Multiple Choice Questions
Question 1. Which of the following does not characterise the business environment?
Answer (b) Employees does not characterise the business environment
Question 2. Which of the following best indicates the importance of business
(b) Improvement in performance
(c) Coping with rapid changes
(d) All of these
Answer (d) Identification, Improvement In performance, coping with rapid changes all
are the indicators of importance of business environment.
Question 3. Which of the following is an example of social environment?
(a) Money supply in the economy
(b) Consumer Protection Act
(c) The Constitution of the country
(d) Composition of family
Answer (d) Social environment Includes social forces thus, composition of families is
the example of social environment
Question 4. Liberalisation means
(a) integrating among economies
(b) reduced Government controls and restrictions
(c) policy of planned disinvestments
(d) None of the above
Answer (b) Liberalisation means end of license, quota and reduction of government
controls and restrictions
Question 5. Which of the following does not explain the impact of Government policy
changes on business and industry?
(a) More demanding customers
(b) Increasing competition
(c) Change in agricultural prices
(d) Market orientation
Answer (c) Change in agricultural prices does not exotom the impact of Government
policy changes on business and industry.
Short Answer Type Questions
Question 1. What do you understand by business environment?
Answer The term ‘business environment’ means the sum total of all Individuals,
institutions and other forces that are outside the control of a business enterprise but that
may affect its performance. The economic. social political, technological and other
forces which operate outside the business enterprise are part of its environment.
Question 2. Why it is important for business enterprises to understand their
environment? Explain briefly.
Answer It is important for business organisations to understand their environment
because of the following reasons
1. It Enables the Firm to Identify Opportunities and Getting the First Mover
Advantage Environment provide numerous opportunities for business Early
identification of opportunities helps an enterprise to use it before instead of losing
them to competitors.
2. It Helps the Firm to Identify Threats and Early Warning Signals Environmental
awareness can help managers to identify various threats on time and serve as an
early warning signals.
3. It Helps in Tapping Useful Resources Environment is a source 01 various
resources for running a business To engage In any type of activity, a business
enterprise assembles various resources called inputs. This can be done better by
understanding what the environment has to offer.
4. It Helps in Coping with Rapid Changes All types of enterprises facing
increaSingly dynamic environment In order to effectively cope with these
Significant changes, managers must understand and examine the environment
and develop suitable courses of action
5. It Helps in ASSisting in Planning and Policy Formulation Since environment is
the source of opportunities and threats, ItS understanding and analysis becomes
the base for various policies to be framed and strategies to be made.
6. It Helps in Improving Performance The enterprises that continuously monitor
their environment and adopt suitable business practices are the ones. which not
only improve their present performance but also continue to succeed in the market
for a longer period.
Question 3. Mention environment the various dimensions of business environment.
1. Economic Environment Interest rates Inflation rates value of rupee and many
more are the economic factors that can affect management practices in a
2. Social Environment The social environment of business Includes the social
forces like customs and traditions values, social trends etc
3. Technological Environment This includes forces relating to scientific
improvements and Innovations whIch provide new ways of producing goods and
services and new methods and techniques of operating a business
4. Political Environment This includes political conditions such as general stability
and peace in the country and specific attitudes that elected government
representatives hold towards business.
5. legal Environment This includes various legislations passed by government
authorities and court Judgements It IS important for the management of every
enterprise to obey the law of land and for this, enough of knowledge of rules and
regulations framed by the government is a pre-requisite for better performance.
Question 4. Briefly explain the following
Answer The three important features of New Economic Policy, 1991
(a) Liberalisation Under the new economic policy of 1991. -he economic reforms that
were introduced aimed at liberaliSing the Indian business and industry from all
unnecessary controls and restrictions. They signalled the end of the licence-permit
(b) Privatisation The new set of economic reforms that aim at giving greater role to the
private sector in the nation building process and a reduced role to the public sector.
(c) Globalisation Globalisation means the integration of the various economies of the
world leading towards the emergence of a cohesive global economy. Till 1991, India
had a policy which strictly regulated imports in value and volume terms. After 1991, the
reforms aimed at Import liberalisation.
Question 5. Briefly discuss the impact of Government policy changes on business and
Answer Impact of Government policy changes on business and Industry
1. Increasing Competition As a result of liberalisation, privatisation and globalisation
number of players Increased in all sectors and Increased competition for
2. More Demanding Customers Increased competition in the market gives the
customer wider choices in purchasing better quality of goods and services, which
makes them more demanding
3. Rapidly Changing Technological Environment New technologies help to improve
machines, process products and services. The rapidly changing technological
environment creates tough challenges before smaller firms.
4. Necessity for Change After 1991, the market forces have become turbulent as a
result of which the enterprises have to continuously modifying their operations.
5. Need for Developing Human Resource The new market conditions require people
with higher competence and greater commitment. Hence. the need for developing
human resources emerged.
6. Market Orientation Earlier, production was taken up first and then selling was
done. Now, due to Increasing competition and more demanding customers firms
have to study and analyse the market hrst and produce goods accordingly.
7. Loss of Budgetary Support to the Public Sector Public sector have less of
budgetary support from the Central Government. Now, they have to generate their
own resources and be more efficient in order to survive and grow.
Long Answer Type Questions
Question 1. How would you characterise business environment? Explain with
examples, the difference between general and specific environment.
Answer Features of business environment
1. Totality of External Forces Business environment is aggregative in nature as It is
the sum total of all things external to business firms.
2. Inter-relatedness Different elements of business environment are closely related
to each other. e.g., increased awareness of health care have increased the
demand for many health products.
3. Dynamic Nature The business environment is highly dynamic. It keeps on
changing. Sometimes there is a change In technology, tastes and preference of
4. Uncertainty The environment cannot be predicted. It IS highly uncertain and
5. Complexity Since there are many elements of business Environment and they are
Inter-related and dynamic in nature Therefore, it becomes very difficult to
understand them as a whole.
Difference between Specific and General Environment There are two types of forces
operating in business environment specific and general Specific forces affect the
individual enterprises directly and Immediately, e.g., customers, suppliers
General forces affect the firms and only indirectly e g , social conditions or political
Question 2. How would you argue that the success of a business enterprise is
significantly influenced by its environment?
Answer Importance of business environment
1. It Enables the firm to Identify Opportunities and Getting the First Mover Advantage
Environment provides numerous opportunities for business success. Early
identification of opportunities helps an enterprise to be the first to exploit them
instead of loosing them to competitors, e g., Eureka Forbes introduced Aquaguard
and took away the cream of demand.
2. It Helps the Firm to Identify Threats and Early Warning Signals Environment
happens to be the source of many threats Environmental awareness can help
managers to identity various threats on time and serve as an early warning signals
e.g. Lakme took serious steps to improve the quality and types of products as
foreign multinational cosmetics companies started coming to India after 1991.
3. It Helps in Tapping Useful Resources Environment offers various resources for
running a business in return the business enterprise supplies the environment
With its outputs such as goods and services for customers taxes for government.
In order to arrange for the best possible resources, better understanding of the
environment becomes Important
4. It Helps in Coping with Rapid Changes It is not the fact of change itself that is so
Important as the pace of change There are many changes taking place in the
environment and at a fast speed. In order to effectively cope with these changes,
managers must understand and examine the environment and develop Suitable
courses of action .
5. It Helps in Assisting in Planning and Policy Formulation Since environment is a
source of both opportunities and threats Its understanding and analysis only helps
In formulating the best possible policies to handle the future properly
. It Helps in Improving Performance Continuous monitoring and adopting changes
in an enterprise will help if! Improving not only their present performance. but also
continue to succeed in the market in long run.
Question 3. Explain with examples, the various dimensions of business environment.
Answer Dimension of business environment
(i) Economic Environment It includes the changes In the system due to economic
policies made by the government. Reserve Bank of India is the key regulator of
country’s economic environment since it
(a) influences the Interest rates
(b) controls the flow of money in the economy
(c) regulates the working of banks
Example When the banks reduce the interest rates on long term loans. automobiles
and construction industries get a boost to the business as more spending is made on
the purchase of homes and cars through loans.
(ii) Social Environment The social environment of business Include the social forces
like customs and traditions, values social trends, society’s expectations from business
etc. In business terms, these values translate into freedom of choice in the market.
Major elements of social environment are
(a) life expectancy
(b) shifts in the presence of women in the workforce
(c) consurnonon habits
Example Due to the sh It In the presence of women in the workforce the demand for
readymade ladles formal wear, cosmetics, packed/processed food, electronic gadgets
has gone up.
(iii) Technological Environment Technological environment Includes forces relating to
scientific Improvements and innovations which provide new ways of producing goods
and services and new methods and techniques of operating a business.
Example Because of technological advancement, it has become possible to book
railway tickets through internet from home, office etc.
(iv) Political Environment Political environment includes political conditions such as
general stability and peace In the country and specific attitudes that elected government
representatives hold towards business. It is only of use when a business enterprise can
predict its business activities under stable political conditions. Major elements of political
(a) The constitution of the country
(b) The nature and profile of political leadership and thinking of political personalities
(c) Political ideology and practices of the ruling party.
Example After the NEP of 1991, due to globalisation the foreign companies started
coming to India, but due to the bureaucratic red tape it became difficult for them to cut
through it to do business here. As a result, these companies were discouraged in our
country regarding investments. The situation has improved overtime.
(v) Legal Environment Legal environment includes various legislations passed by the
Government administrative orders Issued by government authorities, court judgements
as well as the decisions rendered by various commissions and agencies. It is imperative
for the management of every enterprise to obey the law of the land. Therefore, an
adequate knowledge of rules and regulations framed by the government is a prerequisite
for better business performance.
Example There is a government regulation to protect consumer’s interest e.g., the
advertisements of alcoholic beverages is prohibited.
Question 4. What economic changes were initiated by the Government under the
Industrial Policy, 1991? What impact have these changes made on business and
Answer Economic changes initiated by the government under the Industrial Policy,
1. The government reduced the number of industries under compulsory licensing to
2. The role of public sector was reduced. It was now limited only to four industries of
3. Disinvestment was carried out in case of many public sector industrial enterprises.
4. Foreign Direct Investment was permitted.
5. Automatic permission was now granted for technology agreements with foreign
6. Foreign Investment Promotion Board (FIPB) was set up to promote and
channelise foreign investment in India.
The Indian corporate sector has come lace-to-face with several challenges due to
government policy changes. Some of them are
1. Increasing Competition The competition has Increased due to entry of new players
(pnvausanon and globalisation).
2. More Demanding Customers Customers today. has become more demanding
because they are well-informed. Increased competition in the market gives the
customers Wider choice In purchasing better quality of goods and services.
3. Rapidly Changes Technological Environment The rapidly changing technological
environment creates tough challenges before smaller firms
4. Necessity for Change After 1991. the market forces have become turbulent as a
result of which the enterprises have to continuously modify their operations.
5. Need for Developing Human Resources Earlier. Indian enterprises worked with
inadequately trained personnel The new market conditions require people with
higher competence and greater commitment Hence. the need for developing
6. Market Orientation Before 1991. all firms worked with production oriented
marketing operations. In a fast changing world. there was a shift to markel
orientation. The firms had to study and analyse the market first and produce
7. Loss of Budgetary Support to the Public Sector The public sector undertakings
have realised that in order to survive and grow, they will have to be more efficient
and generate their own resources for the purpose
Question 5. What are the essential features of
Answer Essential features of
1. Abolishing licensing requirements In most of the industries a short list. except
2. No restriction on expansion or contraction of business.
3. Free movement of goods and services
4. Freedom in fixing the prices of goods and services.
5. Reduction in tax rates.
6. Simplifying procedures for imports and exports.
7. Making it easier to attract foreign capital and technology to India.
1. The government redefined the role of public sector.
2. Policy of planned disinvestments of the public sector
3. Refining of sick enterprises to the Board of Industrial and Financial
1. Import liberalisation
2. Export promotion
3. Foreign exchange reforms
Lately many companies have planned for significant investment in organised retailing in
India. Several factors have prompted their decision in this regard.
Customers income is rising. People have developed a taste for better quality products
even though they may have to pay more. The aspiration levels have increased. The
government has also liberalised its economic policies in this regard and permitted even
cent per cent foreign direct investment in some sectors of retailing.
Question 1. Identify changes in business environment under different heads –
economic, social, technological, political and legal that have facilitated the companies
decisions to plan significant invstments in organised retailing.
Answer Changes which have taken place In the following areas are as follows
1. Economic Availability of more money because of employment opportunities
2. Social Tastes of customers are changing. As he is getting more exposure to the
outside world his tastes are changing.
3. Technological Technological advancements have led to advanced ways of
counting. checking. coding. billing discounts which are convenient for the
customer and also retailer.
4. Political Government policies are encouraging developers to go mass construction
on real estate. As MNCs are coming to India, they have to be provided an
Internationally based infrastructure to operate from.
5. Legal As the government is providing more rights to the consumers, an organised
retailing outlets would be more particular in taking care as compared to a small
Question 2. What has been the impact of these changes with regard to globalisation
Answer Due to globalisation and privatisation, more retailers from India and abroad are
encouraged to make investments in organised retailing The competition has increased,
the consumers are more demanding and expert working force is required in order to
cope up with the changes, which have taken place and are further changing.