The document discusses the impact of economic environment on business. It defines business environment as all external forces that affect business operations, including economic, social, legal, technological, political, and other factors. The economic environment specifically refers to factors like government economic policies, interest rates, privatization policies, per capita income, and more. Understanding the business environment is important for managers to make informed decisions and adapt their business appropriately to changes in the external forces that affect it.

1. Impact of economic environment on business:
Business, now-a-days is vitally affected by the economic, social, legal,
technological and political factors. These
factors collectively form business environment. Business environment, as such,
is the total of all external forces,
which affect the organization and operations of business. The environment of
an organization has got internal,
operational and general lives managers must be aware of these three
environmental levels and their relationship and
importance.
The term 'business environment implies those external forces, factors and
institutions that are beyond the control of
individual business organizations and their management and affect the business
enterprise. It implies all external
forces within which a business enterprise operates. Business environment
influence the functioning of the business
system. Thus, business environment may be defined as all those conditions and
forces which are external to the
business and are beyond the individual business unit, but it operates within it.
These forces are customer, creditors,
competitors, government, socio-cultural organizations, political parties national
and international organizations etc.
some of those forces affect the business directly which some others have
indirect effect on the business.
Business environment as such are classified into the following three major
categories, they are:
y
Internal environment
y
Operational environment
y
General/external environment
Both internal and operational environment are the creation of the enterprise
itself. The factors of external or general
environment are broad in scope and least controlled and influenced by the
management of the enterprises.

2. Now we discuss those factors in details as below:
Econom ic dim ensions of environm ent
Economic environment refers to the aggregate of the nature of economic
system of the country, the structural
anatomy of the economy to economic policies of the government the
organization of the capital market, the nature of
factor endowment, business cycles, the socio-economic infrastructure etc. The
successful businessman visualizes
the external factors affecting the business, anticipating the prospective market
situations and makes suitable to get
the maximum with minimize cost
Economic factors that affect the business environments are as under:
y
G overnment economic policies
y
rate of interest set by the centeral bank of any country
y
P er capita Income which has a huge impact on business environment by changing
their
consumption behavior
y
P rivatization policy by the government
y
instablity in the economy due to bad political conditions in the county affects the
business
environment
y
D umping
y
C ustoms duty structure
y
A irline air freight charges
y
F oreign investment in the country
G enerally speaking an environment includes the air we breathe, the water we
drink, the available business,

3. social and educational infrastructure in the locality , state and country etc. In
the context of business the environment refers to the sum of internal and
external forces operating on an organization. The managers must perforce
recognize the elements, severity and impact of these forces on the organization.
They must identify, evaluate and react to the forces triggered by the external
environment.
More often than not, these forces are beyond the control of an organization and
its managers.A ccordingly, the factors of the environment will need to be
considered as inputs in the planning and forecasting models developed by an
organization.
It is quite possible that some large organizations themselves constitute a greater
part of the business
environment e.g.P ublic Sector OilC ompanies in India.
A n organization operates within the larger framework of the external
environment that shapes opportunities
and poses threats to the organization. The external environment is a set of
complex, rapidly changing and
significant interacting institutions and forces that affect the organization's
ability to serve its customers.
External forces are not controlled by an organization, but they may be
influenced or affected by that
organization. It is necessary for organizations to understand the environmental
conditions because they
interact with strategy decisions. The external environment has a major impact
on the determination of
marketing decisions. Successful organizations scan their external environment
so that they can respond
profitably to unmet needs and trends in the targeted markets.
The Organization as a System
Internally, an organization can be viewed as a resource conversion machine that
takes inputs (labor, money,
materials and equipment) from the external environment (i.e., the world outside
the boundaries of the
organization), converts them into useful products, goods, and services, and
makes them available to
customers as outputs. The organization must continuously monitor and adapt to
the environment if it is to

4. survive and prosper.D isturbances in the environment may spell profound
threats or new opportunities. The
successful organization will identify, appraise, and respond to the various
opportunities and threats in its
environment.
External Macro environment
The external macro environment consists of all the outside institutions and
forces that have an actual or
potential interest or impact on the organization's ability to achieve its
objectives: competitive, economic,
technological, political, legal, demographic, cultural, and ecosystem. Though
noncontrollable, these forces
require a response in order to keep positive actions with the targeted markets.A
n organization with an
environmental management perspective takes aggressive actions to affect the
forces in its marketing
environment rather than simply watching and reacting to it.
1. Economic Environment
The economic environment consists of factors that affect consumer purchasing
power and spending
patterns. Economic factors include business cycles, inflation, unemployment,
interest rates, and income.
C hanges in major economic variables have a significant impact on the
marketplace. F or example, income
affects consumer spending which affects sales for organizations.A ccording to
Engel's Laws, as income rises,
the percentage of income spent on food decreases, while the percentage spent
on housing remains
constant.
2. Technological Environment
The technological environment refers to new technologies, which create new
product and market
opportunities. Technological developments are the most manageable
uncontrollable force faced by
marketers. Organizations need to be aware of new technologies in order to turn
these advances into
opportunities and a competitive edge. Technology has a tremendous effect on

5. life-styles, consumption
patterns, and the economy.A dvances in technology can start new industries,
radically alter or destroy
existing industries, and stimulate entirely separate markets. The rapid rate at
which technology changes has
forced organizations to quickly adapt in terms of how they develop, price,
distribute, and promote their
products.
3.P olitical and Legal Environment
Organizations must operate within a framework of governmental regulation and
legislation.G overnment
relationships with organizations encompass subsidies, tariffs, import quotas,
and deregulation of industries.
The political environment includes governmental and special interest groups
that influence and limit various
organizations and individuals in a given society. Organizations hire lobbyists to
influence legislation and run
advocacy ads that state their point of view on public issues. Special interest
groups have grown in number
and power over the last three decades, putting more constraints on marketers.
The public expects
organizations to be ethical and responsible.A n example of response by
marketers to special interests is
green marketing, the use of recyclable or biodegradable packing materials as
part of marketing strategy.
The major purposes of business legislation include protection of companies
from unfair competition,
protection of consumers from unfair business practices and protection of the
interests of society from
unbridled business behavior. The legal environment becomes more complicated
as organizations expand
globally and face governmental structures quite different from those within the
United States.
4.D emographic Environment
D emographics tell marketers who current and potential customers are; where
they are; and how many are

6. likely to buy what the marketer is selling.D emography is the study of human
populations in terms of size, density, location, age, sex, race, occupation, and
other statistics.C hanges in the demographic environment can result in
significant opportunities and threats presenting themselves to the organization.
Major trends for marketers in the demographic environment include worldwide
explosive population growth; a changing
age, ethnic and educational mix; new types of households; and geographical
shifts in population.
5. Social /C ultural Environment
Social/cultural forces are the most difficult uncontrollable variables to predict.
It is important for marketers
to understand and appreciate the cultural values of the environment in which
they operate. The cultural
environment is made up of forces that affect society's basic values, perceptions,
preferences, and behaviors.
U.S. values and beliefs include equality, achievement, youthfulness, efficiency,
practicality, self-
actualization, freedom, humanitarianism, mastery over the environment,
patriotism, individualism, religious
and moral orientation, progress, materialism, social interaction, conformity,
courage, and acceptance of
responsibility.C hanges in social/cultural environment affect customer
behavior, which affects sales of
products. Trends in the cultural environment include individuals changing their
views of themselves, others,
and the world around them and movement toward self-fulfillment, immediate
gratification, and secularism.
6. Ecosystem Environment
The ecosystem refers to natural systems and its resources that are needed as
inputs by marketers or that
are affected by marketing activities.G reen marketing or environmental concern
about the physical
environment has intensified in recent years. To avoid shortages in raw
materials, organizations can use
renewable resources (such as forests) and alternatives (such as solar and wind
energy) for nonrenewable

7. resources (such as oil and coal). Organizations can limit their energy usage by
increasing efficiency.
G oodwill can be built by voluntarily engaging in pollution prevention activities
and natural resource.
External Microenvironment
The external microenvironment consists of forces that are part of an
organization's marketing process but
are external to the organization. These micro environmental forces include the
organization's market, its
producer-suppliers, and its marketing intermediaries. While these are external,
the organization is capable
of exerting more influence over these than forces in the macro environment.
1. The Market
Organizations closely monitor their customer markets in order to adjust to
changing tastes and preferences.
A market is people or organizations with wants to satisfy, money to spend, and
the willingness to spend it.
Each target market has distinct needs, which need to be monitored. It is
imperative for an organization to
know their customers, how to reach them and when customers' needs change in
order to adjust its
marketing efforts accordingly. The market is the focal point for all marketing
decisions in an organization.
2. Suppliers
Suppliers are organizations and individuals that provide the resources needed to
produce goods and
services. They are critical to an organization's marketing success and an
important link in its value delivery
system.
3. Marketing Intermediaries
Like suppliers, marketing intermediaries are an important part of the system
used to deliver value to
customers. Marketing intermediaries are independent organizations that aid in
the flow of products from the
marketing organization to its markets. The intermediaries between an
organization and its markets constitute a channel of distribution. These include
middlemen (wholesalers and retailers who buy and resell

8. merchandise).P hysical distribution firms help the organization to stock and
move products from their points
of origin to their destinations. Warehouses store and protect the goods before
they move to the next
destination. Marketing service agencies help the organization target and
promote its products and include
marketing research firms, advertising agencies, and media firms.F inancial
intermediaries help finance
transactions and insure against risks and include banks, credit unions, and
insurance companies.
Importance of understanding the environment
The managers job cannot be accomplished in a vacuum within the organization.
There are a number of
factors both internal as well as external which jointly affect managerial
decision-making. It is therefore very
important for the manager to understand and evaluate the impact of the
business environment due to the
following reasons :
a)Businesses may be doomed to be non starters due to restrictive business
environment which may take the form of rigid government laws ( no polluting
industry can ever be located in around 50 Km radius of the Taj) , state of
competition (C ar manufacturing capacity presently in the country is far in
excess of demand) etc.
b)The present and future viability of an enterprise is impacted by the
environmentF or eg no TV
manufacturer can be expected to survive by making only B&W television sets
when consumer preference
has clearly shifted to colour television sets.
c)The cost of capital and the cost of borrowing - two key financial drivers of
any enterprise are impacted by the external environment .F or eg the ability of a
business to fund its expansion plan by raising money from the stock markets
depends on the prevalent public mood towards investment in stock markets.
d)The availability of all key inputs like skilled labour , trained managers , raw
materials , electricity ,
transportation , fuel etc are a factor of the business environment.

9. e)Increasing public awareness of the negative aspects of certain industries like
hand woven carpets ( use of child labour ) , pesticides (damage to environment
in the form of chemical residues in groundwater), plastic bags (choking of
sewer lines) have resulted in the slow decline of some industries.
f)F inally , the environment offers the opportunities for growth and profits .F or
eg when the insurance and
aviation industry was thrown open to the private sector , the new entrant could
easily build on the
expectations of the public.
C hanging profile of Indian economic environment
India gained independence in 1947 paving the way for national leaders of the
IndianG overnment to build an
economically independent new India.P olicies between 1950-70 were
implemented with a sincere belief in
the efficacy of the socialist philosophy and political democracy. Heavy
investment by government in Steel
plants, atomic energy, hydroelectric power and irrigation projects laid the
foundation of a strong industrial
edifice. The non-aligned movement at a time when the world was divided into
two power blocks with cold
war between the Super-powers, prevented India from becoming a satellite of
any other nation and enabled
it to protect Its economy and the IndianP opulation.
Indian economy has made great strides in the years since independence. In
1947 the country was poor and
shattered by the violence and economic and physical disruption involved in the
partition fromP akistan. The
economy had stagnated since the late nineteenth century, and industrial
development had been restrained
to preserve the area as a market for British manufacturers. In fiscal year (F Y )
1950, agriculture, forestry,
and fishing accounted for 58.9 percent of the gross domestic product (G D P )
and for a much larger
proportion of employment. Manufacturing, which was dominated by the jute
and cotton textile industries,
accounted for only 10.3 percent ofG D P at that time.
India's new leaders sought to use the power of the state to direct economic

10. growth and reduce widespread
poverty. The public sector came to dominate heavy industry, transportation,
and telecommunications. The
private sector produced most consumer goods but was controlled directly by a
variety of government
regulations and financial institutions that provided major financing for large
private-sector projects.
G overnment emphasized self-sufficiency rather than foreign trade and imposed
strict controls on imports
and exports. In the 1950s, there was steady economic growth, but results in the
1960s and 1970s were less
encouraging.
Beginning in the late 1970s, successive Indian governments sought to reduce
state control of the economy.
P rogress toward that goal was slow but steady, and many analysts attributed
the stronger growth of the
1980s to those efforts. In the late 1980s, however, India relied on foreign
borrowing to finance development
plans to a greater extent than before.A s a result, when the price of oil rose
sharply inA ugust 1990, the
nation faced a balance of payments crisis. The need for emergency loans led the
government to make a
greater commitment to economic liberalization than it had up to this time. In
the early 1990s, India's post-
independence development pattern of strong centralized planning, regulation
and control of private
enterprise, state ownership of many large units of production, trade
protectionism, and strict limits on
foreign capital was increasingly questioned not only by policy makers but also
by most of the intelligentsia.
But too much of protection from theG overnment had its own disadvantages.
Our quality standards were not
in tune with international competition. It had produced more traders than
industrialists. It was high time
that Indian economy became more open and entered the international market.
India embarked on a series of economic reforms in 1991 in reaction to a severe
foreign exchange crisis.

11. Those reforms have included liberalized foreign investment and exchange
regimes, significant reductions in
tariffs and other trade barriers, reform and modernization of the financial
sector, and significant adjustments
in government monetary and fiscal policies.
The reform process has had some very beneficial effects on the Indian
economy, including higher growth
rates, lower inflation, and significant increases in foreign investment.F oreign
portfolio and direct investment
flows have risen significantly since reforms began in 1991 and have
contributed to healthy foreign currency
reserves ($32 billion inF ebruary 2000) and a moderate current account deficit
of about 1% (1998-99).
India's economic growth is constrained, however, by inadequate infrastructure,
cumbersome bureaucratic
procedures, and high real interest rates. India will have to address these
constraints in formulating its
economic policies and by pursuing the second generation reforms to maintain
recent trends in economic
growth.
India's trade has increased significantly since reforms began in 1991, largely as
a result of staged tariff
reductions and elimination of non-tariff barriers. The outlook for further trade
liberalization is mixed. India
has agreed to eliminate quantitative restrictions on imports of about 1,420
consumer goods byA pril 2001 to
meet its WTO commitments. On the other hand, the government has imposed
"additional" import duties of
5% on most products plus a surcharge of 10% over the past 2 years. The U.S. is
India's largest trading
partner; bilateral trade in 1998-99 was about $10.9 billion.P rincipal U.S.
exports to India are aircraft and
parts, advanced machinery, fertilizers, ferrous waste and scrap metal, and
computer hardware. Major U.S.
imports from India include textiles and ready-made garments, agricultural and
related products, gems and
jewelry, leather products, and chemicals.

12. Significant liberalization of its investment regime since 1991 has made India an
attractive place for foreign
direct and portfolio investment. The U.S. is India's largest investment partner,
with total inflow of U.S. direct
investment estimated at $2 billion (market value) in 1999. U.S. investors also
have provided an estimated
11% of the $18 billion of foreign portfolio investment that has entered India
since 1992.P roposals for direct
foreign investment are considered by theF oreign InvestmentP romotion Board
and generally receive
government approval.A utomatic approvals are available for investments
involving up to 100% foreign
equity, depending on the kind of industry.F oreign investment is particularly
sought after in power
generation, telecommunications, ports, roads, petroleum exploration and
processing, and mining.
A s India moved into the mid-1990s, the economic outlook was mixed. Most
analysts believed that economic
liberalization would continue, although there was disagreement about the speed
and scale of the measures
that would be implemented. It seemed likely that India would come close to or
equal the relatively
impressive rate of economic growth attained in the 1980s, but that the poorest
sections of the population
might not benefit.
In the recent past, India has witnessed changes in several critical factors
strengthening its economy. With
globalisation becoming the key word of the 90's, it seems to have paved the
way for India's entry in world
markets. Economic reforms have been initiated to facilitate stabilisation and
structural -adjustments
essential for the growth of the economy
Organizational Assessments
Organizational Assessments are powerful tools for identifying an organization's strengths and
weaknesses. They are the critical starting point for initiating any type of organizational change. Our

13. Organizational Assessment will sift through the "symptoms" and identify the actual issues that need to
be resolved in order to move your company forward.
We begin by conducting one-on-one interviews and focus groups with members of the management
team and a cross section of employees. Input from employees and managers representing a variety of
levels and departments in the organization will provide us with an in-depth understanding of the
challenges facing your organization. Additionally, the interviews will provide your employees with an
opportunity to be involved in the development of strategic interventions and thereby increase their
interest and "buy-in."
Interview information is then compiled and analyzed to provide you with a written summary of the
information obtained, customized recommendations and a proposed Action Plan. Our consultants can
work with you to set the Action Plan in motion and get your organization on its way to translating
your vision into reality.
Organizational Assessment

14. TES Scorecard
This assessment is used to benchmark organizations on the Equity Continuum© (EC). The scorecard consists of "the 8 questions that matter" as it
relates to evaluating fairness and equity in the workplace. Examples of typical users of the scorecard include diversity change agents, leadership
teams, and diversity councils and advisory committees.
The purpose of the scorecard is to get the equity conversation started in the organization. As a result of completing the scorecard users are provided
with a report including:
The group's average score on each question relative to the TWI norm
An alignment index that highlights areas of disagreement and consensus
The group's position on the Equity Continuum©
Depending on the size of the group, we also provide EC scores broken out by gender, visible minority status, and level in the organization
Get the equity conversation started by discovering where your organization is positioned on the Equity Continuum©. You can complete a
complimentary scorecard at www.diversitymeasurement.ca/scorecard.
Identification of the Business Case
The Identification of the Business Case for Human Equity™ is aimed at executives and leaders. The purpose of the assessment is to gauge senior
leadership's opinion of the importance/relevance of diversity and human equity to various aspects of their business. It rates the perceived importance of
diversity and human equity to the following business issues and outcomes:
Marketing and Customer Service
Recruitment & Retention
Productivity
Team Management
Globalization
Compliance with legislation and other standards
This assessment is also designed to identify the links between established business priorities and diversity/equity from a leadership perspective.
Contact TWI to find out how to complete this questionnaire online!
The Diversity Quotient©
TWI's Diversity Quotient© is our flagship employee survey and measures the extent to which the organization supports a work environment that is fair
and equitable for all. The DQ measures employee engagement, as well as perceptions of fairness related to a range of business programs, policies,
and procedures. The DQ also assesses the "diversity climate" of the organization by inquiring about employees' comfort levels with members of
different groups, attitudes towards diversity, the organization's location on the Equity Continuum©, and employee experiences with discrimination,
harassment, and abuse of authority in the workplace. Finally, the Diversity Quotient© compares employee responses for each of TWI's standard (vs.
client customized) questions against TWI's "normative database."
Another important feature of this survey is that it allows clients to see results through a diversity lens. That is, results for each component measured in
the survey are "broken out" by a series of demographic and organizational categories.
The Three Drivers of an Equitable Work Environment and their Associated Sub-Drivers

15. Diversity Census
The Diversity Census is a condensed "workforce analysis" that provides organizations with information on minority group representation and other
personal and job-related demographics that define the workforce. The Census collects information about the following:
Level of representation that exist within the organization's workforce as a whole and within different job levels, salary levels, etc. Under-
representation of certain groups or "job ghettos" within the organization act as Oil Lights.
Employee's experiences with work/life balance in the organization.
Questions are consistent with the National Census Surveys in order to allow comparisons with industry and regional norms compiled from the most
recent census statistics.
The Diversity Census is available in hard copy or online. Contact TWI to complete the Diversity Census today!
Talkback
TWI's Talkback Survey is a unique assessment aimed at understanding the extent to which leaders and managers are operating in a way that is
consistent with a strength-based organization - one that leverages the unique strengths and talents of all employees.
Employees are asked to complete a short survey evaluating their managers.
Managers with the highest survey scores are asked to participate in a TWI facilitated in-house session designed to share best practice
strategies with other managers in the organization.
Contact TWI to find out how to arrange a Talkback session in your organization
TEA© can be found online at http://www.diversitystandard.com/
Diversity Competencies
The Diversity Competencies Survey is designed to assess attitudinal and behavioural competencies within an organization's workforce and is based on
TWI's Competency Model. The model, shown below, holds that both attitudes and behaviours are important in creating an organizational climate that

16. respects and values differences within both the workplace (internal environment), and client base (external environment).
This survey brings together our measures of attitudinal competencies and behavioural competencies and is used to determine the extent to which an
organization's workforce has the necessary competencies to work effectively in a diverse workplace and with a diverse client base. The report
identifies:
Levels of diversity competency among employees
Specific developmental opportunities and training needs for employees
Benchmarks that can be used to evaluate progress
Strategic and tactical recommendations for enhancing levels of diversity competency in the organization
Diversification
What Does Diversification Mean?
A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a
portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found
within the portfolio.
Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments
will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are
not perfectly correlated.
Investopedia explains Diversification
Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks will yield the most cost-
effective level of risk reduction. Investing in more securities will still yield further diversification benefits, albeit at a drastically smaller rate.
Further diversification benefits can be gained by investing in foreign securities because they tend be less closely correlated with domestic
investments. For example, an economic downturn in the U.S. economy may not affect Japan's economy in the same way; therefore, having
Japanese investments would allow an investor to have a small cushion of protection against losses due to an American economic downturn.

17. Most non-institutional investors have a limited investment budget, and may find it difficult to create an adequately diversified portfolio. This
fact alone can explain why mutual funds have been increasing in popularity. Buying shares in a mutual fund can provide investors with
an inexpensive source of diversification.
Introduction To Investment Diversification
by James E. McWhinney (Contact Author | Biography)
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Filed Under: Alternative Investments, Bonds, Hedge Funds, Investing Basics, Options, Retirement
Diversification is a familiar term to most investors. In the most general sense, it can be summed up with this phrase: "Don’t put all of your
eggs in one basket." While that sentiment certainly captures the essence of the issue, it provides little guidance on the practical implications
of the role diversification plays in an investor's portfolio and offers no insight into how a diversified portfolio is actually created. In this article,
we'll provide an overview of diversification and give you some insight into how you can make it work to your advantage.
What Is Diversification?
Taking a closer look at the concept of diversification, the idea is to create a portfolio that includes multiple investments in order to reduce risk.
Consider, for example, an investment that consists of only the stock issued by a single company. If that company's stock suffers a serious
downturn, your portfolio will sustain the full brunt of the decline. By splitting your investment between the stocks of two different companies,
you reduce the potential risk to your portfolio. (For more insight, read Determining Risk And The Risk Pyramid.)
Another way to reduce the risk in your portfolio is to include bonds and cash. Because cash is generally used as a short-term reserve, most
investors develop an asset allocation strategy for their portfolios based primarily on the use of stocks and bonds. It is never a bad idea to

18. keep a portion of your invested assets in cash, or short-term money-market securities. Cash can be used in case of an emergency, and
short-term money-market securities can be liquidated instantly in case an investment opportunity arises, or in the event your usual cash
requirements spike and you need to sell investments to make payments. Also keep in mind that asset allocation and diversification are
closely linked concepts; a diversified portfolio is created through the process of asset allocation. When creating a portfolio that contains both
stocks and bonds, aggressive investors may lean toward a mix of 80% stocks and 20% bonds while conservative investors may prefer a 20%
stocks to 80% bonds mix.
Regardless of whether you are aggressive or conservative, the use of asset allocation to reduce risk through the selection of a balance of
stocks and bonds for your portfolio is a more detailed description of how a diversified portfolio is created than the simplistic eggs in one
basket concept. With this in mind, you will notice that mutual fund portfolios composed of a mix that includes both stocks and bonds are
referred to as "balanced" portfolios. The specific balance of stocks and bonds in a given portfolio is designed to create a specific risk-reward
ratio that offers the opportunity to achieve a certain rate of return on your investment in exchange for your willingness to accept a certain
amount of risk. In general, the more risk you are willing to take, the greater the potential return on your investment. (To learn more, check out
Achieving Optimal Asset Allocation and Five Things To Know About Asset Allocation.)
What are My Options?
If you are a person of limited means or you simply prefer uncomplicated investment scenarios, you could choose a single balanced mutual
fund and invest all of your assets in the fund. For most investors, this strategy is far too simplistic. While a given mix of investments may be
appropriate for a child's college education fund, that mix may not be a good match for long-term goals, such as retirement or estate planning.
Likewise, investors with large sums of money often require strategies designed to address more complex needs, such as minimizing capital
gains taxes or generating reliable income streams. Furthermore, while investing in a single mutual fund provides diversification among the
basic asset classes of stocks, bonds and cash (funds often hold a small amount of cash from which to take their fees), the opportunities for
diversification go far beyond these basic categories. (For more detail, read Advantages Of Mutual Funds and Disadvantages Of Mutual
Funds.)
With stocks, investors can choose a specific style, such as focusing on large caps, mid caps or small caps. In each of these areas are stocks
categorized as growth or value. Additional choices include domestic stocks and foreign stocks. Foreign stocks also offer sub-categorizations
that include both developed and emerging markets. Both foreign and domestic stocks are also available in specific sectors, such as
biotechnology and health care.
In addition to the variety of equity investment choices, bonds also offer opportunities for diversification. Investors can choose long-term or
short-term issues. They can also select high-yield or municipal bonds. Once again, risk tolerance and personal investment requirements will
largely dictate investment selection.
While stocks and bonds represent the traditional tools for portfolio construction, a host of alternative investments provide the opportunity for
further diversification. Real estate investment trusts, hedge funds, art and other investments provide the opportunity to invest in vehicles that
do not necessarily move in tandem with the traditional financial markets. These investments offer yet another method of portfolio
diversification. (To read more, see Diversification Beyond Equities and Asset Allocation Within Fixed Income.)
Concerns
With so many investments to choose from, it may seem that diversification is an easy objective to achieve, but that sentiment is only partially
true. The need to make wise choices still applies to a diversified portfolio. Furthermore, it is possible to over-diversify your portfolio, which will
negatively impact your returns. Many financial experts agree that 20 stocks is the optimal number for a diversified equity portfolio. With that in
mind, buying 50 individual stocks or four large-cap mutual funds may do more harm than good. Having too many investments in your
portfolio doesn't allow any one of them to have much impact, and an over-diversified portfolio (sometimes called "diworsification") often
begins to behave like an index fund. In the case of holding a few large-cap mutual funds, multiple funds bring the additional risks of
overlapping holdings as well as a variety of expenses, such as low balance fees and varying expense ratios, which could have been avoided
through more careful fund selection. (For more details, see The Dangers Of Over-Diversification.)
Tools
Investors have many tools to choose from when creating a portfolio. For those lacking time, money or interest in investing, mutual funds
provide a convenient option; there is a fund for nearly every taste, style and asset allocation strategy. For those with an interest in individual
securities, there are stocks and bonds to meet every need. Sometimes investors may even add rare coins, art, real estate and other off-the-
beaten-track investments to their portfolios.
Conclusion
Regardless of your means or method, keep in mind that there is no generic diversification model that will meet the needs of every investor.
Your personal time horizon, risk tolerance, investment goals, financial means and level of investment experience will play a large role in
dictating your investment mix. Start by figuring out the mix of stocks, bonds and cash that will be required to meet your needs. From there,
determine exactly which investments to use in completing the mix, substituting traditional assets for alternatives as needed. If you are too
overwhelmed by the choices or simply prefer to delegate, there are plenty of financial services professionals available to assist you. (See
Choosing An Advisor: Wall Street Vs Main Street and Shopping For A Financial Advisor.)
DIVERSIFICATION
1. Introduction

19. Diversification refers to a strategic direction that takes companies into other products and/or markets by
means of either internal or external development. There are basically two broad forms of diversification as
listed below:
Related diversification, occurs when a company develops beyond its present product
and market whilst remaining in the same area. For example a newspaper company expanding by
acquiring a TV station remains with media sector. It will use its present strengths by using its expertise to
develop new interests in same area.
This form of diversification can further be broken down:

Backward diversification, when activities related to the inputs in the business are developed. For example a
newspaper company acquiring a printing or publishing company.

Forward diversification, refers to development into activities which are concerned with a company’s
output. For example a newspaper company acquiring a distribution outlet.

Horizontal diversification, occurs when a company develops interests complementary to its current
activities. For a company may integrate its activities to include all aspect of the value chain; design,
manufacture, market and distribute.
Unrelated diversification is used to describe a company moving its present interests into
unrelated markets or products. For example a company whose core business is media
services may diversify into provision of financial services.
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2. Alternative methods for carrying out diversification

Internal development

External, through acquisition or strategic alliances
Managers should bear in mind that the acquisition alternative should be seen as both a risk and an
opportunity, therefore a clear promotion and management development strategy must be in place at the
time of the take over.
In order to test the effectiveness of acquisition as an alternative strategy the following
five simple rules may be used as suggested by Drucker:

The acquiring company must consider what value it can add to the acquired
business. This may include management, technology and distribution.

A common core of unity must exit between the businesses in terms of markets,
products and technology etc

The acquiring company’s management must understand the business being
acquired

The acquiring company must put a quality management team quickly into the

20. acquired business

The acquiring business must retain the best management from both businesses.
3. Reasons for diversification

Efficiency gains, where an organisation has underutilized resources and competences that it cannot
effectively close or sell then it makes business sense to use the resources and competences by
diversifying into a new activity.

Increasing market power, an organisation can afford to cross-subsidize one business from the surpluses
earned by another in a way that competitors may not be able to.

Stretching corporate parenting capabilities into markets and products.
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
Responding to market decline

Spreading risk
4.Advantages and disadvantages of diversification in relation to the case study
Advantages

Control of inputs, leading to continuity and improved quality. For instance 1984 and 1985 NewsCorp
acquired Twentieth Century Fox and six television stations of the Metromedia Broadcasting Group in the
US. These acquisition provided the company with a wider platform for consolidation of its related activities
through access to studios for making films and television Programmes.

Control markets by guaranteeing sales and distribution. This can arise through a combination of linkages
in the value chain. For example where production and distribution channels are combined, or where a
company uses its well-established brand names or corporate identity to gain benefits in new markets

Take advantage of existing expertise, knowledge and resources in the company when expanding into
new activities. This may result in transfer of skills, such as research and development knowledge and
sharing of resources.

Provide better risk control through no longer being reliant on a single market

Provide movement away from declining activities

Spread risk by avoiding having all eggs in one basket
Disadvantages

May result in slowing growth in its core business
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