CA Foundation Business & Commercial Knowledge Study Material – Finance, Stock and Commodity Markets Terminology

CA Foundation Business & Commercial Knowledge Study Material Chapter 6 Common Business Terminologies – Finance, Stock and Commodity Markets Terminology

Terminology or vocabulary means a set of basic terms or concepts used in a particular field or discipline. Each and every subject (e.g. Economics, Accountancy, Law, Medicine, Management, etc.) has its own terminology. Good understanding of the correct meaning of the terms used is essential to gain conceptual clarity. A student or professional working in the concerned profession cannot be efficient without understanding the terminology used in the concerned profession. A Chartered Accountant is excepted to know and understand the terminology used not only in finance and accounts but also in related areas such as marketing banking, administration, etc. This is because a Chartered Accountant comes across these terminologies in course of audit.

Finance, Stock and Commodity Markets Terminology


  • Above par: Price of a security quoted higher than its face value.
  • Absorption or acquisition: Takeover of a firm by another firm.
  • Accommodation bill: A bill of exchange drawn and accepted without receiving value in exchange. It is means of lending money.
  • Account: A record of transactions relating to one head e.g. debtors.
  • Accountancy: The held of knowledge containing principles and techniques used in preparing accounts. Account current: A running account summarizing business transactions during a given time period.
  • Accounting: The process of measuring, and recording transactions in the books of account.
  • Agent: (broker): One who buys and sells securities on behalf of his clients.
  • Amortize: To charge regular portion of an expenditure over a fixed time period. For example an expenditure of Rs. 50,000 may be amortized over five years, charging Rs. 10,000 per year in the account books. Also called write off.
  • Annuity: An equal amount paid at fixed intervals (e.g. every three months) for a specified period (e.g. twenty years).
  • Appreciation: Increase in the value of an asset e.g. shares purchased for Rs. 1 lakh may be Rs. 5 lakh now. There is an appreciation of Rs. 4 lakh.
  • Arbitrage: Simultaneous purchase and sale of a security/commodity in different markets to take advantage of price differences.
  • Asset: An economic resource expected to give benefit in future. It may be tangible (e.g. a machine) or intangible (e.g. a patents). Assets are of three types:
    • Current Assets: The assets which are likely to convert into cash within a year e.g. book debts and stock of finished goods.
    • Fixed Assets: The assets which generate revenue and last more than one year e.g. building, vehicles, machinery.
    • Intangible Assets: Assets having no physical shape e.g. patents, trademarks and copy-rights.
  • Ask/Offer: The lowest price at which the owner is willing to sell his securities.
  • Audit: The careful review of financial records to verify their accuracy.
  • Auditor: The qualified Chartered Accountant authorised and appointed to conduct an audit.
  • Authorised capital: The amount of share capital with which a company is registered. It is mentioned in the company’s Memorandum of Association.


  • Backwardation: The charge paid big a bear speculator to a bill for postponement of settlement of a transaction.
  • Bad debts: The debts which are not recoverable and are written off as a loss.
  • Badla: Carry forward of a transaction from one settlement period to the next without any payment or delivery.
  • Balance of payments: A statement of all money flows in and out of a country.
  • Balance of trade: A statement of a country’s exports and imports during the year.
  • Balance sheet: A statement containing the assets, liabilities and capital of an organisation. It shows the financial position on a specific date.
  • Base price: A security’s price at the beginning of a trading day. It is used to determine the day’s lowest/highest price and the price range.
  • Basket trading: The facility which enables investors to buy/sell in one go all the 30 scripts of Sensex in proportion of their current weights in the Sensex.
  • Bear: A pessimist who expects prices to fall and sells quickly before the value of his holding declines. Bear market: A market situation when share price are continuously falling.
  • Beta: A measurement of the relationship between the price of a security and the price movement of the whole market.
  • Bid: The highest price a buyer is willing to pay for a share. It is the opposite of ask/offer.
  • Blue chip: Shares of a large, well established and financially sound company. It can provide high capital gains.
  • Bond: A long-term promissory note issued by a company or government. It shows the amount of the debt, rate of interest and the due date.
  • Bonus shares: A free allotment of shares out of accumulated reserves to the existing shareholders in proportion to their current holding.
  • Book closure: The period during which a company keeps its register of members closed for updating prior to payment of dividend or issue of new shares/debentures.
  • Book value: The value of an asset recorded in the books of account. It also means the difference between total assets and total liabilities.
  • Brokerage: The commission charged by brokers.
  • Break even point: The number of units that must be sold to generate revenue equal to total expenses. Sale above this point create a profit and sales below it create loss.
  • Budget: A detailed plan expressed in quantitative terms for a specific future period.
  • Bull: One who expects prices to rise and buys in anticipation.
  • Bull market: A market situation in which share prices continuously rise.
  • Business days: The days on which stock markets are open – Monday to Friday, excluding public holidays.
  • Business risk: The risk inherent in the operations of a firm which uses no debt.
  • Buyer: The trading member who has placed on order for the purchase of securities.


  • Call: The demand for payment by the company which has issued shares.
  • Call option: The right (not obligation) to buy a particular share at a specified price within the specified time period.
  • Capital budgeting: The process of planning expenditure on fixed assets.
  • Capital gain: The increase in the value of a security.
  • Capital market: The financial market for shares, debentures and long-term debt.
  • Closing price: The price of a security at the end of a trading day.
  • Commercial paper: Short term and unsecured promissory note issued by a large firm with an interest rate below the prime lending rate of commercial banks.
  • Commodity: Products used for commerce and traded on authorized commodity platforms.
  • Convertible security: A preference share, debenture, a bond that can be converted into equity shares at the option of the holder.
  • Consolidation: Business combination of two or more firms.
  • Credit period: The length of time for which credit is granted.
  • Creditor: The individual/organization who owes money on a particular date.


  • Debenture: An instrument acknowledging debt raised by a company/corporation.
  • Debtor: An individual/enterprise who owes money, shown as an asset in the balance sheet. Defensive stock: A stock that provides constant dividends even during economic down turn. Depreciation: An expense allowance made for wear and tear of an asset over its estimated useful life.
  • Derivatives: A security whose price is derived from one or more underlying assets such as shares, bonds, commodities, currencies, etc.
  • Diversification: Spreading the investment risk by purchasing shares of different companies operating in different sectors. Also used to refer to a company investing in several related or unrelated business.
  • Dividend: A part of the company’s earning paid to shareholders.
  • Devaluation: Reducing the value of a currency in relation to other currencies, decided by the government.
  • Disinvestment: Selling a part of the share holding of a public enterprise to private sector.


  • E-commerce: Doing business transactions over the internet.
  • Economic activity: Any activity undertaken to earn money.
  • Equity capital: Funds provided by holders of equity shares.
  • Equity: Equity capital, free reserves, retained earnings and preference capital.
  • Exchange rate: The rate at which one currency can be purchased for another currency. Ex-dividend: Shares on which dividend declared after their purchase is not payable.


  • Foreign company: A company incorporated outside India but having business operations in India.
  • Forward trading: Buying and selling without the intention of delivery and payment, aim is to earn from fluctuations in price.
  • Futures: The right to buy or sell at a future date and at the specified price.
  • Face value: The price at which a share/bond/debenture is issued. Also known as par value.
  • Financial instrument: A written document sharing an agreement or a transaction e.g. share, debenture, cheque, etc.
  • Financial intermediary: One who acts as a link between buyers and sellers of securities, e.g. share brokers, banks.


  • Goodwill: The estimated money value of a firm’s reputation.
  • Government bonds: A security issued by a government to raise debt.
  • Government company: A Company in which government owns 51 per cent or more of the share capital.


  • Hedge: A strategy used to minimise the risk and maximize the return on investment.
  • Holding period: The time period during which an individual/corporation holds/owns an asset. This period is considered while pledging the asset as collateral.


  • Income stock: A security that offers dividend higher than that on common stock. It has a solid record of dividend payments.
  • Index: A statistical measure of change in the security market/economy. It is usually calculated as a percentage change in the base value overtime.
  • Initial public offer (IPO): A company’s first issue of shares to general public.
  • Internet trading: Buying and selling securities over the internet. SEBI approved it in January 2000. Interim dividend: A dividend declared prior to the close of the financial year.


  • Joint venture: A partnership between two or more independent firms resulting in the creation of a third enterprise.
  • Journal: Datewise records of transactions, a book of original entry.


  • Lame duck: A speculator struggling to honour his commitment due to unexpected fluctuations in the price of a security on the stock market.
  • Lease: A legal right for the use of an asset.
  • Ledger: A book of account in which entries are posted from the Journal into various accounts. Lien: A legal claim to property until repayment of debt.
  • Limit order: An order to buy or sell a share at a specified price. It specifies the minimum price the seller is willing to accept or a maximum price the buyer is willing to pay.
  • Liquidation: Piecemeal sale of the assets of a division of the company.
  • Listed stock: The shares of a company that are eligible for trading on the stock exchange.


  • Margin trading: Buying securities on a stock exchange after keeping a deposit with the broker. Market capitalization: The total market value of a company’s out standing shares.
  • Minimum subscription: The minimum amount of share capital a company must receive in cash before making allotment of shares. It is equal to 90 per cent of issued capital.
  • Money market: Market for raising short-term funds.
  • Mutual funds: A pool of money managed by experts for investing in shares, debentures and other securities. .


  • Nominee director: A director nominated by the financial institution from which the company has raised a loan.


  • Odd lot: Shares less than the trading lot and held by a small investor.
  • One sided market: A market having only potential buyers or only potential sellers.
  • Out-of-the money (OTM): In case of call options, it means the share price is below the strike price. In case of put options, it means the share price is above the strike price.


  • Par value: The value of a share printed on the share certificate.
  • Portfolio: Various types of securities of different companies held by an investor.
  • Preliminary expenses: Expenses incurred for the formation of a company.
  • Pre-opening session: Time duration from 9.00 am to 9.15 a.m. during which order entry, modification and cancellation are done before the start of trading on stock exchange.
  • Price earning (PIE) ratio: The market price of a share divided by the earning per share. Prospectus: A document issued by a Company to sell shares/debentures to the general public.
  • Proxy: A written authority given by a member of a company to some one to attend the meeting on his/her benefit.


  • Right shares: Equity shares issued by a company to the existing shareholders in proportion to their current holding.


  • Securities: A transferable certificate of ownership of shares, debentures, etc.
  • Share: A part in the share capital of a company.
  • Stock: Fully paid shares of a company.
  • Strike price: The price at which the shareholder can buy (in case of call option) or sell (in case of put option) a security.
  • Stock split: Splitting one share into several shares to increase the availability of existing shares e.g., splitting a share with face value of 100 into 10 shares with face value of Rs. 10 each.


  • Thin market: A market with a few bids to buy or offer to sell, the prices in such market vary highly. Trading session: The time period during which the stock market is open for trading.


  • Underwriting: Guarantee to subscribe to an issue of shares in case public does not subscribe to it.


  • Working capital: The capital used in day-to-day business activities, also called circulating capital.


  • Yield: Percentage return on investment in case of shares it is calculated by dividing the annual dividend with the current price of the share.
  • Yield-to-call: The rate of return earned on a bond when it is called before the date of maturity.


  • Zero coupon bond: A bond sold at a discount below par but paid back at face value. No interest is payable on it.

CA Foundation Business & Commercial Knowledge Study Material – Foreign Direct Investment (FDI)

CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Foreign Direct Investment (FDI)


Meaning of FDI

Foreign Direct Investment means investment in a foreign country where the investor claims con¬trol over the investment in terms of actual power of management and effective decision-making. Foreign direct investment typically occurs in the form of setting up a subsidiary, starting a joint venture or acquiring a stake in an existing firm in a foreign country According to the Committee on Compilation of FDI in India (Oct 2002). FDI is “the process whereby residents of one country (the home country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country). There are three main categories of FDI-equity capital, reinvested earnings, and lending of funds by a multinational to its affiliate.

When the investor makes only investment and does not retain control over the enterprise it is known as portfolio investment. The investor is interested only in return on his capital and does not want control over the use of the invested capital. Portfolio investment is for a short period and is influenced by short-term gains. On the other hand, foreign direct investment involves long-term commitment and cannot be easily liquidated. Therefore, long-term considerations like political stability, Government policy, industrial prospects, etc. influence it. Direct investors have direct responsibility for the promotion and management of the enterprise. But portfolio investors have no direct responsibility for promotion and management of the enterprise. Portfolio investment takes place through foreign institutional investors (FIIs) like mutual funds and through American Depository Receipts (ADRs) Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). ADRs, GDRs and FCCBs are securities issued by Indian companies in the foreign markets to mobilise foreign capital.

Advantages of Foreign Direct Investment

Foreign direct investment offers the following benefits:

  • FDI increases the level of investment by supplementing domestic capital. The host country gets scarce capital resources from abroad. As a result, FDI contributes towards the development of infrastructure, industry and service sector in the host country. FDI helps to enhance business activity and raise the level of economic development.
  • FDI facilitates transfer of technology, machinery and equipment to the host country. Advanced foreign technology helps to reduce costs and improve quality of products and services. Local firms get the opportunity for technology upgradation.
  • FDI can create a managerial revolution in the host country through professional man-agement and employment of sophisticated techniques of organisation and management. Local firms get access to world class management and corporate practices.
  • FDI helps to boost employment and incomes in the host country through establish¬ment of new industries and development of ancillary industries. Higher production and income in turn increase the tax revenue of the Government. Material and human resources can be utilised optimally.
  • FDI can help the host country to increase its exports and reduce imports These add to the foreign exchange resources of the country and improve its balance of payments position. In fact, the Government of India announced economic liberalisation in July, 1991 due to foreign exchange crisis.
  • FDI may help to increase competition and break domestic monopolies in the host
    country. It can overcome trade barriers like tariffs and quotas. FDI can make Indian industries globally competitive.
  • FDI offers benefits to the home country also. There is inflow of foreign currency in the form of dividend and interest. Exports of technology machinery and equipment help to enhance industrial activity and employment in the home country.
  • There is greater choice of products by consumers. Their standard of living is likely to improve due to better quality and wider choice.

Disadvantages of Foreign Direct Investment

Foreign direct investment has been criticised for the following reasons:

  • FDI tends to flow in the areas of high profits rather than in the priority sectors of the host country.
  • Considerable funds are repatriated from the host country in the form of royalty, fees, dividend, interest, etc. on FDI. Such outflows put pressure on the host country’s balance of payments. The cost of FDI is high.
  • FDI takes place mainly through multinational corporations. These corporations are large in size and have a wide resource base. They pose a threat to the domestic firms in the host country.
  • The technology brought in by the foreign investors may not be appropriate to the market size, resource base, stage of economic development and consumption needs of the host country. Excessive reliance on foreign technology may have an adverse effect on local initiative.
  • FDI poses a threat to the economic autonomy and political sovereignty of the host country. Some of the multinational corporations have destabilised governments in African countries. Excessive reliance on foreign technology may have an adverse effect on local initiative.
  • FDI can lead to adverse effects on domestic savings, and adverse terms of trade for the host country which offers special concessions to attract FDI, Some foreign investors pre-empt investment plans of domestic companies. They engage in unfair and unethical trade practices.
  • FDI may involve costs and risks for the home country. Employment opportunities may shrink and balance of payment position may suffer due to FDI.

Determinants of Foreign Direct Investment

The volume of FDI in a country depends on the following factors:

  1. Natural Resources – Availability of natural resources in the host country is a major determinant of FDI. Most foreign investors seek an adequate, reliable and economical source of minerals and other materials. FDI tends to flow in countries which are rich in resources but lack capital, technical skills and infrastructure required for the exploitation of natural resources. Though their relative importance has declined, the availability of natural resources still continues to be an important determinant of FDI.
  2. National Markets – The market size of a host country in absolute terms as well as in relation to the size and income of its population and market growth is another major determinant of FDI. Large markets can accommodate more firms and can help firms to achieve economies of large scale operations. Market access has been the main motive for investment by American companies in Europe and Asia.
  3. Availability of Cheap Labour – The availability of low cost unskilled labour has been a major cause of FDI in countries like China and India, Low cost labour together with availability of cheap raw materials enable foreign investors to minimise costs of production and thereby increase profits.
  4. Rate of Interest – Differences in the rate of interest prevailing in different countries stimulate foreign investment. Capital tends to move from a country with a low rate of interest to a country where it is higher. Foreign investment is also inspired by foreign exchange rates. Foreign capital is attracted to countries where the return on investment is higher.
  5. Socio-Economic Conditions – Size of the population, infrastructural facilities and income level of a country influence direct foreign investment.
  6. Political Situation – Political stability, legal framework, judicial system, relations with other countries and other political factors influence movements of capital from one country to another.
  7. Government Policies – Policy towards foreign investment, foreign collaborations, foreign exchange control, remittances, and incentives (monetary, fiscal and others) offered to foreign investors exercise a significant influence on FDI in a country. For example, Export Processing Zones have been developed in India to attract FDI and to boost exports.

CA Foundation Business & Commercial Knowledge Study Material – Meaning of Globalization

CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Meaning of Globalization

Meaning of Globalization

Globalization means reduction or removal of Government restrictions on the movement of goods and services, capital, technology and talent across national borders. It is the process of increasing economic interdependence between countries and their economic integration in the form of world economy. Markets become international and global firms consider the whole world as one market.

Globalization in India – Trends and Issues

The process of globalization of Indian economy began largely in 1991 due to the unprecedented balance of payments crisis. Since then the pace of globalization has gained momentum:

  • Foreign Direct Investment upto 100 per cent is now permitted in specified sectors.
  • Foreign investors can invest in Indian companies through GDRs without any lock-in period.
  • Indian companies are allowed to get themselves listed on overseas stock exchanges.
  • Guidelines for Euro issues were liberalised.
  • The Foreign Exchange Management Act (FEMA) has replaced the Foreign Exchange Regulations Act (FERA).

Impact of Globalization of Indian Economy

Globalization has made India a huge consumer market. There has been rapid increase in GDP and India’s exports. India has emerged as one of the fastest growing economies in the world. Our foreign exchange reserves are now huge and there has been rapid increase in foreign direct investment (FDI).


Positive Effects

  • Expansion of market
  • Growth of independent money market
  • Free flow of resources
  • Advancements in technology
  • Equilibrium in balance of payments
  • Development of infrastructure
  • Fligher living standards
  • International cooperation

Negative Effects

  • Cut-throat competition
  • Rise in monopoly
  • Increase in inequalities
  • Takeover of domestic firms
  • Removal of protection to domestic firms
  • Affect on national sovereignty

CA Foundation Business & Commercial Knowledge Study Material – Meaning of Privatization

CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Meaning of Privatization

Meaning of Privatization

Privatization means the transfer of ownership and/or management of an enterprise from the public sector to the private sector. It refers to the introduction of private control and ownership in public sector undertakings. According to the World Bank, “privatization is the transfer of State owned enterprises to the private sector by sale (full or partial) of going concerns or by sale of assets following their liquidation.” In the words of Barbara Lee and John Nellis “Privatization is the general process of involving the private sector in the ownership or operation of a State owned enterprise,”

There are several forms or methods of privatization such as:

  • Denationalization of a public enterprise by its complete sale to the private sector. For example, BALCO. was sold to Sterlite Industries.
  • Divestiture, i.e., the sale of equity in full or part of a public sector undertaking to private sector.
  • Transfer of management of a public sector enterprise to private sector through a management contract.
  • Joint venture, i.e., joint ownership of an enterprise by Government and private sector.
  • Leasing, Le., transferring the use of assets of a public sector unit to private bidders for a specified period.
  • Franchising of public sector services to designated private sector units.

Trends And Issues – Privatization In India

The process of privatization began in India mainly after the Industrial Policy of July 1991. Under this policy the number of industries reserved for the public sector was reduced from 17 to 2 – Railways and Atomic Energy. Shares of several public sector enterprises have been sold to mutual funds, workers and the public.

Impact of Privatization on Indian Economy

The main reason for privatization in India has been the poor performance of public sector units which results in wastage of national resources and burden on common man.


Positive Effects

  • Expansion of market
  • Growth of independent money market
  • Free flow of resources
  • Advancements in technology
  • Equilibrium in balance of payments
  • Development of infrastructure
  • Higher living standards
  • International cooperation

Negative Effects

  • Cut-throat competition
  • Rise in monopoly
  • Increase in inequalities
  • Takeover of domestic firms
  • Removal of protection to domestic firms
  • Affect on national sovereignty


CA Foundation Business & Commercial Knowledge Study Material – Meaning of Liberalization

CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Meaning of Liberalization

India faced foreign exchange crises in 1990. Government of India adopted the policy of Liberalization, Privatization and Globalization (LPG) to overcome the crisis. Government controls on business and industry have since then been dismantled gradually. The process further gained momentum in 2014. Since then rules and regulations have been simplified to increase the ease of doing business. Goods and Services Tax (GST) is the latest step in this process.

Meaning of Liberalization

Liberalization of an economy means removing or relaxing Government controls and restrictions on economic activities. It is the process of liberating the economy from unnecessary controls and restrictions on trade, industry, banking system, etc. of the country. It involves abolition of those policies, rules and regulations which impede economic development.

Liberalization in India – Trends and Issues

The process of economic liberalization in India began primarily in 1991. The economic reforms are being implemented in two stages, namely (i) First Generation Reforms, and (ii) Second Generation Reforms. The main trends of liberalization in India are as follows:

1. Infrastructural Reforms:

  • Opening up of oil exploration and petroleum to foreign investment.
  • Power sector reforms.
  • Private sector participation in infrastructure development.
  • Decontrol of steel.
  • Telecom sector reforms.

2. Industrial Reforms:

  • Delicensing of industry.
  • Public sector undertakings allowed access to capital market.
  • Simplification of licensing procedures.

3. Fiscal Reforms:

  • Reduction in customs duty.
  • Five year tax holiday to enterprises in specified sectors.
  • Downsizing of some departments.
  • Reduction in personal and corporate taxes.
  • Simplified tax administration.
  • Introduction of Value Added Tax (VAT).

4. Capital and Money Market Reforms:

  • Clearing Corporation of India set up.
  • Introduction of Negotiated Dealing System.
  • Floating rate Government bonds re-introduced.
  • Trading in index options, and stock futures introduced.

5. External Sector Reforms:

  • Removal of import restrictions.
  • Liberalised Exchange Rate Management System (LERMS)
  • Liberalisation of NRI remittances.
  • Encouraging foreign tie-ups.
  • Automatic approval of foreign investment and foreign technology agreements to specified extent.

6. Banking Sector Reforms:

  • Reduction in CRR and SLR.
  • Introduction of capital adequacy norms.
  • Setting up of Debt Recovery Tribunals.
  • Issue of guidelines for entry to new private banks.
  • Setting up of IRDA.

Impact of Liberalization of Indian Economy

Liberalization has considerably expanded the scope of private sector in India. Private enterprises can now enter most of the industries. The competitive strength and industrial efficiency have improved. Business opportunities have increased and many Indian companies have established subsidiaries and joint ventures abroad. Liberalisation has also boosted foreign investment in India. Thus, liberalisation has led to radical changes in India’s business environment.


Positive Effects

  • Increase in foreign investment
  • Decline in external debt
  • Rise in foreign exchange reserves
  • Increase in tax receipts
  • Increase in production
  • Technological advancement

Negative Effects

  • Decline in small scale sector
  • Increase in unemployment
  • Decrease in GDP rate

CA Foundation Business & Commercial Knowledge Study Material Chapter 3 Business Organizations – Test Questions

CA Foundation Business & Commercial Knowledge Study Material Chapter 3 Business Organizations – Test Questions

1. Who is the Chairman of Asian Paints Ltd. ?
(a) KBS Anand
(b) Ashwin Choksi
(c) Chimanlal Choksi
(d) Champaklal Choksey

2. Axis Bank was founded in:
(a) 1991
(b) 1992
(c) 1993
(d) 1994

3. Who is the Chief Executive of Axis Bank ?
(a) Sanjiv Misra
(b) Jairam Sridharam
(c) Chanda Cochar
(d) Shikha Sharma

4. Bajaj Auto was founded at
(a) Mumbai
(b) Kolkata
(c) Pune
(d) Bengaluru

5. Who is the Chairman of Bajaj Auto
(a) Sanjiv Bajaj
(b) Rajiv Bajaj
(c) Jamnalal Bajaj
(d) Rahul Bajaj

6. In which year Bharti Airtel was founded ?
(a) 1991
(b) 1992
(c) 1994
(d) 1995

7. Who is the Chairman of Bharti Airtel ?
(a) Deepak Mittal
(b) Navin Mittal
(c) Sunil Mittal
(d) Anil Mittal

8. Cipla operates in which industry
(a) Food
(b) Pharma
(c) Hotels
(d) All the above

9. Dr. Reddy’s laboratories was set up in
(a) 1980
(b) 1983
(c) 1984
(d) 1989

10. HDFC Bank was set up in
(a) 1991
(b) 1992
(c) 1993
(d) 1994

11. Which is India’s largest private sector hank
(a) Axis Bank
(b) SBI
(c) ICICI Bank
(d) HDFC Bank

12. Which company was formed by seven engineers with a capital of ? 10000
(a) Asian Paints
(b) Bharti Airtel
(c) Infosys
(d) None of the above

13. ITC was originally named as:
(a) Imperial Tobacco company
(b) Indian Tobacco company
(c) Indian Tea company
(d) None of the above

14. Larsen & Toubro Ltd. was founded by
(a) Indians
(b) Americans
(c) Danish
(d) Europeans

15. Reliance Industries Ltd. was founded by
(a) Anil Ambani
(b) Mukesh Ambani
(c) Akash Ambani
(d) Dhirubhai Ambani

16. State Bank of India was originally known as
(a) Centurion Bank
(b) United Bank of India
(c) Imperial Bank
(d) None of the Above

17. Which is the largest Commercial bank of India
(a) SBI
(b) ICICI Bank
(c) HDFC Bank
(d) Axis Bank

18. Which Company is the holding company of 100 independent companies of the Tata Group ?
(a) Tata Sons Ltd.
(b) TCS Ltd.
(c) Tata Steel Ltd.
(d) Tata Motors Ltd.

19. Which of the following are conglomerates
(a) Tata Sons Ltd.
(b) L&T Ltd.
(c) Reliance Industries Ltd.
(d) All of these

20. Which information technology company began as an edible oil firm
(a) Infosys
(b) Microsoft
(c) IBM
(d) Wipro

21. Wipro was founded in:
(a) 1948
(b) 1958
(c) 1945
(d) 1968

22. Which banking company is known worldwide for its credit cards
(a) Axis Bank
(b) ICICI Bank
(c) HDFC Bank
(d) American Express

23. Which company was set up in a garage
(a) Infosys
(b) HP
(c) Nestle
(d) Microsoft

24. Apple’s main business is
(a) Fruits
(b) Computers
(c) Retailing
(d) None of the above

25. IBM Corporation was founded in
(a) 1895
(b) 1911
(c) 1921
(d) 1931

26. Which global firm has an Indian as its chief executive
(a) HP
(b) IBM
(c) Microsoft
(d) None of the above

27. Good Food, Good Life is the Slogan of which company
(a) Walmart
(b) Britannia
(c) Parle
(d) Nestle

28. Which company is world’s largest retailer
(a) Shoppers Stop
(b) Smart
(c) Spencer
(d) Walmart

CA Foundation Business & Commercial Knowledge Study Material – An overview of Selected Global Companies

CA Foundation Business & Commercial Knowledge Study Material Chapter 3 Business Organizations – An overview of Selected Global Companies



  • Year of Incorporation : 1850
  • Head office : New York, USA
  • Chairman and CEO : Kenneth I. Chenault
  • Website :

History : American express was founded in 1850 as an express mail business.
Philosophy : Vision : To be a leading provider of payment solutions worldwide.
Mission : To leverage our local and global expertise to be a leading provider of payment solutions by delivering high quality, innovative and world class products and services, while maintaining the highest standards of governance and ethics.
Business portfolio : American Express operates in both card and non-card segments.
Operations : American Express has 2300 offices in 175 countries across the world. It has several subsidiaries and employs over 56000 people. Its revenue in 2015-16 was US $ 32.119 billion. American Express set up its first office in India in 1921 at Kolkata. Since then it has become the leading banking and travel related services. It is considered a pioneer in’off-shoring processes to captive centres in India.
Developments : In 2016, American Express was ranked the 25th most valuable brand in the World. In 2017 it was ranked as the 17th most admired company worldwide.



  • Year of Incorporation : 1976
  • Head office : California, USA
  • Chief Executive : Tim Cook
  • Website :

History: Steve Jobs, Steve Wozniak and Ronald Wayne founded Apple Computer Inc. in January 1977 to develop and sell personal computers. In January 2007 it was renamed as Apple Inc. to reflect its shifted focus towards consumer electronics.
Philosophy: Vision: To produce high quality, low cost, easy to use products that incorporate high technology for the individuals.
Mission: To bring the best personal computing experience to students, educators, creative professionals and consumers around the world through innovative hardware, software and internet offerings.
Business portfolio: Apple operates in Mac, iPad, iPhone, Watch, TV and Music segments. It operates the online Apple Store. Its iTunes store is the world’s largest online music retailer.
Operations: Apple is the world’s largest information technology multinational. It is the world’s second largest mobile phone manufacturer. It maintains 478 retail stores in 17 countries. It has more than 120,000 employees and its revenue in 2015-16 was US $ 215.369 billion.
Developments: In August 2014 Apple acquired Beats Electronics. It was ranked 8th among Forbes World’s Biggest Public Companies in 2016. It ranked 9th in Fortune 500 Global Companies same year.

3. HP


  • Year of Incorporation : 1939
  • Head office : California, USA
  • Chairman : Dion Weisler
  • Chief Executive : Dion Weisler
  • Website :

History: William Redington Hewlett and David Packard founded HP in 1939 in a car garage in Palo Alto to produce electronic test equipment.
Philosophy: To create technology that makes life better for everyone, every where every person, every organization and every community around the globe.
Business portfolio: Major product lines of HP include personal computing devices, enterprise and industry services, related storage devices, networking products. Software, Printers imaging products. It sells to households as well as to-organizations.
Operations: HP is a global information technology company. It develops and sells a wide variety of hardware, software and related products.
Developments: In 2015 HP split its PC and printers business from enterprise products and services business. It resulted into two companies. HP Inc. and Hewlett Packard Enterprise.



  • Year of Incorporation : 1911
  • Head office : New York, USA
  • Chairman : Ginni Rometty
  • Chief Executive : Ginni Rometty
  • Website :

History: On June 16, 1911 four Companies were amalgamated to form the Computing Tabulating Recording Company. It was renamed International Business Machines in 1924. Later on the name was changed as IBM corporation.
Philosophy: Vision: To be the first and foremost on any new enterprise data centre migration short-list.
Mission: To be the leader in innovation, development and manufacture of the industry’s most advanced information technologies, including computer systems, software storage systems and micro-electronics.
Business portfolio: IBM operates in both products (analytics, cloud, commerce, Internet of things, security mobile, security, industry solutions, etc.,) and services business consulting, technology, financing, training etc.,/segments.
Operations: IBM is a global technology company with operations in more than 170 countries. It is a major research organization holding the record for most patents. It has more than 380000 employees and its revenue in 2015-16 was US $ 79.20 billion. It has a subsidiary IBM India Pvt. Ltd. in India since 1992.
Development: IBM acquired Lombard in 2009, Sanovi Technology in 2016 and Agile 3 Solutions and Ravy Technologies in 2017. It is ranked 82nd in Fortune 500 global companies.



  • Year of Incorporation : 1911
  • Head office : Washington, USA
  • Chairman : John Thompson
  • Chief Executive : Satya Nadella
  • Website :

History: Paul Allen and Bill Gates founded Microsoft on April 4,1975. It entered OS business in 1980. It rose to dominate the personal computing with MS-DOS. Since 1990 it has diversified.
Philosophy: Vision: To help individuals and businesses realize their full potential.
Mission: To be a global organization by providing products/services of value for the target market.
Business portfolio: Software and services, devices and Xbox, business developers and IT, for students and educations are the major segments for which Microsoft has products.
Operations: Microsoft is a multinational technology company. It is best known for its software products like Windows, Office, Internet Explorers and Edge Web browsers. It is the largest software maker in the world. It has more than 115000 employees and its revenue in 2015-16 was US $ 85.32 billion. Microsoft Corporation of India was set up 1990. It has six major business units.
Developments: Microsoft acquired Skype Technologies in 2011, mobile hardware division of Nokia in 2014 and Linked in 2016.



  • Year of Incorporation : 1866
  • Head office : Vevey, Switzerland
  • Chairman : Peter Brabeck Letmathe
  • Chief Executive : Mark Schneider
  • Website :

History: Henri Nestle founded Angloswiss Condensed Milk Company in 1866. In 1879, it merged with milk chocolate inventor Daniel Peter. In 1905 the company was renamed Nestle. It entered India in 1923.
Philosophy: To provide consumers with the best tasting, most nutritious choices in a wide range of food and beverage categories and eating occasions from morning to night.
Business portfolio: Nestle has popular brands in bottled water, cereals, health, skincare, pet care, coffee, etc.
Operations: Nestle is a global food and drink company. It is the world’s largest food, nutrition, health and wellness company. It has 2000 plus brands across the globe. It operates 418 plants in 86 countries. Its products are available in 191 countries. It employs 3,35,000 people and its revenue was 89.8 billion Swiss Frank in 2015-16.
Developments: Nestle acquired San Pellegrino, Spillers Pet Foods, Ralston Purina, Chief America, Delta Ice cream, Hsu Fachi, Vitablo and Prometheus Laboratories. It ranked 66th in Fortune 500 and 33rd in Forbes 2000 companies in 2016. It has joint ventures with General Mills, Coca Cola Company, Lactalis and Colgat Palmolive.



  • Year of Incorporation : 1962
  • Head office : Arkansas, USA
  • Chairman : Greg Penner
  • Chief Executive : Dough Mcmillion
  • Website :

History: Sam Walton founded Walmart in 1962. It was incorporated on October 31, 1969.
Philosophy: Vision: To be the best retailer in the hearts and minds of consumers and employees.
Mission: Saving people money so that they can live better, Tagline: Save money Live better.
Business portfolio: Walmart sells a wide range of products such as groceries, foods, fruits and vegetables, personal and house care, clothing’s, office supplies and general merchandise. It is organized into four divisions.
Operations: Walmart is a multinational that operates a chain of hyper markets, discount stores, grocery stores and online stores. It is world’s largest retailer. It has 11695 stores in 28 countries. It has more than 23,00,000 employees and its revenue was $ 485.87 billion in 2015-16. Walmart India has 21 stores which sell 5000 items in 9 States. It launched B2B e-commerce platform on July 1,2014.
Developments: Walmart acquired Moose Jaw and Bonobos, and It is number 1 company in Fortune 500 list and was ranked 15th on Forbes Global list 2000.

CA Foundation Business and Commercial Knowledge Study Material Chapter 2 Business Environment – Test Questions

CA Foundation Business & Commercial Knowledge Study Material Chapter 2 Business Environment – Test Questions

CA Foundation Business and Commercial Knowledge Study Material Chapter 2 Business Environment – Test Questions

1. Which of the following is a characteristic of business environment?
(a) Aggregative
(b) Dynamic
(c) Uncertain
(d) All of them.

2. Which of the following is an element of micro environment:
(a) Customers
(b) Competitors
(c) Suppliers
(d) All of them.

3. Which of following relates to population?
(a) Demographic environment
(b) Social environment
(c) Cultural environment
(d) Natural environment

4. Understanding of environment enables a business enterprise to
(a) focus on customers
(b) gain the first mover advantage
(c) become aware of impending threat
(d) All of them.

5. Demonetization and GST are examples of changes in
(a) Political environment
(b) Social environment
(c) Technological environment
(d) Global environment

6. Merger of associate banks of SBI into SBI is an example of changes in
(a) Economic environment
(b) Technological environment
(c) Social environment
(d) Demographic environment

7. Tick (✓) the correct alternative.
Demographic trends are a part of:
(a) economic environment III
(b) social environment
(c) political environment
(d) legal environment

8. State whether the following statements are True or False:
Wait and watch is a response of least resistance.
Big and powerful firms adopt the response of gaining command over the environment.
Innovative approach requires no feedback system.
Adaptation response involves anticipation of changes in business environment.

9. State whether the following statements are true or false.
Privatisation and globalisation are components of economic liberalisation.
Pressures for structural adjustments are a reason for globalisation.
Denationalisation is a form of privatisation.
Closure of small scale firms is a positive effect of economic liberalisation.

10. Fill in the blanks:

  1. Business environment is the totality of …………… forces
  2. Different elements of business environment are ……………
  3. When business environment changes rapidly and suddenly …………… increases.
  4. Industrial policy, monetary policy and fiscal policy are elements of …………… environment of business.
  5. Business gets …………… from the environment and supplies …………… to the environment.

11. Match the items in column A with those in column B


12. Age, family size, sex composition and other people related elements are part of
(a) political environment
(b) economic environment
(c) demographic environment
(d) natural environment.

CA Foundation Business & Commercial Knowledge Study Material – Meaning and Elements of Macro Environment

CA Foundation Business & Commercial Knowledge Study Material Chapter 2 Business Environment – Meaning and Elements of Macro Environment

Meaning and Elements of Macro Environment

Macro environment refers to the general environment or remote environment within which a business firm and forces in its micro environment operate. A company does not directly or regularly interact with the macro environment. Therefore, macro environment is also known as Indirect Action Environment. Forces in the macro environment, however, create opportunities for and pose threats to the company. The macro environment forces are less controllable than the micro forces. Therefore, success of an enterprise depends on its ability to adapt to the macro environment. For example, when there is a substantial increase in the cost of imported raw materials due to depreciation of the Rupee, production of such materials within the country may become necessary.

Macro environment consists of the following components:

  1. Demographic environment
  2. Political and legal environment
  3. Social and cultural environment
  4. Economic environment
  5. Technological environment
  6. Natural environment
  7. Global environment.

1. Demographic Environment: Demographic environment means various dimensions of country’s population. The demographic environment is important to business because people constitute the market for a business. Moreover, business management involves management of people and the efficiency of business depends largely on the competence and motivation of its people. Business firms often use demographic factors (e.g., age, sex, family size, occupation, family life cycle, education, social class, income distribution) as the basis of market segmentation. The demographic environment differs from country to country and from one place to another within a country. The demographic factors which have very significant implications for business are as follows:

  • Size and growth rate of population,
  • Age and sex composition of population,
  • Life expectancy,
  • Rate of employment,
  • Density of population,
  • Rural urban distribution,
  • Family size,
  • Ethnic composition,
  • Literacy levels, and
  • Income levels.

2. Economic Environment – The economic environment comprises all those economic forces which influence the functioning of business enterprises, e.g., the nature and structure of the economy, the stage of economic development, economic resources, the level of income, economic policies, distribution of income, etc. The main components of economic environment are as follows:

  • The nature of economic system-capitalist, socialist or mixed economy.
  • Economic structure-occupational distribution of labour force, structure of national output, capital formation, investment pattern, composition of trade, balance/imbalance between different sectors, five year plans.
  • Economic policies-industrial policy, export-import policy, monetary policy, fiscal policy, foreign investment and technology policy.
  • Organisation and development of the capital market-banking system, securities markets, etc.
  • Economic indices-gross national product, per capita income, rate of savings and investment, price level, balance of payments position, interest rates, etc.
  • Economic infrastructure and stage of development of the economy.
  • Product markets and factor markets-degree of competition, market size, etc.

3. Political and Legal Environment – Political environment comprises the elements relating to Government affairs. It serves as the regulatory framework of business. The main constituents of a country’s political and legal environment are as follows:

  • The constitution of the country.
  • Political organisation-organisation and philosophy of political parties, ideology of the Government, nature and extent of bureaucracy, influence of primary groups, business donations to political parties, political consciousness, etc.
  • Political stability-structure of military and police force, election system, law and order situation, President’s Rule, foreign infiltrations, secessionist activities, etc.
  • Image of the country and its leaders.
  • Foreign policy-alignment or non-alignment, relations with neighbouring countries.
  • Defence and military policy.
  • Laws governing business, and legal system.
  • Flexibility and adaptability of laws-constitutional amendments and direction of public policies.
  • The judicial system-implementation and effectiveness of laws.

4. Social and Cultural Environment – Social environment refers to the characteristics of the society in which a business firm exists. Social and cultural environment consists of the following:

  • Social institutions and groups.
  • Caste structure and family organisation.
  • Educational system and literacy rates.
  • Customs, attitudes, beliefs, values and life styles.
  • Tastes, preferences of people, and their buying behaviour.
  • Religions, etc.

Family, marriage, education, religion, attitudes to work and wealth and ethics are some examples of socio-cultural factors.

Fig: Elements of Macro Environment

5. Technological and Physical Environment – The main elements of technological and physical environment are the following:

  • Sources and types of technology.
  • Rate of technological change.
  • Approaches to production of goods and services.
  • New processes and equipment.
  • Research and Development (R&D) systems.

6. Natural Environment – The main natural forces are as follows:

  • Climatic and geographical conditions.
  • Agricultural, commercial and other natural resources.
  • Ecological system.
  • Levels of pollution.

7. Global Environment – International agencies (World Bank, IMF, WTO, EEC, etc.), international conventions, treaties and agreements, economic and business conditions in other countries, etc. Certain developments such as a hike in the crude oil price have global impact. Developments in information and communication technologies facilitate rapid spread of culture across countries. Economic conditions abroad affect Indian firms. For example, exports increase when markets expand abroad. International political factors can also affect business. For example, improvements in relations between India and Pakistan has led to higher trade between the two countries. WTO regulations have far reaching impact on business in India. Import and investment liberalisation by WTO has led to greater competition in India. The main determinants of international environment are as follows:

  • The state of the world economy and distribution of world output.
  • International economic cooperation.
  • International market structure and competition.
  • Barriers to international trade and investment.
  • National economic policies of different countries.
  • Role of multilateral economic institutions.
  • International economic laws, treaties, agreements, codes and practices.
  • Political system and conditions in different countries.
  • Cultural factors in different countries.
  • Growth and transfer of technology.
  • Growth and spread of multinationals.


CA Foundation Business & Commercial Knowledge Study Material – Meaning and Elements of Micro Environment

CA Foundation Business & Commercial Knowledge Study Material Chapter 2 Business Environment – Meaning and Elements of Micro Environment

Meaning And Elements of Micro Environment

Micro environment or task environment refers to those individuals, groups and agencies with which the organisations comes into direct and frequent contact in the course of its functioning. In the words of Philip Kotler, “micro environment consists of the actors in company’s immediate environment that affect the performance of the company.” Micro environmental factors exercise a direct and intimate influence on the operations of the enterprise. Therefore, it is also known as Direct Action Environment or specific forces or Stakeholders. Micro environment consists of the groups in the company’s immediate operating environment which have a stake in the company. However, the micro forces may not influence all the firms in a particular industry in the same manner. For example, one firm’s supplier environment may be entirely different from that of another firm which has inhouse supplies. Even when all the competing firms in an industry have similar micro environment, their relative success depends on how effectively they face the micro forces.

Micro environment consists of the following elements:

1. Customers –
The people who buy a firm’s products and services are its customers. A business exists to create and satisfy customers. A firm may have different types of customers like individuals, households, Government departments, commercial establishments, etc. For example, the customers of a paper company may include students, teachers, educational institutions, business firms and other users of stationery.

Fig: Elements of Micro Environment

In order to be successful a company must understand and meet the needs and expectations of its customers. A firm can select the target customer group or market segment on the basis of factors like profitability, elasticity of demand, dependability, degree of competition and growth prospects. It is generally risky to depend upon a single customer group. The customer environment is becoming global due to increasing globalisation and
liberalisation of the economy. With the opening up of Indian market and foreign markets, the customer is becoming more global in the matter of shopping.

2. Competitors –
A company may have both direct and indirect competitors. Direct competitors are the other firms which offer the same or similar products and services. For example, Sony TV faces direct competition from other brands like LG, Samsung, Onida, Videocon, BPL, etc. Indirect competition comes from firms vying for discretionary income. For example, a cinema house, faces indirect competition from Casino, and other firms marketing entertainment. Due to economic liberalisation and globalisation, Indian companies are now facing competition from both domestic firms and multinational corporations. In order to understand the full range of its competition, a company must look at from buyers viewpoint.

3. Suppliers –
Suppliers refer to the people and groups who supply raw materials and components to the company. Reliable sources of supply enable the company to carry on uninterrupted operations and to minimise inventory carrying costs. Suppliers also influence quality levels and costs of manufacturing. It is very risky to depend on a single supplier. A strike*-or any other production problem of the supplier may cause interruptions in manufacturing. Therefore, it is advisable to develop and sustain multiple sources of supply. Some companies like Maruti Suzuki undertake vendor development to ensure timely and regular supply of materials and parts. The relationship between the suppliers and the firm reflects a power equation which is based on the extent to which each of them is dependent on the other.

4. Marketing Intermediaries –
Several marketing intermediaries help a company in promoting, selling and distributing its products to consumers. Middlemen like agents, wholesalers, and retailers serve as a link between the company and its customers. Transportation firms and warehouses assist in the physical distribution of products. Advertising agencies, marketing research agencies and insurance companies are other types of marketing intermediaries. Countrywide retail distribution network has contributed significantly to the success of companies like Hindustan Unilever and Dabur India.

5. Financiers –
The shareholders, financial institutions, debenture holders and banks provide finance to a company. Financial capacity, policies and attitudes of financiers are important factors for the company. For example, the company cannot raise funds through shares if the financiers are not risk taking.

6. Publics –
Publics include all those groups who have an actual or potential, interest in the company or who influence the company’s ability to achieve its objectives. Media groups, environmentalists, non-government organisations (NGOs), consumer associations and local community are examples of publics. These publics can have both positive and negative impact on a business firm. For example, media groups can be used to disseminate useful information. A company can cooperate with the local people to improve its image as well as to provide some benefit to the people. On the negative side, local community concerned with public health can force a company to suspend operations or to take pollution control measures. Non- government organisations often organise protests against firms suspected of being guilty for child labour, cruelty against animals and damage to nature. For example, one of the leading companies in India was attacked by the media for writing advertisements on rocks near a famous hill station. Such activities of publics can tarnish the image of business.

7. Workers and Trade Union –
Workers and their union are an important component of micro environment. A firm’s relations with its workers and trade union have a significant impact on its functioning and performance. Company’s work environment and industrial relations system must be conducive to efficient functioning.

According to Philip Kotler, “companies must put their primary energy into effectively managing their relationships with their customers, distributors and suppliers. Their overall success will be affected by how other publics in the society view their activity. Companies would be wise to spend time monitoring all their public, understanding their needs and opinions and dealing with them constructively.”

CA Foundation Business & Commercial Knowledge Study Material – Meaning of Business Environment

CA Foundation Business & Commercial Knowledge Study Material Chapter 2 Business Environment – Meaning of Business Environment

Business enterprises do not function in isolation. They operate within charging environment. Various elements of this environment and changes in them exercise a significant influence on the working and performance of business firms.

Meaning of Business Environment

The term business environment means “the aggregate of all the forces, factors and institutions which are external to and beyond the control of an individual business enterprise but which exercise a significant influence on the functioning and growth of individual enterprises.” Keith Davis defines business environment as “the aggregate of all conditions, events and influences that surround and affect business.”

According to Bayord O. Wheeler, business environment refers to “the total of all things external to firms and industries which affect their organisation and operation”.

In the words of Arthtur M. Weimer, “business environment encompasses the climate or set of conditions, economic, social, political, or institutional in which business operations are conducted”.

Thus, business environment means all those internal and external factors that have an impact on business.

Nature (Characteristics) of Business Environment

Business environment is characterised by the following features:

  1. Aggregative –
    Business environment is the totality of all the internal and external forces which influence the working and decision-making of an enterprise.
  2. Inter-related –
    Different elements of business environment are closely inter-related and interdependent. A change in one element affects the other elements. Economic environment influences the non-economic environment which in turn affects the economic conditions. For example, economic liberalisation in India since 1991 has opened up new opportunities for private sector and foreign entrepreneurs. Similarly, social pressures against pollution led to the enactment of anti-pollution laws. Therefore, managers should not consider environmental factors in isolation from one another. A holistic approach is necessary for proper understanding of business environment.
  3. Dynamic –
    Business environment is dynamic in nature as it keeps on changing from time to time.
  4. General and Specific Forces –
    Business environment consists of both general and specific forces. General forces such as economic, social, political, legal, natural and technological conditions influence all business enterprises. Specific forces such as investors, customers, competitors, suppliers, etc. affect individual enterprises directly.
  5. Relative –
    Business environment is a relative concept. It differs from country to country and even region to region. Capitalist economies like those of USA and UK have a different kind of environment than communist economies. The nature of economic system in a country affects the environment of business.
  6. Inter-temporal –
    Business environment is also an inter-temporal concept as it changes over time. For example, business environment in India today is much different from that prevailing before 1991. In the short run business environment may remain static. But in the long run, it does change.
  7. Uncertain –
    Business environment is largely uncertain because it is very difficult to forecast the future environment. When the environment is volatile, ie., changes very fast, uncertainty increases.
  8. Contextual –
    Business environment provides the macro framework within which the business firm (a micro unit) operates. The environmental forces are largely those given within which an individual enterprise and its management must function.
    Business environment exercises tremendous influence on the working and success of business firms. Different elements of business environment have different types and degrees of influence on business. A factor that has a favourable impact on one firm may adversely effect another firm. Therefore, management of a business enterprise must have a deep understanding and appreciation of the environment. The changes taking place in environment must be continuously monitored to judge their impact on business. Appropriate and timely steps must be taken to face the environmental changes.

Significance of Business Environment

The survival and success of any enterprise depends upon its inherent capabilities (physical, financial, human and other resources) and its ability to adapt to the changing environment.

It is very important for business firms to understand their environment and changes occurring in it. Business enterprises which know their environment and are ready to adapt to environmental changes would be successful. On the other hand, firms which fail to adapt to their environment are unlikely to survive in the long run. For example, some Indian firms suffered considerably because they failed to appreciate the tightening regulations against environmental pollution. Knowledge of environmental changes is very helpful in the formulation and implementation of business plans. A business can obtain this knowledge through environmental scanning. Environmental scanning is the process by which organisations monitor their relevant environment to identify opportunities and threats affecting their business. With the help of environmental scanning, an enterprise can consider the impact of different events, trends, issues and expectations on its business operations. Firms which systematically analyse and diagnose the environment are more effective than those which do not.

Some of the direct benefits of understanding the environment are given below:

  1. First Mover Advantage – Awareness of environment helps an enterprise to take advantage of early opportunities instead of losing them to competitors. For example, Maruti Suzuki became the leader in small car market because it was the first to recognise the need for small car on account of rising petroleum prices and a large middle class.
  2. Early Warning Signal – Environmental awareness serves as an early warning signal. It makes a firm aware of the impending threat or crisis so that the firm can take timely action to minimise the adverse effects, if any. For example, ‘when new firms entered in the mid segment cars (threat), Maruti Suzuki increased the production of its Esteem threefold. Increase in production enabled the company to make faster delivery. As a result the company captured a substantial share of the market and became a leader in this segment.
  3. Customer Focus – Environmental understanding makes the management sensitive to the changing needs and expectations of consumers. For example, Hindustan Unilever and several other FMCG companies launched small sachets of shampoo and other products realising the wishes of customers. This move helped the firms to increase sales.
  4. Strategy Formulation – Environmental monitoring provides relevant information about the business environment. Such information serves as the basis for strategy making. For example, ITC realised that there is a vast scope for growth in the travel and tourism industry in India and the Government is keen to promote this industry because of its employment potential. With the help of this knowledge, ITC planned new hotels both in India and abroad. Study of environment enables an organisation to analyse its competitors’ strategies and thereby formulate effective counter strategies. All strategic decisions such as what business to do, whether to expand or reduce a business, and so on require a thorough understanding of the internal and external environment of the organisation.
  5. Change Agent – Business leaders act as agents of change. They create a drive for change at the gross root level. In order to decide the direction and nature of change, the leaders need to understand the aspirations of people and other environmental forces through environmental scanning. For example, contemporary environment requires prompt decision-making and power to people. Therefore, business leaders are increasingly delegating authority to empower their staff and to eliminate procedural delays.
  6. Public Image – A business firm can improve its image by showing that it is sensitive to its environment and responsive to the aspirations of public. Leading firms like Reliance Industries, ICICI Bank and others have built good image by being sensitive and responsive to environmental forces. Environmental understanding enables business to be responsive to their environment.
  7. Continuous Learning – Environmental analysis serves as broad based and ongoing education for business executives. It keeps them in touch with the changing scenario so that they are never caught unaware. With the help of environmental learning managers can react in an appropriate manner and thereby increase the success of their organisations. Knowledge of changing environment can keep the organisation dynamic in its approach.

There are two major components of business environment-micro and macro.