BUSINESS STUDIES

BOOK BACK QUESTIONS AND ANSWERS

CHAPTER 03 – BUSINESS ENVIRONMENT

I. Very Short Answer Questions

1. What is meant by 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. The organisation is unable to control such type of forces, but it can definitely
have a positive or negative impact on their performance.

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

business?

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).

The various elements of a Business organisation are interrelated to each other and the
outcome depends on all these elements. Business environment consists of following elements
economic, social, technological, legal.

Let us understand by one example

An automobile company will have the combined impact of all these factors in context of a
business environment.

1. If there is a global recession or economic slowdown, it will result in less sales of cars.
Economic factor comes into play for purchasing car and it will impact the business.

2. Due to introduction of new technology the car manufacturers need to follow that as
industry standard which will be beneficial for the organisation. This is the impact of
technological factor on business environment.

3. With introduction of GST now car manufacturers can charge GST and GST is mandatory
for business which is a legal factor impacting 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).

The following impacts can be seen with changing of business environment for Krishna
Furnishers Mart's

1. Rise in competitors leads to more competition.

2. Innovation in design needed to differentiate product from competitors.

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

Specific forces have a direct impact on the way a business is run. It can be due to the
following changes:
1. Changing tastes of customer.

2. Competitor strategy

3. Shift in investor loyalty

II. Short Answer Questions

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

Explain.

It is very essential to understand business environment as it helps in determining success or

failure of an organisation. The functioning and performance of an organisation is dependent
on various factors which can be external. When we understand business environment it
becomes easier to drive factors that help in growth.

Following points highlight the importance of understanding the business environment for
business enterprises.

1. Business enterprises can identify the positive opportunities for a business. It will help in
making the first move and stay ahead of competition.

2. Businesses can identify the potential threats by studying the business environment
which can impact the growth of the organisation. Therefore, a study of business
environment proves beneficial for identifying threats and determining the best solution to
neutralize the threat.

3. Various resources are required for a business to run and the appropriate resources are
determined by studying the local business environment. These inputs are used to create
various products.

4. Business environment is of dynamic nature, the factors such as technology, consumer

preferences and government policies are subjected to change based on demand. Knowing
the business environment will make things easier to adapt easily with the change.

5. Study of business environment helps in formulating new plans and policies as per the
market trends which makes it more relevant for the current scenario.

6. Analysing of business environment will result in a better performance for the organisation.

2. Explain the following terms:

(a) Liberalisation
(b) Privatization

(c) Globalisation

(a) Liberalisation

Liberalisation is the process or means of the elimination of the control of the state over
economic activities. It provides greater autonomy to the business enterprises in decision-
making and eliminates government interference.

The purpose of liberalisation is to increase competition between enterprises. It also

encourages foreign trade between countries. It also helps the business expand its global
footprint. The opening up of the economy improves the economic development of a nation by
the inflow of funds from foreign resources.

(b) Privatization

Privatisation can be explained as the process of transfer of ownership from the public sector
to the private sector. It is also known as Disinvestment in business. Privatisation aims at
reducing government ownership in industries.

It reduces the workload on the public enterprises and also paves the way for economic
development by encouraging foreign direct investment (FDI).

(c) Globalisation

Globalisation can be understood as the integration of the national economy with the world
economy. It represents a free flow of information, technology, goods and services, ideas,
capital, and even people as a form of resources across different countries. Globalisation helps
in improving t cross border connectivity between different markets in the form of
investments, trade, and cultural exchanges.

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

Government policy has the following impact on the business and industry

1. By relaxing the licensing policy and reducing import duties, domestic firms face
tough competition. More players will be in the field with their offerings which leads to
more competition.

2. Due to increase in competition, the consumers are flooded with choices for goods and
services. This leads to increase in demand of consumers for better quality goods and
services.

3. Government policy changes result in changes in the business policies of the business
enterprises for sustaining and making profit while following the current policies set by
government.

4. With increasing competition firms need to reach customers with products and hence they
adopt more innovate ways to promote their product by using updated technology.

5. All the improvements in technology and product are possible with the help of trained
manpower. Without proper skills no organisation will be able to execute any plans properly.
Therefore, improvements in human resources is very important in the current context.

6. Market orientation has become important as customers have become more demanding
and hence businesses need to analyze the market before launching any product.

7. Public sector enterprises need to perform more efficiently in order to survive the
competition and stop relying on the government funds.

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.

The following business dimensions are highlighted here:

1. By developing a framework of virtual repository of learning resources it highlights the

technological dimension.

2. By supporting researchers, learners and differently abled learners free of cost it highlights
the social dimension.
5. State the impact of demonetization on interest rates, private wealth and real estate.

Demonetisation had the following effect on these sectors

1. Interest rates: As demonetisation happened the number of cash transactions reduced;

bank deposits increase in form of Jan Dhan Accounts. More financial savings by the people
of the nation.

2. Private Wealth: Private wealth saw decline as large volume transactions were not possible
with old notes.

3. Real Estate: Demonetisation led to the decline in price of property. Real estate
industry saw huge drop in business.

III. Long Answer Questions

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

The following are the characteristics of business environment:

1. 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.

2. 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.

3. 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.

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

Specific environment is said to be the external forces that play a 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 how the day to day
business is run. 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 government then it will have an effect on all
organisations.

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

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 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:

1. Whenever 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.

2. Studying of business environment helps in identifying threats for the business. It

helps take preventive measures in order to counter those negative forces.
3. 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.

4. 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.

5. 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.

6. 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.

Business environment has the following dimensions:

1. Economic: The economic dimension consists of economic variables such as income,

stock markets, interest rates that are directly related to the functioning of business
enterprises. For example, if there is an increase in purchasing power of consumer it
automatically leads to increase in demand of goods and services whereas if purchasing
power is low there is a decrease in demand.

2. Social: The social dimension comprises of various traditions, trends, social values,
cultures. For example, companies can use religious festivals to produce items that cater
to the occasion.

3. Technological: This dimension comprises of all the technological changes and

improvements that are happening in the business. There can be many examples like
introduction of computers which changed the way information was gathered to the more
recent developments in mobile and internet. Business not updating themselves in the
technology field can find themselves in spot of bother with competitors.
4. Legal: This dimension consists of the various legal rules and legislations that are passed
by the government. Non-compliance can lead to legal trouble for the business. For 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.

5. Political: Political dimension consists of peace, law and order, stability. If there is a change
in the government there will be a change in the rules and policies. Frequent changes in
administration can result in losing of interest of investors. Also relaxing of rules can
encourage investment. Such an example is of forming of new policy in 1991 that opened the
Indian economy to the world.

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.

The 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.

a. The following dimensions of business environment are seen to be highlighted here:

1. Political: Government has announced demonetisation of the ₹ 500 and ₹ 1,000 currency
notes with effect from the midnight of November 8, 2016. It is a step by government in
curbing the illegal use of money by some entities.

2. Legal: 500 and ₹ 1,000 currency notes stopped being the legal tender and introduction of ₹
500 and ₹ 2,000 became the new legal tender.

3. Technological: As demonetisation happened there was shortage of cash, it encouraged the

use of digital forms of payment in form of e-wallets like Paytm and other modes of cashless
transactions.

The following are the features of demonetization:

1. Demonetization was done with the intention of exposing black money holders and those who
evade tax.
2. Increase in savings of people. Earlier more people used to keep money at home rather
than at bank, this step resulted in savings in bank.
3. It helped in reducing the interest rates in banks.

4. To popularize the use of digital payments and reduce frauds.

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?

The Industrial policy was introduced in 1991. Following are the major highlights of the policy:

1. As per new Industrial policy 1991, the system of licensing was abolished. This helped the
private players in starting a new venture without the need for obtaining license. Some
industries were not exempt such as cigarette, liquor, defence equipment, pharmaceuticals
and dangerous chemicals.

2. There was a considerable reduction in the number of industries that were marked for
public sector. The private sector was given the liberty to operate across industries. The
government chose to keep only selected industries under direct control which were atomic
energy, railways and atomic minerals.

3. Before the new policy was introduced the companies needed to seek permission from the
government for expanding the production. The new policy relaxed these norms for
companies which were having asset base of 100 crores. These companies can increase
production as per the market requirements.

4. The new policy allowed the industrialists to import capital goods from foreign countries
and even allowed 100% of FDI in such cases.

5. There was a reform in the definition of the small-scale industries, the maximum limit of
investment was increased from 5 lakh to 1 crore. This step helped the industries to develop
and contribute more to GDP of nation. Industries became more modern with new
technologies that made work easier for the small-scale industries.

6. This policy also introduced the disinvestment concept which allowed government to
sell some stake to the private sector in order to bring development and monetary benefits
to the public sector industries.

7. A board was setup for encouraging foreign investment in India, it was called Foreign
Investment Promotion Board.

The following were the impact of these changes in business and industry:

1. By relaxing the licensing policy and reducing import duties, domestic firms face
tough competition. More players will be in the field with their offerings which leads to
more competition.

2. Due to increase in competition, the consumers are flooded with choices for goods and
services. This leads to increase in demand of consumers for better quality goods and
services.

3. Government policy changes result in changes in the business policies of the business
enterprises for sustaining and making profit while following the current policies set by
government.

4. With increasing competition firms need to reach customers with products and hence they
adopt more innovate ways to promote their product by using updated technology.

5. All the improvements in technology and product are possible with the help of trained
manpower. Without proper skills no organisation will be able to execute any plans properly.
Therefore, improvements in human resources is very important in the current context.

6. Market orientation has become important as customers have become more demanding
and hence businesses need to analyze the market before launching any product.

7. Public sector enterprises need to perform more efficiently in order to survive the
competition and stop relying on the government funds.
6. What are the essential features of

i. Liberalisation

ii. Privatisation

iii. Globalisation

i. Liberalisation

Liberalisation is the process or means of the elimination of the control of the state over
economic activities. It provides greater autonomy to the business enterprises in decision-
making and eliminates government interference.

Essential features of liberalisation are:

1. Liberalisation helped in removal of various trade restrictions, tariffs, duties which helped
in easy movement of goods and services.

2. Liberalisation helped in encouraging foreign direct investment and increased the

competition attracting foreign service providers.

ii. Privatisation

Privatisation can be explained as the process of transfer of ownership from the public sector
to the private sector. It is also known as Disinvestment in business. Privatisation aims at
reducing government ownership in industries.

It reduces the workload on the public enterprises and also paves the way for economic
development by encouraging foreign direct investment (FDI).

The essential features of privatisation are:

1. Government adopted two different methods for disinvestment. In this the first method was
selling a part of equity in one of the PSU's and the second process was of strategic selling of
PSU's. With these methods many of the firms were sold off. This include major companies
like Maruti Udyog, BALCO etc.
2. A board was established that was specially entrusted with the revival of companies
that were sick or loss making. It was known as Board of Industrial and Financial
Reconstruction.

iii. Globalisation

Globalisation can be understood as the integration of the national economy with the world
economy. It represents a free flow of information, technology, goods and services, ideas,
capital, and even people as a form of resources across different countries. Globalisation helps
in improving t cross border connectivity between different markets in the form of
investments, trade, and cultural exchanges.

Following are the essential features of globalisation:

1. It removed or reduced all the trade barriers such as tariffs, trade restrictions, custom
duties etc which resulted in more business to and from India.

2. Export and Import duties were reduced which helped in promoting the free trade between
India and world.

3. The aim of globalisation was to encourage setting up of foreign capital in form of FDI
(Foreign Direct Investment), it also resulted in formation of SEZ (Special Economic
Zones) and creation of FEMA (Foreign Exchange Management Act).