Published on March 3, 2014
BUSINESS ENVIRONMENT UNIT-1 Meaning: - The term Business Environment is composed of two words „Business‟ and „Environment‟. In simple terms, the state in which a person remains busy is known as Business. The word Business in its economic sense means human activities like production, extraction or purchase or sales of goods that are performed for earning profits. On the other hand, the word „Environment‟ refers to the aspects of surroundings. Therefore, Business Environment may be defined as a set of conditions – Social, Legal, Economical, Political or Institutional that are uncontrollable in nature and affects the functioning of organization. Business Environment has two components: 1.InternalEnvironment 2. External Environment Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually within the control of business. Business can make changes in these factors according to the change in the functioning of enterprise. External Environment: Those factors which are beyond the control of business enterprise are included in external environment. These factors are: Government and Legal factors, Geo-Physical Factors, Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is of two Types: 1. Micro/Operating Environment 2. Macro/General Environment Micro/Operating Environment: The environment which is close to business and affects its capacity to work is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public. (1) Suppliers: – They are the persons who supply raw material and required components to the company. They must be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier. 1
(2) Customers: - Customers are regarded as the king of the market. Success of every business depends upon theleveloftheircustomer‟ssatisfaction.TypesofCustomers (wholesalers (ii)Retailers (iii)Industries (iv)Government and Other Institutions (v) Foreigners (3) Market Intermediaries: - They work as a link between business and final consumers. Types:(i)Middleman (ii)MarketingAgencies (iii) Physical Intermediaries (4) Competitors: - Every move of the competitors affects the business. Business has to adjust itself according to the strategies of the Competitors. (5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media and local public. They may be the users or non-users of the product. Macro/General Environment: – It includes factors that create opportunities and threats to business units. Following are the elements of Macro Environment: (1) Economic Environment: - It is very complex and dynamic in nature that keeps on changing with the change in policies or political situations. It has three elements: (i) Economic Conditions of Public (ii) Economic Policies of the country (iii)Economic System (iv) Other Economic Factors: – Infrastructural Facilities, Banking, Insurance companies, money markets, capital markets etc. (i) Political Environment: - It affects different business units extensively. Components: (a) Political Belief of Government (b) Political Strength of the Country (c) Relation with other countries 2
(d) Defense and Military Policies (e) Centre State Relationship in the Country (f) Thinking Opposition Parties towards Business Unit (ii) Socio-Cultural Environment: - Influence exercised by social and cultural factors, not within the control of business, is known as Socio-Cultural Environment. These factors include: attitude of people to work, family system, caste system, religion, education, marriage etc. (iii) Technological Environment: - A systematic application of scientific knowledge to practical task is known as technology. Everyday there has been vast changes in products, services, lifestyles and living conditions, these changes must be analysed by every business unit and should adapt these changes. (iv) Natural Environment: - It includes natural resources, weather, climatic conditions, port facilities, topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the location for their business. (v) Demographic Environment :- It is a study of perspective of population i.e. its size, standard of living, growth rate, age-sex composition, family size, income level (upper level, middle level and lower level), education level etc. Every business unit must see these features of population and recongnise their various need and produce accordingly. (vi) International Environment: - It is particularly important for industries directly depending on import or exports. The factors that affect the business are: Globalisation, Liberalisation, foreign business policies, cultural exchange. Characteristics:1. Business environment is compound in nature. 2. Business environment is constantly changing process. 3. Business environment is different for different business units. 4. It has both long term and short term impact. 5. Unlimited influence of external environment factors. 6. It is very uncertain. 7. Inter-related components. 8. It includes both internal and external environment 3
IMPORTANCE OF BUSINESS ENVIRONMENT: An analysis of business environment helps to identify strength, weakness, opportunities & threats. Analysis is very necessary for the survival and growth of the business enterprise. The importance of business environment is briefly explained in an analysis below. (1) Identification of Strength: The analysis of the internal environment helps to identify strength of the firm. For instance, if the company has good personal policies in respect of promotion, transfer, training, etc than it can indicates strength of the firm in respect of personal policies. This strength can be identified through the job satisfaction and performance of the employees. After identifying the strengths the firm must try to consolidate its strengths by further improvement in its existing plans & policies. (2) Identification of Weakness: The analysis of the internal environment indicates not only strengths but also the weakness of the firm. A firm may be strong in certain areas; where as it may be weak in some other areas. The firm should identify sue weakness so as to correct them as early as possible. (3) Identification of Opportunities: An analysis of the external environment helps the business firm to identify the opportunities in the market. The business firm should make every possible effort to grab the opportunities as and when they come. (4) Identification of Threats: Business may be subject to threats from competitors and others. Therefore environmental analysis helps to identify threats from the environment identification of threats at an earlier date is always beneficial to the firm as it helps to defuse the same. (5) Exploitation of Business Opportunities: Environment opens new opportunities for the expansion of business activities. Study of environment is necessary in order to discover and exploit such opportunities fully. (6) Keeping Business Enterprise Alert: Environment study is needed as it keeps the business unit alert in its approach and activities. In the absence of environmental changes, the business activities will be dull and lifeless. The problems & prospects of business can be understood properly through the study of business 4
environment. This enables an enterprise to face the problems with confidence and secure the maximum benefits of business opportunities available. (7) Keeping Business Flexible and Dynamic: Study of business environment is needed for keeping business flexible and dynamic as per the changes in the environmental forces. This will enable the development of business organization. (8)Making Business Socially Acceptable: Environment study enables businessmen to expand the business and also make it acceptable to different social groups. Business organizations can make positive contribution for maintaining ecological balance by studying social environment. (9) Ensures Optimum Utilization of Resources: The study of business environment is needed as it ensures optimum use of resources available. For this, the study of economic and technological environment is useful. Such study enables organization to take full benefit of government policies, concessions provided, and technological developments and so on. (12) Economic policies of the govt: Economic policies, export-import policies, foreign exchange policy, industrial policy, taxation policy, pricing policy of the govt shows influence on business directly and indirectly. (13) Administration policies: every business of the country is affected by the administration policy of that country. So every business must have the knowledge of the pros and cons of the system.(POSDCORB). (14) Scientific and technology: the present era is devoted to technological changes and advancement. It is necessary for every business to have the compete knowledge on techniques. ( source: Francis cherunillum : Business environment). Problems and challenges: Through there are many advantages and benefits of studying business environment, there are certain limitations and if they are not kept in view one may be disappointed. The major imitations are as follows study of environment does not eliminate uncertainties of future , but helps to reduce surprises and takes care of them in advance. It does not guarantee effectiveness of organization. One may be lost in the information collected too such reliance on it ma result it loss 5
Challenges:. Areas challenges Macroeconomic stability Even moderate of inflation are a constraint Taxation High tax rates are largest constraint on enterprise performance. Crime and corruption Corruption is high harming domestic enterprises and for foreign investment. Access to finance High interest rates and poor access to long term loans are the most significant problem. The legal system Existing commercial laws are poorly enforced ad the legal infrastructure is week. Source: Business environment: Vivek metal Industrial policy Industrial policy of any country reflects the growth and development of that country as the economic development is largely influenced by the industrial production.the term industrial policy refers to all objectives, principles, rules, regulations and procedures concerning the industrial development, location and functioning of industrial establishments. IP indicates the relationship between government and business and is therefore considered as the most important document of the country. Objectives: To clearly demarcate areas of production under public , private and joint sectors. To provide guidelines for importing foreign capital. to optimize production. to correct imbalance in the growth and development of industries. to prevent formation of combination monopolies and concentration of wealth in the hands of few entrepreneurs. To take necessary measures to solve the problem of unemployment. To bring about diversification of industries. To define the role of pvt sector and its active participation 1948 IP: On 6th April 1948 immediately after independence govt introduced the industrial policy resolution. this outlined the approach to industrial growth and development. 6
Features: To increase production and ensuring its equitable production. To maintain mixed economy. Play a vital role in the economic development of the country. 1) Exclusively monopoly of the central government: The following industries are to be the exclusive monopoly of the central government. The production and control of atomic energy. The manufacturer of arms and ammunition. The ownership and management of railway transport. It was also stated that during emergency the government can take over any industry in which will be considered essential from the point of national defense and security of the nation. 2) Exclusive responsibility of the state: this category covers the following six industries for which new undertakings would be established only by the state. Coal Iron and steel Aircraft manufacturing Ship-building Mineral oils Manufacturing of telephones, telegraph, and wireless apparatus. 3) Basic industries subject to central government: this category consisted of those industries which were of such importance that the government felt it necessary to plan and regulate them. Salt Automobiles Tractors Prime movers Electric engineering Heavy machinery Machine tools Minerals Power and alcohol Air and sea transport Non-ferrous metals Rubber manufacturing 7
Heavy chemicals Fertilizers Cement and sugar Cotton Electro chemicals Paper and news print industry. 4) Private sector responsibility: The rest of the industrial field was left open to private enterprises, individuals, and cooperatives. i) Role of small-scale and cottage industries: the IP resolution of 1948 emphasized on the development of small-scale and cottage industries because through the development of these. II) Labour management relations and remuneration: It emphasized that coordinal relationship between workers and employers is essential for industrial peace and progress of the country. III) Attitude towards working capital: for making rapid industrial growth possible, it favored foreign capital and enterprises. But the entrance of foreign enterprises was to be carefully regulated in the national interest. Advantages: Different labour laws such as minimum wage act, employee state insurance act passed or welfare for workers. A mixed economy pattern was adopted. Disadvantages: The complete development and progress of private sectors. Red tapism in public sectors. coordination problem between government and public sectors. ( source : WWW.Google.co.in and fancies Cherunillum) Industrial Policy 1956 A number of developments had taken place in the country after the adoption of the industrial policy resolution of 1948. These developments necessitated the announcement of the policy of 1956. 8
The enactment of the constitution of India which guarantees certain fundamental rights and enunciates the directive principles of state policy, adoption of socialistic pattern of society by the parliament and the launching of the first five year plan paved the way for a new industrial policy. The new policy was, therefore, announced on30th April, 1956, replacing the resolution of 1948. The industrial policy resolution, 1956 remained the basic plan of the industrial policy until 1991. Objectives of Industrial Policy 1956: The main objectives of the 1956 policy resolution are: 1. To accelerate the rate of economic growth and speed up industrialization 2. To develop heavy industries and machine making industries. 3. To prevent private monopolies and concentration of economic power in different fields in the hands of a few individuals. 4. To expand the public sector, 5. To build up large and growing cooperative sector 6. To reduce disparities in income and wealth. Provisions of Industrial Policy 1956 The main provisions of the industrial policy resolution of 1956 were as follows 1. New Classification of Industries: The new policy resolution gives a new classification of industries in India. The resolution classified the industries into following three broad categories: I) Schedule A, ii) Schedule B, iii) Schedule C I) Schedule A Category: This schedule includes chose industries which were exclusive responsibility of the state. Under schedule A, Following 17 Industries were listed these are 1) Arms and ammunition and allied items of deference equipments 2) Atomic energy. 3) Iron and steel 4) Heavy casting and forgings of iron and steel 5) Heavy plant and machinery required for iron and steel production, for mining, for machine tool manufacture and for such other basic industries as may be specified by central government 9
6) The electrical plant including large hydraulic and steam turbines. 7) Coal and lignite, gypsum, sulphur, gold and diamond 8) Mining and processing of copper, lead zinc, tin, molybdenum and wolfram 9) Minerals specified in the schedule to the atomic energy order, 1953 10) Aircraft 11) Air transport 12) Railway transport 13) Ship-building 14) Telephones 15) Telephone cables 16) Telegraph and wireless apparatus 17) Generation and distribution of electricity 2. Schedule B Category: Schedule B included those industries which were to be mainly owned and managed by the State. This category includes in the following 12 industries: All other minerals except minor minerals as defined in schedule 3 of the minerals concession rules, 1949. aluminum and other non-ferrous metals not included in schedule A machine tools ferro-alloys and tool steels. Basic and intermediate products by chemical industries such as manufacture of other essential drugs Fertilizers Synthetic rubber Carbonization of coal Chemical pulp Road transport Sea-transport 3. Schedule C Category: Schedule C included all the remaining industries which are not included in schedule A and schedule B. the development of industries of this category was left to the private enterprises. 2. Non – Discriminating treatment to private sector: The government took some positive steps to facilitate the development of private sector as it has been assigned an important place in the Indian 10
economy. Private sector was encouraged by developing essential infrastructure facilities such as electricity, transport and by appropriate policies such as monetary and fiscal policies. 3. Important place to small-scale and village industries: Since small – scale and village or cottage industries have an important place in the national economy; the state has reserved production of some goods exclusively for the small-scale industries. 4. Removal of regional industrial disparities: The resolution of 1956 aimed at reducing regional disparities in the levels of economic development. The benefits of industrialization may be shared equally and fairly by people in different regions of the country, therefore, balanced industrial development was to be achieved. 5. Appropriate Amenities for industrial Labour: The industrial policy resolution of 1956 stressed the importance of improving the living and working conditions of industrial labour and continually improving their efficiency. Workers participation in management was suggested in the resolution, so that the workers may be associated with the management of the industrial establishments and may consider themselves as a part and parcel of the industrial structure of the country. 6. Attitude towards foreign capital: State policy in respect of foreign capital in the development of industries in India was to be the same as enunciated in the policy of 1948. Feature of Industrial Policy 1991: Policy Features i) Industrial licensing: Industrial licensing is governed by the industries act, 1951. The policy has undergone a number of modifications over the years. Industrial licensing policy and procedures have also been liberalized form time to time. Now with the strong and competitive industrial base, the new industrial policy of 1991 has abolished all industrial licensing,. Irrespective of levels of investment, for all industries except 18 specified industries, these 18 industries would continue to be subject to compulsory licensing for reasons related to security and strategic concerns, social reasons, problems related to safety and over riding. The government further reduced the industries which were under compulsory licensing to 14 industries. It was reduced to 9 in 1997-98 and later to 5. Now they are reduced to 3. 11
ii) Foreign Investment: From the very beginning, foreign investment in India was regulated by the government. Thus for any foreign investment, prior approval of the government was necessary. All these were resulting in unnecessary delays and thus hampered the decision-making in business. C. Foreign technology agreements Authentic permission will be given or foreign technology agreements in high priority industries (Annex III) upto a lumpsum payment of Rs 1 crore, 5 per cent loyalty for domestic sales and 8 per cent for export, over a 10 year period from date of agreement pay 35% or 7 years pay 5%.( from commencement of production. iii) Public sector policy: regarding public sector the govt will ensure that the public sector plays a vital role in developing socio-economic scenario of the country. iv) According to the policy statement only 8 industries were refered for the public sector. These are as follows arms and ammunition -Atomic energy coal mineral oils mining of iron mining of copper minerals according to schedule III Railway. The public enterprises which were chronically ill referred as the board of industrial and financial reconstruction (BIFR). After this list was reduced to 3 remaining 5 are under BIFR VI) MRTP Act: as per the MRTP Act any firm with assts over a certain size was classified as MRTP firms and such firms were allowed to start only selected industries on a case by approval. But the govt felt that this MRTP limit was become deleterious in its effects on the industrial growth of the country. Functional areas: Liberalization Expansion and diversification Economy development 12
Indian industry more competitive New business opportunity Introduced MRTP act. Permitting 51% share of foreign equity Moderinization economy. Five year Plans: The economy of India is based in part on planning through its five-year plans, developed, executed and monitored by the Planning Commission. After independence, India was in dire conditions and needed to start acting soon .Some of the problems necessitated need for an immediate plan . Vicious circle of poverty Need for Rapid industrialization Population pressure Development of Natural resources Capital Deficiency & Market imperfections First Five Year Plan (1951-1956) Introduced by the then PM Pt. J. Nehru between the period 1951-56.The one responsible -Planning Commission . Objectives: improve living standards of the people in India which was possible by making judicious use of Natural Resources. The segregation Industrial sector Energy, irrigation Transport, Communications Development of Agri & community The growth in GDP achieved by India was 3.4% p.a. 13
Second Five Year Plan (1956-1961) Objectives: To increase the national income by 25% . To make the country more industrialized Development of the public sector increase employment opportunities so that every citizen gets a job. Achievements: Five steel mills at Bhilai, Durgapur, and Jamshedpur . Production of coal increased . More Railway lines were added in the north east The Tata Institute of Fundamental Research – established in 1957 as a research institute Third Five Year Plan (1961-1966) Objectives: More stress to agriculture Subsidies Sufficient help To increase the national income by 5% per annum Minimizing rate of unemployment To establish equality among all the people of the country Achievements: The Panchayat Organization was formed . Many primary schools were started in rural areas State road transportation corporations were formed Many cement and fertilizer plants were also built Problems faced: CHINA-Indian War exposed weaknesses in the economy and shifted the focus towards the Defense industry. In 1964, India fought a war with Pakistan. The war led to inflation and the priority was shifted to price stabilization. GDP rate during this duration was lower at 2.7%. 14
Fourth Five Year Plan (1969 to 1974) At this time Indira Gandhi was the Prime Minister. The Govt. nationalized 19 major Indian banks. Objectives: . To reform and restructure its expenditure agenda (Defense became one major expense) To facilitated growth in exports To alter the socio economic structure of the society Achievements: Spending on war efforts reduced industrial spending Tested the first nuclear weapon with Smiling Buddha in 1957 Food grains production increased to bring about self sufficiency in production Energy Problems faced: India was attacked in 1962 followed by another one in 1965. Worse – India faces drought. Fifth Five Year Plan (1974 to 1979) Objectives: To reduce social, regional, and economic disparities Reducing rate of Unemployment both in Urban & Rural sectors Encourage Self-employment Encourage growth of Small scale industries Prevent over population Achievements: Food grain production was above 118 million tons due to the improvement of infrastructural facilities Sixth Five Year Plan (1980 to 1985) 6th Five Yr Plan -- Known as Janata Govt. Plan . It‟s Existence – Tourism industry increased, I.T sector develops!!!!! The issues – Rajiv Gandhi being the PM, & hence emphasized on Industrial Development Some agreed, but the communist groups protested Objectives: Aimed for rapid Industrial Development Improve the Tourism Industry 15
Family Planning concept introduced, but not forcibly To introduce min Needs Program for the poor Achievements: Planned GDP growth - 5.1% a year, achieved 5.4. Speedy Industrial development The transport and communication system also improved Government investments in the Indian healthcare sector . Seventh Five Year Plan (1985 to 1989) Congress comes into power . Objectives: To upgrade the industrial sector To generate more scope of employment Improved facilities for Education to girls Increase productivity of small and large scale farmers Achievements: Using modern technology Full supply of food, clothing, and shelter Making India an Independent Economy Anti-poverty programs Problems faced: 1989-91 was a period of political instability in India & hence no Five Yr Plan was implemented. Eighth Five Year Plan (1992 to 1997) Objectives: Modernization of Industrial Sector The plan focused on technical development Strengthening the infrastructure Involvement of Panchayat raj, Nagarpalika, N.G.O's & people's participation Many flawed plans & Policies were rectified in this plan. During this period India was the only lucky one to become a member of the WTO (1st Jan 1995) Ninth Five Year Plan (1997 to 2002) Objectives: To prioritize rural development To generate adequate employment opportunity 16
To stabilize the prices To ensure food & nutritional security . To provide for basic infrastructural facilities Water Health Transport Education Encourage Women improvement Achievements: To create a liberal market for Private investment India managed to bring together the giant power, support & effort of public, private & all level of Govt. Tenth Five Year Plan (2002 to 2007) The Tenth Five Plan will cover a period from 1st April 2002 to 31st march 2007. The Tenth plan provides an opportunity at the start of the new millennium, to build upon the gains of the past but also to address the weakness that have emerged. OBJECTIVES: Rate of growth of national income Growth rate of per capita income Improvement in Quality of life Reduction in poverty Provision of gainful employment Provision of universal education Reduction in gender gaps Reduction in growth of population Increases in Literacy Rate Reduction in Infant Mortality Rate Reduction in Material Mortality Ratio (MMR) Environmental Protection Provision of Drinking Water Growth, Equity and Sustainability 17
Balanced Developed in all States Eleventh Five Year Plan (2007-2012) The National Development Council has approved the 11th Five Year Plan for the period from 2007 to 2012. The plan document is entitled “Towards Faster and More Inclusive Growth”. OBJECTIVES: Infrastructure • Roads • Ports • Airports • Railways • Power • Irrigation • Telecom/IT Education Youth Affairs Sports and Physical Education Health Women and Children Income and Poverty Environment 12th Five Year Plan The Government of India (2012-17) is under drafting which aims at the growth rate at 9.56%.With the deteriorating global situation, the Deputy Chairman of the Planning Commission Mr Montek Singh Ahluwalia has said that achieving an average growth rate of 9 per cent in the next five years is not possible. The Final growth target has been set at 9% by the endorsement of plan at the National Development Council meeting held in New Delhi. Importance for Science and technology and employment. 18
Case Study: Corporate social responsibility In January of last year the S.S vulgas an oil tanker of the big dirty oil company ran around in the arena lust north of van counter, spilling of gallons of crude oil the waters and on to the beaches of British Columbia and southern Alaska. The damage to the industry the ecology and the quality of life of the local residents is in calculable but in any case will require many millions of dollars for even the most minimal clean up. 96 the ship struck a small atoll well- arkedon the navigational mass but it was a dark night and the boat was well off course. On further investigation, it was discovered that the captain of the vulgas, Mr.vulgas, Mr. slosh had been drinking heavily, eaving the navigation of the ship to his forst mate, Mr.mudd, he retired to his cabin, to “sleep it off”, Mr.Mudd had never taken charge of the ship before and it is now clear that he misread the maps, misjudged the waters, maintained a speed that was inappropriate and the accident occurred. Subsequent inquiries showed the captain slosh had been arrested on two drunken driving convictions within months of the accident. The vulgass itself, a double hulled tanker, was long due for renovation and it was suggested, would not have cracked up if the hull had been trebly reinforced, as some current tankers were. R.U.Rich the chief executive officer of big dirty oil declared the accident a “Tragedy” and offered two million dollars to aid in the clean up. The premier of British Columbia was outraged. Environmental groups began a consumer campaign against big dirty oil, urging customers to cut up and send their big dirty oil credit cards in protect. in a meeting to the shareholders just last month CEO rich proudly announced the largest quarterly profit in the history of the big dirty oil company. He dismissed the protects as the outpourings of greenies and others fanatics and assured the share holders that his obligation was and would always be, to assure the highest profits possible in the turn oil of today‟ market. Questions: 1) Who is responsible for this? 2) Against whom should criminal charges be leveled? 19
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