Unit-4: Business Environment and Economic Concepts

Legal and Business Environment
18MBA24
UNIT-4
INDIAN BUSINESS ENVIRONMENT
4/18/2020Prof. Kiran Kumar M., East West Institute of Technology., Dept. of MBA.,
1
Online Learning Session-4

Learning Outcome
 Understanding What is Business & What is Environment.
 Learning about Nature and Scope of Business Environment.
 Learning about Structure of Business Environment.
 Understanding Internal and External Environment.
2

Meaning of Business and Environment
Business:
 Business is a human activity carried out by the unified efforts of different
categories of people, to produce the wealth through production and
distribution of the goods and services.
 According to Malvin Anshen : “ Business is the way by which men make their
living.”
 According to Bayard O’Wheeler : “ Business is an institution organized and
operated to provide goods and services to society under the incentive of
private gain.”
Environment:
 The birth, growth and continuous development of organization are influenced
by a wide range of variables like employees, customers, suppliers, producers,
competition etc.
3

Meaning and Definition Of Business
Environment
Business Environment:
 Business Environment refers to those aspects of the surroundings of business
enterprise, which affect or influence its operations and determine its
effectiveness.
 According to Keith Davis: “Business environment is the aggregate of all
conditions, events and influence that surrounds and affects it”
4

Nature and Scope
 Complex: Environment consists of a number of factors, events, conditions
arising from different sources which impact business thus making the
business complex.
 Interdependence: Factors affecting business environment like social,
economic, legal, cultural etc. are inter dependent.
 E.g. A rich country can make sufficient expenditure on the research and
development.
 Dynamic: Business environment is dynamic as it keeps on changing in terms
of technological improvement, changes in consumer preferences, entry of
new competitors.
5

 Uncertainty: Business environment is largely uncertain as it is very difficult to
predict future happenings.
 Relativity: Business environment is a relative concept as it differs from
country to country and region to region.
 e.g. Demand of saree is high in India comparative to other countries.
 Specific and General forces: Specific forces affects individual enterprises
directly and immediately whereas general forces have impact on all
business enterprises.
 Forecasting is not possible for all developments: Many developments such
as interest rate fluctuations, the rate of inflation etc. are difficult to predict
on long term basis which makes difficult to maintain business environment.
6
Nature and Scope Cont.

Structure of Business Environment
7

Internal Environment
 Internal environment refers to factors existing within a business firm. These
factors are generally regarded as controllable factors because the
company has control over these factors.
 Financial Factors: Factors like financial policies, financial procedures and
capital structure are also important internal environment affecting business
performance, strategies and decisions.
 Physical and Human Resources: The characteristics of the human resources
like skill, quality, moral, commitment etc., contribute to the strength and
weakness of an organization.
 Objectives of Business: The business domain of the company, direction of
development, business policy etc., are guided by the objectives of the
company
8

 Work Environment: The organizational structure, company policies, extent of
professionalism in management etc., are important factors influencing
business decisions.
 Company Image and Brand: The image of the company matters while
raising finance, forming joint ventures, entering purchase or sales contract
etc.
 Labour Management Relationship: Factors like the amount of support top
management enjoys from different level of employees, and other
participants influences company decisions and their implementations.
 R&D and Technological Capabilities: It determines a company’s ability to
innovate and compete.
9
Internal Environment Cont.

External Environment
 The external environment refers to the factors existing outside the business
firm. The external factors are beyond the control of a company, hence its
success depends to the adaptability of the environment.
Again external environment is divided in two parts:
 1)Micro Environment
 2)Macro Environment
10

Micro Environment
 The factors which are close to the company and affects its ability to work
constitutes micro environment. It is known as the operating environment of
business. When competing form in the industry have the same micro
elements, the success of the firm depends on their relative effectiveness in
dealing with these elements.
 Suppliers: Suppliers are those who supply the inputs like raw material and
components to the company. Uncertainties regarding the supply
constraints the company to maintain high inventories causing cost
increase.
 Customers: Success of any business depends upon identifying customers,
their needs, likes etc., and enhancing the level of customer satisfaction. The
major task of a business is to create and sustain customers.
11

Micro Environment Cont.
 Competitors: Competitors mans other business units which are marketing or
producing similar products or a very close substitute of our product. Business
has to adjust its various activities according to the action and reactions of
competitors.
 Marketing Intermediaries: These are the firms that aid the company in
promoting , selling and distributing its goods to final buyers. They are the
vital links between the company and the final consumers.
 Public: A public is any group that has an actual or potential interest in or
impact on an organization's ability to achieve its interest. Some companies
are seriously affected by such public.
 E.g. Media
12

Macro Environment
 Macro environment means general environment of business. Macro forces are
uncontrollable in comparison to the micro forces of environment. The growth
and survival of business depends upon its adaptability to macro environmental
factors.
 The important macro environment are:
 1)Economic Environment
 2) Non Economic Environment
 Economic Environment: To know the economic environment of a country or a
business one has to understand the economic policies of the nation. These
policies put direct impact on the working and success of the business.
Economic conditions, economic policies (Industrial policies, monetary and fiscal
policy etc.) and the economic system are the important factors that constitute
economic environment of the business.
13

Non Economic Environment
 Socio cultural Environment: The socio-cultural environmental factors consist of
human relationship and the development. Some of the important factors in the
social environment are the buying and consumption habit of people, their
languages, beliefs and values, custom and traditions, etc. that effects the
business.
 Legal Environment: Every country follows its own system of law. The companies
operating in the global market have to take into account the provisions with
respect to the legal environment prevalent in the countries which thy do
business. These law and regulations affect the day-to-day operations of
business.
 International Environment: The international environment is particularly
important for industries directly depending on imports or exports.
 E.g. Import export policies of various countries
14

Non Economic Environment Cont.
 Political Environment: The political environment consists of factors related to
the management of public affairs that have a considerable impact on the
business of an organization. It impacts the legislations and government rules
and regulations under which business organizations operates in a country.
 Technological Environment: Technological environment comprises both
machines (hard technology) and scientific thinking (soft technology) used
to solve problems and promote progress. It also represents the degree of
advancement of goods and services that are prevalent in a country or a
region.
 Natural Environment: Geographical factors such as natural resources
endowments, weather and climatic conditions, location aspects in the
global context, port facilities etc., are all relevant to business.
15

Summary
 Understood What is Business & What is Environment.
 Learnt about Nature and Scope of Business Environment.
 Learnt about Structure of Business Environment.
 Understood Internal and External Environment.
16

18MBA24
UNIT-4
17

Learning Outcome
 Understanding Global Environment
 Learning about WTO and Global relations
 Learning about different types of agreements.
18

Global Environment
 The business environment existing outside of the territorial boundaries of a
country in which a business operates and yet find the effect of changes &
factors affecting the business environment outside its territorial limits is the
result of global environment.
Components of Global Environment:
 The forces of globalization.
 The international business environment.
 Multi-national business environment.
 International firm management.
19

Factors affecting Global Environment
 Dumping & Legal System.
 Currency rates.
 Technological Advancement gap.
 Ethics, Socio & Cultural factors.
 Political Changes.
 Cartel & Pools formed by nations.
 International tariff & other laws.
20

WTO and Global relations
 Intergovernmental organization which regulates the international trade
 Officially commenced on 1st Jan 1995 under the Marrakesh Agreement
 Signed by 123 nations in 1994
 WTO had replaced GATT (General agreement on tariffs and trade)
 They deal with: agriculture, textiles and clothing, banking,
telecommunications, government purchases, industrial standards and
product safety, food sanitation regulations, intellectual property and much
more.
21

WHY WTO?
 To arrange the implementation, administration and operations of trade
agreements
 Settlement of disputes
 Trade relations in issues deal with under the agreements.
 To provide a framework for implementing of the results arising out of the
deliberations which taken place at ministerial conference level.
 To manage effectively and efficiency the trade policy review mechanism
(TRIM).
 To create more together relationship with all nations in respect of global
economic.
22

Objectives
 Remove or reduce international trade barriers with the member countries.
 Achieve global economic development through optimum utilization of
world resources.
 Increase market shares of developing countries through assistance in their
development efforts.
 Follow a non discriminatory policy for all member countries.
 Act as dispute settle machinery.
23

FUNCTIONS OF WTO
 Administering WTO trade agreements
 Forum for trade negotiations
 Handling trade disputes
 Monitoring national trade policies
 Technical assistance and training for developing countries
 Cooperation with other international organizations
24

PRINCIPLES OF WTO
 The basic principles of the WTO (according to the WTO):
 Trade Without Discrimination
1. Most Favored Nation (MFN): treating other people equally
2. National treatment: Treating foreigners and locals equally
 Freer trade: gradually, through negotiation
 Predictability: through binding and transparency
 Promoting fair competition
 Encouraging development and economic reform
25

WTO Agreements
 Cover goods, services and intellectual property
 Clarify about
– The principles of liberalization
– The permitted allowances
 To lower customs tariffs and other trade barriers
 To open and keep open services markets
 Procedures for settling disagreements
 Suggest special treatment for developing countries.
26

WTO Agreements Cont.
 General Agreement on Tariffs & Trade (GATT)
 General Agreement on Trade in Services (GATS)
 Trade Related aspects of Intellectual Property rights(TRIPS)
 Trade Related Investment Measures(TRIMS)
 Agreement On Agriculture(AOA)
 Agreement on Technical Barriers Trade(TBT)
27

General Agreement on Tariffs & Trade
(GATT)
 GATT was 1st signed in 1947
 Was designed
– To provide an international opportunity
– To encouraged free trade between member states
– To regulate and reduce tariffs on traded goods
– To provide a common mechanism for resolving trade arguments
Main Objective
 Reduction of barriers to international trade
 This was achieved through the reduction of
–Tariff barriers
–Quantitative restrictions
–Subsidies on trade through a series of agreements
28

General Agreement on Trade in Services
(GATS)
 The most development-friendly of WTO Agreements because of its great
flexibility:
Objectives
 Expansion of services trade.
 Progressive liberalization through successive rounds of negotiations.
 Transparency of rules and regulations.
 Increasing participation of developing countries.
29

Trade Related Aspects of Intellectual
Property Rights Agreements (TRIPS)
 It was negotiated at the end of the Uruguay round of the general
agreement on tariffs and trade (GATT) in 1994
 This agreement concern about research, designs, sciences and other fields
along growth in industrial sector
Objectives
 Protection & enforcement of intellectual property
– to the promotion of technological innovation
– to the transfer dissemination technology
 To resolves disputes in trade related issues
30

Agreement on Trade Related Investment
Measures(TRIMs)
 Refers to certain restrictions imposed but governments in respect of foreign
investment in the country
 Provides that no contracting party shall apply any TRIM which is inconsistent
with the WTO articles
31

Agreement on Agriculture(AOA)
 A part of the final act of the Uruguay round
 Implications differ to country to country
 Contain provisions in 3 broad areas of agriculture and trade policy
– Market access
– Domestic support
– Export support
32

Agreement on Technical Barriers
to Trade (TBT)
Objectives
 Allows members to apply standards, technical regulations, conformity assessment
procedures for
- Protection of human safety or health
e.g:- sockets, seat belts, labeling cigarettes
- Protection of animal & plant life or health
e.g:-pollution, extinct egg turtle extruder device
- Protection of environment
e.g:-level of vehicle emissions
- Prevention of deceptive practices
e.g :- labeling, size
- Quality-size of fruits & vegetable
 However need to ensure that these do not create obstacles to international trade.
33

Advantages and Disadvantages
Advantages
 Free trade can be done with the countries which has no economic
sanctions
 Can bond to free trade agreements
Disadvantages
 Increased domestic economic instability from international trade cycles, as
economies become dependent on global markets
 Developing or new industries may find it difficult to become established in a
competitive environment
 Trade & Tariffs can be controlled as per the country’s economical situation
34

18MBA24
UNIT-4
35

Learning Outcome
 Understanding Open and Closed Economies.
 Learning about Primary, Secondary and Tertiary Sector and Its Contribution.
 Learning about SWOT analysis for Indian Economy.
 Understanding of Measuring GDP, Its Growth rate and Components.
 Learning about Business Cycle features and Phases.
36

Open and Closed Economies
 An open economy is a type of economy where not only domestic actors
but also entities in other countries engage in trade of products (goods and
services). Trade can take the form of managerial exchange, technology
transfers, and all kinds of goods and services.
 (However, certain exceptions exist that cannot be exchanged; the railway
services of a country, for example, cannot be traded with another country
to avail the service.)
 A closed economy is one that has no trading activity with outside
economies. The closed economy is therefore entirely self-sufficient,
which means no imports come into the country and no exports leave the
country. The goal of a closed economy is to provide domestic consumers
with everything they need from within the country's borders.
37

38

Primary Sector and Its Contribution
 The primary sector in India is the sector which is largely dependent on the
availability of natural resources in order to manufacture the goods and also
to execute various processes. The services in this sector are entirely
dependent on the availability of the natural resources in order to keep the
day-to-day operations running.
 examples in this sector include fishing and forestry, but agriculture accounts
for the largest in this sector.
 The state, as well as the national government, can increase the funds for
the irrigation facilities and provide loans for buying high-quality seeds and
fertilizers.
39

Secondary Sector and Its Contribution
 The economy in the sector is dependent on the natural ingredients which
are used to create the services and products offered and which at the end
are used for consumption. In terms of value added to the products and
services, this sector is the best sector. The major examples that fall under this
category are transportation and manufacturing.
 This sector is responsible for the employment of almost 14 percent of the
entire workforce currently working in India. The secondary sector also
contributes to almost 28 percent of the share of GDP. This sector is the
backbone of Indian economy and there are more development and
growth in the near future.
40

Tertiary Sector and Its Contribution
 The sector is also the service sector and is important when you consider the
development of the other two sectors. Like the previous sector, this sector
also adds the value to the products.
 The example of this sector is all service sectors which IT services, consulting,
etc.
 This sector is responsible for employing 23 percentage of the workforce out
of the total workforce currently working in India.
 This sector contributes to almost 59 percent of the total share of GDP. The
main problem that this sector is that the jobs which involve lower salaries do
not attract much employment. And this remains the future dilemma as
India is looking for double-digit growth in the near future.
41

SWOT analysis for the Indian Economy
 SWOT analysis (or SWOT matrix) is a strategic planning technique used to
help identify the strengths, weaknesses, opportunities and threats
associated with business competition or project planning of an individual or
company.
 Its objective is to specify the objectives of a company or commercial
project and identify the internal and external factors that are favorable
and unfavorable to achieve those objectives.
 Users of the SWOT analysis often ask and answer questions to make the tool
useful and generate meaningful information for each category to
determine their competitive advantage. SWOT has been described as a
proven and true tool for strategic analysis, but also criticized for its
limitations.
42

43
Strengths:
1. India has a great workforce
2. There is a high percentage of
agricultural land
3. Notes on the diverse nature of the
economy.
4. This is a large English-speaking
population and the availability of skilled
labor
5. A stable economy is not affected by
external changes
6. The extensive higher education policy is
the third largest reservoir of engineers
7. High growth rate of the economy.
8. The IT and BPO sector, which provides
valuable foreign exchange, is booming.
9. Abundance of natural resources.
Weakness:
1. The labor force involved in agriculture
is very high, representing only 23% of GDP
2. A quarter of the population below the
poverty line
3. High unemployment rate
4. Inequality in the current socio-
economic conditions
5. Poor infrastructure
6. Low productivity
7. Massive population that leads to
resource shortages
8. Low-level automation
9. Low literacy rates
10. Unequal distribution of wealth
11. The rural-urban division leads to
disparities in living standards
SWOT analysis for the Indian Economy Cont.

44
Opportunities:
1. The scope of the entry of private companies in
various sectors for business.
2. Foreign direct investment flows are likely to
increase in many sectors.
3. It is possible to earn large currencies in the IT and
ITES sector.
4. Invest in R&D and engineering design.
5. The biotechnology area.
6. Large population of Indian diaspora abroad (NRI).
7. Infrastructure area
8. Large domestic market: an opportunity for the sale
of multinationals
9. There are huge reserves of natural gas in India and
there are huge opportunities for natural gas fuels.
10. A vast forest area and diverse wildlife
11. Huge agricultural resources, fisheries, plantations,
crops and livestock.
Threats:
1. Depression of the global
economy
2. High fiscal deficit
3. Government intervention in
some states is threatening
4. Volatility in crude oil prices
worldwide
5. Increase in import invoice
6. Population explosion, the
population growth rate is even
higher
7. The monsoon depends a lot on
the rain.
SWOT analysis for the Indian Economy Cont.

Measuring GDP
 The size of a nation’s economy is commonly expressed as its gross domestic
product, or GDP, which measures the value of the output of all goods and
services produced within the country in a year.
 GDP is measured by taking the quantities of all final goods and services
produced and sold in markets, multiplying them by their current prices, and
adding up the total.
 GDP can be measured either by the sum of what is purchased in the
economy using the expenditures approach or by income earned on what
is produced using the income approach.
 Step 1: Take the quantity of everything produced.
 Step 2: Multiply it by the price at which each product sold.
 Step 3: Add up the total.
45

Growth rate and Components of GDP
 The GDP growth rate measures how fast the economy is growing. It does this by
comparing one quarter of the country's gross domestic product to the previous
quarter. GDP measures the economic output of a nation.
 The GDP growth rate is driven by the four components of GDP. The main driver
of GDP growth is personal consumption. This includes the critical sector of retail
sales. The second component is business investment, including construction and
inventory levels. Government spending is the third driver of growth. Its largest
categories are Social Security benefits, defense spending, and Medicare
benefits. The government often increases spending to jump-start the economy
during a recession. Fourth is net trade.
 To sum up, Gross Domestic Product (GDP) is the total value of sum of
Consumption Expenditure by households (C), Investment Expenditure by firms
(1), Government Purchases (G) and Net Exports. (X- M). Symbolically:
 GDP = C + I + G + (X-M)
46

Business Cycle
 The business cycle is the natural expansion and contraction of the
production and output of goods and services that happens over a period
of time. It can be said to be the economic rise and fall of a firm in the
economy.
 It is most importantly a tool to understand the economic conditions of the
firm and the economy in general. The firm can use this analysis to make
necessary changes to their policies.
47

Features of Business Cycle
Depression:
 Economic activities slide down from their
normal level.
 Growth rate becomes negative.
 Level of national income and expenditure
declines rapidly.
 Workers lose their jobs.
 Prices of consumer and capital goods falls
steadily.
 Investment in stock becomes less profitable.
 Demand for bank credit reaches a low ebb
and thus finds mounting of cash balances.
 Weaker firms leave industry.
48 Recovery
 Firms plan for additional investment or renovation
programme.
 More employment is generated.
 Consumption expenditure increases due to
increase in wage income rise.
 Procedures speed up production machinery.
Prosperity
 Increase in national output, consumer as well as
capital expenditure, price of raw input materials
and finished goods.
 Bank advances grow rapidly though bank rate
increases.
 General expansion of credit.
 Idle funds find their way to productive investment.

Features of Business Cycle Cont.
Boom
 Additional workers are hard to find and thus can be obtained by bidding wage rate
higher than existing rate.
 Cost of living increases relatively than increase of household incomes, hence fixed
income class review their respective consumption expenditures.
 Actual demand stagnates or even decreases.
Recession (Reverse of Expansion)
 Increase in demand is halted.
 Discrepancy arises between output supply and demand due to unawareness of
producers regarding decreasing demand in some sectors. So, supply exceeds
demand.
 Future investment plans are given up.
 Demand for labour ceases and also casual workers are laid off.
 Gradual decline in income of wages and interest earners.
 Investment falls.
49

Business Cycle Phases
50

Business Cycle Phases
 Expansion or Boom: This phase is characterized by an increase in output and
employment. There is also an increase in the demand in the market, capital
expenditure, sales and subsequently an increase in income and profits. This
cycle will continue till there is hundred percent utilization of available resources.
 Peak: As the name suggests this is the highest point of all the phases of business
cycles. At this point the output is maximum, and the involuntary unemployment
is basically zero. As the economy goes through expansion, inputs become rarer.
Their demands increase and so does their prices.
 Contraction: At the peak of an economy, demand is stagnant. Then very soon,
demand starts falling in certain sections of the economy. This is the start of the
contraction phase of the trade cycle, which is the opposite of the expansion
phase.
 Depression: Is the lowest of the phases of business cycles. It is a severe form of
recession. In this phase, we will see a negative growth rate in the economy.
There is a continuous decrease in demand.
51

Summary
 Understood Open and Closed Economies.
 Learnt about Primary, Secondary and Tertiary Sector and Its Contribution.
 Learnt SWOT analysis for Indian Economy.
 Understood Measuring GDP, Its Growth rate and Components.
 Learnt about Business Cycle features and Phases.
52
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