3 H

CHAPTER-3

Business Environment

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   Business Environment—Concept and Importance

Ø Business Environment : Business environment is the sum total of all external forces which affect the organisation and operation of business.

Ø Features of Business Environment

(i)      Totality of external forces : It is aggregate of all things external to the business firms.

(ii)    Specific and general forces : Specific forces affect individual firm directly (customers, competitors, etc.), general forces affects indirectly (social, political, etc.).

(iii)  Inter-relatedness : Different elements of business environment are closely inter-related.

(iv)  Dynamic nature : It keeps on changing due to changes in its various components.

(v)    Uncertainty : It is very difficult to predict future happenings in business environment with accuracy.

(vi)  Complexity : It is relatively easier to understand in parts but difficult to grasp in totality.

(vii)  Relativity : It differs from country to country and region to region.

Ø Importance of Business Environment

(i)      Enables the firm to identify opportunities and getting the first mover advantage.

(ii)    Helps the firm to identify threats and early warning signals.

(iii)  Helps in tapping useful resources.

(iv)  Helps in coping with rapid changes.

(v)    Helps in assisting in planning and policy formulation.

(vi)  Helps in improving performance             

    Dimensions of Business Environment

Ø Dimensions of Business Environment

(i)      Social Environment : It includes forces such as customs, traditions, social expectations, literacy rate, etc.

(ii)    Economic Environment : It includes factors such as inflation rates, interest rates, stock market indices, etc.

(iii)  Technological Environment : It includes forces related to scientific improvements and innovations in the methods of production and techniques of operating a business.

(iv)  Political Environment : It includes political conditions such as general stability of the ruling party, government ideologies, values and practices of the ruling party, etc.

(v)    Legal Environment : It includes various legislations passed by the Government, administrative orders, court judgments, etc.

  Demonetisation

Ø Demonetisation : It is the process of detaching a currency unit from its status as legal tender in the country.

(i)      Demonetisation results in change in national currency. 

(ii)    The present currency in circulation is pulled off and new currency is circulated.

Ø Types of Demonetisation

(i)      Total Demonetisation – in this the entire range of present currency is replaced by a new range of currency.

(ii)    Partial Demonetisation –in this some currency units are replaced and some are continued.

Ø Purposes sought by Demonetisation

(i)      Combating corruption

(ii)    Combating crime

(iii)  Combating inflation

(iv)  Combating counterfeit currency

(v)    Combating tax evasion

(vi)  Encourage cashless economy

(vii)  Facilitate trade (sometimes)

Ø Demonetisation across the world

(i)      In 1873, USA – silver coins demonetised resulted in 5 years economic depression. As a result, silver remonetised in 1878.

(ii)    In 2002, Europe –German Marc, French Franc, and Italian Lira demonetised in favour of Euro issued by European Union to facilitate trade.

(iii)  In 2015, Zimbabwe - Zimbabwean Dollar demonetised in favour of US Dollar, Botswana Pula and South African Rand.

Ø History of Demonetisation in India.

l On 12/01/1946 – all notes of denominations of ` 500 and ` 1000 were demonetised with a time limit of 10 days to exchange demonetised notes. Its purpose was to catch tax evaders.

l On 16/01/1978 – all notes of denominations of ` 1000, ` 5000 and ` 10000 were demonetised with a time limit of 3 days to exchange demonetised notes. Its purpose was to catch corrupt leaders and officials in predecessor governments.

l On 08/11/2016 – all notes of denominations of ` 500 and ` 1000 were demonetised with a time limit of 50 days to exchange demonetised notes from banks and some essential service stores.

Ø Demonetisation of 2016

(i)      ` 500 and ` 1000 denomination notes were demonetised.

(ii)    ` 500 (new series) and ` 2000 notes were introduced.

(iii)  50 days’ time limit given for exchange of demonetised notes.

(iv)  Limits were put on exchange per day and withdrawal per day (and week) during this time.

(v)    Public announcement made live by Prime Minister of India at 8.00 pm on 08/11/2016 that the demonetised currency can be used till 12 midnight the same day.

(vi)  Mixed reaction by public but strongly criticized by opposition.

Ø Effects of 2016 Demonetisation

(i)      Estimated curb on black money

(ii)     Estimated curb on human trafficking

(iii)   Adverse effect on radical groups like Naxalists and Maoists.

(iv)   Cash shortage among public

(v)     Deaths of people standing in bank queues reported

(vi)   Decline in stock market

(vii) Disruption in public transport system

(viii)   Rise in cashless transactions

(ix)   Move towards digital economy

(x)     Growth in tax collection and number of assesses

(xi)   Decline in GDP growth

Ø Attempts at evasion

(i)       Rise in purchase of gold

(ii)     Rise in donations at temples

(iii)   Rise in initial booking and subsequent cancellation of railway tickets

(iv)   Multiple bank transactions at different branches

(v)       Backdating of accounting records and entries

      Economic Environment in India

The main aim of the New Industrial Policy was to create a more competitive spirit in the economy and the removal of barriers on entry and growth of firms.

As a part of economic reforms, the Indian government announced a “New Industrial Policy” in 1991. The focus of this policy was on liberalisation, privatisation and globalisation.

Ø The broad features of this policy :

(i)       De licensing

(ii)     Decrease in role of public sector

(iii)   Disinvestment

(iv)   Liberalisation of Foreign Capital

(v)     Liberal policy for technical collaboration

(vi)   Setting up or Foreign Investment Promotion Board

(vii) De-reservation under small-Scale industries.

Ø The New Industrial Policy laid stress on replacing the license, quota and permit by:

Ø Impact of Government Policy Changes on Business and Industry

(i)       Increasing Competition : Indian firms are facing more competition due to entry of foreign firms.

(ii)     More Demanding Customers : Customers today are well informed about wider choices available in the market.

(iii)   Rapidly Changing Technological Environment : New technologies are used to improve machines, process, products and services.

(iv)   Necessity for Change : Market forces have become turbulent after 1991 necessitating modification in operations.

(v)     Development of Human Resource : Firms need people with higher competence and greater commitment.

(vi)   Market Orientation : There is a shift from production orientation to market orientation.

Ø Managerial responses to change in Business Environment :

(i)       Diversification spree

(ii)     Consolidation and Joint ventures of Multinationals

(iii)   Brand Building

(iv)   Use of latest technology

(v)     Qualified workforce

(vi)   Market Orientation

Know the Terms

Ø Liberalisation : Abolishing licencing requirements, simplifying export-import procedure as well as attracts FDI to India.

Ø Privatisation : Giving greater role to the private sector in nation building process.

Ø Globalisation : Interaction of domestic economy with the rest of the world economy.

Ø Opportunity : Positive external trends, that helps a firm to improve its performance.

Ø Threat : External environmental trends that hinders a firm’s performance.

Ø Traditions : Social practices that have lasted for decades or even centuries.

Ø Values : Concepts that a society holds in higher esteem.

Ø  BIFR : Board of Industrial and Financial Reconstruction.