Hello Students. Are you Searching for Class 12 Business Studies NCERT Solutions of Chapter 3? If yes then you are in the right place. Here we have provided you with the Question and Answers of Chapter 3: Business Environment. These solutions are written by expert teachers and are so accurate to rely on. These solutions can eliminate any lingering doubts you may have regarding the concepts.
| Chapter | 3. Business Environment |
| Subject | Business Studies |
| Class | Twelve |
| Category | NCERT Solutions for Class 12 |
NCERT Solutions for Class 12 Business Studies can be a great tool for the students who have taken Business Studies stream for higher studies. These NCERT Class 12 Business Studies solutions are written by expert teachers and faculties to make your practice and revision easier. On this page, we have provided you with the complete solutions of Chapter 3: Business Environment.
NCERT Solutions for Class 12 Business Studies Chapter 3
Business Environment Solutions
Very Short Answer Questions
Q1) What is meant by business environment?
Answer) Business environment refers to all the external forces that affect the performance of a business organisation. Such forces can be economic, social, political, technological or legal. Thus, individuals, consumers, government, legal matters all compose business environment. For example, change in taste and preferences of the consumers, change in government policies, change in political scenario, change in legal polices, all make up business environment. An organisation cannot control such forces but they affect its performance either positively or adversely. For example, a change in consumer’s tastes in favour of a firms product, increases demand for its product. Similarly, an introduction of a new technology leaves the technology used by the firm obsolete and its products comparatively inferior. Thus, it can be said that everything that is outside the purview of an organisation but affects its performance composes business environment.
Q2) How does understanding of business environment help in improving performance of a business?
Answer) Organisations that carefully study their business environments and accordingly adopt suitable plans and policies are better able to improve their performance in the long run. The enterprises which keep a check on the environment not only perform well in the present scenario but also continue to succeed in the future.
Q3) 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).
Answer) Business organisations work in a complex environment consisting of numerous interrelated and dynamic conditions. For example, ABC Ltd is an automobile company. Its performance is affected by the following factors:
- Economic: Global recession
- Social: Changed consumption habits of people due to the improved standard of living of customers
- Technological: Advanced technology leading to automation in manufacturing
- Legal: 28% GST levied on automobiles
Q4)
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).
Answer) The impacts of changes in business environment on Krishna Furnishers Mart’s operations are:
- Increased competition
- Necessity for change
- Market orientation
- Innovation in designs (any two)
Q5) Name any two Specific forces of business environment affecting business.
Answer) Specific forces directly affect individual enterprises in the day to day operations. Examples of specific forces:
- Investors loyalty
- Customer tastes and preferences
- Strategies of Competitors
- Terms and conditions of the Suppliers (any two)
Short Answer Questions
Q1) Why it is important for business enterprises to understand their environment? Explain.
Answer) 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.
- Business enterprises can identify the positive opportunities for a business. It will help in making the first move and stay ahead of competition.
- 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.
- 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.
- 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.
- 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.
Q2) Explain the following terms:
(a) Liberalisation
(b) Privatization
(c) Globalisation
Answer)
Answer a). 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.
Answer b). 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.
- Disinvestment of the public sector enterprises
- Establishing Board of Industrial and Financial Reconstruction for the revival of the sick and loss making enterprises.
- Diluting the stake of government in the public sector enterprises.
Answer 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.
- Removal on restriction on imports
- Abolishing the export duty
- Reducing import duty
Q3) Briefly discuss the impact of government policy changes on the business and industry.
Answer) 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.
Q4)
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.
Answer) The business environment highlighted are:
- By developing a framework of virtual repository of learning resources it highlights the technological dimension.
- By supporting researchers, learners and differently abled learners free of cost it highlights the social dimension.
Q5) State the impact of demonetization on interest rates, private wealth and real estate.
Answer) Impact of demonetization:
- Interest rates: Cash transactions declined, Bank deposits increased and Increase in financial savings
- Private wealth: Declined since some high demonetized notes were not returned
- Real estate: Decline in prices of property
Long Answer Questions
Q1) How would you characterise business environment? Explain, with examples, the difference between general and specific environment.
Answer) 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.
The following are the characteristics of business environment:
- 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.
- 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.
- 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.
- The business environment is an uncertain territory. The changes in the market dynamics cannot be predicted easily. Due to which there exists an uncertainty.
- Business environment is the sum total of all interrelated dynamic forces. Hence, it is somewhat complex and difficult to understand. All the factors like social, political, technological etc have an effect on the performance of the organisation. It can be easy to ascertain the individual impact of all the forces; it can be difficult to determine their cumulative effect.
- Business environment varies with each region and hence is relative. The reason behind the variation in business environment is that the forces that determine the nature of business environment are dynamic in nature and therefore change as per region.
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.
Q2) How would you argue that success of a business is significantly influenced by its environment?
Answer) Any organisation cannot function in isolation. Rather, its working and actions are influenced by many external forces such as social and political conditions, technological changes, etc. Such external forces compose environment for an organisation. It is of prime importance for any organisation to have an understanding of the business environment. A continuous study of the business environment enables an organisation to identify the forces that affects it functioning and thereby, helps it in reacting and coping with these forces in an appropriate manner. The following points highlight the importance of environment for the success of a business organisation.
- Changing business environment offers many positive opportunities for business. A careful analysis of the environment enables an enterprise to identify these positive opportunities and take first hand advantage in competition. That is, it enables the organisation to gain maximum benefit and move ahead of its competitors. For example, Tata recognised the demand for a small and economical car in India and thereby, launched the popular Tata Nano at a price of just one lakh. Thus, it became the leader in low cost car in India.
- Besides positive opportunities, certain changes in the environment may also affect the functioning of an environment adversely. A study of business environment helps an enterprise in the identification of these threats or negative signals. Thereby, it enables it to take appropriate preventive measures. For example, if a mobile manufacturing company finds that another company is coming up with new and improved features in its product, then it acts a competition for it. An identification of the threats can enable the organisation to take appropriate measures such as improving the quality and features of its mobile, advertising, etc.
- Environment acts a source of inputs or resources such as raw material, machinery, labour, etc. required for the functioning of an organisation. On the other hand, environment also acts a source of demand for goods and services produced by the organisation. Thus, it is rational for the organisations 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. For example, with a rise in demand for the touch screen technology in mobile phones, manufacturers are accumulating resources required for manufacturing touch screen phones.
- Business environment is dynamic in nature. Technology, consumers taste and preference, government policies, political conditions change continuously. A careful analysis and understanding of the environment helps an enterprise in dealing with these changes in a better manner and take appropriate actions. For example, by a study of business environment many bakery enterprises have realised the growing demand for sugar-free products and are increasing the production of such bakery products.
- With a continuous study of the environment an organisation can identify various threats and opportunities for its business. Accordingly, it can frame suitable plans and policies in view of the current scenario. For example, if on analysing the market for clothes in India, it is found that there is an increasing demand for western wear, then a cloth manufacturing company can frame policies and strategies to incorporate western wear in its production.
Q3) Explain with examples, the various dimensions of business environment.
Answer) The following are the dimensions of business environment.
- 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.
- 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.
- 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.
- 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.
- 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.
Q4)
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.
Answer)
a. Dimensions of business environment highlighted above are:
- Political dimension: ‘The government of India announced Demonetization of ₹ 500 and ₹ 1,000 currency notes with effect from the midnight of November 8, 2016. ‘
- Legal dimension: ‘As a result, the existing ₹ 500 and ₹ 1,000 currency notes ceased to be legal tender from that date.’
- Technological dimension: ‘The step resulted in a substantial increases in the awareness about and use of Point of Sale machines, e-wallets, digital cash and other modes of cashless transactions.’
b. Features of Demonetization are:
- Measure of tax administration- black money holders had to declare the unaccounted wealth and pay taxes at penalty rates
- Measure to avoid tax evasion- indicating the government will not tolerate tax evasion
- Measure of channelizing savings into the financial system- by depositing money in banks
- Create ‘cash-less’ or ‘cash-lite’ economy- for increasing financial savings and reducing tax evasion
Q5) What economic changes were initiated by the government under the Industrial Policy, 1991? What impact have these changes made on the business and industry?
Answer) Government of India introduced the Industrial Policy, in July1991. Major highlights of the policy are as follows.
- Abolition of Licensing- Under the new industrial policy 1991, compulsory licensing system was abolished. In other words, with the industrial reforms the private players were free to start a new venture without the need to obtain a license. However, the system of licensing was retained in six industries namely, liquor, cigarette, defence equipment, dangerous chemicals, industrial explosives, and drugs and pharmaceuticals.
- Dereservation- The number of industries exclusively reserved for the public sector was considerably reduced. The private sector was allowed operation in majority of the industries with only 3 industries under the exclusive purview of the government namely, railways, atomic mineral and atomic energy.
- Augmentation of Production Capacity- Prior to the policy, industries had to obtain permission from the government in order to expand the scale of production. With liberalisation policy the MRTP companies (companies having assets worth more than Rs 100 crore) were free to expand the scale of their business according to the market conditions.
- Freedom in Importing Capital Goods- Under the policy, industrialists were permitted to import capital goods from the foreign countries.100 percent FDI was allowed in the foreign capital.
- Reforms in the Small Scale Industries- In India, small scale industries are defined on the basis of maximum investment that is allowed in the unit. With the commencement of reforms the maximum limit has been increased from Rs 5 lakh to Rs 1 crore. This encouraged development and modernisation of the industries. Further, the number of products reserved for the small scale industries was reduced.
- Disinvestment- The process of disinvestment was carried out for many public sector enterprises. That is, an increasing share of the assets of the public industrial enterprises was sold to the private sector.
- Foreign Investment Promotion Board- This board was set up to encourage and channelise foreign investment in India.
The impact of these changes on the business and industry is highlighted in the following points.
- Increased Competition: As a result of the policies such as abolition of the licensing policy, dereservation the competition faced by the domestic companies has increased. India companies experienced competition in service industry such as telecommunication, banking, insurance, etc.
- Increased Demand: With increased competition the choice of goods and services for the consumers has also increased. Thus, consumers also gain from quality products and greater variety.
- Change in Business Policies: The government policies under new industrial policy directly affected the functioning of the business enterprises. As a result, they altered their policies and operations appropriately.
- Technological Changes: With the increase in competition, firms tend to find new and innovative ways to survive in the market. They increasingly adopt new technology and engage in further research and development.
- Need for Trained Personnel: Due to innovations and improvement in product, application of improved technologies, the demand for skilled, trained and competent personnel has increased. Thus, there arises a need for the development of human resources.
- Greater Market Orientation: With increased competition, it has become imperative for the enterprises to change the production as per the market demand. That is, the production has become market oriented.
- Less Reliance on Budgetary Support by Public Sector Enterprises: To survive the increased competition, the public sector enterprises have realised the need for improving the efficiency and productivity. They have reduced their reliance on budgetary support to cover their losses.
Q6) What are the essential features of:
i. Liberalisation
ii. Privatisation
iii. Globalisation
Answer i). Liberalisation refers to the removal of unnecessary controls and restrictions of the government in the form of licences, permits and quotas. India initiated liberalisation of industries in 1991. Liberalisation of industries in India took the following form.
- Abolition of licenses: License required for the establishment of industries were abolished. The system of licensing was retained only for six industries namely, liquor, cigarette, defence equipment, dangerous chemicals, industrial explosives, and drugs and pharmaceuticals
- Augmentation of Production: Enterprises became free in deciding the scale and size of production and the price of the products. The MRTP companies (companies having assets worth more than Rs 100 crore) were free to expand the scale of their business according to the market conditions
- Removal of Trade Restrictions: Various restrictions regarding trade such as quantitative restrictions, customs, duties, tariff, etc. were removed to ease the movement of goods and services
- Encouragement to Foreign Direct Investment (FDI): Emphasis was laid to encourage competition in the market and to attract Foreign Direct Investment (FDI) from other countries.
Answer ii). Privatisation refers to the gradual transfer of ownership or management of state owned enterprises from the public sector to the private sector enterprises. It implies assigning a greater role to the private sector undertakings. In India, privatisation was followed in the following manner.
- Disinvestment: For disinvestment, the government adopted two methods. First, selling off a part of the equity of the PSU’s and second, strategic sale of PSU’s. Under privatisation, a large portion of the equity of the PSU’s was sold to the private sector. Also, strategic sale of a number of companies such as Modern Foods India, Bharat Alluminium Company (BALCO), Maruti Udyog Ltd., etc. was undertaken.
- Establishing Board of Industrial and Financial Reconstruction: This board was established for the revival of the sick and loss making enterprises.
- Reducing the Role of Public Sector: Under privatisation, the number of industries that were exclusively reserved for the public sector was reduced considerably from 17 to 8. At present, only 3 industries are exclusively reserved for the public sector namely, railways, atomic mineral and atomic energy.
- Navratna Policy: To improve efficiency, infuse professionalism and to enable PSUs to compete effectively in the market, government awarded the status of ‘Navaratnas’ to nine high performing PSUs.
Answer iii). Globalisation: Globalisation refers to the process of integration of various economies of the world. It is the process associated with increasing openness, growing economic independence and promoting economic integration in the world economy. In India, the following policies were followed with regard to globalisation.
- Removal on Trade Restriction: Various barriers on trade such as tariffs, custom duties, quotas, etc. were reduced considerably.
- Reducing the Export Duty and Import Duty: Various duties and taxes on import and export were removed to promote free trade.
- Encouragement to Foreign Capital Investment: With the aim of encouraging foreign capital investment various steps were taken such as increasing the equity limit of foreign capital, setting up of special economic zones, introduction of Foreign Exchange Management Act (FEMA).
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