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Indian business environment book @ bec doms

  1. 1. BUSINESS ENVIRONMENTCHAPTER IBusiness environment- Dynamic factors of environment- Importance ofscanning the environment-Fundamental issues-Economics environmentof business - Sock) - cultural environment- Political/ Legal environment -Cultural environment.CHAPTER IIPolitical economy - Government and business -.Public control, ofbusiness -Trends and structure of Indian economy - Socio - economicproblems of IndiaCHAPTER IIIGovernment controls and regulations -, Regulating economic andindustrial activities - Industrial Licensing policy - Control of monopolies-, Capital issues control - Government control over FDI and collaboration- Distribution and price control - New EXIM policy - Foreign exchangeflow regulation -Technology transfer.CHAPTER IVMonetary and fiscal system - Banking and credit structure in India –Financial institution - Fiscal system - theory and practice.CHAPTER VEconomic planning and development - Government and planning -Indias eight five year plan and structural reforms - Industrial policiesand promotion schemes - Government policy and SSI - Interface betweenGovernment and public sector.CHAPTER VINew Economic Policy Environment in India - Privatization - Liberalizationand Globalization - Experiences and issues - Environmental assessmentand evaluation. BSPATIL
  2. 2. Business environment1 Environment - Introduction Business Environment & Economy2 Control of Business Environment3 Monetary & Fiscal System4 Planning & Development56 Liberalization & Globalization CHAPTER IBusiness environment - Dynamic factors of environment - Importance ofscanning the environment - Fundamental issues - Economic environmentof business - Socio - cultural environment - Political / Legal environment-Cultural environmentThis chapter focuses on the following aspects of Business environment:Definition of business, meaning of business environment, theclassification of business environment, need to study environment inbusiness decisions, the methods of scanning the business environment, BSPATIL
  3. 3. issues that are to be addressed while scanning the environment, varioustypes of factors that influence business environment, non-economicenvironment and its impact on business decisions.To highlight the importance of the Business environment, three casestudies have been appended at the end of this lesson.Definition of businessThe term business is understood and explained in different ways bydifferent people. For some, business is an activity, for some it is amethod of transacting, for sonic others, it is a method of money makingand some people argue that business is an organized activity to achievecertain pre-determined goals or objectives. Dictionary meaning ofbusiness is: the act of buying and selling of goods and services,commerce and trade. Based on all these meanings of justness, we maydefine business as: gainful activity through which various elements ofsociety conduct exchanges of the desirable things.In the olden days, the people engaged in different activities in a societywere classified into four groups : Brahmnas, Shatriyas, Vysyas andSudras, Of these our fold classification of social activities, the activities ofvysyas included basically, facilitating exchange. Hence, business as anexchange activity remained since the days of exchange started. It couldalso be recalled that business as a social activity became popular onlywhen the wants of different people in a society were to be met with theavailable resources. In other words, whenever there was a scope forproducing something, which is wanted, then business activityautomatically emerged.But now a days, business is viewed more as a profession or occupation. BSPATIL
  4. 4. From the days of family owned business, we have reached a stage ofprofessionals and experts starting and running business. It could also benoted that business administration and business management haveemerged as the most prospective field of study and occupation. Personswith educational background in business, enter business or joinbusiness organizations to make them successfully function. Unlike theolden days, a number of interests are involved in business today, viz.owners, investors in business, suppliers, customers, employees,government, stake holders, administrators, managers, strategists,executives, and so many others. Hence, every business activity has tomeet the goals or aims or objectives of these various groups of people.That in fact, has made business a most complicated activity.Modern business has a number of features. Understanding of thesewould help to appreciate and organize business activities in a highlyprofessional way.1. Business is an economic activity :Business involves organizing activities to satisfy human plants. Theseactivities may result in the manufacture or production of a commodity orextension of a service. When a good or service is produced, resources areinvolved. Resources like human resources, physical resources andfinancial resources are all required to realize output to meet human BSPATIL
  5. 5. needs. These resources are limited in supply, and so business involvesidentification of resources, evaluation of resource qualities, buying theseresources and utilizing these resources. These resources being scarce inrelation to their demand, the resources carry some value [i.e., price].They cannot be procured at any cost to produce anything to meet humanwants. So automatically selection among various resources come upwhich is made on the basis of requirement and cost. Once they areprocured, then they are used in a very judicious manner so that there isno waste. That is optimal utilization-of resources is to be achieved. Inthis context, several decisions like resource selection, resourceprocurement, resource mix, resource utilization, etc. are all involved. Asin all these stages, choice among alternatives is involved, every businessactivity is to be treated as economic in nature. Depending upon thebusiness activity, the approach to selection among alternatives woulddiffer. For example, in a manufacturing business, the choice is aboutinput selection to supply quality output, in a service organization thechoice is about-inputs and delivery process, in a governmentorganization it is about production and equitable distribution of output,in an institution like bank, provision of various investment opportunitiesof short term and long term to the public, etc.2. A business organization is an economic unitEvery business organization is engaged in transforming inputs intooutput to meet the requirements of the people. The selection of input andsize of procurement will depend upon, the size of the organization. Thiswould also depend upon the nature or product or service extended/bythe business unit. All these are attended with the objective of making BSPATIL
  6. 6. profit or surplus. Only when there is surplus achieved, can the businessunits grow. Hence creation of surplus in a business becomes the focalpoint and this is best achieved through optimal utilization of resources.That way, all business units have to achieve the maximum output withminimum inputs which in other words is the effort to achieve economicefficiency. Only economic efficiency can enable firms to be efficient inevery other sense. Therefore, business organizations are only economicunits in nature.3. Business decisions making is essentially an economic processAll business decisions involve selection from alternatives. In other words,the rational choice of inputs is implied in every business decision. Hence,to be rational, a business unit goes through the process of : determiningobjectives, identifying opportunities, generating alternatives, classifyingthese alternatives as feasible and infeasible alternatives, then rank thefeasible alternatives on some criteria and then select those alternativesfulfilling the constraints. For example, if the objective of a business unitis to maximize profits, then this would call for minimizing cost andmaximizing revenue. On the cost side, the business unit have to identify,procure and utilize resources in the optimal way and on the revenueside, the business unit should determine the price which would facilitatemaximization of revenue. Price determination again would depend onvarious factors like demand, supply, competitive scenario, governmentinterference, statutory compulsions, conflicting interests of the stakeholders of the business, etc. Therefore, every decision made in a businesswould automatically depend on the economic process.Changing concept of businessIt has been stated already that the concept of business has undergone a BSPATIL
  7. 7. vast change. From a producer driven stage business has becomeconsumer centered and driven stage. While the earliest concept was * sellwhat is produced the modern concept is produce what is wanted Soevery business depends on consumers and their ever changing needs.Any business unit which has successfully understood its customers andoffer the product or service meeting their requirements alone issuccessful. But in this process, business units have to manage pressuresfrom its owners and other stake holders. It should take into account therequirements of the workers and the trade unions. It should abide by therules and regulations of a number of government agencies andinstitutions. It should meet the challenges and threats from competitors.Most important, it has to fulfill its social obligations. To survive everybusiness unit has to also consider: the revolutionary changes intechnology, market expansion, information explosion, competitorstrategies. These are days when the consumers are better informed andso no business unit can afford to ignore consumer awareness andpreferences. Technological development has brought with it thecompulsion to use modern methods and techniques. Social obligationshave made business units to meet pollution norms, etc. Trade unionpressures have made them to design satisfactory service conditions forthe work force. Then there is compulsion to provide for development ofhuman resources in the organization to achieve organizationaldevelopment. All these have made modern business ‘tight rope walking.’BUSINESS ENVIRONMENTBusiness involves activities, which links an organization with outsideworld. Within an organization, a business is governed by the behaviour ofits employees, management or decision makers. But externally abusiness is influenced by a score of factors, which range from customersto competitors and government. Therefore, a business cannot be BSPATIL
  8. 8. independent of (he influence of these external factors. It should also benoted that a business has absolute control over all the internal factors, ithas no control over the external factors. So often it becomes necessaryfor business houses to modify their internal decisions and policies, onthe basis of the pressure from external factors This highlights the need tobe ever- cognizant of changes and influences of external factors so as toconduct business on healthy lines. It is in this context that businessenvironment assumes all significance. Business environment thereforerefers to the influences and pressures exerted by external factors on thebusiness. The following Figure would help to understand the variousfactors which constitute the business environment.From the Figure: 1, it would be clear that business organizationsfunction in an environment subject to the influence of variousconstituents. Earh one of the constituents have in turn a number offactors influencing them. For example, economic environment has microand macro environmental factors affecting it. To develop a rightperspective about business environment, let us discuss briefly abouteach one of the external environment constituents. 1. Demographic environment : This refers to the size and behaviour of population in a country. Suppose a country has a huge size of BSPATIL
  9. 9. population, then, the country would provide extensive business or marketing opportunities for all types of business organizations. On the other hand, a country with low size of population would force the business organizations to seek external market for their products or services. Similarly, if the population in a country is well - tuned to use and throw concept’ [like most of the Western countries] then there would be limited scope for repair shops and employment scope in that segment would be almost nil. But alternatively this would give wide marketing opportunities for manufacturing organizations. On the other hand, if the population is averse to use and throw concept, then the business opportunities would be limited for manufacturing organizations but the repair shops, self-employed technical persons and spares manufacturers, would have roaring business. Hence, the size and quality of population emerges as a vital factor influencing business environment.2. Economic environment: Economic environment refers to the overall economic factors like economic philosophy of the country, economic structure, planning, economic policies, controls and regulations, etc. All these have a serious impact on the functioning of business organizations in a country. For example, in a Capitalistic economic system, business organizations would be subjected to limited government regulations and controls. They would be more governed by market forces [demand and supply] rather than by other factors. On the other hand, in a Socialist system, the government would determine everything on behalf of the country. In a Communist set up, the government has absolute control over every aspect over production that private enterprises may not exist at all. In a Mixed economic system, government BSPATIL
  10. 10. would be selective in allowing die presence of private enterprises in certain activities, reserving some spheres completely for governmental operations. Hence, the economic philosophy of the country directly determines the scope and functions of business organizations in that country.3. Geographical and ecological environment: Geographical environment refers to climatic conditions and natural resources, which determines flu manufacturing scope and the nature of the products that could be marketed. For example, a country like Kenya has to manufacture more of products based on forest resources, while the Gulf countries can produce only crude, Japan can have business in fish, fruits, etc., Countries in the tropical region would have organizations specializing in products from geographical resources available in abundant in that region, while organizations in Mediterranean countries have a Different business scope, Scandinavian countries have scope for dairy product manufacturing, etc. Similarly ecological imbalance is taking place at an alarming rate in the world today, that deforestation and hunting of rare species of animals for food are all prohibited now. Hence, while identifying the business opportunities, business organizations have to be conscious of the limitations posed by the geographical and ecological considerations.4. Legal environment: It is well known that every country has a number of legal regulations to ensure that the interests of business organizations do not run counter to national interests. Right from the stage of incorporation of organizations, their listing in stock exchange, reprisal of customer complaints, payment of tax to BSPATIL
  11. 11. government, manufacturing practices, human resources development to pricing of products and services, a number of legal regulations have to be fulfilled. For example, in USA and several western countries, consumer protection is very active, that even a medical practitioner is subjected to huge liabilities in limes of deficiency in services. In India and other countries, very rigorous legal provisions arc in place to prevent hunting of rare species, that any organization, which manufactures products based on such species, have lo get legal sanctions. In case of failure to honor cheques issued, organizations are now a days made to pay hefty compensations. Hence, the deterrence in terms of legal provisions has become the order of the day. All organizations have to first of all address these provisions become coming in to steam.5. Technological environment: This is a very significant external factor determining the destiny of business organizations. Supported by computerize operations, modem business organizations have succeeded in analyzing customers, minimizing the defects in products, ensuring service at the right time and place, etc. While communications use to take unduly long time in those days, business communications are instantaneous these days, thanks to modem satellite technology. Modern organizations have recognized that research and development alone can ensure organizational growth and stability. They have become more and more pro-active and remain as change agents of the economy. Governments have also become more technology conscious that right from police controls to registration of title deeds, computerizations has been adopted. Customer servicing through call centers is the latest necessity of organizations. Manufacturing activities have become more and more technically BSPATIL
  12. 12. sophisticated. Therefore business environment has become highly dynamic.6. Social environment: Social environment today has brought compulsions on business organizations to adhere to certain business ethics and morals. Social responsibility of business is an important force that modern business organizations cannot wriggle out of their duties and responsibilities towards the society. For example, every leather manufacturing or process unit is made to install pollution prevention system. Similarly, the expectations of various interests in the society have undergone a sea of change. The shareholders, promoters and owners expect a reasonable return on their investments. The workers expect security of service, terminal benefits, accident relief and various other compensations from the organizations. Government expects the business units to pay tax regularly and participate in social improvement. The distributors and agents expect the organizations to ensure smooth delivery process and demand more commission and compensation. Suppliers expect the organizations to give them continuous business and prompt payment of bills. Therefore each social group has a specific interest, the combination of all these, exerts enormous pressure on the business unit. A business unit which succeeds in meeting the interests of all these groups remains successful and grows.7. Educational and cultural environment: Educational environment in a country determines the quality of population. A country with very high illiterate population would always experience political and economic instability. Similarly, lack of education may also give scope for the existence of superstitious beliefs, fatalistic attitude, BSPATIL
  13. 13. etc. Peoples choice of goods and services would be more governed, by their religious faiths and beliefs. For instance, in the colonial days, the Indian population was a victim of the Britishers divide and rule tactics. The economic development of a country completely depends on the literacy level which alone can pave the way for improvement in science and technology, modernization, industrialization, etc. In such a country, the business opportunities are plenty. Cultural environment refers to the values, norms, customs, ethics, goals and other accepted behaviour pattern of people in a country. In olden days, religion was the basis of all activities in a society. The religious leaders and institutions determined what business should do and what people must consume. In India, the existence of caste system has done more damage than any good. Caste based politics has become the order of the day. Under the pretext of working for backward and downtrodden people, several persons have amassed fortune. This is worsened by political support and policies. A modern organization does not have the liberty to recruit people on merit but it has to follow strictly die reservation policy of the government. Another serious aspect of the cultural environment is the attitude and behaviour of the people in urban and rural areas. The urban - rural divide has created enormous problems for administrators and specifically business organizations prefer urban educated person to persons from rural areas.8. Political environment: Political stability is one important factor winch determines the business growth or downfall. A country with relative political stability would witness inflow of foreign capital BSPATIL
  14. 14. and collaboration. By political stability we mean that the policies of government remaining consistent. As the business decisions arc based on government policies, frequent changes in these policies would force business organizations to change their policies too which, makes functioning very difficult. Sometimes, when the policies determined by a party in power are reversed by the succeeding party forming the government, there would be far reaching changes in business environment For example, India was following a policy of protectionism till late" 1908s. Hence, the industrial development and economic development could not take place at a rapid rate. In the absence of competition, the business organizations, made people to accept inferior quality goods and services. Once, the liberalization policy is adopted, the scene has completely changed. Today, no business can survive unless it provides quality goods or services on par with the multinational corporations. Another aspect of political environment is the political ideology with which a party is wedded to, would make the government tow the lines of countries with similar ideologies. Until the disintegration of USSR, India was simply following USSRs lines, but after the disintegration, India has to literally fend for itself. With the pressures mounted by the Western countries, India had to accept various trade and monetary policies. This has brought about a complete change in business environment.NEED TO SCAN ENVIRONMENTHaving discussed very briefly the features of each one of the constituentsof business environment, let us discuss why the environment should beanalyzed by the business organizations. BSPATIL
  15. 15. It is well known that business enterprises cannot remain independent ofthe society and the institutions. So whatever decision they take as to bein tune with the requirements of society and the dictums of theinstitutions. A business organization has to continuously monitor theenvironment so as to identify the business opportunities and threats. Byexploring its strengths and minimizing its weaknesses, if theorganizations can capitalize these opportunities and effectively thwart thethreats, then it would be able to grow. Let us elaborate this with anexample.Suppose an organization wants to introduce a new consumer durableproduct in the market. Then it would study whether there would bedemand for this product and the product would be accepted by thesociety. At the outset, the organization would examine whether theproduct would suit the culture in the society. Suppose the product isuse and throw type. Then people would certainly be influenced by thisfeature of the product while evaluating the price of the product. In India,such a product would never be accepted as the culture here is tolengthen the life of every product by repairing it. Similarly suppose theproduct requires some critical component from abroad. Then unless thegovernment policy is favourable the component has to be imported at avery high cost, which in turn would drive the price up. .Suppose theproduct is only one of its types, the organization would then emerge as amonopoly supplying the product. This may not be tolerated by thegovernment. Suppose the manufacturing of the product involvesadvanced technology, then the type of human resources required wouldbe well educated and trained. Obviously this will rule out the jobopportunities for persons educated in rural areas. Further, if themanufacturing process involves scope for pollution, then the organizationhas to address it in relation to the provisions of the pollution control BSPATIL
  16. 16. norms. Hence, in every decision of the organization, the externalenvironment has an important role to play. Any future plans ofexpansion and forecasting of demand will depend upon the changes inthe business environment. These changes may include both the currentand expected changes. Unless these changes are also foreseen, decisionstaken would turn out to be suicidal. In the case of organizations whichhave been pro-active, the changes in the environment do not affect themmuch. But those which fail to understand from their own experience orthat of the other changes would remain challenges for ever.Among the various constituents of business environment discussedabove briefly, we will focus on the following constituents and discussthem in greater detail. The constituents now elaborated are: Economicenvironment, political environment and cultural environment.1. Economic environmentThe economic environment is composed of various set of economicpolicies, economic system, strategy of economic growth and development,resource endowment, size of market and status of infrastructuralfacilities in a country. All these affect the business environment one wayor the other. To understand the impact of these on businessenvironment, let us discuss each one of these components in detail.Economic policies: Economic policies include fiscal policy, monetarypolicy, foreign trade policy, licensing policy, technology policy, pricepolicy, etc. These policies lay the framework within which everyorganization has to function.A] By fiscal policy we mean, the governments tax efforts, publicexpenditure and public borrowing. Through these the government can BSPATIL
  17. 17. effectively encourage consumption, investment and savings habits andalso restrict them. For example, suppose there is inflation in a country.Inflation implies that the people have high purchasing power and so theydemand goods. To curb this, the government may raise the personal taxand also the corporate tax. Consequently, individuals will be left withlesser disposable income and to minimize tax, they may start savingthrough various tax -saving schemes. As far as the corporate areconcerned, they have to part with more by way of tax to the governmentand this would bring down the rate of profit and dividend declared. As aresult the corporate would resort to upward price revision, which mightlead to further fall in demand for their products and services. Duringdeflationary period, the government would reduce the tax so as toencourage more spending and investment. Even in tax policy, thegovernment can be selective in taxing more of rich and exempting thepoor completely. This would facilitate income re-distribution and improvethe conditions of poor.Similarly, by altering its expenditure on various public projects, thegovernment would be able to influence the prevailing economic condition.Government expenditures are incurred on infrastructural development,public utility services like hospitals, new industrial units of very hugesize, etc. For instance, suppose there is inflation in a country. Thegovernment would reduce its level of expenditure, thereby reducing theincome of the people. With lesser income, the demand would, go downand so the price. At the time of deflation, the government would expandits public expenditure by investing in a number of public projects, sothat there will be income generation find demand generation which willrevive the economy. BSPATIL
  18. 18. Public borrowing is one more instrument in the hands of the governmentto influence the economic condition in a country. This involvesgovernment issuing bonds and encouraging common public and otherinstitutions to buy them. By this, the government would be able to bringdown the level of purchasing power in the economy and control theinflation. During deflation, the government would redeem the bonds andso with more purchasing power, the economy would be able to revive.B] Monetary policy refers to the set of policies determined andimplemented by the central bank of a country to control the economiccondition. The central bank of a country has the basic responsibility tomaintain the price level and money supply in a country. This is possibleonly when the central bank has certain instruments. These instrumentsavailable with the central bank to control the money supply and pricelevel are called monetary policy instruments. They are called Creditcontrol policy. Credit controls can be of two types: Quantitative creditcontrols and Qualitative credit controls. The former aims at limiting themoney supply, while the latter is used to channelize the available creditin the country.Quantitative credit control policy includes three tools: bank rate, openmarket operations and variable reserve ratio. Bank rate refers to the rateat which the central bank would re-discount the eligible bills alreadydiscounted by the commercial- banks. By revising the bank rateupwards, the central bank would be able to make the discounting bybusiness organizations with commercial banks costly. This woulddiscourage discounting and thereby money supply in the economy,would come down. Alternatively, by lowering the bank rate, the centralbank makes credit available at a cheaper rate, and so the business BSPATIL
  19. 19. organizations would go for a larger discounting of eligible bills withcommercial banks. This liberal credit policy would have expansionaryeffects on the economy. Similarly, using open market operations, thecentral bank would buy or sell the securities in the open market andthrough that increase or contract money supply in the economy. Forexample, suppose there is inflation in an economy. To bring down themoney supply, the central bank would sell the securities it has which willbe bought by the commercial banks and other institutions. In thisprocess the excess money with these institutions would be siphoned off,there by they have to restrict credit. Alternatively when there isdeflation, the central bank would buy the securities and the moneyequivalent transferred to the banking system would facilitate adoption ofliberal credit. Variable reserve ratio refers to the increase or decrease inthe quantum of Statutory liquidity ratio and the Cash reserve ratio whichthe commercial banks have to maintain as a proportion of their totaldeposits. By increasing the ratios, the commercial banks would be leftwith lesser volume of funds and so they can lend less. By reducing theratio, the commercial banks would be left with more funds with whichthey can make lending liberal. All these policies would have a directimpact on the business organizations and their operations.Through qualitative credit controls, the central bank can : regulateconsumer credit, alter the margin requirements, resort to persuasiveefforts, take direct action on erring commercial banks, etc. Throughthese policies, the central bank would be able to regulate and direct theavailable credit to the priority sector and discourage credit for lesspriority or no priority sector. Hence, business organizations, which fallunder priority sector, would be able to expand their business with cheapfunds and assistance BSPATIL
  20. 20. C] Foreign trade policy: The foreign trade policy determines the scopefor trade between countries. It would directly affect the businessprospects of the business organizations. A liberal policy would extend thescope for exports and imports, while a restrictive policy would narrow thescope. Similarly, if protectionism is favored, then the businessorganizations will have lesser market threats from multinationalcorporations. Alternatively if liberalization is the policy, then everydomestic business organization has to tune itself to every type ofchallenge posed by the business giants from abroad. Foreign trade policyalso includes the exchange rate policy and exchange controls andcustoms duties. All these are fundamental to the growth of a businessorganization. For example, suppose there is full" convertibility, then thebusiness organizations would be able to export and import and makepayments with lesser restrictions. On the other hand, if there is onlypartial convertibility, the scope for trade is correspondingly less and thebusiness organizations have to go through a sickening process of gettinglicenses for export or import and route all their payments through properchannel. Customs duties also play a vital role in determining the volumeof external trade. A rise in customs duties would discourage domesticdemand because the price of imported goods and services would go upfind remain at a high level compared to the domestically produced goodsand services, A reduction in customs duties would encourage importsand be favourable to the domestic manufacturers.Government frequently changes the foreign trade policy, keeping in viewthe requirements of the country and the economic condition. To tide overthe Glance of payments difficulties, government may resort to variouspolicy measures like devaluation, exchange clearing agreements, tariffsand duties, exchange control regulations, etc. These tools would besuitably modified to achieve the desired goals. For example, to encourage BSPATIL
  21. 21. exports and discourage imports, the government may devalue thecurrency, by which the imports of Indian goods abroad become cheaperand the imports of foreign goods in India become costlier. Hence thebusiness organizations have to continuously monitor the changes in thetrade policies so as to position themselves accordingly.D] Licensing policy: In the pre-liberalization days, India adoptedlicensing policy in regulate the growth of industries in India. Since thedays of independence, India adopted licensing policy, which in effectmade the government control the growth of independence in accordancewith the national priorities. For example, in India, till 1985, theindustries in India were classified into four categories: industriescompletely owned by public sector, industries where both public andprivate sector participation was permitted, small scale industries andcollage industries. Except the first category in all the other categories,private sector presence was permitted through licensing. This wasresulted in several adverse effects, which were all explained in detail bythe Dutt committee report. But till 1985, liberalization was neveraccepted as a part of growth strategy. But after 1985, the situationslowly changed that by 1991 India adopted a policy of liberalization.Consequently, the business scope and prospects of the Indian businessorganization changed since 1991. As has been already pointed out theywere exposed to market competition and threats after liberalization.Performance has become a necessity for survival. By about the end of20th century, the government also proceeded to disinvest several publicsector units thereby opening up the challenges all the more for Indianindustries. Therefore, the licensing policy and its direction have a lot ofimpact on the business organizations.E] Technology policy: One of the most important economic policies isthe technology policy. Improvement in technology is a condition for BSPATIL
  22. 22. growth and survival in any organization. From a stage of man-dependentenvironment, the business organizations are all fast becomingmachine-dependent [computer dependent]. Right from the stage ofenquiries down up to planning the logistics, computers are widely used.Only from the mid -1990s the government started adopting a favourabletechnology policy. Apart from permitting free imports of computers andcomponents as well as telecommunication equipments, the governmenthas devised a number of schemes like Software Technology Park, to givea Phillip to the technology in India. Computerization has come to stayin telecommunication, railways, roadways, postal services, educationalservices, medical services, engineering, financial services, etc. This liberaltechnology policy has resulted in the growth of new industrial segment,viz., and information technology. Millions of youngsters get trained andare gainfully employed. Indian software engineers are considered as thebest in the world and several of the multinational corporations dependon Indian supply of trained software and hardware professionals. Thebusiness environment has completely transformed over the past five tosix years that unless organizations also accordingly change themselves,their survival will become a serious question.F] Price policy: This refers to the controls that government has on theprice in a country. This is necessary, because, unless price is controlled,there is bound to be inflation and then economic instability. Further inIndian context, nearly 35% of the population is living below the povertyline. They do not have any permanent employment. Especially the ruralpoverty is very serious. To overcome this situation, the governmentresorts to price control policy. All the essential and basic necessary goodsare subjected to price control. While the poor and downtrodden areprovided the essential goods at a controlled and subsidized rate throughpublic distribution, the others are expected to meet their requirements BSPATIL
  23. 23. through open market. Through demand and supply management, thegovernment makes all the efforts to keep the prices under--control. Forinstance, by building up buffer stocks, the government overcomes theshortage of food commodities during adverse period. Similarly, specificconcessions are given to industrial units located in backward regions andrural areas. This helps them to run on sound basis. As regards themanufactured products, the government adopts the administered pricemechanism to control the prices. For example, the cooking gas issupplied to the public at one price, to the commercial establishments ata different price. This helps to minimize the strain of the populationusing LPG as cooking media. Similarly till April, 2002, petrol anddiesel were subjected to administered price controls. Sugar, cement, etc.,are also subjected to administered price. Hence, through price policy thegovernment protects the interests of the people and this policy has adirect impact on the functioning of the business organization in ourcountry.2. Political environmentIt is well known that the business environment in a country is very muchinterlinked with the political environment. The political environmentsimply means the political ideology which is adopted by the government.In a democratic country like India, this political ideology changes as andwhen there is a change in the party ruling the country at the Centre andthe State level. A number of examples could be cited to prove how thepolitical ideology has influenced the business environment of thecountry.Before independence, under the guidance of Mahatma Gandhi, Indiawas wedded to the policy of ‘Swadeshi’. That is, Gandhi advocated theuse of only Indian made goods and to completely abstain from imported BSPATIL
  24. 24. goods, specifically British goods. As a result immediately afterindependence, Indian government followed a restrictive, trade policyimposing very heavy customs duty on imported goods. This was thoughtthat such a policy would help to achieve both the political commitmentas well as protection of domestic producers from the invasion of foreign-manufacture-s and traders. A deeper look into such a policy would revealthat India never wanted to entertain a policy of allowing foreign tradingactivities on Indian soil as this would lead to colonization. After all theBritish East India Company entered the Indian shores under the pretextof trading with India in 1600 AD and the country had to pay a heavyprice for the next 350 years being a colony. Hence, a restrictive tradepolicy was very much favored by every one and in such an environmentthe business environment was such the domestic producers couldoperate under the umbrella protection of the government.This is also evident from the Industrial policy of the government in 1948,which clearly posed a threat to foreign interests in India. At the sametime, the Indian government was very much influenced by the Russiantype of planning. Being a declared democratic socialist country, Indiaadopted planning as the strategy of economic development. The First FiveYear plan was formulated and implemented without relying much onindustrial development, when at the end of the I Plan it was realized thatgrowth is impossible without industrial development, a shift focus wasnecessitated that the government gave emphasis on industrialdevelopment. But here again, the government approached the issuewith caution. It felt that a controlled and guided industrial developmentwould yield better results than a free unrestricted industrialdevelopment. The consequence was the Licensing policy. Though importswere permitted, industrial development through collaborative efforts withentrepreneurs abroad was subjected to a very critical scrutiny. When BSPATIL
  25. 25. the Licensing policy led only to concentration of economic power in thehands of a few private sector units like TATA, Birla, and others, thegovernment brought in the Monopolies Restrictive Trade PracticesAct, in 1970. This has on the one hand put a check on growth ofmonopolies in India, on the other hand the industrial development wasnot taking place at a desired pace. The seeds for liberalization weresown in 1985, when the government felt that India could achievemiraculous growth through this liberalization course, it proceeded in thatdirection. This culminated in the introduction of Liberalization policy inl99l. This resulted in a peculiar scenario in –which ‘democratic socialismwith capitalistic ideologies’ existed. Throughout the four decades afterindependence, Indias policies were more governed by the political factorsrather than economic necessities or compulsions. Hence, at thebeginning Indian government adopted a purely socialistic pattern ofdevelopment strategy while by 1990’s development by subscribing tocapitalistic pattern has become the reality. This shift has a great impacton the business environment that domestic business today has to realignitself to survive and grow, in a competitive atmosphere.Having discussed the effect of political environment on businessenvironment let us examine how far the economic system is an importantfactor influencing business environment. Economic system refers to theorganizations and institutions created for the purpose of satisfying thewants of human beings. In a country, available resources have to beutilized to manufacture and distribute goods and services, which wouldmeet the needs of the people so that they are satisfied. Theseinstitutions and organizations function with their own rules andregulations. The economic system has certain broad characteristic.1. The economic system always functions with scarcity of resources. BSPATIL
  26. 26. How the system effectively and efficiently uses the resources will determine the extent to which the needs of the people are met.2. An economic system comprises people. That is, a society of human beings alone can constitute economic system.3. A set of institutions are created and used for the purpose of smooth functioning of an economic system. For example, banks, money, technology, government, price mechanism, planning etc., are all institutions through which the systems operate.4. The basic objective with which an economic system functions is to satisfy the wants of the people. Unless there is want for a commodity or service, nothing can be produced. Hence, the economic system allocates the resources in such a way that the wants of the people are satisfied.5. On the basis of the above characteristics of an economic system, it should be clear that the economic system is very dynamic in nature. That is, the economic system undergoes changes with every change in the institutions, though the rate of change would differ from institution to institution.The economic system functions to answer three vital questions:a] what to produceb]how to produce andc] for whom to produce.Answering these questions assumes enormous significance as that woulddetermine every activity within a country. BSPATIL
  27. 27. The first question What to produce depends on what is wanted. Theeconomic system would throw signals through which the requirements ofthe people could be understood. But not all wants could be satisfied.This is because; a country may not be gifted with all the necessaryresources to produce all the goods. Hence, depending upon the resourceendowment a country would decide what it could produce. Then there isa problem of prioritizing the available resources among the goods to beproduced. Resources should not be used for the production ofunwarranted goods. The production of goods, which are harmful tohuman beings, like narcotic drugs, should be prevented. Hence,considering the availability of resources, the economic system should optto produce only goods that would satisfy the wants of human beings. Inthis context it is also necessary to weigh the individual requirements andthe national requirements for goods. The latter should be givenpreference over the former.The second question ‘How to produce’ addresses basically, issues relatingto selection of right strategy, technology and investment. For example, acountry like India, with very huge population should not prefer capital-intensive technology, as that would lead to more unemployment ofhuman resources. Similarly, while selecting the technology, a countryshould weigh a number of considerations like relevance of technology,cost of technology, support in case of failures, consequences of thetechnology used, etc. Another vital aspect is the investment that acountry has to make while selecting the strategy and the technology. Avery important question is whether the available funds should beinvested in sophisticated research and development or meeting the basicneeds of the people. Hence, the second question would ultimatelydetermine the efficiency with the available resources are utilized. BSPATIL
  28. 28. ‘For whom to produce’ implies that based on the resource utilization, thecountry as a whole should benefit and not a few segments. Hence, havingproduced the goods and services, how they could be equitably distributedis an important aspect. The distribution of national product would differfrom country to country depending upon the economic system in vogue.It has been already pointed out that the way in which the above threequestions are answered depends on the economic system whichfunctions in a country. To understand how these answers differ amongthe economic systems, we should understand the different types ofeconomic systems. In the next section, the details of different types ofeconomic systems are discussed.Types of Economic systemEconomic systems may broadly be classified into three categories:Capitalism, Socialism and Mixed economy. A number of other types alsoemerged but all of them came close to any one of the above three types ofsystems. Such systems include: communism and Marxism Let us nowdiscuss the features, strengths and weaknesses of each one of thesesystems.1. CapitalismCapitalism is an economic system based on the principle of freeenterprise. Individual ownership of resources is an important feature.With control and command over resources, individuals can conduct anytype of business. The object in such a system is to maximize privategains. Any type of enterprise or production of any commodity or serviceis permitted, so long it is wanted by the society. In such a system themarket forces determine the resource allocation and price. That is, the BSPATIL
  29. 29. demand and supply forces together determine what to produce, how toproduce and for whom to produce. Price mechanism is the nucleus of thecapitalistic society. The price mechanism clearly reflects the wants ofthe people. Once this is known, the producers would allocate theresources to manufacture and sell the products in great demand. Whiledoing so, there is no control or regulation over production. In otherwords, oligopoly environment prevails. But each producer differentiateshis product that he would be able to stay in the market. Technology andinnovation ensure the stability and growth of organizations. As a resultonly efficient organization would survive. The resources would be fullyutilized. The system is so flexible that it can adjust itself for anyeconomic condition. The workers get equal opportunities and those withskills would be able to command better wages and salaries. On the wholecapitalism offers scope for growth of efficient individuals andorganizations.But capitalism has a number of weaknesses. The important ones arediscussed below.1. Economic inequality is invariably found in capitalistic societies. Individuals and organizations with ownership of resources and hold over the market for (heir product or service, would be able to maximize their gains. Those who have no such property would remain poor and become poorer. So it is said that under capitalism, rich becomes richer and poor becomes poorer. The inequality in wealth and income widens over a period under capitalism.2. The scope for the emergence of monopolies in capitalistic societies is very high. Organizations by virtue of their economic power BSPATIL
  30. 30. would be able to easily eliminate rivals and competitors in the market. There is also possibility of such monopolies influencing the government in policy making and intervention.3. Though it is said that capitalism would always lead to ideal allocation of resources and fuller utilization of resources, in reality the experience is that resources are held by individuals and organizations and under utilization is the result. Sometimes, products which are not really national priority are produced and forced on the public, through advertisements and sales promotion techniques.4. Though it is expected that in capitalistic societies the output would increase to optimal level, in. practice this is never found. Producers always restrict output to maintain a high price and also maximize profit. So excess capacity would exist in many industries.5. In a capitalistic society the divide between the haves and have- nots widen that over a period. Existence of poverty among the sophisticated sections of people is also seen. This results in built up of frustration in the society. Over a period this might lead to revolution and social upheaval.2. Socialism Socialism refers to an economic system ir which the following features predominant: The resources are owned by the State or state owned institutions. Production takes place in the interest of the society and not for BSPATIL
  31. 31. maximizing profits of individuals or organizations. Governmentdecides the type of productive efforts to be permitted. In otherwords, in a socialist country, government can adopt licensingsystem and other types of regulations to prevent the emergence ofmonopolist and exploitative tendencies. Maximization ofCommunity welfare is the objective than profit maximization.Another very important feature is the government ensuresequitable distribution of national product. Public distributionsystem assumes enormous significance in such an economicsystem. On the whole, the socialistic society differs from capitalistsociety in every sense. In the broad spectrum of economic systems,socialism and capitalism occupy two extremes. In the world today,pure capitalistic society is not seen in any country. Even in USA,government interference in various economic activities is found.For example, in the field of national defense, atomic energy, spacetechnology, social security, etc., the presence of government isalmost complete. Government also retains the right to interfere inthe market system, whenever there is deliberate and intentionalattempt to monopolize the resource ownership or the market.Similarly, in the erstwhile Soviet Union, socialistic principles werefollowed. But even here, there were instances of private ownershipof property, enterprises, etc., were reported. • That is why it is verydifficult to come across pure capitalistic or socialistic societies.The merits of socialism includes: 1. Collective ownership eliminateemergence and existence of monopolies. 2, Resources utilization isplanned and achieved in the interest of the society. 3. Governmentwith its control over the resources is able to use resources fullyutilized and avoid wastage and production of unnecessary goods.4. As equality in distribution is the fundamental feature of BSPATIL
  32. 32. socialism, there is no scope for widening inequalities rind the government takes steps to narrow the gap between the rich and the poor through various measures. However, socialistic states suffer from the following limitations: 1. Excessive dependence on government decisions often result in delay in offering any public service. 2. Bureaucratic control becomes an integral part of the socialistic principles. As a result the benefits and its direction of flow is determined by the bureaucrats. 3. Government by undertaking excessive responsibility on its shoulders, abets inefficiency and corruption in the society. 4. No incentive and motivation for individual excellence or achievements is possible in such a society and so innovations and inventions do not really lake place in large scale in such a society. 5. With governmental presence in every walk of life, efficiency and productivity suffer. 6. Lack of support for individual liberty kills initiative.3. Mixed economyEvolution of the concept of Mixed economy:There was no reference to the mixed economic system in Economicliterature in the past. Economists were mainly familiar and advocatedthe Laissez faire or free enterprise system, as several countries coulddevelop fast following the free enterprise system, in which there was noor little government intervention. The entire economic system operatedwith the price mechanism at its center point. The producers producedwhat the consumers wanted and this provided very little scope for thegovernment to intervene in the system. The Classical economists andtheir ardent supporters believed that the invisible hand will direct the BSPATIL
  33. 33. economy and with private initiative and enterprise, every country shouldbe able to record a faster growth as proved in the case of UK, USA,Europe, Australia, and other countries.But over a period under the leadership of Karl Marx, a new economicsystem was developed called socialism, in which there is no scope for anyprivate enterprise as everything owned and controlled by the government.The government decided the type of developmental activities and merequirements of the society and used the available resources in theprovision of these requirements. Several countries like USSR,Communist China, Vietnam, Cuba and others preferred this socialistsystem in which government is made the custodian of the society. Themain reason for Die emergence of this new economic system was thefailure of capitalism during the 1929 depression to revive every economyfrom depression. Keynes himself thought that capitalism without some ofits evils could certainly help economic recovery. Hence, a time camewhen economists felt that cent per cent free enterprise or cent per centgovernment governed economic development cannot work satisfactorily.A compromise between these extremes was thought of as an idealeconomic system. The new system called mixed economic systemcontained the merits of both the capitalism and socialism and appearedto be full of promise. This mixed economic system is adopted by India asindicated by the First Industrial Policy Resolution 1948.Characteristics of mixed economy:i. Co-existence of public and private sectors:In a mixed economy, one will find the existence of both the private andpublic sectors. In such a system, the government will undertake theresponsibility to build and develop certain sector activities and leave theother activities for the private initiative. In India, the government BSPATIL
  34. 34. announced the adoption of the mixed economy system through its 1948Industrial Policy Resolution. The government clearly earmarked theindustries to be completely under the state control, the industries whichare to owned and controlled by the state as well as the private sector andindustries which are completely left for the private sector. In this way theResolution provided for the simultaneous existence of both private andpublic sectors.ii. State participation in economic development:This is the second feature of mixed economy, according, to which thestate reserves its right to design and decide the type of development to beachieved. In such a set up, the government strives to promote the welfareof the country by ensuring social order, social justice and establishing allthe necessary institutions which are required to achieve the desiredpattern of growth and development.iii. Distribution of ownership and control of resources:This is the next feature of mixed economy. In this system, thegovernment itself enters the field of production so that the availableresources are fully utilized. This will also help to avoid concentration ofwealth in the hands of a few and enable distribution of ownership andcontrol of productive activities. As a result there is no scope forexploitation of any group, say labor, by any other group. In this way theweaker section of the community is well protected and taken care of.Only the mixed economy will enable the government to attain theobjectives of the Directive Principles of the Indian Constitution.iv. Directing the investment in socially desirable projects and BSPATIL
  35. 35. channels:Mixed economy facilitates the flow of investment into channels whichconfers the society with several benefits. For example, the Indiangovernment has invested huge amount in several projects to develop theinfrastructural facilities. This forms the basis for the development ofother sectors. The investment in these infrastructural areas will not comeforth from the private sector as the return is nil. Hence, the governmentin a mixed economic set up provides the thrust by developing thenecessary background and strength which will encourage the privatesector to invest in profitable opportunities. In this way the governmentplays a key role in a mixed economic system.v. Scope for achieving balanced economic development:I Left to itself, the private sector would establish its enterprises only inurban or sub-urban areas and that too in already well developed states.This will mean other areas will have no scope for development. But in amixed economy, the government will itself undertake the initiative to setup industries in backward areas and encourage the private initiative toset up industries in such areas by offering several concessions andexemptions. In the absence of nixed economy, several states in Indiawould have remained industrially Ultimate control and regulation in the hands of government:This feature of mixed economy clearly spells out that in every activityaffecting the economy, the government will be the ultimate authority.Though the private sector is assigned its role to perform, the governmentwill still monitor and control the way in which the private initiative is BSPATIL
  36. 36. performing its role. Infact, according to the 1948 Industrial PolicyResolution, the government made it clear that the industries alreadyestablished by the private sector belonging to that category in which newindustries will be established by the government alone, the governmentwould undertake the review of the working of these industries in privatesector after a period of ten years and if found not satisfactory, they wouldbe taken over by the government. Though this was criticized as a threatof nationalization, yet through such a provision the governmentunderlines its authority. Similarly in the banking and insurance sectors,the government nationalized banks emphasizing its powers to controland regulate any sector.vii. Co-operation in the field of economic development:According to this feature of mixed economy, the government formulatesthe design for development and invites the private sector to participate inthe development. It clearly spells out the guidelines which would governsuch cooperative efforts and the limits of freedom granted to the privatesector. In Indian case, the government prepares the plans fordevelopment and spells out the areas left for the private initiative and theareas that will be under state control. Hence, there is scope for thedevelopment of private sector, though only according to the designdeveloped by the government.Planning process under mixed economy:As has been already stated, in a mixed economy there is a need toachieve a compromise between self-interest and social interest This is avery difficult task as the government has to carefully foresee the type ofdevelopment it wants to achieve and closely monitor the activities of theprivate sector to ensure that the social interest is never at stake. BSPATIL
  37. 37. Obviously, planning is a very difficult exercise in a mixed economy setup. The success of planning will depend upon; i) the extent to which thepublic sector is able to rise to achieve the social gains aimed for, ii) thesuccess of the state in guiding and regulating the private sector activitiestowards social goals and iii) the extent lo which (lie state is able (o checkthe distortions taking place in investment by private sector affecting (heinterest of the public sector. Hence in the planning process the state hastaken up the following steps to ensure the accomplishment of theobjectives of the mixed economy,a. By holding complete ownership of defense and heavy industries, the government has provided an industrial base with which the private sector is expected to plan its investment activities.b. The state also has made huge investments in economic infrastructures so as to help the extension of market for goods, raising the productivity in agricultural and industrial sectors, encouragement of further productive investmentc. The government has complete control of the financial institutions including banks so that it can ensure that the banks and other institutions play a key role in the development activities of the state. The government could also realize the expected gains by encouraging the priority activities in every sector. The economic institutions are made to support the weaker sections of the community.d. Through powerful legislations like MRTP Act, FERA, etc., the government could ensure that there is no scope for exploitation of the common people by the private enterprise. Such a legal framework lays down the rules of the game and ensures fair play in BSPATIL
  38. 38. a mixed economic set up.e. As a method of protecting the weaker and downtrodden people, the government has policies like rationing, price controls, etc. Such regulations are built in the planning mechanism itself, so that the private sector cannot exploit the community.f. Towards the improvement of welfare in the economy, the state has undertaken several specific programs aimed at specific target groups. For example schemes aimed at the backward and schedule tribe providing them reservation in educational, employment and other opportunities, rural oriented schemes for the rural folks, health for all schemes, provision of free educational and medical facilities up to a certain level, etc. All these schemes aim at improving the social welfare. In all these activities the private sector is also welcome to play its role.g. The government makes effective use of the tools of fiscal policy viz. taxation and public expenditure, so as to achieve the objectives of economic planning.Distortions in the planning process :We have explained above that the fundamental objective of the mixedeconomy is to subordinate the self-interest for the national-interestwhether this has been achieved in Indian situation is a moot question. Inspite of various types of regulations and controls, the fruits of mixedeconomy have not appeared to have reached the common men. Even BSPATIL
  39. 39. after four decades after the adoption of mixed economy principle, wecome across glaring distortions which go to prove that mixed economy inpractice has not been very effective. This is mainly because of theinfluence exercised by the private enterprise through political influence,corruptive activities, dishonest bureaucrats, powerful national andinternational lobbying, etc. The extent of distortions could be understoodif we study the following points: 1. One of the basic objectives of Indian planning is to eradicate poverty, but five decades after the adoption of planning strategy, the proportion of population below the poverty line has not significantly changed. 2. The planning mechanism has failed to check the rise in price level. Inflation has come to stay in India with no policy being effective. When double digit inflation is controlled and results in single digit inflation, the country boasts of having achieved something very great. 3. The emergence and existence of black money is yet another yardstick to prove the failure of the mixed economy. The high level of taxation has only resulted in effective tax evasion and tax avoidance. As a result the distance between the rich and the poor remains wide. 4. Till date there has been no effective method to prevent the concentration of economic power in the hands of a few. The rich becomes richer and the poor, the poorer. 5. In spite of five decades of planning, unemployment is very much on the increase and the backlog in every plan is assuming BSPATIL
  40. 40. dangerous proportions. This is mainly because of the failure to control fee growth of population and the adoption of capital intensive production techniques. 6. The failure to achieve re-distribution of income is yet another glaring distortion. All the efforts to bridge the gap between the wages of rural and urban workers or increase the real wage of the working class has not succeeded.When we study the above points, it is clear, that mixed economy has notcarried us in the desired direction. This is mainly because of the inabilityof the government as it is frequently yielding to the pressure exerted bythe vested interests. Even the recent liberalization measure could beviewed from this angle. But a country cannot remain independent of theinternational pressures, especially when India is depending upon the IMFand EBRD, all its internal policies are indirectly governed by theselending agencies: Whether this is right or wrong is a question that couldbe answered only after we evaluate the gains of liberalization policy. Buton the whole, the expected benefits of mixed economy have not beenrealized as is clearly proved by the distortions discussed above.4. MarxismMarxism is essentially socialism in different garb. The pure socialism isproved to be impractical and it made role of government the center point.Most of the government could not fit in this role effectively. Furthercapitalism with its explicit goals threatened the success of socialism. Itwas at this juncture that Karl Marx came up with his ideology, which ledto the evolution of Marxian socialism. Marx succeeded through his logicalreasoning that economics dominates every activity of a society. This leads BSPATIL
  41. 41. to class struggle. When one struggle is tackled another one crop up. Thecontinued onslaught of the capitalist on the society would result in thecreation of haves and have-nots. This division of the society would widenwith the continuance of capitalism, which ultimately will result in classstruggle. Marx explained through his theory of value that every productshould be valued in accordance with the value of labor contained in it.But the laborers are rewarded at a very much lesser rate than what theycreate. That is,, every laborer contribute more by way of his work toproduce the product but he is paid a very low wages. The difference isthe gain realized by the capitalists. The capitalists would accumulateprofits this way at the cost of worsening labor condition. Over a periodthe divide between the proprietary class and the labor class would widenthat much, that there would be social upheaval. Karl Marx predictedclass war and argued that unless the capitalist class realizes this, therewould be severe impact on production and economic condition of acountry. His argument came true in the case of France that the Frenchrevolution broke out in 1789. There were similar problems in differentparts of the globe, like in erstwhile USSR [Scissors crisis], and China.China, especially remained a closed economy till early I990s. But inChina, the Marxism led to the emergence of communism. This isdiscussed in detail below.Though Marxism held sway over a number of countries for some time,yet it has inherent defects. Firstly, Marxs view that all activities in allcountries are basically economic in nature is not true. Secondly, hisargument that class struggle continuously takes place in every countrydid not hold water. A number of other reasons of economic, social andcultural nature led to the struggle and not the way Marx predicted.Thirdly, the theory of surplus value could not be applied in practice inservice industry. Fourthly, Marx never took into the interference that a BSPATIL
  42. 42. government could make in case of exploitation of society by thecapitalists.5. CommunismCommunism is Marxs prediction at the fall of capitalism. Marx arguedthat the widening inequalities in a society coupled with class struggleshould ultimately sound the death knell of capitalism. He is of the viewthat when capitalism falls, the communism will emerge in which, thelaborers will lead the country. The government will own all the resourcesand determine the needs of the society. It will also decide various otherissues of macro and micro importance. Government will turn out to bethe custodian of the society and in a pure communistic society; peoplewill lead a life where basic necessities are provided by the government.Unemployment will be very low as every one is occupied in someavocation or other.But the way in which communism was practiced in China created animpression that the government would be oppressive in its approach thatthe people will lead a life of slavery. One has to work to earn his bread.Military type of regimentation was enforced that common people weresubjected to absolute control and regulation by government. Theeconomy remained closed without any international relations, botheconomic and social. There were no two party systems that thenominated representatives of the Communist party attended to all thegovernmental responsibilities. Market mechanism is completely absent insuch a system, as government determined everything on behalf of thecountry.As has been already pointed out depending upon the economic system, BSPATIL
  43. 43. the business environment will change. In a capitalist system, theenvironment provides opportunities for every one who wants to maximizegains. In a socialist system, the government undertakes theresponsibility of providing everything to the citizens. In a Marxisteconomy, it is ultimately the laborers who will hold the reins. In aCommunist economy, it is the group of administrators who run theeconomy in the interest of the economy.4. Cultural environmentCulture refers to the behaviour, attitude, way of living, belief, faith, lawand custom of people in a country. It; could be immediately understoodthat these aspects would differ from country to country and also indifferent regions of the same country. It is always said mat the culturedetermines the peoples preferences, which directly determines thesuccess or failure of business. Hence, cultural, environment has a directimpact on business. A number of examples could be cited to prove this.In olden days, eating in hotels was considered unhygienic and majority ofthe people never used to accept food from outside. But today, even theorthodox/ people freely take their requirements from fast foodrestaurant. This change has come about, because of the changingculture in the society. For instance, with the presence of a large of multinational corporations, the executives working in such organizations arevery well paid that they rarely find time to spend on food. Suchexecutives prefer working lunch rather than lunch. So provision of suchworking lunch should not take time and if food is made available readilywithout any time loss, then the executives would be able to save theirtime. Further when executives leave home very early, it is impossible forthem to prepare some food and get for their lunch. So when their BSPATIL
  44. 44. working lunch requirement is met nearby by their work Spot in amambient atmosphere it would be welcome. This has given a fillip to thegrowth of Fast food restaurants. In this manner, certain new culturalpractices are transmitted to the society. Similarly, regarding therequirement of clothes, people are slowly switching on to ready madegarments of different varieties and design. Sensing this, severalinternational brands in ready garments are entering the market. This ishow the business adapts itself to the cultural environment in a country.Business also conducts research continuously for the purpose ofinnovating and inventing new products and uses for the existingproducts. It is through this process that several consumer durableproducts like wet grinder, mixer, washing machine, geysers, etc., havebeen introduced in the market. Having created them, the businessimpress upon the people to use them as time saving devices.Hence, cultural environment can create business opportunities. Anyorganization which is able to sense the business opportunity andcapitalize it, would be able to succeed and grow. But it should be notedthat changes in culture do not affect every part of the country or peoplein the same way or at the same time. It is possible to observe certain^regions/people lag in adopting a particular culture. This is what isreferred to as ‘cultural lag.’ For example, even to day in rural areas,certain practices like untouchability is found, though it is a crime. Suchcultural lag is found mainly because of illiteracy, ignorance,conservatism, sentimental factors, political factors and vested interests.Business should be aware of this while addressing the requirements ofpeople in different regions and nations. One more aspect of cultural isthe change. While some of the changes are accepted very fast the othersare resisted. While in some families divorce is accepted as a commonfeature, in others, divorce is viewed very seriously and extreme efforts are BSPATIL
  45. 45. taken to pacify the parties in conflict. Another important example is thewomens employment. While in olden days women were destined todomestic works, today women entrepreneur lead several fields. Attitudetowards work is yet another area when Indian culture lags much behindthe Western and Japanese culture.In the light of the above discussion, the following case studies wouldmake sense and prove how business environment can either give a boostto an organization or cause a doom. BSPATIL
  46. 46. CASE STUDY: 1 WILLIAM HENRY GATES, III AND THE MICROSOFT MONEY MACHINESeveral years ago, when his fortune was a mere several hundred milliondollars, a weekly magazine labeled Bill Gates as ‘America’s richest nerd.In 1992, at age 36, he had passed Donald Trump, Ross Perot and othersto be listed as Americas wealthiest person by Forbes magazine; the valueof his holdings had grown to an estimated $ 6.3 billion. How did the freeenterprise system help him to attain such phenomenal wealth?After graduating from high school in Seattle in 1973, Gates went toHarvard. While there, he learned that the personal computer [PC] was inthe development stage. He dropped out of school and threw himselfcompletely into designing an operating system [the program thatcoordinates the hardware and software of the computer] for the PC. Hissystem, [S - DOS the Microsoft Disk Opening System] was so good thatIBM agreed to use it in their line of, personal computers. With IBMsetting the industry standard, other computer manufacturers quicklyadopted MS DOS as well. Today it is estimated that more than 80 percent of all personal computers in the world use this system: Gates firm,Microsoft, Inc., makes money on every computer sold with MS-DOS asthe operating system. In the 1992, the firm recorded $2.8 billion inrevenue and $ 708 million in net profit. It ranks third in size in theindustry, behind IBM and Hewlett - Packard. Gates personal holdings ofsome 90 million shares of common stock represent about 33 per centownership share of the company.Microsoft also produces programs for word processing, spreadsheets, anda variety of other applications. One of Gates latest ventures has been to BSPATIL
  47. 47. purchase the electronic reproduction rights to thousands of art andphotographic works from museums and libraries around the world.These will be used as a part of his plan for interactive homeentertainment systems.With extremely hard work, a creative mind, and a willingness to takerisks, Gates has demonstrated how the market rewards the successfulentrepreneur. He was able to produce what consumers wanted at a pricethey were willing to pay the result was that both and they are better off !This is the essence of free market economic system.From the above case study, it would be clear how a pro-active,imaginative and innovative entrepreneur can, carry the business withhim. Though a school drop out. Gates has climbed the pinnacle ofbusiness world, merely by his ability to anticipate the changes, in thepersonal computer industry.Failure to read the business environment and initiate appropriate stepsto protect the business, can lead to a serious threat to existence itself.This would-be clsar from the following case on Maruti Udyog of India andDoordarshan. Case study : 2 MARUTI UDYOG LTD.,When Indian car market was opened for new private players, MarutiUdyog limited, which had till then enjoyed an enviable position in themarket, suddenly faced severe market erosion. Even though Maruti is themarket leader and has the largest range of products, cheaper cars, goodservice network and better cost structures, it has been steadily losing its BSPATIL
  48. 48. market share for the last three years and the valuation of the companyhas halved in 4 years time from Rs. 80 bn in 1996 to Rs. 40 bn in 2000.A Marjti udyog rival: What MUL did to Premier Automobiles andHindustan motors is now being done lo it.Empire under siegeJagdish Khattar, MD MUL was a man in trouble. He was facing whatwas the biggest setback ever for the company. With all strategiesbackfiring, he seemed to be fighting a losing battle.Problems were aplenty - the Maruti 800 segment was facing demand -erosion, Zen and its arch-rival Santro were very close in terms ofvolumes, Esteem was losing ground, Baleno, Wagon R and Alto were yetto prove themselves, while Gypsy was snugly ensconced in its niche.[Gypsy was not generating many volumes needed for MUL]Despite the fact the fact that MUL had the biggest range of products, thecheapest cars in the market and a service network and cost structuresthat were better than anyone else, it had steadily lost market share -down from 82.62 percent in 1998 to 52 per cent in 2000. With theimpending disinvestments, [Governments. policy of disinvestments inPublic sector units includes MUEL also along with other profit makingPSUs.] MD was facing flak from the government as well. With marketshare declining, MUL’s valuation had also come down drastically. Whileit was valued at Rs. 80 bn in 1996, by December, 2000, the figure hadtouched Rs. 40 bn.The building blocks BSPATIL
  49. 49. MUL was the largest car manufacturer in India with a market share ofover 52 per cent. It was a joint sector corporation set up by thegovernment of India and Suzuki Motor Corporation, Japan. MUL wasincorporated in 1981 to take over the assets of the erstwhile MUL set upin June 1971 and wound up by a High Court order in 1978. The assetsof MUL were then acquired buy the Government under MUL Acquisitionand Transfer of Undertakings Act, 1980. In 1982, the Government signeda joint venture agreement with Suzuki of Japan. Suzukis stakeincreased from 26 to 40% in 1987, and to 50.25% in 1992. The companywas a significant exporter with exports to over 50 countries.The company manufactured passenger cars at its factor in Gurgaon,Haryana, with an installed capacity of 350,000 vehicles. The firstproduct, Maruti 800 was launched in 1984, followed by the all-terrainvehicle Gypsy in 1985. Over the years, MUL expanded its portfolio withthe launch of the Maruti 1000 [1990]; the Zen and the Esteem [1993];Zen Diesel [1998]p Baleno, Wagon R and the Alto [2000].MUL was known for its ‘value for money pricing’ strategy, which hadbeen made possible due to the high levels of indigenization of its vehicles.While the Maruti 800, Zen, Esteem, and Omni were indigenized to theextent of over 90%, the Gypsy was indigenized to the extent of 82% andthe Alto to the extent of 76%. The company had a network of about 375vendors and had several joint ventures with some of them to source itsraw material requirements Its sales [comprising 112 dealers and salesoutlets in 86. locations] and service [comprising 1010 service workshopscovering 412 locations] network was one of the largest in the country.The Stumbling blocks BSPATIL
  50. 50. Till October 1998, MUL enjoyed a market share of 83.6% reacting to theincreasing number, of players, its-MD commented, “Obviously, ourmarket share will decline with the entry of new manufacturers andmodels in percentage terms, but not in actual volumes.”With cars ranging from Rs. 0.21 mn to s. 0.67 mn, problems associatedwith an ever-expanding product portfolio ‘constantly plagued MUL.Besides the declining market share, cannibalization was another issuethe company could ill-afford to ignore. Forced to take stock of what wentwrong, MUL realized that it was dependent to a large extent on a singleproduct - the Maruti 800.The 800, along with the Omrii [build on the same platform accounted for75% of units sales in the car. market in 1998; it had always been thebreadwinner for MUL. One of the biggest success sagas in Indianautomobile history, the 800 started losing its sheen in the 1990’s asnewer players emerged in the market. The entry-level segment ceased tobe the center of action as easy car finance availability and the lure of newcars made the Rs. 0.3 inn to Rs. 0.4 mn segment the most attractive one.The fact that MUL made only minor changes in the models over the yearsled to the perception that MUL was selling old models.To tackle these problems, MUL adopted a two-pronged strategy. One, tointroduce new models; two, it decided to increase the number of variantsrapidly, offering a new model with every increase of Rs. 25000. MUL alsorevamped its engines and took the 800 to semi-urban and rural areas, tocompensate for the declining urban sales. The company was aiming tomove entry-level prices up without losing out on volumes by launching BSPATIL
  51. 51. cars in the segment just above the 800. As part of this, Baleno, Wagon Rand Alto were launched in quick succession. [Alto was launched in thesame league as the 800. Industry observers contended that Altos launchin the 800-cc category signaled the beginning of a gradual phasing out ofthe 800. However, MUL sources were quick to deny this- and-assertedthat the 800 would be retained:] However, despite favourable reviews,these cars did not go on to become the saviors of MUL was hoping for.The engine-revamp exercise for the 800 had pushed its price close thebase model of rival Daewoos Matiz, eroding the price advantage on whichthe model survived. As a final resort, MUL decided to play what itthought was its trump card - price reduction. The move was also justifiedon the gorunds that the company was following Product Pyramid Profitmodel. [The Product Pyramid incorporated the distinct customersegments and their varied purchase -behaviour in terms of style, colour,feature and price preferences. The base of the Pyramid was occupied bylow price, high volume product s. like the 800, where the margins wereslim. The apex of the Pyramid was occupied by high-price, low volumeproducts such as the Maruti Esteem VX. Although -profits wereconcentrated near the top, the base played a crucial role as it created anentry-barrier for competitors, and insulated the profitable area near thetop from competition. In the specific case of cars, the most commonmodel was the new product profits model. Thus, the profits associatedwith a car followed the "s" curve of its life cycle, and declined as theproduct neared the end of the maturity. phase. MULs decision to dropthe prices of all the versions of the Maruti 800 came at this stage].MUL reduced the prices of Maruti 800 and Zen by about Rs. 24000 andRs. 51000 respectively in December, 1998, This resulted in a drop of Rs. BSPATIL
  52. 52. 3 bn in net profit for the year 1998-99. The MD justified die price cuts,saying that MUL wanted to make up for the increase in the 800’s pricedue to higher sales tax figures for the period. The move was described asan attempt to "redefine the price-value equation." MUL sources claimedthat they expected lower prices to bring an incremental growth of 25%over the next 12 months. However, despite the price cuts, by March1999, the companys market share decreased to 54.57%In early 2000, MUL announced that it would pass on the cost ofinstalling Euro-II compliant engines with Multi-point fuel Injection[MPFI] to its customers. There was a rush in the market for the many first-time consumers who did not want to bear the hike,hastened their purchase. MUL had to increase the price of the 800 from.Rs. 0,18 mn to Rs. 0.22 mn. Around the same time, MUL decided to meetthe competition head-on by having a model or variant with every increaseof Rs. 25000. The idea was to give the customer the widest choicepossible. By mid-2000, the company offered 43 models in a market,which had only 127 models.In June 2000, sales of the 800 stood at 5296 cars compared to the11000 plus cars it had been selling per month for the previous few years.MUL had no option but to again slash prices of various models by Rs.25000 to Rs. 30000, to bring back the sales to normal levels. Otherchanges initiated by the-company included a transformation in itscustomer - interface and a revamped branding strategy with the new cars[Wagon R and Baleno] coming with the Suzuki prefix. The price cuts,however, only added to the declining bottom line problem. MUL reporteda loss of Rs. 6792. II on every car sold between April and October 2000.MUL sources, however, attributed this to the fact that MUL had notpassed on the cost of up-gradation to meet the Euro;I and Euro II BSPATIL
  53. 53. emission norms to its customers. The industry strikes backThe Indian car market of the early 21s1 century was a burgeoning onewith over 127 models on the roads, and many more in the pipeline.Increased competition had radically transformed the market, manifestedclearly in carmakers pricing strategy overhaul. Manufacturers werebreaking the conventional rules of auto pricing by moving from cost-based to value-based pricing and the market soon, became a buyersmarket.When the new players entered the market, there were no doubts that themain artillery for the companies in the car-wars would be the pricingstrategies. It was not just a case of competition forcing a downwardrevision; the players were even ready to forego profits in the short run.Brand building and technology / feature driven campaign were to beadd-ons to the above plan. Industry observers were quick to point outthat MUL would have to get entangled in the price reducing game.A Business India report pointed : No one is better equipped to fight aprice war than Maruti. Its phenomenal profitability, cash reserves andefficiency in manufacturing will allow it to slash prices on all its modelswithout feeling the pinch as much as others.However, Hyundai was the first company to introduce what came to beknown as, pricing based on customers value perceptions. It introducedthe base model of Santro at Rs. 0.29 mn, while two other versions werepriced at Rs. 0.34 and Rs. 0.37 mn. The basic version was targeted atbuyers of the 800, and the other at the Zen. Thereafter, hunches in the BSPATIL
  54. 54. Rs. 0.2 mn to Rs. 0.6 mn segment by Ford and Hyundai showed highlyinnovative pricing strategies being adopted. Soon after, Ind Auto droppedthe price of the Fiat Uno Diesel by Rs. 64867 and Premier AutomobilesLtd lowered the prices of the four versions of the Premier Padmini by Rs.5000 to make it Rs. 53000.MUL had adopted a skimming strategy for Esteem. Launched in 1993, itwas positioned as a luxury car. This continued till the arrival of DaewoosCielo in 1996, which started eating into Esteems share. In 1999, thesegment saw the arrival of Fiat Siena, Opc-1 Corsa, Ford lko.n and theHyundai Accent. MUL resorted to price slashing and brought the pricesdown. While the top end versions price was reduced to Rs. 0.52 mn,from Rs. 0.59 mn, the basic version was brought down to Rs. 0.44 mnfrom 0.46 mn. However, this was possible only because it enjoyedsubstantial margins over costs, being the first mover in the market.MUL also followed the- same modus operandi for Zen, albeit in a differentmanner. The company increased the number of Zen variants to 10, withprices ranging hom Rs. 0.3 mn to Rs. 0.43 mn. The price stood reducedfor the Rs. 0.3 mn variant in terms of stripping down the model’sfeatures.The competition responded with similar moves. Daewoo offered price-variants for Matiz, Ind Auto offered seven variants of Fiat Uno, rangingfrom Rs. 0.27 mn to Rs. 0.41 mn. Hyundais Santro offered six variantsbetween Rs. 0.29 mn and Rs. 0.37 mn; Telcos Indica came in the rangeof Rs. 0.25 mn to Rs. 0.38 mn with four models. NK Goila, VF Honda -Sicl cars, aptly summed up the situation : It is important to be presentwith grade - variation and a range to cover the range of potentialcustomers being targeted. The price - points in the car market were BSPATIL
  55. 55. replaced by price — bands. The width of a price band was a function ofthe size of the segment being targeted besides the intensity ofcompetition. The thumb rule being, the higher the intensity, the widerthe price-band.Ford’s research, before the launch of the Ikon, a car made for the/Indianmarket, revealed that over the previous two three years, the 800 segmenthad graduated to the next level of Zen, Santro, Matiz, Uno and Indica.Fords research on the existing market segments and the consumerresponse to new cars revealed that beyond the Zen segment, the choice ofthe consumer was limited. Models like the Esteem and Cielo had had along innings outside the country and were not exactly contemporary. Theother options were Escort, Lancer and Honda, which were priced aboveRs. 0.7 mn Between them and the Rs. 0.45 - 0.5 run range of the Esteemand Cielo, thee was a vacuum. The gap was identified by General MotorsCorsa and Fiats Siena as well. All three competitors plugged the gap byoffering several versions at various price points. Ford first launched Ikon1.6 but later came up with a lower engine capacity Ikon I.3CLXI at alower price. GM and Fiat also followed the same approach.About price reductionThe fact that 82% of the Indian market was accounted for cars pricedbelow Rs. 0.43 mn, proved how strongly price influenced volumes.Moreover, with domestic car sales dropping by 15.01% in November 1998over November, 1997 manufacturers had to turn towards price toresuscitate demand.In the prevailing conditions, the Second P of aulo marketing pricereduction, seemed to be (he only factor able to rejuvenate the stagnant BSPATIL