Business Environment Class 12 Notes

The business environment is the aggregate of all the external influences that affect the decisions of a management, and the chapter then sets out the features of the concept that make it what it is.

• Business environment means the combination of all the external factors that influence what a business can do, and it is the word external that carries the sense, since the internal factors are the subject of the later chapters.
• The environment of a business is the combination of the external forces, the organisations and the factors that have an impact on it, and the relationship is two-way, because the environment influences the business and the business also influences the environment.
• The business environment is complex, because it consists of a large number of factors whose relationship is not always clear, and the factors interact with each other.
• It is dynamic, because it changes, and what was true of the environment five years ago is not true of it now, and a business that assumes the environment will remain unchanged is wrong.
• It is interrelated, because a change in one factor brings a change in another, so that a change in the political environment brings a change in the legal and the social environment with it.
• It is uncertain, because the interaction of the many factors makes the outcome of a particular decision impossible to predict with certainty, and the management has to take the decisions in the face of this uncertainty.
• It is a mix of the favourable and the unfavourable factors, and the external environment is a mixed one, and the successful business is the one that takes the advantage of the opportunities and avoids the threats.

The importance part is short but heavily tested, because each of the seven points in the syllabus is a separate one-mark question.

• It helps the management to identify the opportunities that are available and the threats that are present, and this is the base of the strategy of the firm.
• It helps in the identification of the gaps in the existing plan, and the plans are made on the assumption of a certain environment, and if the environment changes the plan must change.
• It helps the business to identify the successful and the unsuccessful strategies, since a strategy that succeeded in one set of circumstances may fail in another, and the environment explains the difference.
• It helps in formulating the strategies, because the decision about the product, the market, the technology and the location is taken on the basis of what the environment allows.
• It helps the firms to face the competition, because the knowledge of the environment tells the firm who its competitors are, what they are doing, and what the customer expects.
• It helps to take the decisions relating to the various segments of the market, and the market is divided into the segments on the basis of the factors of the environment.
• It helps the firm to prepare for the future, because the study of the environment shows the direction in which it is moving and the opportunities that will open, and this is done through the environmental scanning and the forecasting.

The internal environment is what lies within the organisation, and its importance lies in the fact that it is the only part of the environment that the management can change by a decision.

• Vision and mission: the vision states where the organisation wants to go and the mission states what it does and for whom, and these two give the direction to every decision of the firm.
• Organisational structure: the arrangement of the people, the work and the authority, and it decides how quickly the decisions are taken and how the responsibility is divided.
• Organisational culture: the shared beliefs, values and expectations that hold the organisation together, and it decides the effort that the people will give without being supervised.
• Systems: the sets of the rules, the procedures and the routines that guide the working, and the accounting system, the marketing system and the information system are the ones that are examined.
• Finance: the funds that are available and the way they are used, and the short term and the long term sources decide what the firm can attempt.
• Personnel: the people who do the work, and their number, their quality, their skill and their motivation decide the capacity of the firm.
• Operations and marketing: the way the goods are produced and the way they are sold, and a change in either of these has to be made in the light of the environment.

The external environment is divided into six groups, and the first two are the economic and the political, and each group is examined through the effects of the changes in it on the business.

• The economic environment is the set of the economic forces that determine the general economic activity, and it includes the money income of the people, the prices, the inflation, the employment, the income distribution, the gross domestic product, the monetary policy, the fiscal policy of the government, and the international economic environment.
• The effects of the economic environment: a rise in the money income of the people increases the demand for the products, and a fall in it reduces the demand, so the sales of the firm move with the income.
• The effects: the rise in the price of the inputs raises the cost of the production and reduces the margin, and the firm that cannot pass the cost on to the customer has to absorb it, and the wage inflation raises the cost of the labour.
• The effects: the rise in the interest rate raises the cost of the borrowing and the cost of the investment, and the availability of the credit decides whether a firm can expand at all.
• The effects: the growth of the gross domestic product increases the industrial output and the demand, and the money supply and the exchange rate decide the competitiveness of the exports.
• The political environment: the political system, the stability of the government, the relations between the government and the business, the philosophy of the government, the effect of the political parties, the area in which the political parties operate and the pressure of the foreign policy.
• The effects of the political environment: the political stability allows the firm to make the long term investments, and the instability forces it to plan only for the short term.
• The effects: the change in the policy of the government, in the rate of the tax, in the licensing and in the import duty changes the cost of the business overnight, and a single decision of the government can affect the sales of a whole industry.

The remaining four groups of the external environment complete the chapter, and the technological and the social factors have grown in importance to the point where most of the questions are now set on them.

• The social environment is the set of the structural factors relating to the society, such as the culture, the values, the beliefs, the customs, the institutions and the attitudes of the people, and the tastes of the consumer are the most immediate of them.
• The effects of the social environment: the consumer is not a homogeneous mass, and the tastes and the preferences differ from one region, one income group and one age group to another, so the product and the advertising have to be adapted to each segment.
• The technological environment is the set of the techniques and the methods available for the creation of the goods and the delivery of the services, and it is the most important of the external factors, because it affects the choice of the product, the method of production, the marketing, the finance and the quality of the goods.
• The effects of the technological environment: a new technology reduces the cost of the production, improves the quality and creates a new product, and a firm that adopts it early gains an advantage over the firm that does not, and the firm that ignores it is eliminated by it.
• The effects: the technology has shortened the life cycle of the product, and the customers now expect a new model every year, and the life cycle of the product has come down from a decade to a few years.
• The demographic environment is the study of the structure of the population, and the factors are the age, the gender, the income, the occupation, the education, the family size, the religion and the location, and each of them decides which group the customer belongs to.
• The demographic changes and their effects: the ageing of the population changes the demand from the products of the youth to the products of the old, the rise in the level of the income changes the demand from the necessity to the luxury, and the change in the size and the composition of the family changes the demand for the consumer durables.
• The legal environment is the set of the laws and the rules that the business must obey, and it includes the Companies Act, the Income Tax Act, the Foreign Exchange Management Act, the Consumer Protection Act, the labour laws and the environment laws, and the law imposes both the duties and the restrictions.
• The effects of the legal environment: the law sets the standard of the conduct, the liability of the producers and the punishment for the violation, and a change in the law changes the cost and the obligation of the firm, and the law is a threat where it is restrictive and an opportunity where it is liberalising.

The demonetisation is the single decision that the syllabus names as its own topic, and it is worth learning as a case rather than as an example, because it is used to show how one act of the political environment can reach into the cash of every firm in the country.

• The concept of the demonetisation is that the government declares a particular series of the currency notes to be no longer legal tender with effect from a fixed date, and the holders of those notes are given a stated period in which to exchange them for the new series, and after that date the old notes have no value at all.
• The two Indian demonetisations are the first, of the notes of the denominations of 500 and 1000 rupees, and the second, of the notes of 500 and 2000 rupees, and the second was a part of the exercise of the demonetisation of the higher denomination notes and it is the one that is usually meant in the examination.
• The first feature is that it is a decision of the government and not of the market, and it is taken by the central government in the public interest and it is binding on every person in the country, and no business can refuse it.
• The second feature is that it affects the business environment of every firm at once, and the effect is felt not by one sector but by all of them, and the firm that buys in the cash, the firm that sells on the credit and the firm that keeps the money in the bank are all affected by the same decision.
• The third feature is that it changes the working of the business rather than the demand, and it does not usually change how much is bought, it changes how the payment is made, so the firm has to change the price labels, the cash handling, the bank arrangements, the system of the receipts and the accounting for a short period.
• The fourth feature is that it is an example of the political environment acting on the economic one, and the political environment becomes visible in this way when a change in the government policy changes the cash of the economy, and it also shows the limit of the management, since the manager can plan for a change in the demand but not for a change in the currency.
• The fifth feature is the time element, because the exchange is allowed only within a stated window, and the firm that delays the exchange of its cash and of its receipts runs the risk of holding the notes on the wrong side of the date, and this is the reason the deadline is examined and the reason the process of the transition is short.

The syllabus asks for the effect of the environment on the business, and it does so with examples rather than with theory. The three examples given are the demonetisation, the change in the laws on the foreign investment and the opening of the economy, and they are worth learning because an application question is very often built on one of them.

• The demonetisation is an example of the political environment acting on the economy, because the decision of the government to declare a particular series of the notes as the old currency changed, in a single decision, the working of every business in the country, and every firm had to accept the new currency, accept the deposits in the new form and change its price labels.
• The second example is the liberalisation of the economy from 1991, which is an example of the political and the legal environment creating an opportunity, because the entry of the foreign investment, the reduction in the licensing and the opening of the sectors gave the firm a wider market and a new source of the capital and the technology.
• The third example is the legal environment acting through a change in the law, and the change in the law relating to the foreign investment, the environment, the labour and the competition changed the obligations of the firm overnight, and a firm that had planned for one set of rules had to revise its plan in a day.
• The example that the syllabus gives for the technological environment is the change in the technology in the telecommunication, which changed the cost of the long distance communication and made the outsourcing across the countries possible, and the firm that used it gained a cost that the firm that did not could not match.
• From these examples the general conclusion is that the environmental factors change the cost, the demand, the obligation and the opportunity of a firm, and a firm that does not keep watching the environment finds that its plan is no longer applicable when it is too late to change it.