BUSINESS ENVIRONMENT Dr.K.S.CHANDRASEKHAR NAIR UNIVERSITY OF KERALA, TRIVANDRUM, INDIA email: kscnair@gmail.com

MODULE 1

Industry Analysis Industries are the circles in the supply chain diagram. Each industry is a set of firms that operate in the same space in a supply chain, competing to control some of the space and so capture value. Industries have structure, history/ trajectories and competitive dynamics that set the context for new entrants. Industries also operate within the macro environment -- where most analysis starts.

Industries are the circles in the supply chain diagram.

Each industry is a set of firms that operate in the same space in a supply chain, competing to control some of the space and so capture value.

Industries have structure, history/ trajectories and competitive dynamics that set the context for new entrants.

Industries also operate within the macro environment -- where most analysis starts.

Scan the Environment In business terminology, the environment consists of all the external forces that impinge on the industry, its markets and its firms. Needless to say, there are a lot of potentially relevant factors.

In business terminology, the environment consists of all the external forces that impinge on the industry, its markets and its firms.

Needless to say, there are a lot of potentially relevant factors.

Environmental Forces Firm/ Organization : Structure Culture Competencies Resources Industry Trade Association Government Union/ employees Competitors Creditors Suppliers Customers Communities Stockholders Sociocultural Forces Political/Legal Forces Technological Forces Economic Forces Macroenvironment

Environmental Forces Indicators ECONOMIC TECHNOLOGICAL GDP trends Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/revaluation Energy availability & cost Disposable & discretionary income Total federal spending for R&D Total industry spending for R&D Focus of technological efforts Patent protection New products New technologies New developments in technology transfer from lab to marketplace Productivity improvements through automation

Environmental Forces Indicators POLITICAL-LEGAL SOCIOCULTURAL Antitrust regulations Environmental protection laws Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies Laws on hiring and promotion Stability of government Lifestyle changes Career expectations Consumer activism Rate of family formation Growth rate of population Age distribution of population Regional shifts in population Life expectancies Birth rates

The Micro-environment: This environment influences the organization directly. It includes suppliers that deal directly or indirectly, consumers and customers, and other local stakeholders. Micro tends to suggest small, but this can be misleading. In this context, micro describes the relationship between firms and the driving forces that control this relationship. It is a more local relationship, and the firm may exercise a degree of influence.

The Micro-environment:

This environment influences the organization directly. It includes suppliers that deal directly or indirectly, consumers and customers, and other local stakeholders. Micro tends to suggest small, but this can be misleading. In this context, micro describes the relationship between firms and the driving forces that control this relationship. It is a more local relationship, and the firm may exercise a degree of influence.

The macro-environment This includes all factors that can influence and organization, but that are out of their direct control. A company does not generally influence any laws (although it is accepted that they could lobby or be part of a trade organization). It is continuously changing, and the company needs to be flexible to adapt. There may be aggressive competition and rivalry in a market. Globalization means that there is always the threat of substitute products and new entrants. The wider environment is also ever changing, and the marketer needs to compensate for changes in culture, politics, economics and technology

The macro-environment

This includes all factors that can influence and organization, but that are out of their direct control. A company does not generally influence any laws (although it is accepted that they could lobby or be part of a trade organization). It is continuously changing, and the company needs to be flexible to adapt. There may be aggressive competition and rivalry in a market. Globalization means that there is always the threat of substitute products and new entrants. The wider environment is also ever changing, and the marketer needs to compensate for changes in culture, politics, economics and technology

The internal environment All factors that are internal to the organization are known as the 'internal environment'. They are generally audited by applying the 'Five Ms' which are Men, Money, Machinery, Materials and Markets. The internal environment is as important for managing change as the external.

All factors that are internal to the organization are known as the 'internal environment'. They are generally audited by applying the 'Five Ms' which are Men, Money, Machinery, Materials and Markets. The internal environment is as important for managing change as the external.

The organization's environment 1.The internal environment e.g. staff (or internal customers), office technology, wages and finance, etc. 2. The micro-environment e.g. our external customers, agents and distributors, suppliers, our competitors, etc. 3. The macro-environment e.g. Political (and legal) forces, Economic forces, Socio-cultural forces, and Technological forces. These are known as PEST factors.

1.The internal environment e.g. staff (or internal customers), office technology, wages and finance, etc.

2. The micro-environment e.g. our external customers, agents and distributors, suppliers, our competitors, etc.

3. The macro-environment e.g. Political (and legal) forces, Economic forces, Socio-cultural forces, and Technological forces. These are known as PEST factors.

Political Factors The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. You must consider issues such as: 1.How stable is the political environment? 2.Will government policy influence laws that regulate or tax your business? 3.What is the government's position on marketing ethics? 4. What is the government's policy on the economy? 5. Does the government have a view on culture and religion? 6. Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or others?

The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. You must consider issues such as:

1.How stable is the political environment?

2.Will government policy influence laws that regulate or tax your business?

3.What is the government's position on marketing ethics?

4. What is the government's policy on the economy?

5. Does the government have a view on culture and religion?

6. Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or others?

Economic Factors 1. Interest rates 2. The level of inflation Employment level per capita 3. Long-term prospects for the economy Gross Domestic Product (GDP) per capita, and so on

1. Interest rates

2. The level of inflation Employment level per capita

3. Long-term prospects for the economy Gross Domestic Product (GDP) per capita, and so on

Sociocultural Factors 1.What is the dominant religion? 2.What are attitudes to foreign products and services? 3.Does language impact upon the diffusion of products onto markets? 4.How much time do consumers have for leisure? 5.What are the roles of men and women within society? 6.How long are the population living? Are the older generations wealthy? 7.Do the population have a strong/weak opinion on green issues?

1.What is the dominant religion?

2.What are attitudes to foreign products and services?

3.Does language impact upon the diffusion of products onto markets?

4.How much time do consumers have for leisure?

5.What are the roles of men and women within society?

6.How long are the population living? Are the older generations wealthy?

7.Do the population have a strong/weak opinion on green issues?

Technological Factors 1. Does technology allow for products and services to be made more cheaply and to a better standard of quality? 2.Do the technologies offer consumers and businesses more innovative products and services such as Internet banking, new generation mobile telephones, etc? 3.How is distribution changed by new technologies e.g. books via the Internet, flight tickets, auctions, etc? 4.Does technology offer companies a new way to communicate with consumers e.g. banners, Customer Relationship Management (CRM), etc?

1. Does technology allow for products and services to be made more cheaply and to a better standard of quality?

2.Do the technologies offer consumers and businesses more innovative products and services such as Internet banking, new generation mobile telephones, etc?

3.How is distribution changed by new technologies e.g. books via the Internet, flight tickets, auctions, etc?

4.Does technology offer companies a new way to communicate with consumers e.g. banners, Customer Relationship Management (CRM), etc?

Scan the Environment The challenge is to sort through the noise to find the key strategic factors for your organization or industry or market. This requires a constant process of scanning, which is both art and science. As you conduct various analyses of your industry or markets, keep track of the outside forces that affect them, and especially the trends and discontinuities -- the opportunities and threats -- driven by these forces.

The challenge is to sort through the noise to find the key strategic factors for your organization or industry or market.

This requires a constant process of scanning, which is both art and science.

As you conduct various analyses of your industry or markets, keep track of the outside forces that affect them, and especially the trends and discontinuities -- the opportunities and threats -- driven by these forces.

Environmental Analysis Informs All Other Analyses Environmental Analysis Economic, Sociocultural, Technological, Political-Legal Factors Interest Group Analysis Market/Buyer Analysis Competitor Analysis Supplier Analysis Governmental Analysis Resource Analysis Select STRATEGIC FACTORS ie Opportunities Threats

Tool: Matrix for Tracking Environmental Forces Env. Forces Communities Creditors Customers Employees Stockholders Suppliers Etc. Economic 1. 2. 1. 2. Stake- holders 1. 2. 1. 2. Technological Political-Legal Sociocultural Note how each force or set of forces affects each stakeholder group...

Tool: Force Field Analysis Organization Can be done for an organization or an industry. Each arrow is a force, with the lengths indicating relative strength.

SWOT Analysis—What to Look for in Sizing Up a Company’s Strength's , Weaknesses, Opportunities , and Threats Potential Internal Strengths CORE COMPETENCIES IN KEY AREAS ADEQUATE FINANCIAL RESOURCES WELL THOUGHT OF BY BUYERS AN ACKNOWLEDGED MARKET LEADER WELL-CONCEIVED FUNCTIONAL AREA STRATEGIES ACCESS TO ECONOMIES OF SCALE INSULATED (AT LEAST SOMEWHAT) FROM STRONG COMPETITIVE PRESSURES PROPRIETARY TECHNOLOGY COST ADVANTAGES

Potential Internal Strengths BETTER ADVERTISING CAMPAIGNS PRODUCT INNOVATION SKILLS PROVEN MANAGEMENT AHEAD ON EXPERIENCE CURVE BETTER MANUFACTURING CAPABILITY SUPERIOR TECHNOLOGICAL SKILLS OTHER?

Potential Internal Weaknesses NO CLEAR STRATEGIC DIRECTION OBSOLETE FACILITIES SUB-PAR PROFITABILITY BECAUSE… LACK OF MANAGERIAL DEPTH AND TALENT MISSING SOME KEY SKILLS OR COMPETENCIES POOR TRACK RECORD IN IMPLEMENTING STRATEGY PLAGUED WITH INTERNAL OPERATING PROBLEMS FALLING BEHIND IN R&D TOO NARROW A PRODUCT LINE

Potential Internal Weaknesses WEAK MARKET IMAGE WEAK MARKET IMAGE WEAK DISTRIBUTION NETWORK BELOW-AVERAGE MARKETING SKILLS UNABLE TO FINANCE NEEDED CHANGES IN STRATEGY HIGHER OVERALL UNIT COSTS RELATIVE TO KEY COMPETITORS OTHER?

Potential External Opportunities SERVE ADDITIONAL CUSTOMER GROUPS ENTER NEW MARKETS OR SEGMENTS EXPAND PRODUCT LINE TO MEET BROADER RANGE OF CUSTOMER NEEDS DIVERSIFY INTO RELATED PRODUCTS VERTICAL INTEGRATION (FORWARD OR BACKWARD) FALLING TRADE BARRIERS IN ATTRACTIVE FOREIGN MARKETS COMPLACENCY AMONG RIVAL FIRMS FASTER MARKET GROWTH OTHER?

Potential External Threats ENTRY OF LOWER-COST FOREIGN COMPETITORS RISING SALES OF SUBSTITUTE PRODUCTS SLOWER MARKET GROWTH ADVERSE SHIFTS IN FOREIGN EXCHANGE RATES AND TRADE POLICIES OF FOREIGN GOVERNMENTS COSTLY REGULATORY REQUIREMENTS VULNERABILITY TO RECESSION AND BUSINESS CYCLES GROWING BARGAINING POWER OF CUSTOMERS OR SUPPLIERS CHANGING BUYER NEEDS AND TASTES ADVERSE DEMOGRAPHIC CHANGES OTHER?

Tool: Industry Scenarios A tool for exploring the impact of major shifts in the underlying context: 1. Examine possible shifts in environmental forces. 2. Identify uncertainties in each of the forces. 3. Identify causal factors behind the uncertainties. 4. Make range of assumptions about each causal factor. 5. Combine assumption into internally consistent scenarios. 6. Analyze the industry situation under each scenario. 7. Determine sources of competitive advantage under each scenario. 8. Predict competitor’s behavior under each scenario.

Industry Structure Once you understand some of the forces affecting your industry, it is useful to look at the structure of the industry, and especially the power relations that define the interactions within the industry. Actually, it often works best to start with this industry analysis and then examine how larger trends might shape or change the picture. The key tool for defining industry structure is Porter’s Five Forces Model -- the one Hamilton presented in detail (see notes in course materials).

Once you understand some of the forces affecting your industry, it is useful to look at the structure of the industry, and especially the power relations that define the interactions within the industry.

Actually, it often works best to start with this industry analysis and then examine how larger trends might shape or change the picture.

The key tool for defining industry structure is Porter’s Five Forces Model -- the one Hamilton presented in detail (see notes in course materials).

Tool: Porter’s Five Forces Model (adjusted) Threat from Substitutes Suppliers’ Power Threat from New Entrants Buyers’ Power Rivalry of Firms Power of other Stakeholders

Tool: Porter’s Five Forces Model, (adjusted) Applying microeconomic theory, Porter highlights the forces that affect a firms ability to raise prices and earn profits. The stronger a force, the more it limits the industry firms’ ability to set prices. Thus, strong forces are threats because they are likely to reduce profits; weak forces are opportunities because they may allow firms a chance to earn greater profits. The pattern of forces shape an industry and constrain firms within the industry -- but industry structure is subject to change as the environment, each force, and each participant’s strategy change.

Applying microeconomic theory, Porter highlights the forces that affect a firms ability to raise prices and earn profits.

The stronger a force, the more it limits the industry firms’ ability to set prices.

Thus, strong forces are threats because they are likely to reduce profits; weak forces are opportunities because they may allow firms a chance to earn greater profits.

The pattern of forces shape an industry and constrain firms within the industry -- but industry structure is subject to change as the environment, each force, and each participant’s strategy change.

Tool: Porter’s Five Forces Model, Threat of Entry Industries that are hard to enter are cozy for insiders, but also often attractive to outsiders longing for the value being shared by so few. Barriers to entry make it harder for newcomers to play. Fierce reaction by incumbents. Size of payoff/relation of supply to demand. Economies of scale: minimum efficient scale of production distribution or sales networks Pioneering brand advantages. Experience curve. Licenses or patents. Cost of exit.

Industries that are hard to enter are cozy for insiders, but also often attractive to outsiders longing for the value being shared by so few.

Barriers to entry make it harder for newcomers to play.

Fierce reaction by incumbents.

Size of payoff/relation of supply to demand.

Economies of scale:

minimum efficient scale of production

distribution or sales networks

Pioneering brand advantages.

Experience curve.

Licenses or patents.

Cost of exit.

Tool: Porter’s Five Forces Model, Threat of Substitution Industries with few substitute products are more attractive than those with many substitutes. Effective substitutes can often provide ways in for upstarts. The threat of substitutes is often the weakest of the forces -- except during times of high demand or fast change, when interlopers may see opportunities.

Industries with few substitute products are more attractive than those with many substitutes.

Effective substitutes can often provide ways in for upstarts.

The threat of substitutes is often the weakest of the forces -- except during times of high demand or fast change, when interlopers may see opportunities.

Tool: Porter’s Five Forces Model, Buyer Power Attractive industries feature disorganized, small customers, with little purchasing and negotiating power. Buyers gain power when: They are large, relative to the seller (superstores). They are organized (eg., a coop). It is easy to switch to another supplier (eg., when products are standard). They could integrate backwards and so take over a supplier.

Attractive industries feature disorganized, small customers, with little purchasing and negotiating power.

Buyers gain power when:

They are large, relative to the seller (superstores).

They are organized (eg., a coop).

It is easy to switch to another supplier (eg., when products are standard).

They could integrate backwards and so take over a supplier.

Tool: Porter’s Five Forces Model, Supplier Power Attractive industries feature small and disorganized suppliers. Suppliers gain power when: They are large, relative to the buyers. (Alcoa). It is difficult for buyers to switch to competing suppliers. (Custom products, proprietary information). They pose a credible threat of integrating forward and taking over the buyers’ functions.

Attractive industries feature small and disorganized suppliers.

Suppliers gain power when:

They are large, relative to the buyers. (Alcoa).

It is difficult for buyers to switch to competing suppliers. (Custom products, proprietary information).

They pose a credible threat of integrating forward and taking over the buyers’ functions.

Tool: Porter’s Five Forces Model, Industry Rivalry Attractive industries are controlled by monopolies or gentlemanly oligopolies. On the other hand, the more the players, and the more equally matched, the closer the industry approximates “perfect competition” and minimum profits. Rivalry is reduced when: Power is concentrated Competitors can truly differentiate. It is easy to exit. Demand is stable and predictable. Regulation takes the edge off.

Attractive industries are controlled by monopolies or gentlemanly oligopolies.

On the other hand, the more the players, and the more equally matched, the closer the industry approximates “perfect competition” and minimum profits.

Rivalry is reduced when:

Power is concentrated

Competitors can truly differentiate.

It is easy to exit.

Demand is stable and predictable.

Regulation takes the edge off.

Tool: Porter’s Five Forces Model, Other Stakeholders’ Power Governments (if not in the environmental scan), unions, creditors (if not a supplier), advocacy groups (eg., environmentalists) can all constrain industries. Regulated industries Teamsters Institutional investors Bottle bills

Governments (if not in the environmental scan), unions, creditors (if not a supplier), advocacy groups (eg., environmentalists) can all constrain industries.

Regulated industries

Teamsters

Institutional investors

Bottle bills

Competitive Intelligence (CI) is the process of gathering and analyzing internal and external knowledge about the environment in which an organization competes. It is the ethical and legal gathering, evaluation and interpretation of marketplace information, based on data available through public sources. The CI analyst creates new knowledge of the present and future competitive arena for timely management decisions. COMPETITIVE INTELLIGENCE

Competitive Intelligence (CI) is the process of gathering

and analyzing internal and external knowledge about the

environment in which an organization competes. It is the

ethical and legal gathering, evaluation and interpretation

of marketplace information, based on data available

through public sources. The CI analyst creates new

knowledge of the present and future competitive arena

for timely management decisions.

Competitive Intelligence Programme " A formalised, yet continuously evolving process by which the management team assesses the evolution of its industry and the capabilities and behaviour of its current and potential competitors to assist in maintaining or developing a competitive advantage"

Competitive Intelligence Programme

" A formalised, yet continuously evolving process by which the management team assesses the evolution of its industry and the capabilities and behaviour of its current and potential competitors to assist in maintaining or developing a competitive advantage"

Tools and Techniques for Competitive Intelligence Activities Contacting Government Agencies Searching Online Databases From Companies and Investment Community Resources Surveys and Interviews Drive-by and On-site Observations Competitive Benchmarking Defensive Competitive Intelligence Reverse Engineering

Tools and Techniques for Competitive Intelligence Activities

Contacting Government Agencies

Searching Online Databases

From Companies and Investment Community Resources

Surveys and Interviews

Drive-by and On-site Observations

Competitive Benchmarking

Defensive Competitive Intelligence

Reverse Engineering

Industry and Competitor Analysis methodology Identifying the most attractive segments of the market Competitive Advantage – Sustainable superiority Understanding the life-cycle dynamics of each market area Uncertainties and Risks Return on Investment

Industry and Competitor Analysis methodology

Identifying the most attractive segments of the market

Competitive Advantage – Sustainable superiority

Understanding the life-cycle dynamics of each market area

Uncertainties and Risks

Return on Investment

How to win in the cut throat market Speed (Dandi salt) Innovation – Appropriate Technology (Samsung) Exploit home grown equity (Amul) Leverage cost leadership (Nirma) Fragment by extension (Colgate) Region concentration (Dabur) Tactical promos (Cease fire)

How to win in the cut throat market

Speed (Dandi salt)

Innovation – Appropriate Technology (Samsung)

Exploit home grown equity (Amul)

Leverage cost leadership (Nirma)

Fragment by extension (Colgate)

Region concentration (Dabur)

Tactical promos (Cease fire)

Predict Competitor Responses Various typologies classify competitors according to their typical responses: Traditional - leader, challenger, follower Porter - neutral, offensive, defensive, etc

Various typologies classify competitors according to their typical responses:

Traditional - leader, challenger, follower

Porter - neutral, offensive, defensive, etc

Sources of Information Literature Search Company Annual Reports (See Library) Business Directories Observation - mystery shopper visits to competitors Media - advertising Trade fairs, exhibitions, etc Trade press Collateral Material (corporate brochures, Internet sites) Exclusive reliance on online sources is to be discouraged

Literature Search

Company Annual Reports (See Library)

Business Directories

Observation - mystery shopper visits to competitors

Media - advertising

Trade fairs, exhibitions, etc

Trade press

Collateral Material (corporate brochures, Internet sites)

Exclusive reliance on online sources is to be discouraged

Competitive Responses Neutral - moves that are not seen as threatening, at least at the time Offensive - moves that are likely to improve an organisation’s position Defensive - moves that are designed to protect an organisation’s position or to prevent further conflict

Neutral - moves that are not seen as threatening, at least at the time

Offensive - moves that are likely to improve an organisation’s position

Defensive - moves that are designed to protect an organisation’s position or to prevent further conflict

Types of Tactics Anticipatory tactics Tactics of Engagement Offensive tactics Defensive tactics PREEMPTION Pioneering (Intel) Intimidation (Kellogg’s) Capture (Coke/ Parle) ATTACK Frontal assualt ( Coke/ Pepsi) Flanking maneuver (IBM/ HP) Siege Warfare (Subhiksha) Guerilla (Indica/ Maruti) DETERRENCE Raising structural barriers Increased expected retaliation Lowering inducements for attack Diplomatic peacekeeping RESPONSE Counter attack (Thumsup) Fast follower (TOMCO / HLL) Retrenchment ( Xerox / Cannon) Withdrawal ( Cibaca /Binaca)

PREEMPTION

Pioneering (Intel)

Intimidation (Kellogg’s)

Capture (Coke/ Parle)

ATTACK

Frontal assualt ( Coke/ Pepsi)

Flanking maneuver (IBM/ HP)

Siege Warfare (Subhiksha)

Guerilla (Indica/ Maruti)

DETERRENCE

Raising structural barriers

Increased expected retaliation

Lowering inducements for attack

Diplomatic peacekeeping

RESPONSE

Counter attack (Thumsup)

Fast follower (TOMCO / HLL)

Retrenchment ( Xerox / Cannon)

Withdrawal ( Cibaca /Binaca)

MARKETING INTELLIGENCE ON NEW CUSTOMERS CHANGE IN DEMOGRPAHICS AND LIFESTYLES TOO MANY PRODUCTS AFTER CUSTOMERS VALUE IN TIME APART FROM VFM NO LOYALTY - OUTCOME OF COST REDUCTIONS TOO MANY ADVERTISEMENTS - AVERSION CUT THROAT SALES PROMOTION FINANCIAL SECURITY AND OVERFLOW PROPENSITY TO PURCHASE ON THE RISE INFLUENCE OF CHILDRENS POWER EFFECT OF A BETTER ECONOMY ON PURCHASE ALPHA CUSTOMERS

CHANGE IN DEMOGRPAHICS AND LIFESTYLES

TOO MANY PRODUCTS AFTER CUSTOMERS

VALUE IN TIME APART FROM VFM

NO LOYALTY - OUTCOME OF COST REDUCTIONS

TOO MANY ADVERTISEMENTS - AVERSION

CUT THROAT SALES PROMOTION

FINANCIAL SECURITY AND OVERFLOW

PROPENSITY TO PURCHASE ON THE RISE

INFLUENCE OF CHILDRENS POWER

EFFECT OF A BETTER ECONOMY ON PURCHASE

ALPHA CUSTOMERS

IMPORTANT CHANGES AMONG THE CONSUMERS INCOME GROWTH AFFORDABLE GROWTH LIBERALISATION CHILDREN GROW UP MORPHING OF RURAL INDIA BEYOND AGRICULTURE RISE OF SELF EMPLOYED ENVIRONMENTAL CHANGES DRIVE ASPIRATION PLUARLITY OF INCOME, SINGULAR MINDSET

INCOME GROWTH

AFFORDABLE GROWTH

LIBERALISATION CHILDREN GROW UP

MORPHING OF RURAL INDIA BEYOND AGRICULTURE

RISE OF SELF EMPLOYED

ENVIRONMENTAL CHANGES DRIVE ASPIRATION

PLUARLITY OF INCOME, SINGULAR MINDSET

CHRACTERISTICS OF INDIAN CONSUMERS STRIVING ‘ I CAN’ THE RISE OF THE WOMEN EDUCATION AND HEALTH DRIVEN PRAGMATISM IN CONSUMPTION AND PREFERENCE FOR REAL VALUE PRODUCTS ENTERTAINMENT COMFORT WITH BORROWING TO FUND FUTURE CONSUMPTION COMFORT WITH CONSUMPTION COMFORT WITH TECHNOLOGY

STRIVING

‘ I CAN’

THE RISE OF THE WOMEN

EDUCATION AND HEALTH DRIVEN

PRAGMATISM IN CONSUMPTION AND PREFERENCE

FOR REAL VALUE PRODUCTS

ENTERTAINMENT

COMFORT WITH BORROWING TO FUND FUTURE

CONSUMPTION

COMFORT WITH CONSUMPTION

COMFORT WITH TECHNOLOGY

MODULE 2

Indicators of an economy and its position in India Gross Domestic Product Gross Domestic Saving Net National Product Gross Domestic Capital Formation Life Expectancy at birth Literacy Rate Birth rate Death Rate Population

Agricultural Production Finished Steel Electricity Wholesale Price Index Consumer Price Index Export Import Securities Market Foreign Direct Investment

Gross Domestic Product Gross Domestic Product is the gross value-added by all the enterprises within the domestic territory f a country Gross Domestic Product represents the money value of all goods and services produced in the domestic territory of a country during a year.

Net National Product & Gross National Product Net National Product is the total value of final goods and services produced in an economy during a year (GNP) minus consumption of fixed capital. Gross National Product is the total value of all goods and services produced by the nationals of a country within the country or outside the country.

GNP= GDP plus or minus net factor income abroad. Net National product at factor cost (NNPFc) and National Income are one and the same.

703,080 MEXICO 875,817 SPAIN 905,629 CANADA 1,503562 ITALY 1,676,846 CHINA 1,858,731 FRANCE 2,016,393 UK 2,488974 GERMANY 4,749,910 JAPAN 12,150931 US GNP (MILLION $) COUNTRY

1,620,454 ITALY 1,724,647 FRANCE 1,736,377 UK 2,391,569 GERMANY 3,290,800 INDIA 3,817,221 JAPAN 7334254 CHINA 11,605185 US GDP(PPP) country

PRIMARY SECTOR % DISTRIBUTION 21.9 1.1 1.0 35.8 3.0 1.0 50.2 6.7 0.9 AGRICULTURE FORESTRY FISHING 23.9 39.7 57.7 PRIMARY SECTOR 2001-02 1980-81 1950- 51

AGRICULTURE

FORESTRY

FISHING

PRIMARY SECTOR

SECONDARY SECTOR % DISTRIBUTION 5.1 6.1 4.1 CONSTRUCTION 2.5 1.7 0.3 ELECTRICITY ,GAS & WATER SUPPLY 16.8 11.1 5.8 13.8 8.1 5.8 8.9 4.4 4.5 MANUFACTURING REGISTERED UNREGISTERED 2.2 2.1 1.5 MINING & QUARRYING 26.6 23.7 14.8 SECONDARY SECTOR 2001-02 1980-81 1950-51

CONSTRUCTION

ELECTRICITY ,GAS & WATER SUPPLY

MANUFACTURING

REGISTERED

UNREGISTERED

MINING & QUARRYING

SECONDARY SECTOR

TERTIARY SECTOR % DISTRIBUTION 13.5 11.7 9.4 COMMUNITY & PERSONAL SERVICES 12.5 6.5 6.7 FINANCE & REAL ESTATE 23.5 18.4 11.9 TRANSPORT , COMMUNICATION TRADE Etc. 2001-02 1980-81 1950-51

COMMUNITY & PERSONAL SERVICES

FINANCE & REAL ESTATE

TRANSPORT , COMMUNICATION TRADE Etc.

COMMODITY & SERVICE SECTOR % DISTRIBUTION 49.5 36.6 28.0 SERVICE SECTOR (III + IV + V) 100 100 100 TOTAL 50.5 63.4 72.0 COMMODITY SECTOR ( I+II ) 2001-02 1980-81 1950-51

SERVICE SECTOR

(III + IV + V)

COMMODITY SECTOR

( I+II )

SHARE OF SERVICE SECTOR IN INDIA’S GDP (in Rs. Crore) 92733 43.69 97045 (45.35) 102142 (45.34) 108974 (45.62) 423200 (49.15) 463980 (50.08) 498572 (49.91) 537642 (51.24) 569005 (51.16) SERVICESECTOR 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 YEAR

Among the Asian countries Japan accounts for nearly half of Asia's GDP China is in the 2 nd place &India in the 3 rd place Luxemburg has the highest per capita GNP followed by Norway ,switzerland,us,japan World GDP-44168157US DOLLARS ASIA-11046708USDOLLARS Japan-4,749,910 us $

Among the Asian countries Japan accounts for nearly half of Asia's GDP

China is in the 2 nd place &India in the 3 rd place

Luxemburg has the highest per capita GNP followed by Norway ,switzerland,us,japan

World GDP-44168157US DOLLARS

ASIA-11046708USDOLLARS

Japan-4,749,910 us $

Capital Formation Capital formation is also called capital accumulation. Acquiring assets is called capital formation. Capital accumulation is that part of current production which is not consumed, but set aside for use in further production. Capital formation is the surplus of production over consumption in an accounting year.

Gross Domestic Capital Formation Gross Domestic Capital Formation is the sum of gross fixed capital formation and change in stocks in the domestic territory of a country in an accounting year. Gross domestic Fixed Capital Formation consists of acquisition of new assets and net purchase of second-hand assets.

Economic Growth Economic Growth is calculated on the basis of the increase in Gross National Product indicating the values of goods and services produced in the economy during a year estimated at current or constant prices.

Sectors affecting GDP Agriculture and allied Industry Mining and Quarrying Manufacturing Electricity gas and Water Supply Construction

Agriculture and allied

Industry

Mining and Quarrying

Manufacturing

Electricity gas and Water Supply

Construction

3. Services a. Trade, Hotels, Transport and Communications Financial Services c. Community, Social and Personal Services

3. Services

a. Trade, Hotels, Transport and Communications

Financial Services

c. Community, Social and Personal Services

INDIAN ECONOMY Rate of inflation in India 1970-80  declined to 8  9 % from 10.7 %. 95-96  7.8% 2001  7.5% 2003-04  3 %

Rate of inflation in India

1970-80  declined to 8  9 % from 10.7 %.

95-96  7.8%

2001  7.5%

2003-04  3 %

Due to increased G.D.P increases inflation decreases . Inflation rate rose due to hike in oil prices . Liberal imports – helps to control prices Positive aspects of low inflationary trends.

Due to increased G.D.P increases inflation decreases .

Inflation rate rose due to hike in oil prices .

Liberal imports – helps to control prices

Positive aspects of low inflationary trends.

INFLATION Definition General rise in price level of goods and services Deflation Price level of most goods decrease

Definition

General rise in price level of goods and services

Deflation

Price level of most goods decrease

TYPES OF INFLATION Creeping inflation Increase in price level is small or gradual Running inflation Continuous creeping inflation for a long period of time without any monetary or fiscal control

Creeping inflation

Increase in price level is small or gradual

Running inflation

Continuous creeping inflation for a long period of time without any monetary or fiscal control

Galloping inflation Complete loss of control over running inflation by monetary authorities Inflation reaches double or triple digit figures

Galloping inflation

Complete loss of control over running inflation by monetary authorities

Inflation reaches double or triple digit figures

SOURCES OF INFLATION Demand pull inflation High aggregate demand over a long period of time Main factors -- increase in money supply,export earnings etc.

Demand pull inflation

High aggregate demand over a long period of time

Main factors -- increase in money supply,export earnings etc.

Cost push inflation Increase in the cost of production,reduces the supply of goods by producers The aggregate demand for goods remains the same

Cost push inflation

Increase in the cost of production,reduces the supply of goods by producers

The aggregate demand for goods remains the same

MEASURING INFLATION Wholesale Price index(WPI) Weights are assigned to a series of 435 commodities in all, proportional to their share in the total value of output in the economy. The sector-wise break-up of the 435 commodities is : Primary articles-98 Fuel, Power, light and lubricants-19 Manufactured products-318

Wholesale Price index(WPI)

Weights are assigned to a series of 435 commodities in all, proportional to their share in the total value of output in the economy.

The sector-wise break-up of the 435 commodities is :

Primary articles-98

Fuel, Power, light and lubricants-19

Manufactured products-318

Advantage-- available at frequent intervals, so continuous monitoring of the price level is possible Disadvantage—Will not cover non-commodity producing sector i.e., services

Advantage-- available at frequent intervals, so continuous monitoring of the price level is possible

Disadvantage—Will not cover non-commodity producing sector i.e., services

Consumer Price Index(CPI) CPI reflects the cost of living of a particular group in the population Measured on the basis of changes in retail prices of selected goods and services (essential goods) on which a particular group of consumers spend their money based on their income

CPI reflects the cost of living of a particular group in the population

Measured on the basis of changes in retail prices of selected goods and services (essential goods) on which a particular group of consumers spend their money based on their income

The consumption basket data is gathered from family budget surveys carried out from time to time Since the CPI reflects changes in the retail price of goods consumed by a homogenous group of people, it cannot capture the consumption patterns of different segments

The consumption basket data is gathered from family budget surveys carried out from time to time

Since the CPI reflects changes in the retail price of goods consumed by a homogenous group of people, it cannot capture the consumption patterns of different segments

Effect of Inflation on the distribution of income and wealth Debtors and Creditors: Debtors gain and creditors lose Producers: Producers gain from inflation Investors: Depends on the investment

Debtors and Creditors:

Debtors gain and creditors lose

Producers:

Producers gain from inflation

Investors:

Depends on the investment

Measures to control inflation Monetary Measures a) Bank rate policy b) Open market operations c) Cash Reserve Ratio d) Regulation of consumer credit

Monetary Measures

a) Bank rate policy

b) Open market operations

c) Cash Reserve Ratio

d) Regulation of consumer credit

Fiscal Measures Public Expenditure Taxation Public borrowing and debt Other Measures a) Price Control and rationing b) Wage Policy

Public Expenditure

Taxation

Public borrowing and debt

Other Measures

a) Price Control and rationing

b) Wage Policy

CURRENT LEVEL During the first quarter of the year 2002,the WPI in India was less than 2% In the last year ,the highest inflation rate was 7.23% The current rate of inflation for the week ended November 19 is 4.32%

During the first quarter of the year 2002,the WPI in India was less than 2%

In the last year ,the highest inflation rate was 7.23%

The current rate of inflation for the week ended November 19 is 4.32%

GDP statistics

Annual rate of inflation (%)

Availability of qualified engineer

Availability of qualified labor

Indian foreign exchange reserve –a steady rise

Literacy Rates in India state with high Lit. rate Kerala : 90.99 Mizoram: 88.5 Delhi : 81.82

Total Foreign Investment

Incidence of Poverty in India States with low pov.rate Goa: 4.4 Punjab: 6.2

Growth of IT service in India Demand side forces encouraging track record of early movers demanding US market environment. successful track record of IT offshoring. supply side demand telecomm cost down by 90% . world class reliability. low cost talented workers. emergence of a credible vendor community.

Demand side forces

encouraging track record of early movers

demanding US market environment.

successful track record of IT offshoring.

supply side demand

telecomm cost down by 90% .

world class reliability.

low cost talented workers.

emergence of a credible

vendor community.