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MBA 1st Year Objectives Business Environment Long Question Answer Set

MBA 1st Year Objectives Business Environment Long Question Answer Set

MBA 1st Year Objectives Business Environment Long Question Answer Set

MBA 1st Year Objectives Business Environment Long Question Answer Set
MBA 1st Year Objectives Business Environment Long Question Answer Set

MBA 1st Year Objectives Business Environment Long Question Answer Set

Introduction:: Business Meaning, Definition, Noture 6 Scope, Objectives of Business: Economic and Social, Types of business organisations Business Environment. Meaning, Characteristics, Scope and Significance, Components of business environment production of Micro-environment: Internal Environment Value system, Mission, Objectives, Organisational structure, Organisational resources, Company image, Brand equity. External Environment: Firm, Customers, Suppliers, Distributors, Competitors, Society. Introduction to Macro Components: Demographic, Natural, Political, social, Cultural, Economic, Technological, International and legal, Difference between macro and Micro-environment.

Section C


Qus.1. Explain the term business. What are the essential characteristics of business?

Or ‘All creative human activities relating to the production of goods or services for satisfying human wants are known as business. It is also a gainful procedure through which individuals and groups exchange goods and services’. Explain how.

Ans. Business

It is a planned approach that aims to satisfy customer’s needs and wants by serving them with their desired goods and services. It can also be referred to as an entity involved in offering products and services to the customers.

All creative human activities relating to the production of goods or services for satisfying human wants are known as business. It is also a gainful procedure through which individuals and groups exchange goods and services. Human activities may be categorised as economic and non-economic. Business includes all those legal activities which are related with earning profit and all the economic activities which are related with earning wealth. Every human activity which is engaged in for the sake of earning profit may be called a business. Human activity is directed towards producing and acquiring wealth through buying and selling goods. Characteristics of Business

The essential characteristics of business are as follows:

  1. Entrepreneur: There must be someone to take initiative for establishing a business. The person who recognises the need for a product or service is known as entrepreneur. The entrepreneur is a key figure in the process of economic growth.
  2. Economic Activities: These also play an important role in carrying out business activities.
  3. Deals in Goods and Services: Business always deals in goods and services. The goods include both customers goods like clothes, shoes, toothpaste and industrial goods like raw material, tools and machinery
  4. Risk: The business involves a greater element of risk and uncertainty. In fact, a businessman tries to foresee the future uncertainties and plan his business activities accordingly.
  5. Profit: Profit is the most important characteristic of business. Business is started for the purpose of earning profit. Profit is driving force of every business activity. The incentive of earning profits keeps a person in business and is also necessary for the continuity of business. This does not mean that there will be no chances of losses in business.
  6. Production: Business always deals on production of goods and services. The object of business is to provide goods and services to society for the purpose of earning profit. The goods must be produced or manufactured so that they can be sold in market.

7 Sales: Sales are related with the transfer of values. The production for personal use does not come under the scope of business. For example, if a shoe-maker makes a pair of shoes and wear himself, his act is not treated as business. If a person makes a pair of shoes for the purpose of selling, now his act is treated as business.

  1. Finance: Finance is another important characteristic of business. No businessman can start business without finance. Finance is the lifeblood of every business organisation.
  2. Management: Every enterprise needs an organisation for its successful working. Various business activities are divided into departments, sections and jobs. In this way, organisation creates the framework for managerial performance and helps in coordinating various business activities.
  3. Regularity: In business, only those transactions are included which have regularity and continuity and isolated transactions will not be called business, even if the person earns profit from that deal. A person builds house for himself, but later on sells it on profit.
  4. Creation of Utility: The goods are provided to the consumer as per their likes and requirements. Business creates various types of utilities in goods so that consumers may use them.
  5. Consumer Satisfaction: The ultimate aim of business is to supply goods to the consumers, which are produced for them. If a consumer is satisfied with the product he will purchase the same thing again, otherwise he will go for an alternative commodity.
  6. Islamic Process: It is a saying of the holy prophet (p.b.u.h) that 9/10 of the risqué lies in business. In this sense business as an Islamic way to earn livelihood income from business is known as profit which is also called risqué-e-halal. The holy prophet did himself proper business.
  7. Planning: Planning is the most important characteristic of business which is related with all the activities of business. Planning is always based on past experience.

Qus.2. What are the objectives of a business? 

Ans.                                             Objectives of Business 

A business is mainly focused towards earning profit but profits is not it’s only objective. Every work is started with an objective. The objective is a goal, the achievement of which is a necessity and all efforts are concentrated for the fulfillment of it. According to Peter Drucker, objectives are needed in every area where performance and results directly and vitally affect survival and prosperity of the business. The different types of business objective are as follows:

  1. Economic Objectives:

(a) Profit Earning: It cannot be denied that business is started for earning profits. Profit is basic incentive to business pursuits. Profits are needed to face various uncertainties like trade cycle, change in demand pattern, fluctuations in money markets. A business needs profits not only for its existence but also for expansion and diversification. The investors want an adequate return on their investments, worker wants higher wages and the entrepreneur needs money for reinvesting.

(b) Production of Goods: The profit can be earned only when some exchange of goods and services takes place. So the next objective is to produce more goods and sell them to the consumer.

(c) Creating Markets: The aim of the businessman is to sell products. Marketing consists of these efforts which affect transfer in ownership of goods and care for their physical distribution.

(d) Technological Improvement: A businessman should always strive to use latest methods of production. In the world of competition, everybody tries to sell his products by offering goods quality products at lower prices.

(e) Focus on Growth and Expansion: Business will not be able to reach its potential customers without growth and expansion. So, it is very crucial to focus on growth and expansion along with survival.

(f) Productivity and Cost Efficiency: Business aims at enhancing the productivity so that more profits can be generated thus leading to cost-efficiency.

  1. Social Objectives: These are related with social welfare as well as well-being of the society. Business uses scarce resources such as men, machines, material, etc. of the society and therefore, this becomes its responsibility to return the favour in terms of social welfare of its people. So, any business activity that can cause harm to the people must be avoided.

Various social objectives include implementation of the fair trade practices, prod,

Hing provisions related to welfare ameni supplying standard products and services, setting provisions contributing in societal welfare.

  1. National Objectives: These objectives of business focus at achieving national goals. Th as follows:

(a) Creating Employment: With the expansion of distribution channels and mar establishing different new units, business can create various employment opportunities.

(b) Promoting Social Justice: Equal job opportunities are offered by the business to do sectors of the society for promoting social justice.

C Contributing to the Revenue: Business aims to pay all the taxes and dues regularly government in order to improve the government revenues.

(d) Making Country Self-sufficientIn order to make the country self-sufficient or self-rol business reduces the import of goods from other countries as well as it promotes exports of dif goods and services from the country for improving foreign capital of the nation.

Qus.3. Elucidate the role of business in development of economy.

Or What are the different types of business? 

Ans.                                         Role of Business 

A business is an organisation that uses economic resources or inputs to provide goods or services customers in exchange for money or other goods and services. It plays a major role in the development of economy. Some of these are:

  1. Promotion of Capital Formation: A business promotes the formation of capital. The inactive . savings of the customers are mobilised in the market in order to generate capital while the borrowed or own capital is used to set the enterprises.
  2. Wealth Creation and Distribution: Business is responsible for it and such a wealth and income is allocated to people of different geographical areas for benefitting various sections of the society.
  3. Promotion of Balanced Regional Development: Different industries or enterprises are set up in different backward and underdeveloped areas in order to eliminate the regional imbalances among them.
  4. Reduction of Concentration of Economic Power: The economic development of the country remains dependent on limited business due to limited industrial activities in few regions, so, the economic power remains concentrated to these industries or business.
  5. Promotion of Country’s Export Trade: Business plays a key role in the promotion of export trade of the country. The goods produced are exported to other countries that brings a large amount of foreign exchange in the home country. These earnings help to balance the dues from import and lead to balance of payment.
  6. Increase Gross National Product and Per Capita Income: Businesses increase these by developing different types of products in the markets and by creating income and wealth for different stakeholders.

Types of Business

There are four major types of businesses:

  1. Service Business: A service type of business provides intangible products (products with no physical form). Service type firms offer professional skills, expertise, advice and other similar products

Examples of service businesses are: schools, repair shops, hair salons, banks, accounting firms and law firms.

  1. Merchandising Business: This type of business buys products at wholesale price and sells the same at retail price. They are known as ‘Buy and sell’ businesses The products at prices higher than their purchase costs.

A merchandising business sells a product without changing its form. Examples are grocery stores, convenience stores, distributors and other resellers.

  1. Manufacturing Business: Unlike a merchandising business, a manufacturing business buys products with the intention of using them as materials in making a new product. Thus, there is transformation of the products purchased.

A manufacturing business combines raw materials, labour and factory overhead in its production process. The manufactured goods will then be sold to customers.

  1. Hybrid Business: Hybrid businesses are companies that may be classified in more than one type of business. A restaurant, for example, combines ingredients in making a fine meal (manufacturing. sells a cold bottle of wine (merchandising), and fills customer orders (service).

Nevertheless, these companies may be classified according to their major business interest. In the case, restaurants are more of the service type, i.e. they provide dining services.

Q.4. What are the different types of business organizations?  Highlight the issues in selecting business organisation forms.

 Or Explain the various types of business organisation with their advantages and disadvantages.

Ans.                         Types of Business Organisation

The basic types of business organisation are:

  1. Sole Proprietorship: A sole proprietorship is a business owned by only one person. It is eas to set-up and is the least costly among all forms of ownership. In it, the owner faces unlimited liability meaning, the creditors of the business may go after the personal assets of the owner if the business cannot pay them.

The sole proprietorship form is usually adopted by small business entities.

Merits: (a) Incurs low production cost.

(b) Helps in timely decision-making.

(C) Easy to start and dissolve.

(d) Provides flexibility in business.

(e) Provides business confidentiality.

Demerits: (a) Has inadequate sources of production.

(b) Provides limited skills and knowledge.

(c) Has no economies of large-scale production.

(d) Has instability and unlimited liability.

(e) Able to only small profits.

  1. Partnership: A partnership is a business owned by two or more persons who contribut resources into the entity. The partners divide the profits of the business among themselves. In general partnerships, all partners have unlimited liability. In limited partnerships, creditors cannot go after the personal assets of the limited partners.

Merits: (a) Require no special permissions and hence easy to establish.

(b) Right and prompt decision-making.

(c) Has use of diverse skills and knowledge.

(d) Provides business confidentiality.

(e) Has a scope of large-scale production.

Demerits: (a) Involves uncertain existence.

(b) Leads to disputes between partners.

(C) In appropriate for large-scale business,

(d) Has weak management and unlimited liability.

(e) Non-transferability of partnership shares.

  1. Joint Stock Company: A joint stock company is an assoc an association of persons in an or assessing a separate legal entity, perpetual succession with a unique name and a common seal.

In it the capital of the company is divided into shares that are transferable and it also has limited liability.

Merits: (a) Raise large amount of funds for its business activities.

(b) Provides transferability of shares.

(c) Has limited liability.

(d) Provides perpetual existence.

(e) Appropriate for large scale enterprises.

Demerits: (a) Difficult to establish.

(b) Hard to maintain any kind of secrecy.

(C) Slow decision-making by the management.

(d) Lack of motivation among people.

(e) Management is autocratic in reality and democratic in theory.

  1. Cooperative: A cooperative is a business organisation owned by a group of individuals an operated for their mutual benefit. The persons making up the group are called members. Coopers may be incorporated or unincorporated.

Some examples of cooperatives are water and electricity (utility) cooperatives, cooperatiu banking, credit unions and housing cooperatives.

Merits: (a) is easy to establish.

(b) Has an open membership

(c) Provides autonomous control.

(d) Provides limited liability.

(e) Has government support.

Demerits: (a) Capital raised is limited.

(6) Has an ineffective management.

(C) Lack of motivation and cooperation among people.

(d) Has reliance on government.

Issues in Selecting Business Organisation Forms: There are various issues while selecting any business form which are as follows:

  1. Nature of the business must be clear before it is started.
  2. Area of operations in which a business operates must be known.
  3. Management style of entrepreneur also plays an important role.
  4. It is necessary to examine the incorporation of limiting personal legal liability
  5. Extent or degree of control over the business also affects the selection of business ownership
  6. Degree to which an entrepreneur can stand risks is also important.
  7. It is essential to know the approximate amount of capital required for starting a business.
  8. The government interferences  may not be liked by every entrepreneur.

Qus.5. What is business environment? 

Or What do you understand by the concept of business environment?

Ans. A business enterprise is a part of society and the busin centerprise is a part of society and the business environment has direct relato with the business. The environment may impose various The environment may impose various constraints on business where bus enterprise do not have any control on environment. The environment is the ‘Success mantra’ of a business any control on environment. Therefore, adaptability and adjustability are the mantra’ of a business enterprise.

Business environment is made up of two words—’Business and Environment,

Meaning of Business: Business is an important institution of society, required for supply of goods and services, for certain job opportunities and for the contribution to the economic growth of the country. It is the organised effort of the enterprise to supply consumers with goods and services, for print All the activities of the business are organised and carried on, with an important purpose of earning print by supplying goods and services to consumers in order to satisfy their needs. People occupy central places, around whom, by whom and for whom business is run. According to Boono and Krutz, Business comprises of all profit seeking activities and enterprises that provide goods and services necessary to the economic system. It is the economic pulse to a nation, striving to increase society’s standard of living. Profit is a mechanism used for motivating these activities.

Meaning of Environment: Environment refers to all external factors which have a bearing on the functioning of business. These are primarily beyond the control of industrial enterprises and their management. It may pose threats to a firm or may offer immense opportunities for potential market exploitation. According to William F. Glueck and Lawrence R. Jauch, “The environment includes factors outside the firm which can lead to opportunities for threats to the firm. Although there are many factors but the most important factors are socio-economic, technological, suppliers, competitors and the government’

Business Environment 

By combining two words, ‘Business’ and ‘Environment’ we can say that, business environment refers to those aspects of the surroundings of business enterprise which affect or influence its operations and determine its effectiveness and success. It has been defined in the following ways:

Business environment is the aggregate of all conditions, events and influences that surround and affect it.

“Business environment is the climate or set of conditions-economic, social, political or institutional in which business operations are conducted’

‘In environment there are external factors which constantly spin out opportunities and threats to the business firm. Although there are many factors but most important among these are socioeconomic, technological, suppliers, competitors and government.”

‘Business environment is the total of all things external to business firm and industries which affect their organisation and operations

Thus, business environment refers to the process by which a strategist monitors by economic, governmental and legal market competitors, geographical and society settings to determine opportunities and threats to their firm.

Qus.6. What do you mean by internal and external environment of business? Explain main characteristics of business environment.

Or Explain the meaning and importance of business environment. Describe the recent political environment in India.

Or What do you understand by business environment? Explain the main characteristics and Importance of business environment. 

Or Briefly explain the meaning and importance of business environment. Also discuss the types of business environment. 

Ans.                                                  Business Environment

Business environment is the Elmate or set of conditions, i.e. economic, social, political or institutional in which business operations are conducted.

Characteristics of Business Environment

Following are the main characteristics of the business environment

  1. Totality of External Forces Business environment is the sum total of all those facto

available outside the business and over which the business has no control. It is many such forces that is why, its nature is of totality.

  1. Specific and General Forces: The forces present outs parts-specific and general.

(a) Specific: These forces affect the firms of an industry separately, e.g. customers.

competitive firms, investors, etc.

(b) General: These forces affect all the firms of an industry equally, e.g. social, political

technical situations.

  1. Interrelatedness: The different factors of business environed us suppose that there is a change in the import-export pony policy with the coming of a new government this case, the coming of new government to power and change in the import-export policy are not

economic changes respectively. Thus, a change in one factor affects the other factor.

  1. Dynamic Nature: It is clear that environment is a mixture of many factors and changes in or the other factors continue to take place. Therefore, it is said that

ace Therefore, it is said that business environment is dyne

  1. Uncertainty: Nothing can be said with any amount of certainty about the factors of the business environment because they continue to change quickly. The  change quickly. The professional people who determina business strategy takes into consideration the likely or same change Deichmann.

But this is a risky job. For example, technical changes are very rapid. Nobody can anticipate the possibility of these swift technical changes. Anything can happen, anytime. The same is the situation of fashion

  1. Complexity: Environment comprises of many factors. All these factors are related to each other Therefore, their individual effect on the business cannot be recognised. This is, perhaps the reason which makes it difficult for the business to face them.
  2. Relativity: Business environment is related to the local conditions and this is the reason why the business environment happens to be different in different countries and different even in the same country at different places.
  3. Long Lasting Impact: Business environment can bring in a long lasting impact on the conduct of business activities. So, it is important to analyse and diagnose the strength and opportunities and formulate strategies and policies so as to avoid risks and threats of the environment.

 Importance of Business Environment

There is a close and continuous interaction between the business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively.

As stated above, the business environment is multifaceted, complex and dynamic in nature and has a far-reaching impact on the survival and growth of the business. To be more specific, proper understanding of the social, political, legal and economic environment helps the business in the following ways:

  1. Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It helps the business enterprises for meeting the challenges successfully.
  2. Giving Direction for Growth: The interaction with the environment Couth for the business firms. It enables the business to identify the areas for growth and expansion of their activities.
  3. Continuous Learning: Environmental analysis makes the task of man makes the task of managers easier in dealing with business challenges. The managers are motivated to Leis in order to meet the predicted changes in the realm of business.
  4. Image Building: Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up Captive Power Plants (CPP) in their factories to meet their own requirement of power.
  5. Meeting Competition: It helps the firms to analyse the competitors’ strategies and formulate their own strategies accordingly,
  6. Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments.

 Recent Political Environment

The major changes that have been made recently in the political environment are as under:

  1. Changes in Political System: Some of the changes are as follows:

(a) Supreme Court disqualifies MPs and MLAs once they are convicted of any crime, to sit in the Parliament.

(b) Bringing political parties under the Right to Information Act, has become a major disruption

to politics.

  1. Changes in the Legislative System: These are as follows:

(a) Street Vendors Bill regulates urban street vending and ensures uniform legal framework to protect the rights of street vendors.

(b) Direct taxes code bill replaces the Income Tax Act and the Wealth Tax Act.

(C) Companies bill replaces the Companies Act, 1956 to modernise the regulation of corporate structure and governance in India.

(d) Constitution Bill, 2009 increases the reservation for women from one-third to 50% of the total number of seats and offices of chairpersons in Panchayats.

(e) Constitution Bill, 2010 increases the retirement age of the High Court Judges by three years

from 62 to 65,

(f) Prevention of bribery of foreign public officials and officials of public International

Organisations Bill, 2011 prevents corruption related to bribery of foreign public officials and that of public organisations.

(g) Constitution Bill, 2008 provides reservation for women in parliament and state legislative assemblies.

  1. Changes in Judicial System: These are as follows:

(a) The government and top judiciary has resolved to set up 1800 fast track courts in different parts of the country.

(b) The litigants may get updates on progress of their cases pending in subordinate courts online and through text messages on mobile phones

Internal and External Environment of Business and Types of Business Environment: Refer to Sec-C, Q,7.

Qus.7. What are the various factors that influence business environment?

Or Explain in brief LEPT factors of business environment.

 Ans.                              Factors Influencing Business Environment 

Environment means the surrounding external objects and influences under which something exists. There are two types of factors which influence the policy of a business organisation which are as follows:

  1. Internal Factors

The internal factors are those factors which can be controlled by the organisation itself. Organisation can alter these factors to suit the environment. There are a large number of internal factors which

Contribute either to failure of business. These factors either work as a strength or trouble to the organisation. Various internal factors are as follows:

  1. Value System, Business Policies, Laws and Regulations and those at the helm of affairs have important bearing on the choice objectives of the organisation, business policies and practices.
  2. Mission and Objectives. Aims and Targets: The business domain of the company, philosophy, business policies, targets and direction of development are guided by mission and objective company. These are decided by the business itself.
  3. Company Image and Brand Equity: The image of the company forming joint ventures or other alliances entering purchase and sale contracts and launch products.
  4. Management Structure and Nature: The organisation structure, the board of directors, extent, professionalisation of management, etc. are important factors influencing business decisions.
  5. Human Resources: The characteristics of human resources like skill, quality, moral, commit attitude, etc. could contribute to the strengths and weaknesses of an organisa
  6. Internal Power Relationship: Factors like amount of the support or top management enim from different levels of employees, shareholders and Board of Directors have important influence the decision and their implementation.
  7. Other Factors: These factors are as follows:

(a) Availability of business resources, productivity and working strength.

(b) Rand D technological capabilities in order to innovate and compete.

(C) Financial position and capital structure are also important internal environment factors

affecting the business performance, strategy and decisions.

(d) Method of production, machine and technology use.

(V) Efficiency of labour and management, colleague relation.

  1. External Factors

External factors are those factors which are beyond the control of the organisation External factors are obtained from micro and macro-environment.

  1. The micro forces that affect the organisation are:
  2. Firm: It includes all departments, such as management, finance, research and development, purchasing, operations and accounting. The relative success of the firm depends on the relative effectiveness in dealing with various other elements in a particular industry.
  3. Suppliers: Suppliers are those who supply the inputs like raw materials and components to the company. Every business enterprise requires a number of suppliers, who supply raw materials and components to the company.
  4. Customers: The major task of a business is to create and sustain customers. Customer is the central point of any business. Success of a business organisation depends upon identifying customers, their needs, tastes, likings, etc. and enhancing the level of customer satisfaction. Customers may be of different types:

(a) Wholesale customers,

(b) Retail customers,

(C) Industrial customers,

(d) Government and other institutions,

(e) Foreign customers.

  1. competitors: A firm’s competitors include not only the other firms, which market the same of ducts but also all those who compete for the discretionary income of the consumers.
  2. Marketing Intermediaries: These are the firms that aid the cormediaries: These are the firms that aid the company in promoting, selling the goods to final buyers. These are vital links between the company and the Il and distributing its goods to final buyers. These are consumers. Marketing intermediaries include middlemen and intermediaries include middlemen, marketing agencies, financial and physic intermediaries.
  3. Public: It is any group that has an actual or potential interest in or impact on an organisation’s ability to achieve its interests. Public may be media public (newspapers, magazines etc.) or local public (people living in the area where business unit is set-up).
  4. The macro forces of business environment involve the following types of business environment:
  5. Socio-cultural Environment: Social and cultural environment is highly relevant for a business unit as the variety of goods it produces the type of employees it gets and its obligation to society depend on the cultural environment in which the firm operates. Socio-cultural factors include people’s attitude towards work, social institution, ethical issues and social responsiveness of business.

Some of the important factors that influence operations in the social and cultural environment are:

(a) Cultural Environment: People of different cultures might use the same product but the mode

of the consumption, conditions of use or the purpose of use, etc. might differ among them prompting the company to change the product attributes, presentation methods, promotion

methods, which may be more suitable to changing character of market. 

(b) Demographic Environment: Demographic factors like population composition, density and

its distribution, rural urban mobility and income distribution, etc. also affect the socio-cultural


(C) Social Responsibility: Social concerns, such as the role of business in society, environment pollution, corruption, etc. affect the environment.

(d) Values and Beliefs: Social attitudes and values, expectations of

society from business, social customs, beliefs and practices, changing lifestyles, patterns and materialism, etc. are the factors that affect business environments.

(e) Education: Education awareness and consciousness of

advantage and is a major rights and work ethics of members of society, etc. are driving force towards globalisation. the factors which are operating in the environment that influence the business.

  1. Political Environment (P factor): Political environment consists of factors related to management of public affairs and their impact on the business of an organisation. Political environment has close relationship with the economic system and economic policy. There are various factors which influence the political environment like political system and its ideology, parties and centers of power, political structure and its goal, political process being followed in the country and political philosophy, government’s role in business and its policies and political philosophy, etc. A dynamic and stable political environment is indispensable for business growth.
  2. Economic Environment (E factor): Economic environment refers to all forces which have an economic impact on business. It consists of macro-level factors related to the means of production and distribution of wealth that have an impact on the business of an organisation. Industrial production, agriculture, planning, basic economic philosophy, infrastructure, national income, money supply, price level, population, savings, trade cycles are major factors which make up the total economic environment.
  3. Regulatory Environment: This environment consists of factors related to planning, promotion and regulation of economic activities by the government that have an impact on the business of an organisation. Some of the important factors operating in the regulatory environment are as follows:

(a) The constitutional framework, directive principles, fundamental rights and division of

legislative powers between central and state governments.

(b) Policies related to licensing, monopolicies, foreign investment and financing of industries.

(c) Policies related to distribution and pricing and also their control.

(d) Policies related to imports and exports of goods.

(e) Other policies related to public sector small-scale industries, sick industries, devil backward areas, control of environmental pollution and consumer protection.

  1. Supplier Environment: The supplier environment consists on reliability and availability of the factors of production or services that have an impact on the bus and organisation. There might be various factors operating under this

operating under this environment like cost continuous supply of raw-materials, availability of energy and human resources, spa after-sales services, infrastructural support and easy availability of the different factors of pro bargaining power of suppliers and existence of substitutes, etc. If there is shortage or any of things, the business is affected to a very large extent. If there is no proper supply of raw mate structural inputs like road transport, etc. the very existence of the business may be in danger

  1. Technological Environment (T factor): Technological environment also exerts consider influence on business. The technological environment consists of the factors related to know. applied and the materials and machines used in the production of goods and services that have an imp on the business of an organisation. It is through business that technology reaches up to the people
  2. Demographic Environment: A business unit is directly interested in demography, i.e. the she of population because market means people with money and inclination to spend their money so a satisfy their demands. In demographic analysis, we study the population composition, le. age, incon raw material or be in danger. vents considerable knowledge i.e. the study education levels, etc
  3. International Environment: International environment is very important for certain categories of industries particularly those which are directly dependent on imports or on global markets. This environment refers to foreign policy, both in case of political as well as monetary policy of the country, international trade agreements, foreign market situation (recession or boom), etc.
  4. Legal Environment (L factor): The central government, state government and local bodies affect business operations. They pass legislation on such matters as wages and prices, employment opportunities, safety and health at work, location, etc. These laws and regulations affect the day-to-day operations of business.

The changes in government policy lead to increase in opportunities and new business for firms. Business can increase if the firms analyse the environment and respond to changes.

Thus, business functions in its technological, political, legal, economic and socio-cultural environments. In fact, business and its environment are mutually related:

  1. Business is influenced by its environment and in turn, to a certain degree influences environment affecting the external forces.
  2. Environment factors are dynamic and so is the business.
  3. A single business firm may not affect business environment but business firms together may

affect business environment.

Qus.8. What is meant by economic environment? What are the factors affecting economic environment? Explain the importance of environmental study.

Or What Is business environment? Explain the economic environment of business. 

Ans. Business Environment: Refer to Sec-C, Q.5.

Economic Environment

growth, transfer of technology, fiscal, taxation

The Economic environment depends upon various policies which have their influence upon income consumption, savings, investments-domestic and foreign, flow of trade, borrowing, ration of technology, fiscal, taxation and monetary policies, employment and infrastructures cultural environment decides the population growth, rate of births and deaths, education fashion, tourism, etc. Political environment decides the type of government in the country and its relations with various countries. However, the political and 105 legal framework of the country and its relations with various countries.However political and legal

environment is influenced by the experiences of other countries and is social and government based experiences of other countries. The constitution framers studied the constitutions of a large number of countries before finally adopting the constitution. The fundamental directive principles have been based on our thoughts and requirements and they have been u number of times when circumstances so warranted.

The economic environment is also not static. India’s first adopted socialistic pattern of society, Nance of public sector between 1948-80, but gradually the policies were made more liberal. whim the changing world and domestic scenario in 1991. maior economic reforms were undertaken to give free hand to market forces. The process is continuing because of global and domestic compulsions and changes in environment. These changes in turn influence business but micro level business cannot change them. However, trade and industry associations do try to influence the thinking of politicians and the government. These efforts had some impact on liberalisation. Thus, environment is a dynamic factor in growth and all environments influence each other. However, ecological balance is also being affected by cutting of forests or building dams. The man through advancement of technology has reached other planets like moon and is trying to control weather, etc. Thus, no one is fully independent and each one acts and reacts on each other as shown in the figure:

  1. Economic Factors

Domestic and international economic factors, events and policies which affect economies are called economic environmental factors. In the ultimate analysis, the macro economic factors in the system are income, production, consumption, savings, investments, prices and employment which may be described as:

S.No Macro Economic Factors












Total investment in economy





Factors affecting investment decisions





Supply of goods and services


Productive Wealth.

Savings+Foreing investment +Past saving+Deficit.

Capital output ratio.

Income-Private and government consumption.

Monetary, fiscal, taxation investment and foreign investment policies

Supply of goods and services and demand of goods and services.

Money supply in system.

Domestic production+Improts-Exprots

Output manpower ratios.




The major objectives of the government of every country are to optimise rate of growth and employment so as to stabilise prices. In developing countries like India, the additional objectives are.

removal of poverty and to reduce disparities in regional development and personal income. To achieve these objectives, economic policies are framed which are all part of economic environment and may be described as follows:

  1. Income and employment policies.
  2. Investment policies including foreign investment.
  3. Capital output ratio, i.e. study of technologies.
  4. Policy of deficit financing.
  5. Production and production policies which include agriculture, industry, small and large scale

industries, industrial licensing, role of state in production.

  1. Price and distribution.
  2. Policies to control investments, i.e. monetary, banking and development banking, fiscal,

financial, taxation, foreign investment policies.

  1. Employment policies, i.e. labour intensive versus technology intensive techniques, labour

relations, exit policy, VRS and wage policies.

  1. Company law.
  2. Capital market including SEBI guidelines.
  3. Mergers and acquisitions.
  4. Public sector sickness.
  5. Industrial sickness.
  6. Foreign trade policies, i.e. import-export policies, WTO and International trade relations.
  7. Pollution control and environment protection.
  8. Infrastructural developments for growth like roads. power, education, health,

Telecommunication, shipping, air transport and others for ensuring higher growth.

  1. Consumer protection through MRTP, Competition Act, price and distribution controls and policies.
  2. Role of cooperatives in economic growth.
  3. Agricultural development.
  4. Globalisation.
  5. Corporate governance.
  6. Social and cultural aspects of business.
  7. Administration policy.
  8. Other macro policies affecting business.
  9. Non-economic Factors

The business environment is influenced by non-economic factors also both for setting up new enterprises and for the working of existing units. The non-economic factors are as follows:

  1. Social Environment: There are a number of aspects of social environment such as: (a) Attitude of society.

(b) Law and order.

(C) Corruption and dishonesty.

(d) Social system acceptable to society.

The working of any enterprise depends to a considerable extent on work ethos, i.e. attitude to work. People of certain states like Gujarat, Maharashtra, Tamil Nadu, Punjab, Western U.P. and Haryana are more hard-working than people of other states, hence industry and agriculture are more prosperous in these states.

Law and order is very necessary for the safety of employers and employees and therefore entrepreneurs select that area where law and order situation is better. When there was naxalite problem in West Bengal, many industries migrated from Kolkata to other places.

Every entrepreneur desires that he should be able to get clearance and approval without delay and without greasing the hands of officers and staff at various levels. To gauge the situation at different places, index or corruption has been prepared by some experts and those states are avoided which are on top of ladder 

The industry and trade prefer such a social system which accepts and cradle prefers such social systems which are acceptable to all. When there had been violence in Gujarat after Godhra incident Guiamat was being avoided. After the Godhra incident, Gujarat was being avoided. In places where the social system is better like Bengaluru and Hyderabad, industries prefer to be settled in these places.

  1. Political System: The political system includes the type of government whether democratic, dictatorship and its belief in free economy versus state control economy. The stability of government also influences development. In India, after 1977. instability of government also influenced development, and the future policies of government and some entrepreneurs believed in policies of watch and wait and search for more stable states.
  2. Legal Environment: The industry desire that there should be a proper system of justice. In this regard, India is considered as one of the best with three layered system of justice-District Court, high Court and the Supreme Court

Aggrieved parties can go to the courts even against the government which has helped to create confidence in business that it will get justice.

Importance of Environmental Study

Working of any business is influenced by economic environment, therefore, it is necessary to study how environmental changes affect marketability, growth and profitability of business and was challenges, opportunities and threats have to be faced with changes in environment. It is, therefore, necessary to study the dynamics of environment.

  1. It provides knowledge on current position and potential changes taking place, which help one

to frame long-term strategy for planning new technologies.

  1. It provides inputs to making strategic decisions. But mere collection of data is not enough, the data and information collected must be interpreted and used.
  2. It stimulates strategic thinking.

In brief, the advantages of environmental studies are as follows:

  1. It helps in long-term planning of capacities, products to be manufactured, pricing, advertisement and other policies.
  2. It helps in international trade, collaborations with foreign companies, planning for foreign capital, foreign borrowing and joint ventures.
  3. It helps to keep a unit modern, increasing productivity, life cycle of products and meeting regulations.
  4. It helps to plan for technological upgradation.
  5. It helps to find out impacts of environment on growth, development and stability of a business.
  6. It keeps one self dynamic.

William F. Glueck and Lawrence R. Jauch have stressed that ‘Environmental analysis and diagnosis give strategies proper time to anticipate opportunities and plan to take optional responses to these opportunities. It also helps strategies to develop an early warning system to prevent threats or to develop strategies which can run a threat to the firm’s advantage. They have also stated that ‘Firms which systematically analyse and diagnose the environment are more effective than those which don’t

Qus.9. Discuss how the political system of the country can influence the economic system of a country.

Ans. A political system is a system of politics and government and is compared to the law system, economic system and other social systems. It is a complete set of institutions, their relationships, political parties, trade unions and rules that govern their functions. A political system is of the following three types:

  1. Libertarian Political System: It is an open system with virtually complete group automat laws and present goals. Laws are limited to customary principles and rights while the goals representational and fixed to present popular interests and needs.
  2. Authoritarian Political System: It is closed with authoritative political positions open to only few by virtue of birth. Groups are autonomous so long as they do not try to alter the traditional state and goals.
  3. Totalitarian Political System: It is closed and customary where law is permitted only as it does not interfere with person’s interests. Law is constructed to satisfy the future goals.

Influence of Political System on Economic System

Each political system is associated with an economic system like democracy is associated with market economies, socialism is concerned with mixed economies. Some of these economies are:

  1. Command Economy. It is a centrally planned economy where state has the responsibility of making all types of decisions with respect to goods and services. The state is the owner of wealth, land and capital and the government allocates resources based on which industries want to develop. Central planning is less efficient in these economies.
  2. Market Economy: Decision-making on levels of production, consumption, investment and savings result from the interaction of supply and demand. These economies are concerned with capitalism where means of production are privately owned and operated. The major task is to establish a legal system and hence protect private property within which the people and firms can carry out their economic activity. Sometimes, government addresses the inequalities which are produced by market economies. ,
  3. Mixed Economy: It exhibits the features of both a market economy and a command economy. To achieve production and distribution, it combines state and market mechanisms. The state mechanisms include finding public education, healthcare, transportation and telecommunication and various other services. For example, in countries like Germany, Japan, Norway, etc. government determines industrial policy, regulates wage rates and even provides subsidies.

Qus.10. Give suggestions for strengthening business environment in India. Ans. Suggestions to Strengthen Business Environment in India

The overall Indian economy is booming but still challenges are there. So, following measures are suggested so as to meet the challenges and to strengthen the business environment.

  1. Fast Expansion of Industry: This is done by at least 10% per year so as to integrate not only the surplus labour in agriculture but also the unprecedented number of women and teenagers that join the labour force every year.
  2. Infrastructure Development: Its need cannot be overemphasized for economic prosperity and global integration. The challenge is to ensure strong, sustainable and balanced development through integration of economies with sustainable development of infrastructure.
  3. Simple Procedures: Simplifying procedures and relaxing entry barriers for business activities like promotion of foreign direct investment.
  4. Population Growth: Checking the growth of population and empowering the population through universal education and health care, India is the second highest populated country in the world after China.
  5. Foreign Trade and Investment: Government has reduced its control on foreign trade and investment and has shown liberalisation in telecom, banking and industries.
  6. Agriculture Growth: It is missing from the economy thus affecting the overall GDP growth rate because of lack of diversification in agriculture, boosting agricultural growth through development pro product processing.
  7. Retail Investors Participation: It is missing in the stock markets and the manipulation may be the way towards which the regulatory agencies have a very special role to play.
  8. Increasing Agricultural Production: In this regard, government should take immediate steps and create employment opportunities in the rural parts of the country so as to reduce the growing inequality between urban and rural areas and to decentralise powers and resources.
  9. Education, Health, Water and Sanitation: India should pay immediate action to ensure rapid development in these fields so that targets are completed without delay under time bound programmers’.
  10. Growth of GDP: This does not solve the chronic poverty and backward level of living norms of the people at the micro level. This growth should be sustainable with human development and decent employment potential.
  11. Legal Infrastructure: Indians must improve legal and administrative infrastructure, Improve trade facilities by cutting down bureaucracy and delays.
  12. Checking Corruption: Corruption will have to be checked by bringing in fast remedial public grievance system, legal system and information dissemination by using e-governance.
  13. Globalisation: India would do well to reorganise its protective agricultural policy in the name of rural poverty and food security and try to capitalise on globalisation of agriculture markets.
  14. Strength of Service Sector: India has solid strength at least for medium term in service sector primarily in IT sector, that should be tapped and further strengthened.

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