Business Environment

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Definition, Important Terms, Explanation in Simple Words for Fast Learning



Meaning, Features and Classification:

The term “business environment” is the aggregate of all the factors and forces that stimulates the working of an organisation but they are outside can’t be controlled of the business and its management. The factors consist of economic, social, technological, political etc. and institutions include suppliers, customers, etc.


Constraints and opportunities provided by environment.

Business environment provides restrictions such as economic conditions, government regulations, customs, accessibility of natural resources, labour supply, etc. For example, India is lacking in FDI, it is not picking up in the nation due to political and administrative reasons.

Opportunities: Along with constraints environment also delivers opportunities in altering requirements of customers and markets. For example: increasing demand for A.C. has attracted new comers into the industries.



  1. Business environment is of Dynamic Nature.
  2. It avails the aggregation of the external factors.
  3. It is Uncertain.
  4. All the forces of the business environment are interrelated.
  5. It is of Complex.
  6. There exists specific and general forces
  7. Relativity.



Business environment can be classified into two types: 


1) Economic environment: It includes the fiscal policies, the monetary policy, nature of the system of an economy of a nation, its development speed, etc. 


2) Non Economic environment: It comprises social, cultural, legal, political environment, etc.


Understanding of the business environment can be beneficial because of the below mentioned reasons:


  1. First mover advantage
  2. Sensitise the management
  3. Source of intellectual stimulation
  4. Continuous learning
  5. Warning signal
  6. Basis of Strategy
  7. Image building


Environment scanning: It is the process of monitoring and analysing the relevant environment to identify opportunities and threats which affects the business of a business.

Dimensions of Business Environment:

General Environment:

General environment is made up of those components which are least in the control of management or business but are very broad in scope and affect the working of an organisation.


Economic Environment of India:
All those measures which aim at modernization of the country’s industrial system, controlling them, encouraging its development. 

Components of general environment are:

  1. Economic environment: It includes corporate profits, inflation rate, productivity, balance of payments, interest rates, gross national product etc.
  2. Social Environment: It contains appearances of the society where the business exists, such as literacy rates, gross national products etc.
  3. Political Environment: In includes type of government, its attitude towards various manufacturing units, platform of political parties etc.
  4. Legal Environment: It contains all the legislations that has been passed by the parliament and state legislatures.
  5. Technological environment: It contains new approaches to produce goods and services, new equipment etc.


Liberalisation, Privatisation and Globalisation:

Liberalization: Liberalization means removing the unnecessary trade restriction to facilitate free movements of goods and services and making the economy of a country more and more competitive. In this process the nation’s government reduces the restriction regarding licencing, quota, tariff etc.


Globalization: Globalization means integration of a nation’s economy with world’s economy to encourage foreign trade, production technologies and investment. Globalisation safeguards a rise in productivity, removes inefficiency, raises the bar of competition and positively affects the economy of the nation.


Privatisation: Privatisation is the procedure by which the participation of private sectors in economic undertakings is increased. The main aim of privatisation is to lessen the participation of public and state sectors and give opportunities to private sector to rise.


The way changing government policy may affects the business and industry:

  1. Destabilisation of protected environment
  2. Threat from MNC
  3. All round competition
  4. Buyer’s market
  5. Corporate vulnerability
  6. World Class Technology
  7. Export – a matter of survival 
  8. Past failure fail to guide the future

MCQ SHort Questions (1 Marks)



Q1: List any four specific forces which the business environment consists of.
Ans: Four specific forces are: 

  1. Investors
  2. Customers
  3. Competitors
  4. Suppliers


Q2: Business environment consists of forces which are both specific and general. Write the name of any four general forces.

  1. Social forces.
  2. Legal forces.
  3. Political forces.
  4. Technological forces.

Q3: What threats can be understood if the manager has knowledge of the business environment?
Ans: Threats to a business refers to the peripheral trends and changes in its environment that can adversely affect the business’s performance.


Q4: What is meant by opportunity in the business environment?
Ans: Opportunities for an organisation means the changes and trends that can provide a firm chance to increase its performance. It generally refers to the positive factors. 


Q5: What is comprised in the ‘Technological Environment’ of business?
Ans: ‘Technological Environment’ means the broad characteristics of technology in which a business undertaking operates.


Q6: Just after the announcement of Lok-sabha Elections 2009 outcomes, the Bombay stock exchange’s price index rose by 2100 points in a day. Find the environmental factor which directed to this rise.
Ans: It’s Political Environment.


Q7: India’s Government is thinking of allowing oil marketing public sector undertakings to solution their own price for petrol and diesel. Which economic reform is the reason for this change in the government’s policy?
Ans: Liberalization. 


Q8: List any two influences of change of policy of government on business and industry.
Ans: Increasing competition and fast varying technological environment.

Short Answers & Questions (3-4 Marks)



Q1: Explain three features of the business environment.

Ans: The features of business environment are as follow:

  1. Aggregate of External forces: Business environment includes all the external forces that affect the undertaking of an organization.
  2. Interrelatedness: All the factors and forces which affect the functioning of a business environment. All these factors and forces are interrelated. 
  3. Uncertain: The business environment is uncertain, no one can predict what can happen in near future.
  4. Complex: Business environment is a mix of all the factors and forces that makes it difficult to understand.
  5. Dynamic Nature: The various forces like political, technological, etc are dynamic in nature.

Q2: ‘Demand for reservation in jobs for minorities’ refer to an example of a key component of the environment of business. Name and explain the component.

Ans: Here the social environment of business is described.

Social Environment: Social environment describes the characteristics of the society in which a business operates. The factors like literacy rate, income distribution, social concerns etc. forms a part of the social environment.


Q4: Briefly explain the following:

  • LiberalizatioN
  • Privatisation
  • Globalization


Ans: Liberalization: Liberalization means removing the unnecessary trade restriction to facilitate free movements of goods and services and making the economy of a country more and more competitive. In this process the government of a nation reduces the restriction regarding licencing, quota, tariff etc.

Privatisation: Privatisation is the process by which the participation of state and public sectors in economic activities reduces with the aim of allowing private sectors to take part in economic activities.

Globalization: Globalization means integration of a country’s economy with the world’s economy to encourage foreign trade, production technologies and investment.


Q5: What are the main impacts of changes in government policy on business and industry? 

Ans: the main impacts of changes of government policy on business and industry are:

  1. More competition: Now firms have to face competition from existing competitors and from new foreign competitors. Changes in government policies also attract new investors from our country as well.
  2. World class technology: Changing government policies also have impacts on the changes in technology, it brings in the best technology from the world.
  3. Destabilization of protected environment: The new government policies threw the existing players out of their protected cover. Now, the profits are no longer secured just by procuring a license. Now, to gain profits, it is important for firms to provide exceptional services to their clients.
  4. Threats from MNC: Changing government policies also makes it easy for foreign companies to enter into Indian market and it is proven as a threat for domestic firms. 
  5. All round Competition: As changing government policies attracts investments from around the world. It creates a very high competition for local business which ultimately raises the quality of production.


Q6: Explain in brief what liberalization is. In what ways have Indian business houses/management responded to this change?

Ans: Liberalization: Liberalization means removing the unnecessary trade restriction to facilitate free movements of goods and services and making the economy of a country more and more competitive. In this process the government of a nation reduces the restriction regarding licencing, quota, tariff etc.

Indian markets have to deal with various challenges because of entry of multinational firms and which makes it difficult for them not only to earn profit but also to survive as well.

Domestic competition also rose as new competitors started to enter the market.

Indian companies are also facing threats of being taken over by foreign firms.

Foreign firms are able to sell the same product at reasonable cost as they have developed technology.

Long Answers & Questions (5-6 Marks)


Q1: Explain any four importance of Principles of management. [NCERT]


Explain by giving any five reasons why proper understanding of management principles is necessary. [Delhi, AI, Foreign 2009]


Explain how management principles:

(i) Provide useful perception into reality and        (ii) help in thoughtful decision making. [Delhi 2012]


Explain how principles of management:

(i) Help in optimum utilization of resources and effective administration and

(ii) Help in thoughtful decision making. [Foreign 2012]

Ans: Importance of management principles: The management principles are extremely important in directing the organization towards taking the best course of action and the most appropriate decision.

  The following points highlight its significance: 

  • The principles of management on the basis of various theories and principles that have been revised over time. It is more suitable for a manager to make decisions on the basis of these principles to avoid any form of test and error. 


  • The principles helps in the optimal utilization of the accessible resources. It helps to predict the thorough reasons and results relationship. 
  • The management principles are based on the logic and not build faith. The decisions are based upon an objective assessment of the situation. 
  • These principles constitutes the basis of the management study in the educational institution. It provides the framework for the improvement of management as a subject. 

Q2: Explain Fayol’s principles of ‘scalar-chain’ and ‘discipline’ with the help of examples.
Ans: According to Fayol, Scalar chain is the chain of superiors designated form the top level of management to lower level of management, the line of authority is represented by this chain. All the managers in the origination is linked together in an origination from highest to the lowest and has subordinates below him but he is also a subordinate to some superiors. The Scalar chain principle defines a clear link between managers at all the level. According to this principle, the clear line of authority from top level to bottom level has to be there which links all the manager.

This can be shown by the below presented diagram:


In case when D has to pass an information to G, D should send that information via C, B, A and then downwards E then to F and then finally that information will reach its destination G. But, it may cause delay, and hence to avoid that delay, Gang Plank is introduced by Fayol, it has been shown by dotted line in the above mentioned diagram.

Positive effects of Scalar chain are:

  1. Clearly states the chain of command.
  2. Chain of communication is well established.
  3. Well defined authority and responsibility relationships.

Discipline: In the reference to management, the word discipline means obedience, proper code of conduct, well-defined relationships and complying with the smooth running of business requires discipline. 

Not only the workers but the management also has to be in discipline by facilitating the good supervisors at all the existing levels of management, by clearly defining the rules and also the penalties should be improved with the fairness.

Q3: What is the meaning of scientific management?
Ans: Instead of depending on the rule of thumb, the scientific management refers to the use of scientific methods in the process of decision making. F.Y. Taylor is the father of scientific management. Scientific management mainly is made up of observation and analysis of each tasks, determination and analysis of each tasks, measurement of the standard of work, selecting and training men to perform their jobs.

Taylor’s principle of scientific management are:

  1. Replacing the rule of thumb with science: Scientific management includes the observation and analysis of every tasks and determination of the standards of work. According to the first scientific principle of management the “Development of a science for each element of a man’s work.” Should be implemented and the rule of thumb should be replaced. Taylor was in believe that efficiency can be maximized only with the help of involving science in the techniques of management.
  1. Close co-operation between employees and management: There must exists a proper coordination between the workers and the management in an organization to ensure that the works is carried out as per the plans and standards of the performance. According to the Taylor, the motive of employees and the management is same in some way, like, the workers wants to get paid more and the employer wants to get more production done and it can be noted that by producing more the workers can earn more. Hence, instead of fighting for the profit and output, there should be harmony in the motives.
  1. Maximum but not restricted output: The main aim of management should be maximization of output not restricting it to a confined level. The interest of both the parties should be involved in the level of production. 
  2. Division of responsibility between managers and workers: The authorities and the responsibility should be well-defined and clearly stated, the manager’s responsibility is to planning the work to be performed and the execution of it is the tasks of the workers.
  1. Harmony not discord: In the views of Taylor, a mutual give and take and proper considerate must be prevalent among workers who work together to carry out a task in harmony, in group action. An enlightened attitude should be adopted by managers and the gains of productivity should be joint with the workers. On the other hand, workers need to work with discipline and loyalty.

Q4: Explain the Taylor’s scientific management.
Ans: Techniques of Scientific Management:

  1. Time Study: Time study is the study to observe and record the time required and each detailed element of an operation. The main purpose of time study is to find out the exact time needed for each element of a man’s work. The standard time required to do a particular job can be fixed by this.
  1. Motion Study: The study of movement of organized body or machine needed to perform a job is known as motion study. Its objectives are eliminating motions and finding out ways to do a job with least movements. By reducing fatigue and wasteful movements on a job, the efficiency of workers can be increased.
  1. Standardization: It is the method of selection tools for the employees and also the ventilation, lightning and other working requirements should be arranged properly.
  1. Functional Foremanship: Taylor has identified various types of functional foreman. He said, only one single foreman may be incompetent performing all the management tasks and hence the different individuals has to be supervised by specialists.
  1. Simplification of work: Simplification of work refers to eliminating the various unnecessary tasks it creates the economy in the use of machines and tools needed. It helps to improve the quantity and reduce the costs and prices.
  1. Fatigue Study: Physical and mental exhaustion due to continuous work leads to fatigue. Accidents, spoilage, absenteeism, and high labor turnover may be resulted due to fatigue. A fatigue study will calculate the time intervals and predict hours of rest. It helps to maintain operational effectiveness of workers without injury to health and happiness.
  2. Method Study: This principle is concerned with the methods used while performing certain jobs. According to Taylor, there should be one best way to perform certain tasks.


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