Business Environment Notes

(1)

BUSINESS ENVIRONMENT (Prof. Pathan F.N.) UNIT – I

BUSINESS CONCEPT

Q. What do you mean by business? What are its characteristics? Or

Outline the nature of modern business. Or

What is your perception about business in 21st_Century?

Ans : Characteristics of Business : The nature of business is very dynamic and it undergoes changes from time to time. Business in 21st_{Century is characterized by intense competition} among firms, aggressive expansion, growth and diversification strategies, keeping pace with sophisticated technology and the like.

 Business fundamentally involves exchange of goods and services for income.  Activities of business enterprise are recurring in nature.

 Profit motive is the main characteristic of business; however the enlightened organizations endeavour to optimize the profits rather than to maximize it.

 Business firms of modern era are strategically oriented to have optimum leverages of strengths, and minimize the impact of weakness and adverse elements in the environment  Globalizaton is the order of the day, and business firms are increasingly becoming global

entities, posing and facing competition world over.

 Growth of Management education and training contributed to professionalization of business, alienating management from ownership.

 Integrated supply chain management is one of the key characteristics of business, which involves integrating procurement, production and distribution operations in the most efficient manner.

 Restructuring of organizational designs, marketing mix and business portfolio is necessitated in the current business due to changes in global environment.

 Co-existence of public and private sector, and increasing number of public private partnerships (PPP) is another distinguishing feature of modern business. Similarly small and medium firms co-exist with large conglomerates.

 Intense competition among domestic firms, and between domestic and multi-national firms: The competition poses several challenges to the firms, but creates immense opportunities as well.

 Business is characterized by increasing use of Technology. Technology influences every sphere of business activity

(2)

BUSINESS ENVIRONMENT (Prof. Pathan F.N.)

 Information revolutionizes the way business is run. Timely availability of reliable information is the key for making right decisions.

Q. Write a note on Vision, Mission, Objectives and Goals of Business.

Ans: Vision: Vision is a broad explanation of why the firm exists and where it is trying to lead. Vision gives the organization a sense of purpose, and a set of values to its employees. It answers the question “where do we go from here”. The vision of Infosys is “To be a globally respected corporation that provides best-of-breed business solutions, leveraging technology, vendors and society at large”.

Mission: A mission statement outlines the fundamental purpose of the organization. A vision becomes tangible as a mission statement. It answers the question “what is our business”. The mission statement of Birla Group reads as “To deliver superior value to our customers, employees, shareholders and society at large”. Similarly the mission statement of Ford Motors is “to improve continually our products and services to meet our customers’ needs, allowing us to prosper as a business and to provide a reasonable return for our stockholders, the owners of our business”.

Objectives: Objectives are more precise statements, giving a clear direction and action plan for accomplishment of mission. Objectives normally cover long-range company aims, more specific department goals, and even individual assignments. Thus objectives may pertain to a wide or narrow part of an enterprise.

Goals: A goal may be defined as an intermediate result to be achieved in a certain time, as part of the grand plan. Specific goals are usually referred to as targets. It may be noted that objectives are the long-term results that an organization seeks to achieve, while goals are the short-term benchmarks that organization strives to reach.

Q. Discuss various goals of business.

Ans: The most common goals of business include the following:

Profit: It is the main incentive and motivator for running the business. Even not-for-profit organizations endeavor to work for a surplus- i.e excess of income over expenditure, to ensure long-run survival and growth. Even though profit is the most important criteria for business, progressive organizations work towards the goal of profit optimization rather than profit maximization- the former often involves exploiting the consumer and resorting to unethical and illegal means to enhance profitability, while the latter duly emphasizes on increasing profits by ethical means and genuinely working to satisfy the customers’ needs. Growth: Every business house strives to grow over the time in terms of its size, market coverage, market share, sales, profits, revenues, brand equity, customer patronage and the like.

(3)

Power: Business confers enormous power on owner and endows them with vast resources. Business executives make and unmake political parties and political leaders. The power commanded by business personalities like Mittal, Tata, Vijay Malya, Ambanis and the like is very much evident from their media posturing.

Employee satisfaction and development: Caring for employee satisfaction and providing for their development has been one of the objectives of enlightened business houses. Providing training and development programs, competency enhancement and career planning programs for employees top the agenda of progressive organizations.

Quality Products and services: Offering quality products/ services keeps the firm ahead of its competitors. So the firms desirous of long run survival make no compromise on quality of products and services that they offer to the consumers.

Market Leadership: Firms do seek to carve a niche for themselves in the market place, through innovation in various areas- product, advertising, distribution, finance and the like. Pidilite, for instance, retains its market leadership in adhesive solutions market through its leading brands Fevicol, Feviquick etc.

Challenging: Businesses endeavor to take on challenges from adverse elements, while constantly posing challenges to the competitors. Maneuvering the rivals gives utmost contentment to the firms.

Joy of creation: It is the ability of the business house to provide solution to the diverse needs of various consumer groups through new ideas and innovations. .

Good Corporate Citizenship: It implies that the business unit complies with the rules of the land, pays taxes to the government regularly, discharges its obligations to society and cares for its employees and consumers.

Q. Define Business Environment and Discuss various components (or elements) of Business Environment.

OR

Write a note on Micro and Macro Environment of business OR

Write a note on internal and external environment OR

Write a note on controllable and uncontrollable environment of business.

Ans: Business Environment consists of all those factors that have a bearing on the business. Business Environment refers to all external and internal forces that have a bearing on the functioning of business. Environmental Analysis is must for the organizations to identify firm’s strengths & weaknesses that lie in the internal environment and to make out opportunities and threats that exist in the external environment. The survival and success of a business firm depend on its innate strength – resources at its command – and its adaptability to the environment and the extent to which the environment is favourable to the development

(4)

of the film. The survival and success of a firm, thus, depend on two sets of factors, which are the internal factors – the internal environment – and external factors – the external environment. However, the term business environment often refers to the external factors.

The external environment has, broadly, two components, that are business opportunities and threats to business. Similarly, the organizational environment has two components: strengths and weaknesses of the organization.

As the company, generally, has control over the internal factors, they are generally regarded as controllable factors because it can alter or modify such factors as its personnel, physical facilities, organization and functional means, such as marketing mix, to suit the environment.

The external factors, on the other hand, are, by and large, beyond the control of a company. The external or environmental factors such as the economic factors, socio-cultural factors, government and legal factors, demographic factors, geo-physical factors etc., are, therefore, generally regarded as uncontrollable factors.

Those external factors with have a direct and intimate impact on the firm (like the suppliers and distributors of the firm) are classified as micro environment, also known as task environment and operating environment. There are other external factors which affect an industry very generally (such as industrial policy, demographic factors etc.). They constitute what is called macro environment, general environment or remote environment.

The following Figure gives a bird’s eye view of the important components of business environment.

(5)

BELOW:-BUSINESS ENVIRONMENT (Prof. Pathan F.N.)

• Mission/objectives: Well defined mission/objectives give clear direction and path to the organization.

• Promoters/shareholders values are emulated down the line in organizations. Values upheld by personalities like Tata helped building ethical and social entities that serve the society the most.

• Management Structure influences concentration or distribution of powers/decision-making authority at various levels within the organization.

• Internal power relationships: The relationship between Board of directors and other key members of the enterprise determine the effectiveness of decision-making and its implementation.

• Firms having strong base of Assets and Physical facilities will have absolute control over operations, and could ensure effective implementation of strategies.

• Company image & Brand equity helps in raising funds, diversifying activities operations etc. smoothly.

• Competent and committed manpower provides greater efficiency, process improvisation and better quality of products/services to the customers.

• Research and Development, and Technological capabilities determine a company’s ability to innovate, reduce cost and achieve leadership position.

IMPACT OF EXTERNAL ENVIRONMENT :

Micro Environment: It is the firm’s immediate environment, and micro-environmental factors are more intimately linked with company’s performance. It includes the following elements:

Suppliers: Having a wide network of reliable suppliers ensures procurement of quality material in the right time in right quantities at competitive prices.

Channel Partners: They act as vital link in taking the product from point of production to point of consumption, providing feedback to the company on customer’s expectations & preferences, and in upholding the image of brands & organizations that they deal with.

Financiers: Reliable financiers are needed for funding the projects, implementing various programs and for smooth functioning of operations.

Competitors: Competitive environment has undergone sea change with the advent of globalization & liberalization. Various firms across diverse sectors compete for the limited disposable income of consumers. A marketer should strive to create primary & selective demand for his product to have an edge.

(6)

Customers: Having a large and loyal customer base is required for sustainable growth and development of the firm.

Public : Rising public awareness on various issues like environment, product safety etc., and changing public expectations towards the companies influence their decision making, product policy, pricing, waste disposal, participation in community development and other issues.

IMPACT OF MACRO ENVIRONMENT ON BUSINESS:

Global Environment: It includes factors such as WTO principles and agreements, Trading blocs, Treaties, conventions, declarations, protocols etc. among various countries/regions. It largely influences firm’s overseas operations, revenues and overall corporate performance. Political & legal environment: Political parties, alliances, their ideologies, the type and tenure of government and similar factors largely determine the economic agenda of the nation. Similarly various laws relating to consumer protection, employee protection, environment protection, Taxation, foreign exchange transactions etc create certain obligations on the firms to do business in a responsible manner.

Economic Environment: Factors kike GDP/NI, Per Capita Income, Monetary & Credit Policy of Government, Demand & Supply conditions, Inflation/phase of business cycle etc will have tremendous impact on business.

Social & Cultural environment: It consists of people’s values, attitudes, beliefs customs, traditions and the like that have huge influence on what they want, what they accept and what they don’t.

Technological environment: Development of Information and Communication Technology facilitates fast cross-border spread of cultures, movement of Technology and capital, which have significant implications for business.

Natural Environment: Geographical conditions, climate, monsoon, rainfall, draught availability of natural resources etc… have huge impact on firm’s decisions and operations.

Q. What is macro environment? What are its components? Ans: MACRO ENVIRONMENT :

It is also called as general environment and remote environment. The macro environment is generally uncontrollable than micro environment, the success of the company depends on its adaptability to the environment.

The important macro environment factors as follows: I. TECHNOLOGICAL ENVIRONMENT

(7)

Technology is one of the important determinants of success of a firm as well as economic and social development of nation. It includes both hardware and software to solve problems and promote progress.

1. Innovative drive of company

The term innovation means introduction of new product, the use of new method of production. “The technical, industrial and commercial steps which leads to marketing of new products and to commercial use of new technical process and equipment.”

2. Customers Needs / Expectation

Technological orientation and R&D effects of a company may also be influenced by the customer needs and expectation. In several cases the customer and the supplier have a collaborative relationship to develop the product or solutions. If the customers are highly demanding, companies would be compelled to be innovative.

3. Demand conditions

The size of demand influences the choice of the technology . The size of demand influences the choice of the technological scale. Fast growing trend of demand would encourage development of technology of large scale.

4. Suppliers offering

Many times technological changes are encouraged by the suppliers of a company, like a capital goods supplier etc.

5. Competitive dynamics

Competition compels the adoption of the best technology and constant endeavor to innovate.

6. Substitutes

Emergence of new substitutes or technological improvements or substitutes which alter technological change.

7. Social forces

Certain social forces like pretext against environment pollution or other ecological problems demand for eco-friendly products.

1. Research organization

The technological environment of business is enriched by researched organizations which develops new technologies and provide other technical inputs.

2. Govt. policy

The govt. contributes to the development to the technology by its own direct involvement by establishing research organization and funding R & D. The govt. may encourage private R & D by various incentives.

II. DEMOGRAPHIC ENVIRONMENT

The importance of demographic factors to business is clear from the facts that “Management is men” & “Market is people.” i.e., Management in Men, Material, Machinery and Money, and market is people in the sense that the demand depends on the people and their characteristics – the number, income levels, tastes and preferences, beliefs, attitudes and sentiments.

(8)

Important demographic bases of market segmentation include the following: 1. Age structure 2. Gender 3. Income distribution 4. Family size 5. Occupation 6. Education 7. Social class 8. Religion 9. Race 10. Nationality

Demographic factors such as size of population, growth rate, age composition, ethnic, density of population, rural – urban distribution, nature of family have very significant implication for business.

III. ECONOMIC ENVIRONMENT

Economic Environment refers to all those economic factors, which have a bearing on the functioning of a business. Business depends on the economic environment for all the needed inputs. It also depends on the economic environment to sell the finished goods. Naturally, the dependence of business on the economic environment is total and is not surprising because, as it is rightly said, business is one unit of the total economy.

Economic environment influences the business to a great extent. It refers to all those economic factors which affect the functioning of a business unit. Dependence of business on economic environment is total — i.e. for input and also to sell the finished goods. Trained economists supplying the Macro economic forecast and research are found in major companies in manufacturing, commerce and finance which prove the importance of economic environment in business. The following factors constitute economic environment of business:

(a) Economic system (b) Economic planning (c) Industry

(d) Agriculture (e) Infrastructure

(f) Financial & fiscal sectors

(g) Removal of regional imbalances (h) Price & distribution controls (i) Economic reforms

(j) Human resource and

(k) Per capita income and national income

The state became the encourager of savings and also an important investor and the owner of capital. Since the state was to be the primary agent of economic change, it followed that private sector activities had to be strictly regulated and controlled to conform to the objectives of state policy.

(9)

The growth strategy also meant, in the early years of planning, a relative neglect of public investments in agriculture. This negligence of agriculture sector was supported by the general view that the increase labour in the developing countries could only be absorbed in the industry, and that during the early stages of industrialization, it was necessary for agriculture to contribute in the establishment of modern industry by offering inexpensive work force. A faster development of industry was the central objective of planning. The above is a thumbnail sketch of the growth strategy followed by the planners in the past four decades.

Business partners and strategies are influenced by the economic characteristics. The economic environment includes the structure and nature of the economy, the stage of development of economy, economic resources, level of income, global economic linkages, economic policies etc. 1. Nature of the Economy

The general level of development of the economy has lot of implication for business – it has significant bearing on the nature and size demand, govt. policies affecting business. The widely used method of classification of the economies is on the basis of per capita income. Accordingly the low income, middle and high income economies.

Low income economies are economies with very low per capita income. High income economies are economies with very rich income per capita. Middle income economies are sub divided into lower middle and upper middle income where income per capita is neither very high nor low.

2. Structure of the economy

Factors such as contribution of different structure like primary (agricultural), secondary (industrial) & tertiary (secondary) sectors, large, medicine, small sectors to economy. These factors and the nature of each sector have business implication. For example, India is one of the largest producers of agricultural products, because of the small and fragmented nature of land holdings, efficient collection and processing of products become difficult. The land holding pattern also makes productivity improvements difficult.

3. Economic policies

There are several economic policies which can have very great impact on business. Important economic policies are

a) Industrial policy

It defines the scope and role of different sectors like private, public, joint and cooperative. It may influence the location of industrial undertakings. Choice of technology, state of operation, product mixes etc.

(10)

It can affect the fortunes of firms. For example a policy of protecting the home industry may greatly help the import competing industries, while liberation of the impart policy may create difficulties for such industries. This mean the firm should come up with quality, cost, and marketing and after sales service etc.

c) Foreign exchange policy

Exchange rate policy and policy in respect of cross border movement of capital are important for business.

d) Foreign investment and technology policy

Foreign investment and technology policy will increase domestic competition at the same time it would benefit many domestic firms – by permitting global sourcing of capital and technology, by increasing the quantity and quality of domestic supply of many goods and services.

e) Fiscal policy

Govt. strategy in respect of public expenditure and revenue can have significant impact on business. The pattern of public expenditure may affect the develop of industries. Such as govt. often use tax incentives or disincentives to encourage or discourage certain activities. For ex: when industry suffers from recession, a reduction of taxes like excise duty or sales tax may help improve the demand.

f) Monetary policy

The central bank, by its policy towards the cost and availability of credit, can significantly influence savings, investments and consumer spending in economy. For example – 1% reduction in cash reserve ratio will significantly increase loan able funds with commercial banking systems. IV. NATURAL ENVIRONMENT

The natural environment ultimately is the source and support of everything used by business – every raw material, energy resource, life sustaining factor etc.

The natural environment determines what can be got done in a society and how institution can function. Resource availability is the fundamental factor is the development of business in the society.

Thus geographical and ecological factors, such as natural endowments, weather and climatic conditions, topographic factors, vocational aspects in the global context etc., are all relevant to business.

1. Geographical factors: differences in geographical condition between markets may sometimes call for changes in the market mix. It influences the location of some industries.

(11)

2. Climatic and weather conditions: It affects the location of certain industries like cotton textile industry. Topographic factors may affect the demand pattern in some cases. E.g. in hilly areas Jeeps are greater demand than cars.

Weather and climatic factors affect the demand of certain types of products. E.g. in region where temperature is very high in summer, there is good demand for desert coolers.

Weather and climatic factors can affect the demand pattern of clothing, building materials, food, medicines etc. further, weather and climatic conditions may call for modification to the products, packaging storage conditions etc.

3. Ecological factors: It assumes great importance, the depletion of natural resources, environmental pollution another disturbance of the ecological balance have carried great concern, govt. policies aimed as preservation of environment purity and ecological balance, conservation of non-replenish able resources have resulted additional responsibilities and problems for business.

Macro environment of business consists of Economic, Political and legal, Social, Cultural, Technological, Natural and Global environment.

ECONOMIC ENVIRONMENT

8. What do you mean by Economic Environment? What are the different factors of economic environment that effect business

(OR) Evaluate Economic Environment in India

(OR)

What are the Components of Economic Environment?

Ans : Economic environment refers to all those economic factors which have a bearing on business. Business depends on economic environment for procurement of inputs & sale of its output.

The major factors of economic environment effecting business are discussed as below:  Growth Strategy of the nation

(12)

BUSINESS ENVIRONMENT (Prof. Pathan F.N.)  Economic Planning

 Major sectors of the economy, such as Agriculture, Industry and Infrastructure  Economic Reforms

 Human Capital  Income & GDP

 Distribution of Income & Assets  Global linkages

Growth Strategy: The growth strategy followed in India until 90’s was Soviet Model, with little/marginal participation by private sector. This strategy contributed to overall growth of the economy, but was subjected to severe criticism for its poor focus on agriculture, neglect of export and trade opportunities and excessive protectionism. There has been a major turnaround in the growth strategy in the post-liberalization era.

Economic Systems: Major economic systems adopted in various countries include. Capitalist Model, in which the private enterprises have major control over resources; Socialism, in which the tools of production are organized, owned and managed by government; and Communism which goes further to abolish all private property and property rights to income. Though India adopted Mixed Economic System to facilitate existence of public and private sectors, the role of private sector was very limited. The scenario had drastically changed in 90’s with the phenomenon of Liberalization, Privatization & Globalization.

Economic Planning: India has been planned economy with the central and state governments playing a lead role in determining priorities and allocation of funds & resources across various sectors and regions. However the objectives of economic planning such as rising production & income, full employment, equitable distribution of income and wealth, and equality & justice could not be achieved to the right extent due to lapses in policies and their implementation.

Production, Agriculture & Infrastructure: These are the vital components of the structure of the economy. Great emphasis was laid on development of Industry; with due priority to agricultural sector. However the scenario has been rapidly changing in the last two decades, as the service sector growing phenomenally and contributes 51.6% of GDP, while Agriculture and Industry contributes 22.7% and 25.7% respectively.

Economic Reforms: Economic Reforms helped dismantling license, permit, quota Raj, which was taken over by the phenomenon of liberalization, privatization & globalization. Controls are largely slashed/ rationalized, restrictions on FDI & MNCs are removed/relaxed, prices are deregulated (still few price controls exist). Protectionism given way for market oriented

(13)

policies. Various economic policies that have profound influence on business include: Industrial policy, Foreign Investment policy, Foreign Exchange Policy, EXIM Policy and Monetary and Fiscal Policy.

Human Capital: Of late, required attention is being paid to development of skilled and competent manpower in India. The nation’s excessive population, once viewed to be a burden on the economy, is being shaped into vital resource, which makes India a most attractive manufacturing and outsourcing destination for MNCs. However the problem of unemployment is still in dangerous proportion, especially in the unorganized sector/among unskilled laborers. Programs like Mahatma Gandhi National Rural Employment Guarantee Scheme go in the right direction, if properly implemented.

Income & GDP: They are the most vital indicators of a nation’s economic progress. India’s position on these parameters has been improving over the time in money terms. The situation is even better in terms of purchasing power Parity. India ranks 10th_{in terms of Gross} National Income in the world, but stands 4th_{in terms of purchasing power Parity. The rate of} economic Growth in India in new millennium has been highly impressive and the future looks to be very promising.

Distribution of Income & Assets: The rising employment, Income, FDI and the like do not compensate for widening inequalities between rich and poor in the society. The number of Millionaires & Billionaires is growing but the fact that the farmers, weavers and other vulnerable & disadvantaged sections committing suicides cannot be ignored. The growing inequalities between rich & poor nations has been alarming, as 20% of world population in developed countries control 80% of income/resources while 80% people fight for remaining meager income.

Global Linkages: It includes elements such as magnitude and nature of cross-border trade and investments, and membership of WTO, IMF, World Bank, Trading Blocs, etc. India has been the active member in various international bodies. Its cross-border flows are rising, but India’s contribution in Global Trade is dismally low at about 1%.

To conclude, the economic environment in India is turning out to be positive and promising as Indian firms are increasingly exploiting global opportunities, and MNCs are being increasingly inclined to do business in India.

(14)

Ans: Economic environment refers to all those economic factors which have a bearing on business. Business depends on economic environment for procurement of inputs & sale of its output.

The impact of economic environment on business may be understood from the following facts.

 Business depends on economic environment for pooling various resources.

 Crucial business decisions viz. what to produce, how to, how much, when, where etc. are largely influenced by the factors in economic environment.

 Economic Environment reflects government’s policy towards various sectors of the economy viz., Manufacturing, Agriculture & Services. The quantum of credit available for various sectors, interest rates, subsidies, incentives/controls, price regulations, taxation structure and other such vital factors.

 It determines the extent of protection or competition faced by the organization.

 It influences firm’s decisions with respect to pricing, promotion, business growth, expansion and diversification.

 It influences overall investment climate in the country and flow of FDI into the country. The following table shows various variables/ factors of Economic environment and how they are related to business.

Factors/Variable Relevance to Business

−Income & employment −Purchasing power of people & demand for goods & services. −GDP trends −Overall investment climate in the country.

−Distribution of income −Prevailing inequalities in income & wealth distribution. −Price Trends −Output discuss inventory, profitability, investment etc.

−Trade and BOP Trends −Degree of flexibility on exports and imports, incentives/controls. −Industrial policy. −Role & Scope for private investment.

(15)

−Global linkages. −Fosters open competition, removal of trade barriers, protectionism abandoned.

−Economic planning. −Priority areas/sectors of investment. −Global economic

Trends.

−Influences outsourcing Foreign investment, etc.

analysis of economic environment enables the organization to leverage the favorable factors, and take steps to minimize the impact of adverse factors in the environment.

Q. Do you think the present economic environment in India is favorable to business?

Ans: Yes. The present economic environment in India is largely favorable with favorable macro economic indicators – impressive growth rate in GDP @ 7% +, which is commendable during the spell of recession world over. Thanks to the strong fundamentals of the domestic economy, series of stimulus packages ushered in by the government and partial recovery of the global economy, Indian economy is going strong. The sales of various manufacturing units such as Automobile, PCs, consumer electronics, industrial goods, etc have been rising, while exports register an impressive growth during latter half of F.Y 2009-10.

The recovery of IT sector is very much evident from the companies’ expansion plans, new recruitments and further investments. The opportunities in sectors like Telecom, Retail, Automobile Consumer Electronics, FMCG, Pharma, Insurance & Financial services, real estates and the like are plenty.

India is 4th_{largest economy in the world in terms of purchasing power parity and 2}nd_rapidly growing economy after China, and is competing strongly with China in attracting FDI.

However there are still several controls on flow of FDI in various sectors, while rapidly changing political environment in some states including that of Andhra Pradesh that could adversely affect the economic climate.

To conclude, the economic environment in India is by and large favourable, however prudence demands caution and meticulous scrutiny of problems and prospects of every business decision.

Q. Give a comparative account on pre-reform and post-reform economic environment in India.

Ans:

(16)

Pre-1991 situation Post-1991 situation Consequent / implication Of the change Private sector excluded from

many important industries. In a number of other important industries public sector had priority to establish new undertakings.

All but a few industries are open to the private sector.

Enormous scope for private investment. Considerable freedom to decide the portfolio strategy. Competition increases substantially and public sector loses its monopoly/dominant positions. Entry, involving investment

above specified exemption limit, are restricted by licensing.

All but a few industries are free from licensing.

Reinforces the above factors.

Entry of large firms was subject to MRTP Act restrictions, besides licensing.

No MRTP Act restrictions

on entry. Reinforces the above factors. Licensing and MRTP Act

restrictions on growth of existing undertakings.

All but a few industries are free from licensing restrictions on growth. No

MRTP Act

restrictions on growth.

Companies can grow organically and by acquisitions. Firms will grow in size and several industries will witness consolidation of firms. A small number of firms would eventually dominate the industry in several cases.

Limited scope for foreign capital and technology.

Foreign capital and technology policies

have been

substantially liberalized.

Entry of many foreign firms by Greenfield projects and acquisitions. Opportunity for Indian firms for acquiring technology and establishing joint ventures. Substantial increase in competition. Highly restrictive import policy. Imports substantially

liberalized.

User industries can benefit by global sourcing. Import competing firms face stiff competition. Global competition emerges in the Indian market. Indian firms will have to improve their competitiveness and become more innovative to face the global competition.

Q. What is political environment? Outline the impact of political environment on business

(17)

Ans: The political environment of a country is influenced by the political organizations such as philosophy of political parties, ideology of government or party in power, nature and extent of bureaucracy influence of primary groups etc. The political environment of the country influences the business to a great extent the political environment includes factors such as  Characteristics and policies of the political parties.

 The nature of the constitution and government system and the government environment.  Encompassing the economic/business policies and regulations.

 Stability of Government.  Type: Democracy/Autocracy.

 Role of Judiciary: Various laws like consumer protection Act, Environment protections Act, MRTP Act or Competition Act, Companies Act, various Acts governing employee welfare /security viz. factories Act, PF Act, ESI Act, Gratuity Act, workmen compensation Act etc., create several obligations on the part of organizations. Contravention of the provisions of any law/act calls for severe penalties to the firm

 Political Interference in business. Reliance Retail business in Uttar Pradesh faced many hurdles and suffered huge losses since Mayavathi Government came to power. Similarly investment in Telangana Region had drastically slowed down if not turned negative- that may largely be ascribed to political factors.

These factors may vary very significantly across different countries, different provinces in a country and also over the time. The vital institutions under political system include legislature, executive and judiciary, each bestowed with well defined role and authority. They have profound influence on business. The businessman of today cannot limit himself to the problems internal to his business unit but has to intelligently keep himself constantly abreast of the national problems. Such an understanding will help him in the long run while dealing with his own managerial and business problems being influenced by the political environment.

Public opinion is a very important aspect of modern life. In a democracy, any act must be supported by public opinion to be upheld and sustained. Even so the business activity must get the support of public opinion. Political leaders are the representatives of the public and the spokesmen of its opinion. Therefore, business and politics are closely related. Without a clear understanding of dynamics of politics and the support and encouragement from the politicians, business cannot prosper. The business strategy adopted by the businessman is to be framed keeping in mind what is the present political situation, what are going to be the steps taken by political forces in the country and abroad and what will be the repercussions of different political developments on the life of business. If the general atmosphere in the political circle is against business-specially the private sector, the businessman has to deal with it by making necessary modifications in his attitude, policies and practices. If he does not care for the political environment he may be meeting with the failure as the political forces may finish the chances of his success by creating insurmountable obstacles in his way.

(18)

The case of Maruti Limited which was set up for the manufacture of mini-cars in good example of how the change of political forces affects favorably or adversely the business venture. During the emergency, when the country was governed by the Congress (I), Mr. Sanjay Gandhi was able to get all sorts of assistance from the Government including huge finance because of his close relations with the then Prime Minister Mrs. Indira Gandhi. With the change in Government, i.e., when the Janata party came into power, the same concern had to see its dooms day as so many charges of corruption and bungling were laid against Maruti Limited and its Directors because of which the business came to a close and the legal battle is still going on. The political climate determines the prospects and problems of any concern.

Q. Write a note on impact of a) Legislature, b) Executive or government c) Judiciary on business

Ans : Impact of legislature on business : Various laws like consumer protection Act, Environment protections Act, MRTP Act or Competition Act, Companies Act, various Acts governing employee welfare /security viz. factories Act, PF Act, ESI Act, Gratuity Act, workmen compensation Act etc., create several obligations on the part of organizations. Contravention of the provisions of any law/act calls for severe penalties to the firm.

Impact of Executive or Government on business: Executive is the law implementation agency. Keeping in tune with federal setup, the powers are divided between the central and State Government. The role of the govt. is vital as it facilitates smooth conduct of business. The mutual impact of govt. and business towards each other is show below:

Govt. also influences business by fixing tariffs and quotas. With the advent of liberalization, privatization and globalization, the role of government changed from regulator to a facilitator. However the role of government continues to be relevant as licensing continues, though the list of industries subject to licensing is reduced, subsidies and tariffs continue though on a reduced scale.

Impact of Judiciary on business: The role of the judiciary is to ensure that the executive authority conforms to the general rules laid down by the legislature. It also settles the relationship between private citizens on the one hand, and between citizens and the government on the other. The power of the judiciary to settle legal disputes affects business considerably. Judiciary has the power to penalize the erring organizations /employers, duly protecting their rights.

DEMOGRAPHIC ENVIRONMENT

(19)

Ans: It is conventionally said that Management is Men, Material, Machinery and Money. Even if all the other Ms are excellent, it would not be of use unless the Men are the right ones (in terms of quality, potential, motivation & commitment etc.)

Market is people in the sense that the demand depends on the people and their characteristics – the number, income levels, tastes and preferences, beliefs, attitudes and sentiments and a host of other demographic factors. No wonder, demography is an important element of macro environment

Important elements of demographic environment include the following. • Age structure

• Gender

• Income distribution • Family size

• Family life cycle (For example: Young, single: young, married, no children; young married with children ……)

• Occupation • Education • Social class • Religion • Race • Nationality

The demographic environment differs from country to country and from place to place within the same country or region. Further it may change significantly over time. Peter Ducker, who emphasizes the tremendous economic and business implications of demographic changes, suggests that any strategy, that is any commitment of present resources to the future expectations, has to start out with demographics.

Various demographic factors that influence business include:

 Population size: Larger the size of population greater the opportunity for business. Eg: India & China are attracting MNCs given to the size of population in respective countries.  Population Growth Rate: It determines pattern of demand for various product, services,

(20)

 Age composition: It determines needs, income/ earning capacity, ability to work, physical stamina of people of different age groups.

 Ethnic composition: People belonging to different caste, religion, race, nationality etc exhibit different buying patterns and behaviour. The organizations should tailor the products/services according to ethnic composition.

 Density of population: With rising density of population, especially in urban and semi-urban areas, the demand/need for compact houses, household goods vise.

 Rural – Urban distribution: People in rural and urban areas have different levels of income and purchasing power. So accordingly the organization should design their marketing mix.

 Family Size & Nature of family: The demand for consumer electronics for instance, will be greater with nuclear family system and vice versa.

 Income levels: Higher the incomes, greater the spending on comforts & luxuries and vice-versa.

 Family life cycle: Double income families with no/single kid have higher levels of income & purchasing power than the families with grown-up children.

Q. What is natural environment? Give a detailed note on impact of natural environment on business.

Ans : Natural Environment : As Watrick and Wood observe “the natural environment ultimately is the source of and support of everything used by businesses (and almost any other human activity) - every raw material, every energy source, every life-sustaining factor, even every waste disposal site.

A country's territorial size, geographical location, natural resources, climate, rivers, lakes and forests constitute its physical environment. The physical environment influences political and economic activities, shapes cultural characteristics such as language and religion, and determines land usage, transportation, and commercial flows.

The natural environment determines what can be got done in a society and how institutions can function. Resource availability is the fundamental factor in the development of business in societies.

Differences in geographical conditions between markets may sometimes call for changes in the marketing mix. Geographical and ecological factors also influence the location of certain industries. For example, industries with high material index tend to be located near the raw material sources.

The dreadful earthquakes that ravaged several areas of Gujarat in early 2001 and the potential for such occurrences in a number of other places would influence the decision

(21)

making in respect location of business. It is also likely to affect the demand for flats and accommodation in high rise buildings. It could also influence the choice of building technology, design, material etc.

Topographical factors may affect the demand pattern in some cases. For example, in hilly areas, with a difficult terrain, jeeps may be in greater demand than cars. Similarly, in several regions where the temperature is very high in summer, there is good demand for desert coolers; but they are not at all used in some of the States in India. In regions characterized by very cold climate in winter and very hot climate in summer both room heaters and air conditions may in good demand in the respective seasons. Weather and climatic factors can affect the demand pattern for clothing, building materials and designs, food, medicines etc. Further, weather and climatic conditions may call for modifications to the product, packaging, storage conditions etc. Abnormal weather conditions (e.g. winter season in Jammu & Kashmir region) can disrupt the transportation of export products while unforeseen changes in the weather can threaten companies which produce seasonal goods. Topography will influence the routing of goods and the choice of transport mode, which in turn will affect cost and thus impact on the price offered to the buyer.

Ecological factors have recently assumed great importance. The depletion of natural resources, environmental pollution and the disturbance of the ecological balance has caused great concern. Government policies aimed at the preservation of environmental purity and ecological balance, conservation of non-replenishable resources, etc., have resulted in additional responsibilities and problems for business, and some of these have the effect of increasing the cost of production and marketing. Externalities have become a very important problem the business has to confront with.

Although the physical environment is not considered one of the core components of the SLEPT factors (Social, Legal, Economic, Political and Technological factors) it is an environment that can impact upon success of a firm’s exports and consequently needs to be considered.

Q. What is meant by culture? What are its characteristics and elements (or components)? Ans : Nature of Culture : Culture is understood as that complex whole which includes

knowledge, belief, art, morals, law, customs and other capabilities and habits acquired by an individual as a member of a society. It includes the thought and behavioral patterns that members of a society learn through religion, language and other forms of symbolic interaction-their customs, habits, beliefs, and values, the common viewpoints which bind them together as a social entity. Cultures change gradually, picking up new ideas and dropping old ones, but many of the cultures of the past have been so persistent and self-contained that the impact of any sudden change tears them apart, uprooting their people psychologically.

The following characteristics of culture are worth mentioning:

1. Learned – Culture is not inherited or biological based, it is acquired by learning and experience.

(22)

2. Shared – People as members of a group, organization, or society share culture; it is not specific individuals.

3. Transgenerational – Culture is passed on from one generation to the next.

4. Symbolic – Culture is based on the human capacity to symbolize or use one thing to represent another.

5. Adaptive – Culture is based on the human capacity to change or adapt, as opposed to the more genetically driven adaptive process of animals.

Q. Discuss the impact of culture on business. Ans : Impact of Culture on Business :

− Culture creates people. It trains people along particular lines, there are sub-cultures within culture. It conveys a sense of identity to organizational members.

− Culture & Globalization: As business units go international, the need for understanding and appreciating cultural differences across various countries is essential. Workforce diversity becomes major issue in cross-cultural environment.

− Culture determines what type of goods/services people like/dislike; Eg products like cosmetics, Fashion goods, Liquor, etc. are largely consumed/prohibited on cultural lines. − Language & culture: The interrelationship between language and culture is very strong. All languages have limited set of words that in turn constrain the ability of the users to understand or conceptualize the world.

− Culture determines attitudes towards work, ethics, business, time, interpersonal relationships and so on.

− It determines individualism vs collectivity, which effects employee morale, motivation, unity, and the like.

− Ambitious/complacent: Culture makes a person to be ambitious or complacent. Ambitious individual is highly motivated, is wealth acquisitive while complacent employee is satisfied with status quo.

− Culture determines education that in turn influences labour characteristics, wage structure, workforce distribution, employment and the like.

− Culture determines family system which has high relevance to protection in inheritance, property rights, morality, care for sick and helpless and so on.

(23)

− Others factors: Other elements of culture such as Religion, Scientific outlook, caste /creed etc. have profound impact on business.

(24)

Q. Explain the importance of environment analysis. (OR)

“Firms which systematically analyze and diagnose environment are more effective than those which don’t”. Elucidate. Also discuss the limitations of environmental analysis.

Ans: Environmental analysis has several benefits like those mentioned below.

 The very idea of environmental analysis makes one aware of the environment-organization linkage.

 A corollary of the above is that (environmental analysis helps) an organization to identify the present and future threats and opportunities.

 Environmental analysis will provide a necessary and very useful picture of the important factors which influence the business.

 Environmental analysis helps to understand the transformation of the industry environment.

 Technological forecasting will indicate some of the future opportunities and challenges.  A very important benefit of environmental analysis is its contribution to identification of risks.

 Environmental analysis is a prerequisite for formulation of right strategies – corporate, business and functional.

 Environmental monitoring helps suitable modifications of the strategies as and when required.

 Environmental analysis keeps the managers informed, alert, and often dynamic  It encourages favourable attitude towards change and forward thinking.

 It minimizes the effects of adverse conditions and changes.

Limitations of Environmental Analysis:

 Environmental forecasting has several limitations. Some of the limitations arise from the forecasting techniques used. Further there are also chances of certain errors affecting the reliability of the forecasts.

 Environmental analysis does not foretell the future, nor does it eliminate uncertainty for any organization.

(25)

 Environment analysis is only a tool for strategy development and testing, and not a sufficient guarantor of organizational effectiveness.

 Excessive reliance on scanned data may lead to erroneous decisions  Decision making is often constrained by overload of information

In spite of several limitations, organizations do engage in scanning and analyzing the environment to cope with dynamics of business environment.

Q. Explain the process (or steps) of environmental analysis.

Ans: The Process of Environmental Analysis: Environmental analysis is a challenging, time consuming and expensive affair. The analysis consists of four sequential steps: (i) scanning, (ii) monitoring, (iii) forecasting, and (iv) assessment.

Scanning - Being the first step in the process of environmental analysis, scanning involves general surveillance of all environmental factors and their interactions in order to (a) identify early signals of possible environmental change, and (b) detect environmental change already under way.

The potentially relevant data for scanning are unlimited but are scattered, vague, and imprecise. The fundamental challenge for analysis in scanning is, therefore, to make sense out of vague, ambiguous, and unconnected data.

Monitoring: Monitoring involves tracking the environmental trends, sequences of events, or streams of activities. It frequently involves following signals or indicators unearthed during environmental scanning. The purpose of monitoring is to assemble sufficient data to discern whether certain trends and patterns are emerging. Thus, as monitoring progresses, the data turn more precise.

Three outcomes emerge out of monitoring: (a) a specific description of environmental trends and patterns to be forecast; (b) the identification of trends for further monitoring, and (c) the identification of areas for further scanning. These outputs (particularly the first) become inputs for forecasting. They will also cause for further scanning and monitoring.

Forecasting: Scanning and monitoring provide a picture of what has already taken place and what is happening. Strategic decision-making, however, requires a future orientation. Naturally, forecasting is an essential element in environmental analysis.

Forecasting is concerned with developing plausible projections of the direction, scope, and intensity of environmental change. It tries layout the evolutionary path of anticipated change. For example, how long will it take the new technology to reach the market place? Are current life-style trends likely to continue? These kinds of questions provide the grist for forecasting efforts.

Unlike scanning and monitoring, forecasting is well focused and is much more deductive and complex activity. This is so because the focus, scope and goals of forecasting are more specific than the earlier two stages of environmental analysis.

(26)

Assessment: - Scanning, monitoring and forecasting are not ends in themselves. Unless their outputs are assessed to determine implications for the organization's current and potential strategies, scanning, monitoring and forecasting simply provide 'nice-to-know' information. Assessment involves identifying and evaluating how and why current and projected environmental changes affect or will affect strategic management of the organization.

In assessment, the frame of reference moves from understanding the environment - the focus of scanning, monitoring and forecasting - to identifying what the understanding means for the organisation. Assessment, therefore, tries to answer questions such as what are the key issues presented by the environment, and what are the implications of such issues for the organisation.

Linkages among

Stages:-Though conceptually scanning, monitoring, forecasting and assessment are separate activities, they are inextricably intertwined.

For example, upon unearthing an emerging trend through scanning, one might quickly jump to - potential implications for the organization (assessment) by implicitly forecasting the future path of the trend. If warranted by the potential impact, one may then continue scanning and monitoring. Deriving implications (assessment) often prompts the organisation to the need to conduct further scanning, monitoring and forecasting. Thus, environmental analysis is not as simple and as linear as moving from scanning to monitoring to forecasting to assessment, and should be carried out diligently.

RESPONSIBILITY OF BUSINESS/CSR Q. Define Social Responsibility of Business.

(27)

Discuss the responsibility of business towards various sections (or interest groups or stakeholders) of society

Ans: Social Responsibility, also referred as corporate social responsibility, is understood as the obligation of decision makers to take actions, which protect and improve the welfare of society as a whole along with their own interests. There is no unanimity of opinion as to what constitutes social responsibility of business. The important generally accepted responsibilities of the business to different sections of the society are described below.

Responsibility to Shareholders: The responsibility of a company to its shareholders, who are the owners, is indeed a primary one. The fact that the shareholders have taken a great risk in making investment in the business should be adequately recognized.

1. To protect the interests of the shareholders and employees, the primary business of a business is to stay in business.

2. To safeguard the capital of the shareholders and to provide a reasonable dividend, the company has to strengthen and consolidate its position and improve its business and build up its financial independence.

3. To provide clean and transparent administration of the enterprise and making necessary disclosures from time to time.

4. By innovation and growth the company should consolidate and improve its position and help strengthen the share prices. At the same time, it should avoid indulging in tampering of share prices and mislead the investors.

5. The shareholders are interested not only in the protection of their investment and the return on it but also in the image of the company. It shall, therefore, be the endeavour of the company to ensure that its public image is such that the shareholders can feel proud of their company.

It may be mentioned here that the shareholders also have certain responsibilities which they have to discharge to protect their own interests. They shall not only offer whole-hearted support and co-operation in the positive efforts of the company but shall also guide and control properly its policies and activities. At the same time, they shall appreciate the responsibility of the business to other sections of society – to the workers, consumers and the community.

Responsibility to Employees: The success of an organization depends to a very large extent on the morale of the employees and their whole-hearted co-operation. Employee morale depends to a large extent on the discharge of the company’s responsibilities to them and the employer-employee relationship. The responsibility of the organization to the workers includes:

1. The payment of fair wages;

2. The provision of the best possible working conditions; 3. The establishment of fair work standards and norms;

(28)

4. The provision of labour welfare facilities to the extent possible and desirable; 5. Arrangements for proper training and education of the workers;

6. Reasonable chances and proper system for accomplishment and promotion;

7. Proper recognition, appreciation and encouragement of special skills and capabilities of the workers;

8. The installation of an efficient grievance handling system;

9. An opportunity for participating in managerial decisions to the extent desirable.

The Committee that conducted the social audit of Tata Iron and Steel Company (TISCO) observes that “not only should the company carry out its various obligations to the employees as well as the larger community as a matter of principle, but his has also led to a higher degree of efficiency in TISCO works and an unparalleled performance in industrial peace and considerable team spirit and discipline which have all resulted in high productivity and utilization of capacity”. Thus, by discharging its responsibilities to the employees, the business advances its own interests.

It may, however, be pointed out that the expenditure on labour welfare, etc., should have relevance to the financial position of the company and the economic conditions of the nation. This aspect has to be particularly taken note of by public sector enterprises. Such expenditure shall not exceed the socially and economically warranted limits and shall not cause undue burden on the consumers or the general public. It shall not result in the formation of islands of affluence or comfort in the midst of poverty and suffering at the expense of society.

Responsibility to Consumers: According to Peter Drucker, “there is only one valid definition of business purpose; to create a customer”. It has been widely recognized that customer satisfaction shall be the key to satisfying the organizational goals. Important responsibilities of the business to the customers are:

1. To improve the efficiency of the functioning of the business so as to (a) increase productivity and reduce prices, (b) improve quality and (c) smoothen the distribution system to make goods easily available.

2. To do research and development, to improve quality and introduce better and new products.

3. To take appropriate steps to remove the imperfections in the distribution system, including black-marketing or profiteering by middlemen or anti-social elements.

4. To supply goods at reasonable prices even when there is a seller’s market. 5. To provide the required after-sales services.

(29)

7. To provide sufficient information about the products, including their adverse effects, risks, and care to be taken while using the products.

8. To avoid misleading the customers by improper advertisements or otherwise. 9. To provide an opportunity for being heard and to redress genuine grievances.

10. To understand customer needs and to take necessary measures to satisfy these needs. Responsibility to government: They include:

1. Payment of taxes from time to time

2. Compliance to various laws, rules and regulations

3. Provide vital information to facilitate policy decision making

4. Participate in effective implementation of various schemes, programs etc.

Responsibility to the Community: A business has a lot of responsibility to the community around its location and to the society at large. These responsibilities include:

1. Taking appropriate steps to prevent environmental pollution and to preserve the ecological balance.

2. Rehabilitating the population displaced by the operation of the business, if any. 3. Assisting in the overall development of the locality.

4. Taking steps to conserve scarce resources and developing alternatives, wherever possible.

5. Improving the efficiency of the business operation. 6. Contributing to research and development.

7. Development of backward areas.

8. Promotion of ancillary and small-scale industries.

9. Making possible contribution to furthering social causes like the promotion of education and population control.

10. Contributing to the national effort to build up a better society.

(30)

Ans: Arguments for and Against Social Involvement: The important arguments for and against the social involvement of business are given below.

Arguments for ( in favor) Social Involvement Business:

1. Business which survives using the resources of the society has a responsibility to the society.

2. Business which is an integral part of the social system has to care for the varied needs of the society.

3. Social involvement of business would foster a harmonious and healthy relationship between the society and business to the mutual benefit of both.

4. Social responsibilities like recycling of waste may have favorable financial effects. 5. Social involvement may discourage additional government regulation and intervention. 6. Social involvement may create a better public image for the company which may help it

in attracting customers, efficient personnel and investors. Arguments Against Social Involvement of Business:

1. Business should confine to its own business. There are government and social organizations to carry out social activities.

2. Involvement in social activities could adversely affect the economic health of a business enterprise. It may be noted that the expenditures on social welfare has been imposing severe burden on TISCO.

3. If the cost of the social involvement of the business is ultimately passed on to the consumers, there is no point in exalting the social involvement of business. Sometimes there could even be a net loss to the society because of the high cost of the corporate sector undertaking such activities.

4. Many companies involve themselves in social activities because of the tax exemptions on the income spent on special social purposes.

5. If the social involvement of a business enterprise causes an increase in the price of its product, it could affect its competitiveness both in the domestic and international markets.

6. Social involvement of business could lead to an increase in the domination or influence of business over the society.

Q. What are benefits and challenges involved in CSR?

Ans: Being good in CSR provides bundle of benefits to the organization. The major benefits that organizations gain include: