Ch-3 Question Answer PDF

Business Environment
Meaning
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. It includes all forces external to a business firm -specific forces namely
investors, customers, competitors & suppliers and general forces such as social, political.
legal and technological
Features of Business Environment
1. The Totality of External Force- Business environment includes the sum total of all the
external forces so it is aggregative in nature.
2. Specific and General Forces- Business environments include both specific and general
forces. Specific forces such as investors, customers affect business directly.General forces
such as social. political. legal and technological conditions affect the business indirectly.
3. Inter-relatedness- All the forces and factors of business are interrelated
Eg; Increased awareness for health has increased the demand for healthy products and
services..
4. Dynamic Nature- Business environment is dynamic in nature. It keeps on changing
whether in terms of technological improvements or change in consumer preferences.etc.
5. Uncertainty- Business environment is uncertain and these changes are difficult to predict
the future happenings.
6. Complexity- Business environment is difficult to understand. It can be understood easily
in parts but in totality it is difficult to understand.
7. Relativity- Business environment is a relative concept whose impact differs from country
to country, region to region and firm to firm. For example, a shift of preference from soft
drinks to juices will be welcomed as an opportunity by juice making companies while a
threat to soft drink manufacturers.
Importance of Business Environment
1. It enables firms to identify opportunities and get the first mover advantage:
Understanding of the business environment helps an organization in identifying
advantageous opportunities and getting their benefits prior to competitors, thus reaping the
benefits of being a pioneer.
2. It helps the firm to Identify threats and early warning signals- Correct knowledge of the
business environment helps an organization to identify those threats which may adversely
affect its operations. For example, Bajaj Auto made considerable improvements in its two
wheelers when Honda & other companies entered the auto industry.
3. It helps in tapping useful resources: Business environment makes available various
resources such as capital, labor, machines, raw material etc. toa business firm. In order to
know the availability of resources and making them available on time at an economical
price.
4. It helps in coping with rapid changes: Continuous study/scanning of the business
environment helps in knowing the changes which are taking place and thus they can be
faced effectively.
5. It helps in assisting in planning and policy formulation: Understanding and analysis of
business environments helps an organization in planning & policy formulation. For
example, ITC Hotels planned new hotels in India after observing a boom in the tourism
sector.
6. It helps in improving performance: The enterprises that continuously monitor their
environment and adopt suitable business practices will be in a better position to improve
their performance.
Dimensions/Components of Business Environment
1. Economic Environment: It has immediate and direct economic impact on a business.

Rate of interest, inflation rate, change in the income of people, disposable income of a
person, monetary policy, price level etc. are some economic factors which could affect
business firms. Economic environment may offer opportunities to a firm or it may put
constraints.
2. Social Environment: It includes various social forces such as customs, beliefs, literacy
rate, educational levels, lifestyle, values etc. Changes in the social environment affect an
organization in the long run. Example: Nowadays people are paying more attention towards
their health, as a result of which demand for mineral water, diet coke etc. has increased
while demand for tobacco, fatty food products has decreased.
3. Technological Environment: It provides new and advanced ways/techniques of
production. A businessman must closely monitor the technological changes taking place in
the industry as it helps in facing competition and improving quality of the product. For
Example, Digital watches in place of traditional watches, artificial fabrics in place of
traditional cotton and silk fabrics, booking of railway tickets on the internet etc.
4. Political Environment: Changes in political situations also affect business organizations.
Political stability builds confidence among the business community while political
instability and bad law & order situation may bring uncertainty in business activities.
Ideology of the political party, attitude of government towards business, type of
government-single party or coalition government affects the business Example: Bangalore
and Hyderabad have become the most popular locations for IT due to supportive political
climate.
5. Legal Environment: It constitutes the laws and legislations passed by the Government,
administrative orders, court judgments, decisions of various commissions and agencies.
Businessmen have to act according to various legislations and their knowledge Very
necessary. Example: Advertisement of Alcoholic products is prohibited and it is compulsory
to give statutory warning on advertisement of cigarettes.
Economic Environment in India
As a part of economic reforms, the Government of India announced New Economic Policy in
July 1991 for taking the country out of economic difficulty and speeding up the development
of the country.
Main features of New Economic Policy, 1991 are as follows:
1. Only six industries were kept under a licensing scheme.
2. Many of the public sectors were dereserved and limited only to four industries of strategic
importance.
3. Disinvestment was carried out in many public sector enterprises.
4. Foreign capital/investment policy was liberalized and in many sectors100% direct foreign
investment was allowed.
5. Automatic permission was given for signing technology agreements with foreign companies.
6. Foreign investment promotion board (FIPB) was set up to promote & bring foreign investment
in India.
The main objective of New Industrial Policy was to promote Liberalization, Privatization
and Globalization.
1. Liberalization: It means liberalizing the Indian Industry from all unnecessary
government controls and restrictions.
Liberalization of Indian industry has taken place with respect to:
● Abolishing licensing requirements;
● Freedom in deciding the scale of business;
● removals of restriction on movements of goods and service;
● reduction in tax rates;
● freedom in fixing prices;
● simplifying procedures; making it easier to attract foreign investment.
2. Privatization: Giving greater role to private sector in the nation building process and
reduced role of public sector. Disinvestment in many Public Sectors undertaking
etc.Divestment means transfer of ownership of a public sector enterprise to a private
enterprise. If there were dilution of Government ownership beyond 51 percent, it
would result in transfer of ownership and management of the enterprise to the private
sector.
Setting up of BIFR to revive sick units in public sector enterprises suffering
losses. It aimed at improving efficiency and performance of government undertakings,
reducing budgetary deficit & better utilization of national resources.
3. Globalization: It means integration of various economies of the world leading to the
emergence of a cohesive global economy. Globalization means interaction and
interdependence of a country with the economies of other countries to facilitate free
flow of goods and services, capital and technology across borders.
The measures taken by the Government include trade liberalization which includes import
liberalization; Export promotion through rationalization of tariff structure. Foreign exchange
liberalization; increased interaction among global economies under the
aegis(protection/support) of World Trade Organization. It resulted in addition of Export duty,
reduction of import.
Demonetisation is the act of the government to cancel the legal tender status of a currency
unit in circulation. The aim of demonetisation was to curb corruption, especially the
accumulation of ‘black money’ generated by income that has not been declared to the tax
authorities.
Answer the following Questions
PART - A
1.What is Business Environment?
2. Which of the following does not characterize the business environment?
(a) Uncertainty (b) Employees
(c) Relativity (d) Complexity
3. Which of the following is an example for a social environment?
(a) Money supply in the economy (b) Consumer Protection Act (c) The Constitution of the
country (d) Composition of family
4.Liberalization means
(a) Integration among economies (b) Reduced government controls and restrictions
(c) Policy of planned disinvestments (d) None of the above
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
(c) Change in agricultural prices
(d) Market orientation
PART - B- 2marks
6.Give the meaning of Globalization.
7.What is Privatization?
8.What is liberalization ?
PART - C - 4 marks
9.Explain any four features of Business Environment.
10.Explain any four points of the importance of the understanding of Business Environment
or a manager.
11.Explain with examples the various dimensions of the business environment.

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Business Environment

1. Economic Environment: It has immediate and direct economic impact on a business.

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