NCERT Class 12 Business Studies Chapter 3 Business Environment

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NCERT Class 12 Business Studies Chapter 3 Business Environment

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Business Environment

Chapter: 3

PART – Ⅰ  PRINCIPLES AND FUNCTIONS OF MANAGEMENT

EXERCISE

VERY SHORT ANSWER TYPE

1. What is meant by business environment?

Ans: The term ‘business environment’ means the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance. 

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

Ans: The economic, social, political, technological and other forces which operate outside a business enterprise are part of its environment. So also, the individual consumers or competing enterprises as well as the governments, consumer groups, competitors, courts, media and other institutions working outside an enterprise constitute its environment. The important point is that these individuals, institutions and forces are likely to influence the performance of a business enterprise although they happen to exist outside its boundaries.

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: Reliance Jio’s entry into the Indian telecom market in 2016 is a great example of how a business operates within an interrelated business environment.

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 analyze 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: Impacts of Changes in Business Environment on Krishna Furnishers Mart:

(i) Increase in Competition: New entrants in the industry led to a decline in market share, forcing the firm to innovate and improve efficiency.

(ii) Market Orientation: The firm now needs to analyze market trends and customer preferences to design and develop products accordingly.

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

Ans: Two specific forces of a business environment affecting a business are customer behavior and competitor activity; these directly impact a company’s sales, market share, and overall strategy by influencing customer choices and the competitive landscape they operate in. 

SHORT ANSWER TYPE

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

Ans: A good understanding of environment by business managers enables them not only to identify and evaluate, but also to react to the forces external to their firms. It enables the firm to identify opportunities and getting the first mover advantage, Opportunities refer to the positive external trends or changes that will help a firm to improve its performance. Environment provides numerous opportunities for business success. It helps in tapping useful resources, Environment is a source of various resources for running a business. To engage in any type of activity, a business enterprise assembles various resources called inputs like finance, machines, raw materials, power and water, labour, etc., from its environment including financiers, government and suppliers.

2. Explain the following terms: 

(a) Liberalisation.

Ans: The economic reforms that were introduced were aimed at liberalising the Indian business and industry from all unnecessary controls and restrictions. They signalled the end of the licence permit quota raj.

Liberalisation of the Indian industry has taken place with respect to: 

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

(ii) Freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities.

(iii) Removal of restrictions on the movement of goods and services.

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

(v) Reduction in tax rates and lifting of unnecessary controls over the economy.

(vi) Simplifying procedures for imports and experts. and 

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

(b) Privatization.

Ans: The new set of economic reforms aimed at giving greater role to the private sector in the nation building process and a reduced role to the public sector. This was a reversal of the development strategy pursued so far by Indian planners. To achieve this, the government redefined the Industrial Policy of 1991, adopted the policy of planned disinvestments of the public sector and decided to refer the loss making and sick enterprises to the Board of Industrial and Financial Reconstruction. The term disinvestments used here means transfer in the public sector enterprises to the private sector. It results in dilution of stake of the Government in the public enterprise. If there is dilution of Government ownership beyond 51 percent, it would result in transfer of ownership and management of the enterprise to the private sector.

(c) Globalisation.

Ans: Globalisation means the integration of the various economies of the world leading towards the emergence of a cohesive global economy. Till 1991, the Government of India had followed a policy of strictly regulating imports in value and volume terms.

These regulations were with respect to:

(a) licensing of imports.

(b) tariff restrictions. and

(c) quantitative restrictions.

The new economic reforms aimed at trade liberalisation were directed towards import liberalisation, export promotion through rationalisation of the tariff structure and reforms with respect to foreign exchange so that the country does not remain isolated from the rest of the world. Globalisation involves an increased level of interaction and interdependence among the various nations of the global economy.

3. 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, lifelong learners and differently abled learners free of cost. State the dimensions of business environment highlighted above. 

Ans: The dimensions of business environment highlighted above are discussed below: 

(i) Technological Environment: Technological environment includes forces relating to scientific improvements and innovations which provide new ways of prod ucing goods and services and new methods and techniques of operating a business. For exa mple, recent technological, advances in computers and electro nics have modified the ways in which companies advertise their products. 

(ii) Political Environment: Political environment includes political conditions such as general stability and peace in the country and specific attitudes that elected government representatives hold towards business. The significance of political conditions in business success lies in the predictability of business activities under stable political conditions. 

(iii) Legal Environment: Legal envi ronment includes various legis lations passed by the Government administrative orders issued by government authorities, court judgments as well as the decisions rendered by various commissions and agencies at every level of the government, centre, state or local.

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

Ans: The impact of demonetization on interest rates, private wealth and real estate are:

Money/Interest rates	Decline in cash transactions. Bank deposits increased.  Increase in financial savings
Private wealth	Declined since some high demonetised notes were not returned and real estate prices fell.
Real estate	Prices declined.

LONG ANSWER TYPE

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

Ans: The term ‘business environment’ means the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance. The economic, social, political, technological and other forces which operate outside a business enterprise are part of its environment. So also, the individual consumers or competing enterprises as well as the governments, consumer groups, competitors, courts, media and other institutions working outside an enterprise constitute its environment. The important point is that these individuals, institutions and forces are likely to influence the performance of a business enterprise although they happen to exist outside its boundaries.

The difference between general and specific environments are:

Specific Environment	General Environment
Specific and general forces: Business environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly and immediately in their daytoday working.	General forces (such as social, political, legal and technological conditions) have an impact on all business enterprises and thus may affect an individual firm only indirectly.
specific environment, these factors explain the general environment which mostly influences many enterprises at the same time. However, management of every enterprise can benefit from being aware of these dimensions instead of being disinterested in them.	general environment which mostly influences many enterprises at the same time. However, management of every enterprise can benefit from being aware of these dimensions instead of being disinterested in them.

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

Ans: A business’s success is significantly influenced by its environment because the environment can create opportunities and threats that affect a business’s performance. Here are some points that describe the success of a business enterprise is significantly influenced by its environment.

(i) It enables the firm to identify opportunities and getting the first mover advantage: Opportunities refer to the positive external trends or changes that will help a firm to improve its performance. Environment prov ides numerous opportunities for business success. Early identi fication of opportunities helps an enterprise to be the first to exploit them 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 performance. Besides opportunities, the environment happens to be the source of many threats. Environmental awareness can help managers to identify various threats on time and serve as an early warning signal. 

(iii) It helps in tapping useful resources: Environment is a source of various resources for running a business. To engage in any type of activity, a business enterprise assembles various resources called inputs like finance, machines, raw materials, power and water, labour, etc., from its environment including financiers, government and suppliers.

(iv) It helps in coping with rapid changes: Today’s business environment is getting increasingly dynamic where changes are taking place at a fast pace. It is not the fact of change itself that is so important as the pace of change. Turbulent market conditions, less brand loyalty, divisions and subdivisions (fragmentation) of markets, more demanding customers, rapid changes in technology and intense global competition are just a few of the images used to describe today’s business environment. 

(v) It helps in assisting in planning and policy formulation: Since environment is a source of both opportunities and threats for a business enterprise, its understanding and analysis can be the basis for deciding the future course of action (planning) or training guidelines for decision making (policy). For instance, entry of new players in the market, which means more competition may make an enterprise think afresh about how to deal with the situation.

(vi) It helps in improving performance: The final reason for understanding business environment relates to whether or not it really makes a difference in the performance of an enterprise. The answer is that it does appear to make a difference. Many studies reveal that the future of an enterprise is closely bound up with what is happening in the environment. And, the enter prises 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.

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

Ans: The various dimensions of the business environment are:

(i) Economic Environment: Interest rates, inflation rates, changes in disposable income of people, stock market indices and the value of rupee are some of the economic factors that can affect management practices in a business enterprise. Short and long term interest rates significantly affect the demand for product and services. For example, in case of construction companies and automobile manufacturers, low longer term rates are beneficial because they result in increased spending by consumers for buying homes and cars on borrowed money.

(ii) Social Environment: The social environment of business include the social forces like customs and traditions, values, social trends, society’s expectations from business, etc. Traditions define social practices that have lasted for decades or even centuries. For example, the celebration of Diwali, Eid, Christmas, and Guru Parv in India provides significant financial opportunities for gree tings card companies, sweets or confectionery manufacturers, tailoring outlets and many other related business. 

(iii) Technological Environment: Technological environment includes 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. For example, recent technological, advances in computers and electronics have modified the ways in which companies advertise their products. It is common now to see computerised information kiosks, and World Wide Web multimedia pages highlighting the virtues of products.

(iv) Political Environment: Political environment includes political conditions such as general stability and peace in the country and specific attitudes that elected government representatives hold towards business. The significance of political conditions in business success lies in the predictability of business activities under stable political conditions. 

(v) Legal Environment: Legal environment includes various legislations passed by the Government administrative orders issued by government authorities, court judgments as well as the decisions rendered by various commissions and agencies at every level of the government— centre, state or local. 

4. The government of India announced Demonetization of Rs. 500 and Rs. 1,000 currency notes with effect from the midnight of November 8, 2016. As a result, the existing Rs. 500 and R. 1,000 currency notes ceased to be legal tender from that date. New currency notes of the denomination of Rs.500 and Rs. 2,000 were issued by the 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.

Ans: The dimensions of business environment highlighted above are discussed below: 

(i) Technological Environment: Technological environment includes forces relating to scientific improvements and innovations which provide new ways of prod ucing goods and services and new methods and techniques of operating a business. For example, recent technological, advances in computers and electronics have modified the ways in which companies advertise their products. 

(ii) Political Environment: Political environment includes political conditions such as general stability and peace in the country and specific attitudes that elected government representatives hold towards business. The significance of political conditions in business success lies in the predictability of business activities under stable political conditions. 

(iii) Legal Environment: The move encouraged digital payments, increasing the use of e-wallets, UPI, and Point of Sale (PoS) machines. Legal environment includes various legislations passed by the Government administrative orders issued by government authorities, court judgments as well as the decisions rendered by various commissions and agencies at every level of the government, centre, state or local.

(b) State the features of Demonetization. 

Ans: The features of Demonetisation are listed below:

(i) Demonetisation is viewed as a tax administration measure. Cash holdings arising from declared income was readily deposited in banks and exchanged for new notes. But those with black money had to declare their unaccounted wealth and pay taxes at a penalty rate.

(ii) Demonetisation is also interpreted as a shift on the part of the government indicating that tax evasion will no longer be tolerated or accepted. 

(iii) Demonetisation also led to tax administration channelizing savings into the formal financial system. Though, much of the cash that has been deposited in the banking system is bound to be withdrawn but some of the new deposits schemes offered by the banks will continue to provide a base loans, at lower interest rates. 

(iv) Another feature of demonetisation is create a less-cash or cash-lite economy, i.e., channeling more savings through the formal financial system and improving tax compliance. Though there are arguments against this as digital transactions require use of cell phones for customers and PointofSale (PoS) machines for merchants, which will only work if there is internet connectivity.  

5. What economic changes were initiated by the Government under the Industrial Policy, 1991? What impact have these changes made on business and industry? 

Ans: India’s experience with economic planning has delivered mixed results. In 1991 the economy faced a serious foreign exchange crisis, high government deficit and a rising trend of prices despite bumper crops. As a part of economic reforms, the Government of India announced a new industrial policy in July 1991.

The broad features of this policy were as follows: 

(i) The Government reduced the number of industries under compulsory licensing to six. 

(ii) Many of the industries reserved for the public sector under the earlier policy, were dereserved. The role of the public sector was limited only to four industries of strategic importance. 

(iii) Disinvestment was carried out in case of many public sector industrial enterprises. 

(iv) Policy towards foreign capital was liberalised. The share of foreign equity participation was increased and in many activities 100 per (FDI) was permitted. 

(v) Automatic permission was now granted for technology agreements with foreign companies. 

(vi) Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign investment in India. 

Appropriate measures were taken to remove obstacles in the way of growth and expansion of industrial units of large industrial houses. Small scale sector was assured all help and accorded due recognition. In essence, the Industrial Policy of 1991 aimed to free industries from the rigid licensing system (Liberalization), reduce the dominance of the public sector (Privatization), and encourage foreign private investment in India’s industrial growth (Globalization).

6. What are the essential features of:

(a) Liberalisation.

Ans: The economic reforms that were introduced were aimed at liberalising the Indian business and industry from all unnecessary controls and restrictions. They signalled the end of the licence permit quota raj.

Liberalisation of the Indian industry has taken place with respect to: 

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

(ii) Freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities.

(iii) Removal of restrictions on the movement of goods and services.

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

(v) Reduction in tax rates and lifting of unnecessary controls over the economy.

(vi) Simplifying procedures for imports and experts. and

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

(b) Privatization and.

Ans: The new set of economic reforms aimed at giving a greater role to the private sector in the nation building process and a reduced role to the public sector. This was a reversal of the development strategy pursued so far by Indian planners. To achieve this, the government redefined the role of the public sector in the New Industrial Policy of 1991, adopted the policy of planned disinvestments of the public sector and decided to refer the loss making and sick enterprises to the Board of Industrial and Financial Reconstruction. 

(i) Reduced Role of Public Sector: The government aimed to limit its involvement in business and industry, focusing only on strategic sectors.

(ii) Encouragement to Private Sector: Greater opportunities were provided to private businesses to participate in economic activities and contribute to national development.

(iii) Planned Disinvestment: The government adopted a policy of selling shares of public sector enterprises (PSEs) to private entities to reduce its stake and increase efficiency.

(iv) Transfer of Ownership & Management: If government ownership in a PSE was reduced below 51%, control and management shifted to private hands.

(v) Rehabilitation of Loss-Making Units: Sick and loss-making enterprises were referred to the Board of Industrial and Financial Reconstruction (BIFR) for revival or closure.

(c) Globalisation?

Ans: Globalisation means the integration of the various economies of the world leading towards the emergence of a cohesive global economy. Till 1991, the Government of India had followed a policy of strictly regulating imports in value and volume terms. 

(i) Integration of Economies: Globalisation promotes economic integration by reducing trade barriers and encouraging free flow of goods, services, and investments across borders.

(ii) Trade Liberalisation: The policy aimed at reducing restrictions on imports and exports through rationalisation of tariffs, removal of licensing requirements, and quantitative restrictions.

(iii) Foreign Exchange Reforms: Measures were taken to make foreign exchange transactions more flexible and to integrate India with the global financial system.

(iv) Encouragement of Foreign Investment: Policies were introduced to attract Foreign Direct Investment (FDI) and technology transfer to boost industrial growth and global competitiveness.

(v) Technological Advancements: Rapid progress in information technology and communication helped businesses overcome geographical and political barriers, expanding global markets.