NCERT Business Studies Solutions Class 12 Chapter 3

 Very Short Answer Questions NCERT Business Studies Solutions Class 12 Chapter 3

1. What is meant by business environment?

The sum of all the forces (external, institutions and individuals) that are outside the control of a

business organisation is referred to as the business environment. The forces mentioned here can

be of varied nature, such as social, economic, political, legal or technological. The organisation is

unable to control such types of forces, but it can definitely have a positive or negative impact on

their performance. For e.g., altering the design of a product with efficiency leads to its demand in

the market, whereas below-par performance and poor design will result in making the product

inferior.

2. How does understanding of business environment help in improving performance of a

business?

Understanding the business environment properly by the organisation results in developing plans

and policies according to the environment, which results in great improvement in performance. It

also helps to counter any negativity that may exist in the market with a well-defined strategy. This

will help an organisation perform at its best every time.

3. Give an example to show that a business firm operates within numerous interrelated

factors constituting the business environment. (Hint: example highlighting the

interrelatedness of dimensions of business environment).

The various elements of a Business organisation are interrelated and the outcome depends on

all these elements. The business environment consists of economic, social, technological, and

legal elements.

Let us understand using one example

An automobile company will have the combined impact of all these factors in context of a

business environment.

1. If there is a global recession or economic slowdown, it will result in fewer sales of cars.

Economic factor comes into play for purchasing a car, and it will impact the business.

2. Due to the introduction of new technology, car manufacturers need to follow that as an

industry standard, which will be beneficial for the organisation. This is the impact of technological

factors on the business environment.

3. With the introduction of GST, car manufacturers can charge GST, and GST is mandatory for

business, which is a legal factor impacting the business environment.

4. 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. (Hint: increase in competition and Market orientation).

The following impacts can be seen with changing of the business environment for Krishna

Furnishers Mart

1. Rise in competitors leads to more competition.

2. Innovation in design is needed to differentiate their products from that of their competitors.

5. Name any two Specific forces of business environment affecting business.

Specific forces have a direct impact on the way a business is run. It can be due to the following

changes:

1. Changing tastes of customers.

2. Competitor strategy

3. Shift in investor loyalty

Short Answer Questions NCERT Business Studies Solutions Class 12

Chapter 3

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

It is essential to understand the business environment as it helps in determining the success or

failure of an organisation. The functioning and performance of an organisation are dependent on

various factors, which can be external. When we understand the business environment, it

becomes easier to drive factors that help in growth.

The following points highlight the importance of understanding the business environment for

business enterprises.

1. Business enterprises can identify positive opportunities for a business. It will help in making

the first move and staying ahead of the competition.

2. Businesses can identify potential threats by studying the business environment, which can

impact the growth of the organisation. Therefore, a study of the business environment proves

beneficial for identifying threats and determining the best solution to neutralize the threat.

3. Various resources are required for a business to run, and the appropriate resources are

determined by studying the local business environment. These inputs are used to create various

products.

4. Business environment is of dynamic nature. Factors such as technology, consumer

preferences and government policies are subject to change based on demand. Knowing the

business environment will make things easier to adapt easily to the change.

5. Study of the business environment helps in formulating new plans and policies as per the

market trends, which makes it more relevant for the current scenario.

6. Analysing the business environment will result in better performance for the organisation.

2. Explain the following terms:

(a) Liberalisation

(b) Privatization

(c) Globalisation

(a) Liberalisation

Liberalisation is the process or means of the elimination of the control of the state over

economic activities. It provides greater autonomy to the business enterprises in decision-

making and eliminates government interference.

The purpose of liberalisation is to increase competition between enterprises. It also

encourages foreign trade between countries. It also helps the business expand its global

footprint. The opening up of the economy improves the economic development of a

nation by the inflow of funds from foreign resources.

(b) Privatization

Privatisation can be explained as the process of transfer of ownership from the public

sector to the private sector. It is also known as Disinvestment in business. Privatisation

aims at reducing government ownership in industries.

It reduces the workload on the public enterprises and also paves the way for economic

development by encouraging foreign direct investment (FDI).

(c) Globalisation

Globalisation can be understood as the integration of the national economy with the world

economy. It represents a free flow of information, technology, goods and services, ideas,

capital, and even people as a form of resources across different countries. Globalisation

helps in improving t cross border connectivity between different markets in the form of

investments, trade, and cultural exchanges.

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

Government policy has the following impact on the business and industry

1. By relaxing the licensing policy and reducing import duties, domestic firms face tough

competition. More players will be in the field with their offerings which leads to more competition.

2. Due to the increase in competition, consumers are flooded with choices for goods and

services. This leads to an increase in the demand of consumers for better quality goods and

services.

3. Government policy changes result in changes in the business policies of the business

enterprises for sustaining and making a profit while following the current policies set by the

government.

4. With increasing competition, firms need to reach customers with products, and hence they

adopt more innovative ways to promote their products by using updated technology.

5. All the improvements in technology and product are possible with the help of trained

manpower. Without proper skills, no organisation will be able to execute any plans properly.

Therefore, improvements in human resources are very important in the current context.

6. Market orientation has become important as customers have become more demanding and

hence businesses need to analyze the market before launching any product.

7. Public sector enterprises need to perform more efficiently in order to survive the competition

and stop relying on government funds.

4. National Digital Library of India (NDL India) is a pilot project initiated by the HRD

ministry. It works 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.

The following business dimensions are highlighted here:

1. By developing a framework of a virtual repository of learning resources, it highlights the

technological dimension.

2. By supporting researchers, learners and differently-abled learners free of cost, it highlights the

social dimension.

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

Demonetisation had the following effect on these sectors

1. Interest rates: As demonetisation happened, the number of cash transactions reduced; bank

deposits increased in the form of Jan Dhan Accounts. More financial savings by the people of the

nation.

2. Private Wealth: Private wealth saw a decline as large-volume transactions were not possible

with old notes.

3. Real Estate: Demonetisation led to a decline in real estate prices. The real estate industry

witnessed a huge drop in business.

Long Answer Questions NCERT Business Studies Solutions Class 12

Chapter 3

1. How would you characterise business environment? Explain, with examples, the

difference between general and specific environment.

The sum of all the forces (external, institutions and individuals) that are outside the control of a

business organisation is referred to as the business environment. The forces mentioned here can

be of varied nature, such as social, economic, political, legal or technological. The organisation is

unable to control such types of forces, but it can definitely have a positive or negative impact on

their performance.

The following are the characteristics of the business environment:

1. Business environment is the sum total of all external forces, which includes individuals,

government, and consumers. These have an impact on the business performance that is either

positive or negative.

2. The different forces that have an impact on the business environment are interrelated. This

interrelation has an effect on the business environment. For e.g., if there is an increase in the

annual income of the consumers, they are more likely to purchase goods that fulfil all their

demands, and this leads to an increase in demand for electric appliances, mobile phones,

gadgets etc.

3. Business environment is constantly evolving and therefore is dynamic in nature. This can be

explained as we see changing trends in consumer behaviour, technology and policies of the

government.

4. The business environment is an uncertain territory. The changes in the market dynamics

cannot be predicted easily. Due to this, there exists uncertainty.

5. Business environment is the sum total of all interrelated dynamic forces. Hence, it is somewhat

complex and difficult to understand. All the factors like social, political, technological, etc., have

an effect on the performance of the organisation. It can be easy to ascertain the individual impact

of all the forces; it can be difficult to determine their cumulative effect.

6. Business environment varies with each region and hence is relative. The reason behind the

variation in the business environment is that the forces that determine the nature of the business

environment are dynamic in nature and therefore change as per region.

Specific environment is said to be the external forces that play a role in functioning of an

organisation directly. These forces are specific to a particular organisation or an

enterprise. Specific environment is unique to a industry and has an impact on how the

day to day business is run. For example, change in price of a raw material required for

production will result in less demand and abundant supply of raw materials has a direct

impact on the production of the company.

General Environment comprises of all the forces that has an impact on all organisations

irrespective of the type of industry. These forces do not differentiate between the

industries or types of business. They have a cumulative effect on the organisation’s

performance. For example, a new technology for communication will have a impact on the

quality and quantity of production or if there is a change in government then it will have

an effect on all organisations.

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

environment?

Any organisation is unable to function on its own. It is influenced by various political, legal, social,

and technological forces. These forces form the business environment of an organisation. It is

essential that an organisation has a good understanding of its business environment. It enables

an organisation to identify those that help or those that obstruct the growth of organisation.

Knowing them well will help in reacting better to these forces.

The success of a business is influenced by its environment in the following ways:

1. Whenever there is a change in the business environment, it provides the opportunity to start

fresh. Careful observation of the business environment is helpful in identifying these

opportunities. It also gives the first movers an advantage in the business. Organisations can reap

the maximum benefit in comparison to their competitors.

2. Studying of business environment helps in identifying threats to the business. It helps take

preventive measures in order to counter those negative forces.

3. Environment provides sources or inputs such as machinery, raw materials, labour, etc., which

are essential for an organisation. Therefore, it makes sense for organisations to choose those

resources from the environment and convert them into desired products.

4. Business environment is dynamic in nature. There is a constant change in the factors that

make up the business environment. Having a good understanding of the business environment

helps cope with the factors better and helps organisations derive benefits from them.

5. Various threats and opportunities are discovered during the analysis of the business

environment. The business can thus formulate plans and policies that will be appropriate for the

market in the existing scenario.

6. Knowing about the threats and opportunities helps one improve their performance by adapting

to these changes in a more informed manner. Being prepared for the situation helps in providing

the best performance.

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

The business environment has the following dimensions:

1. Economic: The economic dimension consists of economic variables such as income, stock

markets, and interest rates that are directly related to the functioning of business enterprises. For

example, if there is an increase in purchasing power of consumers, it automatically leads to an

increase in demand for goods and services, whereas if purchasing power is low, there is a

decrease in demand.

2. Social: The social dimension comprises various traditions, trends, social values, and cultures.

For example, companies can use religious festivals to produce items that cater to the occasion.

3. Technological: This dimension comprises all the technological changes and improvements that

are happening in the business. There can be many examples, like the introduction of computers

which changed the way information was gathered to the more recent developments in mobile

phones and the internet. Businesses not updating themselves in the technology field can find

themselves in a spot of bother with competitors.

4. Legal: This dimension consists of the various legal rules and legislations that are passed by

the government. Non-compliance can lead to legal trouble for the business. For example, the

setting up of a company is governed by the Companies Act, and not acting according to the law

will result in the company facing legal hassles.

5. Political: Political dimension consists of peace, law and order, and stability. If there is a change

in the government, there will be a change in the rules and policies. Frequent changes in

administration can result in a loss of interest of investors. Also, relaxing rules can encourage

investment. Such an example is of forming of a new policy in 1991 that opened the Indian

economy to the world.

4. 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.

The 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.

a. The following dimensions of the business environment are seen to be highlighted here:

1. Political: The government announced the demonetisation of the ₹ 500 and ₹ 1,000 currency

notes with effect from midnight of November 8, 2016. It is a step by the government to curb the

illegal use of money by some entities.

2. Legal: 500 and ₹ 1,000 currency notes stopped being the legal tender, and ₹ 500 and ₹ 2,000

became the new legal tender.

3. Technological: As demonetisation happened, there was a shortage of cash, which encouraged

the use of digital forms of payment in the form of e-wallets like Paytm and other modes of

cashless transactions.

The following are the features of demonetization:

1. Demonetization was done with the intention of exposing black money holders and those who

evade tax.

2. Increase in savings of people. Earlier more people used to keep money at home rather than at

the bank, and this step resulted in savings in the bank.

3. It helped in reducing the interest rates in banks.

4. To popularize the use of digital payments and reduce fraud.

5. What economic changes were initiated by the government under the Industrial Policy,

1991? What impact have these changes made on the business and industry?

The Industrial policy was introduced in 1991. The following are the major highlights of the policy:

1. As per the new Industrial policy of 1991, the system of licensing was abolished. This helped

the private players in starting a new venture without the need to obtain a license. Some

industries were not exempt, such as those involved in the manufacture of cigarettes, liquor,

defence equipment, pharmaceuticals and dangerous chemicals.

2. There was a considerable reduction in the number of industries that were marked for the

public sector. The private sector was given the liberty to operate across industries. The

government chose to keep only selected industries under direct control, which were atomic

energy, railways and atomic minerals.

3. Before the new policy was introduced, companies needed to seek permission from the

government to expand production. The new policy relaxed these norms for companies which

were having an asset base of 100 crores. These companies can increase production as per the

market requirements.

4. The new policy allowed the industrialists to import capital goods from foreign countries and

even allowed 100% of FDI in such cases.

5. There was a reform in the definition of small-scale industries. The maximum limit of investment

was increased from 5 lakhs to 1 crore. This step helped the industries to develop and contribute

more to the GDP of the nation. Industries became more modern with new technologies that

made work easier for small-scale industries.

6. This policy also introduced the disinvestment concept, which allowed the government to sell

some stakes to the private sector in order to bring development and monetary benefits to the

public sector industries.

7. A board was set up to encourage foreign investment in India. It was called Foreign Investment

Promotion Board.

The following were the impact of these changes in business and industry:

1. By relaxing the licensing policy and reducing import duties, domestic firms face tough

competition. More players will be in the field with their offerings which leads to more competition.

2. Due to the increase in competition, consumers are flooded with choices for goods and

services. This led to an increase in consumers’ demand for better-quality goods and services.

3. Government policy changes result in changes in the business policies of the business

enterprises for sustaining and making a profit while following the current policies set by the

government.

4. With increasing competition, firms need to reach customers with products and hence they

adopt more innovative ways to promote their products by using updated technology.

5. All the improvements in technology and product are possible with the help of trained

manpower. Without proper skills, no organisation will be able to execute any plans properly.

Therefore, improvements in human resources are very important in the current context.

6. Market orientation has become important as customers have become more demanding and

hence businesses need to analyze the market before launching any product.

7. Public sector enterprises need to perform more efficiently in order to survive the competition

and stop relying on government funds.

6. What are the essential features of 

i. Liberalisation

ii. Privatisation

iii. Globalisation

i. Liberalisation

Liberalisation is the process or means of the elimination of the control of the state over economic

activities. It provides greater autonomy to business enterprises in decision-making and eliminates

government interference.

The purpose of liberalisation is to increase competition between enterprises. It also encourages

foreign trade between countries. It also helps the business expand its global footprint. The

opening up of the economy improves the economic development of a nation through the inflow of

funds from foreign resources.

Essential features of liberalisation are:

1. Liberalisation brought about the abolition of licensing policies. Only a handful of industries

were retained, such as those involved in the manufacture of cigarettes, liquor, defence

equipment, pharmaceuticals and dangerous chemicals.

2. Businesses can decide on the number of goods they want to produce as per market

conditions. This is applicable for those companies which have an asset base of 100 crores.

3. Liberalisation helped in the removal of various trade restrictions, tariffs, and duties which

helped in the easy movement of goods and services.

4. Liberalisation helped encourage foreign direct investment and increased the competition

attracting foreign service providers.

ii. Privatisation

Privatisation can be explained as the process of transfer of ownership from the public sector to

the private sector. It is also known as Disinvestment in business. Privatisation aims at reducing

government ownership in industries.

It reduces the workload on public enterprises and also paves the way for economic development

by encouraging foreign direct investment (FDI).

The essential features of privatisation are:

1. Government adopted two different methods for disinvestment. In this, the first method was

selling a part of the equity in one of the PSUs and the second process was strategic selling of

PSUs. With these methods, many of the firms were sold off. This includes major companies like

Maruti Udyog, BALCO etc.

2. A board was established that was specially entrusted with the revival of companies that were

sick or loss-making. It was known as the Board of Industrial and Financial Reconstruction.

3. In privatisation, the role of the public sector was reduced substantially, with only 8 companies

under government control. In the present condition, only 3 industries are under government

control, and these are atomic energy, railways and atomic minerals.

4. To improve efficiency among public sector companies and increase the level of

professionalism, the government decided to honour the title of Navaratna to all the 9 high-

performing PSUs (Public Sector Units).

iii. Globalisation

Globalisation can be understood as the integration of the national economy with the world

economy. It represents a free flow of information, technology, goods and services, ideas, capital,

and even people as a form of resources across different countries. Globalisation helps in

improving cross-border connectivity between different markets in the form of investments, trade,

and cultural exchanges.

The following are the essential features of globalisation:

1. It removed or reduced all the trade barriers such as tariffs, trade restrictions, customs duties,

etc., which resulted in more business to and from India.

2. Export and Import duties were reduced, which helped in promoting free trade between India

and the world.

3. The aim of globalisation was to encourage the setting up of foreign capital in the form of FDI

(Foreign Direct Investment). It also resulted in the formation of SEZs (Special Economic Zones)

and the creation of FEMA (Foreign Exchange Management Act).

This chapter provides us with a brief introduction to the following concepts. It provides a clear

picture of what and how the business environment operates.