Meaning: - The term Business Environment is composed of two words „Business‟ and „Environment‟. In
simple terms, the state in which a person remains busy is known as Business. The word Business in its
economic sense means human activities like production, extraction or purchase or sales of goods that are
performed for earning profits.
On the other hand, the word „Environment‟ refers to the aspects of surroundings. Therefore, Business
Environment may be defined as a set of conditions – Social, Legal, Economical, Political or Institutional
that are uncontrollable in nature and affects the functioning of organization. Business Environment has two
2. External Environment
Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually
within the control of business. Business can make changes in these factors according to the change in the
functioning of enterprise.
External Environment: Those factors which are beyond the control of business enterprise are included in
external environment. These factors are: Government and Legal factors, Geo-Physical Factors, Political
Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is of two Types:
1. Micro/Operating Environment
2. Macro/General Environment
Micro/Operating Environment: The environment which is close to business and affects its capacity to
work is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market
Intermediaries, Competitors and Public.
(1) Suppliers: – They are the persons who supply raw material and required components to the company.
They must be reliable and business must have multiple suppliers i.e. they should not depend upon only one
(2) Customers: - Customers are regarded as the king of the market. Success of every business depends
(iv)Government and Other Institutions
(3) Market Intermediaries: - They work as a link between business and final consumers. Types:(i)Middleman
(iii) Physical Intermediaries
(4) Competitors: - Every move of the competitors affects the business. Business has to adjust itself
according to the strategies of the Competitors.
(5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media and
local public. They may be the users or non-users of the product.
Macro/General Environment: – It includes factors that create opportunities and threats to business units.
Following are the elements of Macro Environment:
(1) Economic Environment: - It is very complex and dynamic in nature that keeps on changing with the
change in policies or political situations. It has three elements:
(i) Economic Conditions of Public
(ii) Economic Policies of the country
(iv) Other Economic Factors: – Infrastructural Facilities, Banking, Insurance companies, money markets,
capital markets etc.
(i) Political Environment: - It affects different business units extensively. Components:
(a) Political Belief of Government
(b) Political Strength of the Country
(c) Relation with other countries
(d) Defense and Military Policies
(e) Centre State Relationship in the Country
(f) Thinking Opposition Parties towards Business Unit
(ii) Socio-Cultural Environment: - Influence exercised by social and cultural factors, not within the
control of business, is known as Socio-Cultural Environment. These factors include: attitude of people to
work, family system, caste system, religion, education, marriage etc.
(iii) Technological Environment: - A systematic application of scientific knowledge to practical task is
known as technology. Everyday there has been vast changes in products, services, lifestyles and living
conditions, these changes must be analysed by every business unit and should adapt these changes.
(iv) Natural Environment: - It includes natural resources, weather, climatic conditions, port facilities,
topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors
before choosing the location for their business.
(v) Demographic Environment :- It is a study of perspective of population i.e. its size, standard of living,
growth rate, age-sex composition, family size, income level (upper level, middle level and lower level),
education level etc. Every business unit must see these features of population and recongnise their various
need and produce accordingly.
(vi) International Environment: - It is particularly important for industries directly depending on import
or exports. The factors that affect the business are: Globalisation, Liberalisation, foreign business policies,
Characteristics:1. Business environment is compound in nature.
2. Business environment is constantly changing process.
3. Business environment is different for different business units.
4. It has both long term and short term impact.
5. Unlimited influence of external environment factors.
6. It is very uncertain.
7. Inter-related components.
8. It includes both internal and external environment
IMPORTANCE OF BUSINESS ENVIRONMENT:
An analysis of business environment helps to identify strength, weakness, opportunities & threats. Analysis
is very necessary for the survival and growth of the business enterprise. The importance of business
environment is briefly explained in an analysis below.
(1) Identification of Strength: The analysis of the internal environment helps to identify strength of the
firm. For instance, if the company has good personal policies in respect of promotion, transfer, training, etc
than it can indicates strength of the firm in respect of personal policies. This strength can be identified
through the job satisfaction and performance of the employees. After identifying the strengths the firm
must try to consolidate its strengths by further improvement in its existing plans & policies.
(2) Identification of Weakness: The analysis of the internal environment indicates not only strengths but
also the weakness of the firm. A firm may be strong in certain areas; where as it may be weak in some
other areas. The firm should identify sue weakness so as to correct them as early as possible.
(3) Identification of Opportunities: An analysis of the external environment helps the business firm to
identify the opportunities in the market. The business firm should make every possible effort to grab the
opportunities as and when they come.
(4) Identification of Threats: Business may be subject to threats from competitors and others. Therefore
environmental analysis helps to identify threats from the environment identification of threats at an earlier
date is always beneficial to the firm as it helps to defuse the same.
(5) Exploitation of Business Opportunities: Environment opens new opportunities for the expansion of
business activities. Study of environment is necessary in order to discover and exploit such opportunities
(6) Keeping Business Enterprise Alert: Environment study is needed as it keeps the business unit alert in
its approach and activities. In the absence of environmental changes, the business activities will be dull and
lifeless. The problems & prospects of business can be understood properly through the study of business
environment. This enables an enterprise to face the problems with confidence and secure the maximum
benefits of business opportunities available.
(7) Keeping Business Flexible and Dynamic: Study of business environment is needed for keeping
business flexible and dynamic as per the changes in the environmental forces. This will enable the
development of business organization.
(8)Making Business Socially Acceptable: Environment study enables businessmen to expand the business
and also make it acceptable to different social groups. Business organizations can make positive
contribution for maintaining ecological balance by studying social environment.
(9) Ensures Optimum Utilization of Resources: The study of business environment is needed as it
ensures optimum use of resources available. For this, the study of economic and technological environment
is useful. Such study enables organization to take full benefit of government policies, concessions
provided, and technological developments and so on.
(12) Economic policies of the govt: Economic policies, export-import policies, foreign exchange policy,
industrial policy, taxation policy, pricing policy of the govt shows influence on business directly and
(13) Administration policies: every business of the country is affected by the administration policy of that
country. So every business must have the knowledge of the pros and cons of the system.(POSDCORB).
(14) Scientific and technology: the present era is devoted to technological changes and advancement. It is
necessary for every business to have the compete knowledge on techniques.
( source: Francis cherunillum : Business environment).
Problems and challenges:
Through there are many advantages and benefits of studying business environment, there are certain
limitations and if they are not kept in view one may be disappointed. The major imitations are as follows
study of environment does not eliminate uncertainties of future , but helps to reduce surprises and
takes care of them in advance.
It does not guarantee effectiveness of organization.
One may be lost in the information collected too such reliance on it ma result it loss
Even moderate of inflation are a constraint
High tax rates are largest constraint on
Crime and corruption
Corruption is high harming domestic
enterprises and for foreign investment.
Access to finance
High interest rates and poor access to long
loans are the
The legal system
Existing commercial laws are poorly
enforced ad the legal infrastructure is week.
Source: Business environment: Vivek metal
Industrial policy of any country reflects the growth and development of that country as the
economic development is largely influenced by the industrial production.the term industrial policy
refers to all objectives, principles, rules, regulations and procedures concerning the industrial
development, location and functioning of industrial establishments.
IP indicates the relationship between government and business and is therefore considered as the
most important document of the country.
To clearly demarcate areas of production under public , private and joint sectors.
To provide guidelines for importing foreign capital.
to optimize production.
to correct imbalance in the growth and development of industries.
to prevent formation of combination monopolies and concentration of wealth in the hands of
To take necessary measures to solve the problem of unemployment.
To bring about diversification of industries.
To define the role of pvt sector and its active participation
On 6th April 1948 immediately after independence govt introduced the industrial policy resolution. this
outlined the approach to industrial growth and development.
To increase production and ensuring its equitable production.
To maintain mixed economy.
Play a vital role in the economic development of the country.
1) Exclusively monopoly of the central government: The following industries are to be the exclusive
monopoly of the central government.
The production and control of atomic energy.
The manufacturer of arms and ammunition.
The ownership and management of railway transport.
It was also stated that during emergency the government can take over any
industry in which will be considered essential from the point of national defense and security of the
2) Exclusive responsibility of the state: this category covers the following six industries for which new
undertakings would be established only by the state.
Iron and steel
Manufacturing of telephones, telegraph, and wireless apparatus.
3) Basic industries subject to central government: this category consisted of those industries which were
of such importance that the government felt it necessary to plan and regulate them.
Power and alcohol
Air and sea transport
Cement and sugar
Paper and news print industry.
4) Private sector responsibility: The rest of the industrial field was left open to private enterprises,
individuals, and cooperatives.
i) Role of small-scale and cottage industries: the IP resolution of 1948 emphasized on the
development of small-scale and cottage industries because through the development of these.
II) Labour management relations and remuneration: It emphasized that coordinal
relationship between workers and employers is essential for industrial peace and progress of the
III) Attitude towards working capital: for making rapid industrial growth possible, it favored
foreign capital and enterprises. But the entrance of foreign enterprises was to be carefully
regulated in the national interest.
Different labour laws such as minimum wage act, employee state insurance act passed or
welfare for workers.
A mixed economy pattern was adopted.
The complete development and progress of private sectors.
Red tapism in public sectors.
coordination problem between government and public sectors.
( source : WWW.Google.co.in and fancies Cherunillum)
Industrial Policy 1956
A number of developments had taken place in the country after the adoption of the industrial policy
resolution of 1948. These developments necessitated the announcement of the policy of 1956.
The enactment of the constitution of India which guarantees certain fundamental rights and
enunciates the directive principles of state policy, adoption of socialistic pattern of society by the
parliament and the launching of the first five year plan paved the way for a new industrial policy. The new
policy was, therefore, announced on30th April, 1956, replacing the resolution of 1948. The industrial
policy resolution, 1956 remained the basic plan of the industrial policy until 1991.
Objectives of Industrial Policy 1956:
The main objectives of the 1956 policy resolution are:
1. To accelerate the rate of economic growth and speed up industrialization
2. To develop heavy industries and machine making industries.
3. To prevent private monopolies and concentration of economic power in different fields in the hands
of a few individuals.
4. To expand the public sector,
5. To build up large and growing cooperative sector
6. To reduce disparities in income and wealth.
Provisions of Industrial Policy 1956
The main provisions of the industrial policy resolution of 1956 were as follows
1. New Classification of Industries: The new policy resolution gives a new classification of
industries in India. The resolution classified the industries into following three broad categories: I)
ii) Schedule B,
iii) Schedule C
Schedule A Category: This schedule includes chose industries which were exclusive
responsibility of the state. Under schedule A, Following 17 Industries were listed these are
1) Arms and ammunition and allied items of deference equipments
2) Atomic energy.
3) Iron and steel
4) Heavy casting and forgings of iron and steel
5) Heavy plant and machinery required for iron and steel production, for mining, for machine
tool manufacture and for such other basic industries as may be specified by central
6) The electrical plant including large hydraulic and steam turbines.
7) Coal and lignite, gypsum, sulphur, gold and diamond
8) Mining and processing of copper, lead zinc, tin, molybdenum and wolfram
9) Minerals specified in the schedule to the atomic energy order, 1953
11) Air transport
12) Railway transport
15) Telephone cables
16) Telegraph and wireless apparatus
17) Generation and distribution of electricity
2. Schedule B Category: Schedule B included those industries which were to be mainly owned and
managed by the State. This category includes in the following 12 industries:
All other minerals except minor minerals as defined in schedule 3 of the minerals
concession rules, 1949.
aluminum and other non-ferrous metals not included in schedule A
ferro-alloys and tool steels.
Basic and intermediate products by chemical industries such as manufacture of other
Carbonization of coal
3. Schedule C Category: Schedule C included all the remaining industries which are not included in
schedule A and schedule B. the development of industries of this category was left to the private
2. Non – Discriminating treatment to private sector: The government took some positive steps to
facilitate the development of private sector as it has been assigned an important place in the Indian
economy. Private sector was encouraged by developing essential infrastructure facilities such as electricity,
transport and by appropriate policies such as monetary and fiscal policies.
3. Important place to small-scale and village industries: Since small – scale and village or cottage
industries have an important place in the national economy; the state has reserved production of some
goods exclusively for the small-scale industries.
4. Removal of regional industrial disparities: The resolution of 1956 aimed at reducing regional
disparities in the levels of economic development. The benefits of industrialization may be shared equally
and fairly by people in different regions of the country, therefore, balanced industrial development was to
5. Appropriate Amenities for industrial Labour: The industrial policy resolution of 1956 stressed the
importance of improving the living and working conditions of industrial labour and continually improving
their efficiency. Workers participation in management was suggested in the resolution, so that the workers
may be associated with the management of the industrial establishments and may consider themselves as a
part and parcel of the industrial structure of the country.
6. Attitude towards foreign capital: State policy in respect of foreign capital in the development of
industries in India was to be the same as enunciated in the policy of 1948.
Feature of Industrial Policy 1991:
i) Industrial licensing: Industrial licensing is governed by the industries act, 1951. The policy has
undergone a number of modifications over the years. Industrial licensing policy and procedures
have also been liberalized form time to time.
Now with the strong and competitive industrial base, the new industrial
policy of 1991 has abolished all industrial licensing,. Irrespective of levels of investment, for all
industries except 18 specified industries, these 18 industries would continue to be subject to
compulsory licensing for reasons related to security and strategic concerns, social reasons, problems
related to safety and over riding. The government further reduced the industries which were under
compulsory licensing to 14 industries. It was reduced to 9 in 1997-98 and later to 5. Now they are
reduced to 3.
ii) Foreign Investment: From the very beginning, foreign investment in India was regulated by the
government. Thus for any foreign investment, prior approval of the government was necessary. All
these were resulting in unnecessary delays and thus hampered the decision-making in business.
C. Foreign technology agreements
Authentic permission will be given or foreign technology agreements in high priority
industries (Annex III) upto a lumpsum payment of Rs 1 crore, 5 per cent loyalty for
domestic sales and 8 per cent for export, over a 10 year period from date of agreement pay
35% or 7 years pay 5%.( from commencement of production.
iii) Public sector policy: regarding public sector the govt will ensure that the public sector plays a vital
role in developing socio-economic scenario of the country.
iv) According to the policy statement only 8 industries were refered for the public sector. These are as
arms and ammunition
mining of iron
mining of copper
minerals according to schedule III
The public enterprises which were chronically ill referred as the board of industrial
and financial reconstruction (BIFR). After this list was reduced to 3 remaining 5 are under BIFR
VI) MRTP Act: as per the MRTP Act any firm with assts over a certain size was classified as MRTP
firms and such firms were allowed to start only selected industries on a case by approval. But the govt felt
that this MRTP limit was become deleterious in its effects on the industrial growth of the country.
Expansion and diversification
Indian industry more competitive
New business opportunity
Introduced MRTP act.
Permitting 51% share of foreign equity
Five year Plans:
The economy of India is based in part on planning through its five-year plans, developed, executed
and monitored by the Planning Commission. After independence, India was in dire conditions and
needed to start acting soon .Some of the problems necessitated need for an immediate plan .
Vicious circle of poverty
Need for Rapid industrialization
Development of Natural resources
Capital Deficiency & Market imperfections
First Five Year Plan (1951-1956)
Introduced by the then PM Pt. J. Nehru between the period 1951-56.The one responsible -Planning Commission .
improve living standards of the people in India which was possible by making judicious use of
Development of Agri & community
The growth in GDP achieved by India was 3.4% p.a.
Second Five Year Plan (1956-1961)
To increase the national income by 25% .
To make the country more industrialized
Development of the public sector
increase employment opportunities so that every citizen gets a job.
Five steel mills at Bhilai, Durgapur, and Jamshedpur .
Production of coal increased .
More Railway lines were added in the north east
The Tata Institute of Fundamental Research – established in 1957 as a research institute
Third Five Year Plan (1961-1966)
More stress to agriculture
To increase the national income by 5% per annum
Minimizing rate of unemployment
To establish equality among all the people of the country
The Panchayat Organization was formed .
Many primary schools were started in rural areas
State road transportation corporations were formed
Many cement and fertilizer plants were also built
CHINA-Indian War exposed weaknesses in the economy and shifted the focus towards the Defense
industry. In 1964, India fought a war with Pakistan. The war led to inflation and the priority was
shifted to price stabilization. GDP rate during this duration was lower at 2.7%.
Fourth Five Year Plan (1969 to 1974)
At this time Indira Gandhi was the Prime Minister. The Govt. nationalized 19 major Indian banks.
. To reform and restructure its expenditure agenda (Defense became one major expense)
To facilitated growth in exports
To alter the socio economic structure of the society
Spending on war efforts reduced industrial spending
Tested the first nuclear weapon with Smiling Buddha in 1957
Food grains production increased to bring about self sufficiency in production
Energy Problems faced:
India was attacked in 1962 followed by another one in 1965.
Worse – India faces drought.
Fifth Five Year Plan (1974 to 1979)
To reduce social, regional, and economic disparities
Reducing rate of Unemployment both in Urban & Rural sectors
Encourage growth of Small scale industries
Prevent over population
Food grain production was above 118 million tons due to the improvement of infrastructural
Sixth Five Year Plan (1980 to 1985)
6th Five Yr Plan -- Known as Janata Govt. Plan .
It‟s Existence – Tourism industry increased, I.T sector develops!!!!!
The issues – Rajiv Gandhi being the PM, & hence emphasized on Industrial Development Some
agreed, but the communist groups protested
Aimed for rapid Industrial Development
Improve the Tourism Industry
Family Planning concept introduced, but not forcibly
To introduce min Needs Program for the poor
Planned GDP growth - 5.1% a year, achieved 5.4.
Speedy Industrial development
The transport and communication system also improved
Government investments in the Indian healthcare sector .
Seventh Five Year Plan (1985 to 1989)
Congress comes into power .
To upgrade the industrial sector
To generate more scope of employment
Improved facilities for Education to girls
Increase productivity of small and large scale farmers
Using modern technology
Full supply of food, clothing, and shelter
Making India an Independent Economy
Problems faced: 1989-91 was a period of political instability in India & hence no Five Yr Plan was
Eighth Five Year Plan (1992 to 1997)
Modernization of Industrial Sector
The plan focused on technical development
Strengthening the infrastructure
Involvement of Panchayat raj, Nagarpalika, N.G.O's & people's participation
Many flawed plans & Policies were rectified in this plan. During this period India was the only
lucky one to become a member of the WTO (1st Jan 1995)
Ninth Five Year Plan (1997 to 2002)
To prioritize rural development
To generate adequate employment opportunity
To stabilize the prices
To ensure food & nutritional security .
To provide for basic infrastructural facilities
Encourage Women improvement
To create a liberal market for Private investment
India managed to bring together the giant power, support & effort of public, private & all level of
Tenth Five Year Plan (2002 to 2007)
The Tenth Five Plan will cover a period from 1st April 2002 to 31st march 2007. The Tenth plan
provides an opportunity at the start of the new millennium, to build upon the gains of the past but
also to address the weakness that have emerged.
Rate of growth of national income
Growth rate of per capita income
Improvement in Quality of life
Reduction in poverty
Provision of gainful employment
Provision of universal education
Reduction in gender gaps
Reduction in growth of population
Increases in Literacy Rate
Reduction in Infant Mortality Rate
Reduction in Material Mortality Ratio (MMR)
Provision of Drinking Water
Growth, Equity and Sustainability
Balanced Developed in all States
Eleventh Five Year Plan (2007-2012)
The National Development Council has approved the 11th Five Year Plan for the period from 2007
to 2012. The plan document is entitled “Towards Faster and More Inclusive Growth”.
Sports and Physical Education
Women and Children
Income and Poverty
12th Five Year Plan
The Government of India (2012-17) is under drafting which aims at the growth rate at 9.56%.With the
deteriorating global situation, the Deputy Chairman of the Planning Commission Mr Montek Singh
Ahluwalia has said that achieving an average growth rate of 9 per cent in the next five years is not possible.
The Final growth target has been set at 9% by the endorsement of plan at the National Development
Council meeting held in New Delhi. Importance for Science and technology and employment.
Case Study: Corporate social responsibility
In January of last year the S.S vulgas an oil tanker of the big dirty oil company ran around in the arena lust
north of van counter, spilling of gallons of crude oil the waters and on to the beaches of British Columbia
and southern Alaska. The damage to the industry the ecology and the quality of life of the local residents is
in calculable but in any case will require many millions of dollars for even the most minimal clean up.
96 the ship struck a small atoll well- arkedon the navigational mass but it was a dark night and the boat was
well off course. On further investigation, it was discovered that the captain of the vulgas, Mr.vulgas, Mr.
slosh had been drinking heavily, eaving the navigation of the ship to his forst mate, Mr.mudd, he retired to
his cabin, to “sleep it off”, Mr.Mudd had never taken charge of the ship before and it is now clear that he
misread the maps, misjudged the waters, maintained a speed that was inappropriate and the accident
occurred. Subsequent inquiries showed the captain slosh had been arrested on two drunken driving
convictions within months of the accident. The vulgass itself, a double hulled tanker, was long due for
renovation and it was suggested, would not have cracked up if the hull had been trebly reinforced, as some
current tankers were.
R.U.Rich the chief executive officer of big dirty oil declared the accident a “Tragedy” and offered two
million dollars to aid in the clean up. The premier of British Columbia was outraged. Environmental groups
began a consumer campaign against big dirty oil, urging customers to cut up and send their big dirty oil
credit cards in protect. in a meeting to the shareholders just last month CEO rich proudly announced the
largest quarterly profit in the history of the big dirty oil company. He dismissed the protects as the
outpourings of greenies and others fanatics and assured the share holders that his obligation was and
would always be, to assure the highest profits possible in the turn oil of today‟ market.
1) Who is responsible for this?
2) Against whom should criminal charges be leveled?