Business Environment Solved Papers: November' 2011 | Dibrugarh University

2011 (November)
Commerce (General/Speciality)

1. Answer as directed: (1x8=8)
(a)    Which of the following is an internal factor of business environment?
(i)      Value system
(ii)    Company’s image
(iii)   Management structure
(iv)  Company’s financial position
(v)    All of the above factors
(b)   There is no difference between economic growth and economic development. (True of False)
(c)    The units set up under SEZ, must be a foreign exchange earner. (True or False)
(d)   Capital market deals in short-term/long-term Loanable funds. (True or False) Money market deals in short-term Loanable funds. Capital market deals with long term funds.
(e)   Dunkel Draft” was proposed in the Uruguay round of GATT.
(f)     SDR’s are also called as “Paper Gold”. 
(g)    Write the full form of SAFTA. South Asian Free Trade Agreement
(h)   Mention an adverse impact of globalization on the Indian economy. outsourcing of jobs to developing countries has resulted in loss of jobs

2. Write short notes on: (4x4=16)
(a)    SWOT analysis
Ans: SWOT analysis is a simple framework for generating strategic alternatives from a situation analysis. It is applicable to either the corporate level or the business unit level and frequently appears in marketing plans.
 SWOT (sometimes referred to as TOWS) stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis consists of the following two activities: 
a.       An assessment of the organization’s internal Strengths and Weaknesses and
b.      An assessment of the Opportunities and Threats posed by its external environment
a)      Assessing the Internal Environment
Internal scan or assessment of the internal environment of the organization involves identification of its strengths and weaknesses i.e., those aspects that help or hinder accomplishment of the organization’s mission and fulfillment of its mandate with respect to the following Four Ps:
1.       People (Human Resources)
2.       Properties (Buildings, Equipments and other facilities)
3.       Processes (Such as student placement services, M.I.S etc.)
4.       Products (Students, Publications etc.)
b)      Assessing the External Environment
External scan refers to exploring the environment outside the organisation in order to identify the opportunities and threats it faces. This involves considering the following:
1.       Events, trends and forces in the Social, Technological, Economical, Environmental and Political areas (STEEP).
2.       Identifying the shifts in the needs of customers and potential clients and
3.       Identification of competitors and collaborators.

(b)   Present International business environment
Ans: The international business environment can be defined as the environment in different sovereign countries, with factors exogenous to the home environment of the organization, influencing decision-making on resource use and capabilities.
International business environment refers to totality of all the factors viz. geographic, economic, financial, socio-cultural, political, legal, technological and ecological which are external to and beyond the control of individual business enterprises. International business environment is more complex than the business environment because international business environment consists of foreign and global factors, which are external to domestic environment. A firm is generally familiar with the factors operating at the national level but a firm has to be aware of various factors operating in a country of trading partner. Thus, international business environment is sum total of domestic, foreign and global environments.
International business environment consists of a number of micro-level and macro-level factors operating at domestic level, foreign level and global level. Accordingly various factors constituting business environment may be grouped as under:
(i) Domestic Environment
(ii) Foreign Environment

(iii) Global Environment
Ans: Like on the lines of IMF and the World Bank, it was initially decided at the Bretton Woods conference to set up the International Trade Organisation (ITO) to promote and facilitate international trade among the member countries and to overcome various restrictions and discriminations as were being practiced at that time. But the idea could not materialise due to stiff opposition from the United States. Instead of altogether abandoning the idea, the countries that were participants to the Bretton Woods conference agreed upon having some arrangement among them so as to liberalise the world from high customs tariffs and various other types of restrictions that were in vogue at that time. This arrangement came to be known as the General Agreement for Tariffs and Trade (GATT).
GATT came into existence with effect from 1st January 1948 and remained in force till December 1994. Various rounds of negotiations have taken place under the auspices of GATT to reduce tariff and non-tariff barriers. The last one, known as the Uruguay Round, was the most comprehensive one in terms of coverage of issues, and also the lengthiest one from the point of view of duration of negotiations which lasted over a period of seven years from 1986 to 1994.
One of the key achievements of the Uruguay Round of GATT negotiations was the decision to set up a permanent institution for looking after the promotion of free and fair trade amongst nations. Consequent to this decision, the GATT was transformed into World Trade Organisation (WTO) with effect from 1st January 1995. The head quarters of WTO are situated at Geneva, Switzerland. Establishment of WTO, thus, represents the implementation of the original proposal of setting up of the ITO as evolved almost five decades back.
(c)    World Bank
Ans: The World Bank or the International Bank for Reconstruction and Development (IBRD) was established in 1945 under the Bretton Woods Agreement of 1944. An International Monetary and Financial Conference was held at Bretton Woods, New Hampshire during July 1-22, 1944. The main purpose of the conference was finalisation of the Articles of Association of IMF and establishment of an institution for the reconstruction of the war shattered world economies. Thus, the conference has given birth to World Bank or International Bank for Reconstruction and Development (IBRD). World Bank was established to provide long-term assistance for the reconstruction and development of the economies of the member countries while IMF was established to provide short term assistance to correct the balance of payment disequilibrium.
There are the four basic objectives of the World Bank’s funding strategy:
a)      To make sure availability of funds in the market.
b)      To provide the funds at the lowest possible cost to the borrowers through appropriate currency mix of its borrowing and opting to borrow when interest rates are expected to rise.
c)       To control volatility in net income and overall loan changes.
d)      To provide an appropriate degree of maturity transformation between its lending and the borrowing. Maturity transformation depicts the Bank’s capacity to lend for longer period than it borrows.

3. (a) Explain the concept and significance of business environment. (7+7=14)
Ans: Concept: Business Environment
Business is any activity undertaken for the purpose of producing or selling a particular commodity r service and earns a profit. The business has several dimensions such as purchasing the inputs, converting the inputs into the output, selling that output at a profitable price. Every dimension of a business depends upon several factors. Hence a business is influenced by several factors, all them put together are described as Business Environment. A business can grow and prosper in a particular environment just as a plant can grow in a particular soil, climate, water supply etc.  Hence the entrepreneur has to pay attention to the environment in which he has to conduct his business activities. If he is able to adapt his business to the environment effectively and efficiently the business can make higher profits. This makes the study of business environment important.
According to Keith Davis, “Business environment is the aggregate of all conditions, events and influences that surrounds and affects the business.”
According to wheeler, “Business environment is the total of all things external to business firms and industries which affect their organisation and operations.”
Importance of Business Environment
There is a close and continuous interaction between the business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively. As stated above, the business environment is multifaceted, complex, and dynamic in nature and has a far-reaching impact on the survival and growth of the business. To be more specific, proper understanding of the social, political, legal and economic environment helps the business in the following ways:
1.       Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It helps the business enterprises to exploit business opportunities and face the threat associated with such opportunities. For example, Maruti Udyog became the leader in the small car market because it was the first to recognize the need for small cars in India.
2.       Continuous Learning: Environmental analysis makes the task of managers easier in dealing with business challenges. The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business.
3.       Image Building: Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up Captive Power Plants (CPP) in their factories to meet their own requirement of power.
4.       Ensures Optimum Utilization of Resources: The study of business environment is needed as it ensures optimum use of resources available. For this, the study of economic and technological environment is useful. Such study enables organization to take full benefit of government policies, concessions provided, and technological developments and so on.
5.       Giving Direction for Growth: The interaction with the environment leads to opening up new frontiers of growth for the business firms. It enables the business to identify the areas for growth and expansion of their activities.
6.       Coping with rapid changes: All sizes and all types of enterprises are facing increasingly dynamic environment. In order to effectively cope with these significant changes, managers must understand and examine the environment and develop suitable courses of action.
7.       Improving performance and meeting competition: the enterprises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.

8.       Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments.
9.       Keeping Business Enterprise Alert: Environment study is needed as it keeps the business unit alert in its approach and activities. In the absence of environmental changes, the business activities will be dull and lifeless. The problems & prospects of business can be understood properly through the study of business environment. This enables an enterprise to face the problems with confidence and secure the maximum benefits of business opportunities available.
10.   Understanding Future Problems and Prospects: The study of business environment enables to understand future problems and prospects of business in advance. This enables business organizations to face the problems boldly and also take the benefit of favorable situation.

(b) Discuss the external factors of business environment. 14
Ans: External Environment: The external environment is made up of micro and macro environment.
Micro Environment: This refers to the factors which influence the prospects of a particular firm; the firm can influence them with certain efforts. They are as follows:
a) Customers: The type and the nature of the customers influence the rate of growth of any firm. The firm has to be very particular about choosing the inputs and transforming them in to the output. The cost factor is subsidiary if the firm is dealing with such customers. If the customers are more commoners the quality of the commodity if less important than the cost of production. The customers want the commodity at a lower price so the firm will have to conscious about the cost in purchasing the inputs, in employment of labour, in packing and such other factors influencing the cost.
b) Competitors:  In modern age an absolute monopoly is a very rare thing. Most of the FIRMS have to work in some type of competition such as Monopolistic Competition or Oligopoly. A Firm has to be particular about the intensity of the competition. If the competition is severe the firm will have to be very particular about keeping the costs at the lowest level so that it can sell the commodity at a competitive price.
c) Suppliers:  The quality of the commodity and the cost of production are considerably influenced by the supplies of the inputs. If the inputs are supplied at economical prices, are of standard quality and if the supply is uninterrupted and timely the firm can produce a standard quality of a commodity and sell it at reasonable prices. Often the firms employ more than one supplier so as to ensure an uninterrupted supply of inputs. If the supplies of inputs are regular, consistent and reliable there is no need to keep a larger quantity in stock.
d) Channel Intermediaries: They refer to the different levels in the chain from the production unit to the final customer. The chain incorporates the stockists, the wholesalers, the distributors, the retailer etc. If there is a high level of efficiency maintained at every part of the chain the commodity can reach the final consumer in good condition and at a reasonable price. So the Firm has to select and maintain efficient intermediaries. The firm has to offer them proper terms
e) Society: The prospects of a firm depend upon the society in which it has to work and sell its products. In a homogenous society the job of the firm is easy. The people have almost the same habits likes and dislikes, values and ethical norms. In a heterogeneous society the job of the firm is difficult. A particular product may be acceptable to a particular section of the society but not acceptable to some other sections. In a country like India a firm has to into consideration all types of sections of the community such as the religious sections, the caste, the sect, language, region etc.
Conclusion: All these forces influence the chances available to a firm to survive and develop.
Macro Environment: The macro environment comprises of those forces which influence all business firms operating in an economy. They can be studied under the following categories: economic environment, political and regulatory environment, social/ cultural environment, demographic environment and technological. The components of these environments are discussed as below:
a) Economic Environment:  The survival and success of each and every business enterprise depend fully on its economic environment. The main factors that affect the economic environment are:
(i) Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth.

(ii) Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are: Industrial policy, Fiscal policy, monetary policy, foreign investment policy and Export –Import policy. The government keeps on changing these policies from time to time in view of the developments taking place in the economic scenario.
(ii) Economic System: The world economy is primarily governed by three types of economic systems, viz. Capitalist economy; Socialist economy; and Mixed economy. India has adopted the mixed economy system which implies co-existence of public sector and private sector.
b) Political Environment: This 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. It sends a signal of strength, confidence to various interest groups and investors.
c) Legal Environment:  This refers to set of laws, regulations, which influence the business organisations and their operations. Every business organisation has to obey, and work within the framework of the law. The important legislations that concern the business enterprises include: Companies Act, 1956, Foreign Exchange Management Act, 1999, The Factories Act, 1948, Industrial Disputes Act, 19112, Payment of Gratuity Act, 19112, Industries (Development and Regulation) Act, 1951 etc. Besides, the above legislations, the following are also form part of the legal environment of business:
(i) Provisions of the Constitution
(ii) Judicial Decisions.
d)  Social Environment: The social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits, flower, etc.
e) Technological Environment:  Technological environment include the methods, techniques and approaches adopted for production of goods and services and its distribution. The varying technological environments of different countries affect the designing of products. In the modern competitive age, the pace of technological changes is very fast. Hence, in order to survive and grow in the market, a business has to adopt the technological changes from time to time.
f) Demographic Environment:  This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services.
g) Natural Environment:  The natural environment includes geographical and ecological factors that influence the business operations. These factors include the availability of natural resources, weather and climatic condition, location aspect, topographical factors, etc. Business is greatly influenced by the nature of natural environment. For example, sugar factories are set up only at those places where sugarcane can be grown. It is always considered better to establish manufacturing unit near the sources of input.
4. (a) What do you mean by “Business cycle”? Explain the phases of business cycle with the help of a diagram. (4+10=14)
Ans: Business Cycle – Meaning, Phases and characteristics
The business cycle is an alternate expansion and contraction in overall business activity, as evidenced by fluctuations in aggregate economic activity such as GNP, industrial production, employment and income.
According to J.M.Keynes “A Business cycle is composed of periods of good trade characterized by rising prices and low unemployment percentages, alternating with periods of bad trade characterized by fall in prices and high unemployment percentages.”
Phases of a Business Cycle: A business cycle will have 5 different phases or stages. They are
1)      Depression
2)      Recovery
3)      Prosperity or full employment
4)      Boom or overfull employment
5)      Recession
(1) Depression: During this period business activity in the country will be much below normal level. It is characterized by a short fall in production, mass unemployment, and fall in prices, low wages, and contraction of credit, a high rate of business failures and an atmosphere of all round pessimism.
(2) Recovery: During this period business activity increases. The industrial production and volume of employment steadily increases. The prices and wages increases. The recovery may take place due to the following reasons:
•New government expenditure
•Exploitation of new sources of energy
•Investment in new areas
•Changes in the techniques of production
(3) Prosperity: This stage is characterized by high capital investment in basic industries, expansion of bank credit, high prices, high profits, high rate of formation of new business enterprises and the full employment.
 (4) Boom: It is the stage of rapid expansion in business activity resulting in high stocks and commodity prices, high profits and over-full employment. A situation develops in which the no. of jobs exceeds the no. of workers in the market. Such a situation is known as over-full employment. Profits will further increase. This will lead to more investment and in turn further rise in price level and inflation.
(5) Recession: In this stage more business enterprises fail, prices collapse and confidence is shaken. Building construction slows down and unemployment increases. There is fall in income during recession.
(b) Explain the causes of industrial sickness and analysis the effects of it in the north-eastern region of India. (10+4=14)
Ans: Industrial Sickness – Meaning, Causes and Remedies
Industrial sickness is a universal phenomenon. It is a major problem of all industries in the world whether it is developed or developing countries. It is a serious matter of the countries.
Definition of a sick unit is given by Sick Industrial companies act, 1985. According to the act “ The sick industrial company is a company which has at the end of any financial year accumulated losses equal to or excluding its entire net worth and has also suffered cash losses in that financial year and in the financial year immediately preceding it.”              
According to state bank of India,” A sick unit is that unit which falls to generate internal surplus on a continuing basis and depends for its survival on subsequent infusion of external funds”.
Industrial sickness especially in small-scale Industry has been always a demerit for the Indian economy, because more and more industries like – cotton, Jute, Sugar, and Textile small steel and engineering industries are being affected by this sickness problem.
1) Internal Cause for sickness: Internal causes are those which are within the control of management.  This sickness arises due to internal disorder in the areas justified as following:

a) Lack of Finance:  This including weak equity base, poor utilization of assets, inefficient working capital management, absence of costing & pricing, absence of planning and budgeting and inappropriate utilization or diversion of funds.
b) Bad Production Policies :  The another very important reason for sickness is wrong selection of site which is related to production, inappropriate plant & machinery, bad maintenance of Plant & Machinery, lack of quality control, lack of standard research & development and so on.
c) Marketing and Sickness: This is another part which always affects the health of any sector as well as SSI.  This including wrong demand forecasting, selection of inappropriate product mix, absence of product planning, wrong market research methods, and bad sales promotions. 
d) Inappropriate Personnel Management: The another internal reason for the sickness of SSIs is inappropriate personnel management policies which includes bad wages and salary administration, bad labour relations, lack of behavioural approach causes dissatisfaction among the employees and workers.
e) Ineffective Corporate Management:  Another reason for the sickness of SSIs is ineffective or bad corporate management which includes improper corporate planning, lack of integrity in top management, lack of coordination and control etc.
2) External causes for sickness:
a) Personnel Constraint: The first for most important reason for the sickness of small scale industries are non availability of skilled labour or manpower wages disparity in similar industry and general labour invested in the area.
b) Marketing Constraints: The second cause for the sickness is related to marketing.  The sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by govt. and market recession.
c) Production Constraints:  This is another reason for the sickness which comes under external cause of sickness.  This arises due to shortage of raw material, shortage of power, fuel and high prices, import-export restrictions.
d)  Finance Constraints:  The external cause for the sickness of SSIs is lack of finance.  This arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable investments, fear of nationalization.
The economy of North- East India has got its definite identity due to its peculiar physical, economic and socio-cultural characteristics. This region consists of eight states viz., Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and Sikkim. The NER of India covers an area of 2.62 lakh It accounts for 7.9% of total geographical area of the country. With a total population of 39 million (2001), it accounts for 3.8% of total population of India. 
There are differences among the eight States in the North Eastern region with respect to their resource endowments, level of industrialization as well as infrastructural facilities. The industrial sector has mainly grown around tea, petroleum (crude), natural gas etc. in Assam and mining, saw mills and steel fabrication units in other parts of the region. The full potential of the region is yet to be exploited and this has left the economy in a primarily agrarian state. 
Industrially, the NER continues to be the most backward region in the country, and the states in the region hardly have any industrial base, except perhaps Assam, because of its traditional tea, oil and wood based industries .To some extent Meghalaya has made some headway in setting up of small and medium industries.
Effect of sickness : Industrial Sickness contributes to high cost economy. This in turn, will affect the competitiveness of the economy at home and abroad. Dead investment is a burden on both banks and budgets and ultimately consumers should pay the high cost. Money locked up in sick units gives no returns and effects the availability of resources to the other viable units 
5. (a) Discuss the salient features of New Industrial Policy (1991) of India. 14  
Ans: New Industrial Policy, 1991
In order to solve economic problems of our country, the government took several steps including control by the State of certain industries, central planning and reduced importance of the private sector. The main objectives of India’s development plans were:
a.    Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty;
b.   Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries;
c.    Reduce inequalities of income and wealth;
d.   Adopt a socialist pattern of development based on equality and prevent exploitation of man by man.
As a part of economic reforms, the Government of India announced a new industrial policy in July 1991. The broad features of this policy were as follows:
a.       The Government reduced the number of industries under compulsory licensing to six.
b.      Policy towards foreign capital was liberalized. The share of foreign equity participation was increased to 51% and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted.
c.       Government will encourage foreign trad­ing companies to assist Indian exporters in export activities.
d.      Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign investment in India.
e.      Automatic permission was now granted for technology agreements with foreign companies.
f.        Relaxation of MRTP Act (Monopolies and Restrictive Practices Act) which has almost been rendered non-functional.
g.       Dilution of foreign exchange regulation act (FERA) making rupee fully convertible on trade account.
h.      Disinvestment was carried out in case of many public sector industrial enterprises incurring heavy losses.
i.         Abolition of wealth tax on shares.
j.        General reduction in customs duties.
k.       Provide strength to those public sector enterprises which fall in reserved areas of operation or in high priority areas.
l.         Constitution of special boards to negoti­ate with foreign firms for large investments in the development of industries and import of technol­ogy.
(b) Describe the salient features of Government of India’s latest Industrial Policy for the North-Eastern Region. 14
Ans: Ans: North East Industrial and Investment Promotion Policy (NEIIP, 2007)
(i)            Sikkim will be included under NEIIPP, 2007 and the ‘New Industrial Policy and other concessions for the State of Sikkim’ announced earlier in December, 2002 will be discontinued from the date of notification of NEIIPP, 2007.
(ii)          Under NEIIPP, 2007, all new units as well as existing units which go in for substantial expansion, unless otherwise specified and which commence commercial production within the 10 year period from the date of notification of NEIIPP, 2007 will be eligible for incentives for a period of 10 years from the date of commencement of production.
(iii)         The incentives under the NEIIPP, 2007 will be available to all industrial units, new as well as existing units on their substantial expansion, located anywhere in the North Eastern Region.  Consequently, the distinction between ‘thrust’ and ‘non thrust’ industries made in NEIP, 97 will be discontinued from the date of notification of NEIIPP, 2007.
(iv)        Under NEIIPP, 2007 incentives on substantial expansion will be given to units effecting ‘an increase by not less than 25% in the value of fixed capital investment in plant and machinery for the purpose of expansion of capacity/modernization and diversification’ as against an increase by 33 ½  % prescribed at present.
(v)          Under NEIIPP, 2007, 100% excise duty exemption will be continued as at present on finished products made in the North Eastern Region.  However, in cases, where the CENVAT paid on the raw materials and intermediate products going into the production of finished products (other than the products which are otherwise exempt or subject to nil rate of duty) is higher than the excise duties payable on the finished products, ways and means to refund such overflow of CENVAT credit will be separately notified by the M/O Finance.
(vi)        100% income tax exemption will continue under NEIIPP, 2007 as at present.
(vii)       Capital investment subsidy will be enhanced from 15% of the investment in plant and machinery to 30% and the limit for automatic approval of subsidy at this rate will be Rs. 1.5 crore per unit as against Rs. 30 lakhs at present.  Such subsidy will be applicable to units in the private sector, joint sector, cooperative sector as well as the units set up by the State Governments of the North Eastern Region.  For grant of capital investment subsidy higher than Rs. 1.5 crore but upto a maximum of Rs.30 crore, there will be an Empowered Committee.
(viii)     Interest subsidy will be made available @ 3% on working capital loan under NEIIPP, 2007 as at present.
(ix)        Under NEIIPP, 2007, new industrial units as well as the existing units on their substantial expansion will be eligible for reimbursement of 100% insurance premium under the Comprehensive Insurance Scheme.
(x)          To include tobacco and tobacco products, pan masala, plastics carry bags and goods produced by refineries, in a host of industries which would not be eligible for incentives under NEIIPP, 2007.
(xi)        To provide incentives to service sector, bio-technology and power generating industries.
(xii)       To continue North Eastern Development Finance Corporation Ltd. (NEDFi) as the nodal agency for disbursal of subsidies under NEIIPP, 2007.
 The provisions of the NEIIPP, 2007 would provide the requisite incentives as well as an enabling environment to speed up the industrialization of the North Eastern Region which is otherwise less than 4% p.a. against a national average of 8%.
6. (a) What is meant by “Monetary policy”? Discuss the objectives of monetary policy in a developing economy. (4+10=14)

(b) Explain the quantitative credit control measures of central bank. 14