NCERT solutions class 12 Business Studies Chapter 3 BUSINESS ENVIRONMENT

Chapter 3: Business Environment

Part I: Very Short Answer Questions

1. What is meant by business environment? Concept of Business Environment

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.

Impact on Organization:

The organisation is unable to control such types of forces, but it can definitely have a positive or negative impact on their performance. For e.g., altering the design of a product with efficiency leads to its demand in the market, whereas below-par performance and poor design will result in making the product inferior.

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

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 its best every time.

3. Give an example to show that a business firm operates within numerous interrelated factors constituting the business environment. Interrelatedness of Dimensions

The various elements of a Business organisation are interrelated and the outcome depends on all these elements. Let us understand using the example of an Automobile Company:

1. Economic Factor: If there is a global recession or economic slowdown, it will result in fewer sales of cars.
2. Technological Factor: Due to the introduction of new technology, car manufacturers need to follow that as an industry standard, which will be beneficial for the organisation.
3. Legal Factor: With the introduction of GST, car manufacturers must charge and comply with GST regulations, which is mandatory for business.

4. Krishna Furnishers Mart found their market share declining because of new entrants... List any two impacts of changes in business environment on Krishna Furnishers Mart’s operations. Impact of Changing Environment

The following impacts can be seen with the changing of the business environment for Krishna Furnishers Mart:

1. Increase in Competition: Rise in new entrants leads to tough competition in the market.
2. Market Orientation & Innovation: Innovation in design and studying market trends are needed to differentiate their products from competitors.

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

Specific forces have a direct impact on the way a particular business is run. Examples include:

1. Changing tastes and preferences of customers.
2. Competitor strategy and actions.
3. Shift in investor loyalty.

Part II: Short Answer Questions

1. Why it is important for business enterprises to understand their environment? Explain. Importance of Business Environment

It is essential to understand the business environment as it helps in determining the success or failure of an organisation. The following points highlight its importance:

1. Identifying Opportunities: Business enterprises can identify positive opportunities to make the first-mover advantage and stay ahead of the competition.
2. Identifying Threats: Businesses can identify potential threats and determine the best solutions to neutralize them early warning signals.
3. Tapping Useful Resources: Various resources required for a business to run are determined by studying the local business environment.
4. Coping with Rapid Changes: The business environment is dynamic (technology, consumer preferences). Knowing it helps adapt to these rapid changes effectively.
5. Planning and Policy Formulation: It helps in formulating new plans and policies as per the current market trends.
6. Improving Performance: Continuous analysis ultimately results in better overall performance for the organisation.

2. Explain the following terms: (a) Liberalisation (b) Privatization (c) Globalisation The LPG Reforms (a) Liberalisation

Liberalisation is the process of eliminating state control over economic activities. It provides greater autonomy to business enterprises in decision-making and eliminates unnecessary government interference, aiming to increase competition and encourage foreign trade.

(b) Privatization

Privatisation is the process of transferring ownership, management, and control of public sector enterprises to the private sector. Also known as disinvestment, it reduces the workload on public enterprises and paves the way for economic development by encouraging FDI.

(c) Globalisation

Globalisation is the integration of the national economy with the world economy. It represents a free flow of information, technology, goods, services, capital, and people across different countries, improving cross-border connectivity.

3. Briefly discuss the impact of government policy changes on the business and industry. Impact of Policy Changes

1. Increasing Competition: Relaxing licensing policies and reducing import duties means domestic firms face tough competition from internal and global players.
2. More Demanding Customers: Increased competition floods consumers with choices, leading to higher demands for better quality goods and services.
3. Rapidly Changing Technological Environment: Firms must adopt innovative ways and updated technology to promote and improve their products.
4. Necessity for Change: Enterprises must continuously modify their business policies to sustain and make a profit under new government rules.
5. Need for Developing Human Resources: Improvements in technology require highly trained and skilled manpower to execute plans properly.
6. Market Orientation: Businesses must analyze the market before production, rather than producing first and selling later.
7. Loss of Budgetary Support: Public sector enterprises must perform efficiently to survive, as they can no longer rely entirely on government funds.

4. National Digital Library of India (NDL India) 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. Highlighted Dimensions

1. Technological Dimension: By developing a framework of a virtual repository of learning resources and a single-window search facility.
2. Social Dimension: By supporting researchers, life-long learners, and differently-abled learners free of cost, aiming at educational welfare.

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

1. Interest Rates: Cash transactions reduced, and bank deposits increased (e.g., Jan Dhan Accounts), leading to more financial savings and a subsequent decrease in bank interest rates.
2. Private Wealth: Private wealth saw a decline as large-volume cash transactions and unaccounted wealth holdings were invalidated.
3. Real Estate: The real estate industry witnessed a huge drop in business, leading to a decline in property prices.

Part III: Long Answer Questions

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

1. Totality of External Forces: It is the sum total of all external forces (individuals, government, consumers) impacting business performance.
2. Inter-relatedness: Different forces are interconnected. For example, an increase in consumers' income leads to a higher demand for electric appliances.
3. Dynamic Nature: It is constantly evolving, seen in changing consumer trends, technology, and government policies.
4. Uncertainty: Changes in market dynamics cannot be predicted easily, making the environment highly uncertain.
5. Complexity: Being the sum of interrelated dynamic forces, it is difficult to understand their cumulative effect completely.
6. Relativity: The environment varies from region to region and country to country.

Specific vs. General Environment Specific Environment:

These are external forces that directly affect the daily functioning of a particular organisation or industry.
Example: A change in the price of a raw material required by a specific company, or a shift in its direct customers' tastes.

General Environment:

These are forces that have a broad impact on all organisations irrespective of the industry. They do not differentiate between businesses.
Example: A new technological advancement in communication or a change in the national government affects all companies.

2. How would you argue that success of a business is significantly influenced by its environment? Influence of Environment on Business Success

Any organisation does not function in a vacuum. It is heavily influenced by political, legal, social, and technological forces. The environment determines success in the following ways:

1. First Mover Advantage: Careful observation helps identify positive opportunities early, allowing the business to reap maximum benefits before competitors.
2. Early Warning Signals: Studying the environment helps identify threats and take preventive measures to counter negative forces.
3. Tapping Useful Resources: The environment provides essential inputs (machinery, raw materials, labor) which the business converts into desired outputs.
4. Coping with Rapid Change: Understanding the dynamic nature of the environment helps organizations adapt effectively to continuous changes.
5. Assisting in Planning: Discovering threats and opportunities allows businesses to formulate realistic plans and policies appropriate for the existing market scenario.
6. Improving Performance: Being prepared for external situations leads to better, more informed performance and long-term sustainability.

3. Explain with examples, the various dimensions of the business environment. Dimensions of Business Environment [Image of Dimensions of Business Environment]

1. Economic Environment: Consists of variables such as income, stock markets, and interest rates. Example: An increase in the purchasing power of consumers leads to higher demand for goods and services.
2. Social Environment: Comprises traditions, trends, social values, and cultures. Example: Companies ramping up production of sweets and gifts during religious festivals like Diwali or Eid.
3. Technological Environment: Includes technological changes and improvements. Example: The shift from physical ticket booking to online platforms and mobile apps for airlines and railways.
4. Legal Environment: Consists of legislations passed by the government and court judgments. Non-compliance leads to penalties. Example: Mandatory statutory warnings on cigarette packages.
5. Political Environment: Relates to peace, law and order, and government stability. Example: A stable government encourages foreign investment, whereas frequent changes in administration cause investor panic.

4. The government of India announced Demonetization... As a result, the existing ₹ 500 and ₹ 1,000 currency notes ceased to be legal tender... (a) Enumerate the dimensions highlighted. (b) State the features of Demonetization. (a) Dimensions Highlighted

1. Political: The government's bold step to demonetize the currency to curb illegal activities and black money.
2. Legal: The immediate cessation of ₹ 500 and ₹ 1,000 notes as legal tender and the introduction of new notes by the RBI.
3. Technological: The subsequent substantial increase in the use of Point of Sale (PoS) machines, e-wallets, and digital cash.

(b) Features of Demonetization

1. Tax Administration Measure: Done with the intention of exposing black money holders and those evading taxes.
2. Channelizing Savings: Increased the financial savings of people in the formal banking system rather than keeping cash at home.
3. Creating a Less-Cash Economy: Aimed to popularize the use of digital payments and reduce cash-related fraud.
4. Lower Interest Rates: The massive influx of deposits helped in reducing the interest rates in banks.

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

1. Abolition of Licensing: Industrial licensing was abolished for almost all product categories, except a few like alcohol, cigarettes, and defense equipment.
2. De-reservation of Public Sector: The number of industries reserved strictly for the public sector was drastically reduced (currently only 3: atomic energy, railways, atomic minerals).
3. Removal of Expansion Restrictions: Norms were relaxed for companies to expand production capacity based on market requirements without seeking prior government permission.
4. Encouraging Foreign Investment: Allowed 100% FDI in many sectors and permitted the import of capital goods. Established the Foreign Investment Promotion Board (FIPB).
5. SSI Reforms: The investment limit for small-scale industries was increased to help them modernize and develop.
6. Disinvestment: Introduced selling government stakes in public sector units to the private sector.

Impact on Business and Industry

These changes led to immense increasing competition from both domestic and foreign players. Customers became more demanding due to a wider array of choices. Businesses had to adopt rapid technological advancements and shift to a market-oriented approach. Furthermore, the need to develop skilled human resources skyrocketed, and public sector enterprises lost their absolute budgetary support, forcing them to operate more efficiently to survive.

6. What are the essential features of (i) Liberalisation (ii) Privatisation (iii) Globalisation? (i) Liberalisation

The elimination of state control over economic activities, providing autonomy to enterprises.

Features:

• Abolition of restrictive licensing policies.
• Freedom for businesses to scale operations and produce goods based on market conditions.
• Removal of trade restrictions, tariffs, and duties.
• Encouraging foreign direct investment.

(ii) Privatisation

The transfer of ownership and control from the public sector to the private sector (Disinvestment).

Features:

• Selling part or whole equity of PSUs to private entities (Strategic selling).
• Establishing boards like BIFR to revive or handle sick PSUs.
• Reducing the overall role and monopoly of the public sector.
• Granting autonomy and "Navaratna" status to high-performing PSUs to improve efficiency.

(iii) Globalisation

The integration of the national economy with the world economy, ensuring a free flow of resources.

Features:

• Removal or significant reduction of trade barriers like customs duties to promote free trade.
• Encouraging foreign capital via FDI.
• Formation of Special Economic Zones (SEZs) to boost exports.
• Implementation of acts like FEMA (Foreign Exchange Management Act) to regulate foreign exchange seamlessly.