Business Environment

CBSE Class 12 Business Studies
NCERT Solutions
Chapter 03
Business Environment

1. Which of the following does not characterise the business environment?

(a) Uncertainty

(b) Employees

(d) Complexity

Ans: Among the options given above, employees do not characterise business environment. Business environment refers to the external forces such as individuals, enterprises, situations, and other such forces that affect the performance of the organisation. Employees are integral to an organisation and does not characterise its environment.

2. Which of the following best indicates the importance of the business environment?

(a) Identification

(b) Improvement in performance

(d) All of them

Ans: All the options given above indicate the importance of business environment. Study of business environment helps in identifying the positive changes as well as threats or hindrances that affects the performance of an organisation. Thereby, it helps them in taking appropriate measures for improving the performance. In addition, a careful study of the continuously changing environment helps the organisation in coping with it in a better manner.

3. Which of the following is an example of social environment?

(a) Money supply in the economy

(b) Consumer Protection Act

(d) Composition of family

Ans: Social environment refers to the social forces such as customs, traditions, social values, social trend etc. that affect the business opportunities and performance. Among the options given in the question, composition of family represents an example of social environment. If the composition of family is such that it comprises of more of children than elderly persons then, this implies greater business opportunity for baby product companies.

4. Liberalization means

(a) Integration among the economies

(b) Reduced government controls and restrictions

(d) None of them

Ans: Liberalization means reduced government controls and restrictions such as licenses and quotas.

5. Which of the following does not explain the impact of government policy changes on business and industry?

(a) More demanding customers

(b) Increasing competition

(d) Market orientation

Ans: Among the options given above, change in agriculture prices does not explain the impact of government policy changes on business and industry. Government policy changes such as liberalisation, privatisation and globalisation affect the working of business organisations. More demanding customers, increasing competition and market orientation all explain the impact of such policy changes. On the other hand, change in agricultural prices is independent of the government policy changes and takes place due to change in the demand and supply of agricultural products.

Short Answer Type:

1. What do you understand by business environment?

Ans: Business environment can be defined as " the forces, factors and institution with the businessman has to deal with to achieve its objectives." In general words we can say business environment is the surroundingsin which business exists. Whenever any businessman is operating or working then he has to interact with the customers, suppliers and he has to perform the transactions within the rules and regulations of the government. All these persons, institution and policies form a part of business environment.

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

Ans: The understanding and awareness of business environment is must for every businessman as ignorance about business environment can throw the business man out from the market. Proper understanding and awareness about the business environment brings lots of benefits for the businessman and these benefits are-

i. Identification of Opportunities: With a careful analysis of the business environment an enterprise can identify the positive opportunities for business. An early identification of the opportunities helps it in taking first hand advantage in competition.

ii. Identification of Threats: Besides positive opportunities, a study of business environment helps an enterprise in the identification of threats or negative signals that may adversely affects its functioning. Thereby, it enables it to take appropriate preventive measures.

iii. Accumulating Useful Resources: Environment provides a business various resources or inputs for its functioning such as raw material, machinery, labour, etc. On the other hand, enterprises provide the environment with output in the form of goods and services. That is, environment acts both as a source of resources as well as a source of demand for the products of the enterprises. Thus, it becomes logical for the enterprises to take up those resources from the environment that can be converted into the desired output. This is possible only if the enterprises have an understanding of what the environment desires and what it can offer.

iv. Adjusting to Changes: Business environment is dynamic in nature. Changes in technology, consumers taste and preference, government policies take place continuously. A careful analysis and understanding of the environment helps an enterprise in dealing with these changes in a better manner and thereby, take appropriate actions.

v. Formulating Plans and Policies: A continuous study of environment helps an organisation in the identification of the opportunities and threats. Thereby, it guides the organisation in framing suitable plans and policies in view of the current scenario.

vi. Improving Performance: A continuous analysis of the environment helps the enterprises in framing suitable policies and plans and thereby, improves their performance.

3. Mention the various dimensions of business environment.

Ans: The following are the dimensions of business environment.

i. Economic Environment: It comprises of the economic variables such as interest rates, income, stock market indices that affect the functioning of the enterprises. For example, an increase in income affects the demand for goods and services of the enterprises.

ii. Social Environment: Social environment refers to the social forces such as customs, traditions, social values, social trend etc. For example, religious celebrations provide business opportunities to many enterprises such as those producing sweets, decoration items, etc.

iii. Technological Environment: Technological environment includes technological changes and improvements. For example, introduction of computers, internet, new telecommunication facilities, etc. all affect the business enterprises. An improvement in the technology used in the manufacturing of a product provides new business opportunities for the enterprises while on the other hand, is a threat for the enterprises using obsolete technology.

iv. Legal Environment: It comprises of the legislation and rules passed by the government such as the Companies Act, Trade union Act, etc. These legislations govern how an enterprise functions and behaves. Knowledge of these legislation is essential for enterprises as their non-compliance can lead to legal trouble for them.

v. Political Environment: Political conditions such as peace and stability, law and order compose political business environment. It directly affects the functioning of enterprises. For example, a situation of political unrest erodes confidence of the investors and thereby, makes it difficult for the enterprises to function smoothly.

4. Briefly explain the following:

(a) Liberalisation

(b) Privatisation

Ans: (a) Liberalisation: Liberalisation refers to end of licence, quota and many more restrictions and controls which were put on industries before 1991. Indian companies got liberalisation in the following way:

1. Abolition of licence except in few.

2. No restrictions on expansion or contraction of business activities.

3. Freedom in fixing prices.

4. Liberalisation in import and export.

5. Freedom in movement of goods n services.

(b) Privatisation: Privatisation implies according greater role to the private sector and reducing the involvement of public sector. Privatisation was followed in India in the following manner.

(i) Disinvestment of the public sector enterprises

(ii) Establishing Board of Industrial and Financial Reconstruction for the revival of the sick and loss making enterprises.

(iii) Diluting the stake of government in the public sector enterprises.

(c) Globalisation: Globalisation refers to the process of integration of various economies of the world. It implies reducing the restrictions on the import and export such as licensing and tariffs. In India the following policies were followed with regard to globalisation.

(i) Removal on restriction on imports

(ii) Abolishing the export duty

(iii) Reducing import duty

5. Briefly discuss the impact of government policy changes on the business and industry.

Ans: The policies of liberalisation, privatisation and globalisation by the government affect the functioning of the business enterprises. The following points highlight the impact of government policy changes on the business and industry.

i. Increased Competition: As a result of the policies such as relaxation of the licensing policy and reduction of import duties, the competition faced by the domestic firms increases. India companies experienced competition in service industry such as telecommunication, banking, insurance, etc.

ii. Increased Demand: As competition increases, the choice of goods and services for the consumers also increases. Thus, consumers also gain from quality products and greater variety.

iii. Change in Business Policies: The government policies directly impact the functioning of the business enterprises. As a result, they have to alter their policies appropriately.

iv. Technological Changes: As competition increases firms tend to find new and innovative ways to survive in the market. In such a scenario, technological improvements become imperative.

v. Need for Trained Personnel: Innovations and improvement in product, application of improved technologies requires skilled and trained personnel. Thus, there arises a need for the development of human resources.

vi. Greater Market Orientation: With increased competition, the production has become market oriented. That is, the enterprises produce as per the demand market.

vii. Less Reliance on Budgetary Support by Public Sector Enterprises: To survive the increased competition, the public sector enterprises must improve efficiency and productivity rather than relying on budgetary support to cover their losses.

Long Answer Type:

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

Ans: Business environment refers to all the external forces such as economic, social, political, technological or legal that affects the performance of a business organisation. In other words, everything that is outside the purview of an organisation but affects its performance composes business environment.

Business environment has the following characteristics.

i. Aggregate of External Forces: Business environment includes all the forces, institutions and factors which directly or indirectly affect the business organisation.

ii. Interrelation: All the forces and factors of business environment are interrelated to each other. For example- with inclination of youth towards western culture, the demand for fast food is increasing.

iii. Ever Changing: Business environment is highly flexible and keep changing. It is not static or rigid that is why it is essential to monitor and scan the business environment continuously.

iv. Uncertainty: Business environment is uncertain. Changes in different forces of the environment cannot be predicted easily. In addition, dynamism of the forces makes it even more uncertain.

v. Complex: Business environment is the aggregate of different interrelated and dynamic forces. Thus, it becomes difficult and complex to understand. For example, all political, social, economic, technological and legal matters affect the performance of organisation simultaneously. While, it may be easy to understand the individual effect of these forces, their cumulative effect is quite difficult to understand.

vi. Relative: Business environment is relative in nature. It differs from region to region. For example, political conditions, religious beliefs, government rules and policies differ from one region to another.

Specific Environment and General Environment: Specific environment refers to those external forces that affect an organisation directly. That is, they are the forces that are specific to a particular organisation or a company. For example, a change in tastes and preferences of consumers towards the products of a company, directly affects its demand. Similarly, a delay in the supply of raw material from the suppliers directly affects the production of a company.

On the other hand, general environment refers to those external forces that affect all the organisations. As against specific forces, general forces do not pertain to a particular organisation, rather they affect the performance of all the organisations. Thus, such forces affect a particular organisation only indirectly. For example, a change in technology affects the quantity and quality of production of all the organisations. Similarly, a change in political conditions affects all companies simultaneously.

Business Environment - Solutions