 
e nvironMent e nvironMent The term ‘business environment’ 
means the sum total of all individuals, 
institutions and other forces that 
are outside the control of a business 
enterprise but that may affect its 
performance. As one writer has put 
it– “Just take the universe, subtract 
from it the subset that represents 
the organisation, and the remainder 
is environment”. Thus, the economic, 
social, political, technological and 
other forces which operate outside 
a business enterprise are part of its 
environment. So also, the individual 
consumers or competing enterprises 
as well as the governments, consumer 
groups, competitors, courts, media 
and other institutions working 
outside an enterprise constitute its 
environment. The important point is 
that these individuals, institutions 
and forces are likely to influence the 
performance of a business enterprise 
although they happen to exist outside 
its boundaries. For example, changes 
in government’s economic policies, 
rapid technological developments, 
political uncertainty, changes in 
fashions and tastes of consumers 
and increased competition in the 
market — all influence the working 
of a business enterprise in important 
ways. Increase in taxes by government 
can make things expensive to buy. 
Technological improvements may 
render existing products obsolete. 
Political uncertainty may create fear 
in the minds of investors. Changes 
in fashions and tastes of consumers 
may shift demand in the market 
from existing products to new ones. 
Increased competition in the market 
may reduce profit margins of firms.
On the basis of the foregoing 
disc ussion, it can be said business 
environment, has the following 
features: 
 (i) Totality of external forces: 
Business environment is the 
sum total of all things external 
to business firms and, as such, 
is aggregative in nature.
 (ii) Specific and general forces: 
Business environment includes 
both specific and general forces. 
Specific forces (such as investors, 
customers, competitors and supp-
liers) affect individual enterprises 
directly and immediately in their 
day-to-day working. General 
forces (such as social, political, 
legal and technological conditions) 
have impact on all business 
enterprises and thus may affect 
an individual firm only indirectly.
 (iii) Inter-relatedness: Different 
elements or parts of business 
2015-16(21/01/2015)
74 Business Studies
environment are closely inter-
related. For example, increased 
life expectancy of people and 
increased awareness for health  
care have increased the demand 
for many health products and 
services like diet Coke, fat-free 
cooking oil, and health resorts. 
New health products and services 
have, in turn, changed people’s 
life styles.
 (iv) Dynamic nature: Business 
environment is dynamic in that 
it keeps on changing whether 
in terms of technological imp-
rovement, shifts in consumer 
preferences or entry of new 
competition in the market.
 (v) Uncertainty: Business envir-
onment is largely uncertain as it 
is very difficult to predict future 
happenings, especially when 
environment changes are taking 
place too frequently as in the 
case of information tech nology 
or fashion industries.
 (v i ) Complexity: Since business env-
ironment consists of numerous 
interrelated and dynamic cond-
itions or forces which arise from 
different sources, it becomes 
difficult to comprehend at once 
what exactly constitutes a given 
environment. In other words, 
environment is a complex pheno-
menon that is relatively easier 
to understand in parts but 
difficult to grasp  in its totality. 
For example, it may be difficult 
to know the extent of the relative 
impact of the social, economic, 
political, technological or legal 
factors on change in demand of 
a product in the market.
(vii) Relativity: Business environment 
is a relative concept since it 
differs from country to country 
and even region to region. 
Political conditions in the USA, 
for instance, differ from those 
in China or Pakistan. Similarly, 
demand for sarees may be fairly 
high in India whereas it may be 
almost non-existent in France.
i Mportance of Business i Mportance of Business 
e nvironMent e nvironMent Just like human beings, business 
enterprises do not exist in isolation. 
Each business firm is not an island 
unto itself; it exists, survives 
and grows within the context 
of the element and forces of its 
environment. While an individual  
firm is able to do little to change 
or control these forces, it has 
no alternative to responding or 
adapting according to them. A good 
understanding of environment by 
business managers enables them 
not only to identify and evaluate, but 
also to react to the forces external 
to their firms. The importance 
of business environment and its 
understanding by managers can 
be appreciated if we consider the 
following facts:
2015-16(21/01/2015)
Page 4


3
BUSINESS ENVIRONMENT BUSINESS ENVIRONMENT
CHAPTER
After studying this 
chapter you will be able 
to: 
n Explain the meaning of 
business environment;
n Discuss the 
importance of 
business environment;
n Describe the various 
elements of business 
environment; and
n Examine the 
economic 
environment in India 
and the impact of 
Government policies 
on business and 
industry.
LEARNING 
OBJE CT I VE S
The soft-drinks giants, Pepsico and Coca-Cola, 
suffered a decline in sales of colas in India in the 
beginning of the year 2006 after an environmental 
group, Centre for Science and Environment (CSE) 
claimed to have found pesticides in their drinks 
upto 50 times the permissible health limits. These 
companies issued a number of press statements and 
conducted many publicity compaigns in India claiming 
that their beverages were perfectly safe. The Union 
Health Ministry’s expert committee also observes that 
Coke and Pepsi were safe. CSE, in turn, criticised the 
expert committees findings and said that 11 of Coke 
and Pepsi drinks contained average pesticide levels 
that were 24 times higher than the limits agreed by 
the Indian government. Despite health ministry’s 
clean chit to colas, several States continue to ban 
or restrict Coke and Pepsi. However, the pesticide 
controversy adversely affected the sales of both Coke 
and Pespi as consumers started watching their diet 
more closely . Organic food products suddenly became 
popular as the healthier option. By definition, organic 
means fruits, vegetables, foodgrains and processed 
products that have been produced with no pesticide 
or inorganic fertilisers. Meanwhile the soft drinks 
giants have been continuously advertising and trying 
to convince the consumers about the safety of their 
products. 
The Pepsi Cola controversy raises 
an interesting question: Why are 
soft drinks giants, Coca-Cola and 
Pepsico putting in so much effort on 
publicity campaigns in India after the 
decline in their sales? The answer 
lies in the fact that their success 
is dependent not merely on their 
internal management, but also on 
many external forces as, for example, 
2015-16(21/01/2015)
Business Environment 73
decisions and actions of governments, 
consumers, other business firms and 
even non-government organisations 
(NGOs) like CSE. In this chapter, 
we shall identify certain important 
external forces (or environmental 
conditions) and their impact on the 
operations of business enterprises.
Meaning of Business Meaning of Business 
e nvironMent e nvironMent The term ‘business environment’ 
means the sum total of all individuals, 
institutions and other forces that 
are outside the control of a business 
enterprise but that may affect its 
performance. As one writer has put 
it– “Just take the universe, subtract 
from it the subset that represents 
the organisation, and the remainder 
is environment”. Thus, the economic, 
social, political, technological and 
other forces which operate outside 
a business enterprise are part of its 
environment. So also, the individual 
consumers or competing enterprises 
as well as the governments, consumer 
groups, competitors, courts, media 
and other institutions working 
outside an enterprise constitute its 
environment. The important point is 
that these individuals, institutions 
and forces are likely to influence the 
performance of a business enterprise 
although they happen to exist outside 
its boundaries. For example, changes 
in government’s economic policies, 
rapid technological developments, 
political uncertainty, changes in 
fashions and tastes of consumers 
and increased competition in the 
market — all influence the working 
of a business enterprise in important 
ways. Increase in taxes by government 
can make things expensive to buy. 
Technological improvements may 
render existing products obsolete. 
Political uncertainty may create fear 
in the minds of investors. Changes 
in fashions and tastes of consumers 
may shift demand in the market 
from existing products to new ones. 
Increased competition in the market 
may reduce profit margins of firms.
On the basis of the foregoing 
disc ussion, it can be said business 
environment, has the following 
features: 
 (i) Totality of external forces: 
Business environment is the 
sum total of all things external 
to business firms and, as such, 
is aggregative in nature.
 (ii) Specific and general forces: 
Business environment includes 
both specific and general forces. 
Specific forces (such as investors, 
customers, competitors and supp-
liers) affect individual enterprises 
directly and immediately in their 
day-to-day working. General 
forces (such as social, political, 
legal and technological conditions) 
have impact on all business 
enterprises and thus may affect 
an individual firm only indirectly.
 (iii) Inter-relatedness: Different 
elements or parts of business 
2015-16(21/01/2015)
74 Business Studies
environment are closely inter-
related. For example, increased 
life expectancy of people and 
increased awareness for health  
care have increased the demand 
for many health products and 
services like diet Coke, fat-free 
cooking oil, and health resorts. 
New health products and services 
have, in turn, changed people’s 
life styles.
 (iv) Dynamic nature: Business 
environment is dynamic in that 
it keeps on changing whether 
in terms of technological imp-
rovement, shifts in consumer 
preferences or entry of new 
competition in the market.
 (v) Uncertainty: Business envir-
onment is largely uncertain as it 
is very difficult to predict future 
happenings, especially when 
environment changes are taking 
place too frequently as in the 
case of information tech nology 
or fashion industries.
 (v i ) Complexity: Since business env-
ironment consists of numerous 
interrelated and dynamic cond-
itions or forces which arise from 
different sources, it becomes 
difficult to comprehend at once 
what exactly constitutes a given 
environment. In other words, 
environment is a complex pheno-
menon that is relatively easier 
to understand in parts but 
difficult to grasp  in its totality. 
For example, it may be difficult 
to know the extent of the relative 
impact of the social, economic, 
political, technological or legal 
factors on change in demand of 
a product in the market.
(vii) Relativity: Business environment 
is a relative concept since it 
differs from country to country 
and even region to region. 
Political conditions in the USA, 
for instance, differ from those 
in China or Pakistan. Similarly, 
demand for sarees may be fairly 
high in India whereas it may be 
almost non-existent in France.
i Mportance of Business i Mportance of Business 
e nvironMent e nvironMent Just like human beings, business 
enterprises do not exist in isolation. 
Each business firm is not an island 
unto itself; it exists, survives 
and grows within the context 
of the element and forces of its 
environment. While an individual  
firm is able to do little to change 
or control these forces, it has 
no alternative to responding or 
adapting according to them. A good 
understanding of environment by 
business managers enables them 
not only to identify and evaluate, but 
also to react to the forces external 
to their firms. The importance 
of business environment and its 
understanding by managers can 
be appreciated if we consider the 
following facts:
2015-16(21/01/2015)
Business Environment 75
 (i) It enables the firm to identify 
opportunities and getting 
the first mover advantage: 
Opportunities refer to the positive 
external trends or changes that  
will help a firm to improve its 
performance. Environment prov-
ides numerous opportunities for 
business success. Early identi-
fication of opportunities helps an 
enterprise to be the first to exploit 
them instead of losing them to 
competitors. For example, Maruti 
Udyog became the leader in the 
small car market because it was 
the first to recognise the need 
for small cars in an environment 
of rising petroleum prices and  
a large middle class population 
in India.
 (ii) It helps the firm to identify 
threats and early warning 
signals: Threats refer to the 
external environment trends and 
changes that will hinder a firm’s 
performance. Besides oppor-
tunities, environment happens 
to be the source of many threats. 
Environmental awareness can 
help managers to identify various 
threats  on time and serve as an 
early warning signal. For example, 
if an Indian firm finds that a 
foreign multinational is entering 
the Indian market with new 
substitutes, it should act as a 
warning signal. On the basis of 
this information, the Indian firms 
can prepare themselves to meet 
the threat by adopting such 
measures as improving the 
quality of the product, reducing 
cost of the production, engaging 
in aggr essive advertising, and  
so on.
 (iii) It helps in tapping useful 
resources: Environment is a 
source of various resources for 
running a business. To engage 
in any type of activity, a business 
enterprise assembles various 
resources called inputs like 
finance, machines, raw materials, 
power and water, labour, etc., 
from its environment including 
financiers, government and 
suppliers. They decide to provide 
these resources with their own 
expectations to get something in 
return from the enterprise. The 
business enterprise supplies the 
environment with its outputs 
such as goods and services for 
customers, payment of taxes to 
government, return on financial 
investment to investors and so on. 
Because the enterprise depends 
on the environment as a source 
of inputs or resources and as an 
outlet for outputs, it only makes 
sense that the enterprise designs 
policies that allow it to get the 
resources that it needs so that it 
can convert those resources into 
outputs that the environment 
desires. This can be done better 
by understanding what the 
environment has to offer.
2015-16(21/01/2015)
Page 5


3
BUSINESS ENVIRONMENT BUSINESS ENVIRONMENT
CHAPTER
After studying this 
chapter you will be able 
to: 
n Explain the meaning of 
business environment;
n Discuss the 
importance of 
business environment;
n Describe the various 
elements of business 
environment; and
n Examine the 
economic 
environment in India 
and the impact of 
Government policies 
on business and 
industry.
LEARNING 
OBJE CT I VE S
The soft-drinks giants, Pepsico and Coca-Cola, 
suffered a decline in sales of colas in India in the 
beginning of the year 2006 after an environmental 
group, Centre for Science and Environment (CSE) 
claimed to have found pesticides in their drinks 
upto 50 times the permissible health limits. These 
companies issued a number of press statements and 
conducted many publicity compaigns in India claiming 
that their beverages were perfectly safe. The Union 
Health Ministry’s expert committee also observes that 
Coke and Pepsi were safe. CSE, in turn, criticised the 
expert committees findings and said that 11 of Coke 
and Pepsi drinks contained average pesticide levels 
that were 24 times higher than the limits agreed by 
the Indian government. Despite health ministry’s 
clean chit to colas, several States continue to ban 
or restrict Coke and Pepsi. However, the pesticide 
controversy adversely affected the sales of both Coke 
and Pespi as consumers started watching their diet 
more closely . Organic food products suddenly became 
popular as the healthier option. By definition, organic 
means fruits, vegetables, foodgrains and processed 
products that have been produced with no pesticide 
or inorganic fertilisers. Meanwhile the soft drinks 
giants have been continuously advertising and trying 
to convince the consumers about the safety of their 
products. 
The Pepsi Cola controversy raises 
an interesting question: Why are 
soft drinks giants, Coca-Cola and 
Pepsico putting in so much effort on 
publicity campaigns in India after the 
decline in their sales? The answer 
lies in the fact that their success 
is dependent not merely on their 
internal management, but also on 
many external forces as, for example, 
2015-16(21/01/2015)
Business Environment 73
decisions and actions of governments, 
consumers, other business firms and 
even non-government organisations 
(NGOs) like CSE. In this chapter, 
we shall identify certain important 
external forces (or environmental 
conditions) and their impact on the 
operations of business enterprises.
Meaning of Business Meaning of Business 
e nvironMent e nvironMent The term ‘business environment’ 
means the sum total of all individuals, 
institutions and other forces that 
are outside the control of a business 
enterprise but that may affect its 
performance. As one writer has put 
it– “Just take the universe, subtract 
from it the subset that represents 
the organisation, and the remainder 
is environment”. Thus, the economic, 
social, political, technological and 
other forces which operate outside 
a business enterprise are part of its 
environment. So also, the individual 
consumers or competing enterprises 
as well as the governments, consumer 
groups, competitors, courts, media 
and other institutions working 
outside an enterprise constitute its 
environment. The important point is 
that these individuals, institutions 
and forces are likely to influence the 
performance of a business enterprise 
although they happen to exist outside 
its boundaries. For example, changes 
in government’s economic policies, 
rapid technological developments, 
political uncertainty, changes in 
fashions and tastes of consumers 
and increased competition in the 
market — all influence the working 
of a business enterprise in important 
ways. Increase in taxes by government 
can make things expensive to buy. 
Technological improvements may 
render existing products obsolete. 
Political uncertainty may create fear 
in the minds of investors. Changes 
in fashions and tastes of consumers 
may shift demand in the market 
from existing products to new ones. 
Increased competition in the market 
may reduce profit margins of firms.
On the basis of the foregoing 
disc ussion, it can be said business 
environment, has the following 
features: 
 (i) Totality of external forces: 
Business environment is the 
sum total of all things external 
to business firms and, as such, 
is aggregative in nature.
 (ii) Specific and general forces: 
Business environment includes 
both specific and general forces. 
Specific forces (such as investors, 
customers, competitors and supp-
liers) affect individual enterprises 
directly and immediately in their 
day-to-day working. General 
forces (such as social, political, 
legal and technological conditions) 
have impact on all business 
enterprises and thus may affect 
an individual firm only indirectly.
 (iii) Inter-relatedness: Different 
elements or parts of business 
2015-16(21/01/2015)
74 Business Studies
environment are closely inter-
related. For example, increased 
life expectancy of people and 
increased awareness for health  
care have increased the demand 
for many health products and 
services like diet Coke, fat-free 
cooking oil, and health resorts. 
New health products and services 
have, in turn, changed people’s 
life styles.
 (iv) Dynamic nature: Business 
environment is dynamic in that 
it keeps on changing whether 
in terms of technological imp-
rovement, shifts in consumer 
preferences or entry of new 
competition in the market.
 (v) Uncertainty: Business envir-
onment is largely uncertain as it 
is very difficult to predict future 
happenings, especially when 
environment changes are taking 
place too frequently as in the 
case of information tech nology 
or fashion industries.
 (v i ) Complexity: Since business env-
ironment consists of numerous 
interrelated and dynamic cond-
itions or forces which arise from 
different sources, it becomes 
difficult to comprehend at once 
what exactly constitutes a given 
environment. In other words, 
environment is a complex pheno-
menon that is relatively easier 
to understand in parts but 
difficult to grasp  in its totality. 
For example, it may be difficult 
to know the extent of the relative 
impact of the social, economic, 
political, technological or legal 
factors on change in demand of 
a product in the market.
(vii) Relativity: Business environment 
is a relative concept since it 
differs from country to country 
and even region to region. 
Political conditions in the USA, 
for instance, differ from those 
in China or Pakistan. Similarly, 
demand for sarees may be fairly 
high in India whereas it may be 
almost non-existent in France.
i Mportance of Business i Mportance of Business 
e nvironMent e nvironMent Just like human beings, business 
enterprises do not exist in isolation. 
Each business firm is not an island 
unto itself; it exists, survives 
and grows within the context 
of the element and forces of its 
environment. While an individual  
firm is able to do little to change 
or control these forces, it has 
no alternative to responding or 
adapting according to them. A good 
understanding of environment by 
business managers enables them 
not only to identify and evaluate, but 
also to react to the forces external 
to their firms. The importance 
of business environment and its 
understanding by managers can 
be appreciated if we consider the 
following facts:
2015-16(21/01/2015)
Business Environment 75
 (i) It enables the firm to identify 
opportunities and getting 
the first mover advantage: 
Opportunities refer to the positive 
external trends or changes that  
will help a firm to improve its 
performance. Environment prov-
ides numerous opportunities for 
business success. Early identi-
fication of opportunities helps an 
enterprise to be the first to exploit 
them instead of losing them to 
competitors. For example, Maruti 
Udyog became the leader in the 
small car market because it was 
the first to recognise the need 
for small cars in an environment 
of rising petroleum prices and  
a large middle class population 
in India.
 (ii) It helps the firm to identify 
threats and early warning 
signals: Threats refer to the 
external environment trends and 
changes that will hinder a firm’s 
performance. Besides oppor-
tunities, environment happens 
to be the source of many threats. 
Environmental awareness can 
help managers to identify various 
threats  on time and serve as an 
early warning signal. For example, 
if an Indian firm finds that a 
foreign multinational is entering 
the Indian market with new 
substitutes, it should act as a 
warning signal. On the basis of 
this information, the Indian firms 
can prepare themselves to meet 
the threat by adopting such 
measures as improving the 
quality of the product, reducing 
cost of the production, engaging 
in aggr essive advertising, and  
so on.
 (iii) It helps in tapping useful 
resources: Environment is a 
source of various resources for 
running a business. To engage 
in any type of activity, a business 
enterprise assembles various 
resources called inputs like 
finance, machines, raw materials, 
power and water, labour, etc., 
from its environment including 
financiers, government and 
suppliers. They decide to provide 
these resources with their own 
expectations to get something in 
return from the enterprise. The 
business enterprise supplies the 
environment with its outputs 
such as goods and services for 
customers, payment of taxes to 
government, return on financial 
investment to investors and so on. 
Because the enterprise depends 
on the environment as a source 
of inputs or resources and as an 
outlet for outputs, it only makes 
sense that the enterprise designs 
policies that allow it to get the 
resources that it needs so that it 
can convert those resources into 
outputs that the environment 
desires. This can be done better 
by understanding what the 
environment has to offer.
2015-16(21/01/2015)
76 Business Studies
 (iv) It helps in coping with rapid 
changes: Today’s business envir-
onment is getting increasingly 
dynamic where changes are 
taking place at a fast pace. It is not 
the fact of change itself that is so 
important as the pace of change. 
Turbulent market conditions, 
less brand loyalty, divisions and 
sub-divisions (fragmentation) 
of markets, more demanding 
customers, rapid changes in 
technology and intense global 
competition are just a few of the 
images used to describe today’s 
business environment. All sizes 
and all types of enterprises are 
facing increasingly dynamic 
environment. In order to eff-
ectively cope with these signifi-
cant changes, managers must 
understand and examine the 
environment and develop suit-
able courses of action.
 (v) It helps in assisting in planning 
and policy formulation:   Since 
environment is a source of 
both opportunities and threats 
for a business enterprise, its 
understanding and analysis 
can be the basis for deciding 
the future course of action 
(planning) or training guidelines 
for decision making (policy). For 
instance, entry of new players 
in the market, which means 
more competition may make an 
enterprise think afresh about 
how to deal with the situation.
 (vi) It helps in improving 
performance: The final reason 
for underst anding business 
environment relates to whether or 
not it really makes a difference in 
the performance of an enterprise. 
The answer is that it does appear 
to make a difference. Many 
studies reveal that the future of 
an enterprise is closely bound 
up with what is happening in 
the environment. And, the enter-
prises that continuously monitor 
their environment and adopt 
suitable business practices are 
the ones which not only improve 
their present performance but 
also continue to succeed in the 
market for a longer period.
DiMensions of Business DiMensions of Business 
e nvironMent e nvironMent Dimensions of, or the factors cons-
tituting the business environment 
include economic, social, techno-
logical, political and legal conditions 
which are considered relevant for 
decision-making and improving the 
performance of an enterprise. In 
contrast to the specific environment, 
these factors explain the general 
environment which mostly influences 
many enterprises at the same time. 
However, management of every 
enterprise can benefit from being 
aware of these dimensions instead 
of being disinterested in them. For 
instance, scientific research has 
2015-16(21/01/2015)
Read More
Offer running on EduRev: Apply code STAYHOME200 to get INR 200 off on our premium plan EduRev Infinity!

Complete Syllabus of Commerce

Dynamic Test

Content Category

Related Searches

past year papers

,

pdf

,

Objective type Questions

,

Previous Year Questions with Solutions

,

study material

,

Extra Questions

,

NCERT Textbook - Business Environment Commerce Notes | EduRev

,

practice quizzes

,

Sample Paper

,

video lectures

,

shortcuts and tricks

,

ppt

,

Semester Notes

,

Summary

,

Viva Questions

,

Free

,

NCERT Textbook - Business Environment Commerce Notes | EduRev

,

Exam

,

MCQs

,

NCERT Textbook - Business Environment Commerce Notes | EduRev

,

mock tests for examination

,

Important questions

;