CBSE Class 12 Business Studies Business Environment Notes

Meaning : The totality of all individuals, institutions and other forces that are outside a business enterprise but that may affect its functioning and performance.

Nature : 
(a) totality of external forces
(b) specific and general forces
(c) Inter‐relatedness
(d) dynamic
(e) uncertainty
(f) complexity
(g) Relativity

Importance :
(a) first mover advantage
(b) early warning signal
(c) tapping useful resources
(d) coping with rapid change
(e) planning and policy formulation
(f) improving performance

Dimensions : 
(a) economic
(b) social
(c) technological
(d) political
(e) legal

Liberalisation : Liberating industry from licensing and other regulations.

Privatisation : transferring ownership and management of public enterprises to private sector

Globalisation : integrating different economies into a world economy by removing barriers to free flow of goods, services, capital, labour, etc. from one country to another.

Impact of Policy Changes: (a) increasing competition (b) more demanding customers (c) rapidly changing technology (d) necessity for change (e) need to develop human resources (f) market orientation (g) loss of budgetary support to public sector.

KEY CONCEPTS IN NUTSHELL

1. MEANING :
It is the sum total of all individuals or institutions comprising of consumers, competitors, suppliers government, courts, media and also the forces like economic, social, political, legal and technological that are outside the ambit and control of business enterprise but that which can affect its performance.

2. FEATURES OF BUSINESS ENVIRONMENT :
i. Constitutes totally of external forces ­ it comprises of the sum total of all forces that are external to the business firm which it must deal with.
ii. Specific and general forces ­ the forces present outside can be divided into two parts Specific‐ these forces affect the firms of an industry separately
e.g. Customers, suppliers, competitive firms etc. General ‐ these forces affect all the firms of an industry equally e.g. Social, political.
iii. Inter­ related ­ the different factors are co‐related
e.g. Change in the import‐ export policy is a political change that gives rise to economic change as well
iv. Uncertainty ­ business environment are susceptible to rapid changes, no one can predict with certainty the changes in the factors. e.g. change in technology and fashion.
v. Dynamic ­ business environment keeps on changing.
vi. Complex ­ it is difficult to know the extent of impact of the changes that the factors can bring in.
vii. Relative ­ business environment is a relative concept as it differs from country to country, region to region.

3. IMPORTANCE OF BUSINESS ENVIRONMENT:
i. Identify the opportunities and getting the first mover advantage ­ by being aware of the changes in business environment, enterprises can identify opportunity and strategize ways to capitalise on them.
ii. Identify threats and early warning signals ­ environment scanning helps in detecting possible threats in future.
iii. Basis for planning and policy for formulation ­ identification of threats and opportunity serves as basis for deciding the future course of action.
iv. Tapping useful resources ­ the resources are required to carry on a successful business enterprise. These have to be procured from the business environment.
v. Helps in coping with rapid changes ­ turbulent markets, less brand loyalty, divisions and sub‐divisions (fragmentation) of markets, more demanding customers, rapid changes in technology and intense global competition combined with complex business environment calls for a flexible planning to cope with the changes.
vi. Improvement in organisation performance ­ continuous and constant monitoring and adapting suitable business practices result in improved business performance.

4. DIMENSIONS OF BUSINESS ENVIRONMENT:
The various dimensions of business environment in terms of general environment are:

Economic Environment :
Refers to all those forces that have economic impact on the business activity Components of economic environment are GDP, Inflation rate, Interest rate, Rupee value, Stock exchange index, Tax rate

Political Environment: includes political conditions such as political leadership, political stability, practices of the ruling party and the nature of the government in power and their level of interference Components of political environment are Constitution of the country, Political ideology of the ruling party, nature and extent of government interference, international relations.

Legal Environment: refers to the framework of laws and various legislations within which the business activities take place Components of Legal Environment are Government legislations, court judgements, Decisions of various commissions.

Social Environment: represents the customs and traditions, values, culture, social trends, beliefs, norms and ethics of a society in which business enterprises operate.

Components of Social Environment are customs traditions, social expectations, lifestyles, values, literacy level

Technological Environment: refers to the influence of the changes in the technology on the business environment.

Components of Technological Environment: new methods and techniques of business operations, Scientific improvements and innovations,

As a part of economic reforms the Government of India announced New Industrial
Policy in July 1991 which emphasised on three major elements which were:

• Liberalisation ­ from the clutches of licensing policy. Therefore, removal of entry and growth restrictions on the private sector enterprises.

• Globalisation ­ encouragement of foreign private participation in industrial development. This step mainly intended at integrating the national economy with the world economy through the removal of barriers on international trade and capital movements.

• Privatisation ­ drastic reduction in the role of public sector. Further it aimed at transfer of ownership ,management and control of the public sector enterprise to the private sector.

The new industrial policy aimed at creating a more competent environment in the economy so as to strengthen the process of industrialisation. Its features are as follows
• Delicensing of all projects except six industries
• Decreased role of public sector to merely 4 industries
• Disinvestment: selling of a part or whole of the shares of the public sector undertaking
• Liberalisation of Foreign capital
• Setting up of Foreign Investment board (FIPB)
• Liberal policy for technical collaborations

7. IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY:

• Increase in competition
• Demanding customers
• Technical change and increased investment in R and D
• Necessity of change
• Development of human resource
• Market orientation
• Loss of budgetary support to the public sector.

BUSINESS ADMINISTRATION AND BUSINESS ENVIRONMENT

Business environment refers to different forces or surroundings that affect business operations. Such forces include customers, competitors, suppliers, distributors, industry trends, substitutes, regulations, government activities, the economy, demographics, and social and cultural factors. Others are innovations and technological developments.

WHAT IS BUSINESS ENVIRONMENT?

A business organization can not exist a vacuum. It needs living persons, natural resources and places and things to exist. The sum of all these factors and forces is called the business environment.

Business environment is of two types-
(i) Micro environment or the internal environment
(ii) Macro environment or the external environment
(i) Micro environment / Internal Environment of Business

Micro environment comprises of the factors in the immediate environment of the company that affect the performance of the company. In includes the suppliers,competitors, Marketing intermediaries, customers, pressure groups and the general public. Supplier form an important factor of the micro environment of business as the importance of reliable sources of supply are obvious. Supplier include the financial labor input. Stock holders, banks and other similar organizations that supply money to the organization are also termed as suppliers. Managers always strive to ensure a study flow of inputs at the lowest price. Customers are also an important factor in the internal environment of business. The customers or the clients absorb the output of an organization and a business exists to meet the demands of the customers. Customers could be individuals, industries, government and other institutions. Labor force is also an important part of the internal environment of business. Other than these the business associates, competitors, regulatory agencies and the marketing intermediaries are also a part of the micro business environment.

Macro environment / External environment of Business :

The forces and institutions out side of the organization that can potentially affect the performance of the organization come under the external environment of Business. The macro environment of business consist of the economic, demographic, natural, cultural and political forces. The external environment of business is often categorized into the economic environment, political and government environment, socio cultural environment and the international environment.Business Market is understanding the environment within which the business has to operate is very important for running a business unit successfully at any place. Because, the environmental factors influence almost every aspect of business, be it its nature, its location, the prices of products, the distribution system, or the personnel policies. Hence it is important to learn about the various components of the business environment, which consists of the economic aspect, the socio-cultural aspects,

3.2.1 ECONOMIC ENVIRONMENT
The survival and success of each and every business enterprise depend fully on its economic environment. The main factors that affect the economic environment are:
(a) Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth.
(b) Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time.

Some of the important economic policies are :
(i) Industrial policy
(ii) Fiscal policy
(iii) Monetary policy
(iv) Foreign investment policy
(v) Export -Import policy (Exim policy)

RECENT DEVELOPMENT IN INDIAN ECONOMY
The economic environment of business in India has been changing at a fast rate mainly due to the changes in the economic policies of the government. At the time of independence, the Indian economy was basically agrarian with a weak industrial base. To speed up the industrial growth and solve various economic problems, the government took several steps like state ownership on certain categories of industries, economic planning, reduced role of private sector, etc. The Government adopted several control measures on the functioning of private sector enterprises. All these efforts resulted a mixed response. There was growth in net national product, per capita income and development of capital goods sector and infrastructure. But rate of industrial growth was slow, inflation increased and government faced a serious foreign exchange crisis during eighties. As a result, the government of India introduced a radical change in economic policies in 1991. This policy abolished industrial licensing in most of the cases, allowed private participation in most industries, disinvestment was carried out in many public sector industrial enterprises and opened up the economy considerably. Foreign Investment Promotion Board was set up to channelise foreign capital investment in India. Let us discuss the developments under three heads, viz., (a) Liberalisation, (b) Privatisation, and (c) Globalisation

(A) LIBERALISATION
Liberalisation refers to the process of eliminating unnecessary controls and restrictions on the smooth functioning of business enterprises. It includes:
• abolishing industrial licensing requirement in most of the industries;
• freedom in deciding the scale of business activities;.

(iii) freedom in fixing prices of goods and services;
(iv) simplifying the procedure for imports and exports;
(v) reduction in tax rates; and
(vi)simplified policies to attract foreign capital and technology to India.
Through this liberalisation process, Indian Economy has opened up and started interacting with the world in a big way. This has resulted in easy entry of foreign business organisations in India. This has further resulted in stiff competition and efficiency. Ultimately, liberalisation has helped us in achieving a high growth rate, easy availability of goods at competitive rates, a healthy and flourishing stock market, high foreign exchange reserve, low inflation rate, strong rupee, good industrial relations, etc.

(b) PRIVATISATION
Privatisation refers to reducing the role of public sector by involving the private sectors in most activities. Due to the policy reforms announced in 1991, the expansion of public sector has literally come to a halt and the private sector registered fast growth in the post-liberalised period. The issues of privatisation include:
reduction in the number of industries reserved for the public sector from 17 to 8 (reduced further to 3 later on) and the introduction of selective competition in the reserved area;

(i) disinvestment of shares of selected public sector industrial enterprises in order to raise resources and to encourage wider participation of general public and workers in the ownership in business;

(ii) improvement in performance through an MOU system by which managements are to be granted greater autonomy but held accountable for specified results.

In India, as a result of these steps, the post liberalisation phase has witnessed a massive expansion of the private sector business in India. You can have an idea of their expansion from the fact that the total capital employed in top 500 private sector companies rose from Rs. 1,39,806 crores in 1992-93 to Rs. 2, 34, 751 crores in 1994-95 (an expansion of 68% in just two years).

(c) GLOBALISATION
Globalisation means 'integrating' the economy of a country with the world economy. This implies free flow of goods and services, capital, technology and labour across national boundaries. To achieve these objectives of globalisation, the government has adopted various measures such as reduction in custom duties, removal of quantitative restrictions or quotas on exports and imports, facilitating foreign investment and encouragement of foreign technology. These measures are expected to achieve a higher rate of growth, enlargement of employment potential, and reduction of regional disparities

VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)

Question. What is Business Environment?
Answer : Forces affecting the performance of an organisation but outside its control are called as Business Environment.

Question. How have customers benefited by increased competition after liberalisation and globalisation?
Answer : While purchasing they get a better quality and wider choice of goods and services.

Question. How can the firms cope up with changing technological environment?
Answer : They have to develop new ways.

Question. What do you mean by Globalisation?
Answer : When the various economies of the world integrate, it is known as Globalisation.

Question. Which policy of Indian Government has moved India towards globalisation?
Answer : The Industrial Policy of 1991.

Question. What do you mean by disinvestment?
Answer : When the private sector takes over public sector, it is called disinvestment.

Question. Give one measure taken by Indian Government to introduce liberalisation.
Answer : Abolishing licensing requirements.

Question. What do you mean by first mover advantage?
Answer : Early identification of opportunities.

Question. What are Values?
Answer : Concepts held by a society in high esteem are values.

Question. Which of the sector was given importance after independence?
Answer : Public sector.

Question. What was the responsibility given to private sector after independence?
Answer : Developing consumer goods industry was the responsibility gives to private sector.

Question. What do you mean by Liberalisation?
Answer : It means reduction in government controls and restrictions

Question. Which two factors are included in Technological Environment?
Answer : Scientific Improvement and Innovations.

Question. What is meant by opportunities?
Answer : It refers to the positive external trends that help an enterprise to improve its performance.

Question. What do you mean by Innovation?
Answer : Producing goods and services by new methods is called as Innovation.

Question. Name the economic reforms introduced to free Indian business from unnecessary controls and restrictions.
Answer : Liberalisation.

SHORT ANSWER TYPE QUESTIONS (3 OR 4 MARKS)

Question. Define Business Environment. State two important concerns of business environment.
Answer : The sum total of all external factors which are outside the control of business enterprises is termed as Business Environment. Factors may be social, political, economic etc.

Question. Explain the specific and general forces of business environment ?
Answer : Business environment comprises of both specific and general forces. Specific forces refer to those forces that are having direct effect on the day to day working of the business viz. customers, competitors, investors etc. General forces refer to social, political, legal and other forces which are having an indirect effect on the operations of a business.

Question. Enumerate the benefits of understanding business environment.
Answer :
The benefits of understanding business environment are:
(i) Enabling the identification of opportunities and getting the first mover advantage.
(ii) Helping in the identification of threats and early
(iii) Tapping useful resources.
(iv) Coping with the rapid changes.
 (v) Assisting in planning and policy. (vi) Improvement in performance.

Question. What are the main dimensions of business environment ? What does environment consist of?
Answer : The main dimensions of business environment are
(i) Economic, (ii) Social, (iii) Technological, (iv) Political, (v) Legal Economic environment consists of the factors having economic dimensions such as fiscal policy, monetary policy, industrial policy etc.

Question. Explain the role of political environment in shaping the business.?
Answer : Business functions within the framework of political environment. Generally, government's policies change with the change of guard in power. Business is required to understand and follow such changes and also respect the orders that judiciary gives from time to time.
For example, after globalization, Government of India allowed many companies to enter the Indian market for giving boost to the different industries like food processing industry etc. That paved the way for entry of multinationals in India on a large scale.

Question. Explain the concept of technological environment.
Answer : It includes new approaches, new procedures, and new equipments to transform inputs into outputs. It facilitates an organization's efficiency and effectiveness so that it can try to remain at par with the best in the world. Technological changes provide opportunities for some enterprises and become threats for some others.
For example, digital watches killed the business prospects of traditional watches; TV has adversely affected radio & cinema industry; mobile phones have taken over the market from landline phones.

Question. What do you understand by legal environment? Give two examples which protect consumers' interests.
Answer : Legal environment consists of rules and regulations, framed by the Parliament, under which business must operate. To exist and grow, business is required to follow all the rules and regulations that constitute this environment.

Two examples protecting consumers' interests:

(i) Advertisement of alcoholic beverages is prohibited.
(ii) Packets of cigarettes should mention the statutory warning 'Cigarette smoking is Injurious to health'.

Question. List the various changes initiated by the Government of India since 1991.
Answer :
Various changes initiated by the Government of India since 1991 are as follows:
(i) New industrial policy
(ii) New trade policy
(iii) Fiscal reforms
(iv) Monetary policy
(v) Capital market reforms

Question. List some important factors that influence the working of a business enterprises?
Answer : Following are the important factors that influence the working of a business enterprise:‐ (i) Changes in economic policies. (ii) Political uncertainty in the country. (iii) Increase in the rate of competition. (iv) Changes in fashion.

LONG ANSWER TYPE QUESTIONS ( 5 OR 6 MARKS)

Question. What do you mean by business environment? Explain the key components of business environment.
Answer : Business environment is the sum total of all external factors that influence the functioning of a business enterprise.
The components of general environment are:

(i) Economic environment:
Economic environment consists of factors having economic dimensions such as fiscal policy, monetary policy, industrial policy etc.

Impact: Banking sector reforms have led to attractive deposit avenues and easier credit policy. Likewise reforms in leasing & financial institutions are also catalyzing company's economic growth.

(ii) Social environment: It discriminates characteristics of the society in which an enterprise exists. It consists of literary rates, educational levels, customs and demographic distribution etc.

Impact : Equal pay for equal work for both male and female workers, reservation of jobs for minorities etc.

(iii) Political environment

It consists of the political forces responsible for the management of public affairs and their influence on business.

Impact : Government allowed Pepsi to enter Indian market again for giving boost to the food processing industry.

(iv) Technological environment

It comprises of the various processes, techniques, approaches etc. by which an organization transforms inputs into output.

Impact : Digital watches have pushed out traditional watches.

(v) Legal Environment : It characterises various governmental rules, regulations and legislations etc. that all members of business community must follow.

Impact : Removal of control on foreign exchange and liberalization of foreign direct investments.

Question. What do you understand by economic environment? List the main aspects of economic environment.
Answer : Economic environment consists of factors likes inflation rates, interest rates, consumer’s incomes, economic policies, market conditions etc. which affect the performance of a business firm.
Following are the main aspects of economic environment:
(i) The role of public and private sector in the existing structure of the economy.
(ii) The rate of increase in GNP and per capita income both at current and constant prices.
(iii) Quantum of exports and imports of different products.
(iv) Increase in transportation and communication facilities.
(v) Trends in agricultural and industrial productions.
(vi) Amount of savings and investments.

Question. Social environment of business is important for a business enterprise". Explain ?
Answer : A business is a part of the society in which it operates. The buying and consumption habits of the people, their languages, customs, preferences, tastes etc. are the factors that influence the business. Businessmen should be alert enough to visualize the factors that directly or indirectly affect their organization. Cooperation between business and society will see business boom and will help growth of professional managers. The failure of any business organization in adapting to changes in the social environment will lead to dissatisfaction amongst its customers and rejection of its products. This shift of demand can even endanger the very survival of a business.
For example, equal pay for male and female workers, demand for reservation in jobs for minorities and women etc.

Question. Enumerate negative impacts of liberalization and globalisation.
Answer :
The negative impacts of liberalization and globalization are as follows; (i) Threats from Multinational Companies (MNCs).
(ii) Corporate vulnerability. (iii) Increased competition. (iv) Fast changing technology.
(vi) High obsolescence of material resources.
(vii) High labour turnover.
(vii) Threat to indigenous culture and values.

Question. Enumerate any ten Positive impacts of liberalization and globalization.
Answer :
The positive impacts of liberalization and globalization are as follow:
(i) Opportunities for new entrepreneurs.
(ii) Latest technology becoming available.
(iii) Opening up of foreign markets.
(iv) Easy imports of capital goods.
(v) Direct investment by Indian companies abroad.
(vi) Changed attitude of labor unions,
(viii) Easy inflow of foreign capital.
(ix) Freedom to expand and diversify. 
(x) Restructuring of industries.
(x) Widening of product choices for consumers.

Question. Explain any five negative impacts of liberalization and globalization.
Answer : Following are the negative effects of liberalization and globalization.
(i) Threats from multinational companies (MNCs)
With the arrival of multinationals it is becoming difficult for small and medium business units to even survive. The massive entry and consolidation to multinationals in the Indian markets is a challenge that has already forced some business enterprises to take the exit route.

(ii) Destabilization of protected environment
With easier entry of multi‐national companies, Indian business environment is fast losing its protective shield. The new entrepreneurial freedom is creating problems for the existing players. Even manufacturers of
Maruti car could not retain their market share and had to remodel their products and announce heavily price reductions from time to time.

(iii) Decline in public sector
Public sector is losing markets and their capacity utilization has declined, hampering thereby pace of country's technological and economic growth.

(iv) Sellers' market turned into buyers' market
With the entry of foreign goods .and services, shortage of goods, which is boon for the sellers, has now turned into surplus. Resultantly, sales/margin to many sellers have come down substantially. Buyers are now free to buy any product of their choice at a price they can afford.

(v) Fall in the value of rupee
Indian rupee has been devaluing against DOLLAR, EURO and many other foreign currencies. This phenomenon has forced even some established exporters to encash their stake partly/fully.

QUESTIONS WITH DIFFERENT DIFFICULTY LEVELS

Question. Why is business environment uncertain?
Answer : Future happenings are very difficult to predict.

Question. What is meant by Market Orientation?
Answer : The firms produce goods after analysing the market needs.

Question. How can environment awareness help managers?
Answer : Various threats are identified in time.

Question. How can political stability be beneficial to the economy? ­
Answer : Confidence among the business people is built up to invest and take up new ventures.

Question. What was the immediate cause of economic reforms in 1991?
Answer : High Government deficit.

Question. What is meant by threats?­ 
Answer : It refers to those environmental trends which hinder the performance of an enterprise

Question. Give one of the most important objectives of Indian development programmes at the time of independence.
Answer : Rapid Economic Growth

Question. 'Environment provides both constraints and opportunities." Comment.
Answer : Business environment provides both constraints and opportunities. Some of the constraints are economic conditions, customs, government regulations, availability of natural resources etc. Inspite of many initiatives, FDI is not picking up in India due to political and bureaucratic hurdles.
On the other hand, environment also offers various opportunities which include changing needs of customers, technological advances etc. For example, the growing demand for A.C. has attracted many new players, domestic (Godrej, Kirloskar) as well as multinationals (LG Electronics) to this industry.

Question. Business environment or Environmental Scanning helps in the identification of threats and early warning signals." Explain?­
Answer : Environmental scanning helps an enterprise to recognize qualitative information in advance, which can be used to prepare it for facing likely challenges. For example, if any new multinational company is entering the Indian market, the manager of an Indian firm dealing with same product, as that of the multinational company, should take it as a warning signal. He should take measures like improving the quality of his product, heavy advertisement etc. to face the challenge.

Question. What is meant by liberalization? List the impact of changes in government policy On business and industry.
Answer : Indian economy has gradually become more liberal and global since
1991. Liberalization refers to the removal of various outdated rules, regulations etc. and providing more helpful norms for the business to grow, particularly in the fields of exports and imports.
Some of the impacts of changes in government policy on business and industry are as under:
(i) Increasing competition.
(ii) More demanding Customers
(iii) Rapidly changing technological environment
(iv) Necessity for change.
(v) Need for developing human resource.
(vi) Market orientation.
(vii) Loss of budgetary support to the public sector.

Question. Explain the meaning of the term Privatisation? List any two reforms made under Privatisation. ­
Answer : Privatisation refers to reducing the role of public sector and increasing the role of private sector for rapid development of the nation.

Two reforms made under Privatisation:
(i) Loss making or sick public sector enterprises were either closed or handed over to Board of Industrial and Financial Reconstruction.
(ii) Disinvestment of public sector enterprises.

Question. Enumerate the various ways in which managers respond to changes in business environment. ­
Answer : Following are the ways in which managers respond to changes in business environment:
(i) Strategic alliances, mergers and acquisitions of businesses.
(ii) Diversification.
(iii) Collaboration with multinationals.
(iv) Brand building.
(v) Restructuring of business activities.
(vi) Capital restructures.
(vii) Customer focus.
(viii) Latest technology.
(ix) Compensation levels and incentive schemes.

Question. Mention four examples of acquisitions and mergers.­ 
Answer : Four examples of mergers and acquisitions are:
(i) SRF buy Ceat's Rayon Tyre Cord.
(ii) Parle's take‐over by Coke.
(iii) Godrej has bought over Goodnight.
(iv) Hutch by Vodafone.

Question. Explain the changes initiated by the Government of India since 1991.
Answer : Following changes have been observed since 1991:

(i) New Industrial Policy:

• Government has begun disinvesting in public sector undertakings.
• There are new schemes to attract Foreign Direct Investment (FDI).
• There is prompt clearance of foreign investment proposals.
• Tax concessions are given to units in Special Economic Zones (SEZs).
• There is broadband facility in telecom sector.
• Abolition of industrial registration schemes.

(ii) New Trade Policy:

• There is liberalization of import policy.
• Deemed exporters are entitled to special import licenses.
• There are greater concessions to Export Oriented Units (EOU) and units in
Export Promotion Zones (EPZ).
• Credit is now less expensive and many imports are duty free.
• Simplification of procedures related to export promotion.
• Removal of export quotas & reduction in import duties.

(iii) Fiscal Reforms

• Measures have been taken to bring down fiscal deficit.
• Tax reforms have been initiated to increase revenue and tax compliance.
• Reduction in direct and indirect taxes.
• Decrease in subsidies.

(iv) Monetary Reforms

• Phased reduction of statutory liquidity ratio (SLR).
• Private sector banks allowed to set up new branches.
• Banks have now been allowed to access capital market for raising capital.
• Permission for disinvestment (up to 49% of total equity).

(v) Capital Market Reforms

• Ceiling on rate of interest on debentures and bonds abolished. FIIs can access capital markets.
• Private sector can set up mutual funds.
• Bonus issues have been made more liberal.
• Security and Exchange Board of India (SEBI) has been made a statutory body

Question. 'Explain 'fiscal reforms' and 'monetary reforms' as per economic change initiated by Government of India since 1991. 
Answer :

 (i) Fiscal Reforms

• Measures have been taken to bring down fiscal deficit.
• Tax reforms have been initiated to increase revenue and tax compliance
• Reduction in direct and indirect taxes.
• Decrease in subsidies.

(ii) Monetary Reforms

• Phased reduction of statutory liquidity ratio (SLR).
• Private sector banks allowed to set up new branches.
• Banks have now been allowed to access capital market for raising capital.
• Permission for disinvestment (up to 49% of total equity).

Question. Explain any five ways in which managers have responded to changes in business environment.
Answer : Following are the ways in which managers have responded to changes in businessmen environment:

i) Strategic alliance, mergers and consolidation of businesses

To achieve the objectives of market dominance, market entry, product ranges etc., the Indian business enterprises are also indulging in mergers, acquisitions, amalgamations and takeovers. Initiative for same has naturally
come from managers of such enterprises.

ii) Diversification spree: Managers are leading diversification of their companies into various fields.

For example, Reliance is now also in the business of communications, retail chains etc. Likewise, they are bold enough to diversify into other nations too if need be.

iii) Consolidation of multinationals: Many multinational companies have entered India through new joint ventures. For example, General Motors' entry through a joint venture with Hindustan Motors.

iv) Brand Building: Companies are becoming more aggressive towards brand building. Their managers are spending huge amounts on same. Focus is on securing prime positions for their brands, through creative media‐mix, in the minds of consumers.

v) Labour : Managers are changing their behaviour towards labour. Labour is also benefitted through higher wages and other facilities like training to upgrade their skills and job enrichment.

MAIN POINTS 

1. Meaning of Business Environment :-

It means the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but may affect its performance. It has the following features :-
- Totality of External Forces.
- Specific and General Forces :- Specific forces such as investors and customers; General forces such as social, political and legal conditions etc.
- Inter-relatedness :- Different parts of business environment are inter- related.
- Dynamic nature :- Business environment keeps on changing.
- Uncertainty :- It is difficult to predict.
- Complexity :- Numerous inter-related and dynamic conditions or forces which arise from different sources make the Business environment easier to understand in parts but difficult to grasp it in totality.
- Relativity :- It differs from country to country.

2. Importance of Business Environment :-

The importance of knowledge of Business Environment can be realized from the following facts :-
- It enables the firm to identify opportunities and getting the first mover advantage.
- It helps the firm to identify threats and early warning signals.
- It helps in tapping useful resources.
- It helps in coping with rapid changes.
- It helps in assisting in planning and policy formulation.
- It helps in improving performance.

3. Dimensions of Business Environment :-

These include economic, social, technological, political and legal conditions which are considered relevant for decision making and improving the performance of an enterprise. The example of sub components of these dimensions are :-
- Economic Environment : - Relative roles of public and private sectors in the economy; rates of growth of GNP and per capital income; Rates of saving and investment; Imports and exports; Balance of payments and changes in foreign exchange reserves; Agricultural and Industrial Production trends etc.
- Social Environment :- Attitudes towards product innovations, lifestyles, occupational distribution and consumer preferences; Concern with quality of life; Life Expectancy; Expectations from work force; Shifts in the presence of women in workforce; Birth and death rates; Population shifts; Educational system and literacy rates; Consumption habits; Compositions of family.
- Technological Environment :- Forces relating to scientific improvements and innovations which provide new ways of producing goods and services and new methods and techniques of operating a business.
- Political Environment :- The constitution of the country; Prevailing political system ; Degree of Politicization of business and economic issues; Ideologies of political parties; Nature and profile of political leadership; level of political morality; Political institutions like government and allied agencies; Extent and nature of government intervention in Business; The nature of relationship of our country with foreign countries.
- Legal Environment :- It includes various legislations passed, administrative orders issued, court judgments Pronounced as well as decisions rendered by various commissions and agencies at every level of the government Centre, state or local.

4. Economic Environment in India :-

In India the Economic environment is characterized by policies which promote Liberalization, Privatization and Globalization. These are described below :-
- Liberalization :- Abolishing licensing requirements; Freedom in deciding the scale of business; removals of restrictions on movements of goods and services; reduction in tax rates; freedom in fixing prices; simplifying procedures; making it easier to attract foreign investment.
- Privatization :- Giving greater role to private sector in the nation building process and reduced role of public sector; Disinvestment in many Public Sector undertaking etc.
- Globalization :- It means integration of various economics of the world leading to the emergence of cohesive global economy. The measures taken by the Government include trade liberalization which includes import liberalization; Export Promotion though rationalization of tariff structure; Foreign exchange liberalization; increased interaction among global economics under the aegis of World Trade Organization.

5. Impact of Government Policy Changes on Business and Industry :

These are as under :-
- Increasing Competition.
- More Demanding Customers.
- Rapidly changing technological environment.
- Necessity for change :- Due to turbulent market forces the enterprises have to continuously modify their operations.
- Market Orientation.
- Loss of support to the Public Sector.

IMPORTANT QUESTIONS

1 MARK QUESTIONS (To be answered in 1 word or 1 sentence)

Question. Govt. of India is seriously thinking to allow oil marketing public sector undertaking to fix their own price for petrol and diesel. Which economic reform is the reason of this change in government’s policy?
Answer : Liberalization

Question. Just after declaration of Lok Sabha Elections 2009 results, the Bombay stock exchange’s price index (Sensex) rose by 2100 points in a day. Identify the environmental factor which led to this rise.
Answer : Political Environment

Question. State any two impacts of change of government policy on business and industry.

Question. “The understanding of business environment helps the managers to identify ‘threats’.” What is meant by ‘threats’ here?
Answer : Threats refer to the external environment trends and changes that will hinder a firm’s performance

Question. “Business environment includes both ‘specific and general forces.’ List any four specific forces.
Answer : Suppliers, investors, customers and competitors.

Question. “The understanding of business environment helps the managers to identify “Opportunities”. What is meant by ‘Opportunities’ here?
Answer : Social, Economic, Political Legal and Technological.

Question. Business Environment includes both ‘specific and general’ forces’. List any four general forces.
Answer : Opportunities refer to positive changes and trends that will help the business to improve its performance.

1. Explain any three features of Business Environment.

2. Explain any two impacts of Government policy changes on Business and Industry.

3. Explain ‘Increasing Competition’ and ‘More demanding customers’ as impact of Government policy changes on Business and Industry.

5 Marks Questions (To be answered in about 150 words)

Question. Identify the type of dimension of environment to which the following are related :-
i) Banks reducing interest rates on housing loans.
ii) An increasing number of working women.
iii) Booking of air tickets through internet.
iv) Alcohol beverages are prohibited to be advertised on ‘Door Darshan’.

Answer : (i) Economic Environment,
(ii) Social Environment,
(iii) Technological Environment,
(iv) Legal Environment