Business EnvironmentClass 12 Business Studies Part 1 NCERT Solutions
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Q1Long Answer Type:
How would you characterize business environment? Explain with examples, the difference between general and specific environment.
Solution
The business environment can be characterized by the following features:
- Totality of External Forces: It is the sum total of all forces external to a business firm.
- Specific and General Forces: It includes both specific forces (like customers and competitors) and general forces (like social and political conditions).
- Inter-relatedness: Different elements of the environment are closely interrelated. For example, a social trend towards health consciousness increases the demand for health products.
- Dynamic Nature: The environment is constantly changing due to factors like technological advancements and shifts in consumer preferences.
- Uncertainty: It is difficult to predict future happenings, especially in fast-changing industries like information technology.
- Complexity: The environment consists of numerous interrelated forces, making it difficult to understand in its totality.
- Relativity: The business environment is a relative concept as it differs from country to country and even region to region.
Difference between General and Specific Environment:
The business environment includes both specific and general forces.
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Specific Environment: This refers to the forces that affect individual enterprises directly and immediately in their day-to-day working. These forces are unique to a firm's industry. For example, a new competitor entering the market will have a direct impact on a firm's market share and pricing. Similarly, a change in the tastes of a firm's customers or a new deal with a supplier are specific forces.
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General Environment: This refers to the broader forces such as social, political, legal, and technological conditions that have an impact on all business enterprises. The effect of these forces on an individual firm is usually indirect. For example, a change in the government's tax policy (economic force) will affect all businesses. Similarly, a new technology or a shift in social values will have a widespread impact on all industries, not just one specific firm.
Q2Long Answer Type:
How would you argue that the success of a business enterprise is significantly influenced by its environment?
Solution
The success of a business enterprise is significantly influenced by its environment because no business exists in a vacuum. It must interact with its environment to survive and grow. A good understanding and adaptation to the environment contribute to success in the following ways:
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Enables Identification of Opportunities: The environment provides numerous opportunities for business success. An enterprise that is aware of its environment can be the first to identify and exploit these opportunities, gaining a 'first-mover advantage'. For example, Maruti Udyog recognized the need for small cars in India due to rising fuel prices and a large middle class, which led to its market leadership.
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Helps in Identifying Threats: The environment is also a source of threats that can hinder a firm's performance. Environmental awareness acts as an early warning signal, allowing managers to prepare for challenges. For instance, if an Indian firm learns about a foreign multinational entering its market, it can take proactive steps like improving product quality or reducing costs to meet the threat.
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Assists in Tapping Useful Resources: Businesses assemble inputs like finance, machinery, and raw materials from the environment. A better understanding of the environment helps the firm to acquire these resources effectively and convert them into outputs that the environment desires, such as goods and services for customers and returns for investors.
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Helps in Coping with Rapid Changes: The modern business environment is highly dynamic. To cope with rapid changes in technology, competition, and customer demands, managers must continuously understand and examine the environment to develop suitable strategies.
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Improves Performance: Enterprises that continuously monitor their environment and adapt their practices accordingly are the ones that not only improve their present performance but also succeed in the market for a longer period. The future of a firm is closely linked to what is happening in its environment.
Q3Long Answer Type:
Explain, with examples, the various dimensions of business environment.
Solution
The various dimensions of the business environment constituting the general environment are as follows:
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Economic Environment: This includes economic factors that affect business operations. Examples include interest rates, inflation rates, disposable income of people, and stock market indices. For instance, low long-term interest rates are beneficial for automobile manufacturers as they increase consumer spending on cars financed through borrowed money.
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Social Environment: This dimension consists of social forces like customs, traditions, values, and social trends. For example, the celebration of festivals like Diwali and Eid in India provides significant opportunities for businesses such as greeting card companies and sweet manufacturers. Another example is the health-and-fitness trend, which has created a demand for products like organic food and gyms.
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Technological Environment: This includes forces related to scientific improvements and innovations that provide new ways of producing goods and operating a business. For example, technological advances in computers and the internet have enabled airline companies to offer online booking of tickets, and retailers to have direct links with suppliers for stock replenishment.
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Political Environment: This dimension comprises political conditions such as general stability and peace in the country, and the specific attitudes of the elected government towards business. Political stability builds confidence among business people to invest in long-term projects. Conversely, political unrest can create uncertainty and discourage investment.
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Legal Environment: This includes the various legislations passed by the government, administrative orders, court judgments, and decisions of various commissions and agencies. Businesses must operate within this legal framework. For example, the law in India prohibits the advertisement of alcoholic beverages, and advertisements for cigarettes must carry the statutory warning 'Cigarette smoking is injurious to health'.
Q4Long Answer Type:
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 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.
Solution
a. Dimensions of Business Environment:
The dimensions of the business environment highlighted in the above case are:
- Political Environment: The decision to demonetise was taken by the 'Government of India', which is a political action reflecting the attitude of the ruling party towards issues like corruption and black money.
- Legal Environment: The announcement made the existing currency notes cease to be 'legal tender'. This involves a change in the legal framework governing currency, enforced through government orders and regulations.
- Economic Environment: The policy had a significant impact on the economy. It affected money supply, bank deposits, interest rates, and tax collection, all of which are key components of the economic environment.
- Technological Environment: The move spurred a 'substantial increase in the use of Point of Sale machines, e-wallets, digital cash'. This highlights the role of the technological environment in providing alternatives to cash transactions and shaping new business practices.
b. Features of Demonetization:
The features of demonetisation are:
- Tax Administration Measure: It was viewed as a measure to manage taxes. Individuals with black money had to declare their unaccounted wealth and pay taxes at a penalty rate.
- Signal against Tax Evasion: The move indicated a shift in the government's stance, signaling that tax evasion would no longer be tolerated or accepted.
- Channelizing Savings: Demonetisation led to a surge in deposits in the formal financial system (banks). This provided a base for providing more loans at potentially lower interest rates.
- Creating a Less-Cash Economy: A key feature was to encourage a 'cash-lite' economy by promoting digital transactions. This helps in bringing more people into the formal economy, increasing financial savings and improving tax compliance.
Q5Long Answer Type:
What economic changes were initiated by the Government under the Industrial Policy, 1991? What impact have these changes made on business and industry?
Solution
Economic Changes under the Industrial Policy, 1991:
As a part of economic reforms, the Government of India announced a new industrial policy in July 1991. The main aim was to liberate the industry from the shackles of the licensing system, reduce the role of the public sector, and encourage foreign participation. The key changes were:
- Liberalisation: This involved ending the 'licence-permit-quota raj'. The government abolished licensing requirements for most industries, provided freedom in deciding the scale of business activities, and removed restrictions on the movement of goods and services.
- Privatisation: The role of the public sector was drastically reduced. Many industries previously reserved for the public sector were opened to the private sector. The government also adopted a policy of planned disinvestment of public sector enterprises.
- Globalisation: The policy aimed to integrate the Indian economy with the world economy. The share of foreign equity participation was increased (in many activities 100% FDI was permitted), automatic permission was granted for technology agreements with foreign companies, and the Foreign Investment Promotion Board (FIPB) was set up to promote foreign investment.
Impact of these Changes on Business and Industry:
The policy changes have had a significant impact on the working of business and industry in India:
- Increasing Competition: The delicensing and entry of foreign firms have intensified competition for Indian firms in almost all sectors.
- More Demanding Customers: Increased competition has provided customers with wider choices, making them more demanding in terms of quality and service.
- Rapidly Changing Technological Environment: The entry of foreign firms has forced Indian companies to adopt the latest technologies to survive and grow.
- Necessity for Change: After 1991, the business environment has become highly dynamic, forcing enterprises to continuously modify their operations.
- Need for Developing Human Resources: The new market conditions require people with higher competence and greater commitment, leading to an increased need for training and developing human resources.
- Market Orientation: Earlier, firms had a production-oriented approach. The new environment has forced them to become market-oriented, focusing on studying market needs and satisfying customers.
- Loss of Budgetary Support to the Public Sector: The government's budgetary support for financing public sector undertakings has declined, forcing them to survive and grow by utilising their own resources more efficiently.
Q1Short Answer Type:
Why it is important for business enterprises to understand their environment? Explain.
Solution
It is crucial for business enterprises to understand their environment because they do not exist in isolation. A good understanding of the environment enables managers to identify, evaluate, and react to external forces. The key reasons for its importance are:
- Identify Opportunities and Get First Mover Advantage: Early identification of positive trends helps a firm to be the first to exploit them.
- Identify Threats and Early Warning Signals: Awareness of negative trends helps managers to take timely action to minimize harm.
- Tapping Useful Resources: Businesses get inputs like finance and raw materials from the environment and must design policies to acquire them effectively.
- Coping with Rapid Changes: Understanding the dynamic environment helps managers develop suitable courses of action to deal with changes in technology, competition, and customer preferences.
- Assisting in Planning and Policy Formulation: Environmental analysis provides the basis for future planning and decision-making guidelines.
Q2Short Answer Type:
Explain the following terms: a. Liberalisation b. Privatization c. Globalisation
Solution
The explanation of the terms is as follows:
a. Liberalisation: Liberalisation refers to the process of liberating Indian business and industry from all unnecessary controls and restrictions. It involves measures like abolishing industrial licensing for most industries, giving freedom in deciding the scale of business activities, removing restrictions on the movement of goods and services, and simplifying procedures for imports and exports.
b. Privatisation: Privatisation is the process of giving a greater role to the private sector and a reduced role to the public sector in the nation-building process. This is achieved through measures like the disinvestment of public sector enterprises, which involves the transfer of public sector enterprises to the private sector.
c. Globalisation: Globalisation means the integration of the various economies of the world into a cohesive global economy. It involves creating a boundaryless world with a free flow of goods, services, capital, information, and technology across nations. It aims to reduce trade barriers like tariffs and import licensing to promote greater interaction and interdependence among nations.
Q3Short Answer Type:
National Digital Library of India (NDL India) work 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.
Solution
The dimensions of the business environment highlighted in the case of the National Digital Library of India (NDL India) are:
- Technological Environment: The creation of a 'virtual repository' and a 'single-window search facility' points to the use of scientific improvements and innovations in the field of information technology to provide services.
- Social Environment: The initiative aims to support all academic levels, including differently-abled learners, free of cost. This reflects societal values related to equality of opportunity in education and the expectation that business and government initiatives should contribute to social welfare.
Q4Short Answer Type:
State the impact of demonetization on interest rates, private wealth and real estate.
Solution
The impact of demonetisation on the following is:
- Interest rates: Demonetisation led to a surge in bank deposits and an increase in financial savings. This increase in the cash holdings of banks created the potential for a decline in interest rates on loans.
- Private wealth: Private wealth declined because some high-denomination notes that constituted 'black money' were not returned to the banking system. Additionally, the fall in real estate prices also contributed to the decline in private wealth.
- Real estate: The real estate sector experienced a decline in prices following demonetisation, as it curtailed the use of unaccounted cash in property transactions.
Q1Very Short Answer Type:
What is meant by business environment?
Solution
The business environment refers to the sum total of all individuals, institutions, and other forces that are external to a business enterprise but have the potential to affect its performance. It includes economic, social, political, technological, and other forces that operate outside the business.
Q2Very Short Answer Type:
How does understanding of business environment help in improving performance of a business?
Solution
A thorough understanding of the business environment helps in improving a firm's performance. Studies show that enterprises which continuously monitor their environment and adopt suitable business practices not only improve their present performance but also continue to succeed in the market for a longer period.
Q3Very Short Answer Type:
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).
Solution
An example of the interrelatedness of business environment factors is the increased awareness for health care. This social trend has led to an increased demand for health products and services like fat-free cooking oil and health resorts. In turn, the availability of these new products and services has changed people's lifestyles, showing how different elements of the business environment are closely interrelated.
Q4Very Short Answer Type:
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).
Solution
The two impacts of changes in the business environment on Krishna Furnishers Mart's operations are:
- Increasing Competition: The entry of new firms in the furniture industry led to a decline in Krishna Furnishers Mart's market share, forcing them to review their operations.
- Market Orientation: To survive the competition, the firm had to shift its focus from just production to understanding market needs. They decided to study market trends and design products accordingly, which is a market-oriented approach.
Q5Very Short Answer Type:
Name any two Specific forces of business environment affecting business.
Solution
Two specific forces of the business environment that affect individual enterprises directly are:
- Customers
- Competitors