NCERT Solutions for Class 12 Business Studies Chapter 3 - Business Environment

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Very Short Answer Type Questions

1. What is meant by business environment?

Ans. The term ‘business environment’ means the sum total of all individuals, institutions and other external forces that are outside the control of a business organisation which may affect its performance. The economic, social, political, technological and legal other forces, which operate outside the business enterprise are part of its environment.

2. How does understanding of business environment help in improving performance of a business?

Ans. Understanding the business environment properly by the organisation results in developing plans and policies according
to the environment which results in great improvement in performance. It also helps to counter any negativity that may exist in the market with a well-defined strategy. This will help an organisation perform at best every time.

3. Give an example to show that a business firm operates within numerous inter related factors constituting the business environment. (Hint: example highlighting the inter-relatedness of dimensions of business environment).

Ans. Business organisations work in a complex environment consisting of numerous interrelated and dynamic conditions.
For example, ABC Ltd. is an automobile company. Its performance is affected by the following factors:
Economic: Global recession,
Social: Changed consumption habits of people due to the improved standard of living of customers.
Technological: Advanced technology leads to automation in manufacturing.
Legal: 28% GST levied on automobiles.

4. Krishna Furnishers Mart started its operations in the year 1954 and emerged as the market leader in the industry because of their original designs and efficiency in operations. They had a steady demand for their products but over the years, they found their market share declining because of new entrants in the field. The firm decided to review their operations and decided that in order to meet the competition, they need to study and analyse the market trends and then design and develop their products accordingly. List any two impacts of changes in business environment on Krishna Furnishers Mart’s operations. (Hint: increase in competition and
market orientation).

Ans. The following impacts can be seen with changing changes in business environment on Krishna Furnishers Mart's operations are:

Rise in competitors leads to more competition.
Innovation in designs needed to differentiate product from competitors.

5. Name any two specific forces of business
environment affecting business.

Ans. Specific forces are those forces that directly affect individual enterprises in the day-to-day operations.
Examples of specific forces are:

Investors loyalty,
Customer tastes and preferences
Strategies of Competitors,
Terms and conditions of the Suppliers (any two)

Short Answer Type Questions

1. Why is it important for business enterprises to understand their environment? Explain.

Ans. It is important for business organisations to understand their environment because of the following reasons:

(i) It enables the firm to identify opportunities and getting the first mover advantage:
There are various opportunities provided by environment to business. Initial identification of opportunities helps an enterprise to use it before instead of losing them to competitors.

(ii) It helps the firm to identify threats and early warning signals: Threats refer to the external environment trends and changes that will hinder a firm’s information. Managers can get insights through environment screening get it on time and they may get early warnings and serve as an early warning signals.

(iii) It helps in tapping useful resources: Environment turns out to be an effective source to run a business. To engage in any type of activity, a business enterprise summons various resources called inputs. The appropriate resources are determined by studying the local business environment.

(iv) It helps in coping with rapid changes: All types of enterprises facing increasingly dynamic environment which means changes which have to be adaptable. In order to adapt easily with the change, managers must understand and examine the environment and develop suitable courses of action.

(v) It helps in assisting in planning and policy formulation: Since environment is the source of opportunities and threats, its understanding and analysis becomes the base for various policies to be framed and strategies to be made as per the market trends.

(vi) It helps in improving performance: The enterprises that continuously monitor their environment and adopt suitable business practices are the ones, which not only improve their present performance but also continue to succeed in the market for a longer period.

2. Explain the following terms:
(a) Liberalisation
(b) Privatisation
(c) Globalisation

Ans. The three important features of New Economic Policy, 1991 are:

(a) Liberalisation: Under the new economic policy of 1991, the economic reforms that were introduced aimed at liberalising or freeing the Indian business and industry from all unnecessary controls and restrictions. They signalled the end of the licence-permit quota raj and relief in trade barriers.

(b) Privatisation: The new set of economic reforms is privatisation which aims at expanding the role of the private sector in the nation building process and reducing the role of public sector. Hence, there with be less ownership of government owned sector.

(c) Globalisation: Globalisation means the integration of the various economies of the world leading towards the emergence of a cohesive global economy. Its main focus is on foreign trade and institutional and private investments. Till 1991, India had a policy which strictly regulated imports in value and volume terms. After 1991, the reforms aimed at import liberalisation.

3. Briefly discuss the impact of Government policy changes on business and industry.

Ans. Impact of changes in Government policy on business and industry are:

(i) Increasing competition: As a result of LPG, there are new players who came and increased the number of players in all sectors and firms now face competition from MNCs also.

(ii) More demanding customers: Increased competition in the market gives the customer wider choices in purchasing better quality of goods and services, which makes them more demanding.

(iii) Rapidly changing technological environment: New technologies help to upgrade machines, process products and services. The rapid changes in technological environment creates tough challenges for smaller firms.

(iv) Necessity for change: After 1991, the market forces are unstable in nature as a result of which, the enterprises have to continuously amend their operations.

(v) Need for developing human resource: The new market conditions require people with higher competence and greater commitment. Hence, the need for developing human resources emerged.

(vi) Market orientation: Earlier, production stage was taken up first place and then the process of selling was done. Now, due to the increasing competition and more demanding customers firms have to study and analyse the market first and then produce the goods accordingly.

(vii) Loss of budgetary support to the public sector: Now-a-days public sectors have lesser budgetary support from the Central Government. So, they have to generate their own resources and be more efficient in order to survive and grow.

4. National Digital Library of India (NDL India) is a pilot project initiated by the HRD ministry. It works towards developing a framework of virtual repository of learning resources with a single-window search facility. It provides support to all academic levels including researchers, life-long learners and differently-abled learners free of cost. State the dimensions of business environment highlighted above.

Ans. The dimensions of business environment being highlighted here are:

Technological dimension: By developing a framework of virtual repository of learning resources with a single-window search facility it highlights the technological dimension.
Social dimension: 'By providing support to all academic levels including researchers, life-long learners and differently-abled learners free of cost it highlights social dimension.

5. State the impact of demonetization on interest rates, private,wealth and real estate.

Ans. Impact of demonetization on:

Interest rates: Because of demonetization cash transactions got declined, there is an increment in bank deposits and financial savings
Private wealth: High demonetised notes were not returned, hence it results in declination in private wealth.
Real estate: Decline in prices of property.

Long Answer Type Questions

1. How would you characterise business environment? Explain with examples, the difference between general and specific environment.

Ans. The sum of all the forces (external, institutions and individuals) that are outside the control of a business organisation is referred to as the business environment. The forces mentioned here can be of varied nature such as social, economic, political, legal or technological. The organisation is unable to control such type of forces, but it can definitely have a positive or negative impact on their performance.

The following are the characteristics of business environment:

(i) Business environment is the sum total of all external forces which includes individuals, government, consumers. These have an impact on the business performance that is either positive or negative.

(ii) The different forces that have an impact on the business environment are inter-related. This inter-relation has an effect on the business environment. For e.g., if there is an increase in the annual income of the consumers, they are more likely to purchase goods that fulfil all their demands and this leads to increase in demand for electric appliances, mobile phones, gadgets etc.

(iii) Business environment is constantly evolving and therefore is dynamic in nature. This can be explained as we see changing trends in consumer behaviour, technology and policies of the government.

(iv) The business environment is an uncertain territory. The changes in the market dynamics cannot be predicted easily. Due to which there exists an uncertainty.

(v) Business environment is the sum total of all interrelated dynamic forces. Hence, it is somewhat complex and difficult to understand. All the factors like social, political, technological etc. have an effect on the performance of the organisation. It can be easy to ascertain the individual impact of all the forces; it can be difficult to determine their cumulative effect.

(vi) Business environment varies with each region and hence is relative. The reason behind the variation in business environment is that the forces that determine the nature of business environment are dynamic in nature and therefore change as per the region.

Specific environment is said to be the external forces that play a vital role in functioning of an organisation directly. These forces are specific to a particular organisation or an enterprise. Specific environment is unique to a industry and has an impact on day to day business activities. For example, change in price of a raw material required for production will result in less demand and abundant supply of raw materials has a direct impact on the production of the company.
General environment comprises of all the forces that has an impact on all organisations irrespective of the type of industry. These forces do not differentiate between the industries or types of business. They have a cumulative effect on the organisation’s performance. For example, a new technology for communication will have a impact on the quality and quantity of production or if there is a change in technology then it will have an effect on all organisations.

2. How would you argue that the success of a business enterprise is significantly influenced by its environment?

Ans. Any organisation is unable to function on its own. It is influenced by the various forces such as political, legal, social, technological. These forces form the business environment of an organisation. It is essential that an organisation has a good understanding of its business environment. It enables an organisation to identify that help or those that obstruct the growth of an organisation, knowing them well will help in reacting better to these forces.
Success of a business is influenced by its environment in the following ways:

(i) Whenev er there is a change in the business environment, it provides the opportunity to start fresh. Careful observation of the business environment is helpful in identifying these opportunities. It also gives the first movers advantage to the business. Organisations can reap maximum benefit in comparison to its competitors.

(ii) Studying of business environment helps in identifying threats for the business. It helps to take preventive measures in order to counter those negative forces.

(iii) Environment provides source or inputs such as machinery, raw materials, labour etc., which are essential for an organisation. Therefore, it makes sense for the organisations to choose those resources from the environment and convert into desired products.

(iv) Business environment is dynamic in nature. There is a constant change in the factors that make up the business environment. Having a good understanding of the business environment helps cope up with the factors better and help organisations derive benefit from them.

(v) As various threats and opportunities are discovered during analysis of the business environment. The business can thus formulate plans and policies that will be appropriate for the market in the existing scenario.

(vi) Knowing about the threats and opportunities helps one improve their performance by adapting to these changes in a more informed manner. Being prepared for the situation helps in providing the best performance.

3. Explain with examples, the various dimensions of business environment.

Ans. Business environment has the following dimensions:

(i) Economic Environment: It includes the changes in the system due to economic policies made by the government. Reserve Bank of India is the key regulator of country’s economic environment since it—

(a) affects the interest rates.
(b) manages the flow of money in the economy.
(c) regulates the working of banks.

Example: If the banks reduce the interest rates on long term loans, industries like construction and automobiles get a boost to the business as more spending is made on the purchase of homes and cars by loans.

(ii) Social Environment: The social environment comprises of the social forces like customs and traditions, values, social trends, society’s expectations from business etc. But in business terms, these values turn into freedom of choice in the market.
Major elements of social environment are:
(a) life expectancy,
(b) shifts in the presence of women in the workforce,
(c) consumption habits

Example: Due to the shift in women’s presence in the workforce, the demand for the readymade ladies formal wear, cosmetics, packed/processed food, electronic gadgets has risen.

(iii) Technological Environment: Technological environment comprises of forces relating to scientific improvements and innovations which provide new ways of producing goods and services and new methods and techniques of operating a business. Business not updating themselves in the technology field can find themselves in spot of bother with competitors.

Example: Due to the technological advancement, booking of railway tickets through internet from home, office, etc. became possible.

(iv) Political Environment: Political environment includes political conditions such as general stability, peace in the country, law and order and specific attitudes that elected the government representatives hold towards business. It can be used only when a business enterprise can predict its business activities under stable political conditions.
Major elements of political environment are:
(a) The constitution of the country,
(b) The nature and profile of political leadership and thinking of political personalities,
(c) Political ideology and practices of the ruling party.

Example: After the NEP of 1991, due to the globalisation the international companies started coming to India, but due to the bureaucratic red tape it became difficult to do business here. As a result, these companies got bothered in our country regarding investments.

(v) Legal Environment: Legal environment includes various legislations and legal rules passed by the Government administrative orders issued by government authorities, court judgements as well as the decisions rendered by various commissions and agencies. Non-compliance can lead to legal trouble for the business. Therefore, an adequate knowledge of rules and regulations framed by the government is mandatory to pre-requisite for the better business performance.
Example: Setting up of a company is governed by the Companies Act, not acting according to the law will result in company facing legal hassles.

4. The government of India announced Demonetization of ₹500 and ₹1,000 currency notes with effect from the midnight of November 8, 2016. As a result, the existing ₹500 and ₹1,000 currency notes ceased to be legal tender from that date. New currency notes of the denomination of ₹500 and ₹2,000 were issued by Reserve Bank of India after the announcement.
This step resulted in a substantial increase in the awareness about and use of Point of Sale machines, e-wallets, digital cash and other modes of cashless transactions. Also, increased transparency in monetary transactions and disclosure led to a rise in government revenue in the form of tax collection.
(a) Enumerate the dimensions of business environment highlighted above.
(b) State the features of Demonetization.

Ans. Dimensions of business environment highlighted above are as follows:

(i) Political dimension: ‘The government of India announced demonetization of ₹500 and ₹1,000 currency notes with effect from the midnight of November 8, 2016 to curb the illegal use of money by some entities.

(ii) Legal dimension: As a result, the existing ₹500 and ₹1,000 currency notes ceased to be illegal tender from that date to introduce the new legal tender.

(iii) Technological dimension: The step resulted in a substantial increases in the awareness about and use of digital forms of payment like Point of Sale machines, e-wallets, digital cash and other modes of cashless transactions.

(b) Features of Demonetization are:
(i) Measure of tax administration: Because of demonetisation black money holders had to declare the unaccounted wealth and pay taxes at penalty rates.

(ii) Measure to avoid tax evasion: Demonetisation considered as a strict measure as indicating the government will not tolerate tax evasion

(iii) Measure of channelizing savings into the financial system: By depositing money in banks

(iv) Creation of a ‘cash-less’ or ‘cash-lite’ economy: Demonetisation helps in channeling more savings and reducing tax evasion.

5. What economic changes were initiated by the Government under the Industrial Policy, 1991? What impact have these changes made on business and industry? (Question not in Syllabus according to new curriculum 2022)

Ans. Some economic changes which were initiated by the Government under the Industrial Policy,1991 are:

(i) Under the new Industrial Policy 1991, industrial licensing was prohibited. The system of licensing was retained in six industries likewise drug and pharmaceuticals, defence equipment, dangerous chemicals, liquor, cigarette, industrial explosives.

(ii) The Government set up the Foreign Investment Promotion Board to encourage and channelise the foreign investment .

(iii) The role of industries exclusively reserved for the public sector was considerably reduced. The private sector was given preference to operation in majority of the industries with only three industries under the government namely, railways, atomic mineral and atomic energy.

(iv) For many public sector enterprises, the process of disinvestment was carried out. That is, an increase in share of the assets of the public industrial enterprises was sold to the private sector.

Features of impact of government policy changes on business and industry are as follows:

(i) Demanding customers: Government policies have allowed entry to competitively driven products and services under new economic policies. Consumers have also become well-informed and could choose from a variety of such products and services. Along with rising incomes, increasing purchasing power and changing lifestyles, Indian customers have become more demanding about value driven products and services.

(ii) Increasing competition: Government’s new policies have given an impetus to private sector and enabled easy access to foreign companies, thus enabling a competitive structure in India. Competition has led to the development of new products and services, innovation, creating easy access to domestic and foreign markets and resources, led to existence of competitive pricing, increased productivity and profitability across industries and businesses.

(iii) Technological development: Increase in competition with the entry of foreign companies has led to technological development in the country. Government policies and regulations have been directed towards following global production compliances that have led businesses with large-scale operations to adopt state-of-the art technology.

(iv) Market orientation: Market orientation means that businesses attempt to discover and match the needs and desires of the consumers by providing customised products and services by encouraging privatisation and competition. Thus, businesses have to bear huge costs on planning based on market research, and producing products or services based on the changing tastes, needs and wants of their customers. The concept of market has changed from selling to marketing.

5. What are the essential features of:
(a) Liberalisation
(b) Privatisation
(c) Globalisation

Ans. (a) Liberalisation: The essential features of liberalisation are:

(i) Abolishing licensing requirements in most of the industries except a short list of industries.

(ii) No restriction on expansion or contraction of business.

(iii) Free movement of goods and services.

(iv) Freedom in fixing the prices of goods and services.

(v) Reduction in tax rates.

(vi) Simplifying procedures for imports and exports.

(vii) Making it easier to attract foreign capital and technology to India.

(b) Privatisation:

(i) The government redefined the role of public sector.

(ii) Policy of planned disinvestments of the public sector.