NCERT Solutions for Class 12 Business Studies Business Studies I Chapter 3: Business Environment

Chapter at a glance

Exercises – Very Short Answer Type

Question VSA – Q1

What is meant by business environment?

Answer

Business environment means the totality of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance – e.g. customers, competitors, suppliers, government policies, economic conditions, technology and social trends.

Business environment is the sum of all external individuals, institutions and forces outside a firm’s control that affect its performance.

Question VSA – Q2

How does understanding of business environment help in improving performance of a business?

Answer

Firms that continuously monitor their environment and adapt to it can identify opportunities and threats early, plan suitable strategies and respond quickly to changes. This helps them improve their present performance and continue to succeed in the long run.

By monitoring the environment, a firm spots opportunities and threats early and adapts its strategies, improving present and future performance.

Question VSA – Q3

Give an example to show that a business firm operates within numerous inter related factors constituting the business environment.

Answer

The rising health consciousness among people (social factor) increased the demand for organic food, low-fat products and fitness equipment. Manufacturers responded with new products and technology (technological factor), the government framed food-safety and labelling regulations (legal/political factor), and higher incomes (economic factor) supported the demand. A change in one dimension thus affects the others – they are inter-related.

Growing health awareness (social) raised demand for organic and diet products (economic), leading to new products and technology (technological) and food-labelling laws (legal) – showing how the dimensions are inter-related.

Question VSA – Q4

Krishna Furnishers Mart started its operations in the year 1954 and emerged as the market leader in the industry because of their original designs and efficiency in operations. They had a steady demand for their products but over the years, they found their market share declining because of new entrants in the field. The firm decided to review their operations and decided that in order to meet the competition, they need to study and analyze the market trends and then design and develop their products accordingly. List any two impacts of changes in business environment on Krishna Furnishers Mart’s operations.

Answer

1. Increasing competition – new entrants reduced its market share.
2. Market orientation – the firm now has to study market trends and design products according to customers’ needs.

Increasing competition and the need for market orientation.

Question VSA – Q5

Name any two Specific forces of business environment affecting business.

Answer

Customers and competitors (others: investors, suppliers).

Customers and competitors (also investors and suppliers).

Exercises – Short Answer Type

Question SA – Q1

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

Answer

1. Identifying opportunities and getting the first-mover advantage – early identification lets the firm exploit opportunities before competitors (e.g. Maruti spotting the need for small cars).
2. Identifying threats and early warning signals – helps the firm take timely action against threats such as new competitors or changing tastes.
3. Tapping useful resources – the environment is the source of inputs (finance, machinery, raw materials, labour); knowing it helps obtain them.
4. Coping with rapid changes – helps firms adapt to changing markets, technology and laws.
5. Assistance in planning and policy formulation – opportunities and threats form the basis of plans.
6. Improving performance – firms that monitor the environment and adapt perform better.

It helps identify opportunities (first-mover advantage) and threats, tap resources, cope with rapid change, plan and formulate policies and improve performance.

Question SA – Q2

Explain the following terms: a. Liberalisation b. Privatisation c. Globalisation

Answer

a. Liberalisation – freeing Indian business and industry from unnecessary controls and restrictions. Under the 1991 policy it meant: abolishing licensing in most industries; freedom in deciding the scale of business, expansion or contraction; free movement of goods and services; freedom in fixing prices; reduced tax rates; simplified import–export procedures; easier attraction of foreign capital and technology.

b. Privatisation – giving a greater role to the private sector in nation-building and reducing the role of the public sector. Measures: disinvestment of public sector undertakings (transfer of ownership to private hands), de-reservation of industries for the public sector, referring sick PSUs to the BIFR, and reducing government shareholding.

c. Globalisation – integration of the Indian economy with the world economy. It means free flow of goods, services, capital, technology and people across borders: reduced import duties, removal of quantitative restrictions, encouragement of foreign direct investment and foreign technology, and membership of the WTO.

Liberalisation is freeing business from controls; privatisation is a greater role for the private sector through disinvestment; globalisation is integrating the Indian economy with the world economy.

Question SA – Q3

National Digital Library of India (NDL India) work towards developing a framework of virtual repository of learning resources with a single-window search facility. It provides support to all academic levels including researchers, life-long learners and differently-abled learners free of cost. State the dimensions of business environment highlighted above.

Answer

1. Technological environment – use of digital technology to build a virtual repository with single-window search.
2. Social environment – free education and support for all, including life-long and differently-abled learners, reflecting social values of inclusion and literacy.
3. Political environment – it is a government initiative (Ministry of Education) reflecting the government’s policy priorities.

Technological (digital repository), social (free, inclusive learning) and political (a government initiative) dimensions.

Question SA – Q4

State the impact of demonetization on interest rates, private wealth and real estate.

Answer

1. Interest rates – banks received huge deposits of old notes, which increased their liquidity and lending capacity; this led to a fall in interest rates on deposits and loans.
2. Private wealth – wealth held in unaccounted cash lost value; people with black money had to deposit it and pay tax and penalty or lose it. Wealth shifted to formal financial savings.
3. Real estate – real estate, where cash transactions and black money were common, saw a fall in demand and prices, as cash dealings became difficult.

Interest rates fell as bank deposits rose; private wealth held as unaccounted cash was hit and shifted to formal savings; real estate demand and prices declined as cash deals dried up.

Exercises – Long Answer Type

Question LA – Q1

How would you characterize business environment? Explain with examples, the difference between general and specific environment.

Answer

Characteristics of business environment

1. Totality of external forces – it is the sum of all forces outside the business.
2. Specific and general forces – specific forces affect a firm directly; general forces affect all firms indirectly.
3. Inter-relatedness – different forces are closely related (e.g. a rise in health awareness raises demand for organic food).
4. Dynamic nature – it keeps changing (technology, tastes).
5. Uncertainty – future changes are difficult to predict.
6. Complexity – many factors interact, making it hard to understand fully.
7. Relativity – it differs from country to country and region to region (e.g. demand for sarees differs between India and the USA).

General vs specific environment

The business environment is a totality of external forces – specific and general, inter-related, dynamic, uncertain, complex and relative. Specific forces (customers, competitors, suppliers, investors) affect a firm directly; general forces (economic, social, technological, political, legal) affect all firms indirectly.

Question LA – Q2

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

Answer

A business is an open system: it takes inputs from the environment and sells outputs to it. Its success depends on how well it reads and adapts to the environment:

1. Opportunities – firms that spot opportunities early gain the first-mover advantage (e.g. Maruti Udyog in small cars, Jio in cheap data).
2. Threats – firms that ignore warning signals lose (e.g. Nokia’s decline after missing the shift to smartphones).
3. Resources – finance, materials, technology and talent all come from the environment.
4. Customers and competitors decide demand, prices and market share.
5. Government policies (taxes, licensing, GST, FDI rules) shape costs and opportunities.
6. Technology creates new products and destroys old ones (e.g. digital cameras replacing film).
7. Social trends (health, convenience, eco-friendliness) change demand patterns.

Therefore businesses that continuously monitor and adapt to their environment succeed, while those that do not decline.

A business depends on its environment for resources and markets; firms that identify opportunities and threats early and adapt to economic, political, technological and social changes succeed, while those that ignore them fail.

Question LA – Q3

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

Answer

1. Economic environment – interest rates, inflation, disposable income, stock market indices, value of the rupee, GDP growth, economic policies. Example: a rise in interest rates makes car loans costlier, reducing car sales.
2. Social environment – customs, traditions, values, social trends, demographics, education, lifestyle. Example: health awareness increases demand for organic food and fitness products; festivals raise demand for gifts and sweets.
3. Technological environment – scientific improvements and innovations that create new ways of producing goods and services. Example: smartphones replaced pagers; e-commerce changed retail.
4. Political environment – political conditions, stability, government’s attitude towards business, peace and order. Example: political stability attracts foreign investment; a pro-business government eases regulations.
5. Legal environment – laws and regulations, court judgements, administrative orders. Example: the Consumer Protection Act, 2019; mandatory health warnings on cigarette packs; GST laws.

Economic (interest rates, income), social (values, lifestyle), technological (innovations), political (stability, government attitude) and legal (laws and regulations) dimensions, each with examples above.

Question LA – Q4

The Government of India announced Demonetization of ₹ 500 and ₹ 1,000 currency notes with effect from the midnight of November 8, 2016. As a result, the existing ₹ 500 and ₹ 1,000 currency notes ceased to be legal tender from that date. New currency notes of the denomination of ₹ 500 and ₹ 2,000 were issued by Reserve Bank of India after the announcement. This step resulted in a substantial increase in the awareness about and use of Point of Sale machines, e-wallets, digital cash and other modes of cashless transactions. Also, increased transparency in monetary transactions and disclosure led to a rise in government revenue in the form of tax collection. a. Enumerate the dimensions of business environment highlighted above. b. State the features of Demonetization.

Answer

a. Dimensions highlighted

1. Political – a government decision announced by the Government of India.
2. Legal – old notes ceased to be legal tender.
3. Economic – new currency notes, impact on money supply and tax revenue.
4. Technological – greater use of POS machines, e-wallets and digital cash.
5. Social – change in people’s habits towards cashless transactions and greater awareness.

b. Features of demonetisation

1. It was a tax administration measure – cash holdings are now recorded as people deposit old notes.
2. It channelled savings into the formal financial system – some cash went into bank deposits and digital savings.
3. It aimed to create a less-cash or cash-lite economy – encouraging digital transactions.
4. It sought to curb black money, corruption and counterfeit currency and terror financing.
5. It increased transparency and tax compliance, raising government revenue.

1. Political, legal, economic, technological and social dimensions. b. Demonetisation was a tax-administration measure that channelled savings into the formal system, promoted a cash-lite digital economy, targeted black money and counterfeiting, and increased transparency and tax collection.

Question LA – Q5

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

Answer

Economic changes under the New Industrial Policy, 1991

1. Abolition of industrial licensing except for a few industries (security, strategic, hazardous).
2. Reduction of industries reserved for the public sector (now only a few, like atomic energy and railways).
3. Disinvestment of public sector enterprises.
4. Liberalisation of foreign capital – automatic approval of FDI in many sectors; foreign technology agreements allowed.
5. MRTP Act restrictions on large companies removed (later replaced by the Competition Act, 2002).
6. Trade liberalisation – lower import duties, removal of quantitative restrictions, rupee convertibility on current account.
7. Financial sector reforms and the setting up of SEBI.

Impact on business and industry

1. Increasing competition – from domestic and foreign firms.
2. More demanding customers – wider choice and better quality.
3. Rapidly changing technology – firms had to upgrade.
4. Necessity for change – firms had to continuously adapt.
5. Need for developing human resources – better-trained, competent people.
6. Market orientation – produce what customers want (instead of selling what is produced).
7. Loss of budgetary support to the public sector – PSUs had to become efficient and earn their own resources.

The 1991 policy brought liberalisation (abolition of licensing, free FDI and trade), privatisation (disinvestment, fewer reserved sectors) and globalisation; its impact was more competition, demanding customers, fast technological change, the need to adapt and develop people, market orientation and loss of budgetary support for PSUs.

Topic checklist

• ☒ Meaning, features and importance of business environment (VSA 1–3; SA 1; LA 1, 2)
• ☒ Specific and general forces; dimensions (VSA 5; SA 3; LA 1, 3)
• ☒ Economic reforms 1991 – LPG and impact (VSA 4; SA 2; LA 5)
• ☒ Demonetisation (SA 4; LA 4)

Total questions answered: 14 of 14