NCERT Solutions For Class 12 Business Studies Chapter 3 Business Environment

NCERT Book Solutions For Class 12 Business Studies Chapter 3 Business Environment

Class 12 Business Studies Chapter 3 NCERT Solutions Takshila Learning’s NCERT Solutions for Business Studies are an advanced and next stage of Class 11 NCERT Solutions in business studies. We provide the basic fundamentals of the subject in Class 11 and then move on to an advanced degree of concepts in Class 12. The business studies topics are related to our practical life and dealt with in an easy way for understanding.

NCERT Solutions For Class 12 Business Studies Chapter 3 Business Environment provides us with all-inclusive information on all concepts. As students would have to learn the basics about the subject in class 12, this curriculum for class 12 is a comprehensive study material, which explains the concepts in a great way.

Questions Covered In Class 12 Business Studies Chapter 3 Business Environment

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

(a) Uncertainty

(b) Employees

(c) Relativity

(d) Complexity

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

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

• (a) Identification
• (b) Improvement in performance
• (c) Coping with rapid changes
• (d) All of them

Ans: All the options above indicate the importance of the business environment. The study of the business environment helps identify positive changes as well as threats or obstacles that affect the performance of an organization. This enables them to take appropriate measures to improve performance. In addition, a careful study of the constantly changing environment helps the organization to compete better.

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

• (a) Money supply in the economy
• (b) Consumer Protection Act
• (c) The constitution of the country
• (d) Composition of family

Ans: Social environment refers to social forces such as customs, traditions, social values, social instincts, etc. that influence business opportunities and performance. In the options given in the question, the composition of the family represents an example of the social environment. If the family structure is such that it includes more children than elderly individuals, it means that there is more and more business opportunity for baby products companies.

4. Liberalization means

• (a) Integration among the economies
• (b) Reduced government controls and restrictions
• (c) Policy of planned disinvestment
• (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
• (c) Change in agricultural prices
• (d) Market orientation

Ans: Among the options given above, changes in agricultural prices do not explain the effect of changes in government policy on trade and industry. Government policy changes such as liberalization, privatization and globalization affect the work of business organizations. High demand customers, increased competition, and market orientation all explain the impact of such policy changes. On the other hand, changes in the prices of agricultural products are independent of government policy changes and are caused by changes in demand and supply of agricultural products.

Short Answer Type:

1. What do you understand by business environment?

Ans: Business environment refers to all external forces that affect the performance of a business organization. Such forces may be economic, social, political, technical or legal. Thus, individuals, consumers, government, legal matters all form the business environment. For example, changes in consumer choice and choice, changes in government policies, changes in the political landscape, changes in legal policies, all make up the business environment. An organization cannot control such forces but they positively or adversely affect its performance. For example, a change in consumer tastes in favor of a firm’s product increases the demand for its product. Similarly, the introduction of a new technology leaves the firm obsolete and the technology degrading its products comparatively.Thus, it can be said that everything that is outside the scope of an organization, but affects its performance makes up the business environment.

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

Ans: An understanding of the business environment is critical to the successful functioning of an organization. No organization can function independently. This function and performance also depends on many external forces. Constant evaluation and understanding of the business environment helps a firm to take care of these forces in a better way and this improves its functioning. The following points highlight the importance of understanding of the environment for business enterprises.

i. Identification of Opportunities: With careful analysis of the business environment an enterprise can identify positive opportunities for business. An early recognition of opportunities helps take advantage of the competition first hand.ii. Hazard identification:In addition to positive opportunities, a study of the business environment helps an enterprise to identify threats or negative signals that may adversely affect its functioning. Thereby, it enables to take appropriate preventive measures.iii. Accumulating useful resources: The environment provides various resources or inputs such as raw materials, machinery, labor, etc. for its functioning. On the other hand, enterprises provide production in the form of goods and services to the environment. That is, the environment serves as both a source of resources as well as a source of demand for the products of enterprises. Thus, it becomes logical for enterprises to take resources from the environment that can be converted into desired outputs. This is possible only when enterprises have an understanding of what the environment wants and what it can offer.iv. Adjusting for change: The business environment is dynamic in nature. Changes in technology, taste and choice of consumers, government policies continue to run. Careful analysis and understanding of the environment helps an enterprise to better deal with these changes and as such, takes appropriate steps.v. Formation of plans and policies: A continuous study of the environment helps an organization in identifying opportunities and threats. Thus, it guides the organization in formulating appropriate plans and policies, looking at the current scenario. vi. Performance improvement: Continuous analysis of the environment helps enterprises to formulate appropriate policies and plans and thereby improve their performance.

3. Mention the various dimensions of business environment.

Ans: The following are the dimensions of business environment.

i. Economic Environment: It includes economic variables such as interest rate, income, stock market index which affect the functioning of enterprises. For example, an increase in income affects enterprises’ demand for goods and services.ii. Social environment: Social environment refers to social forces such as customs, traditions, social values, social trends, etc. For example, religious festivals provide business opportunities to many enterprises such as the production of sweets, decorations, etc.iii. Technological Environment: Technological environment involves technological changes and improvements. For example, the introduction of computers, the Internet, new telecommunications facilities, etc. affect all business enterprises. Improvements in the technology used in product manufacturing provide new business opportunities for enterprises, while on the other hand, is a threat to enterprises using obsolete technology.iv. Legal environment: It includes laws and regulations passed by the government such as Companies Act, Trade Union Act, etc. These laws govern the functioning and behavior of an enterprise. Knowledge of these laws is essential for enterprises because their non-compliance can cause legal trouble for them.v. Political environment: Political conditions such as peace and stability, law and order constitute the political business environment. This directly affects the functioning of enterprises. For example, a situation of political unrest breaks investor confidence and makes it difficult for enterprises to function smoothly.

4. Briefly explain the following:

(a) Liberalisation

(b) Privatisation

(c) Globalisation

Ans: (a) Liberalisation: Liberalization refers to the removal of unnecessary government controls and restrictions in the form of licenses, permits and quotas. India started liberalization of industries in 1991. The liberalization of industries in India took the following form.(i) The license required for the establishment of industries was abolished. (ii) Enterprises become free to decide the scale and size of production and the price of products(iii) Ban on movement of goods and services was lifted(iv) Processes related to exports and imports were relaxed  (b) Privatisation: Privatization refers to greater role of the private sector and reduced public sector participation. Privatization was followed in India in the following manner.(i) Disinvestment of Public Sector Enterprises(ii) Establishment of Industrial and Financial Reconstruction Board for revival of sick and loss making enterprises.(iii) reducing the government’s stake in public sector enterprises.

(c) Globalisation: Globalization refers to the process of integration of various economies of the world. This means reducing restrictions on imports and exports such as licenses and tariffs. The following policies regarding globalization were followed in India.(i) Removal of ban on imports(ii) abolition of export duty(iii) Reduction of import duty

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

Ans: The policies of liberalization, privatization and globalization by the government affect the functioning of commercial enterprises. The following points highlight the impact of government policy changes on business and industry.i. Increased Competition: As a result of policies such as exemption in licensing policy and reduction in import duty, competition faced by domestic firms increases. Companies in India experienced competition in the service industry such as telecommunications, banking, insurance, etc. ii. Increased demand: As competition increases, the choice of goods and services for consumers also increases. Thus, consumers also benefit from quality products and greater variety.iii. Changes in business policies: Government policies directly affect the functioning of business enterprises. As a result, they have to change their policies appropriately.iv. Technological Changes: As competition increases, firms have to find new and innovative ways to survive in the market. In such a scenario, technological improvements become mandatory.v. Requirement of trained personnel: Innovation and improvement in product, application of advanced technologies require skilled and trained personnel. Thus, there is a need for development of human resources.vi. Greater market orientation: With increasing competition, production has become market oriented. That is, demand produces enterprises according to the market.vii. Reduced reliance on budgetary support by public sector enterprises: To avoid increased competition, public sector enterprises should improve efficiency and productivity instead of 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 external forces such as economic, social, political, technical or legal that affect the performance of a business organization. In other words, everything that is outside the scope of an organization but affects its performance creates a business environment.The following are the characteristics of a business environment.i. Aggregation of external forces: The business environment is the aggregate of all external forces such as individuals, consumers, government, legal matters that positively or negatively affect the performance of an organization.ii. Interconnection: Different strengths of the business environment are closely connected with each other. For example, increasing consumer income increases the demand for consumer durables such as televisions, refrigerators, etc.iii. Never change: The business environment is dynamic and ever changing in nature. For example, consumer tastes and preferences, technology, government regulations and policies are constantly changing.iv. Uncertainty:The business environment is uncertain. The change in various forces of the environment cannot be easily estimated. Furthermore, the dynamics of forces make it even more uncertain.v. Complex: Business environment is a set of different interrelated and dynamic forces. Thus, it becomes difficult and complex to understand. For example, all political, social, economic, technical, and legal matters together affect the performance of an organization. Although the individual effects of these forces may be easy to understand, their cumulative effect is quite difficult to understand.vi. Relative: Business environment is relative to nature. It varies from region to region. For example, political conditions, religious beliefs, government regulations and policies vary from region to region.vii. Specific Environment and General Environment: Specific environment refers to the external forces that directly affect an organization. That is, they are forces that are specific to a particular organization or company. For example, changes in consumers’ tastes and choices towards a company’s products directly affect its demand. Similarly, delays in the supply of raw materials from suppliers directly affect a company’s production.On the other hand, the general environment refers to the external forces that affect all organizations. As against specific forces, general forces do not belong to a particular organization, rather they affect the performance of all organizations. Thus, such forces indirectly affect a particular organization. For example, changes in technology affect the quantity and quality of production of all organizations. Likewise, a change in political circumstances affects all companies simultaneously.

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

Ans: No organization can function in isolation. Instead, these tasks and tasks are influenced by many external forces such as social and political conditions, technological changes, etc. Such external forces create the environment for an organization. Understanding of the business environment is very important for any organization. A continuous study of the business environment enables an organization to identify the forces it is operating and, thereby, react and respond to these forces in an appropriate manner. The following points highlight the importance of the environment for the success of a business organization.

(A) Identification of Opportunities: Changing business environment provides many positive opportunities for business. A careful analysis of the environment enables an enterprise to identify these positive opportunities and take advantage of the competition first hand. That is, it enables the organization to achieve maximum benefits and to surpass its rivals. For example, Tata recognized the demand for a small and affordable car in India and as such, launched the popular Tata Nano at a price of just one lakh. Thus, it became a leader in low cost car in India. (b) Identification of hazards: Apart from positive opportunities, some changes in the environment can also adversely affect the functioning of the environment. The study of the business environment helps an enterprise to identify these threats or negative signals. Thereby, it enables to take appropriate preventive measures. For example, if a mobile manufacturing company learns that another company is coming up with new and improved features in its product, it acts as a competition for it. Identification of threats can enable an organization to take appropriate measures such as the quality and features of its mobile, advertising, etc. (C) To store useful resources:Environment is the source of inputs or resources required for the functioning of an institution such as raw materials, machinery, labor, etc. On the other hand, the environment is also a source of demand for goods and services produced by the organization. Thus, it is logical for organizations to take resources from the environment that can be converted into desired outputs. This is possible only when enterprises have an understanding of what the environment wants and what it can offer. For example, with the increase in demand for touch screen technology in mobile phones, manufacturers are accumulating the necessary resources to manufacture touch screen phones. (d) Adjustment for change: The business environment is dynamic in nature. Technology, consumer tastes and choices, government policies, political situations constantly change. Careful analysis and understanding of the environment helps an enterprise to better deal with these changes and do the proper work. For example, studies of the business environment have led many bakery enterprises to realize the increasing demand for sugar-free products and are increasing the production of such bakery products. (e) Formation of plans and policies: With continuous study of the environment an organization can identify various threats and opportunities for its business. Accordingly, it can frame appropriate plans and policies, given the current scenario. Examples For, if analyzing the market for clothes in India, it is found that there is a growing demand for western wear, then a textile manufacturing company is able to increase its production To include the wear Western could frame policies and strategies.

(F) Performance improvement: Analysis of the business environment helps enterprises to identify various threats and opportunities that affect its performance. This helps the organization to deal with these changes in an appropriate manner. Which helps him to improve his performance.

3. Explain with examples, the various dimensions of business environment.

Ans: The following are the dimensions of business environment.

i. Economic Environment: It includes economic variables such as interest rate, income, stock market indexes that affect the functioning of enterprises. For example, an increase in the income of consumers increases the demand for goods and services of enterprises. Similarly, a fall in loan interest rates for consumer durables increases spending capacity and increases demand for such products.

ii. Social Environment: Social environment refers to social forces such as customs, traditions, social values, social trends, etc. For example, religious festivals provide business opportunities to many enterprises such as the production of sweets, decorations, etc. Social change in India. The trend towards western lifestyle has increased the demand for western wear, fast food, etc.iii. Technological Environment: Technological environments include technological changes and improvements. For example, the introduction of computers, the Internet, has changed the way organizations work today. Similarly, continuous improvements and innovations in technology used in production improve production quality. While on the one hand, improvement in technology provides new business opportunities for enterprises, on the other hand, there is a danger for enterprises using obsolete technology.

1. Legal Environment:

It refers to laws and regulations passed by the government such as the Companies Act, Trade Union Act, etc. Knowledge of these laws is essential for enterprises because their non-compliance can cause legal trouble for them. For example, an export-import company in India has to follow the rules and regulations laid down under the EXIM Policy and Foreign Trade (Development and Regulation) Act, 1992. Similarly, petroleum, refining, processing, distribution, sale of petroleum products are regulated by the Petroleum and Natural Gas Regulatory Board Act, 2006. v. Political Environment: Political environment includes political situations like peace and stability, law and order etc. For example, political unrest such as frequent changes in the ruling government leads to changes in government regulations and policies regarding production and manufacturing. Such frequent changes in regulations regarding production discourage investment. Similarly, the opening of our economy under the new economic policy in 1991 gave many foreign companies the opportunity to trade.

4. What economic changes were initiated by the government under the Industrial Policy, 1991? What impact have these changes made on the business and industry?

Ans: The Government of India introduced the Industrial Policy in July 1919. The major highlights of the policy are as follows.(i) Abolition of Licensing – The compulsory licensing system was abolished under the New Industrial Policy 1991. In other words, with industrial reforms private players were free to start a new venture without the need to obtain a license. However, the system of licensing was maintained in six industries namely alcohol, cigarettes, defense equipment, hazardous chemicals, industrial explosives and drugs and pharmaceuticals.

(ii) De-reservation- The number of industries reserved exclusively for the public sector was reduced significantly. The private sector was allowed to operate industries with only 3 industries, such as railways, nuclear minerals and nuclear power, within the exclusive ambit of the government. (iii) Expansion of production capacity – Prior to the policy, industries had to get permission from the government to expand the scale of production. MRTP companies (companies with assets of more than Rs 100 crore) with liberalization policy were free to expand the scale of their business as per market conditions.

(iv) Freedom in import of capital goods – Under this policy, industrialists were allowed to import capital goods from abroad. 100 percent FDI was allowed in foreign capital. (v) Reforms in 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. It encouraged the development and modernization of industries. In addition, the number of products reserved for small scale industries was reduced.

(vi) Disinvestment-Disinvestment process was done for many public sector enterprises. Namely, an increasing share of the assets of public industrial enterprises were sold to the private sector.

(vii) Foreign Investment Promotion Board – This board was set up to encourage and channelize foreign investment into India.The following points highlight the impact of these changes on trade and industry.(A) Increased competition: As a result of policies such as the abolition of the licensing policy, there is increased competition faced by domestic companies. Companies in India experienced competition in the service industry such as telecommunications, banking, insurance, etc. (b) Increased demand: With increased competition, the choice of goods and services for consumers has also increased. Thus, consumers also benefit from quality products and greater variety.(c) Changes in business policies: Under the new industrial policy, government policies have directly affected the functioning of commercial enterprises. As a result, they changed their policies and actions appropriately.(d) Technological Changes: With the increase in competition, firms find new and innovative ways to survive in the market. They rapidly adopt new technology and engage in further research and development.(e) Need for trained personnel: Due to innovations and improvements in product, application of better technologies, demand for skilled, trained and competent personnel has increased. Thus, there is a need for development of human resources. (F) Greater market orientation:With increased competition, it has become mandatory for enterprises to change production according to market demand. That is, production has become market oriented.(G) Reduced reliance on budgetary support by public sector enterprises: To avoid increased competition, public sector enterprises have realized the need to improve efficiency and productivity. They have reduced their dependence on budgetary support to cover their losses.

5. What are the essential features of 

• i. Liberalisation
• ii. Privatisation
• iii. Globalisation

Ans: Liberalization: Liberalization refers to the removal of unnecessary government controls and restrictions in the form of licenses, permits and quotas. India started liberalization of industries in 1991. The liberalization of industries in India took the following form.(i) Abolition of license: The license required for the establishment of industries was abolished. The system of licensing was maintained for only six industries such as alcohol, cigarettes, defense equipment, hazardous chemicals, industrial explosives and drugs and pharmaceuticals. (ii) Expansion of production: Enterprises became independent in deciding the scale and size of production and the price of products. MRTP companies (companies with assets of over Rs 100 crore) were free to expand the scale of their business according to market conditions.(iii) Removal of trade restrictions: Various restrictions related to trade such as quantitative restrictions, customs duties, tariffs, etc. were removed to make the movement of goods and services easier.(iv) Incentives for Foreign Direct Investment (FDI): Emphasis was given to encourage competition in the market and attract foreign direct investment (FDI) from other countries.

Personalization:Privatization refers to the gradual transfer of ownership or management of state-owned enterprises from public sector to private sector enterprises. This means giving more roles to private sector undertakings. In India, privatization was followed in the following manner.(i) Disinvestment: For disinvestment, the government adopted two methods. First, selling a part of PSU’s equity and second, strategic selling of PSUs. Under privatization, a major portion of the PSU’s equity was sold to the private sector. Apart from this, many companies like Modern Foods India, Bharat Aluminum Company (BALCO), Maruti Udyog Limited, etc., had strategic sales.(ii) Establishment of Industrial and Financial Reconstruction Board: This board was established for the revival of sick and loss making enterprises.(iii) Reducing the role of the public sector: Under privatization, the number of industries reserved exclusively for the public sector was reduced from 17 to 8.. At present, only 3 industries are exclusively reserved for the public sector ie Railways, nuclear minerals and nuclear power.(iv) Navratna Policy: In order to improve efficiency, promote professionalism and enable PSUs to compete effectively in the market, the government gave arat navratna status of nine to nine high performing PSUs. Globalization: Globalization refers to the process of integration of different economies of the world. It is a process associated with increasing openness, increasing economic freedom and promoting economic integration in the world economy. In India, the following policies regarding globalization were followed.(i) Removal on Trade Restrictions: Various constraints on trade such as tariffs, custom duties, quotas, etc. were reduced significantly.(ii) Reducing Export Duty and Import Duty: Various duties and taxes on imports and exports were removed to promote free trade.(iii) Encouragement of foreign capital investment: Various steps like raising equity limit of foreign capital, setting up of Special Economic Zones, introduction of Foreign Exchange Management Act (FEMA) were taken with a view to encourage foreign capital investment.