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STD. XI Commerce

Organization of Commerce &

Management

Written as per the revised syllabus prescribed by the Maharashtra State Board of Secondary and Higher Secondary Education, Pune.

• Exhaustive coverage of syllabus in Question Answer Format.

• Covers answers to all Textual Questions.

• Relevant Marking Scheme for Each Question.

• Includes Additional Important Questions for better preparation.

• Mnemonics to facilitate easy answer recall.

• Quick Recap at the end of each chapter to facilitate quick revision.

• Simple and Lucid language.

• Includes GG - our very own mascot.

Salient Features:

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P.O. No. 126918

TEID: 12581_JUP

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including photocopying; recording or by any information storage and retrieval system without permission in writing from the Publisher.

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PREFACE We present to you "Std. XI Commerce: Organization of Commerce and Management" with a revolutionary fresh approach towards content thus laying a platform for an in-depth understanding of the subject. This book has been written according to the revised syllabus and guidelines as per the State Board and covers answers to all textual questions. In addition to this, we have included extra questions in each lesson that not only aim at covering the entire topic but also make students ready to face the competition. The sub-topic wise classified “Question and Answer” format of this book helps students in easy comprehension. Furthermore, we have provided model answers to each question in the form of pointers which makes it easy for students to memorize and reproduce the answers in their examinations. We have incorporated “Mnemonics” to facilitate easy answer recall. Every chapter ends with a Quick Recap to facilitate quick revision of the

lesson learnt. The model questions are provided with relevant marking schemes so as to highlight the importance of each question. We are sure this study material will turn out to be a powerful resource for students and facilitate them in understanding the concepts of this subject in the most lucid way. The journey to create a complete book is strewn with triumphs, failures and near misses. If you think we've nearly missed something or want to applaud us for our triumphs, we'd love to hear from you. Please write to us on: [email protected]

Best of luck to all the aspirants! Yours faithfully, Publisher. Edition: Second

Disclaimer This reference book is transformative work based on textual contents published by Bureau of Textbook. We the publishers are making this reference book which constitutes as fair use of textual contents which are transformed by adding and elaborating, with a view to simplify the same to enable the students to understand, memorize and reproduce the same in examinations. This work is purely inspired upon the course work as prescribed by the Maharashtra State Board of Secondary and Higher Secondary Education, Pune. Every care has been taken in the publication of this reference book by the Authors while creating the contents. The Authors and the Publishers shall not be responsible for any loss or damages caused to any person on account of errors or omissions which might have crept in or disagreement of any third party on the point of view expressed in the reference book. © reserved with the Publisher for all the contents created by our Authors. No copyright is claimed in the textual contents which are presented as part of fair dealing with a view to provide best supplementary study material for the benefit of students.

Gyan Guru (GG) We present to you our mascot 'GG', who has been proudly

introduced by us. GG is a student-buddy who pops up throughout the book and draws your attention to important bits

of knowledge also termed as 'Good to Know'. These 'Good to Know' sections help you understand a concept distinctly with a

corresponding example from your immediate environment. This is our initiative in education that helps linking learning to life

and we're hopeful that you are going to love it.

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Sr. No. Topic Name Page No.

1. Nature and scope of Business 1

2. Small Business 30

3. Private, Public and Global Enterprises 67

4. Internal Trade 96

5. International Business 132

6. Business Environment 169

7. Marketing 189

8. Nature and Significance of Management 219

Note: All Textual questions are represented by * mark.

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Chapter 06: Business Environment

` Miss Priya was conducting her class as usual and the discussion revolved around the term

‘Environment’. She explained her students that the environment impacts us in various ways. Miss Priya: What does your environment in this class consist of? Ajay: Air, benches, desks, books etc. Miss Priya: Absolutely right Ajay. I remember yesterday you were not well. What happened? Ajay: Ma’am, due to climatic change I had cold and fever. Miss Priya: Let’s take Ajay’s example. Here, Ajay fell ill due a sudden change in climate. He

does not have a control over the changing climate and hence it is a part of uncontrollable or external environment. Ajay, did you take your medicines on time?

Ajay: Yes Ma’am. Miss Priya: Good. Ajay looked after his health by taking medicines on time. Thus, taking

medicine and looking after our health forms a part of the controllable or internal environment.

How many of you know about the sweet shop just around the corner of our college?

(Everyone raise their hands) The shopkeeper once told me that he was witnessing a fall in demand for his

sweets. He looked puzzled and confused about the situation. He asked a few of his loyal customers the reason behind this. He came to know that people in general and elderly people in particular have become a lot more health conscious than before. They are more satisfied eating ‘Sugar‐free’ sweets.

Sushant: Ma’am, the change in people's preference was a part of the external environment, isn’t it?

Miss Priya: Absolutely correct. The shopkeeper, thus, started making sugar‐free sweets in addition to regular sweets. His employees quickly learnt the skill required to make sugar‐free sweets. This made the business successful as earlier. Can you tell me which type of environment do the employees fall under?

Sushant: Internal. Miss Priya: Good. Thus, the sweet shop was able to adapt to the threat posed by a change in

people’s preferences by making good use of its employees’ strength and skill in making sugar‐free sweets.

Hence, we can see that a business functions within the constraints of the business environment. In this chapter, you will learn about the meaning, importance and dimensions of business

environment. Meaning: Business can be defined as, “the organized efforts of enterprises to supply customers with

goods and services for a profit.” Nature: ‐ Business is undertaken to provide goods and services to customers in exchange of other

goods and services or in exchange of money. ‐ A business may be conducted at a small/large scale. The scale of business can be identified

from the sales volume of the business and the number of employees. ‐ The main objective of business is to earn profits.

06.Business Environment

Introduction

Meaning & Nature of Business

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‐ Business plays an important role in the society as: it supplies the necessary goods and services to the society and creates employment opportunities. ‐ It leads to income generation in the society and thus, improves the quality of life and the

standard of living. ‐ It results in economic growth and enhances the global presence of the country. ‐ Therefore, we can say that, business plays a vital role in the society.

Q.1. Discuss the relationship between business and its environment. [5] Ans: ‐ Environment refers to all the factors, elements, individuals, institutions, circumstances or

conditions that encircle or surround a particular object. ‐ Similarly, all the individuals, institutions and other forces that surround a business and have

an impact on the functioning of the business are included in the business environment. These various factors combine to form the business environment. ‐ The environment has a strong influence on the activities of every business. ‐ Every organization sets its mission, objectives and goals to be achieved. In order to achieve

pre‐set goals, it develops strategies. ‐ Formation of business strategy can be defined as establishing a business which is

environmentally fit. ‐ The business strategies are affected by both, external as well as internal environment. Hence,

the firm must formulate its objectives, goals and strategies only after properly analyzing these environmental factors.

‐ ‘Strengths’ and ‘Weaknesses’ are a part of internal environment whereas ‘Opportunities’ and ‘Threats’ are a part of the external environment.

‐ The factors included in the internal environment are controllable factors whereas; those included in the external environment are uncontrollable factors.

‐ A SWOT analysis (i.e. analysis of Strengths, Weaknesses, Opportunities and Threats) is the first step in the strategic management process of any business.

‐ The SWOT analysis is important because it helps in building a harmony between the business and the environment in which it operates.

Thus, business and environment are inter‐related as the activities of a business are continuously affected by the business environment.

What do you mean by ‘Business Environment’? ‐ The word ‘environment’ is derived from the French word ‘environ’ which means to encircle or

surround. ‐ The word ‘environment’ literally means the surroundings within which someone or

something exists. It is like a climate or culture which surrounds us. ‐ Thus, the sum total of all the individuals, institutions and other forces that surround a

business and have an impact on the functioning of the business are included in the business environment. These various factors combine to form the business environment.

Business‐Environment Inter‐Relationship

Meaning and Definitions of Business Environment

Internal Environment

Business DecisionExternal

Environment

Controllable Factors Uncontrollable Factors

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‐ Environment includes both, internal as well as external factors.

‐ The business environment is beyond the control of the individual enterprises and their management. However, it may affect the functioning of the business.

‐ The business environment comprises of technological, political, economic, social, cultural, global and natural factors.

Definitions:

‐ Barry M. Richman and Melvyn Copen explain environment as, “Environment factors or constraints are largely if not totally, external and beyond the control of individual enterprises and their managements”. These are essentially the ‘givens’ within which the firms and their management must operate in a specific country. These factors vary from country to country.

‐ William F. Glueck and Lowrence R. Jauch explains business environment as, “the environment includes factors outside the firm which can lead to opportunities for or threats to the firm. Although there are socio economic, technological, suppliers, competitors and government”.

The second definition states that the environmental factors consist of socio economic, technological, suppliers, competitors and government. Though these factors are highly relevant, two more factors can be included which are natural or physical environment and global environment.

*Q.2. What is the Business Environment? Explain the importance of Business Environment.

[10]

Ans: All the factors which surround the business and have an effect on the working of the business are known as the business environment.

It becomes important for the business units to understand and adapt to the changes that takes place in their environment. The business units that resist such change / adaptation will find it difficult to survive for a longer period of time. Hence, the study of business environment becomes important as it helps in formulating business strategies.

The importance of business environment is explained below:

‐ Environment provides various opportunities for the success of business. The business unit should be aware about its environment and the changes that take place in it. Proper study of the environment is necessary in order to take advantage of the opportunities instead of losing it to competitors.

‐ Environmental awareness can help the business unit to identify the threats before time. This helps the business firm to modify its existing functioning as per the changing requirement.

‐ The proper understanding of business environment makes the management sensitive towards the changing needs and expectation of consumers.

‐ In the modern business scenario, the business environment is getting extremely dynamic where changes are taking place at a very fast pace. Demanding customers, increased global competition, turbulent market conditions, etc. are some of the images of today’s business environment. A proper study of the business environment helps the mangers to cope with the changes that are taking place by developing suitable course of action.

‐ Proper understanding of the business environment helps in collecting qualitative information about the business environment. This further helps the business in formulating plans, policies and strategies so that it can cope up with the changes taking place.

‐ The organizations that continuously monitor the business environment are able to improve not only the existing performance but also continue to succeed in the highly competitive market for a longer time.

Importance of Business Environment

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Dimensions of business environment refer to the factors or elements of business environment.

It includes economic, social, political and legal conditions which are important for decision making and improving the performance of an organization.

*Q.3. Write a short note on: Political Environment of Business Organization. [5] Ans: ‐ Political systems or political conditions existing in the country constitute the Political

Environment. ‐ It indicates the general stability and peace in the nation and attitude of the elected

government representatives towards business. ‐ Based on the stability of the political environment, businessmen get confidence to make

investments in long term projects. ‐ India is a democratic country which has adopted a mixed economy. ‐ It has a stable political system where the government plays the role of a planner, promoter

and a regulator of the country’s economic activities. ‐ Government’s actions affect the operations of business organizations. ‐ The decisions taken by the government have a significant influence on the way business is

being conducted. ‐ The attitude of the government officials towards business may affect the business in a

positive / negative manner. ‐ The political environment is influenced by the ideology of the political party in power. ‐ The decisions taken are in line with the political philosophy followed by the ruling party in

the Centre and the State. Hence, it becomes very important for the business managers to be well versed with the

political environment of the country. The political environment of a business comprises of the following factors: ‐ The constitution of the country. ‐ Political systems, conditions, peace and stability. ‐ Political ideology and practices of the ruling party. ‐ Image of the country and its leadership. ‐ Attitude of the elected government representatives. ‐ The extent and nature of government intervention in business. ‐ Foreign policy of the country. ‐ The nature of relationship of our country with foreign countries. Good to Know: The policies adopted by the Government of Andhra Pradesh were

conducive to the development of various IT companies in Hyderabad. In 1991, the Government threw open, the economy for the foreign

companies thereby having a huge impact on local businesses. Q.4. Explain in brief the Economic Environment of Business. [5] Ans: ‐ Business is called an ‘Economic Institution’. ‐ Economic environment refers to all those economic factors that affect the functioning of a

business. ‐ It includes agriculture planning, infrastructure, price level etc. ‐ It has direct influence on the activities of the business. ‐ It mainly consists of: Economic conditions; Economic Policies and Economic Systems.

Dimensions of Business Environment

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They are explained as follows:

i. Economic Conditions: ‐ It refers to various factors in the economic environment of the country (arising from the

combined effect) like nature of the economy, stage of development, level of income, natural resources, industrial development, rate of interest, employment rate, capital formation etc.

‐ These factors are important as they determine the potential of development of the nation’s economy.

‐ Economic conditions which prevail in a nation have a great influence on how a business performs.

ii. Economic Policies: ‐ Economic policies are formulated by the government to direct the economic activities in the

country in a desired direction. ‐ These policies significantly affect the economic environment of the business. ‐ Economic policies are classified into Industrial Policy, Trade policy, Monetary Policy and Fiscal

Policy. ‐ Economic policies include: Import‐Export Policy; Agricultural Policy; Taxation Policy; Education Policy; Public Expenditure Policy; Foreign Investment Policy and Employment Policy. ‐ Business organizations have to be aware of such policies as they have a great influence on

the business activities.

iii. Economic Systems: ‐ Economic systems are of three types: Capitalist System (Owned, organized and managed by the private individuals); Social System (Owned, organized and managed by the government) and Mixed System (Owned by the government as well as private individuals). ‐ The economic environment has a significant impact on the success of any business. Interest

rates, inflation rates, changes in disposable income of people, stock market indices and value of rupee are some of the economic factors which influence business decisions.

‐ Short and long term interest rates also affect the functioning of business activities. It affects the demand for the products/services.

‐ Banking sector too plays a major role in the economic environment. ‐ Banking reforms have resulted in easier credit terms, better service and effective & reliable

services. ‐ Moreover, recent changes in the economic policies have resulted in developments in the

leasing and finance companies, public sector bonds, foreign capital in Indian businesses etc. Q.5. Write short notes on: [5 marks each] *i. Social Environment of Business Organization.

Ans: ‐ Social environment refers to the characteristics of the society in which the organization exists.

‐ It consists of social forces like customs and traditions, values, social trends, society’s expectations from business etc.

‐ These factors influence the business in a remarkable way.

‐ Any business cannot overlook the components of the social environment.

Good to Know:

The preference for vegetarian foods in India has forced many multinational companies like Mc Donalds and KFC

to add vegetarian food items in their menu.

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‐ The business practices and procedures must be in accordance with the belief of the society.

‐ For e.g. Growing number of working women and changing life‐style has increased the demand for household appliances in India.

Factors Meaning Example Opportunities

Traditions/Festivals Traditions refer to the social practices that are followed by people for decades or even for centuries.

Celebration of festivals like Diwali, Christmas, Eid etc. are traditions followed in India.

Festive seasons provide business opportunities to tailoring outlets, greeting card companies, fireworks, hotel industries, sweet shops, etc.

Values Value refers to the concepts that are highly valued by the society.

Social justice, equality of opportunity and national integration are some of the values followed by people in India.

Such values provide business opportunities like freedom of choice in the market, social responsibility of the business, etc

Social Trends Social trends refer to the practices that are currently being followed in the society.

There is a social trend of people being fit and healthy.

Recently, such social trends have opened up the market for diet drinks, organic food, mineral water, oil free products, sugar free biscuits, etc.

Hence, businesses should follow the social norms and be aware of the changes that take place

in the environment. They should avoid activities like adulteration, high prices, inferior quality products, corrupt practices etc. This is necessary for the business to grow and survive.

ii. Legal Environment. Ans: ‐ Legal environment consists of the framework of laws, regulations and court decisions which

guide and control the business activities. ‐ The government passes various laws at local, state and central level to regulate business

activities. ‐ It is imperative for business management to follow all the laws of the land. ‐ If the business fails to follow any laws, it may invite heavy fines, punishment and/or penalty. ‐ Hence, it is very important that the business should have adequate knowledge of all the rules

and regulations framed by the government of the country in which it operates. ‐ It also covers any planning, promotion and regulation of economic activities undertaken by

government which have an impact on the business activities.

‐ For e.g. Advertisements of cigarettes and alcoholic beverages are prohibited; Cigarettes packets should carry the statutory warning “Cigarette smoking is injurious to health”, the maximum retail price (MRP) of the product should be printed on the package, etc.

Some of the important laws influencing the business in India

Indian Contract Act, 1872

Workmen’s Compensation Act, 1923

Trade Union Act, 1926

Industrial Dispute Act, 1947

Factories Act, 1948

Companies Act, 1956

Industries (Development And Regulation) Act, 1951

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Standards of Weight and Measures Act, 1976

Foreign Exchange Regulation Act (FERA), 1973

Consumers Protection Act, 1986

Competition Act, 2002

Trade Marks Act, Minimum Wages Act, Payment of Minimum Wages Act, Indian Income Tax Act, Sale of Goods Act, Negotiable Instruments Act, SEBI Act etc.

*iii. Technological Environment. Ans: ‐ Technological environment is one

of the most important elements of the business environment.

‐ It exerts a significant influence on the business activities.

‐ J. K. Galbraith defines technology as “a systematic application of scientific or other organized knowledge to practical tasks”.

‐ Technology has introduced dramatic changes in the lives of people.

‐ It has created both, positive as well as negative impact.

‐ It has also introduced comfortable and luxury products. For e.g. Air conditioners, television, etc.

‐ Advancement in medicines, surgery etc. has created wonders whereas, inventions like hydrogen bombs, nuclear weapons, etc. have created horrors.

‐ Technology has created a considerable impact on the society. Every individual’s personal as well as social life has changed due to the advancements in technology.

The impact of technological changes on the society can be explained as follows:

a. Technology Reaches People through Business: ‐ Business is the medium through which technology reaches people.

‐ Society expects business to convert new discoveries into goods and services.

‐ Hence, business puts together various resources and undertakes necessary research. ‐ The new discoveries are then converted into products which can then be used by the society.

‐ It is due to the efforts undertaken by the business that new discoveries are made available to individuals else, the new ideas would just remain on paper or mock models in laboratories.

b. High Expectations of Consumers: ‐ Technology has contributed to the creation of affluent societies.

‐ It has increased the expectations of people. ‐ People from affluent societies demand things of higher quality, newer varieties of products,

pollution free products/services, safer products etc.

‐ Hence, the business has to produce and supply products according to their demand.

c. System Complexity: ‐ Technological advancements have

created new and modern machines.

‐ A machine or a system is composed of innumerable components.

‐ All the components should work together as per the directives in order to accomplish the desired task. Hence, it is important that each part should perform reliably.

‐ However, these machines though better and faster are complex in nature.

‐ In case of breakdown, experts will be required to repair them.

Good to Know:

In the past the only easy way to book a vacation was through a travel agent. This has all changed now with so many different

websites out there that can help you easily book a trip within a matter of minutes and that includes booking flight, hotel, car rentals and much more with a few clicks.

Good to Know:

The Space Shuttle is assembled from more than 2.5 million parts, 230 miles of wire, 1,060 valves, and 1,440 circuit breakers.

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d. Social Change:

‐ Technology has a significant

impact on social life.

‐ It affects social life in more than

one way.

‐ For e.g. A new invention may

replace thousands of workers and

at the same time may result in the

creation of a new city somewhere.

It may also result in creation of

new jobs.

Q.6. Explain the impact of government policy changes on Business and Industry. [10]

Ans: ‐ The government has made a significant impact on the working of the business and industry by introducing the policies of Liberalization, Privatization and Globalization (LPG).

‐ This has resulted in economic reforms and liberalization in the Indian corporate sector.

‐ The reforms aim at modernizing the industrial system of the country by introducing and implementing new techniques, which are beneficial for the growth of business and industries.

The impact of government policy changes on Business and Industry are as follows:

‐ The government, by changing the rules of industrial licensing and by allowing foreign firms to enter the Indian market, has increased competition for Indian firms.

The government has also opened up the industries which were earlier in the public sector like insurance, banking, telecommunication airlines etc. for the private sector.

‐ Today’s market is customer oriented. The customers are well informed and are made aware of their consumer rights. As the competition has increased, the customers can make a choice from a wide range of quality goods and services at reasonable cost.

‐ Rapid changes in technology have given rise to cut‐throat competition. Hence, the businesses have to develop new ways that will enable them to survive and grow in the competitive market. Such rapid change in technology makes it difficult for the smaller organizations to survive as it brings tough challenges.

‐ Prior to 1991, the organizations’ policies and practices were more or less stable in nature. However, after that, in order to survive in the market, it became necessary for the organizations’ to continuously modify their operations and policies.

‐ Increased competition and continuous advent of technology made it essential to have competent and committed people in the organization. Due to this, the business units are continuously taking efforts to train the workforce so that they can effectively handle the dynamic business environment.

‐ There has been a shift in the operations of businesses from production oriented to market oriented. Earlier, the organizations used to produce the goods first and then sell those goods in the market. However, now, due to the fast changing environment, the organizations have to first study the markets and then produce goods according to the demands of the market.

Impact of Government Policy Changes on Business and Industry

Good to Know:

Labour‐saving technology reduces demand for some workers but increases demand for others. If firms successfully deploy robotic labour, that will be good for robotics firms and the ancillary businesses that power them. It will likely give

rise to complementary industries which would then provide employment opportunities.

Good to Know:

India’s annual average growth rate from 1990 ‐ 2010 has been 6.6% which is almost double than pre reforms era.

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‐ The new trade policy has opened up the markets. This enables the organizations to earn foreign exchange which can be used by them to import raw materials, spares and components required by them for the production process.

‐ The government has reduced the finance availability to the public sector companies over the last one and half decades. Additionally, these public sector units have to face fierce competition from the private sector. This has forced the public sector companies to operate more efficiently and become self‐sufficient.

The changes in government policies have shown positive changes in the Indian business and industry. Even the industry has shown great willingness to adapt to the changes in the economy to face competition. They are now customer centric and ready to adopt new measures and technologies in order to improve customer relationship and satisfaction.

Q.7. What is Liberalization? Explain its need and also state the measures taken by the Indian

Government under the Liberalization process. [10] Ans: Meaning of Liberalization: ‐ As per Wikipedia, the internet encyclopedia, “liberalization refers to relaxation of previous

government restrictions usually in areas of social or economic policy”. ‐ Liberalization means removal of trade barriers, thereby making the economy free from

unnecessary licensing, tariffs, duty, controls etc. ‐ India adopted the liberalization policy in 1991 to overcome the severe economic crisis it was

facing. It was not able to honour the international payments and it was in a debt trap. Its foreign exchange reserves were also very low.

‐ In order to solve the problems, the Indian Government (led by the then Prime Minister, Dr. Narsimha Rao and the then Finance Minister, Dr. Manmohan Singh) undertook certain measures to overcome he crisis.

‐ These measures led to the process of economic liberalization movement. Need for Liberalization: The need for liberalization is as follows: ‐ Liberalization leads to nation’s rapid growth and development. ‐ It leads to opening up of the economy to foreign and private companies. This helps in

increasing the competition and thereby improving the quality of products and services. ‐ It removes restrictions and simplifies the Import‐Export procedures. This helps in expansion

of foreign trade and increases foreign investments. It also encourages various multinational companies to undertake their business in different countries.

‐ It increases the country’s share in the global market. Post liberalization, India was able to expand its international trade. This helped India in improving its foreign exchange reserves.

‐ Due to liberalization, various industries under the public sector like banking, insurance etc. were opened up to the private sector. This has led to the growth and development of these sectors.

‐ The main aim of liberalization is to reduce the restrictions and introduce free flow of capital between the countries. This helps businesses to have access to capital at a cheaper rate. This enables the business to undertake profitable investment.

Thus, liberalization process is a beneficial and desirable process for the developing economies as it helps in increasing their efficiency.

Measures Undertaken by the Indian Government: The measures that were undertaken by the Indian Government under the economic

liberalization process were: ‐ Abolishing the licensing requirements for most of the industries. ‐ Removal of restrictions on the import of goods and services.

Liberalization

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‐ Opening of basic telecommunication services to the private sector.

‐ Tax holidays up to five years for setting up industries in backward areas.

‐ Freedom to decide the scale of business activities.

‐ Simple procedures for imports and exports.

‐ Attracting foreign investment.

‐ Freedom in fixing prices of goods/services.

‐ Reduction in tax rates and lifting of unnecessary controls on the economy.

Q.8. What is Privatization? Explain its need. [10]

Ans: Meaning of Privatization:

‐ As per Wikipedia, the internet encyclopedia, Privatization is the process of transferring ownership of a business, enterprise, agency or public services from the public sector (Government) to the private sector (Business).

‐ Post privatization, the ownership, management and control of the public sector passes in the hands of private individuals.

‐ Today most of the governments across the globe have adopted privatization in order to boost the economy.

‐ The aim of privatization is to let the private sector to play a larger role in nation building.

‐ In India, the government adopted the policy of privatization in the year 1991 when the New Industrial Policy was adopted.

‐ The government started diluting its stake in public enterprises by adopting the policy of planned disinvestment. The sick public sector units were referred to the Board of Industrial and Financial Reconstruction (BIFR).

‐ China had also adopted privatization in the area of agriculture in 1978, when it transferred agricultural land to small scale farmers. This resulted in growth of agricultural produce by over 6% over the next 15 years.

Need of Privatization:

The need for privatization is as follows:

i. More Efficiency:

‐ The companies in private sector operate more efficiently.

‐ This is because; their ultimate goal is to earn profits.

‐ Such type of attitude is missing in governmental enterprises.

‐ Thus, privatization results in increased efficiency.

ii. Less Political Interference:

‐ Governmental enterprises face hurdles and difficulties in procedural systems (red tape).

‐ This leads to delay in operations and decision making.

‐ In private organizations, political interference is reduced.

‐ Absence of red tape helps the companies to make quicker, economic and commercial decisions.

iii. Reduction in Labour Problems: ‐ The government sector has a huge labour force that is protected by the strong labour unions.

‐ These labour unions cause strikes and agitations to force the management to accept their terms.

‐ However, in private sector, efficiency and commitment of employees are given more importance.

‐ They are given timely rewards and recognitions which helps in improving the efficiency of business organizations.

iv. Accountability:

‐ In private sector, employees’ responsibility and accountability are well defined. This helps in the smooth working of the business.

Privatization

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‐ However, in governmental organizations, there is no well defined responsibility.

‐ Most of the times, responsibility is merely avoided in public sector companies by passing the buck to one another.

‐ In simple words, accountability and well defined responsibility are required for efficient working.

v. Capital Market Discipline:

‐ When the public sector enterprises require capital, they get it from the government.

‐ However, this is not the case with the private sector enterprises. If they need capital, they need to prove themselves and gather the same from financial institutions or public.

‐ Hence, the private sector enterprises are under continuous scrutiny by financial experts as their ability to raise capital from the market is entirely dependent upon their performance.

Q.9. What is Globalization? Explain its features and also list its advantages. [10]

Ans: Meaning of Globalization:

‐ Wikipedia describes globalization as “an ongoing process by which regional economics, societies and cultures have become integrated through a globe spanning network of exchange”.

‐ The term ‘globalization’ refers specifically to economic globalization.

‐ In an economic sense, Globalization means the integration of national economies into international economies through trade, foreign direct

investment (FDI), capital flows, migration and the spread of technology.

‐ In simple words, globalization means a ‘boundaryless’ world where there is free flow of goods, services, information, capital and people across nations without any restrictions.

‐ Globalization makes all the nations interdependent resulting in better relations and improved interactions in the global economy.

‐ India moved towards globalization from the year 1991 after it reformed its policies.

Features/Advantages of Globalization:

The features of globalization are as follows:

‐ Globalization allows the organizations to set up and operate business in any part of the world. It creates a ‘boundaryless’ world. It allows free access to the world markets with no or minimum restrictions.

‐ Due to globalization, the goods and/or services can be traded easily. It gives access to quality raw materials, latest technology and cheap finance.

‐ The ‘boundaryless’ markets reduce the differences between international and domestic markets i.e. there is free movement of goods and/or personnel inter‐nations.

‐ Globalization removes restrictions, which enables the businesses to conduct their manufacturing, production and distribution activities in any part of the world.

‐ Opening up of markets results in inflow of capital into the economy. It leads to an increase in the foreign direct investment which results in economic development.

‐ The exchange of new ideas and latest technology across nations result in development of the economy at a faster rate.

Globalization

Good to Know:

Established in 1907, Tata Steel is among the top ten global steel companies in the world with an annual crude steel capacity of 28 million tonnes per annum

(mtpa). The company is now one of the world's most geographically‐diversified steel producers, with operations in 26 countries and a commercial presence in over 50 countries.

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I. Select the correct option from the options given below and rewrite the sentences:

[1 mark each]

*1. Business environment has tremendous impact on _______.

(A) government (B) people (C) business

2. Factors of Internal environment are _______.

(A) controllable (B) uncontrollable (C) stable

3. The two factors of internal environment are Strengths and _______.

(A) Threats (B) Weaknesses (C) Opportunities

*4. Environment awareness provides _______ signal.

(A) red (B) yellow (C) warning

*5. A change in the fiscal policy of the government is an aspect of _______ environment.

(A) political (B) social (C) economic

*6. A change in the judicial system is an aspect of _______ environment.

(A) economic (B) social (C) legal

*7. Level of literacy is an aspect of _______ environment.

(A) economic (B) social (C) political

*8. A change in the ruling government is an aspect of _______ environment.

(A) economic (B) social (C) political

9. _______ is a component of social environment.

(A) Fiscal policies (B) Laws (C) Customs and traditions *10. The New Industrial Policy was formulated in _______.

(A) 1961 (B) 1981 (C) 1991

11. Today’s markets have to be _______.

(A) Customer oriented (B) Production oriented

(C) Cost oriented

12. Liberalization involves _______.

(A) opening up of markets (B) imposing restrictions on exports

(C) reducing labour mobility

*13. Privatization implies reduction in the role of _______ sector.

(A) public (B) private (C) joint

14. The sick public sector units were referred to the _______.

(A) BIFR (B) IDBI (C) Government

*15. Globalization is concerned with _______ markets.

(A) regional (B) national (C) world

Multiple Choice Questions

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*II. Match the correct pairs: [1 mark each pair]

Group “A” Group “B”

i. Privatization a. Unlimited Liability

ii. Internal Environment b. Supreme Court Judge

iii. Liberalization c. Foreign Policy

iv. Political Environment d. World economy

v. Globalization e. Disinvestment

f. Delicensing

g. National Economic Relations

h. National Economy

i. Judicial System

j. Controllable factors Ans: (i e), (ii j), (iii f), (iv c), (v d). III. Write a word or phrase or a term which can substitute each of the following:

[1 mark each]

*1. Name of the analysis which is the systematic approach to understanding the environment.

*2. Uncontrollable factors of the business environment.

3. The main objective for which the business is undertaken.

4. The sum total of all individuals, institutions and other forces that surround the business and influence its functioning.

*5. The environment of business that includes customs and traditions, values, social trends.

6. The social practices that are followed by the people for decades or even for centuries.

7. The practices that are currently being followed in the society.

8. The environment that consists of laws, regulations and court decisions which control the business activities.

9. The policy of relaxation of previous government restrictions in social or economic policies.

*10. The process of transferring ownership of a business enterprise, agency or public service from the public sector to private sector.

*11. A boundaryless world where there would be free flow of goods, services, information, capital and people across nations.

Ans: 1. SWOT Analysis

2. External environment

3. Profits

4. Business Environment

5. Social Environment

6. Traditions

7. Social Trends

8. Legal Environment

9. Liberalization

10. Privatization

11. Globalization

Match the Pairs

One Word

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IV. Distinguish between the following:

1. Give a comparative chart between Economic Environment, Social Environment, Political Environment and Legal Environment.

Ans:

Sr.No. Economic

Environment Social

Environment Political

Environment Legal

Environment

Meaning

i. Economic environment refers to all those factors that affect the functioning of a business viz. economic conditions, economic policies and economic system.

Social environment refers to the characteristics of the society in which the organization exists. It includes the factors that affect business socially.

Political systems or political conditions existing in the country constitute the Political Environment.

Legal environment consists of the framework of laws, regulations and court decisions that guide and control the business at center, state and local level.

Consists of

ii. Economic environment consists of economic conditions, economic policies and economic system.

Social environment of a business consists of social forces like customs and traditions, values, social trends, society’s expectation from business etc.

Political environment consists of components like constitution of the country, attitude of government, foreign policy etc.

Legal environment consists of laws, regulations, court rulings, etc.

Stability

iii. Economic environment affects the stability of business as it is extremely dynamic in nature.

Social environment is more or less stable when compared to economic environment.

Political environment is dynamic in nature. In India, the political environment is more or less stable.

Legal environment is more stable in nature. This is mainly because, the formulated laws cannot be changed instantly.

Benefits

iv. It helps the business units in taking proper decision with respect to demand, supply, manufacturing, etc.

It helps the business units in satisfying customer in a better manner.

It helps in maintaining relations with government.

It helps in following prescribed laws and rules. This helps the businesses to carry out their operations smoothly.

Distinguish Between

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Examplesv. Examples of

economic factors that may affect the working of an enterprise are: interest rates, inflation rates, tax rates, stock market indices, foreign exchange rates etc.

Examples of social factors are festivals, religious beliefs, customs, traditions, etc.

Examples of political factors are political system, government intervention in business, relationship with foreign countries, etc.

Business need to adhere with various acts like Indian Contract Act, 1872, Industrial Dispute Act, 1947, Indian Income Tax Act, 1961 etc.

2. Give a comparative chart between Liberalization, Globalization and Privatization. Ans:

Sr.No. Liberalization Globalization PrivatizationMeaning

i. Liberalization means removal of trade barriers, thereby making the economy free from unnecessary licensing, tariffs, duty, controls etc.

Globalization means the integration of national economies into international economies through trade, foreign direct investment (FDI), capital flows, migration and the spread of technology.

Privatization is the process of transferring ownership of a business, enterprise, agency or public services from the public sector (Government) to the private sector (Business).

Methodology Usedii. Liberalization is the

initial step towards opening an economy.

Globalization is possible only after liberalization. This is because, it is a continuous process.

Privatization is possible oncethe conditions and restrictions are removed and

the private sector is given the

freedom to operate.

Importanceiii. It is required so as to

ensure reduction in cost, inflation, give opportunity to society to start business (in any sector), etc.

It is required so as to ensure free flow of goods and services, labour, capital and technology across nations.

It is required so as to boost the economy and allow private sector to play larger role.

Motiveiv. It aims at expanding

and ensuring growth of the economy.

It aims at creating a boundaryless market with free trade between nations.

It aims at improving the performance and efficiency of the company.

Advantagesv. It helps in encouraging

businessmen to undertake various types of businesses. This would indirectly help in raising standard of living, employment etc.

It helps in importing materials that country fails to sufficiently produce. It provide variety of choices of products to consumers at affordable costs.

It helps in reducing pressure on public sector and thereby reduce their monopoly.

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Competition to Local Ones vi. Liberalization generates

more local competition. This is because, new businesses from India will compete with the existing ones.

Globalization generates foreign competition. The business units that are set up abroad can compete with business units of the home country.

Privatization generates competition for public sector.

Benefitsvii. Liberalization

encourages the new businessmen to set up their business units due to reduced legal formalities.

Globalization benefits the customers by providing them with a wide range of products at lower costs.

Privatization helps in increasing efficiency in public sector enterprises.

V. State with reasons, whether the following statements are True or False: [5 marks each] *i. The external factors of business environment are controllable factors. Ans: This statement is FALSE. [External factors of business environment are uncontrollable factors]

Reasons: ‐ The factors in a business environment are classified into two: Internal and External factors. ‐ Internal factors consist of strengths and weaknesses of an organization. These can be

controlled by the business. ‐ Social, technological, legal, political and economic factors are all factors of External environment.

‐ These factors heavily influence the working of a business organization. ‐ However, the external factors are beyond the control of the organization. An organization

cannot alter or make any changes in the external factors. ‐ Business has to change its strategies and policies in accordance with the external factors. Thus, the external factors of business environment are uncontrollable factors. *2. Social environment consists of factors related to the management of public affairs. Ans: This statement is FALSE. [Political environment consists of factors related to the management

of public affairs] Reasons: ‐ Social environment refers to the characteristics of the society in which the organization exists. ‐ It consists of social forces like customs and traditions, values, social trends, society’s

expectations from business etc. ‐ A proper study of social environment helps the businesses to formulate the strategies based

upon the social factors. ‐ On the other hand, political environment includes nation’s political systems or conditions. ‐ It indicates the general stability and peace in the nation and attitude of the elected

government representatives towards business. ‐ The business class will prefer a government that promotes business and investment in the

economy. Thus, political environment consists of factors related to the management of public affairs. 3. Laws and court orders are a part of the political environment. Ans: The statement is FALSE. [Laws and court orders are a part of the legal environment] Reasons: ‐ Political environment includes nation’s political systems or conditions. ‐ It indicates the general stability and peace in the nation and attitude of the elected

government representatives towards business.

True or False

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‐ The business class will prefer a government that promotes business and investment in the economy.

‐ The political environment is influenced by the ideology of the political party in power. ‐ The decisions taken by the government are a part of the political environment. ‐ On the other hand, legal environment consists of the framework of laws, regulations and

court decisions which guide and controls the business activities. Thus, the laws and court orders are a component of the legal environment. *4. Liberalization refers to a set of measures and reforms aimed at the creation of an open

economy. Ans: This statement is TRUE. Reasons: ‐ As per Wikipedia, the internet encyclopedia, “liberalization refers to relaxation of previous

government restrictions usually in areas of social or economic policy”. ‐ Liberalization means removal of trade barriers, thereby making the economy free from

unnecessary licensing, tariffs, duty, controls etc. ‐ It involves opening up of the public sector to the private companies, increasing the flexibility

of labour market, lowering of tax rate for businesses, opening up of markets to foreign companies etc.

‐ Some of the measures taken by the Indian Government under the liberalization process were abolishing the licensing requirements for most of the industries, removal of restrictions on the import of goods and services, opening of basic telecommunication services to the private sector etc.

Thus, liberalization refers to a set of measures and reforms with the aim of creating an open economy.

*5. Privatization of the public sector requires some precautions to be taken by the

Government. Ans: This statement is TRUE. Reasons: ‐ As per Wikipedia, the internet encyclopedia, Privatization is the process of transferring

ownership of a business, enterprise, agency or public services from the public sector (Government) to the private sector (Business).


‐ Government has to take certain precautions before privatizing the public sector. ‐ There is a need to analyze the business environment before taking the decision of

privatization. ‐ The government should take care that privatization does not lead to monopoly or

concentration of power in few hands. ‐ They should also ensure that the Indian businesses are not facing any threats due to the

foreign companies entering the markets. ‐ The process of selling the public sector units should be done with utmost transparency. ‐ Privatization may lead to unemployment and hence, necessary measures should be taken to

provide adequate compensation to the workers who have lost their jobs. Thus, the above statement is true. 6. Privatization helps to improve the performance and efficiency of the company. Ans: This statement is TRUE. Reasons: ‐ As per Wikipedia, the internet encyclopedia, Privatization is the process of transferring

ownership of a business, enterprise, agency or public services from the public sector (Government) to the private sector (Business).

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‐ Privatization helps to improve the performance and efficiency of the company as the business becomes more profit oriented.

‐ Decision making is quicker in private sector units due to less political interference and absence of red tapism.

‐ In private sector, the employees are more efficient and committed as they are appreciated and rewarded for good performance.

‐ There is greater accountability in private sector which leads to more efficient working. ‐ The private companies are more conscious about their financial performance as it affects

their borrowing potential. Thus, the above statement is true. *7. Globalization results into unequal competition. Ans: This statement is TRUE. Reasons: ‐ Wikipedia

describes globalization as “an ongoing process by which regional economics, societies

and cultures have become integrated through a globe spanning network of exchange”. ‐ In an economic sense, Globalization means the integration of national economies into

international economies through trade, foreign direct investment (FDI), capital flows, migration and the spread of technology.

‐ Prior to the introduction of NEP, 1991, the Indian industries worked in a confined business environment viz. with minimum competition, etc.

‐ Due to minimum competition faced, they never focused on quality production / improvisation and followed the traditional production oriented approach for marketing the products.

‐ However, post globalization i.e. after the introduction of NEP, 1991, markets were opened up and foreign companies entered the domestic market.

‐ Unlike majority Indian industries, the international companies possessed technical know‐how and huge resources.

‐ Due to which, they were able to manufacture goods on a large scale and also at an affordable cost.

‐ The Indian firms had to face various hurdles such as high cost of capital, government controls, lack of technological know‐how etc. As a result, they were not able to compete at global scale.

Thus, globalization results in unequal competition. *Q.1. What is the need and importance of Business Environment? [5] Ans: Refer Q.2. *Q.2. Explain the need for Liberalization. [5] Ans: Refer Q.7. “Need for Liberalization” *Q.3. Write a short note on: Need of Privatization. [5] Ans: Refer Q.8. “Need of Privatization” *Q.4. What is Globalization? OR Write a short note on: Globalization [5] Ans: Refer Q.9. “Meaning of Globalization”

*Q.5. Write a short note on: Features of Globalization. [5] Ans: Refer Q.9. “Features of Globalization”

Additional Questions for Revision

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*Q.6. What are the advantages of Globalization? [5]

Ans: Refer Q.9. “Advantages of Globalization” *Q.7. Explain Globalization, Liberalization and Privatization. [10]

Ans: Refer IV (2) Q.8. Distinguish between the following: [5 marks each]

*i. Economic Environment and Social Environment

Ans: Refer IV (1) “Economic Environment and Social Environment” *ii. Political Environment and Legal Environment

Ans: Refer IV (1) “Political Environment and Legal Environment” *iii. Liberalization and Privatization.

Ans: Refer IV (2) “Liberalization and Privatization” *iv. Globalization and Liberalization.

Ans: Refer IV (2) “Globalization and Liberalization” Q.9. State with reasons, whether the following statements are True or False. [5 marks each]

*i. Privatization is the transformation of public sector into private sector either fully or partially.

Ans: This statement is TRUE.

Reasons: Refer Q.8. “Meaning of Privatization” *ii. Globalization is the expansion and extension of economic activities across political

boundaries of a country.

Ans: This statement is TRUE.

Reasons: Refer Q.9. “Meaning of Globalization”

QUICK RECAP

Economic Conditions

Economic Systems

Dimensions of Business Environment

Political Environment

Legal Environment

Economic Environment

Social Environment

EconomicPolicies

Technological Environment

Internal Environment

Business DecisionExternal

Environment

Controllable Factors Uncontrollable Factors

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i. Leads to rapid growth anddevelopment in the economy.

ii. Leads to opening of the economy toforeign and private companies.

iii. Removes restrictions and simplifies theimport‐export procedures.

iv. Increases the country’s share in theglobal market.

v. Led to the growth of sectors likebanking, insurance etc.

vi. Reduces the restrictions andintroduces free flow of capital betweenthe countries.

Need for Liberalization

i. Companies operate more efficiently. ii. Political interference is reduced. iii. Reduced labour related problems. iv. Employee accountability is well

defined. v. Improved capital market discipline.

Need of Privatization

India moved towards globalization from theyear 1991. It reformed its policies. i. Leads to freedom to set up and

operate business in any part of theworld.

ii. Goods and services can be bought andsold freely. It gives access to goodquality raw materials, latest technologyand cheap finance.

iii. Reduces the differences betweeninternational and domestic markets.

iv. Helps in removing restrictions to set upmanufacturing, production anddistribution facilities in any part of theworld.

v. Leads to an increase in foreign directinvestment.

vi. Results in development of theeconomy at a faster rate.

Features of Globalization

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