Business Environment Class 12 Notes: CBSE Business Studies Chapter 3

Meaning of Business Environment

Business environment refers to all the factors that are outside the control of the business enterprise but may equally affect the performance of the business. The social, political, economic, and technological factors that operate outside a business form a part of the business environment.

Features of Business Environment

• The totality of External Forces: Includes every external or outside force that could impact a business organisation such as government, competitors, etc.

• Specific and General Forces: Particular factors are those that have a direct impact on a single corporate organisation. General forces are those that have a direct impact on the broader industry yet have an indirect impact on a firm.

• Inter-Relatedness: Changes in general forces may have an impact on particular forces. A change in government (a political power, for example) may result in a change in tax rates or import-export rates (an economic force)

• Dynamic Nature: The external forces keep changing due to constant changes in technology, consumer preferences, availability of different types of raw materials, etc.

• Uncertainty: Constant changes in the environment make it difficult to predict changes in the external environment.

• Complexity: The interrelated and dynamic nature of external forces makes it difficult to prepare one single strategy to handle all the changes.

• Relativity: The impact of changes depends on business to business country to country region to region etc.

Importance of Business Environment

• Identification of Opportunities: It enables the firm to identify opportunities and get the first mover advantage. The positive external changes provide opportunities for a business organisation to improve its performance.

• Identifying Threat: It helps the firm to identify threats and provide early warning signals. Adverse changes in external factors act as ‘threats’ to the business which hinders performance. Early identification of threats helps managers to make strategies to convert threats into opportunities.

• Tapping Useful Resources: The business utilises resources of the external environment as inputs like finance, labour, etc., and supplies its output to the environment in the form of goods and services, taxes, etc.

• Coping with Rapid Changes: The business environment is extremely dynamic so the managers need to develop strategies not only to cope with the changes but also to use them as their strengths to improve their market shares.

• Planning and Policy Formulation: A clear understanding and analysis of the business environment help businesses formulate their plans and strategies to cope with all external changes.

• Improves Performance: The continuous monitoring of the business environment and changing business practices from traditional methods help businesses improve their present performance and also continue to retain their market position in the long run.

Dimensions in Business Environment

• Economic Environment: It refers to all those factors and forces that have an economic impact on the business activities. Key economic factors include inflation, money supply, price level, etc. For example, an increase in inflation rates results in a fall in disposable incomes and as a result, the demand for products falls.

• Social Environment: The social environment represents the society's conventions and traditions, values, culture, social trends, beliefs, and ethics in which businesses operate. Businesses, for example, are increasingly worried about the quality of things they offer as consumers become more conscious of their rights.

• Political Environment: It includes political stability such as political leadership, political stability, practices of the ruling party, etc. For example, a change in government, or an unstable government.

• Legal Environment: It includes all the legislation passed, administrative orders issued, court judgements, or decisions taken by a government or its related offices. For example, all cigarette packets must carry a warning ‘Smoking is injurious to health’.

• Technological Environment: It consists of forces relating to scientific improvements and innovations, which lead to better production techniques and methods to produce goods. For example, the shift from books to e-books, and telephones to touch-screen mobile phones. 

Economic Environment in India

The Indian economic environment consists of various factors that impact the means of production and distribution of wealth.

Some of the factors are:

• Economic development stages of the country.

• The economic structure of the country is a mixed economy structure.

• Economic policies such as fiscal and monetary policies of the government.

• Government’s economic planning for the country in terms of five-year plans etc.

• Economic indices of the country such as growth rate, national income, balance of payment, savings and investment rate, etc.

• Infrastructural facilities of the country such as health, communication, transportation, etc.

Objectives of India's Development Plans

• To raise the standard of living by reducing unemployment and poverty.

• To set up a strong industrial base with emphasis on heavy and basic industries.

• Self-Reliance.

• Reduction in wealth and income inequalities.

• Prevent exploitation and adopt a socialist pattern of development.

New Industrial Policy 1991

Due to economic problems like high government deficit, foreign exchange crisis, and rising prices, the Government of India developed a new industrial policy to overcome the economic problems.

Features:

• Industries under compulsory licensing were brought down to six by the government.

• Dereservation of industries was done and the role of the public sector was limited only to four industries.

• Disinvestment was carried out for many public sector industries.

• The foreign capital policy was liberalised. 

• FDI up to 100% was permitted for many sectors.

• Automatic grants were given for technology agreements with foreign countries.

• The Foreign Investment Promotion Board (FIPB) was set up to promote foreign investment in India.

Liberalisation

It is a reform that was introduced to remove unnecessary controls, licensing, and government restrictions in an economy. This marked the end of the licence raj in India. 

The main objectives of introducing liberalisation were:

• To restrict licensing requirements to only a few core industries.

• To remove all restrictions related to scale of operation expansion or contraction of business activities.

• To remove restrictions on the movement of goods and services.

• To provide freedom to fix prices.

• To reduce tax rates and remove unnecessary control.

• Twinkle import of foreign capital and technology.

• To simplify the procedures of import and export.

Privatisation

It refers to the transfer of development responsibilities from the state to the private sector. Private sector enterprises are those in which the government owns less than 51 percent of the company.

Objectives:

• To introduce plant disinvestment of the public sector. 

• Dilute the ownership stake in public sector companies to less than 51%.

• Establishment of the Board of Industrial and Financial Reconstruction to evaluate the loss-making and sick enterprises. 

• Disinvestment means to transfer ownership from the public sector to the private sector.

Globalisation

• Globalisation entails making it possible for the world's diverse economies to participate in the creation of a global economy. This was done to facilitate the free movement of imports and exports around the world.

• Globalisation promoted fast technological progress since geographical barriers were no longer an impediment.

Demonetisation

• The term demonetisation means to invalidate all the currency notes of a particular denomination by the government of a country.

• The Indian Government demonetised the two largest denomination notes of Rs 500 and Rs 1000 on 8th November 2016.

• This move aimed to curb corruption and illegal activities and stop the hoarding of black money.

Features of Demonetisation

• After demonetisation, cash is deposited into banks for exchange with new notes which makes the payment of tax compulsory with penalty rate.

• The government introduced demonetisation to reduce tax evasion.

• Demonetisation reduces the cash transactions in the economy which means more savings through the financial system and improving tax payment system.

• Demonetisation facilitates tax administration and paves the way for a cashless economy

Impact of Demonetisation

Impact of Government Policy Changes on Business and Industry

The LPG reforms brought about a significant impact on Indian business and industry. The challenges are:

• Increased competition: The increase in the number of Indian firms and the entry of foreign companies increased competition, especially in the service industry.

• More demanding customers: An increase in the number of enterprises gives consumers a wider choice of products leading to a rise in expectations and demands.

• Rapidly changing technological environment: Fast-changing technology requires companies to install the latest machinery, and adopt the latest techniques of production leading to an increase in investments in the business.

• The necessity for change: With the change in government policies businesses had to modify their policies and practices, invest in research and development, innovation, etc.

• Need for developing human resources: With change in technology business enterprises need to educate and train their staff so that they are competent to handle changes.

• Market orientation: With increased awareness among consumers business enterprises had to shift the product-oriented operations to market-oriented operations.

• Loss of budgetary support to the public sector: The public sector had to run in competition with the private sector. Therefore, they had to organise their resources and functions efficiently.

5 Important Topics of Business Studies Class 12 Chapter 3 You Shouldn’t Miss!

Importance of Class 12 Business Environment Chapter 3 Notes PDF

• The Class 12 Business Environment Chapter 3 Notes PDF is an essential resource for students preparing for their board exams. 

• These notes offer a clear and concise overview of the various external factors that impact business operations, including economic, political, social, and technological influences. 

• By using these notes, students can easily understand how the business environment affects decision-making and strategy development. 

• The PDF format allows for convenient access and quick revision, making it easier for students to review key concepts and perform well in their exams.

Tips for Learning the Class 12 Business Studies Chapter 3 Business Environment Notes

• Start by familiarising yourself with the fundamental components of the business environment, such as economic, political, social, and technological factors. Grasping these basics will help you understand how each element influences business decisions.

• Connect the concepts you learn with real-world business scenarios. This will make the information more relatable and easier to remember.

• After studying each section, summarise the key points in your own words. This practice will reinforce your understanding and make revision more efficient.

• Visual aids like diagrams, flowcharts, and tables can help you organise information and see the connections between different aspects of the business environment.

• Revisit the notes regularly to keep the concepts fresh in your mind. Focus on areas that you find challenging and use Vedantu’s PDF notes for quick and effective revision.

• Work on questions that require you to apply your knowledge to specific business situations. This will help you develop a deeper understanding and prepare for application-based exam questions.

Conclusion

Chapter 3, Business Environment, is crucial for understanding the various external factors that influence business operations and decision-making. This chapter covers essential components such as economic, political, social, and technological environments, providing a comprehensive view of how these elements interact and impact businesses. Vedantu’s notes simplify these concepts, making it easier for students to grasp and apply the material effectively. Understanding this chapter will not only enhance your understanding of the business environment but also prepare you to analyse and adapt to external factors in real-world business scenarios.

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