CBSE Class 12 Business Studies Business Environment Notes Set 02

IMPORTANCE OF BUSINESS ENVIRONMENT

1. Identification of opportunities to get first mover advantage: Understanding of business environment help an organisation in identifying advantageous opportunities and getting their benefits prior to competitors.

2. Identification of threats: Correct knowledge of business environment help an organisation to identify those threats which may adversely affect its operations.

3. Tapping useful resources: Business environment made available various resources such as capital, labour, machines, raw material etc to a business firm. In order to know the availability of resources and making them available on time knowledge of business environment is necessary.

4. Coping with Rapid changes: Continuous study/scanning of business environment help in knowing the changes which are taking place and thus they can be faced effectively.

5. Assistance in planning and policy formulation: Understanding and analysis of business environment help an organisation in planning & policy formulation.

6. helps in Improving Performance: Correct and continuous monitoring of business environment help an organisation in improving its performance.

DIMENSIONS / COMPONENTS OF BUSINESS ENVIRONMENT

1. Economic Environment: It has immediate and direct impact on a business. Rate of interest, inflation rate, change in the income of people etc. are some economic factors which could affect business firms. Economic environment offers opportunities to a firm or it may put constraints.

2. Social Environment: It includes various social forces such as customs, beliefs, literacy rate, educational levels, lifestyle, values etc. Changes in social environment affect an organisation in the long run. Example: now a days people are paying more attention towards their health as a result of which demand for mineral water, diet coke etc has increased while demand of tobacco, fatty food products has decreased.

3. Technological Environment: It provides new and advance ways/ techniques of production. A businessman must closely monitor the technological changes taking place in the industry as it helps in facing competition and improving quality of the product.

4. Political Environment: Changes in political situation also affect business organisations. Political stability builds confidence among business community white political instability and bad law & order situation, may bring uncertainly in business activities. Political environment has immediate and great impact on the business transactions, so the businessman must scan the environment carefully so that necessary changes can be made in the organisation as per requirements.

5. Legal Environment: It constitutes the laws and legislation passed by the Government, administrative orders, court judgements & decisions of various commissions and agencies. Businessman had to act according to various legislations and so their knowledge is very necessary.

Economic Reforms:

As a part of Economic reforms, the Government of India announces new Industrial Policy in 1991, whose main features are as follows:

1. Only six industries were kept under licencing scheme.

2. The role of public sector was limited only to four industries.

3. Disinvestment was carried out in many public sector enterprises.

4. Foreign capital/investment policy was liberalised and in many sectors 100% direct foreign investment was allowed.

5. Automatic permission was given for signing technology agreements with foreign companies.

6. Foreign investment promotion board (FIPB) was setup to promote & bring foreign investment in India.

Business Environment:
Business environment can be defined as those forces, individuals and institutions who have the ability to influence the working of an organization.

Features of Business Environment:

Totality of external forces: Business environment is the sum total of all the forces/factors external to a business firm.

Specific and general forces: Business environment includes both specific and general forces. Specific forces include investors, competitors, customers etc. who influence business firm directly while general forces include social, political, economic, legal and technological conditions which affect a business firm indirectly.

Inter-relatedness: All the forces/factors of a business environment are closely interrelated. For example, increased awareness of health care has raised the demand for organic food and roasted snacks.

Dynamic: Business environment is dynamic in nature which keeps on changing with the change in technology, consumer’s fashion and tastes etc.

Uncertainty: Business environment is uncertain as it is difficult to predict the future environmental changes and their impact with full accuracy.

Complexity: Business environment is complex which is easy to understand in parts separately but it is difficult to understand in totality.

Relativity: Business environment is a relative concept whose impact differs from  country to country, region to region and firm to firm. For example, a shift of preference from soft drinks to juices will be welcomed as an opportunity by juice making companies while a threat to soft drink manufacturers.

Importance of Business Environment:

Identification of opportunities to get first mover advantage: Understanding of business environment helps an organization in identifying advantageous opportunities and getting their benefits prior to competitors, thus reaping the benefits of being a pioneer.

Identification of threats: Correct knowledge of business environment helps an organization to identify those threats which may adversely affect its operations. For example, Bajaj Auto made considerable improvements in its two wheelers when Honda & other companies entered the auto industry.

Tapping useful resources: Business environment makes available various resources such as capital, labour, machines, raw material etc. toa business firm. In order to know the availability of resources and making them available on time at economical price, knowledge of business environment is necessary.

Coping with Rapid changes: Continuous study/scanning of business environment helps in knowing the changes which are taking place and thus they can be faced effectively.

Assistance in planning and policy formulation: Understanding and analysis of business environment helps an organization in planning &policy formulation. For example, ITC Hotels planned new hotels in India after observing boom in tourism sector. 

Helps in Improving performance:
Correct analysis and continuous monitoring of business environment helps an organization in improving its performance. 

Economic Environment in India:
As a part of economic reforms, the Government of India announced New Economic Policy in July 1991 for taking out the country out of economic difficulty and speeding up the development of the country. 

Main features of NEP, 1991 are as follows:

- Only six industries were kept under licensing scheme.

- The role of public sector was limited only to four industries.

- Disinvestment was carried out in many public sector enterprises.

- Foreign capital/investment policy was liberalized and in many sectors 100% direct foreign investment was allowed.

- Automatic permission was given for signing technology agreements with foreign companies.

- Foreign investment promotion board (FIPB) was setup to promote & bring foreign investment in India.

Various benefits were offered to small scale industries.

The main objective of New Industrial Policy was to promote Liberalization, Privatization and Globalization.
1. Liberalization: It means freeing of Indian Industry from all unnecessary government controls and restrictions. Abolishing licensing requirements; Freedom in deciding the scale of business; removals of restriction on movements of goods and service; reduction in tax rates; freedom in fixing prices; simplifying procedures; making it easier to attract foreign investment.
2. Privatization: Giving greater role to private sector in the nation building process and reduced role of public sector; Disinvestment in many Public Sector undertaking etc.,Setting up of BIFR to revive sick units in public sector enterprises suffering losses. It aimed at improving efficiency and performance of government undertakings, reducing budgetary deficit & better utilization of national resources.
3. Globalization: It means integration of various economies of the world leading to the emergence of cohesive global economy. The measures taken by the Government include trade liberalization which includes import liberalization; Export Promotion through rationalization of tariff structure; Foreign exchange liberalization; increased interaction among global economies under the aegis (protection /support) of World Trade  Organization. It resulted in addition of Export duty, Reduction of import.

Dimensions/Components of Business Environment:

Economic Environment: It has immediate and direct economic impact on a business. Rate of interest, inflation rate, change in the income of people, monetary policy, price level etc. are some economic factors which could affect business firms. Economic environment may offer opportunities to a firm or it may put constraints.

Social Environment: It includes various social forces such as customs, beliefs, literacy rate, educational levels, lifestyle, values etc. Changes in social environment affect an organization in the long run. Example: Now a day’s people are paying more attention towards their health, as a result of which demand for mineral water, diet coke etc. has increased while demand of tobacco, fatty food products has decreased.

Technological Environment: It provides new and advance ways/techniques of production. A businessman must closely monitor the technological changes taking place in the industry as it helps in facing competition and improving quality of the product. For Example, Digital watches in place of traditional watches, artificial fabrics in place of traditional cotton and silk fabrics, booking of railway tickets on internet etc.

Political Environment: Changes in political situation also affect business organizations. Political stability builds confidence among business community while political instability and bad law & order situation may bring uncertainty in business activities. Ideology of the political party, attitude of government towards business, type of government-single party or coalition government affects the business Example: Bangalore and Hyderabad have become the most popular locations for IT due to supportive political climate.

Legal Environment: It constitutes the laws and legislations passed by the government administrative orders, court judgements, decisions of various commissions and agencies. Businessmen have to act according to various legislations and their knowledge is very necessary. Example: Advertisement of Alcoholic products is prohibited and it is compulsory to give statutory warning on advertisement of cigarettes.

Major steps in Economic forms:

New Industrial Policy: Under this the industries have been freed to a large extend from licences and other controls. Efforts have been made to encourage foreign investment.

New Trade Policy: The Foreign trade has been freed from the unnecessary control. The age old restrictions have been eliminated.

Fiscal Reforms: The greatest problem confronting the Indian Govt. is excessive
fiscal deficit. Fiscal Deficit: It means country is spending more than its income Gross Domestic Product (GDP): It is the sum total of the financial value of all goods & services produced in a year in a country.

Monetary Reform: It is a sort of control policy through which the central bank controls the supply of money with a view to achieving objectives of general economic policy.

Capital Market Reforms: The Govt. has taken the following steps for the development of this market:
(i) SEBI has been established.
(ii) The restriction in respect of interest on debentures has been lifted.
(iii) Private Sector has been permitted to establish Mutual Fund.

Dismantling Price control :
The govt. has taken steps to remove price control in many products especially in fertilizers, iron and steel, petro products. Restrictions on the import of these things have also been removed.

Impact of Government Policy Changes on Business and Industry:

Increasing Competition: De-licensing and entry of foreign firm’s Indian market is increased the level of competition for Indian firms.

More Demanding Customers: Now customers are more aware and they keep maximum information of the market as the result of which now market is customer/buyer oriented, Now, products are produced keeping in mind the demands of the customers.

Rapid Changing Technological Environment: Rapid Technological advancement as changed / improved the production process as a result of which maximum production is possible at minimum cost but it leads to tough challenges in front of small firms. 

Necessity for Change: After New Industrial. Policy the market forces (demand & supply) are changing at a very fast rate. Change in the various components of business environment has made it necessary for the business firms to modify their policies & operations from time to time.

Need for Developing Human Resources: The changing market conditions of today requires people with higher competence and greater commitment, hence there is a need for developing human resources which could increase their effectiveness and efficiency.

Market Orientation: Earlier selling concept was famous in the market now its place is taken by the marketing concept. Today firms produce those goods & services which are required by the customers. Marketing research, educational advertising, after sales services have become more significant.

Reduction in budgetary Support to Public Sector: The budgetary support given by the government to the public sector is reducing thus the public sector has to survive and grow by utilizing their own resources efficiently.

Meaning of Business Environment

Question 1. What is business environment?
Answer: Business environment refers to all the factors that are outside the control of the business enterprise but may equally affect the performance of the business. The social, political, economic, technological factors that operate outside a business forms a part of the business environment.
In simple words: Business environment is made up of all the outside forces and conditions that a business cannot control but that do affect how well it runs.

Exam Tip: Always emphasize that business environment consists of external factors beyond company control — this is the defining characteristic.

Features Of Business Environment

Question 2. What are the features of business environment?
Answer: The features of business environment are:
1. Totality of external forces - Business environment is the sum total of all the forces/factors external to a business firm.
2. Specific and general forces - Business environment includes both specific and general forces. Specific forces include investors, competitors, customers etc. who influence business firm directly while general forces include social, political, economic, legal and technological conditions which affect a business firm indirectly.
3. Inter-relatedness - All the forces/factors of a business environment are closely interrelated. For example, increased awareness of health care has raised the demand for organic food and roasted snacks.
4. Dynamic - Business environment is dynamic in nature which keeps on changing with the change in technology, consumer's fashion and tastes etc.
5. Uncertainty - Business environment is uncertain as it is difficult to predict the future environmental changes and their impact with full accuracy.
6. Complexity - Business environment is complex which is easy to understand in parts separately but it is difficult to understand in totality.
7. Relativity - Business environment is a relative concept whose impact differs from country to country, region to region and firm to firm. For example, a shift of preference from soft drinks to juices will be welcomed as an opportunity by juice making companies while a threat to soft drink manufacturers.
In simple words: Business environment has seven key features - it is made up of outside forces, includes both targeted and broad forces, where everything connects to everything else. It keeps changing with new technologies and customer tastes, making it hard to forecast what comes next. It is hard to see the whole picture at once, and its effects vary based on where your business is located and which industry you work in.

Exam Tip: List all seven features with brief explanations - examiners look for completeness and understanding of each characteristic.

Importance Of Business Environment

Question 3. What is the importance of business environment?
Answer:
(i) Environment Provides Numerous Opportunities for Business Success - It enables the firm to identify opportunities and get the first mover advantage.
(ii) Threats and Early Warning Signals - Environmental awareness can help managers to identify various threats on time and serve as an early warning signal.
(iii) It Helps in Tapping Useful Resources - Environment is a source of various resources for running a business. Like finance, machines, raw materials etc.
(iv) It Helps in Copying with Rapid Changes - Knowledge of environmental changes sensitises the management to make new strategies to copy with the emerging problems of changes.
(v) It Helps in Assisting in Planning and Policy Formulation - Its understanding and analysis can be the basis for deciding the future course of action or training guidelines for decision making.
(vi) It helps in Improving Performance - With continuous scanning of the business environment, companies can easily improve their performance.
In simple words: Business environment is important because it helps firms spot new chances to grow and get ahead of competitors. It warns managers about dangers before they become big problems. It gives access to money, tools, and materials needed to run the business. It helps companies learn to deal with fast changes, make better plans for the future, and keep raising how well they do their work.

Exam Tip: Cover all six points of importance - focus on how environment helps with opportunities, threats, resources, changes, planning, and performance improvement.

Dimensions In Business Environment

Question 4. What are the dimensions of business environment?
Answer:
1. Economic Environment - It refers to all those factors and forces that have an economic impact on the business activities. Key economic factors include inflation, money supply, price level, etc. For example, increase in inflation rates result in fall in disposable incomes and as a result the demand for products falls.
2. Social Environment - Social environment represents the customs and traditions, values, culture, social trends, beliefs, ethics of society in which business operate. For example, with greater awareness among consumers about their rights, businesses are more concerned about the quality of goods they sell.
3. Political Environment - It includes political stability such as political leadership, political stability, practices of the ruling party, etc. For example, change in government, or unstable government.
4. Legal Environment - It includes all the legislations passed, administrative orders issued, court judgments or decisions taken by government or its related offices. For example, all cigarette packets must carry a warning 'smoking is injurious to health'.
5. Technological Environment - It consists of forces relating to scientific improvements and innovations, which lead to better production techniques and methods to produce goods. For example, shift from books to e-books, telephones to touch screen mobile phones.
In simple words: Business environment has five main areas. Economic environment includes inflation and money supply that shape business. Social environment covers the way people live, what they believe in, and how much they value things. Political environment is about government power and how stable it is. Legal environment covers laws and court decisions that companies must follow. Technological environment is about new discoveries and better ways to make products.

Exam Tip: Describe all five dimensions with relevant examples - each dimension must be clearly distinguished from the others.

Economic Environment In India

Question 5. What is the New Economic Policy (NEP) 1991? What are its main features?
Answer: The New Economic Policy (NEP) was announced by the Government of India in July 1991 for taking the country out of economic difficulty and speeding up the development of the country. The main features of NEP, 1991 are as follows:
1. Only six industries were kept under licensing scheme.
2. The role of the public sector was limited only to four industries.
3. Disinvestment was carried out in many public sector enterprises.
4. Foreign capital/investment policy was liberalized and in many sectors 100% direct foreign investment was allowed.
5. Automatic permission was given for signing technology agreements with foreign companies.
6. Foreign investment promotion board (FIPB) was setup to promote & bring foreign investment in India.
7. Various benefits were offered to small scale industries.
In simple words: The NEP was a major change brought in by India's government to help the country grow faster and get out of money problems. It eased rules for most industries, gave foreign companies permission to invest their money directly into India, and made it simpler to bring in new technology from other countries. It also set up a special board to attract foreign investment and gave extra help to small businesses.

Exam Tip: Mention the year (1991) and list all seven features with clear explanations - examiners expect comprehensive coverage of NEP components.

Liberalisation

Question 6. What is liberalisation? What are its objectives?
Answer: Liberalisation means removing unnecessary trade restrictions and making the economy more competitive like freedom of production, expansion of industries. The main objectives of introducing liberalisation were:
- To restrict licensing requirements to only a few core industries.
- To remove all restrictions related to scale of operation expansion or contraction of business activities.
- To remove restrictions on the movement of goods and services.
- To provide freedom to fix prices.
- To reduce tax rates and remove unnecessary control.
- To encourage import of foreign capital and technology.
- To simplify the procedures of import and export.
In simple words: Liberalisation means cutting away rules that slow down business and letting companies make their own choices about what to produce and how to expand. The goal was to require licenses for only a handful of key industries, let businesses change their size freely, let goods move between places with fewer barriers, allow firms to set their own prices, lower taxes, bring in foreign money and know-how, and make it easier to buy and sell things across borders.

Exam Tip: Define liberalisation first, then cover all seven objectives - show how liberalisation increased business freedom and reduced government control.

Privatisation

Question 7. What is privatisation? What are its objectives?
Answer: Privatisation means removing strict control over the private sector and making them free to make necessary decisions. Like a reduction in the number of reserved public sector industries, increasing the share of private sector investment. The objectives of privatisation are:
- To introduce plant disinvestment of the public sector.
- Dilute the ownership stake in public sector companies to less than 51%.
- Establishment of the Board of Industrial and Financial Reconstruction to evaluate the loss making and sick enterprises.
- Disinvestment, that means to transfer the ownership from the public sector to the private sector.
In simple words: Privatisation means reducing government control and letting private business people take charge. It involves selling off public sector factories, reducing government ownership in state-run companies to below half, creating a board to check which public businesses are losing money and cannot be saved, and finally handing over these businesses from the government to private owners.

Exam Tip: Distinguish privatisation from liberalisation - focus on transfer of ownership from public to private sector and reduction of government control.

Globalisation

Question 8. What is globalisation? How did New Economic Policy contribute towards globalisation?
Answer: Free interaction among economies of the world in the field of trade, finance, production, technologies and investment is termed as globalisation. Our new economic policy contributed towards globalisation in the following ways:
(a) Devaluation of rupee
(b) Raising foreign equity participation
(c) Long period trade policy
(d) Convertability of rupee
In simple words: Globalisation is when countries' businesses and money systems work together freely across borders. India's new economic policy helped this happen by making the rupee less valuable so Indian exports would be cheaper and easier to sell, letting foreign investors buy more shares in Indian companies, making trade policy work over longer time periods to give stability, and allowing rupees to be changed into other world currencies easily.

Exam Tip: Define globalisation clearly, then explain how each of the four ways - rupee devaluation, foreign equity, long-term trade policy, and currency convertability - helped India join the global economy.

Dimensions/Components Of Business Environment

Question 9. Explain the economic environment as a dimension of business environment.
Answer: It has immediate and direct economic impact on a business. Rate of interest, inflation rate, change in the income of people, monetary policy, price level etc. are some economic factors which could affect business firms. Economic environment may offer opportunities to a firm or it may put constraints.
In simple words: The economic environment touches a business right away through interest rates, rising prices, how much money people have to spend, bank policies, and product costs. These economic factors can either help a firm find new chances to make money or create barriers that make doing business harder.

Exam Tip: Explain how economic factors have both direct and immediate effects - provide specific examples of opportunities and constraints.

Question 10. Explain the social environment as a dimension of business environment.
Answer: It includes various social forces such as customs, beliefs, literacy rate, educational levels, lifestyle, values etc. Changes in the social environment affect an organization in the long run. Example - Nowadays people are paying more attention towards their health, as a result of which demand for mineral water, diet coke etc. has increased while demand for tobacco, fatty food products has decreased.
In simple words: Social environment covers how people live, what they think is right and wrong, how much schooling they have, and what matters to them. When these social factors shift, businesses feel the impact over time. Today people care more about staying healthy, so they buy more bottled water and diet cola but less cigarettes and oily snacks.

Exam Tip: Include multiple social forces and provide real-world examples showing how social change affects demand - health consciousness is a strong contemporary example.

Question 11. Explain the technological environment as a dimension of business environment.
Answer: It provides new and advanced ways/techniques of production. A businessman must closely monitor the technological changes taking place in the industry as it helps in facing competition and improving quality of the product. For Example, Digital watches in place of traditional watches, artificial fabrics in place of traditional cotton and silk fabrics, booking of railway tickets on internet etc.
In simple words: The technological environment brings new and better ways to make things. Business owners need to stay alert to how technology is changing in their field because it helps them stay ahead of rivals and make better products. Old watches have been replaced with digital ones, natural fabrics now compete with man-made materials, and buying train tickets over the internet has become normal.

Exam Tip: Emphasize the need for businesses to monitor technological changes continuously - give concrete examples of how technology replaces old methods.

Question 12. Explain the political environment as a dimension of business environment.
Answer: Changes in political situations also affect business organizations. Political stability builds confidence among the business community while political instability and bad law & order situation may bring uncertainty in business activities. Ideology of the political party, attitude of government towards business, type of government-single party or coalition government affects the business Example - Bangalore and Hyderabad have become the most popular locations for IT due to supportive political climate.
In simple words: When the government stays stable and has fair rules, business people feel confident and want to invest more. But when politics becomes messy or crime rises, companies get worried and slow down their plans. The ruling party's beliefs, how the government treats business, and whether power stays with one party or spreads across several parties all shape what firms can do. Bangalore and Hyderabad became major tech hubs because their governments backed the IT industry.

Exam Tip: Connect political stability to business confidence and instability to uncertainty - use the Bangalore/Hyderabad IT example as concrete evidence.

Question 13. Explain the legal environment as a dimension of business environment.
Answer: It constitutes the laws and legislations passed by the Government, administrative orders, court judgments, decisions of various commissions and agencies. Businessmen have to act according to various legislations and their knowledge is very necessary. Example - Advertisement of Alcoholic products is prohibited and it is compulsory to give statutory warning on advertisement of cigarettes.
In simple words: The legal environment is made of all the rules, court orders, and government decisions that businesses must follow. Company leaders need to understand these laws well to stay out of trouble. For instance, alcohol ads are banned, and cigarette ads must carry health warnings to inform buyers about the risks.

Exam Tip: Define legal environment as rules and regulations - provide specific examples of how laws control business practices, especially in regulated industries.

Impact Of Government Policy Changes On Business And Industry

Question 14. What is the impact of government policy changes on business and industry?
Answer:
(i) Increasing Competition - There is a tough competition between multinationals and there is also competitions between Indian enterprises and foreign enterprises.
(ii) More Demanding Customers - Customers today become more demanding because they are well-informed.
(iii) World Class Technology - Changes in government policy regarding business and industry has provided us with world class technology.
(iv) Necessity for Change - After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.
(v) Need for Developing Human Resource - The new market conditions require people with higher competence and greater commitment.
(vi) Market Orientation - Today firms are market oriented. They research the market, need and wants of consumers and then they produce well accordingly.
(vii) Loss of Budgetary Support to Public Sectors - The government's budgetary support for financing the public sector has declined over the years.
In simple words: Government policy changes have made business harder and different in many ways. Global and Indian firms now fight each other fiercely. Buyers have better information and ask for more. New technology from all over the world is now within reach. Businesses must shift and adapt their work constantly. Workers need higher skills and stronger dedication. Companies now focus on what customers want and study the market before making things. Public sector companies get less money from the government to run their work.

Exam Tip: Cover all seven impacts thoroughly - demonstrate understanding of how policy changes after 1991 transformed business landscape in India.