Indian business environment book @ bec doms

1. BUSINESS ENVIRONMENT
CHAPTER I
Business environment- Dynamic factors of environment- Importance of
scanning the environment-Fundamental issues-Economics environment
of business - Sock) - cultural environment- Political/ Legal environment -
Cultural environment.
CHAPTER II
Political economy - Government and business -.Public control, of
business -Trends and structure of Indian economy - Socio - economic
problems of India
CHAPTER III
Government controls and regulations -, Regulating economic and
industrial 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
flow regulation -Technology transfer.
CHAPTER IV
Monetary and fiscal system - Banking and credit structure in India –
Financial institution - Fiscal system - theory and practice.
CHAPTER V
Economic planning and development - Government and planning -
India's eight five year plan and structural reforms - Industrial policies
and promotion schemes - Government policy and SSI - Interface between
Government and public sector.
CHAPTER VI
New Economic Policy Environment in India - Privatization - Liberalization
and Globalization - Experiences and issues - Environmental assessment
and evaluation.
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2. Business environment
1 Environment - Introduction
Business Environment & Economy
2
Control of Business Environment
3
Monetary & Fiscal System
4
Planning & Development
5
6 Liberalization & Globalization
CHAPTER I
Business environment - Dynamic factors of environment - Importance of
scanning the environment - Fundamental issues - Economic environment
of business - Socio - cultural environment - Political / Legal environment
-Cultural environment
This chapter focuses on the following aspects of Business environment:
Definition of business, meaning of business environment, the
classification of business environment, need to study environment in
business decisions, the methods of scanning the business environment,
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3. issues that are to be addressed while scanning the environment, various
types of factors that influence business environment, non-economic
environment and its impact on business decisions.
To highlight the importance of the Business environment, three case
studies have been appended at the end of this lesson.
Definition of business
The term business is understood and explained in different ways by
different people. For some, business is an activity, for some it is a
method of transacting, for sonic others, it is a method of money making
and some people argue that business is an organized activity to achieve
certain pre-determined goals or objectives. Dictionary meaning of
business is: the act of buying and selling of goods and services,
commerce and trade. Based on all these meanings of justness, we may
define business as: gainful activity through which various elements of
society conduct exchanges of the desirable things.
In the olden days, the people engaged in different activities in a society
were classified into four groups : Brahmnas, Shatriyas, Vysyas and
Sudras, Of these our fold classification of social activities, the activities of
vysyas included basically, facilitating exchange. Hence, business as an
exchange activity remained since the days of exchange started. It could
also be recalled that business as a social activity became popular only
when the wants of different people in a society were to be met with the
available resources. In other words, whenever there was a scope for
producing something, which is wanted, then business activity
automatically emerged.
But now a days, business is viewed more as a profession or occupation.
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4. From the days of family owned business, we have reached a stage of
professionals and experts starting and running business. It could also be
noted that business administration and business management have
emerged as the most prospective field of study and occupation. Persons
with educational background in business, enter business or join
business organizations 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 so many others. Hence, every business activity has to
meet the goals or aims or objectives of these various groups of people.
That in fact, has made business a most complicated activity.
Modern business has a number of features. Understanding of these
would help to appreciate and organize business activities in a highly
professional way.
1. Business is an economic activity :
Business involves organizing activities to satisfy human plants. These
activities may result in the manufacture or production of a commodity or
extension of a service. When a good or service is produced, resources are
involved. Resources like human resources, physical resources and
financial resources are all required to realize output to meet human
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5. needs. These resources are limited in supply, and so business involves
identification of resources, evaluation of resource qualities, buying these
resources and utilizing these resources. These resources being scarce in
relation to their demand, the resources carry some value [i.e., price].
They cannot be procured at any cost to produce anything to meet human
wants. So automatically selection among various resources come up
which is made on the basis of requirement and cost. Once they are
procured, then they are used in a very judicious manner so that there is
no waste. That is optimal utilization-of resources is to be achieved. In
this context, several decisions like resource selection, resource
procurement, resource mix, resource utilization, etc. are all involved. As
in all these stages, choice among alternatives is involved, every business
activity is to be treated as economic in nature. Depending upon the
business activity, the approach to selection among alternatives would
differ. For example, in a manufacturing business, the choice is about
input selection to supply quality output, in a service organization the
choice is about-inputs and delivery process, in a government
organization it is about production and equitable distribution of output,
in an institution like bank, provision of various investment opportunities
of short term and long term to the public, etc.
2. A business organization is an economic unit
Every business organization is engaged in transforming inputs into
output to meet the requirements of the people. The selection of input and
size of procurement will depend upon, the size of the organization. This
would also depend upon the nature or product or service extended/by
the business unit. All these are attended with the objective of making
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6. profit or surplus. Only when there is surplus achieved, can the business
units grow. Hence creation of surplus in a business becomes the focal
point and this is best achieved through optimal utilization of resources.
That way, all business units have to achieve the maximum output with
minimum inputs which in other words is the effort to achieve economic
efficiency. Only economic efficiency can enable firms to be efficient in
every other sense. Therefore, business organizations are only economic
units in nature.
3. Business decisions making is essentially an economic process
All 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 : determining
objectives, identifying opportunities, generating alternatives, classifying
these alternatives as feasible and infeasible alternatives, then rank the
feasible alternatives on some criteria and then select those alternatives
fulfilling the constraints. For example, if the objective of a business unit
is to maximize profits, then this would call for minimizing cost and
maximizing 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 facilitate
maximization of revenue. Price determination again would depend on
various factors like demand, supply, competitive scenario, government
interference, statutory compulsions, conflicting interests of the stake
holders of the business, etc. Therefore, every decision made in a business
would automatically depend on the economic process.
Changing concept of business
It has been stated already that the concept of business has undergone a
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7. vast change. From a producer driven stage business has become
consumer centered and driven stage. While the earliest concept was * sell
what is produced' the modern concept is 'produce what is wanted' So
every business depends on consumers and their ever changing needs.
Any business unit which has successfully understood its customers and
offer the product or service meeting their requirements alone is
successful. But in this process, business units have to manage pressures
from its owners and other stake holders. It should take into account the
requirements of the workers and the trade unions. It should abide by the
rules and regulations of a number of government agencies and
institutions. It should meet the challenges and threats from competitors.
Most important, it has to fulfill its social obligations. To survive every
business unit has to also consider: the revolutionary changes in
technology, market expansion, information explosion, competitor
strategies. These are days when the consumers are better informed and
so no business unit can afford to ignore consumer awareness and
preferences. Technological development has brought with it the
compulsion to use modern methods and techniques. Social obligations
have made business units to meet pollution norms, etc. Trade union
pressures have made them to design satisfactory service conditions for
the work force. Then there is compulsion to provide for development of
human resources in the organization to achieve organizational
development. All these have made modern business ‘tight rope walking.’
BUSINESS ENVIRONMENT
Business involves activities, which links an organization with outside
world. Within an organization, a business is governed by the behaviour of
its employees, management or decision makers. But externally a
business is influenced by a score of factors, which range from customers
to competitors and government. Therefore, a business cannot be
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8. independent of (he influence of these external factors. It should also be
noted that a business has absolute control over all the internal factors, it
has no control over the external factors. So often it becomes necessary
for business houses to modify their internal decisions and policies, on
the basis of the pressure from external factors This highlights the need to
be ever- cognizant of changes and influences of external factors so as to
conduct business on healthy lines. It is in this context that business
environment assumes all significance. Business environment therefore
refers to the influences and pressures exerted by external factors on the
business. The following Figure would help to understand the various
factors which constitute the business environment.
From the Figure: 1, it would be clear that business organizations
function in an environment subject to the influence of various
constituents. Earh one of the constituents have in turn a number of
factors influencing them. For example, economic environment has micro
and macro environmental factors affecting it. To develop a right
perspective about business environment, let us discuss briefly about
each one of the external environment constituents.
1. Demographic environment : This refers to the size and behaviour of
population in a country. Suppose a country has a huge size of
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9. population, then, the country would provide extensive business or
marketing opportunities for all types of business organizations. On
the other hand, a country with low size of population would force
the business organizations to seek external market for their
products or services. Similarly, if the population in a country is
well - tuned to 'use and throw concept’ [like most of the Western
countries] then there would be limited scope for repair shops and
employment scope in that segment would be almost nil. But
alternatively this would give wide marketing opportunities for
manufacturing organizations. On the other hand, if the population
is averse to 'use and throw' concept, then the business
opportunities would be limited for manufacturing organizations
but the repair shops, self-employed technical persons and spares
manufacturers, would have roaring business. Hence, the size and
quality of population emerges as a vital factor influencing business
environment.
2. Economic environment: Economic environment refers to the overall
economic factors like economic philosophy of the country,
economic structure, planning, economic policies, controls and
regulations, etc. All these have a serious impact on the functioning
of business organizations in a country. For example, in a
Capitalistic economic system, business organizations would be
subjected to limited government regulations and controls. They
would be more governed by market forces [demand and supply]
rather than by other factors. On the other hand, in a Socialist
system, the government would determine everything on behalf of
the country. In a Communist set up, the government has absolute
control over every aspect over production that private enterprises
may not exist at all. In a Mixed economic system, government
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10. would be selective in allowing die presence of private enterprises in
certain activities, reserving some spheres completely for
governmental operations. Hence, the economic philosophy of the
country directly determines the scope and functions of business
organizations in that country.
3. Geographical and ecological environment: Geographical
environment refers to climatic conditions and natural resources,
which determines flu manufacturing scope and the nature of the
products that could be marketed. For example, a country like
Kenya has to manufacture more of products based on forest
resources, while the Gulf countries can produce only crude, Japan
can have business in fish, fruits, etc., Countries in the tropical
region would have organizations specializing in products from
geographical resources available in abundant in that region,
while organizations in Mediterranean countries have a Different
business scope, Scandinavian countries have scope for dairy
product manufacturing, etc. Similarly ecological imbalance is
taking place at an alarming rate in the world today, that
deforestation and hunting of rare species of animals for food are all
prohibited now. Hence, while identifying the business
opportunities, business organizations have to be conscious of the
limitations posed by the geographical and ecological
considerations.
4. Legal environment: It is well known that every country has a
number of legal regulations to ensure that the interests of business
organizations do not run counter to national interests. Right from
the stage of incorporation of organizations, their listing in stock
exchange, reprisal of customer complaints, payment of tax to
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11. government, manufacturing practices, human resources
development to pricing of products and services, a number of legal
regulations have to be fulfilled. For example, in USA and several
western countries, consumer protection is very active, that even a
medical practitioner is subjected to huge liabilities in limes of
deficiency in services. In India and other countries, very rigorous
legal provisions arc in place to prevent hunting of rare species, that
any organization, which manufactures products based on such
species, have lo get legal sanctions. In case of failure to
honor cheques issued, organizations are now a days made to pay
hefty compensations. Hence, the deterrence in terms of legal
provisions has become the order of the day. All organizations have
to first of all address these provisions become coming in to steam.
5. Technological environment: This is a very significant external
factor determining the destiny of business organizations.
Supported by computerize operations, modem business
organizations have succeeded in analyzing customers, minimizing
the defects in products, ensuring service at the right time and
place, etc. While communications use to take unduly long time in
those days, business communications are instantaneous these
days, thanks to modem satellite technology. Modern
organizations have recognized that research and development
alone can ensure organizational growth and stability. They have
become more and more pro-active and remain as change agents of
the economy. Governments have also become more technology
conscious that right from police controls to registration of title
deeds, computerizations has been adopted. Customer servicing
through call centers is the latest necessity of organizations.
Manufacturing activities have become more and more technically
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12. sophisticated. Therefore business environment has become
highly dynamic.
6. Social environment: Social environment today has brought
compulsions on business organizations to adhere to certain
business ethics and morals. Social responsibility of business is an
important force that modern business organizations cannot
wriggle out of their duties and responsibilities towards the
society. For example, every leather manufacturing or process unit
is made to install pollution prevention system. Similarly, the
expectations of various interests in the society have undergone a
sea of change. The shareholders, promoters and owners expect a
reasonable return on their investments. The workers expect
security of service, terminal benefits, accident relief and various
other compensations from the organizations. Government expects
the business units to pay tax regularly and participate in social
improvement. The distributors and agents expect the
organizations to ensure smooth delivery process and demand more
commission and compensation. Suppliers expect the organizations
to give them continuous business and prompt payment of bills.
Therefore each social group has a specific interest, the
combination of all these, exerts enormous pressure on the
business unit. A business unit which succeeds in meeting the
interests of all these groups remains successful and grows.
7. Educational and cultural environment: Educational environment
in a country determines the quality of population. A country with
very high illiterate population would always experience political
and economic instability. Similarly, lack of education may also give
scope for the existence of superstitious beliefs, fatalistic attitude,
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13. etc. People's 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 Britisher's divide
and rule tactics. The economic development of a country
completely depends on the literacy level which alone can pave the
way for improvement in science and technology, modernization,
industrialization, etc. In such a country, the business
opportunities are plenty.
Cultural environment refers to the values, norms, customs, ethics,
goals and other accepted behaviour pattern of people in a country.
In olden days, religion was the basis of all activities in a society.
The religious leaders and institutions determined what business
should do and what people must consume. In India, the existence
of caste system has done more damage than any good. Caste based
politics has become the order of the day. Under the pretext of
working for backward and downtrodden people, several persons
have amassed fortune. This is worsened by political support and
policies. A modern organization does not have the liberty to recruit
people on merit but it has to follow strictly die reservation policy of
the government. Another serious aspect of the cultural
environment is the attitude and behaviour of the people in urban
and rural areas. The urban - rural divide has created enormous
problems for administrators and specifically business
organizations prefer urban educated person to persons from rural
areas.
8. Political environment: Political stability is one important factor
winch determines the business growth or downfall. A country with
relative political stability would witness inflow of foreign capital
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14. and collaboration. By political stability we mean that the policies of
government remaining consistent. As the business decisions arc
based on government policies, frequent changes in these policies
would force business organizations to change their policies too
which, makes functioning very difficult. Sometimes, when the
policies determined by a party in power are reversed by the
succeeding party forming the government, there would be far
reaching changes in business environment For example, India was
following a policy of protectionism till late" 1908's. Hence, the
industrial development and economic development could not take
place at a rapid rate. In the absence of competition, the business
organizations, made people to accept inferior quality goods and
services. Once, the liberalization policy is adopted, the scene has
completely changed. Today, no business can survive unless it
provides quality goods or services on par with the multinational
corporations. Another aspect of political environment is the
political ideology with which a party is wedded to, would make the
government tow the lines of countries with similar ideologies. Until
the disintegration of USSR, India was simply following USSR's
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 ENVIRONMENT
Having discussed very briefly the features of each one of the constituents
of business environment, let us discuss why the environment should be
analyzed by the business organizations.
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15. It is well known that business enterprises cannot remain independent of
the society and the institutions. So whatever decision they take as to be
in tune with the requirements of society and the dictums of the
institutions. A business organization has to continuously monitor the
environment so as to identify the business opportunities and threats. By
exploring its strengths and minimizing its weaknesses, if the
organizations can capitalize these opportunities and effectively thwart the
threats, then it would be able to grow. Let us elaborate this with an
example.
Suppose an organization wants to introduce a new consumer durable
product in the market. Then it would study whether there would be
demand for this product and the product would be accepted by the
society. At the outset, the organization would examine whether the
product would suit the culture in the society. Suppose the product is
'use and throw' type. Then people would certainly be influenced by this
feature 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
lengthen the life of every product by repairing it. Similarly suppose the
product requires some critical component from abroad. Then unless the
government policy is favourable the component has to be imported at a
very high cost, which in turn would drive the price up. .Suppose the
product is only one of its types, the organization would then emerge as a
monopoly supplying the product. This may not be tolerated by the
government. Suppose the manufacturing of the product involves
advanced technology, then the type of human resources required would
be well educated and trained. Obviously this will rule out the job
'opportunities for persons educated in rural areas. Further, if the
manufacturing process involves scope for pollution, then the organization
has to address it in relation to the provisions of the pollution control
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16. norms. Hence, in every decision of the organization, the external
environment has an important role to play. Any future plans of
expansion and forecasting of demand will depend upon the changes in
the business environment. These changes may include both the current
and expected changes. Unless these changes are also foreseen, decisions
taken would turn out to be suicidal. In the case of organizations which
have been pro-active, the changes in the environment do not affect them
much. But those which fail to understand from their own experience or
that of the other changes would remain challenges for ever.
Among the various constituents of business environment discussed
above briefly, we will focus on the following constituents and discuss
them in greater detail. The constituents now elaborated are: Economic
environment, political environment and cultural environment.
1. Economic environment
The economic environment is composed of various set of economic
policies, economic system, strategy of economic growth and development,
resource endowment, size of market and status of infrastructural
facilities in a country. All these affect the business environment one way
or the other. To understand the impact of these on business
environment, let us discuss each one of these components in detail.
Economic policies: Economic policies include fiscal policy, monetary
policy, foreign trade policy, licensing policy, technology policy, price
policy, etc. These policies lay the framework within which every
organization has to function.
A] By fiscal policy we mean, the government's tax efforts, public
expenditure and public borrowing. Through these the government can
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17. effectively encourage consumption, investment and savings habits and
also restrict them. For example, suppose there is inflation in a country.
Inflation implies that the people have high purchasing power and so they
demand goods. To curb this, the government may raise the personal tax
and also the corporate tax. Consequently, individuals will be left with
lesser disposable income and to minimize tax, they may start saving
through various tax -saving schemes. As far as the corporate are
concerned, they have to part with more by way of tax to the government
and this would bring down the rate of profit and dividend declared. As a
result the corporate would resort to upward price revision, which might
lead to further fall in demand for their products and services. During
deflationary period, the government would reduce the tax so as to
encourage more spending and investment. Even in tax policy, the
government can be selective in taxing more of rich and exempting the
poor completely. This would facilitate income re-distribution and improve
the conditions of poor.
Similarly, by altering its expenditure on various public projects, the
government 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
government would reduce its level of expenditure, thereby reducing the
income of the people. With lesser income, the demand would, go down
and so the price. At the time of deflation, the government would expand
its public expenditure by investing in a number of public projects, so
that there will be income generation find demand generation which will
revive the economy.
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18. Public borrowing is one more instrument in the hands of the government
to influence the economic condition in a country. This involves
government issuing bonds and encouraging common public and other
institutions to buy them. By this, the government would be able to bring
down the level of purchasing power in the economy and control the
inflation. During deflation, the government would redeem the bonds and
so with more purchasing power, the economy would be able to revive.
B] Monetary policy refers to the set of policies determined and
implemented by the central bank of a country to control the economic
condition. The central bank of a country has the basic responsibility to
maintain the price level and money supply in a country. This is possible
only when the central bank has certain instruments. These instruments
available with the central bank to control the money supply and price
level are called monetary policy instruments. They are called Credit
control policy. Credit controls can be of two types: Quantitative credit
controls and Qualitative credit controls. The former aims at limiting the
money supply, while the latter is used to channelize the available credit
in the country.
Quantitative credit control policy includes three tools: bank rate, open
market operations and variable reserve ratio. Bank rate refers to the rate
at which the central bank would re-discount the eligible bills already
discounted by the commercial- banks. By revising the bank rate
upwards, the central bank would be able to make the discounting by
business organizations with commercial banks costly. This would
discourage discounting and thereby money supply in the economy,
would come down. Alternatively, by lowering the bank rate, the central
bank makes credit available at a cheaper rate, and so the business
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19. organizations would go for a larger discounting of eligible bills with
commercial banks. This liberal credit policy would have expansionary
effects on the economy. Similarly, using open market operations, the
central bank would buy or sell the securities in the open market and
through that increase or contract money supply in the economy. For
example, suppose there is inflation in an economy. To bring down the
money supply, the central bank would sell the securities it has which will
be bought by the commercial banks and other institutions. In this
process 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
equivalent transferred to the banking system would facilitate adoption of
liberal credit. Variable reserve ratio refers to the increase or decrease in
the quantum of Statutory liquidity ratio and the Cash reserve ratio which
the commercial banks have to maintain as a proportion of their total
deposits. By increasing the ratios, the commercial banks would be left
with lesser volume of funds and so they can lend less. By reducing the
ratio, the commercial banks would be left with more funds with which
they can make lending liberal. All these policies would have a direct
impact on the business organizations and their operations.
Through qualitative credit controls, the central bank can : regulate
consumer credit, alter the margin requirements, resort to persuasive
efforts, take direct action on erring commercial banks, etc. Through
these policies, the central bank would be able to regulate and direct the
available credit to the priority sector and discourage credit for less
priority or no priority sector. Hence, business organizations, which fall
under priority sector, would be able to expand their business with cheap
funds and assistance
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20. C] Foreign trade policy: The foreign trade policy determines the scope
for trade between countries. It would directly affect the business
prospects of the business organizations. A liberal policy would extend the
scope for exports and imports, while a restrictive policy would narrow the
scope. Similarly, if protectionism is favored, then the business
organizations will have lesser market threats from multinational
corporations. Alternatively if liberalization is the policy, then every
domestic business organization has to tune itself to every type of
challenge posed by the business giants from abroad. Foreign trade policy
also includes the exchange rate policy and exchange controls and
customs duties. All these are fundamental to the growth of a business
organization. For example, suppose there is full" convertibility, then the
business organizations would be able to export and import and make
payments with lesser restrictions. On the other hand, if there is only
partial convertibility, the scope for trade is correspondingly less and the
business organizations have to go through a sickening process of getting
licenses for export or import and route all their payments through proper
channel. Customs duties also play a vital role in determining the volume
of external trade. A rise in customs duties would discourage domestic
demand because the price of imported goods and services would go up
find remain at a high level compared to the domestically produced goods
and services, A reduction in customs duties would encourage imports
and be favourable to the domestic manufacturers.
Government frequently changes the foreign trade policy, keeping in view
the requirements of the country and the economic condition. To tide over
the Glance of payments difficulties, government may resort to various
policy measures like devaluation, exchange clearing agreements, tariffs
and duties, exchange control regulations, etc. These tools would be
suitably modified to achieve the desired goals. For example, to encourage
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21. exports and discourage imports, the government may devalue the
currency, by which the imports of Indian goods abroad become cheaper
and the imports of foreign goods in India become costlier. Hence the
business organizations have to continuously monitor the changes in the
trade policies so as to position themselves accordingly.
D] Licensing policy: In the pre-liberalization days, India adopted
licensing policy in regulate the growth of industries in India. Since the
days of independence, India adopted licensing policy, which in effect
made the government control the growth of independence in accordance
with the national priorities. For example, in India, till 1985, the
industries in India were classified into four categories: industries
completely owned by public sector, industries where both public and
private sector participation was permitted, small scale industries and
collage industries. Except the first category in all the other categories,
private sector presence was permitted through licensing. This was
resulted in several adverse effects, which were all explained in detail by
the Dutt committee report. But till 1985, liberalization was never
accepted as a part of growth strategy. But after 1985, the situation
slowly changed that by 1991 India adopted a policy of liberalization.
Consequently, the business scope and prospects of the Indian business
organization changed since 1991. As has been already pointed out they
were exposed to market competition and threats after liberalization.
Performance has become a necessity for survival. By about the end of
20th century, the government also proceeded to disinvest several public
sector units thereby opening up the challenges all the more for Indian
industries. Therefore, the licensing policy and its direction have a lot of
impact on the business organizations.
E] Technology policy: One of the most important economic policies is
the technology policy. Improvement in technology is a condition for
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22. growth and survival in any organization. From a stage of man-dependent
environment, the business organizations are all fast becoming
machine-dependent [computer dependent]. Right from the stage of
enquiries down up to planning the logistics, computers are widely used.
Only from the mid -1990's the government started adopting a favourable
technology policy. Apart from permitting free imports of computers and
components as well as telecommunication equipments, the government
has devised a number of schemes like Software Technology Park, to give
a Phillip to the technology in India. Computerization has come to stay
in telecommunication, railways, roadways, postal services, educational
services, medical services, engineering, financial services, etc. This liberal
technology policy has resulted in the growth of new industrial segment,
viz., and information technology. Millions of youngsters get trained and
are gainfully employed. Indian software engineers are considered as the
best in the world and several of the multinational corporations depend
on Indian supply of trained software and hardware professionals. The
business environment has completely transformed over the past five to
six 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 the
price in a country. This is necessary, because, unless price is controlled,
there is bound to be inflation and then economic instability. Further in
Indian context, nearly 35% of the population is living below the poverty
line. They do not have any permanent employment. Especially the rural
poverty is very serious. To overcome this situation, the government
resorts to price control policy. All the essential and basic necessary goods
are subjected to price control. While the poor and downtrodden are
provided the essential goods at a controlled and subsidized rate through
public distribution, the others are expected to meet their requirements
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23. through open market. Through demand and supply management, the
government makes all the efforts to keep the prices under--control. For
instance, by building up buffer stocks, the government overcomes the
shortage of food commodities during adverse period. Similarly, specific
concessions are given to industrial units located in backward regions and
rural areas. This helps them to run on sound basis. As regards the
manufactured products, the government adopts the administered price
mechanism to control the prices. For example, the cooking gas is
supplied to the public at one price, to the commercial establishments at
a different price. This helps to minimize the strain of the population
using LPG as cooking media. Similarly till April, 2002, petrol and
diesel were subjected to administered price controls. Sugar, cement, etc.,
are also subjected to administered price. Hence, through price policy the
government protects the interests of the people and this policy has a
direct impact on the functioning of the business organization in our
country.
2. Political environment
It is well known that the business environment in a country is very much
interlinked with the political environment. The political environment
simply means the political ideology which is adopted by the government.
In a democratic country like India, this political ideology changes as and
when there is a change in the party ruling the country at the Centre and
the State level. A number of examples could be cited to prove how the
political ideology has influenced the business environment of the
country.
Before independence, under the guidance of Mahatma Gandhi, India
was wedded to the policy of ‘Swadeshi’. That is, Gandhi advocated the
use of only Indian made goods and to completely abstain from imported
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24. goods, specifically British goods. As a result immediately after
independence, Indian government followed a restrictive, trade policy
imposing very heavy customs duty on imported goods. This was thought
that such a policy would help to achieve both the political commitment
as well as protection of domestic producers from the invasion of foreign-
manufacture-s and traders. A deeper look into such a policy would reveal
that India never wanted to entertain a policy of allowing foreign trading
activities on Indian soil as this would lead to colonization. After all the
British East India Company entered the Indian shores under the pretext
of trading with India in 1600 AD and the country had to pay a heavy
price for the next 350 years being a colony. Hence, a restrictive trade
policy was very much favored by every one and in such an environment
the business environment was such the domestic producers could
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 same
time, the Indian government was very much influenced by the Russian
type of planning. Being a declared democratic socialist country, India
adopted planning as the strategy of economic development. The First Five
Year plan was formulated and implemented without relying much on
industrial development, when at the end of the I Plan it was realized that
growth is impossible without industrial development, a shift focus was
necessitated that the government gave emphasis on industrial
development. But here again, the government approached the issue
with caution. It felt that a controlled and guided industrial development
would yield better results than a free unrestricted industrial
development. The consequence was the Licensing policy. Though imports
were permitted, industrial development through collaborative efforts with
entrepreneurs abroad was subjected to a very critical scrutiny. When
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25. the Licensing policy led only to concentration of economic power in the
hands of a few private sector units like TATA, Birla, and others, the
government brought in the Monopolies Restrictive Trade Practices
Act, in 1970. This has on the one hand put a check on growth of
monopolies in India, on the other hand the industrial development was
not taking place at a desired pace. The seeds for liberalization were
sown in 1985, when the government felt that India could achieve
miraculous growth through this liberalization course, it proceeded in that
direction. This culminated in the introduction of Liberalization policy in
l99l. This resulted in a peculiar scenario in –which ‘democratic socialism
with capitalistic ideologies’ existed. Throughout the four decades after
independence, India's policies were more governed by the political factors
rather than economic necessities or compulsions. Hence, at the
beginning Indian government adopted a purely socialistic pattern of
development strategy while by 1990’s development by subscribing to
capitalistic pattern has become the reality. This shift has a great impact
on the business environment that domestic business today has to realign
itself to survive and grow, in a competitive atmosphere.
Having discussed the effect of political environment on business
environment let us examine how far the economic system is an important
factor influencing business environment. Economic system refers to the
organizations and institutions created for the purpose of satisfying the
wants of human beings. In a country, available resources have to be
utilized to manufacture and distribute goods and services, which would
meet the needs of the people so that they are satisfied. These
institutions and organizations function with their own rules and
regulations. The economic system has certain broad characteristic.
1. The economic system always functions with scarcity of resources.
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26. How the system effectively and efficiently uses the resources will
determine the extent to which the needs of the people are met.
2. An economic system comprises people. That is, a society of human
beings alone can constitute economic system.
3. A set of institutions are created and used for the purpose of
smooth functioning of an economic system. For example, banks,
money, technology, government, price mechanism, planning etc.,
are all institutions through which the systems operate.
4. The basic objective with which an economic system functions is to
satisfy the wants of the people. Unless there is want for a
commodity or service, nothing can be produced. Hence, the
economic system allocates the resources in such a way that the
wants of the people are satisfied.
5. On the basis of the above characteristics of an economic system, it
should be clear that the economic system is very dynamic in
nature. That is, the economic system undergoes changes with
every change in the institutions, though the rate of change would
differ from institution to institution.
The economic system functions to answer three vital questions:
a] what to produce
b]how to produce and
c] for whom to produce.
Answering these questions assumes enormous significance as that would
determine every activity within a country.
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27. The first question 'What to produce' depends on what is wanted. The
economic system would throw signals through which the requirements of
the people could be understood. But not all wants could be satisfied.
This is because; a country may not be gifted with all the necessary
resources to produce all the goods. Hence, depending upon the resource
endowment a country would decide what it could produce. Then there is
a problem of prioritizing the available resources among the goods to be
produced. Resources should not be used for the production of
unwarranted goods. The production of goods, which are harmful to
human beings, like narcotic drugs, should be prevented. Hence,
considering the availability of resources, the economic system should opt
to produce only goods that would satisfy the wants of human beings. In
this context it is also necessary to weigh the individual requirements and
the national requirements for goods. The latter should be given
preference over the former.
The second question ‘How to produce’ addresses basically, issues relating
to selection of right strategy, technology and investment. For example, a
country like India, with very huge population should not prefer capital
-intensive technology, as that would lead to more unemployment of
human resources. Similarly, while selecting the technology, a country
should weigh a number of considerations like relevance of technology,
cost of technology, support in case of failures, consequences of the
technology used, etc. Another vital aspect is the investment that a
country has to make while selecting the strategy and the technology. A
very important question is whether the available funds should be
invested in sophisticated research and development or meeting the basic
needs of the people. Hence, the second question would ultimately
determine the efficiency with the available resources are utilized.
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28. ‘For whom to produce’ implies that based on the resource utilization, the
country as a whole should benefit and not a few segments. Hence, having
produced the goods and services, how they could be equitably distributed
is an important aspect. The distribution of national product would differ
from country to country depending upon the economic system in vogue.
It has been already pointed out that the way in which the above three
questions are answered depends on the economic system which
functions in a country. To understand how these answers differ among
the economic systems, we should understand the different types of
economic systems. In the next section, the details of different types of
economic systems are discussed.
Types of Economic system
Economic systems may broadly be classified into three categories:
Capitalism, Socialism and Mixed economy. A number of other types also
emerged but all of them came close to any one of the above three types of
systems. Such systems include: communism and Marxism Let us now
discuss the features, strengths and weaknesses of each one of these
systems.
1. Capitalism
Capitalism is an economic system based on the principle of free
enterprise. Individual ownership of resources is an important feature.
With control and command over resources, individuals can conduct any
type of business. The object in such a system is to maximize private
gains. Any type of enterprise or production of any commodity or service
is permitted, so long it is wanted by the society. In such a system the
market forces determine the resource allocation and price. That is, the
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29. demand and supply forces together determine what to produce, how to
produce and for whom to produce. Price mechanism is the nucleus of the
capitalistic society. The price mechanism clearly reflects the wants of
the people. Once this is known, the producers would allocate the
resources to 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
his product that he would be able to stay in the market. Technology and
innovation ensure the stability and growth of organizations. As a result
only efficient organization would survive. The resources would be fully
utilized. The system is so flexible that it can adjust itself for any
economic condition. The workers get equal opportunities and those with
skills would be able to command better wages and salaries. On the whole
capitalism offers scope for growth of efficient individuals and
organizations.
But capitalism has a number of weaknesses. The important ones are
discussed 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
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30. would be able to easily eliminate rivals and competitors in the
market. There is also possibility of such monopolies influencing
the government in policy making and intervention.
3. Though it is said that capitalism would always lead to ideal
allocation of resources and fuller utilization of resources, in reality
the experience is that resources are held by individuals and
organizations and under utilization is the result. Sometimes,
products which are not really national priority are produced and
forced on the public, through advertisements and sales promotion
techniques.
4. Though it is expected that in capitalistic societies the output
would increase to optimal level, in. practice this is never found.
Producers always restrict output to maintain a high price and also
maximize profit. So excess capacity would exist in many
industries.
5. In a capitalistic society the divide between the haves and have-
nots widen that over a period. Existence of poverty among the
sophisticated sections of people is also seen. This results in built
up of frustration in the society. Over a period this might lead to
revolution and social upheaval.
2. Socialism
Socialism refers to an economic system ir which the following
features predominant:
The resources are owned by the State or state owned institutions.
Production takes place in the interest of the society and not for
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31. 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
almost complete. Government also retains the right to interfere in
the market system, whenever there is deliberate and intentional
attempt to monopolize the resource ownership or the market.
Similarly, in the erstwhile Soviet Union, socialistic principles were
followed. But even here, there were instances of private ownership
of property, enterprises, etc., were reported. • That is why it is very
difficult to come across pure capitalistic or socialistic societies.
The merits of socialism includes: 1. Collective ownership eliminate
emergence and existence of monopolies. 2, Resources utilization is
planned and achieved in the interest of the society. 3. Government
with its control over the resources is able to use resources fully
utilized and avoid wastage and production of unnecessary goods.
4. As equality in distribution is the fundamental feature of
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32. socialism, there is no scope for widening inequalities rind the
government takes steps to narrow the gap between the rich and
the poor through various measures.
However, socialistic states suffer from the following limitations: 1.
Excessive dependence on government decisions often result in
delay in offering any public service. 2. Bureaucratic control
becomes an integral part of the socialistic principles. As a result
the benefits and its direction of flow is determined by the
bureaucrats. 3. Government by undertaking excessive
responsibility on its shoulders, abets inefficiency and corruption in
the society. 4. No incentive and motivation for individual excellence
or achievements is possible in such a society and so innovations
and inventions do not really lake place in large scale in such a
society. 5. With governmental presence in every walk of life,
efficiency and productivity suffer. 6. Lack of support for individual
liberty kills initiative.
3. Mixed economy
Evolution of the concept of Mixed economy:
There was no reference to the mixed economic system in Economic
literature in the past. Economists were mainly familiar and advocated
the Laissez faire or free enterprise system, as several countries could
develop fast following the free enterprise system, in which there was no
or little government intervention. The entire economic system operated
with the price mechanism at its center point. The producers produced
what the consumers wanted and this provided very little scope for the
government to intervene in the system. The Classical economists and
their ardent supporters believed that the invisible hand will direct the
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33. economy and with private initiative and enterprise, every country should
be able to record a faster growth as proved in the case of UK, USA,
Europe, Australia, and other countries.
But over a period under the leadership of Karl Marx, a new economic
system was developed called socialism, in which there is no scope for any
private enterprise as everything owned and controlled by the government.
The government decided the type of developmental activities and me
requirements of the society and used the available resources in the
provision of these requirements. Several countries like USSR,
Communist China, Vietnam, Cuba and others preferred this socialist
system in which government is made the custodian of the society. The
main reason for Die emergence of this new economic system was the
failure of capitalism during the 1929 depression to revive every economy
from depression. Keynes himself thought that capitalism without some of
its evils could certainly help economic recovery. Hence, a time came
when economists felt that cent per cent free enterprise or cent per cent
government governed economic development cannot work satisfactorily.
A compromise between these extremes was thought of as an ideal
economic system. The new system called 'mixed economic system'
contained the merits of both the capitalism and socialism and appeared
to be full of promise. This mixed economic system is adopted by India as
indicated 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 and
public sectors. In such a system, the government will undertake the
responsibility to build and develop certain sector activities and leave the
other activities for the private initiative. In India, the government
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34. announced the adoption of the mixed economy system through its 1948
Industrial Policy Resolution. The government clearly earmarked the
industries to be completely under the state control, the industries which
are to owned and controlled by the state as well as the private sector and
industries which are completely left for the private sector. In this way the
Resolution provided for the simultaneous existence of both private and
public sectors.
ii. State participation in economic development:
This is the second feature of mixed economy, according, to which the
state reserves its right to design and decide the type of development to be
achieved. In such a set up, the government strives to promote the welfare
of the country by ensuring social order, social justice and establishing all
the necessary institutions which are required to achieve the desired
pattern of growth and development.
iii. Distribution of ownership and control of resources:
This is the next feature of mixed economy. In this system, the
government itself enters the field of production so that the available
resources are fully utilized. This will also help to avoid concentration of
wealth in the hands of a few and enable distribution of ownership and
control of productive activities. As a result there is no scope for
exploitation of any group, say labor, by any other group. In this way the
weaker section of the community is well protected and taken care of.
Only the mixed economy will enable the government to attain the
objectives of the Directive Principles of the Indian Constitution.
iv. Directing the investment in socially desirable projects and
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35. channels:
Mixed economy facilitates the flow of investment into channels which
confers the society with several benefits. For example, the Indian
government has invested huge amount in several projects to develop the
infrastructural facilities. This forms the basis for the development of
other sectors. The investment in these infrastructural areas will not come
forth from the private sector as the return is nil. Hence, the government
in a mixed economic set up provides the thrust by developing the
necessary background and strength which will encourage the private
sector to invest in profitable opportunities. In this way the government
plays 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 in
urban 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 a
mixed economy, the government will itself undertake the initiative to set
up industries in backward areas and encourage the private initiative to
set up industries in such areas by offering several concessions and
exemptions. In the absence of nixed economy, several states in India
would 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 activity
affecting the economy, the government will be the ultimate authority.
Though the private sector is assigned its role to perform, the government
will still monitor and control the way in which the private initiative is
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36. performing its role. Infact, according to the 1948 Industrial Policy
Resolution, the government made it clear that the industries already
established by the private sector belonging to that category in which new
industries will be established by the government alone, the government
would undertake the review of the working of these industries in private
sector after a period of ten years and if found not satisfactory, they would
be taken over by the government. Though this was criticized as a threat
of nationalization, yet through such a provision the government
underlines its authority. Similarly in the banking and insurance sectors,
the government nationalized banks emphasizing its powers to control
and regulate any sector.
vii. Co-operation in the field of economic development:
According to this feature of mixed economy, the government formulates
the design for development and invites the private sector to participate in
the development. It clearly spells out the guidelines which would govern
such cooperative efforts and the limits of freedom granted to the private
sector. In Indian case, the government prepares the plans for
development and spells out the areas left for the private initiative and the
areas that will be under state control. Hence, there is scope for the
development of private sector, though only according to the design
developed by the government.
Planning process under mixed economy:
As has been already stated, in a mixed economy there is a need to
achieve a compromise between self-interest and social interest This is a
very difficult task as the government has to carefully foresee the type of
development it wants to achieve and closely monitor the activities of the
private sector to ensure that the social interest is never at stake.
BSPATIL

37. 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 the
public sector is able to rise to achieve the social gains aimed for, ii) the
success of the state in guiding and regulating the private sector activities
towards social goals and iii) the extent lo which (lie state is able (o check
the distortions taking place in investment by private sector affecting (he
interest of the public sector. Hence in the planning process the state has
taken up the following steps to ensure the accomplishment of the
objectives 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 investment
c. The government has complete control of the financial institutions
including banks so that it can ensure that the banks and other
institutions play a key role in the development activities of the state.
The government could also realize the expected gains by
encouraging the priority activities in every sector. The economic
institutions are made to support the weaker sections of the
community.
d. Through powerful legislations like MRTP Act, FERA, etc., the
government could ensure that there is no scope for exploitation of
the common people by the private enterprise. Such a legal
framework lays down the rules of the game and ensures fair play in
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38. a mixed economic set up.
e. As a method of protecting the weaker and downtrodden people, the
government has policies like rationing, price controls, etc. Such
regulations are built in the planning mechanism itself, so that the
private sector cannot exploit the community.
f. Towards the improvement of welfare in the economy, the state has
undertaken several specific programs aimed at specific target
groups. For example schemes aimed at the backward and schedule
tribe providing them reservation in educational, employment and
other opportunities, rural oriented schemes for the rural folks,
health for all schemes, provision of free educational and medical
facilities up to a certain level, etc. All these schemes aim at
improving the social welfare. In all these activities the private sector
is also welcome to play its role.
g. The government makes effective use of the tools of fiscal policy viz.
taxation and public expenditure, so as to achieve the objectives of
economic planning.
Distortions in the planning process :
We have explained above that the fundamental objective of the mixed
economy is to subordinate the self-interest for the national-interest
whether this has been achieved in Indian situation is a moot question. In
spite of various types of regulations and controls, the fruits of mixed
economy have not appeared to have reached the common men. Even
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39. after four decades after the adoption of mixed economy principle, we
come across glaring distortions which go to prove that mixed economy in
practice has not been very effective. This is mainly because of the
influence exercised by the private enterprise through political influence,
corruptive activities, dishonest bureaucrats, powerful national and
international lobbying, etc. The extent of distortions could be understood
if we study the following points:
1. One of the basic objectives of Indian planning is to eradicate
poverty, but five decades after the adoption of planning strategy,
the proportion of population below the poverty line has not
significantly changed.
2. The planning mechanism has failed to check the rise in price
level. Inflation has come to stay in India with no policy being
effective. When double digit inflation is controlled and results in
single digit inflation, the country boasts of having achieved
something very great.
3. The emergence and existence of black money is yet another
yardstick to prove the failure of the mixed economy. The high
level of taxation has only resulted in effective tax evasion and tax
avoidance. As a result the distance between the rich and the poor
remains wide.
4. Till date there has been no effective method to prevent the
concentration of economic power in the hands of a few. The rich
becomes richer and the poor, the poorer.
5. In spite of five decades of planning, unemployment is very much
on the increase and the backlog in every plan is assuming
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40. dangerous proportions. This is mainly because of the failure to
control fee growth of population and the adoption of capital
intensive production techniques.
6. The failure to achieve re-distribution of income is yet another
glaring distortion. All the efforts to bridge the gap between the
wages of rural and urban workers or increase the real wage of the
working class has not succeeded.
When we study the above points, it is clear, that mixed economy has not
carried us in the desired direction. This is mainly because of the inability
of the government as it is frequently yielding to the pressure exerted by
the vested interests. Even the recent liberalization measure could be
viewed from this angle. But a country cannot remain independent of the
international pressures, especially when India is depending upon the IMF
and EBRD, all its internal policies are indirectly governed by these
lending agencies: Whether this is right or wrong is a question that could
be answered only after we evaluate the gains of liberalization policy. But
on the whole, the expected benefits of mixed economy have not been
realized as is clearly proved by the distortions discussed above.
4. Marxism
Marxism is essentially socialism in different garb. The pure socialism is
proved to be impractical and it made role of government the center point.
Most of the government could not fit in this role effectively. Further
capitalism with its explicit goals threatened the success of socialism. It
was at this juncture that Karl Marx came up with his ideology, which led
to the evolution of Marxian socialism. Marx succeeded through his logical
reasoning that economics dominates every activity of a society. This leads
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41. to class struggle. When one struggle is tackled another one crop up. The
continued onslaught of the capitalist on the society would result in the
creation of haves and have-nots. This division of the society would widen
with the continuance of capitalism, which ultimately will result in class
struggle. Marx explained through his theory of value that every product
should be valued in accordance with the value of labor contained in it.
But the laborers are rewarded at a very much lesser rate than what they
create. That is,, every laborer contribute more by way of his work to
produce the product but he is paid a very low wages. The difference is
the gain realized by the capitalists. The capitalists would accumulate
profits this way at the cost of worsening labor condition. Over a period
the divide between the proprietary class and the labor class would widen
that much, that there would be social upheaval. Karl Marx predicted
class war and argued that unless the capitalist class realizes this, there
would be severe impact on production and economic condition of a
country. His argument came true in the case of France that the French
revolution broke out in 1789. There were similar problems in different
parts of the globe, like in erstwhile USSR [Scissor's crisis], and China.
China, especially remained a closed economy till early I990's. But in
China, the Marxism led to the emergence of communism. This is
discussed in detail below.
Though Marxism held sway over a number of countries for some time,
yet it has inherent defects. Firstly, Marx's view that all activities in all
countries are basically economic in nature is not true. Secondly, his
argument that class struggle continuously takes place in every country
did not hold water. A number of other reasons of economic, social and
cultural nature led to the struggle and not the way Marx predicted.
Thirdly, the theory of surplus value could not be applied in practice in
service industry. Fourthly, Marx never took into the interference that a
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42. government could make in case of exploitation of society by the
capitalists.
5. Communism
Communism is Marx's prediction at the fall of capitalism. Marx argued
that the widening inequalities in a society coupled with class struggle
should ultimately sound the death knell of capitalism. He is of the view
that when capitalism falls, the communism will emerge in which, the
laborers will lead the country. The government will own all the resources
and determine the needs of the society. It will also decide various other
issues of macro and micro importance. Government will turn out to be
the custodian of the society and in a pure communistic society; people
will lead a life where basic necessities are provided by the government.
Unemployment will be very low as every one is occupied in some
avocation or other.
But the way in which communism was practiced in China created an
impression that the government would be oppressive in its approach that
the people will lead a life of slavery. One has to work to earn his bread.
Military type of regimentation was enforced that common people were
subjected to absolute control and regulation by government. The
economy remained closed without any international relations, both
economic and social. There were no two party systems that the
nominated representatives of the Communist party attended to all the
governmental responsibilities. Market mechanism is completely absent in
such a system, as government determined everything on behalf of the
country.
As has been already pointed out depending upon the economic system,
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43. the business environment will change. In a capitalist system, the
environment provides opportunities for every one who wants to maximize
gains. In a socialist system, the government undertakes the
responsibility of providing everything to the citizens. In a Marxist
economy, it is ultimately the laborers who will hold the reins. In a
Communist economy, it is the group of administrators who run the
economy in the interest of the economy.
4. Cultural environment
Culture refers to the behaviour, attitude, way of living, belief, faith, law
and custom of people in a country. It; could be immediately understood
that these aspects would differ from country to country and also in
different regions of the same country. It is always said mat the culture
determines the people's preferences, which directly determines the
success or failure of business. Hence, cultural, environment has a direct
impact on business. A number of examples could be cited to prove this.
In olden days, eating in hotels was considered unhygienic and majority of
the people never used to accept food from outside. But today, even the
orthodox/ people freely take their requirements from fast food
restaurant. This change has come about, because of the changing
culture in the society. For instance, with the presence of a large of multi
national corporations, the executives working in such organizations are
very well paid that they rarely find time to spend on food. Such
executives prefer working lunch rather than lunch. So provision of such
working lunch should not take time and if food is made available readily
without any time loss, then the executives would be able to save their
time. Further when executives leave home very early, it is impossible for
them to prepare some food and get for their lunch. So when their
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44. working lunch requirement is met nearby by their work Spot in am
ambient atmosphere it would be welcome. This has given a fillip to the
growth of Fast food restaurants. In this manner, certain new cultural
practices are transmitted to the society. Similarly, regarding the
requirement of clothes, people are slowly switching on to ready made
garments of different varieties and design. Sensing this, several
international brands in ready garments are entering the market. This is
how the business adapts itself to the cultural environment in a country.
Business also conducts research continuously for the purpose of
innovating and inventing new products and uses for the existing
products. It is through this process that several consumer durable
products like wet grinder, mixer, washing machine, geysers, etc., have
been introduced in the market. Having created them, the business
impress upon the people to use them as time saving devices.
Hence, cultural environment can create business opportunities. Any
organization which is able to sense the business opportunity and
capitalize it, would be able to succeed and grow. But it should be noted
that changes in culture do not affect every part of the country or people
in 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 is
referred to as ‘cultural lag.’ For example, even to day in rural areas,
certain practices like untouchability is found, though it is a crime. Such
cultural lag is found mainly because of illiteracy, ignorance,
conservatism, sentimental factors, political factors and vested interests.
Business should be aware of this while addressing the requirements of
people in different regions and nations. One more aspect of cultural is
the change. While some of the changes are accepted very fast the others
are resisted. While in some families divorce is accepted as a common
feature, in others, divorce is viewed very seriously and extreme efforts are
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45. taken to pacify the parties in conflict. Another important example is the
women's employment. While in olden days women were destined to
domestic works, today women entrepreneur lead several fields. Attitude
towards work is yet another area when Indian culture lags much behind
the Western and Japanese culture.
In the light of the above discussion, the following case studies would
make sense and prove how business environment can either give a boost
to an organization or cause a doom.
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46. CASE STUDY: 1
WILLIAM HENRY GATES, III AND THE MICROSOFT
MONEY MACHINE
Several years ago, when his fortune was a mere several hundred million
dollars, a weekly magazine labeled Bill Gates as ‘America’s richest nerd.'
In 1992, at age 36, he had passed Donald Trump, Ross Perot and others
to be listed as America's wealthiest person by Forbes magazine; the value
of his holdings had grown to an estimated $ 6.3 billion. How did the free
enterprise system help him to attain such phenomenal wealth?
After graduating from high school in Seattle in 1973, Gates went to
Harvard. While there, he learned that the personal computer [PC] was in
the development stage. He dropped out of school and threw himself
completely into designing an operating system [the program that
coordinates the hardware and software of the computer] for the PC. His
system, [S - DOS the Microsoft Disk Opening System] was so good that
IBM agreed to use it in their line of, personal computers. With IBM
setting the industry standard, other computer manufacturers quickly
adopted MS DOS as well. Today it is estimated that more than 80 per
cent of all personal computers in the world use this system: Gate's firm,
Microsoft, Inc., makes money on every computer sold with MS-DOS as
the operating system.' In the 1992, the firm recorded $2.8 billion in
revenue and $ 708 million in net profit. It ranks third in size in the
industry, behind IBM and Hewlett - Packard. Gate's personal holdings of
some 90 million shares of common stock represent about 33 per cent
ownership share of the company.
Microsoft also produces programs for word processing, spreadsheets, and
a variety of other applications. One of Gate's latest ventures has been to
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47. purchase the electronic reproduction rights to thousands of art and
photographic works from museums and libraries around the world.
These will be used as a part of his plan for interactive home
entertainment systems.
With extremely hard work, a creative mind, and a willingness to take
risks, Gates has demonstrated how the market rewards the successful
entrepreneur. He was able to produce what consumers wanted at a price
they 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
business world, merely by his ability to anticipate the changes, in the
personal computer industry.
Failure to read the business environment and initiate appropriate steps
to protect the business, can lead to a serious threat to existence itself.
This would-be clsar from the following case on Maruti Udyog of India and
Doordarshan.
Case study : 2
MARUTI UDYOG LTD.,
When Indian car market was opened for new private players, Maruti
Udyog limited, which had till then enjoyed an enviable position in the
market, suddenly faced severe market erosion. Even though Maruti is the
market leader and has the largest range of products, cheaper cars, good
service network and better cost structures, it has been steadily losing its
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48. market share for the last three years and the valuation of the company
has 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
Hindustan motors is now being done lo it.
Empire under siege
Jagdish Khattar, MD MUL was a man in trouble. He was facing what
was the 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 prove themselves, while Gypsy was snugly ensconced in its niche.
[Gypsy was not generating many volumes needed for MUL]
Despite the fact the fact that MUL had the biggest range of products, the
cheapest cars in the market and a service network and cost structures
that 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 the
impending disinvestments, [Government's. policy of disinvestments in
Public sector units includes MUEL also along with other profit making
PSUs.] MD was facing flak from the government as well. With market
share declining, MUL’s valuation had also come down drastically. While
it was valued at Rs. 80 bn in 1996, by December, 2000, the figure had
touched Rs. 40 bn.
The building blocks
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49. MUL was the largest car manufacturer in India with a market share of
over 52 per cent. It was a joint sector corporation set up by the
government of India and Suzuki Motor Corporation, Japan. MUL was
incorporated in 1981 to take over the assets of the erstwhile MUL set up
in June 1971 and wound up by a High Court order in 1978. The assets
of MUL were then acquired buy the Government under MUL Acquisition
and Transfer of Undertakings Act, 1980. In 1982, the Government signed
a joint venture agreement with Suzuki of Japan. Suzuki's stake
increased from 26 to 40% in 1987, and to 50.25% in 1992. The company
was a significant exporter with exports to over 50 countries.
The company manufactured passenger cars at its factor in Gurgaon,
Haryana, with an installed capacity of 350,000 vehicles. The first
product, Maruti 800 was launched in 1984, followed by the all-terrain
vehicle Gypsy in 1985. Over the years, MUL expanded its portfolio with
the launch of the Maruti 1000 [1990]; the Zen and the Esteem [1993];
Zen Diesel [1998]p Baleno, Wagon R and the Alto [2000].
MUL was known for its ‘value for money pricing’ strategy, which had
been made possible due to the high levels of indigenization of its vehicles.
While the Maruti 800, Zen, Esteem, and Omni were indigenized to the
extent of over 90%, the Gypsy was indigenized to the extent of 82% and
the Alto to the extent of 76%. The company had a network of about 375
vendors and had several joint ventures with some of them to source its
raw material requirements It's sales [comprising 112 dealers and sales
outlets in 86. locations] and service [comprising 1010 service workshops
covering 412 locations] network was one of the largest in the country.
The Stumbling blocks
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50. Till October 1998, MUL enjoyed a market share of 83.6% reacting to the
increasing number, of players, its-MD commented, “Obviously, our
market share will decline with the entry of new manufacturers and
models in percentage terms, but not in actual volumes.”
With cars ranging from Rs. 0.21 mn to s. 0.67 mn, problems associated
with an ever-expanding product portfolio ‘constantly plagued MUL.
Besides the declining market share, cannibalization was another issue
the company could ill-afford to ignore. Forced to take stock of what went
wrong, MUL realized that it was dependent to a large extent on a single
product - the Maruti 800.
The 800, along with the Omrii [build on the same platform accounted for
75% of units sales in the car. market in 1998; it had always been the
'breadwinner' for MUL. One of the biggest success sagas in Indian
automobile history, the 800 started losing its sheen in the 1990’s as
newer players emerged in the market. The entry-level segment ceased to
be the center of action as easy car finance availability and the lure of new
cars 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 years
led to the perception that MUL was selling old models.
To tackle these problems, MUL adopted a two-pronged strategy. One, to
introduce new models; two, it decided to increase the number of variants
rapidly, offering a new model with every increase of Rs. 25000. MUL also
revamped its engines and took the 800 to semi-urban and rural areas, to
compensate for the declining urban sales. The company was aiming to
move entry-level prices up without losing out on volumes by launching
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51. cars in the segment just above the 800. As part of this, Baleno, Wagon R
and Alto were launched in quick succession. [Alto was launched in the
same league as the 800. Industry observers contended that Alto's launch
in the 800-cc category signaled the beginning of a gradual phasing out of
the 800. However, MUL sources were quick to deny this- and-asserted
that 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 the
base model of rival Daewoo's Matiz, eroding the price advantage on which
the model survived. As a final resort, MUL decided to play what it
thought was its trump card - price reduction. The move was also justified
on the gorunds that the company was following Product Pyramid Profit
model. [The Product Pyramid incorporated the distinct customer
segments and their varied purchase -behaviour in terms of style, colour,
feature and price preferences. The base of the Pyramid was occupied by
low price, high volume product s. like the 800, where the margins were
slim. The apex of the Pyramid was occupied by high-price, low volume
products such as the Maruti Esteem VX. Although -profits were
concentrated near the top, the base played a crucial role as it created an
entry-barrier for competitors, and insulated the profitable area near the
top from competition. In the specific case of cars, the most common
model was the new product profits model. Thus, the profits associated
with a car followed the "s" curve of its life cycle, and declined as the
product neared the end of the maturity. phase. MUL's decision to drop
the 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.
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52. 3 bn in net profit for the year 1998-99. The MD justified die price cuts,
saying that MUL wanted to make up for the increase in the 800’s price
due to higher sales tax figures for the period. The move was described as
an attempt to "redefine the price-value equation." MUL sources claimed
that 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 company's market share decreased to 54.57%
In early 2000, MUL announced that it would pass on the cost of
installing Euro-II compliant engines with Multi-point fuel Injection
[MPFI] to its customers. There was a rush in the market for the 800.
as many first-time consumers who did not want to bear the hike,
hastened their purchase. MUL had to increase the price of the 800 from.
Rs. 0,18 mn to Rs. 0.22 mn. Around the same time, MUL decided to meet
the competition head-on by having a model or variant with every increase
of Rs. 25000. The idea was to give the customer the widest choice
possible. By mid-2000, the company offered 43 models in a market,
which had only 127 models.
In June 2000, sales of the 800 stood at 5296 cars compared to the
11000 plus cars it had been selling per month for the previous few years.
MUL had no option but to again slash prices of various models by Rs.
25000 to Rs. 30000, to bring back the sales to normal levels. Other
changes initiated by the'-company included a transformation in its
customer - interface and a revamped branding strategy with the new cars
[Wagon R and Baleno] coming with the Suzuki prefix. The price cuts,
however, only added to the declining bottom line problem. MUL 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 cost of up-gradation to meet the Euro;I and Euro II
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53. emission norms to its customers. '
The industry strikes back
The Indian car market of the early 21s1 century was a burgeoning one
with over 127 models on the roads, and many more in the pipeline.
Increased competition had radically transformed the market, manifested
clearly in carmaker's pricing strategy overhaul. Manufacturers were
breaking the conventional rules of auto pricing by moving from cost-
based to value-based pricing and the market soon, became a buyer's
market.
When the new players entered the market, there were no doubts that the
main artillery for the companies in the car-wars would be the pricing
strategies. It was not just a case of competition forcing a downward
revision; the players were even ready to forego profits in the short run.
Brand building and technology / feature driven campaign were to be
add-ons to the above plan. Industry observers were quick to point out
that MUL would have to get entangled in the price reducing game.
A Business India report pointed : No one is better equipped to fight a
price war than Maruti. Its phenomenal profitability, cash reserves and
efficiency in manufacturing will allow it to slash prices on all its models
without feeling the pinch as much as others.
However, Hyundai was the first company to introduce what came to be
known as, pricing based on customer's value perceptions. It introduced
the base model of Santro at Rs. 0.29 mn, while two other versions were
priced at Rs. 0.34 and Rs. 0.37 mn. The basic version was targeted at
buyers of the 800, and the other at the Zen. Thereafter, hunches in the
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54. Rs. 0.2 mn to Rs. 0.6 mn segment by Ford and Hyundai showed highly
innovative pricing strategies being adopted. Soon after, Ind Auto dropped
the price of the Fiat Uno Diesel by Rs. 64867 and Premier Automobiles
Ltd lowered the prices of the four versions of the Premier Padmini by Rs.
5000 to make it Rs. 53000.
MUL had adopted a skimming strategy for Esteem. Launched in 1993, it
was positioned as a luxury car. This continued till the arrival of Daewoo's
Cielo in 1996, which started eating into Esteem's share. In 1999, the
segment saw the arrival of Fiat Siena, Opc-1 Corsa, Ford lko.n and the
Hyundai Accent. MUL resorted to price slashing and brought the prices
down. While the top end version's price was reduced to Rs. 0.52 mn,
from Rs. 0.59 mn, the basic version was brought down to Rs. 0.44 mn
from 0.46 mn. However, this was possible only because it enjoyed
substantial margins over costs, being the first mover in the market.
MUL also followed the- same modus operandi for Zen, albeit in a different
manner. The company increased the number of Zen variants to 10, with
prices ranging hom Rs. 0.3 mn to Rs. 0.43 mn. The price stood reduced
for the Rs. 0.3 mn variant in terms of stripping down the model’s
features.
The competition responded with similar moves. Daewoo offered price-
variants for Matiz, Ind Auto offered seven variants of Fiat Uno, ranging
from Rs. 0.27 mn to Rs. 0.41 mn. Hyundai's Santro offered six variants
between Rs. 0.29 mn and Rs. 0.37 mn; Telco's Indica came in the range
of Rs. 0.25 mn to Rs. 0.38 mn with four models. NK Goila, VF Honda -
Sicl cars, aptly summed up the situation : It is important to be present
with grade - variation and a range to cover the range of potential
customers being targeted. The price - points in the car market were
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55. replaced by price — bands. The width of a price band was a function of
the size of the segment being targeted besides the intensity of
competition. The thumb rule being, the higher the intensity, the wider
the price-band.
Ford’s research, before the launch of the Ikon, a car made for the/Indian
market, revealed that over the previous two three years, the 800 segment
had graduated to the next level of Zen, Santro, Matiz, Uno and Indica.
Ford's research on the existing market segments and the consumer
response to new cars revealed that beyond the Zen segment, the choice of
the consumer was limited. Models like the Esteem and Cielo had had a
long innings outside the country and were not exactly contemporary. The
other 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
and Cielo, thee was a vacuum. The gap was identified by General Motors'
Corsa and Fiat's Siena as well. All three competitors plugged the gap by
offering several versions at various price points. Ford first launched Ikon
1.6 but later came up with a lower engine capacity Ikon I.3CLXI at a
lower price. GM and Fiat also followed the same approach.
About price reduction
The fact that 82% of the Indian market was accounted for cars priced
below Rs. 0.43 mn, proved how strongly price influenced volumes.
Moreover, with domestic car sales dropping by 15.01% in November 1998
over November, 1997 manufacturers had to turn towards price to
resuscitate demand.
In the prevailing conditions, the 'Second P of aulo marketing' price
reduction, seemed to be (he only factor able to rejuvenate the stagnant
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56. demand.
However, not every player had the financial-muscle to play the price
card. Instead of cutting the price of Matiz, Daewoo Motors introduced an
enhanced version with product features like power steering, and product-
plus features like better service and customer-care. Players like Hyundai
and Telco did not opt for price reduction, as they simply did not have the
economies of scale to profit from such moves. Such strategies worked
best for companies with offering in several segments of the market.
Higher volumes from the combined sales of products across segments
enabled them to drive harder bargains with their suppliers; unit
marketing and distribution costs decreased; and the higher margins on
products positioned near the top compensated for the pared margins on
the basic product.
The players who chose to stay out of the race to cut prices had to
convince their customers that the higher prices they charged were
justified by the greater value they offered. A product and promotional mix
had to be specifically designed to convey the above message. Most
manufacturers of mid-size cars, including General Motors, Ford, Honda-
Siel, adopted this strategy rather than cut costs to increase sales. They
argued that because of the 'snob-value' of a costlier car, buyers in this
segment were not that susceptible to be swayed by price cuts.
They cited the Cielo price reduction fiasco as an example. When sales of
Daewoo's Cielo went down from a peak of 2260 cars in September 1956
to 314 in December 1997, the company slashed the price of its base
model Rs. 0.13 inn in January, 1998. Daewoo also introduced zero-
interet finance schemes and its dealers gave unofficial discounts ranging
from Rs. 0.08 mn to Rs. 0.10 mn, Sales increased by 300% to 906 and
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