Class 12-commerce NCERT Solutions Business Studies Chapter 3: Business Environment

The dimensions of business environment highlighted above are as follows:

• Political Dimesnsion
• Legal Dimension
• Technological Dimension

Following are the features of Demonetization:

1. Tax administration- black money holders had to declare the unaccounted wealth and pay taxes at penalty rates
2. Avoiding of tax evasion- indicating the government will not tolerate tax evasion
3. Channelizing savings into the financial system- by depositing money in banks 
4. Creating ‘cash-less’ or ‘cash-lite’ economy- for increasing financial savings and reducing tax evasion

Specific forces directly affect individual enterprises in the day to day operations. Examples of specific forces:

1. Investors loyalty 2. Customer tastes and preferences 3. Strategies of Competitors 4. Terms and conditions of the Suppliers (any two)

No organisation can function in isolation. Understanding of business environment is of vital importance for a smooth and successful functioning of an organisation. A business environment refers to the aggregate of external conditions, events and resources which are outside the control of a business but interacts with it and affect its performance. In other words, everything which is outside the purview of an organisation but affects its performance composes of business environment. Some factors have direct influence and some have indirect influence on the business. A continuous evaluation and understanding of the business environment helps a firm to take account of these forces in a better manner, and thereby improve its functioning. The following points highlight the importance of understanding of environment for business enterprises.

1. Identification of opportunities and threats: The business environment is ever evolving. An interaction with the environment and careful analysis will help a business identify positive opportunities and possible threats. An identification of the threats can enable the organisation to take appropriate measures such as improving the quality and features of its mobile, advertising.  It enables the organisation to grab these opportunities, gain maximum benefit and move ahead of its competitors.
2. Accumulating useful resources: Environment offers itself as a source of inputs such as raw material, machinery, labour, for the running of an organisation. In return, the business supplies the environment with its output. This is possible only if the enterprises have an understanding of what the environment desires and what it can offer. Thus, it is rational for the organisations to take up those resources from the environment that can be converted into the desired output.
3. Adjusting to changes: Business environment is dynamic in nature and is prone to numerous socio-economic changes. A careful analysis and understanding of the environment helps an enterprise in adapting with these changes and take timely actions.
4. Formulating plans and policies: Understanding and analysing opportunities and threats helps a business frame suitable plans and policies in view of the current scenario. 
5. Improving performance: The main aim behind analyzing and understanding the environment is to improve a firm's performance and efficiency. The future of an organisation depends on how closely it bonds with the environment and thrive to survive its ever changing policies.

Impact of demonetization:

1. Interest rates: Cash transactions declined, Bank deposits increased and Increase in financial savings

2. Private wealth: Declined since some high demonetized notes were not returned

3. Real estate: Decline in prices of property

1. Liberalisation: Liberalisation refers to progressive elimination of government control and restrictions in the form of licenses, permits and quotas. The main aim was to liberalise the Indian business industry from excessive government control and to give complete freedom to make their own decisions regarding the investments, marketing, pricing and production. Liberalisation of industries in India took the following form:

a. License required for the establishment of industries were abolished.

b. Enterprises became free in deciding the scale and size of production and the price of the products

c. Restrictions were removed on the movement of goods and services

d. Procedures regarding exports and imports were relaxed

2. Privatisation: Privatisation refers to the process of gradual transfer of ownership or management from the state/public owned enterprises to individuals or private units i.e. from public sector to the private sector enterprises. It implies assigning a greater role to the private sector undertakings. This dilutes the stake of the government in the public enterprise and results in a transfer of ownership of that enterprise to a private sector. Privatisation was followed in India in the following manner:

a. Disinvestment of the public sector enterprises

b. Establishing Board of Industrial and Financial Reconstruction for the revival of the sick and loss making enterprises

c. Diluting the stake of government in the public sector enterprises

3. Globalisation: Globalisation refers to the process of securing socio-economic integration and development of various economies of the world. It is a conscious and active process associated with free flow of information, knowledge, services and goods so as to expand business and trade across the borders of the countries. It aims at increasing openness, growing economic independence and promoting economic integration in the world economy. In India, the following policies were followed with regard to globalization:
1. Removal on restriction on imports.
2. Abolishing the export duty
3. Reducing import duty

The policies of liberalisation, privatisation and globalisation by the government affect the functioning of the business enterprises. The following points highlight the impact of government policy changes on the business and industry:

1. Increased competition: The policy allowed easy entry of foreign firms and abolition of the licensing. The domestic companies, thus, have to compete with the international firms in the market which is a serious challenge and threat to them. 
2. Increased demand: Because of the fierce competition from the foreign market and new businessmen joining the production line, there has been a tremendous increase in the customer's demands for a better choice of goods and services.
3. Change in business policies: The business enterprises had to alter their policies and operations from time to time following the government policies under new industrial policy.
4. Technological changes: The competitive spirit has the led new firms fund new and innovative ways to outrun each other in the market. They increasingly adopt new technology and engage and invest further research and development.
5. Need for trained personnel: High-end technologies and innovations have resulted in improved product applications. The market now demands for skilled, trained and competent personnel to handle the ever evolving technologies and its products. 
6. Greater market orientation: Planning the production on the basis of market research and customer demand is the new criteria of the firms owing to the increased competition.
7. Less reliance on budgeter support by public sector enterprises: The need to improve efficiency and productivity has helped the public sector firms survive the increased competition. They have reduced their reliance on budgetary support to cover their losses so as to avoid disinvestment.

An environment, within which the business has to operate, needs to be understood for its successfully running at any point of time. A business environment refers to the aggregate of external conditions, events and resources which are outside the control of a business but interacts with it and affect its performance. In other words, everything which is outside the purview of an organisation but affects its performance, composes of business environment. Some factors have direct influence and some have indirect influence on the business. The business environment comprises of the economic, social, technological, political and legal environment which are considered significant for improving the performance and decision making feature of a firm.

Business environment has the following characteristics:

1. Aggregate of external Forces: Business environment can be considered as the aggregate sum of the external forces such as individuals, consumers, government and legal matters which affect the performance of an organisation, either positively or negatively.
2. Interrelation: Different forces and factors such as legal, technological, political and social conditions of business environment are closely related to each other. For example, an increase in the income of the consumers increases the demand for consumer durables such as television and refrigerator Thus, a change in one factor affects the other factor.
3. Dynamic in nature: Any business should cope up with the dynamic nature of an environment. Being a mixture of numerous forces and factors, changes are bound to happen in a business environment. For example, the tastes and preferences of a consumer, technology, government rules and policies keep changing continuously.
4. Uncertainty: Being dynamic in nature, a business environment can be easily termed as uncertain. Predicting the future changes is a bit difficult as these changes happen too quickly. For example, the technical changes. 
5. Complexity: Variable dynamic forces arising from different sources constitute a business environment. It becomes difficult and complex to understand their cumulative effect. For example, all political, social, economic, technological and legal matters affect the performance of organisation simultaneously.
6. Relative: Being relative in nature as its factors depend on the local conditions, business environment differs from region to region. For example, political conditions, religious beliefs, government rules and policies differ from one region to another.

Specific environment and General environment 

Specific environment refers to the external forces or institutions which exist outside an organisation and with which an organisation has to interact during its working course. These factors and forces have a direct and immediate effect on the decisions and actions of an organisation. Each organisation has its own unique environment which is dynamic in nature. For example, a change in taste and preference of consumers towards the products of a company, directly affects its demand. Similarly, a delay in the supply of raw material directly affects the production of a company.

General environment refers to those external forces which exhibits broad trends and conditions affecting all the organisations. As against specific forces, general forces do not pertain to a particular organisation, rather they affect the performance of all the organisations. Thus, such forces affect a particular organisation only indirectly. The major elements such legal, political, economic and socio-culture affects an organisation in their long run. For example, a change in technology affects the quantity and quality of production of all the organisations. Similarly, a change in political conditions affects all companies simultaneously.

A close and continuous interaction takes place between an organisation and its environment. Organisations, just like human beings, cannot operate or work in isolation; it is born, survives and grows within the context and forces of the environment such as social and political conditions and technological changes. A continuous study of the business environment enables an organisation to identify the forces and has a far-reaching impact on its survival which affects it functioning, and thereby helps it in reacting and coping with these forces in an appropriate manner. The following points highlight the importance of environment for the success of a business organisation:

1. Identification of opportunities and threats: The business environment is ever evolving. An interaction with the environment and careful analysis will help a business identify positive opportunities and possible threats. An identification of the threats can enable the organisation to take appropriate measures such as improving the quality and features of its mobile, advertising.  It enables the organisation to grab these opportunities, gain maximum benefit and move ahead of its competitors. For example, Tata recognised the demand for a small and economical car in India, and thereby launched the popular Tata Nano at a price of just one lakh. Thus, it became the leader in low cost car in India.
2. Accumulating useful resources: Environment offers itself as a source of inputs such as raw material, machinery, labour, for the running of an organisation. In return, the business supplies the environment with its output. This is possible only if the enterprises have an understanding of what the environment desires and what it can offer. Thus, it is rational for the organisations to take up those resources from the environment that can be converted into the desired output. For example, with a rise in demand for the touch screen technology in mobile phones, manufacturers are accumulating resources required for manufacturing touch screen phones.
3. Adjusting to changes: Business environment is dynamic in nature and is prone to numerous socio-economic changes. A careful analysis and understanding of the environment helps an enterprise in adapting with these changes and take timely actions. For example, by a study of business environment many bakery enterprises have realised the growing demand for sugar-free products and are increasing the production of such bakery products.
4. Formulating plans and policies: Understanding and analysing opportunities and threats helps a business frame suitable plans and policies in view of the current scenario. For example, if on analysis, the market for clothes in India, it is found that there is an increasing demand for western wear, then a cloth manufacturing company can frame policies and strategies to incorporate western wear in its production.
5. Improving performance: The main aim behind analyzing and understanding the environment is to improve a firm's performance and efficiency. The future of an organisation depends on how closely it bonds with the environment and thrive to survive its ever changing policies.  

Factors, institutions and forces which constitute and have a direct or indirect influence over the business transactions are a termed as dimensions of environment. The business environment comprises of the economic, social, technological, political and legal environment which are considered significant for improving the performance and decision making feature of a firm. Let us have a detailed look into the following dimensions of the business environment:

1. Economic environment: Economic factors such as unemployment rates, stock market indices, inflation rate and interest rate within which a business conducts and operates its working, points to the general condition of the economy. Because these factors have direct impact on the business, a businessman should scan the economic environment and take timely actions to deal with it. For example, an increase in the consumer's income increases the demand for goods and services of the enterprises. Similarly, a fall in the interest rates for loans for consumer durables increases the spending capacity and thereby, increases the demand for such products.
2. Social environment: A business originates and develops in a society and therefore the effect of social factors is anything but natural. Social environment implies the nature of the lifestyle, customs, literacy rates, traditions, social trends, educational levels and other characteristics of the society. These factors cannot be overlooked as they do have an impact on the society in the long run. Social traditions and practices such as religious celebrations provide significant business opportunities to many enterprises such as those producing sweets, decoration items and greeting cards. Any change in the social environment affects the supply of capital, labour and demand of the product. A business booms or survives only when there is cooperation between the business and the society. For example, in India, there has been a change in social trend towards western lifestyle which has increased the demand for western wear and fast food.
3. Technological environment: The nature of the technology available and used by the economy or production house falls under the technological dimension. Any new scientific improvements, new procedures or techniques for improving the quality of services and goods facilitate a firm's effectiveness and efficiency to survive in the competing world. Technological environment comprises of the technological changes and improvements. And may also get reflected in factors such as expenditure on RandD and rate of obsolescence. For example, computers and internet have changed the way organisations work today. While, on one hand, improvement in technology provides new business opportunities for the enterprises, on the other hand, it is a threat for the enterprises using obsolete technology.
4. Legal environment: It refers to the legislation and rules framework impacting the business. These laws relate to consumer protection, joint stock companies, employment relation and health and safety. It is framed by the Parliament and passed by the government such as the Companies Act 1956, Industries Dispute Act, 1947 and Trade union Act. These acts constitute to form the legal regulatory environment. These regulations are essential for the smooth functioning of the enterprises as their non-compliance can lead to legal trouble for them. For example, an export-import company in India has to follow the rules and regulations as stated under the MOM policy and the Foreign Trade (Development and Regulation) Act, 1992. Similarly, the refuting, processing, distribution, sale of petroleum, petroleum products is governed by the Petroleum and Natural Gas Regulatory Board Act, 2006.
5. Political environment: It is a combination of different ideologies advocated by different parties. The factors relating to affairs such as political stability, power and attitude of government towards policies and societies constitute under the political environment. It has a direct and immediate impact on the business transactions and its functioning. Political stability boosts a businessman's confidence, whereas political instability has adverse affects on them. For example, a situation of political unrest such as frequent change in the ruling government implies a change in the rules and policies of the government regarding production and manufacturing. Such a frequent change in the regulations regarding production discourages investment. 

The business environment highlighted are:

1. Technological dimension: 'It works towards developing a framework of virtual repository of learning resources with a single-window search facility.'

2. Social dimension: 'It provides support to all academic levels including researchers, life-long learners and differently-abled learners free of cost. '

The impacts of changes in business environment on Krishna Furnishers Mart's operations are:

1. Increased competition

2. Necessity for change

3. Market orientation

4. Innovation in designs (any two)

Business organisations work in a complex environment consisting of numerous interrelated and dynamic conditions. For example, ABC Ltd is an automobile company. Its performance is affected by the following factors: Economic: Global recession Social: Changed consumption habits of people due to the improved standard of living of customers Technological: Advanced technology leading to automation in manufacturing Legal: 28% GST levied on automobiles

Organisations that carefully study their business environments and accordingly adopt suitable plans and policies are better able to improve their performance in the long run. The enterprises which keep a check on the environment not only perform well in the present scenario but also continue to succeed in the future. 

An environment, within which the business has to operate, needs to be understood for its successfully running at any point of time. A business environment refers to the aggregate of external conditions, events and resources which are outside the control of a business but interacts with it and affects its performance. For example, change in taste and preferences of the consumers, change in government policies, change in political scenario, change in legal polices, all make up business environment. In other words, everything which is outside the purview of an organisation but affects its performance, composes of business environment. Some factors have direct influence and some have indirect influence on the business. The business environment comprises of the economic, social, technological, political and legal environment which are considered significant for improving the performance and decision making feature of a firm.

Government of India introduced the Industrial Policy, in July1991. Major highlights of the policy are as follows.

1. Abolition of licenses: The Industrial Policy, 1991 abolished the licensing required for the establishment of new ventures. In other words, with the industrial reforms the private players were free to start a new venture without the need to obtain a license. For industries related to liquor, cigarette, defense equipment, dangerous chemicals, industrial explosives and drugs and pharmaceuticals, licensing was retained
2. Dereservation: Post 1991, under privatisation, the number of industries which were exclusively reserved for the public sector was brought down from 17 to 8. However, only 3 industries are exclusively reserved for the public sector namely, railways, atomic mineral and atomic energy exist now under the public sector.
3. Augmentation of production capacity- Enterprises were free to decide the scale of business activities such as the size of production and the price of the products. The MRTP companies (companies having assets worth more than Rs 100 crore) were free to expand the scale of their business according to the market conditions.
4. Freedom in importing capital goods: Under the policy, industrialists were permitted to import capital goods from the foreign countries.100 percent FDI was allowed in the foreign capital.
5. Reforms in the small scale industries: With the commencement of reforms, the maximum investment limit has been increased from its 5 lakh to Rs 1 crore. This encouraged development and modernisation of the industries. Further, the number of products reserved for the small scale industries was reduced.
6. Disinvestment: The government adopted two methods for the purpose of disinvestment; first, selling off a part of the equity of the PSU's, and second, strategic sale of PSU's. Under privatisation, a large portion of the equity of the PSU's was sold to the private sector. Public enterprises which underwent disinvestment are Maruti, HTL, and VSNL to name a few.
7. Foreign Investment Promotion Board- This board was set up to encourage and channelise foreign investment in India.

 The impact of these changes on the business and industry is highlighted in the following points:

1. Increased competition: The policy allowed easy entry of foreign firms and abolition of the licensing. The domestic companies, thus, have to compete with the international firms in the market which is a serious challenge and threat to them. There has been a huge increase in market competition especially in service industries such as telecommunication and banking and insurance.
2. Increased customer demand: Because of the fierce competition from the foreign market and new businessmen joining the production line, there has been a tremendous increase in the customer's demands for a better choice of goods and services.
3. Change in business policies: The business enterprises had to alter their policies and operations from time to time following the government policies under new industrial policy.
4. Rapid technological changes: The competitive spirit has the led new firms fund new and innovative ways to outrun each other in the market. They increasingly adopt new technology and engage and invest further research and development. 
5. Need for trained human resources: High-end technologies and innovations have resulted in improved product applications. The market now demands for skilled, trained and competent personnel to handle the ever evolving technologies and its products. Thus, there arises a need for trained human resources.
6. Greater market orientation: Planning the production on the basis of market research and customer demand is the new criteria of the firms owing to the increased competition. The production has, thus, become market oriented.
7. Less reliance on budgetary support by public sector enterprises: The need to improve efficiency and productivity has helped the public sector firms survive the increased competition. They have reduced their reliance on budgetary support to cover their losses so as to avoid disinvestment.

Liberalisation: Liberalisation refers to progressive elimination of government control and restrictions in the form of licenses, permits and quotas. The main aim was to liberalise the Indian business industry from excessive government control and to give complete freedom to make their own decisions regarding the investments, marketing, pricing and production. India initiated liberalisation of industries in the Industrial Policy, 1991. Liberalisation of industries in India took the following form:

1. Abolition of licenses: The Industrial Policy, 1991 abolished licensing required for the establishment of new ventures. For industries related to liquor, cigarette, defense equipment, dangerous chemicals, industrial explosives and drugs and pharmaceuticals, licensing was retained.
2. Augmentation of production: Enterprises were free to decide the scale of business activities such as the size of production and the price of the products. The MRTP companies (companies having assets worth more than Rs 100 crore) were free to expand the scale of their business according to the market conditions.
3. Removal of trade restrictions and taxation: Various restrictions regarding trade such as quantitative restrictions, customs, duties and tariff were removed to ease the movement of goods and services. Also, there has been a liberal reduction of taxation rate, benefitting the operating firms. 
4. Encouragement to Foreign Direct Investment (FDI): Liberlistaion to FDI encouraged competition in the market. This resulted in benefits such as increase in the inflow of foreign capital.

Privatisation: Privatisation refers to the process of gradual transfer of ownership or management from the state/public owned enterprises to individuals or private units i.e. from public sector to the private sector enterprises. It implies assigning a greater role to the private sector undertakings. This dilutes the stake of the government in the public enterprise and results in a transfer of ownership of that enterprise to a private sector. In India, privatisation was characterized by the following features:

1. Disinvestment: More stress is laid on privatization through disinvestment. The government adopted two methods for the purpose of disinvestment; first, selling off a part of the equity of the PSU's, and second, strategic sale of PSU's. Under privatisation, a large portion of the equity of the PSU's was sold to the private sector. Public enterprises which underwent disinvestment are Maruti, HTL, and VSNL to name a few.
2. Establishing Board of Industrial and Financial Reconstruction (BIFR): The sick and loss making enterprises were handed over to BIFR for their revival or to be shut down. Some of the units were considered for renewal and rehabilitation and some others were closed down 
3. Reducing the role of public sector: Post 1991, under privatisation, the number of industries which were exclusively reserved for the public sector was brought down from 17 to 8. However, only 3 industries are exclusively reserved for the public sector namely, railways, atomic mineral and atomic energy exist now under the public sector.
4. Navaratna policy: The government awarded the status of 'Navaratnas' to nine high performing PSUs so as to improve efficiency, infuse professionalism and to enable PSUs to compete effectively in the market.

Globalisation: Globalisation refers to the process of securing socio-economic integration and development of various economies of the world. It is a conscious and active process associated with free flow of information, knowledge, services and goods so as to expand business and trade across the borders of the countries. It aims at increasing openness, growing economic independence and promoting economic integration in the world economy. In India, the following policies were followed with regard to globalization:

1. Removal on trade restriction: To keep the trade and business away from excessive regulatory regulations, various barriers on them such as tariffs, custom duties and quotas were reduced considerably.
2. Reducing the export duty and import duty: Various duties and taxes on import and export were removed to promote free flow of goods and services was sanctioned.
3. Encouragement to foreign capital investment: Various steps were taken to encourage foreign capital investment such as increasing the equity limit of foreign capital, setting up of special economic zones and introduction of Foreign Exchange Management Act (FEMA).