CBSE Class 12 Business Studies - Business Environment 


The business environment is the sum total of all individuals, institution and other forces that are outside the control of the business but which may affect its performance. It includes individual consumers or competing enterprises, governments, consumers group, competitors, courts, media, and other institutions.

It is truly said by one writer that “Just take the universe, subtract from it the subset that represents the organization, and the remainder is the environment.”

Although these factors are outside the boundaries of the business they are likely to influence the performance of the business enterprise. For example, changes in fashions and taste of consumers may shift demand in the market from existing products to new ones.



  1. Dynamic nature: Business environment is dynamic as it keeps on changing whether in terms of technology or change in taste and preference of consumers, entry of new firms in the market, government policies, etc.
  2. Uncertain:  A business involves a lot of environmental changes that are taking place too quickly, therefore, it becomes very difficult to predict the future happenings. For example, information technology or fashion industries are ever-changing.
  3. Complexity: A Business environment is very complex as it involves a large number of factors, therefore it becomes quite difficult to understand what exactly forms a given environment.
  4. Specific and general forces: Business environment is made up of two forces which are:

Specific forces: it includes forces such as customers, investors, competitors, and suppliers. Specific forces affect individual enterprises directly and immediately.

General forces: it includes social, political, legal and technological conditions. General forces have an immediate impact on all business enterprises and thus may affect an individual firm only indirectly.

  1. Inter- relatedness: Different elements of the business environment are closely interrelated. For example, increased awareness of health care has increased the demand for many health products and services like diet coke, fat-free cooking oil, Yoga, Zumba, etc. These products and services, in turn, have changed people’s life.
  2. Relativity: Business environment is a relative concept since it differs from country to country and even region to region. Political conditions and policies in India differ from that of the USA. For example, the demand for electric car in the US is fairly high but it’s almost non-existent in India.


In the present day competitive market, it is essential for a business to remain alert and aware of its environment. Significance of understanding the environment in shaping the future of business can be appreciated if we consider the following facts:

1. Helps the firm to identify opportunities and get the first-mover advantage:

  • Opportunity means an occasion or situation that makes it possible to do something that you want to do or have to do. Environment provides a firm various new opportunities for expansions and growth. A firm must make first mover advantage to make their business successful. For example: In India Honda become a leader in two – wheeler market because it was the first one to realise the need of scooters in an environment of rising petrol prices and large young population.  


2. It helps the firm to identify threats and early warning signals:

  • Threats refer to the changes in the external environment that will hamper a firm’s performance.  Environment provides a firm both opportunities and threats. Environmental awareness help managers to identify various threats on time so that they can take appropriate decisions for example, if an Indian firm finds that a multinational company(MNC) is entering the Indian market with new substitutes,
  • On the basis of this information, the Indian firms should act and prepare themselves to meet the threat by adopting various measures such as improving the quality of the product, reducing its cost, etc.                            


3.  It helps in tapping useful resources:

  • A business enterprise needs various resources called inputs (land, labour, finance, raw materials, machines, water, electricity, etc.) for production of output. As a business gets all these resources or inputs from its environment, it supplies the environment with its various outputs such as goods and services for customers, taxes for the government and so on.
  • As a business enterprise produce an output using various inputs which are provided by the environment it must understand what the environment has to offer.


4.  It helps in coping with rapid changes:

  • In modern times business environment is getting increasingly dynamic i.e. changes are taking place at a fast pace.
  • Today’s business environment have turbulent market conditions, more demanding customers, intense global competition, division and sub -division of markets, rapid changes in technology and many more complexities. In order to cope with the changing environment, managers must understand the environment and develop suitable course of actions.


5. It helps in improving performance:

  • The main reason for understanding business environment is related to its performance. Many studies reveal that the future of an enterprise is closely related with the environment.
  • The enterprises that continuously monitors their environment and accordingly adopts business practices are the ones that will continue to succeed in the market for a longer period of time.


The factors or dimensions of the business environment includes social, political, economic, technological, legal conditions:

1. Economic Environment: It includes various factors such as a change in disposable income of people, the value on rupees, stock market indices, these factors can affect management practices in a business enterprise. For example change in interest rate by commercial banks affect each and every industry in an economy.

Components of economic environment are:

  • Rate of growth of GNP and per capita income at current and constant price
  • Balance of payments and changes in foreign exchange reserve
  •  Rate of savings and investments
  • Money supply in the economy
  • Agricultural and industrial production
  • Type of markets ex.Monopolistic, oligopoly. 

 2. Social Environment: The social environment of business include social forces like customs and traditions, social trends, societies expectation from the business, values, etc. Traditions are social practices that have lasted for decades and even centuries.

  • For example, the celebration of Diwali, Valentine’s Day, and Christmas give opportunities to various businesses like sweet shops, gift shops, tailoring outlets, etc.
  • Social trends present various opportunities and the threat to business enterprises, for example, the health and fitness trend has created a demand for products like diet coke, gyms, food supplements, etc.

Components of the social environment are:

  • The concern with the quality of life
  • Life expectancy
  • Consumption habits
  • Composition of family
  • Birth and death rate
  • Population shifts

3. Political environment: it includes political conditions like stability, peace, attitude of elected government representatives. Political environment provides opportunities and treats to various businesses. For example if government provides subsidy in the production of cotton garments, it will have positive impact on cotton textile businesses.

Components of political environment:

  • Prevailing political system
  • Level of political molarity
  • Constitution of the country
  • Dominant ideologies and values of political parties
  • The extent and nature of government intervention in business.

4. Legal environment: legal environment includes various laws that are passes by the government authorities, court judgements, as well as decisions by various commissions at every level of government.

  • It is important for the management of an enterprise to obey the law of the land. For example: companies act 1956, foreign exchange management act, Trade union act 1926, consumer protection act 1986, competition act, 2002 and various other acts are a pre - requisite for better business performance.
  • FOR EXAMPLE- Advertisements of alcohol and cigarette on national television is prohibited.
  • Advertisements of baby food must inform the potential buyers that mothers milk is the best

5.Technological environment: The technological industry is growing at a rapid rate, each year some or the other changes takes place. These changes provide some new ways/methods/process of producing goods and services. For example: recent advances in computers and internet have led to development of multi-billion dollar E - commerce websites such as Amazon, Flipkart etc.

  • FOR EXAMPLE-Transfer of technology and scientific research.


As a part of economic reforms, the Government of India announced a new industrial policy in July 1991 which sought to liberate the industry from the shackles of the licensing system (liberalisation), drastically reduce the role of the public sector (privatisation) and encourage foreign- private participation in industrial development (globalisation).

  1. Liberalisation means “freeing the Indian business and industry form all unnecessary controls and restrictions.”
  • Freedom in fixing the prices of goods and services.
  • Freedom to decide the scale of business
  • Abolishing ay requirement of license for most of the industries
  • Reduction in taxes
  • Simplifying procedure for imports and exports
  1. Privatisation means “giving greater role to the private sector in the nation building process and reducing the role of the public sector” to achieve this government adopted the policy of planned ‘disinvestments’. Which means transferring the shares of public sector enterprise to private sector i.e. transfer of ownership from government to private enterprise.
  2. Globalisation means the integration of various economies of the world into one big economy. Since 1991 government had many restriction on export and imports. The new policies aimed at:
  • Export promotion
  • Import liberalisation
  • Foreign exchange reforms.

Through globalisation India got connected with different economies of the world, which helped in development of India in many ways for example: transfer of technology and scientific research etc.


The LPG (liberalisation, privatisation and globalisation) policies of 1991 lead to many changes in the working of business enterprise. The Indian corporate sector have faced many challenges due to the policies implemented by the government. Some of the challenges are explained below:

  1. Increased competition:

As government removed the need for licensing and allowed foreign firms to enter into Indian market all these factors have increased the competition of Indian firms especially in service industries like banking, airlines, telecommunication etc.

  1. Rapidly changing technological environment:

The globalisation phenomenon lead to transfer of new technologies from developed nation into India which changed the ways in which businesses are conducted. New technologies make it possible to improve machines, process, product and services.

  1. More demanding customers:

Customers today have become more demanding because they are well informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services.

  1. Market orientation:

Earlier firms had production – oriented marketing operations, where they used to produce first and go to the market for sale later. But now, firms have to study and analyse the market first to identify customer needs and produce goods accordingly.

  1. Necessity for change:

After the 1991 policies the market forces have become turbulent as a result enterprises have to continuously modify their operations.

  1. Need for developing human resource:

Earlier the Indian workforce was inadequately trained but the new market conditions require more people with higher skills and competence and greater commitment. Hence there’s a need for developing human resource.