BUSINESS ENVIRONMENT

Section A

Ques 1 Attempt all 10 Ques. All Ques carry 1 mark each. (Ans in max 05 lines)

Define the following:-

(a) Business
Business is 'the organized effort of individuals to produce and sell, for a profit, the
goods and services that satisfy society's needs.' It can also be defined as an organization
which seeks to make a profit through individuals working toward common goals. The goals
of the business will vary based on the type of business and the business strategy being used.

(b) Business Environment

Business environment may be defined as the total surroundings, which have a direct
or indirect bearing on the functioning of business. It may also be defined as the set of
external factors, such as economic factors, social factors, political and legal factors,
demographic factors, and technical factors etc., which are uncontrollable in nature and
affects the business decisions of a firm.

(c) Types of Business Environment

There are, broadly, two types of environment, the internal & external environment.
Internal environment is the factors internal to the firm regarded as controllable factors
because the company has control over these factors; it can alter or modify such factors.

External environment are regarded as uncontrollable factors and are environmental

factors such as the economic "factors, sociocultural factors, government and legal factors,
demographic factors, geo-physical factors etc;

(d) Non-Economic Environment of a Business

Non-economic environment comprises social, political, legal, technological,

demographic and natural environment. All these have a bearing on the strategies adopted
by the firms and any change in these areas is likely to have a far-reaching impact on their
operations.

(e) Ethics
The term ethics commonly refers to the rules or principles that define right and
wrong conduct. Ethics is defined as the “discipline dealing with what is good and bad and
with moral duty and obligation”.
(f) Internal Environment
The internal factors are generally regarded as controllable factors because the
company has control over these factors; it can alter or modify such factors as its personnel,
physical facilities, organization and functional means, such as marketing mix, to suit the
environment.

(g) Unemployment
Unemployment means a person willing to work but unable to find a qualified job. It
is important to provide work opportunities to people as this helps them earn income to
meet the material needs and provide them with a sense of dignity and purpose of life.

(h) Poverty
Poverty refers to a situation when people are deprived of basic necessities of life. It
is often characterized by inadequacy of food, shelter and clothes.

(j) Privatisation
Privatization refers to the process of transfer of ownership, can be of both
permanent or long term lease in nature, of a state-owned or public owned property to
individuals or groups that intend to utilize it for private benefits and run the entity with the
major aim of profit maximization..

(k) Social Responsibility of Business

It signifies that all activities a business does over and above the statutory
requirement comes under corporate social responsibility. It depicts that the business has
some more moral responsibilities towards the society.

Ques 2 Attempt any 5 Ques. All Ques carry 2 marks each. (Ans in max 10 lines)
Write short notes.

(a) UNDP

The United Nations Development Programme (UNDP) is the UN's global

development network, advocating for change and connecting countries to
knowledge, experience and resources to help people build a better life.

UNDP is at the centre of the UN’s efforts to reduce global poverty. At the
global level, UNDP chairs the United Nations Development Group (UNDG), which
includes the UN’s key players in international development. UNDP is also helping to
reinforce joint action on development in such forums as the Economic and Social
Council, and the General Assembly of the United Nations. At the country level, UNDP
plays two important roles, one as a partner for development work and the other as
manager of the Resident Coordinator system.
(b) Corporate Responsibility
Corporations have a responsibility to those groups and individuals that they can
affect, i.e., its stakeholders, and to society at large. Stakeholders are usually defined as
customers, suppliers, employees, communities and shareholders or other financiers.
The responsibility to society at large may well be identical with the responsibility to its
various communities. Corporations have a special “social responsibility” over and above its
business purpose. In any case corporate responsibility consists of earning a licence to
operate by creating value for stakeholders, including shareholders, and society.
Corporate responsibility includes being consistent with ethical principles and
conduct such as honesty, integrity and respect for others. By voluntarily accepting
responsibility for its actions corporations earn their licence to operate in society.

(c) Inflation
Inflation can be defined as a sustained increase in the general prices for goods and
services. It can be measured as an annual percentage increase. Inflation is a phenomenon
where the average price of all goods is on an increasing trajectory for some stretch of time.
This may be accompanied by changes in relative prices. Inflation affects quite badly the
common people, as the rises in prices of goods is not matched by an equivalent increase in
the price of labour. There is a long run negative relationship between inflation and
economic growth in India.

(d) Liberalisation vs Privatisation

LIBERALISATION
Liberalisation refers to the process of eliminating unnecessary controls and
restrictions on the smooth functioning of business enterprises. It includes:
(i) abolishing industrial licensing requirement in most of the industries;
(ii) freedom in deciding the scale of business activities;.
(iii) freedom in fixing prices of goods and services;
(iv) simplifying the procedure for imports and exports;
(v) reduction in tax rates; and
(vi) simplified policies to attract foreign capital and technology to India.

PRIVATISATION
Privatisation refers to reducing the role of public sector by involving the private
sectors in most activities. The issues of privatisation include:
(e) IMF
The International Monetary Fund (IMF) is an international organization of "189 countries
working to foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable economic growth, and
reduce poverty around the world." Washington, D.C is it’s headquarter.
The organisation's objectives stated in the Articles of Agreement are: to promote
international monetary co-operation, international trade, high employment, exchange-rate
stability, sustainable economic growth, and making resources available to member
countries in financial difficulty.
It stabilizes the global economy in three ways. First, it monitors global conditions and
identifies risks. Second, it advises its members on how to improve their economies. Third, it
provides technical assistance and short-term loans to prevent financial crises.The IMF's goal
is to prevent these disasters by guiding its members.
 
(f) FDI
FDI refers to obtaining ownership in foreign business entity. It can also be attributed
that FDI circulates capital across national boundaries. It can be defined as an investor based
in one country (home country), acquires an asset in another country (host country), with the
intention to manage it. It is this dimension of management that distinguishes FDI from
portfolio investment in foreign stocks and other financial instruments.
FDI is characterized by decreased sensitivity to fluctuations in foreign exchange
rates. Since FDI is the result of a long term perspective of the investor, it is much less volatile
than FPI. The returns of FDI are generally in form of profit that is retained earnings, profits,
dividends, royalty payments, management fees etc.
Managing interest in the host country firm can be acquired by holding ten percent or
more of equity shares.

(g) Business Challenges of India

Here are some fundamental problems
 Lack of good intentions at the top: Its hard to think of any politician in country
whose intention is to do good for the people of the country. They are all mostly
there for the power and the money.

 Lack of trust in general:  Trust is important for people to build great businesses
and do good. Its still hard to find in India.

 Lack of empathy: lack of empathy in people -- lack of respect of other people's

time is a consequence of being selfish, and not understanding .
 Valuing the wrong things: Society values how much you earn over what you really
do. People often choose careers based on how much money they can make, over
what they would love to do.
  Poverty and inequality: There is a vast inequality amongst people, our population
is still under poverty line. Poverty and inequality stems from problems in our
governance, and general lack of empathy in people.
 Corruption: Again, lack of empathy, bad governance, causes corruption.
Corruption is further reinforced due to poverty and inequality.
 Scaling up our systems (educational, infrastructure etc.): need to scale up our
systems (like housing, sewage, electricity, education, transport etc.) to a much
better quality and quantity than there exists at the moment.

(h) Role of WTO

WTO is the only international organization dealing with the rules of trade between
nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the
world’s trading nations and ratified in their parliaments. The goal is to help producers of
goods and services, exporters and importers to conduct their business fairly. The WTO
ensures that trade is as fair as possible and as free as practicable by negotiating rules and
obeying them.
Role
1. Administering the WTO trade agreements.
2. Providing the forum for negotiations among its members concerning their multilateral
trade
relations.
3. Administering the mechanism for settling trade disputes between the member countries.
4. Monitoring national trade policies.
5. Providing technical assistance and training for developing countries.
6. Cooperating with other international organizations like the IMF,IBRD and its affiliated
agencies
with a view to achieving greater coherence in global economic policy making.

Section B
Ques 3 Attempt any 3 Ques. All Ques carry 10 marks each. (Ans in max 02
pages)

(a) Features of Business Environment and How it differs in India from

other countries

(1) Environment is the Surrounding Situation: Business environment means the

surrounding situation within which business organization has to operate. It is a sum total of
cultural, political, economical, social, physical, technological, legal and global forces which
move around the business organization. These forces collectively create a socio-economic-
political situation called business environment. Environment is an inseparable part of
business which can not operate in vacuum.
(2) Environment is Complex:  Business environment is governed by external factors making
it a complex phenomenon; difficult to grasp.

(3) Environment is Dynamic: Business environment is dynamic and perpetually evolving

resulting in continuous change in its character. It changes frequently due to various external
forces i.e. economic, political, social, international, technological and demographic.

(4) Environment is Multi Faceted: Environmental changes are frequent but their shape and
character depends on the knowledge & experience of the observer.

(5) Environment has Long Term Impact on Business: Environment has long lasting impact
on functioning of business organizations. Their growth and profitability depends upon the
environment under which they have to operate.

(6) Environment Needs Minute Study by Business Organizations: Every business

organization has to study changes constantly taking place in the environment forces. The
success of business depends on its ability to adjust itself with the local, national and
international environment.

(7) Environment Influences Business Organization: Business organizations have limited

capacity to influence business environment as it is the result of government policies and
social and technological changes which are basically external variables.

(8) Environment and Business Planning go Together: Business environment and business

planning are closely related concepts. Planning is useful for dealing with the problems
created by unfavorable environment.

(9) Environment needs Adaptability: Business have to learn to adjust with ever changing
business environment. One of the basic laws of nature is that adaptability is the price of
survival. Businessmen have to adjust with the prevailing environment.

(10) Business Environment Changes Regularly: The environment factors changes regularly.

The business environment in India is totally different as was in past. Future environment is
the product of past & present environment.

Major Differences from other countries

1. Political and Legal Differences

The political and legal environment of is different. The complexity generally increases as the
number of states in which a company does business increases. the political and legal
environment is not exactly the same in all the states of India.

2. Cultural Differences

The cultural differences, is one of the most difficult problems due to cultural diversity.
3. Economic Differences

The economic environment may varies from other countries.

4. Differences in the Currency Unit

The currency unit may sometimes cause problems of currency convertibility, besides the
problems of exchange rate fluctuations. The monetary system and regulations may also
vary.

5. Differences in the Language

the multiplicity of languages in India often encounters problems arising out of the
differences in the language.

6. Differences in the Marketing Infrastructure

The availability and nature of the marketing facilities available in different countries may
vary widely.

7. Trade Restrictions

A trade restriction, particularly import controls, is a very important problem.

8. High Costs of Distance

When the markets are far removed by distance, the transport cost becomes high and the
time required for affecting the delivery tends to become longer. Distance tends to increase
certain other costs also.

9. Differences in Trade Practices

Trade practices and customs may differ from other countries.

(b) Describe How Political Environment can affect your business

Political Environment- includes the political system, the government policies and
attitude towards the business community and the unionism. All these aspects have a
bearing on the strategies adopted by the business firms. The stability of the government
also influences business and related activities to a great extent. Further, ideology of the
political party also influences the business organisation and its operations. Again the trade
union activities also influence the operation of business enterprises. Most of the labour
unions in India are affiliated to various political parties. Strikes, lockouts and labour disputes
etc.also adversely affect the business operations. It could also be a mix of these factors.
 Political decisions affect the economic environment.
 Political decisions influence the country’s socio-cultural environment.
 Politicians can influence the rate of emergence of new technologies.
 Politicians can influence acceptance of new technologies.
The political environment is perhaps among the least predictable elements in the business
environment. This external element of business includes the effects of pressure groups.
Pressure groups tend to change government policies.
Corruption is a barrier to economic development for many countries. Some firms survive
and grow by offering bribes to government officials. The success and growth of these
companies are not based on the value they offer to consumers.

There are 4 main effects of these political factors on business organizations. They are:
 Impact on economy
 Changes in regulation
 Political stability
 Mitigation of risk

Impact on economy - The political situation of a country affects its economic setting. The
economic environment affects the business performance.

Changes in regulation - Governments could alter their rules and regulations. This could in
turn have an effect on a business.

Political Stability - Lack of political stability in a country effects business operations. This is
especially true for the companies which operate internationally.

Mitigation of Risk - Buying political risk insurance is a way to manage political risk.
Companies that have international operations use such insurance to reduce their risk
exposure.

(c) SEBI and its Role in Development of Businesses

Securities Exchange Board of India (SEBI) was established in 1988 to regulate the
functions of securities market and promote orderly development in the stock market. It was
set up with the main idea to keep a check on malpractices and protect the interest of
investors. Its main objectives are:

 To regulate activities in stock exchange and ensure safe investments

 To prevent fraudulent practices by striking a balance between business and its
statutory regulations

Role of SEBI:- SEBI has three major Roles as follows:

1. Protective function
2. Developmental function
3. Regulatory function

1. Protective functions are performed by SEBI to protect interest of investors and

provide safe investments. This entails:
  Checks on prices rigging: Price rigging refers to manipulating the prices of
securities.
 Prevents insider trading: Insider refers to directors, promoters of the
company. These people have sensitive information which they can use to
make profit. SEBI keeps a stringent check whether insiders are buying
securities of the company.
 Prohibits fraudulent and unfair practices: SEBI does not allow companies to
make misleading statements.

2. Developmental functions are performed by the SEBI to develop activities in stock

exchange to increase the business in stock exchange. Under this category,
following functions are performed by SEBI:

 Promoting training of intermediaries of the securities market

 Promote activities of stock exchange by adopting flexible methods such as
internet trading
 Initial public offer of primary market is permitted through stock exchange.

3. Regulatory functions are performed by SEBI to regulate the business in stock

exchange.

 SEBI registers and regulates the working of mutual funds and other
investment options.
 SEBI regulates takeover of the companies.
 SEBI conducts inquiries and audit of stock exchanges.

SEBI has played a really important role in regulating the capital markets and in the
development of our overall economy.

(d) RBI and its Roles

In India, the Reserve Bank of India (RBI) is the Central Bank. The RBI was established
in 1935. It was nationalised in 1949. The RBI plays role of regulator of the banking system in
India. The Banking Regulation Act 1949 and the RBI Act 1953 has given the RBI the power to
regulate the banking system.
The RBI has different functions in different roles.
1. RBI is the Regulator of Financial System
The RBI regulates the Indian banking and financial system by issuing broad guidelines and
instructions. The objectives of these regulations include:
  Controlling money supply in the system,
 Monitoring different key indicators like GDP and inflation,
 Maintaining people’s confidence in the banking and financial system, and
 Providing different tools for customers’ help, such as acting as the “Banking
Ombudsman.”

2. RBI is the Issuer of Monetary Policy

The RBI formulates monetary policy twice a year. It reviews the policy every quarter as well.
The main objectives of monitoring monetary policy are:

 Inflation control
 Control on bank credit
 Interest rate control
The tools used for implementation of the objectives of monetary policy are:

 Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR),

 Open market operations,
 Different Rates such as repo rate, reverse repo rate, and bank rate.
3. RBI is the Issuer of Currency
Section 22 of the RBI Act gives authority to the RBI to issue currency notes. The RBI also
takes action to control circulation of fake currency.
4. RBI is the Controller and Supervisor of Banking Systems
The RBI has been assigned the role of controlling and supervising the bank system in India.
The RBI is responsible for controlling the overall operations of all banks in India. These banks
may be:

 Public sector banks

 Private sector banks
 Foreign banks
 Co-operative banks, or
 Regional rural banks
The control and supervisory roles of the Reserve Bank of India is done through the
following:
Issue Of Licence: Under the Banking Regulation Act 1949, the RBI has been given powers to
grant licenses to commence new banking operations. The RBI also grants licenses to open
new branches for existing banks. Under the licensing policy, the RBI provides banking
services in areas that do not have this facility.
Prudential Norms: The RBI issues guidelines for credit control and management. The RBI is a
member of the Banking Committee on Banking Supervision (BCBS). As such, they are
responsible for implementation of international standards of capital adequacy norms and
asset classification.
Corporate Governance: The RBI has power to control the appointment of the chairman and
directors of banks in India. The RBI has powers to appoint additional directors in banks as
well.
KYC Norms: To curb money laundering and prevent the use of the banking system for
financial crimes, The RBI has “Know Your Customer“ guidelines. Every bank has to ensure
KYC norms are applied before allowing someone to open an account.
Transparency Norms: This means that every bank has to disclose their charges for providing
services and customers have the right to know these charges.
Risk Management: The RBI provides guidelines to banks for taking the steps that are
necessary to mitigate risk. They do this through risk management in basel norms.
Audit and Inspection: The procedure of audit and inspection is controlled by the RBI
through off-site and on-site monitoring system. On-site inspection is done by the RBI on the
basis of “CAMELS”. Capital adequacy; Asset quality; Management; Earning; Liquidity; System
and control.
Foreign Exchange Control: The RBI plays a crucial role in foreign exchange transactions. It
does due diligence on every foreign transaction, including the inflow and outflow of foreign
exchange. It takes steps to stop the fall in value of the Indian Rupee. The RBI also takes
necessary steps to control the current account deficit. They also give support to promote
export and the RBI provides a variety of options for NRIs.
Development: Being the banker of the Government of India, the RBI is responsible for
implementation of the government’s policies related to agriculture and rural development.
The RBI also ensures the flow of credit to other priority sectors as well. Section 54 of the RBI
gives stress on giving specialized support for rural development. Priority sector lending is
also in key focus area of the RBI.
Apart from the above, the RBI publishes periodical review and data related to banking. The
RBI plays a very important role in every aspect related to banking and finance.

(e) Roles and Functions of Commercial Banks and How they differ from
Public Sector Banks
A commercial bank is a financial institution that is authorized by law to receive
money from businesses and individuals and lend money to them. Commercial banks are
open to the public and serve individuals, institutions, and businesses. A commercial bank is
almost certainly the type of bank you think of when you think about a bank because it is the
type of bank that most people regularly use.
Banks has the following role in accelerating the economic growth of a country in the
following ways:
1. Accelerating the Rate of Capital Formation:
Commercial banks encourage the habit of thrift and mobilise the savings of people. These
savings are effectively allocated among the ultimate users of funds, i.e., investors for
productive investment. So, savings of people result in capital formation which forms the
basis of economic development.
2. Provision of Finance and Credit:
Commercial banks are a very important source of finance and credit for trade and industry.
The activities of commercial banks are not only confined to domestic trade and commerce,
but extend to foreign trade also.
3. Developing Entrepreneurship:
Banks promote entrepreneurship by underwriting the shares of new and existing companies
and granting assistance in promoting new ventures or financing promotional activities.
Banks finance sick (loss-making) industries for making them viable units.
4. Promoting Balanced Regional Development:
Commercial banks provide credit facilities to rural people by opening branches in the
backward areas. The funds collected in developed regions may be channelised for
investments in the under developed regions of the country. In this way, they bring about
more balanced regional development.
5. Help to Consumers:
Commercial banks advance credit for purchase of durable consumer items like Vehicles,
T.V., refrigerator etc., which are out of reach for some consumers due to their limited
paying capacity. In this way, banks help in creating demand for such consumer goods.

Functions of Commercial Banks:

Commercial banks are institutions that conduct business for profit motive by accepting
public deposits for various investment purposes.

The functions of commercial banks are broadly classified into primary functions and
secondary functions, which are shown in Figure:

The functions of commercial banks (as shown in Figure-1) are discussed as follows:
(a) Primary Functions:
Refer to the basic functions of commercial banks that include the following:
(i) Accepting Deposits: Implies that commercial banks are mainly dependent on public
deposits.
There are two types of deposits, which are discussed as follows:
(1) Demand Deposits: Refer to kind of deposits that can be easily withdrawn by individuals
without any prior notice to the bank. In other words, the owners of these deposits are
allowed to withdraw money anytime by simply writing a check. These deposits are the part
of money supply as they are used as a means for the payment of goods and services as well
as debts. Receiving these deposits is the main function of commercial banks.
(2) Time Deposits: Refer to deposits that are for certain period of time. Banks pay higher
interest on rime deposits. These deposits can be withdrawn only after a specific time period
is completed by providing a written notice to the bank.
(3) Advancing Loans: Refers to one of the important functions of commercial banks. The
public deposits are used by commercial banks for the purpose of granting loans to
individuals and businesses. Commercial banks grant loans in the form of overdraft, cash
credit, and discounting bills of exchange.
(b) Secondary Functions: Refer to crucial functions of commercial banks. The secondary
functions can be classified under three heads, namely, agency functions, general utility
functions, and other functions.
These functions are explained as follows:
(1) Agency Functions:
Implies that commercial banks act as agents of customers by performing various
functions, which are as follows:
(i) Collecting Checks: Refer to one of the important functions of commercial banks. The
banks collect checks and bills of exchange on the behalf of their customers through clearing
house facilities provided by the central bank.
(ii) Collecting Income: Constitute another major function of commercial banks. Commercial
banks collect dividends, pension, salaries, rents, and interests on investments on behalf of
their customers. A credit voucher is sent to customers for information when any income is
collected by the bank.
(iii) Paying Expenses: Implies that commercial banks make the payments of various
obligations of customers, such as telephone bills, insurance premium, school fees, and rents.
Similar to credit voucher, a debit voucher is sent to customers for information when
expenses are paid by the bank.

(2) General Utility Functions: Include the following functions:

(i) Providing Locker Facilities: Implies that commercial banks provide locker facilities to its
customers for safe keeping of jewellery, shares, debentures, and other valuable items. This
minimizes the risk of loss due to theft at homes.
(ii) Issuing Traveller’s Checks: Implies that banks issue traveler’s checks to individuals for
traveling outside the country. Traveler’s checks are the safe and easy way to protect money
while traveling.
(iii) Dealing in Foreign Exchange: Implies that commercial banks help in providing foreign
exchange to businessmen dealing in exports and imports. However, commercial banks need
to take the permission of the central bank for dealing in foreign exchange.
(iv) Transferring Funds: Refers to transferring of funds from one bank to another. Funds are
transferred by means of draft, telephonic transfer, and electronic transfer.
(3) Other Functions: Include the following:
(i) Creating Money: Refers to one of the important functions of commercial banks that help
in increasing money supply. For instance, a bank lends Rs. 5 lakh to an individual and opens
a demand deposit in the name of that individual.
Bank makes a credit entry of Rs. 5 lakh in that account. This leads to creation of demand
deposits in that account. The point to be noted here is that there is no payment in cash.
Thus, without printing additional money, the supply of money is increased.

(ii) Electronic Banking: Include services, such as debit cards, credit cards, and Internet
banking.

Public sector banks are those where majority of the stake in the bank is held by government.
Where as in private sector bank, majority is held by shareholders of the bank. In these banks, most
of the equity is owned by private bodies, corporations, institutions or individuals rather than
government. These banks are managed and controlled by private promoters.