BUSINESS ENVIRONMENTCHAPTER IBusiness environment- Dynamic factors of environment- Importance ofscanning the environment-F...
Business environment1     Environment - Introduction      Business Environment & Economy2      Control of Business Environ...
classification of business environment, need to study environment inbusiness decisions, the methods of scanning the busine...
But now a days, business is viewed more as a profession or occupation.From the days of family owned business, we have reac...
needs. These resources are limited in supply, and so business involvesidentification of resources, evaluation of resource ...
business units grow. Hence creation of surplus in a business becomes thefocal point and this is best achieved through opti...
what is produced the modern concept is produce what is wanted Soevery business depends on consumers and their ever changin...
for business houses to modify their internal decisions and policies, on thebasis of the pressure from external factors Thi...
products or services. Similarly, if the population in a country is well  - tuned to use and throw concept’ [like most of t...
3. Geographical    and       ecological       environment:        Geographical  environment refers to climatic conditions ...
any organization, which manufactures products based on such   species, have lo get      legal    sanctions.       In      ...
to install pollution prevention system. Similarly, the expectations of   various interests in the society have undergone a...
Cultural environment refers to the values, norms, customs, ethics,  goals and other accepted behaviour pattern of people i...
organizations, made people to accept inferior quality goods and      services. Once, the liberalization policy is adopted,...
society. At the outset, the organization would examine whether theproduct would suit the culture in the society. Suppose t...
1.    Economic environmentThe economic environment is composed of various set of economicpolicies, economic system, strate...
poor completely. This would facilitate income re-distribution and improvethe conditions of poor.Similarly, by altering its...
Public borrowing is one more instrument in the hands of the governmentto influence the economic condition in a country. Th...
commercial banks. This liberal credit policy would have expansionaryeffects on the economy.     Similarly, using open mark...
prospects of the business organizations. A liberal policy would extendthe scope for exports and imports, while a restricti...
business organizations have to continuously monitor the changes in thetrade policies so as to position themselves accordin...
technology policy. Apart from permitting free imports of computers andcomponents as well as telecommunication equipments, ...
manufactured products, the government adopts the administered pricemechanism to control the prices.          For example, ...
After all the British East India Company entered the Indian shores underthe pretext of trading with India in 1600 AD and t...
l99l. This resulted in a peculiar scenario in –which ‘democratic socialismwith capitalistic ideologies’ existed.   Through...
4.   The basic objective with which an economic system functions is to     satisfy the wants of the people. Unless there i...
considering the availability of resources, the economic system should optto produce only goods that would satisfy the want...
systems. In the next section, the details of different types of economicsystems are discussed.Types of Economic systemEcon...
skills would be able to command better wages and salaries. On the wholecapitalism   offers   scope   for   growth    of   ...
always restrict output to maintain a high price and also maximize     profit. So excess capacity would exist in many indus...
almost complete. Government also retains the right to interfere inthe market system, whenever there is deliberate and inte...
3.    Mixed economyEvolution of the concept of Mixed economy:There was no reference to the mixed economic system in Econom...
compromise between these extremes was thought of as an idealeconomic system. The new system called mixed economic systemco...
This is the next feature of mixed economy. In this system, thegovernment itself enters the field of production so that the...
up industries in backward areas and encourage the private initiative to setup industries in such areas by offering several...
areas that will be under state control. Hence, there is scope for thedevelopment of private sector, though only according ...
state. The government could also realize the expected gains by     encouraging the priority activities in every sector. Th...
Distortions in the planning process :We have explained above that the fundamental objective of the mixedeconomy is to subo...
4.    Till date there has been no effective method to prevent the           concentration of economic power in the hands o...
Marxism is essentially socialism in different garb. The pure socialism isproved to be impractical and it made role of gove...
countries are basically economic in nature is not true. Secondly, hisargument that class struggle continuously takes place...
governmental responsibilities. Market mechanism is completely absent insuch a system, as government determined everything ...
should not take time and if food is made available readily without anytime loss, then the executives would be able to save...
in some families divorce is accepted as a common feature, in others,divorce is viewed very seriously and extreme efforts a...
CASE STUDY: 1            WILLIAM HENRY GATES, III AND THE MICROSOFT                             MONEY MACHINESeveral years...
to purchase the electronic reproduction rights to thousands of art andphotographic works from museums and libraries around...
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...
MUL was the largest car manufacturer in India with a market share of over52 per cent. It was a joint sector corporation se...
Till October 1998, MUL enjoyed a market share of 83.6% reacting to theincreasing number, of players, its-MD commented, “Ob...
same league as the 800. Industry observers contended that Altos launchin the 800-cc category signaled the beginning of a g...
an attempt to "redefine the price-value equation." MUL sources claimedthat they expected lower prices to bring an incremen...
The Indian car market of the early 21s1 century was a burgeoning one withover 127 models on the roads, and many more in th...
MUL had adopted a skimming strategy for Esteem. Launched in 1993, itwas positioned as a luxury car. This continued till th...
had graduated to the next level of Zen, Santro, Matiz, Uno and Indica.Fords research on the existing market segments and t...
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  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 exchange flowregulation -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 policies andpromotion 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, the BSPATIL
  3. 3. classification of business environment, need to study environment inbusiness decisions, the methods of scanning the business environment,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 and Sudras,Of these our fold classification of social activities, the activities of vysyasincluded basically, facilitating exchange. Hence, business as an exchangeactivity remained since the days of exchange started. It could also berecalled that business as a social activity became popular only when thewants of different people in a society were to be met with the availableresources. In other words, whenever there was a scope for producingsomething, which is wanted, then business activity automatically emerged. BSPATIL
  4. 4. But now a days, business is viewed more as a profession or occupation.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 join businessorganizations to make them successfully function. Unlike the olden 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 somany others. Hence, every business activity has to meet the goals or aimsor objectives of these various groups of people. That in fact, has madebusiness a most complicated activity.Modern business has a number of features. Understanding of these wouldhelp 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]. Theycannot 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 inputand size of procurement will depend upon, the size of the organization.This would also depend upon the nature or product or serviceextended/by the business unit. All these are attended with the objectiveof making profit or surplus. Only when there is surplus achieved, can the BSPATIL
  6. 6. business units grow. Hence creation of surplus in a business becomes thefocal point and this is best achieved through optimal utilization ofresources. That way, all business units have to achieve the maximumoutput with minimum inputs which in other words is the effort to achieveeconomic efficiency. Only economic efficiency can enable firms to beefficient in every other sense. Therefore, business organizations are onlyeconomic units 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 revenue side,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 avast change. From a producer driven stage business has becomeconsumer centered and driven stage. While the earliest concept was * sell BSPATIL
  7. 7. what 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 a businessis influenced by a score of factors, which range from customers tocompetitors and government. Therefore, a business cannot beindependent 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 necessary BSPATIL
  8. 8. for business houses to modify their internal decisions and policies, on thebasis of the pressure from external factors This highlights the need to beever- 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 organizations functionin an environment subject to the influence of various constituents. Earhone of the constituents have in turn a number of factors influencing them.For example, economic environment has micro and macro environmentalfactors affecting it. To develop a right perspective about businessenvironment, let us discuss briefly about each one of the externalenvironment constituents. 1. Demographic environment : This refers to the size and behaviour of population in a country. Suppose a country has a huge size of 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 BSPATIL
  9. 9. 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 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. BSPATIL
  10. 10. 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 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 BSPATIL
  11. 11. 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 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 BSPATIL
  12. 12. 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, 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. BSPATIL
  13. 13. 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 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 BSPATIL
  14. 14. 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.It is well known that business enterprises cannot remain independent ofthe society and the institutions. So whatever decision they take as to be intune with the requirements of society and the dictums of the institutions.A business organization has to continuously monitor the environment soas to identify the business opportunities and threats. By exploring itsstrengths and minimizing its weaknesses, if the organizations cancapitalize these opportunities and effectively thwart the threats, then itwould be able to grow. Let us elaborate this with an example.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 the BSPATIL
  15. 15. society. At the outset, the organization would examine whether theproduct would suit the culture in the society. Suppose the product is useand 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 to lengthenthe life of every product by repairing it. Similarly suppose the productrequires 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 controlnorms. Hence, in every decision of the organization, the externalenvironment has an important role to play. Any future plans of expansionand forecasting of demand will depend upon the changes in the businessenvironment. These changes may include both the current and expectedchanges. Unless these changes are also foreseen, decisions taken wouldturn out to be suicidal. In the case of organizations which have beenpro-active, the changes in the environment do not affect them much. Butthose which fail to understand from their own experience or that of theother 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. BSPATIL
  16. 16. 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 infrastructural facilitiesin a country. All these affect the business environment one way or theother. To understand the impact of these on business environment, let usdiscuss 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 caneffectively 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 the BSPATIL
  17. 17. poor 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 huge size,etc. For instance, suppose there is inflation in a country. The governmentwould reduce its level of expenditure, thereby reducing the income of thepeople. With lesser income, the demand would, go down and so the price.At the time of deflation, the government would expand its publicexpenditure by investing in a number of public projects, so that there willbe income generation find demand generation which will revive theeconomy. 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 credit inthe 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, wouldcome down. Alternatively, by lowering the bank rate, the central bankmakes credit available at a cheaper rate, and so the businessorganizations would go for a larger discounting of eligible bills with BSPATIL
  19. 19. commercial 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 is deflation,the central bank would buy the securities and the money equivalenttransferred to the banking system would facilitate adoption of liberalcredit. Variable reserve ratio refers to the increase or decrease in thequantum of Statutory liquidity ratio and the Cash reserve ratio which thecommercial banks have to maintain as a proportion of their total deposits.By increasing the ratios, the commercial banks would be left with lesservolume of funds and so they can lend less. By reducing the ratio, thecommercial banks would be left with more funds with which they canmake lending liberal. All these policies would have a direct impact on thebusiness 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. Through thesepolicies, 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 assistanceC] Foreign trade policy: The foreign trade policy determines the scopefor trade between countries. It would directly affect the business BSPATIL
  20. 20. prospects of the business organizations. A liberal policy would extendthe scope for exports and imports, while a restrictive policy would narrowthe scope. 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 imports andbe 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 encourageexports 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 the BSPATIL
  21. 21. business 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, the industriesin India were classified into four categories: industries completely ownedby public sector, industries where both public and private sectorparticipation was permitted, small scale industries and collage industries.Except the first category in all the other categories, private sectorpresence was permitted through licensing. This was resulted in severaladverse effects, which were all explained in detail by the Dutt committeereport. But till 1985, liberalization was never accepted as a part of growthstrategy. But after 1985, the situation slowly changed that by 1991 Indiaadopted a policy of liberalization. Consequently, the business scope andprospects of the Indian business organization changed since 1991. Ashas been already pointed out they were exposed to market competitionand threats after liberalization. Performance has become a necessity forsurvival. By about the end of 20th century, the government also proceededto disinvest several public sector units thereby opening up the challengesall the more for Indian industries. Therefore, the licensing policy and itsdirection have a lot of impact on the business organizations.E] Technology policy: One of the most important economic policies isthe technology policy. Improvement in technology is a condition forgrowth 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 favourable BSPATIL
  22. 22. technology 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 stay intelecommunication, 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 depend onIndian 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 requirementsthrough 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 the BSPATIL
  23. 23. manufactured 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 at adifferent price. This helps to minimize the strain of the population usingLPG as cooking media. Similarly till April, 2002, petrol and diesel weresubjected to administered price controls. Sugar, cement, etc., are alsosubjected 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 the country.Before independence, under the guidance of Mahatma Gandhi, India waswedded to the policy of ‘Swadeshi’. That is, Gandhi advocated the use ofonly Indian made goods and to completely abstain from imported goods,specifically British goods. As a result immediately after independence,Indian government followed a restrictive, trade policy imposing veryheavy customs duty on imported goods. This was thought that such apolicy would help to achieve both the political commitment as well asprotection of domestic producers from the invasion offoreign-manufacture-s and traders. A deeper look into such a policywould reveal that India never wanted to entertain a policy of allowingforeign trading activities on Indian soil as this would lead to colonization. BSPATIL
  24. 24. After all the British East India Company entered the Indian shores underthe pretext of trading with India in 1600 AD and the country had to pay aheavy price for the next 350 years being a colony. Hence, a restrictivetrade policy was very much favored by every one and in such anenvironment the business environment was such the domestic producerscould operate 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 issue withcaution. It felt that a controlled and guided industrial developmentwould yield better results than a free unrestricted industrial development.The consequence was the Licensing policy. Though imports werepermitted, industrial development through collaborative efforts withentrepreneurs abroad was subjected to a very critical scrutiny. When theLicensing 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 in BSPATIL
  25. 25. l99l. 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 the beginningIndian government adopted a purely socialistic pattern of developmentstrategy while by 1990’s development by subscribing to capitalisticpattern has become the reality. This shift has a great impact on thebusiness environment that domestic business today has to realign itselfto 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. 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. BSPATIL
  26. 26. 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.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. Thisis because; a country may not be gifted with all the necessary resourcesto produce all the goods. Hence, depending upon the resourceendowment a country would decide what it could produce. Then there is aproblem 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, BSPATIL
  27. 27. 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, issuesrelating to selection of right strategy, technology and investment. Forexample, a country like India, with very huge population should notprefer capital -intensive technology, as that would lead to moreunemployment of human resources. Similarly, while selecting thetechnology, a country should weigh a number of considerations likerelevance of technology, cost of technology, support in case of failures,consequences of the technology used, etc. Another vital aspect is theinvestment that a country has to make while selecting the strategy andthe technology. A very important question is whether the available fundsshould be invested in sophisticated research and development or meetingthe basic needs of the people. Hence, the second question wouldultimately determine the efficiency with the available resources areutilized.‘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 which functionsin a country. To understand how these answers differ among theeconomic systems, we should understand the different types of economic BSPATIL
  28. 28. systems. In the next section, the details of different types of economicsystems 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 typesof systems. 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, thedemand 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 of thepeople. Once this is known, the producers would allocate the resourcesto manufacture and sell the products in great demand. While doing so,there is no control or regulation over production. In other words,oligopoly environment prevails. But each producer differentiates hisproduct 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 with BSPATIL
  29. 29. skills 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 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 BSPATIL
  30. 30. 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 maximizing profits of individuals or organizations. Government decides the type of productive efforts to be permitted. In other words, in a socialist country, government can adopt licensing system and other types of regulations to prevent the emergence of monopolist and exploitative tendencies. Maximization of Community welfare is the objective than profit maximization. Another very important feature is the government ensures equitable distribution of national product. Public distribution system assumes enormous significance in such an economic system. On the whole, the socialistic society differs from capitalist society 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, space technology, social security, etc., the presence of government is BSPATIL
  31. 31. almost 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 socialism,there is no scope for widening inequalities rind the governmenttakes steps to narrow the gap between the rich and the poorthrough various measures.However, socialistic states suffer from the following limitations: 1.Excessive dependence on government decisions often result indelay in offering any public service. 2. Bureaucratic controlbecomes an integral part of the socialistic principles. As a resultthe benefits and its direction of flow is determined by thebureaucrats. 3. Government by undertaking excessive responsibilityon its shoulders, abets inefficiency and corruption in the society. 4.No incentive and motivation for individual excellence orachievements is possible in such a society and so innovations andinventions do not really lake place in large scale in such a society. 5.With governmental presence in every walk of life, efficiency andproductivity suffer. 6. Lack of support for individual liberty killsinitiative. BSPATIL
  32. 32. 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 advocated theLaissez faire or free enterprise system, as several countries could developfast following the free enterprise system, in which there was no or littlegovernment intervention. The entire economic system operated with theprice mechanism at its center point. The producers produced what theconsumers wanted and this provided very little scope for the governmentto intervene in the system. The Classical economists and their ardentsupporters believed that the invisible hand will direct the economy andwith private initiative and enterprise, every country should be able torecord 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, CommunistChina, Vietnam, Cuba and others preferred this socialist system in whichgovernment is made the custodian of the society. The main reason forDie emergence of this new economic system was the failure of capitalismduring the 1929 depression to revive every economy from depression.Keynes himself thought that capitalism without some of its evils couldcertainly help economic recovery. Hence, a time came when economistsfelt that cent per cent free enterprise or cent per cent governmentgoverned economic development cannot work satisfactorily. A BSPATIL
  33. 33. 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 governmentannounced 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 tobe achieved. In such a set up, the government strives to promote thewelfare of the country by ensuring social order, social justice andestablishing all the necessary institutions which are required to achievethe desired pattern of growth and development.iii. Distribution of ownership and control of resources: BSPATIL
  34. 34. 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 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 set BSPATIL
  35. 35. up industries in backward areas and encourage the private initiative to setup industries in such areas by offering several concessions andexemptions. In the absence of nixed economy, several states in Indiawould have remained industrially backward.vi. 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 isperforming 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 co¬operative efforts and the limits of freedom granted to theprivate sector. In Indian case, the government prepares the plans fordevelopment and spells out the areas left for the private initiative and the BSPATIL
  36. 36. areas 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.Obviously, planning is a very difficult exercise in a mixed economy set up.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 BSPATIL
  37. 37. 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 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. BSPATIL
  38. 38. 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 afterfour decades after the adoption of mixed economy principle, we comeacross 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. BSPATIL
  39. 39. 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 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 these lendingagencies: Whether this is right or wrong is a question that could beanswered only after we evaluate the gains of liberalization policy. But onthe whole, the expected benefits of mixed economy have not beenrealized as is clearly proved by the distortions discussed above.4. Marxism BSPATIL
  40. 40. Marxism 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 leadsto 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. Butthe 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 is thegain realized by the capitalists. The capitalists would accumulate profitsthis way at the cost of worsening labor condition. Over a period the dividebetween the proprietary class and the labor class would widen that much,that there would be social upheaval. Karl Marx predicted class war andargued that unless the capitalist class realizes this, there would be severeimpact on production and economic condition of a country. Hisargument came true in the case of France that the French revolutionbroke out in 1789. There were similar problems in different parts of theglobe, like in erstwhile USSR [Scissors crisis], and China. China,especially remained a closed economy till early I990s. But in China, theMarxism led to the emergence of communism. This is discussed in detailbelow.Though Marxism held sway over a number of countries for some time, yetit has inherent defects. Firstly, Marxs view that all activities in all BSPATIL
  41. 41. countries 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 agovernment 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 the BSPATIL
  42. 42. governmental 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,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 the responsibilityof providing everything to the citizens. In a Marxist economy, it isultimately the laborers who will hold the reins. In a Communist economy,it is the group of administrators who run the economy in the interest ofthe 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 food restaurant.This change has come about, because of the changing culture in thesociety. For instance, with the presence of a large of multi nationalcorporations, the executives working in such organizations are very wellpaid that they rarely find time to spend on food. Such executives preferworking lunch rather than lunch. So provision of such working lunch BSPATIL
  43. 43. should not take time and if food is made available readily without anytime loss, then the executives would be able to save their time. Furtherwhen executives leave home very early, it is impossible for them toprepare some food and get for their lunch. So when their working lunchrequirement is met nearby by their work Spot in am ambient atmosphereit would be welcome. This has given a fillip to the growth of Fast foodrestaurants. In this manner, certain new cultural practices are transmittedto the society. Similarly, regarding the requirement of clothes, people areslowly switching on to ready made garments of different varieties anddesign. Sensing this, several international brands in ready garments areentering the market. This is how the business adapts itself to the culturalenvironment in a country. Business also conducts research continuouslyfor the purpose of innovating and inventing new products and uses forthe existing products. It is through this process that several consumerdurable products like wet grinder, mixer, washing machine, geysers, etc.,have been 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 shouldbe aware of this while addressing the requirements of people in differentregions and nations. One more aspect of cultural is the change. Whilesome of the changes are accepted very fast the others are resisted. While BSPATIL
  44. 44. in some families divorce is accepted as a common feature, in others,divorce is viewed very seriously and extreme efforts are taken to pacifythe parties in conflict. Another important example is the womensemployment. While in olden days women were destined to domesticworks, today women entrepreneur lead several fields. Attitude towardswork is yet another area when Indian culture lags much behind theWestern 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
  45. 45. 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 IBM settingthe industry standard, other computer manufacturers quickly adopted MSDOS as well. Today it is estimated that more than 80 per cent of allpersonal computers in the world use this system: Gates firm, Microsoft,Inc., makes money on every computer sold with MS-DOS as the operatingsystem. In the 1992, the firm recorded $2.8 billion in revenue and $ 708million in net profit. It ranks third in size in the industry, behind IBM andHewlett - Packard. Gates personal holdings of some 90 million shares ofcommon stock represent about 33 per cent ownership share of thecompany.Microsoft also produces programs for word processing, spreadsheets,and a variety of other applications. One of Gates latest ventures has been BSPATIL
  46. 46. to purchase the electronic reproduction rights to thousands of art andphotographic works from museums and libraries around the world. Thesewill be used as a part of his plan for interactive home entertainmentsystems.With extremely hard work, a creative mind, and a willingness to take risks,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 with him.Though a school drop out. Gates has climbed the pinnacle of businessworld, merely by his ability to anticipate the changes, in the personalcomputer industry.Failure to read the business environment and initiate appropriate steps toprotect the business, can lead to a serious threat to existence itself. Thiswould-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
  47. 47. 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 and Hindustanmotors is now being done lo it.Empire under siegeJagdish Khattar, MD MUL was a man in trouble. He was facing what wasthe biggest setback ever for the company. With all strategies backfiring,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 of volumes,Esteem was losing ground, Baleno, Wagon R and Alto were yet to provethemselves, while Gypsy was snugly ensconced in its niche. [Gypsy wasnot 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. While itwas valued at Rs. 80 bn in 1996, by December, 2000, the figure hadtouched Rs. 40 bn.The building blocks BSPATIL
  48. 48. MUL was the largest car manufacturer in India with a market share of over52 per cent. It was a joint sector corporation set up by the government ofIndia and Suzuki Motor Corporation, Japan. MUL was incorporated in1981 to take over the assets of the erstwhile MUL set up in June 1971 andwound up by a High Court order in 1978. The assets of MUL were thenacquired buy the Government under MUL Acquisition and Transfer ofUndertakings Act, 1980. In 1982, the Government signed a joint ventureagreement with Suzuki of Japan. Suzukis stake increased from 26 to 40%in 1987, and to 50.25% in 1992. The company was a significant exporterwith 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 first product,Maruti 800 was launched in 1984, followed by the all-terrain vehicleGypsy in 1985. Over the years, MUL expanded its portfolio with thelaunch of the Maruti 1000 [1990]; the Zen and the Esteem [1993]; ZenDiesel [1998]p Baleno, Wagon R and the Alto [2000].MUL was known for its ‘value for money pricing’ strategy, which had beenmade 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
  49. 49. 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 and modelsin 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 issue thecompany 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 launchingcars in the segment just above the 800. As part of this, Baleno, Wagon Rand Alto were launched in quick succession. [Alto was launched in the BSPATIL
  50. 50. same league as the 800. Industry observers contended that Altos launchin the 800-cc category signaled the beginning of a gradual phasing outof the 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 onwhich the 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 and Rs.51000 respectively in December, 1998, This resulted in a drop of Rs. 3bn 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 as BSPATIL
  51. 51. an 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 March 1999,the companys market share decreased to 54.57%In early 2000, MUL announced that it would pass on the cost of installingEuro-II compliant engines with Multi-point fuel Injection [MPFI] toits customers. There was a rush in the market for the 800. as manyfirst-time consumers who did not want to bear the hike, hastened theirpurchase. MUL had to increase the price of the 800 from. Rs. 0,18 mn toRs. 0.22 mn. Around the same time, MUL decided to meet thecompetition head-on by having a model or variant with every increase ofRs. 25000. The idea was to give the customer the widest choice possible.By mid-2000, the company offered 43 models in a market, which hadonly 127 models.In June 2000, sales of the 800 stood at 5296 cars compared to the 11000plus cars it had been selling per month for the previous few years. MULhad no option but to again slash prices of various models by Rs. 25000 toRs. 30000, to bring back the sales to normal levels. Other changesinitiated by the-company included a transformation in its customer -interface and a revamped branding strategy with the new cars [Wagon Rand Baleno] coming with the Suzuki prefix. The price cuts, however, onlyadded to the declining bottom line problem. MUL reported a 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 not passed on the costof up-gradation to meet the Euro;I and Euro II emission norms to itscustomers. The industry strikes back BSPATIL
  52. 52. The Indian car market of the early 21s1 century was a burgeoning one withover 127 models on the roads, and many more in the pipeline. Increasedcompetition had radically transformed the market, manifested clearly incarmakers pricing strategy overhaul. Manufacturers were breaking theconventional rules of auto pricing by moving from cost-based tovalue-based pricing and the market soon, became a buyers market.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 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. BSPATIL
  53. 53. 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, fromRs. 0.59 mn, the basic version was brought down to Rs. 0.44 mn from0.46 mn. However, this was possible only because it enjoyed substantialmargins over costs, being the first mover in the market.MUL also followed the- same modus operandi for Zen, albeit in adifferent manner. The company increased the number of Zen variants to10, with prices ranging hom Rs. 0.3 mn to Rs. 0.43 mn. The price stoodreduced for the Rs. 0.3 mn variant in terms of stripping down the model’sfeatures.The competition responded with similar moves. Daewoo offeredprice-variants for Matiz, Ind Auto offered seven variants of Fiat Uno,ranging from Rs. 0.27 mn to Rs. 0.41 mn. Hyundais Santro offered sixvariants between Rs. 0.29 mn and Rs. 0.37 mn; Telcos Indica came in therange of Rs. 0.25 mn to Rs. 0.38 mn with four models. NK Goila, VFHonda - Sicl cars, aptly summed up the situation : It is important to bepresent with grade - variation and a range to cover the range of potentialcustomers being targeted. The price - points in the car market werereplaced 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 wider theprice-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 segment BSPATIL
  54. 54. had 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 choiceof the 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 above Rs.0.7 mn Between them and the Rs. 0.45 - 0.5 run range of the Esteem andCielo, 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 a lowerprice. 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 stagnantdemand.However, not every player had the financial-muscle to play the price card.Instead of cutting the price of Matiz, Daewoo Motors introduced anenhanced version with product features like power steering, andproduct-plus features like better service and customer-care. Players likeHyundai and Telco did not opt for price reduction, as they simply did nothave the economies of scale to profit from such moves. Such strategies BSPATIL

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