MBA

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Business Environment and Ethics (1)
Business environment is the sum total of all
external and internal factors that influence a business. You
should keep in mind that external factors and internal factors can
influence each other and work together to affect a business
Definition
The combination of internal and external factors
that influence a company's operating situation. The business
environment can include factors such as: clients and suppliers;
its competition and owners; improvements in technology; laws
and government activities; and market, social and economic
trends.
Business Environment Types (External Micro and External
Macro)
Type 1# External Micro Environment:
Micro external forces have an important effect on
business operations of a firm.
However, all micro forces may not have the same
effect on all firms in the industry. For example, suppliers, an
important element of micro level environment, are often willing
to provide the materials at relatively lower prices to big business
firms.
They do not have the same attitude towards
relatively small business firms. Similarly, a competitive firm
will start a price war if its rival firm in the industry is relatively

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small. If the rival firm is a big one which is a capable of
retaliating any adverse action from its rival, a competitive firm
will hesitate to start a price war. We explain below important
factors or forces of micro-level external environment.
Suppliers of Inputs:
An important factor in the external environment
of a firm is the suppliers of its inputs such as raw materials and
components. A smooth and efficient working of a business firm
requires that it should have ensured supply of inputs such as raw
materials. If supply of raw materials is uncertain, then a firm
will have to keep a large stock of raw materials to continue its
transformation process uninterrupted. This will unnecessarily
raise its cost of production and reduce its profit margin.
To ensure regular supply of inputs such as raw
materials some firms adopt a strategy of backward integration
and set up captive production plants for producing raw materials
themselves.
Further, energy input is an important input in
the manufacturing business. Many large firms such as Reliance
industries have their own power generating plants so as to
ensure regular supply of electricity for their manufacturing
business. However, small firms cannot adopt this strategy of
vertical integration and have to depend on outside sources for
supply of needed inputs.
Further, it is not a good strategy to depend on a
single supplier of inputs. If there is disruption in production of
the supplier firm due to labor strike or lock-out, it will adversely
affect the production work of a firm. Therefore, to reduce risk

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and uncertainty business firms prefer to keep multiple suppliers
of inputs
Customers:
The people who buy and use a
firm’s product and services are an important part of external
micro-environment. Since sales of a product or service is critical
for a firm’s survival and growth, it is necessary to keep the
customers satisfied. To take care of customer’s sensitivity is
essential for the success of a business firm.
A firm has different categories of customers.
For example, a car manufacturing firm such as Maruti Udyog
has individuals, companies, institutions, government as its
customers. Maruti Udyog, therefore, has catered to the needs of
all these types of customers by producing different varieties and
models of cars.
Besides, a business firm has to compete with
rival firms to attract customers and thereby increase the demand
and market for its product. In the present day of intense
competition a firm has to spend a lot on advertisements to
promote the sales of its product by creating new customers and
retaining the old ones. For this purpose, a business firm has also
to launch new products or models.

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With increasing globalization and liberalization
the customers’ satisfaction is of paramount importance because
the consumers have the option of buying imported products.
Therefore, to survive and succeed a firm has to make continuous
efforts to improve the quality of its products.
Marketing Intermediaries:
In a firm’s external environment marketing intermediaries play
an essential role of selling and distributing its products to the
final buyers. Marketing intermediaries include agents and
merchants such as distribution firms, wholesalers, retailers.
Marketing intermediaries are responsible for
stocking and transporting goods from their production site to
their destination, that is, ultimate buyers. There are marketing
service agencies such as marketing research firms, consulting
firms, advertising agencies which assist a business firms in
targeting, promoting and selling its products to the right
markets.

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Thus, marketing is an important link between a
business firm and its ultimate buyers. A dislocation of this link
will adversely affect the fortune of a company. A few years ago
chemists and druggists in India declared a collective boycott of a
leading pharma company because it was providing a low retail
margin. They succeeded in raising this margin. This shows that a
business firm must take care of its intermediaries if it has to
succeed in this age of intense competition.

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Competitors:
Business firms compete with each other not
only for sale of their products but also in other areas. Absolute
monopolies in case of which competition is totally absent are
found only in the sphere of what are called public utilities such
as power distribution, telephone service, gas distribution in a
city etc. More generally, market forms of monopolistic
competition and differentiated oligopolies exist in the real
world.
In these market forms different firms in
an industry compete with each other for sale of their products.
This competition may be on the basis of pricing of their
products. But more frequently there is non-price competition
under which firms engage in competition through competitive
advertising, sponsoring some events such as cricket matches for
sale of different varieties and models of their products, each
claiming the superior nature of its products.
The readers will be witnessing how intense is the
competition between Coca Cola and Pepsi Cola. Sometimes

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there has been price war between them to capture new markets
or enlarge their market share. Likewise, there is severe
competition between the manufacturers of Aerial and Surf
washing powders, between manufacturers of various brands of
colour TV. This type of competition is generally referred to as
brand competition as it relates to producing and selling different
brands of a product.
But not only is there a competition among the
producers producing different varieties or brands of a product
but also among firms producing quite diverse products as all
products ultimately compete for attracting spending by the
consumers of their disposable incomes.
For example, competition for a firm producing TVs
does not come only from other brands of TV manufacturers but
also from manufacturers of air conditioners, refrigerators, cars,
washing machines etc. All these goods compete for attracting
disposable incomes of the final consumers. Competition among
these diverse products is generally referred to as desire

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competition as all these goods fulfill the various desires of the
consumers who have limited disposable incomes.
As a consequence of liberalization and globalization
of the Indian economy since the adoption of economic reforms
there has been a significant increase in competitive environment
of business firms. Now, Indian firms have to compete not only
with each other but also with the foreign firms whose products
can be imported.
For example, in the USA American firms faced a lot
of competition from the Japanese firms producing electronic
goods and automobiles. Similarly, the Indian firms are facing a
lot of competition from Chinese products. It is important to note
that for successful competition the Indian firms have to improve
not only the quality of the products but also to enhance their
productivity so that cost per, unit can be reduced.
Publics:
Finally, publics are an important force in
external micro environment. Public, according to Philip Kotler
“is any group that has an actual or potential interest in or impact
on a company’s ability to achieve its objective”.
Environmentalists, media groups, women associations,
consumer protection groups, local groups, citizens associations
are some important examples of publics which have an
important bearing on environment of the firms.

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For example, a consumer protection firm in
Delhi headed by Sunita Narain came out with an amazing fact
that cold drinks such as Coca Cola, Pepsi Cola, Limca, and
Fanta had higher contents of pesticides which posed threat to
human health and life. This produced a good deal of adverse
effect on the sale of these products in 2003-04. The Indian laws
are being amended to ensure that these drinks must not contain
pesticides beyond European safety standards.
Similarly, environmentalists like
Arundhi Roy has been campaigning against industries which
pollute the environment and cause health hazards. Women in
some villages of Haryana protested against liquor shops being
situated in their localities.
Many citizen groups are actively
campaigning against cigarette manufactures for their advertising
campaigns luring the people to indulge in smoking. Thus, the
existence of various types of publics influences the working of
business firms and compels them to be socially responsible.
Type 2# External Macro Environment:
Apart from micro-environment, business firms
face large external environmental forces. The external macro
environment determines the opportunities for a firm to exploit
for promoting its business and also presents threats to it in the
sense that it can put restrictions on the expansion of business
activities. The macro-environment has thus both positive and
negative aspects.

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An important fact about external macro-environmental forces is
that they are uncontrollable by the management of a firm.
Because of the uncontrollable nature of macro forces a firm has
to adjust or adapt itself to these external forces.
External macro-environmental factors are classified into:
(1) Economic,
(2) Social,
(3) Technological,
(4) Political and legal, and
(5) Demographic (natural).
We explain below all these factors determining external
macro-environment:
1. Economic Environment:
Economic environment includes the type
of economic system that exists in the economy, the nature and
structure of the economy, the phase of the business cycle (for
example, the conditions of boom or recession), the fiscal,
monetary and financial policies of the Government, foreign
trade and foreign investment policies of the government. These
economic policies of the government present both the
opportunities as well as the threats (i.e. restrictions) for the
business firms.

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The type of the economic system, that is,
socialist, capitalist or mixed provides institutional framework
within which business firm have to work. For example, before
1991, the Indian economic system was of the type of a mixed
economy with pronounced orientation towards the public sector.
Prior to 1991 private sector’s role in India’s mixed economy was
greatly restricted. Many industries were reserved exclusively for
investment and production by the public sector.
Private sector operations were limited mainly
to the consumer goods industries. Even in these goods the
private sector production and operation was controlled by
industrial licensing system, Monopolistic and Restrictive Trade
Practices (MRTP) Commission. The private sector was also
subjected to various export and import-restrictions. High tariffs
were imposed to protect domestic industries and to pursue
import substitution strategy of industrial growth.
Now, there have been significant changes in
the economic policies since 1991 which have changed the
macroeconomic environment for private sector firms. Far-
reaching structural economic reforms were carried out by Dr.
Manmohan singh during the period 1991-96 when he was the
Finance Minister. Industrial licensing has been abolished and
private sector can now invest and produce many industrial
products without getting license from the government.
Many industries, except only a few industries of
strategic importance, which were earlier reserved for the public
sector have been thrown open for the private sector. Import
duties have been greatly reduced due to which domestic
industries face competition from the imported products.

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Incentives have been given to boost exports. Rupee has been
made convertible into foreign currencies on current account. It is
thus evident that new economic reforms carried out since 1991
has significantly changed the business environment.
2. Social and Cultural Environment:
Members of a society
wield important influence over business firms. People these days
do not accept the activities of business firms without question.
Activities of business firms may harm the physical environment
and impose heavy social costs. Besides, business practices may
violate cultural ethos of a society. For example, advertisement
by business firms may be nasty and hurt the ethical sentiments
of the people.

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Businesses should consider the social
implications of their decisions. This means that companies must
seriously consider the impact of its actions on the society. When
a business firm in their decision making take care of social
interests, it is said to be socially responsible.
Social responsibility is the felt obligation or self-
enforced duty of business firms to serve or protect social
interests. By doing so they promote social well-being. Good
corporate governance should be judged not only by the
productivity and profits earned by a business firm but also by its
social-welfare promoting activities.
It is worth noting that in modern management
science a new concept of social responsiveness has been
developed. By social responsiveness we mean “the ability of a
corporate firm to relate its operations and policies to social
environment in way that are mutually beneficial to the company
and society at large”.

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It may be noted that social responsibility or
social responsiveness is related to ethics. The discipline of ethics
deals with what is good and bad, or right and wrong or with
moral duty and obligation. Further, even if managers enjoy full
freedom to adopt actions and policies in accordance with the
conceived notion of social responsibility, they may not do so if
standards applied to evaluate their performance are quite
different.
Every manager would like its performance to be
positively appraised. Therefore, if the performance of managers
of business firms are judged by the amount of profits .they make
for the owners of the firms, it is then not proper to expect
socially responsible actions from them.
3. Political and Legal Environment:
Businesses are closely related to
the government. The political philosophy of the government
wields a great influence over business policies. For example,
after independence under the leadership of Jawahar Lal Nehru
India adopted ‘democratic socialism as its goal.
In the economic sphere it implied that
public sector was to play a vital role in India’s economic
development. Besides, it required that working of the private

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sector were to be controlled by a suitable industrial policy of the
government. In this political framework provide business firms
worked under various types of regulatory policies which sought
to influence the directions in which private business enterprises
had to function.
Thus, Industrial Regulation Act 1951,
Industrial Policy Resolution 1956, Foreign Exchange Regulation
Act (FERA), Monopolistic and Restrictive Practices (MRTP)
Act were passed to control the business activities of the private
sector. Besides, role of foreign direct investment was restricted
to only few spheres.
However, since 1991 several structural
economic reforms have been undertaken following a change in
political philosophy in favor of a free market economy. The
collapse of socialism in Soviet Russia, China and East European
Countries has brought about a change in political thinking about
the roles of public and private sectors in India’s industrial
development.
To encourage the growth of the private sector
in India, licensing has now been abolished, role of public sector
greatly reduced and foreign capital, both direct and portfolio, is
being encouraged to raise the rate of capital formation in the
Indian economy. FERA has been replaced by FEM A (Foreign
Exchange Management Act) It is evident from above that with
the change in the nature of political philosophy business envi-
ronment for private firms has greatly changed.

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4. Technological Environment:
The nature of technology
used for production of goods and services is an important factor
responsible for the success of a business firm. Technology
consists of the type of machines and processes available for use
by a firm and the way of doing things. The improvement in
technology raises total factor productivity of a firm and reduces
unit cost of output.
The use of a superior technology by a
firm gives it a competitive advantage over its rival firms. The
use of a particular technology by a firm for its transformation
process determines its competitive strength. In this age of
globalization the firms have to compete in the international
markets for sales of their products. The firms which use
outdated technologies cannot compete globally. Therefore,
technological development plays a vital role in enhancing the
competitive strength of business firms.
It has been generally observed that
the competition between firms in the domestic economy and in
international markets ensures that the firms will try to improve
the technology they use because failure to do so would pose a
threat to their survival. In the protected markets, technological

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improvements are slow and firms are able to survive for a long
period without making technological changes.
This is quite evident from the experience of
automobile industry in India. Manufacturers of Ambassadors
and Fiat Cars not only made no significant changes in their
models, but also did not make any improvement in technology
for decades because of absence of competition. The users had no
choice and Ambassador and Fiat cars survived for decades in the
protected environment.
It is when Maruti Udyog Ltd. was started in India
using superior technology and introducing more attractive
models that there has been a significant improvement in car
manufacturing. With liberalization of the Indian economy new
car manufacturing firms have entered the industry and are
producing different verities and models of cars with improved
technology.
Besides, the cotton textile industry is another
important example of an industry which due to protection
provided to it by imposing high tariffs on imports of cotton
textiles became sick. Following trade liberalization many cotton
textile firms have closed down because they could not withstand
competition. Technological environment affects the success of
firms and the need for technological advancement cannot be
ignored.

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5. Demographic Environment:
Demographic environment includes the size and growth of
population, life expectancy of the people, rural-urban
distribution of population, the technological skills and
educational levels of labor force. All these demographic features
have an important bearing on the functioning of business firms.
Since new workers are recruited from outside the firm,
demographic factors are considered as parts of external
environment.
The skills and ability of a firm’s workers
determine to a large extent how well the organization can
achieve its mission. The labor force in a country is always
changing. This will cause changes in the work force of a firm.
The business firms have to adjust to the requirements of their
employees. They have also to adapt themselves to their child
care services, labor welfare programmers etc.

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The demographic environment affects both the
supply and demand sides of business organizations. Firms obtain
their working force from the outside labor force. The technical
and education skills of the workers of a firm are determined
mostly by human resources available in the economy which are
a part of demographic environment.
On the other hand, the size of population and its
rural-urban distribution determine the demand for the products
of industrial firms. For example, when there is good monsoon in
India causing increase in incomes of rural population dependent
on agriculture, demand for industrial products greatly increases.
In the wake of economic reforms initiated in the
early nineties when foreign investors were allowed to make
investment in India, they were prompted to invest in India by
pointing out that the size of Indian market was quite large. They
were told that 200 million Indian people could afford to buy the
industrial products and this constituted quite a large market
which could be profitably exploited.
Besides, the growth rate of population and age
composition of population determine the demand pattern of
goods. When the population of a country is growing at a high
rate, its child population will be relatively large. This means
demand for products such as baby food which cater to the needs
of children will be relatively high.
On the other hand, if population of a country is
stable and life expectancy of the people is high, this will cause
greater proportion of elderly aged people in the population of a
country. This means different demand pattern of goods. Thus
business firms have to consider all these demographic factors in

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their planning for production of goods and services and
formulation of marketing strategies for sale of their products.
Demographic environment is also important for
business firms as it determines the choice of technology by
them. Other things being equal, if labor is abundant and
relatively cheaper than capital, business firms will prefer
relatively labor-intensive techniques for production of goods.
However, for various reasons such as rigid labor
laws and low productivity of labor, various tax concessions on
investment in capital equipment and machinery, business firms
in India are generally seem to be using capital-intensive
technologies imported from abroad. This has resulted in the
increase in unemployment of labor, especially among the young
workers.
Therefore, social and government pressure is
increasing on the business firms to create more employment
opportunities for labor so as to render help in solving the
problem of unemployment. It is quite interesting to note here
that to take advantages of relatively cheap labor in India and
China that foreign MNCs are setting up manufacturing plants in
these countries. It is evident from above that demographic
factors play a crucial role in determining the productive activity
of business firms.
Natural Environment:
Natural environment is the ultimate source of
many inputs such as raw materials, energy which business firms
use in their productive activity. In fact, availability of natural
resources in a region or country is a basic factor in determining
business activity in it. Natural environment which includes

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geographical and ecological factors such as minerals and oil
reserves, water and forest resources, weather and climatic
conditions, port facilities are all highly significant for various
business activities.
For example, the availability of minerals such
as iron, coal etc. in a region influence the location of certain
industries in that region. Thus, the industries with high material
contents tend to be located near the raw material sources. For
example, steel producing industrial units are set up near coal
mines to save cost of transporting coal to distant locations.
Besides, certain weather and climatic conditions
also affect the location of certain business units. For example, in
India the firms producing cotton textiles are mostly located in
Bombay, Madras, and West Bengal where weather and climatic
conditions are conducive to the production of cotton textiles.
Natural environment also affects the demand for
goods. For example, in regions where there is high temperature
in summer there is a good deal of demand for dessert coolers, air
conditioners, business firms set up industrial units producing
these products. Similarly, weather and climatic conditions
influence the demand pattern for clothing, building materials for
housing etc. Furthermore, weather and climatic conditions
require changes in design of products, the type of packaging and
storage facilities.
It may however be noted that resource
availability is not a sufficient condition for the growth of
production and business activities. For instance, India through
rich in natural resources remained poor and underdeveloped

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because available resources had not been put to use due to lack
of adequate capabilities of Indian business class. Thus, it is not
the availability of natural resources alone but also the
technology and ability to being them into use that determines the
growth of business and the economy.
Ecological Effects of Business:
Until recently businesses had generally
overlooked the serious ecological effects of its activities. Driven
purely by the motive of maximizing profits, they cause
irreparable damage to the exhaustible natural resources,
especially minerals and forests. By their careless attitude they
caused pollution of environment, especially air and water which
posed health hazards for the people.
By creating external detrimental diseconomies
they imposed heavy costs on the society. Thanks to the efforts
by environmentalists and international organizations such as
World Bank, the people and the governments have now became
conscious of the adverse effects of depletion of exhaustible
natural resources and pollution of environment by business
activity.
Accordingly, laws have been passed for
conservation of natural resources and prevention of environment
pollution. These laws have imposed additional responsibilities
and costs for business firms. But it is socially desirable that
these costs are borne by business firms if we want sustainable
economic growth and also healthy environment for human
beings.

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Macro Environment
Natural Environment
1) It include natural resources , weather ,climatic conditions,
port facilities ,topographical factors such as soil ,sea ,rivers,
rainfall etc.
2) Every business unit must look for these factors before
choosing the location for their business.
Demographic Environment
1) It is a study of perspective of population i.e. its size
standard of living ,growth rate , age sex composition
,family size ,income level (upper level ,middle level and
lower level) ,education level etc.
2) Every business unit must see these feature of population
and recognize their various needs and produce accordingly.
PESTLE
 Political
 Economical
 Social
 Technological
 Legal
 Environmental

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What does opportunity mean?
An appropriate or favorable time or occasion: Their
meeting afforded an opportunity to exchange views. A situation
or condition favorable for attainment of a goal. A good position,
chance, or prospect, as for advancement or success
An opportunity is a situation in which it is possible
for you to do something that you want to do.
Today’s business world is as complex as ever. And it’s always
changing.
Ray Carvey, executive vice president of corporate learning
at Harvard Business Publishing, a subsidiary of the Harvard
Business School, says management structures today are
very different than 20 years ago, namely because of the middle
manager.
Carvey describes today’s business world as “volatile, uncertain,
complex, and ambiguous,” and says it’s crucial to stay
productive through this time of change.
According to Harvard Business Publishing’s recent report,
“Leading Now: Critical Capabilities for a Complex World,”
there are eight critical capabilities leaders must possess to be
effective today.
1. Effective leaders manage complexity.
“Leaders who know how to manage complexity are skilled at
solving problems and making decisions under fast-changing
systems,” the report says. Even before any definitive

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information is available, effective leaders must assess a
situation’s complexity and choose appropriate courses of action.
2. Effective leaders manage global businesses.
Carvey says that managing a global business wouldn’t have
made the list 10 years ago, but today, understanding global
markets and knowing you’re in a global market is key. Leaders
must maintain a global focus on a day-to-day basis. “This
includes assessing what’s happening with consumers,
competitors, the economy, and the politics of the markets in
which their businesses operate,” according to the report.
3. Effective leaders act strategically.
Just as thinking globally is a must, a forward-thinking approach
is also necessary. “While older practices focused on long-term
strategy development, today’s world requires a more continuous
process: Leaders must always be prepared to adjust their
strategies to capture emerging opportunities or tackle
unexpected challenges,” the report says.
4. Effective leaders foster innovation.
With the ever-increasing levels of competition, “no strategy can
sustain a company’s competitive edge indefinitely,” the
report says. Regardless of how successful something may be,
there can always be an emphasis on innovation. Effective
leaders understand this and are focused on taking a business to
the next level.

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5. Effective leaders leverage networks.
Successful leaders take networking beyond advancing their own
careers, the report says. Rather, they view it as a way to benefit
the organization and create relationships with “customers,
suppliers, strategic partners, and even competitors.” No matter
how it’s used, though, effective leaders in this category must
“demonstrate a talent for collaboration,” according to the report.
6. Effective leaders inspire engagement.
It’s absolutely crucial to keep employees at all levels of an
organization interested and engaged in the work being done. It’s
all about giving them a feeling of value. Simply retaining
employees isn’t the goal. “People can occupy jobs for years, but
they won’t create value for their organizations if they’re not
invested in their work,” the report says. It’s up to the leader to
ensure employees actually feel that they’re making a difference.
7. Effective leaders develop personal adaptability.
Again, this is a matter of understanding the continuous change
that’s occurring. Something that may have worked brilliantly in
the past won’t necessarily work again. “Adaptable leaders steer
clear of a ‘that’s how we’ve always done it’ mentality,” the
report says. Instead, they look at new realities through fresh eyes
so they can spot and seize valuable opportunities.
8. Effective leaders cultivate learning agility.
Learning agility is the trait most everyone struggles with,
Carvey says. As business strategies and models evolve, the
leader must, as well. Effective leaders take the initiative in

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finding opportunities to learn. “They continuously experiment
with new approaches, using techniques such as rapid
prototyping,” the report says. “And they take time to reflect on
their experiences so they can learn from successes and failures.”
Keep in mind, however, that as the business world continues to
change, the key traits necessary for leaders to be successful may
also change. In a volatile environment, the ability to react to new
scenarios is imperative.
S W O T
SWOT stands for Strengths, Weaknesses,
Opportunities, and Threats. Strengths and weaknesses are
internal to your company—things that you have some control
over and can change
SWOT analysis (strengths, weaknesses, opportunities
and threats analysis) is a framework for identifying and
analyzing the internal and external factors that can have an
impact on the viability of a project, product, place or person.
SWOT analysis (or SWOT matrix) is a strategic
planning technique used to help a person or organization
identify strengths, weaknesses, opportunities, and threats
related to business competition or project planning it is
intended to specify the objectives of the business venture
or project and identify the internal and external factors
that are favorable and unfavorable to achieving those
objectives. Users of a SWOT analysis often ask and

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answer questions to generate meaningful information for
each category to make the tool useful and identify their
competitive advantage. SWOT has been described as the
tried-and-true tool of strategic analysis.
Strengths and weakness are frequently internally-related,
while opportunities and threats commonly focus on the
external environment. The name is an acronym for the
four parameters the technique examines:
1. Strengths: characteristics of the business or project
that give it an advantage over others.
2. Weaknesses: characteristics of the business that
place the business or project at a disadvantage
relative to others.
3. Opportunities: elements in the environment that the
business or project could exploit to its advantage.
4. Threats: elements in the environment that could
cause trouble for the business or project.
Strengths
Strengths are internal, positive attributes of your company.
These are things that are within your control.
1. What business processes are successful?
2. What assets do you have in your team, such as knowledge,
education, network, skills, and reputation?
3. What physical assets do you have, such as customers,
equipment, technology, cash, and patents?

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4. What competitive advantages do you have over your
competition?
Weaknesses
Weaknesses are negative factors that detract from your
strengths. These are things that you might need to improve on to
be competitive.
1. Are there things that your business needs to be
competitive?
2. What business processes need improvement?
3. Are there tangible assets that your company needs, such as
money or equipment?
4. Are there gaps on your team?
5. Is your location ideal for your success?
Opportunities
Opportunities are external factors in your business environment
that are likely to contribute to your success.
1. Is your market growing and are there trends that will
encourage people to buy more of what you are selling?
2. Are there upcoming events that your company may be able
to take advantage of to grow the business?
3. Are there upcoming changes to regulations that might
impact your company positively?
4. If your business is up and running, do customers think
highly of you?

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Threats
Threats are external factors that you have no control over. You
may want to consider putting in place contingency plans for
dealing them if they occur.
1. Do you have potential competitors who may enter your
market?
2. Will suppliers always be able to supply the raw materials
you need at the prices you need?
3. Could future developments in technology change how you
do business?
4. Is consumer behavior changing in a way that could
negatively impact your business?
5. Are there market trends that could become a threat?

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Strategic management
Strategic management is the continuous
planning, monitoring, analysis and assessment of all that is
necessary for an organization to meet its goals and objectives.
The Definition of Strategic management
It is the art and science of formulating,
Implementing, and Evaluating Cross-Functional decisions that
enable an origination to achieve its objective
What are the processes of strategic management?
Strategic Management Process - Meaning, Steps
and Components. The strategic management process means

32. 32
defining the organization's strategy. It is also defined as the
process by which managers make a choice of a set of
strategies for the organization that will enable it to achieve
better performance.
Strategic management
1) Start from Strategic intent
2) External audit
3) Internal audit
4) State long term objective
5) Formula Strategies
6) Strategic implementation
7) Strategic evaluation and control
Definition: Strategic Intent can be understood as the
philosophical base of strategic management process. It implies
the purpose, which an organization endeavors of achieving. It is
a statement that provides a perspective of the means, which will
lead the organization, reach the vision in the long run.
Strategic intent gives an idea of what the organization desires to
attain in future. It answers the question what the organization
Strategic
intent
External
audit
Internal
audit
State long
term objective
Formula
Strategies
Strategic
implementation
Strategic evaluation
and control
O TP
SWOT

33. 33
strives or stands for? It indicates the long-term market position,
which the organization desires to create or occupy and the
opportunity for exploring new possibilities.
Strategic Intent Hierarchy
1.
1. Vision: Vision implies the blueprint of the company’s
future position. It describes where the organization
wants to land. It is the dream of the business and an
inspiration, base for the planning process. It depicts
the company’s aspirations for the business and
provides a peep of what the organization would like to
become in future. Every single component of the
organization is required to follow its vision.
2. Mission: Mission delineates the firm’s business, its
goals and ways to reach the goals. It explains the
reason for the existence of business. It is designed to
help potential shareholders and investors understand
the purpose of the company. A mission statement
helps to identify, ‘what business the company

34. 34
undertakes.’ It defines the present capabilities,
activities, and customer focus and business makeup.
3. Business Definition: It seeks to explain the business
undertaken by the firm, with respect to the customer
needs, target audience, and alternative technologies.
With the help of business definition, one can ascertain
the strategic business choices. The corporate
restructuring also depends upon the business
definition.
4. Business Model: Business model, as the name implies
is a strategy for the effective operation of the business,
ascertaining sources of income, desired customer base,
and financing details. Rival firms, operating in the
same industry relies on the different business model
due to their strategic choice.
5. Goals and Objectives: These are the base of
measurement. Goals are the end results, that the
organization attempts to achieve. On the other hand,
objectives are time-based measurable actions, which
help in the accomplishment of goals. These are the end
results which are to be attained with the help of an
overall plan, over the particular period.
The vision, mission, business definition, and business model
explains the philosophy of business but the goals and objectives
are established with the purpose of achieving them.
Strategic Intent is extremely important for the future growth and
success of the enterprise, irrespective of its size and nature.

35. 35
An external audit is an independent examination of the
financial statements prepared by the organisation. It is usually
conducted for statutory purposes (because the law requires it).
An external auditor performs an audit, in accordance with
specific laws or rules, of the financial statements of a company,
government entity, other legal entity, or organization, and is
independent of the entity being audited.[1]
Users of these entities'
financial information, such as investors, government agencies,
and the general public, rely on the external auditor to present an
unbiased and independent audit report.
"Internal audit is a dynamic profession involved in helping
organisations achieve their objectives. It is concerned with
evaluating and improving the effectiveness of risk management,
control and governance processes in an organisation.
Internal auditors will examine issues related to company
business practices and risks, while external auditors examine
the financial records and issue an opinion regarding the financial
statements of the company. Internal audits are conducted
throughout the year, while external auditors conduct a single
annual audit.
What is a long term objective?
Performance goals of an organization, intended to be
achieved over a period of five years or more. Long-term
objectives usually include specific improvements in the
organization's competitive position, technology leadership,

36. 36
profitability, return on investment, employee relations and
productivity, and corporate image.
Formula Strategies
STRATEGY FORMULATION Strategic
Management Strategic management involves formulation
and implementation of the major goals and initiatives taken by a
company's top management on behalf of owners, based on
consideration of resources and an assessment of the internal and
external environments in which the organization
Strategic implementation
Strategic implementation is critical to a company's
success, addressing the who, where, when, and how of reaching
the desired goals and objectives. It focuses on the entire
organization. Implementation occurs after environmental scans,
SWOT analyses, and identifying strategic issues and goals
Strategic evaluation and control.
Strategic evaluation and control. Strategic
evaluation and control is the process of determining the
effectiveness of a given strategy in achieving the organizational
objectives and taking corrective actions whenever required
Political environment
Political Environment is the state, government and its
institutions and legislations and the public and private
stakeholders who operate and interact with or influence the
system

37. 37
Government actions which affects the operations
of a company or business. These actions may be on local,
regional, national or international level. Business owners and
managers pay close attention to the political environment to
gauge how government actions will affect their company.
Government policies
The political situation of a country affects its
economic setting. The economic environment affects the
business performance. For example, there are major differences
in Democratic and Republican policies in the US. This
influences factors like taxes and government spending, which
ultimately affect the economy.
The term 'government policy' can be used to
describe any course of action which intends to change a certain
situation. Think of policies as a starting point for government to
take a course of action that makes a real life change.
Government uses policy to tackle a wide range of issues
The stability of a political system can affect the
appeal of a particular local market. Governments view business
organizations as a critical vehicle for social reform.
Governments pass legislation, which impacts the relationship
between the firm and its customers, suppliers, and other
companies

38. 38
Stability of the government
There are many external environmental factors
that can affect your business. It is common for managers to
assess each of these factors closely. The aim is always to take
better decisions for the firm’s progress. Some common factors
are political, economic, social and technological (known as
PEST analysis). Companies also study environmental, legal,
ethical and demographical factors.
The political factors affecting business are
often given a lot of importance. Several aspects of government
policy can affect business. All firms must follow the law.
Managers must find how upcoming legislations can affect their
activities.
The political environment can impact business
organizations in many ways. It could add a risk factor and lead
to a major loss. You should understand that the political factors
have the power to change results. It can also affect government
policies at local to federal level. Companies should be ready to
deal with the local and international outcomes of politics.
Changes in the government policy make up the
political factors. The change can be economic, legal or social. It
could also be a mix of these factors.
Increase or decrease in tax could be an
example of a political element. Your government might increase
taxes for some companies and lower it for others. The decision
will have a direct effect on your businesses. So, you must
always stay up-to-date with such political factors. Government

39. 39
interventions like shifts in interest rate can have an effect on the
demand patterns of company.
Certain factors create Inter-linkages in many ways. Some
examples are:
1. Political decisions affect the economic environment.
2. Political decisions influence the country’s socio-cultural
environment.
3. Politicians can influence the rate of emergence of new
technologies.
4. Politicians can influence acceptance of new technologies.
The political environment is perhaps among the least
predictable elements in the business environment. A cyclical
political environment develops, as democratic governments have
to pursue re-election every few years. This external element of
business includes the effects of pressure groups. Pressure groups
tend to change government policies.
As political systems in different areas vary, the political impact
differs. The country’s population democratically elects open
government system. In totalitarian systems, government’s power
derives from a select group.
Corruption is a barrier to economic development for many
countries. Some firms survive and grow by offering bribes to
government officials. The success and growth of these
companies are not based on the value they offer to consumers.

40. 40
Below, is a list of political factors affecting business?
1. Bureaucracy
2. Corruption level
3. Freedom of the press
4. Tariffs
5. Trade control
6. Education Law
7. Anti-trust law
8. Employment law
9. Discrimination law
10. Data protection law
11. Environmental Law
12. Health and safety law
13. Competition regulation
14. Regulation and deregulation
15. Tax policy (tax rates and incentives)
16. Government stability and related changes
17. Government involvement in trade unions and agreements
18. Import restrictions on quality and quantity of product
19. Intellectual property law (Copyright, patents)
20. Consumer protection and e-commerce
21. Laws that regulate environment pollution
There are 4 main effects of these political factors on business
organizations. They are:
 Impact on economy
 Changes in regulation
 Political stability
 Mitigation of risk

41. 41
Impact on economy
The political situation of a country affects its economic setting.
The economic environment affects the business performance.
For example, there are major differences in Democratic and
Republican policies in the US. This influences factors like taxes
and government spending, which ultimately affect the economy.
A greater level of government spending often stimulates the
economy.
Changes in regulation
Governments could alter their rules and regulations. This could
in turn have an effect on a business.
After the accounting scandals of the early 21st century, the US
SEC became more attentive on corporate compliance. The
government introduced the Sarbanes-Oxley compliance
regulations of 2002. This was a reaction to the social
environment. The social environment urged a change to make
public companies more liable.
Political Stability
Lack of political stability in a country effects business
operations. This is especially true for the companies which
operate internationally.
For example, an aggressive takeover could overthrow a
government. This could lead to riots, looting and general
disorder in the environment. These disrupt business operations.

42. 42
Sri Lanka was in a similar state during a civil war. Egypt and
Syria faced disturbances too.
Mitigation of Risk
Buying political risk insurance is a way to manage political risk.
Companies that have international operations use such insurance
to reduce their risk exposure.
There are some indices that give an idea of the risk exposure in
certain countries. The index of economic freedom is a good
example. It ranks countries based on how politics impacts
business decisions there.
The importance of observing the political environment
Firms should track their political environment. Change in the
political factors can affect business strategy because of the
following reasons:
1. The stability of a political system can affect the appeal of a
particular local market.
2. Governments view business organizations as a critical
vehicle for social reform.
3. Governments pass legislation, which impacts the
relationship between the firm and its customers, suppliers,
and other companies.
4. The government is liable for protecting the public interest.
5. Government actions influence the economic environment.
6. Government is a major consumer of goods and services.

43. 43
Example: How political factors affect Nike
Studies show that Nike has earned high profits from the growth
orientated policies of US government. The policies maintained
low-interest rates. Currency exchange stability and
internationally competitive tax arrangements were also
maintained. The company has also benefited from government
initiatives in terms of transparency in the global value chain.
One example of this is in membership of the Clinton
administration’s 1997 Apparel Industry Partnership. Nike
enjoyed changes in the political factors in many ways.
However, political pressures had a negative impact on Nike’s
employment practices.
Government
A government is the system or group of people governing an
organized community, often a state.
In the case of its broad associative definition, government
normally consists of legislature, executive, and judiciary.
Government is a means by which organizational policies are
enforced, as well as a mechanism for determining policy. Each
government has a kind of constitution, a statement of its
governing principles and philosophy. Typically the philosophy
chosen is some balance between the principle of individual
freedom and the idea of absolute state authority (tyranny).
While all types of organizations have governance, the word
government is often used more specifically to refer to the
approximately 200 independent national governments on Earth,
as well as subsidiary organizations.

44. 44
Historically prevalent forms of government include monarchy,
aristocracy, timocracy, oligarchy, democracy, theocracy and
tyranny. The main aspect of any philosophy of government is
how political power is obtained, with the two main forms being
electoral contest and hereditary succession.
Form of Government
1. Democrat
2. Legislative
3. Judiciary
1) Democrat
a) Government by the people; a form of government in
which the supreme power is vested in the people and
exercised directly by them or by their elected agents under
a free electoral system.
b) A state having such a form of government.
2) Legislative
A legislature is a deliberative assembly with the authority to
make laws for a political entity such as a country or city.
Legislatures form important parts of most governments; in the
separation of powers model, they are often contrasted with the
executive and judicial branches of government.
Laws enacted by legislatures are known as primary legislation.
Legislatures observe and steer governing actions and usually
have exclusive authority to amend the budget or budgets
involved in the process.

45. 45
The members of a legislature are called legislators. In a
democracy, legislators are most commonly popularly elected,
although indirect election and appointment by the executive are
also used, particularly for bicameral legislatures featuring an
upper chamber.
3) Judiciary
The judiciary (also known as the judicial system or the court
system) is the system of courts that interprets and applies the
law in the name of the state. The judiciary can also be thought
of as the mechanism for the resolution of disputes.
Political party
A political party is an organized group of citizen who profess to
share the same political view and who by acting as a political
unit, try to control the government
Features of political party
a) A political party is a fairly large group of people
b)Member of a political party have similar political views or
fait in one political ideology.
c) A political party always tries to get the power to form the
government and to rule the country
d) A political party has full faith in peaceful methods .In
always acts through peaceful means, like elections, for
fulfilling its aim
e) It fields its candidates ,organizes election campaigns and
tries to win more and more seats in the elections

46. 46
f) A political party is actively involved in politics either as a
ruling party or as an opposition party.
g) Political party which run the govt. is called ruling party
.when several ,essentially more than two political parties
are actively involved in politics ,the system is called multi
party system
1) Registration and Classification of Political Parties •
The Election Commission recognizes each party either
as a national party, or a regional party to a local party
or registered and recognized party. The Election
Commission grants such recognition on the basis of
the achievement of various parties is elections, which
are held from time to time. • A party is recognised as a
national party by the Election Commission on the
basis of a formula. The political party which has
secured not less than four percent of the total
validvotes in the previous general elections at least in
four states, is given the status of a national party. • A
regional parity is an active party in one or two states. •
The Constitution of India has granted to the people of
India the fundamental right to freely organize their
political parties.

47. 47
MAJOR NATIONAL POLITICAL PARTIES National
Party
1.Bhartiya Janta Party ( BJP )
2.Bahujan Samaj Party ( BSP )
3.Communist Party of India ( C PI )
4.Communist Party of India ( C PM )
5.Indian National Congress 6.Nationalist Congress Party (
NCP )
NITIN GADKARI (BJP)
Mayawati (BSP)
Ardhendu Bhushan Bardhan (CPI)
Prakash Karat(CPM)
Sonia Gandhi(INC)
Sharad Pawar(NCP)
REGIONAL POLITICAL PARTIES IN INDIA PARTY
RESERVED SYMBOL 1 Assam Gan Parishad Elephant 2
Telugu Desam Party Bicycle 3 DMK Rising Sun 4 All-
India Anna DMK Two Leaves 5 Shiv Sena The Bow and
Arrow 6 National Conference Plough 7 Shiromani Akali
Dal Scales 8 Rastriya Janta Dal Lalten 9 Samajwadi Party
Cycle
1) Ideology of bharatiya Janta Party • The Bharatiya Janata
Party ( Indian People's Party) was founded in 1980 . The
concept of Hindutva has a special place in its ideology,
with the party aiming to transform India in to a modern,
progressive and enlightened nation which draws
inspiration from India's ancient Hindu culture . "The

48. 48
party is pledged to build up India as a strong and
prosperous nation, which is modern, progressive and
enlightened in outlook and which proudly draws
inspiration from India's ancient culture and values and
thus is able to emerge as a great world power playing an
effective role in the commity of Nations for the
establishment of world peace and a just international
order. • The Party aims at establishing a democratic state
which guarantees to all citizens irrespective of caste,
creed or sex, political, social and economic justice,
equality of opportunity and liberty of faith and
expression. • A Ban on Cow Slaughter, to honor the
Hindu tradition of not consuming the flesh of cow, and
prohibiting the consumption of beef.
2) Ideology of Bahujan Samaj Party • The BSP acquired the
status of a national party in 1996 .The ideology of the
Bahujan Samaj Party (BSP) is "Social Transformation
and Economic Emancipation" of the "Bahujan Samaj ",
which comprises of the Scheduled Castes (SCs), the
Scheduled Tribes (STs), the Other Backward Classes
(OBCs) and Religious Minorities such as Sikhs,
Muslims, Christians, Parsis and Buddhists which account
for over 85 per cent of the country's total population. •
It's ideology is based on the argument that the majority
are oppressed by the select upper class. It aims to change
this using the government power. The Scheduled Castes,
the Scheduled Tribes, the other Backward Castes, and

49. 49
the minorities, are the most oppressed and exploited
people in India. Keeping in mind their large numbers,
such a set of people in India is known as the Bahujan
Samaj. The Party organize these masses. • The party
work for these down trodden masses to- a. to remove
their backwardness; b. to fight against their oppression
and exploitation; c. to improve their status in society and
public life; d. to improve their living conditions in day to
day life. • The social structure of India is based on
inequalities created by caste system. The movement of
the Party is geared towards changing the social system
and rebuild it on the basis of equality and human values.
3) Communist Parties • The two communist parties are the
Communist Party of India (CPI) and the Communist
Party of India (Marxist) [CPI(M)] next to the Congress.
They are supporting the United Progressive Alliance
(UPA) government at the Centre from outside. • The
Communist Party is the oldest in India. The communist
movement began in the early twenties and the
Communist Party was founded in 1925. • The
communists assert that the people should be
economically equal and the society should not be divided
into classes of rich and poor. The workers and peasants
and other toiling people who do most of the productive
work for the society, should be given due recognition
and power.

50. 50
4) Indian National Congress • Indian National Congress
(INC) or generally known as the Congress Party is
prominent political player in India. INC came in to
existence in 1885 in Bombay. W.C. Bonnarjee was the
first President of the Indian National Congress. The
congress is ideologically committed to socialism,
secularism and democracy. • Their special emphasis is
on the planned economic development of country in
which the Govt, is expected to play a key role. • The
party enjoyed the support of the common people and
played a very significant role in the freedom struggle.
Thus, party supports common people and ensures
development of a country as a whole.
5) They try to inculcate a feeling of national unity to
eradicate the notion of race, creed and provincial
prejudices. • Seek the co-operation of all the Indians in
its efforts and allow them to take part in the
administrative affairs of the country. • Eradicate poverty
has been a slogan of the Indian National Congress for
long. Their main motive is to find a solution to the social
problems of the country.
6) Nationalist Congress Party The Nationalist Congress
Party became a registered political party when the
Election Commission of India accorded registration to
the party as a political party on 5th June 1999 under
section 29A of the Representation of Peoples' Act.

51. 51
7) Ideology of NCP Party • Maintaining the unity and
integrity of India by building up on the concept of unity
in diversity and by strengthening federalism and
decentralization of power consistent with the Gandhi an
concept of taking it right down to the village level; •
Promoting economic growth and prosperity through
competition, self-reliance, individual initiative and
enterprise with emphasis on equity and social justice; •
Strengthening the Rule of Law and Constitutional Order
based on Parliamentary and participatory democracy; •
Empowerment of the weaker sections through
affirmative action’s in favour of the disadvantaged
sections of the society like Scheduled Castes, the
Scheduled Tribes, Other Backward Classes, Women and
the Disabled. • Promoting science and technology,
including by drawing upon traditional indigenous know-
how and constantly adapting the same to the changing
needs of modern Indian society; monitoring the
application of science and technology so adapted,
immediately for the overall betterment of the people and
ultimately for generation, amongst them, of the spirit of
inquiry and scientific temper; • Strengthening the forces
of peace within the country and in the world; attempting
to secure universal, non-discriminatory disarmament;
maintaining an independent Indian position and identity
in world affairs; and committing to resolving
international conflicts through a strengthened and truly

52. 52
representative United Nations; • Ensuring
institutionalized and democratic functioning of the Party
at all levels by encouraging free exchange of views and
permitting the members of the Party to make their best
individual contribution to enrich the lives of the people
in all spheres;
8) CRISIS OF INDIAN PARTY SYSTEM 1. Multiple
Party systems 2. One Dominant Party System 3. Rise of
Effective Opposition Party 4. Independent Members 5.
Lack of Continuous Contact with the Masses 6. Absence
of Clear-cut Ideology 7. Criminalization of Politics 8.
Existence of many Communal and Regional Parties
What is a political party ideology?
Ideological parties, sometimes called third parties,
are political organizations committed to a comprehensive set of
beliefs or a social/political ideology.
Political Environment is the state, government and
its institutions and legislations and the public and private
stakeholders who operate and interact with or influence the
system.

53. 53
Function of government
1) Basic functions
Provisions for property rights macroeconomic stability
control of diseases safe water, Roads etc
2) Intermediate function
Management of externalities pollution,
Regulation of monopolies provisions for social insurance
(egg... Pensions, Unemployment, benefits)
3) Activists function
Stabilization and promotion of markets
redistribution of assets or incomes
Economic roles of government
In a socialist economy, the function of government is
entirely different from the function of government in a
capitalist economy. ... On the other hand, in a socialist
economy, the government plays a comprehensive role in

54. 54
almost all economic activities, such as production, distribution,
and consumption, of a nation.
The six roles of government in a market economy are:
(1) Provide for a stable set of institutions and rules;
(2) promote effective and workable competition;
(3) correct for externalities;
(4) ensure economic stability and growth;
(5) Provide for public goods and services; and
(6) Adjust for undesired market results.
On the basis of the ownership and distribution of
resources, the economic system can be grouped into three
categories, which are shown in Figure-1:
Let us learn about the different types of an economic system (as
shown in Figure-1).
Capitalist Economy:
A capitalist economy refers to an economy that works
on the principle of the free market mechanism. It is also termed
as laissez faire system. In a capitalist economy, the role of

55. 55
government is very limited. The main functions of government,
as given by Adam Smith, are to maintain law and order in a
country, make national defense stronger, and regulate money
supply. According to Smith, the market system administers
various economic functions. However, over a period of time, the
functions of government in an economy have increased.
In a capitalist economy, the main responsibilities performed by
the government are as follows:
a. Developing and sustaining the free market mechanism system
b. Eliminating any kind of restrictions on the working of free
competitive market
c. Increasing the effectiveness of free competitive market system
through various measures
In the view of Meade, following are the responsibilities of a
government in a capitalist economy:
a. Regulating and controlling various economic situations, such
as inflation and deflation, by formulating and implementing
various fiscal and monetary measures
b. Controlling the power of monopolistic and large corporations
to elude various economic problems, such as unemployment and
inequitable distribution of resources
c. Possessing the ownership of public utilities, such as railways,
education, medical care, water, and electricity, which are
required by an economy as a whole
d. Prohibiting discrimination among individuals and providing
them equal educational and job opportunities
e. Limiting restrictive trade practices and power of trade unions
f. Maintaining law and order, administering justice, and
safeguarding the freedom of individuals in an economy
g. Supporting private ventures in an economy

56. 56
h. Creating central planning body that helps in the development
of an economy on a larger scale
i. Handling problems to environment, extinction of natural
resources, and growth of population
Therefore, we can conclude that the major role of government in
a capitalist economy is to control and encourage the free market
mechanism. In addition, the government should encourage
private ventures for safeguarding the future of an economy.
Socialist Economy:
In a socialist economy, the function of government is
entirely different from the function of government in a capitalist
economy. In a capitalist economy, the government acts as a
regulatory and complementary body. On the other hand, in a
socialist economy, the government plays a comprehensive role
in almost all economic activities, such as production,
distribution, and consumption, of a nation. In a socialist
economy, not only the ownership of private property is allowed
to a limited amount, but the concept of free market mechanism
is also eliminated.
The private ownership of resources, in a socialist
economy, is changed by state ownership. In addition, in a
socialist economy, the government plans and regulates all the
economic activities centrally at a state level. Moreover, the
decisions related to production, allocation of resources,
employment, pricing, and consumption, are completely
dependent on the government or its central planning authority.
In a socialist economy, individual’s decisions are totally
dependent on the limit decided by the government.
For example, individuals are given the freedom of
choice, but it is subject to the limitations of policy framework of
the socialist economy. The countries in which socialist economy

57. 57
is adopted are China, Yugoslavia, Czechoslovakia, and Poland.
The objective of the government in a socialist economy is same
as in the capitalist economy, such as growth, efficiency, and
maintaining justice. However, the ways adopted by the socialist
economy to achieve those objectives are different from the
capitalist economy.
For example, in the capitalist economy, the main
force of motivation is the private profit, whereas in the social
economy, the encouraging factor is the social welfare. The
socialist way of managing an economy facilitates the elimination
of various evil activities of the capitalist economy, such as labor
exploitation, unemployment, and inequality in the society. This
is only the classical view of the socialist economy.
However, over a passage of time, the scope of socialist economy
has also been reduced due to various reasons, such as
prohibition of profits from private ventures, inadequate
utilization of resources, and restrictions on economic
development as noted by Union of Soviet Socialist Republics
(USSR).
Mixed Economy:
Mixed economy refers to an economy that-comprises
the features of both, the socialist economy and capitalist
economy. This implies that working of a mixed economy is
based on the principles of the free market mechanism and
centrally planned economic system.
In a mixed economy, the private sector is encouraged
to work on the principle of the free market mechanism under a
political and economic policy outline decided by the
government. On the other hand, the public sector, in a mixed
economy, is involved in the growth and development of public
utilities, which is based on the principle of socialist economy.

58. 58
In a mixed economy the public sector comprises
certain industries, businesses, and activities that are completely
owned, managed, and operated by the government. Moreover, in
a mixed economy, certain laws have been enacted by the
government to restrict the entry of private entrepreneurs in
industries reserved for the public sector.
Apart from this, the government also strives hard
for the expansion of the public sector by nationalizing various
private ventures. For example, in India, the government has
nationalized several private banks, which has resulted in the
expansion of the public sector. Besides working for the growth
and development of the public sector, the government, in a
mixed economy, controls the activities of the private sector by
implementing various monetary and fiscal policies.
It should be noted here that the free market
mechanism is actually a form of a mixed economy. This is
because of the reason that in free market mechanism, both the
private and public sectors exist simultaneously. However, public
sector in a free market mechanism economy is different from the
public sector of the mixed economy.
In free market mechanism economy, the public
sector is responsible to maintain law and order in a country,
make national defense stronger, and regulate money supply. On
the other hand the public sector of a mixed economy is involved
almost all economic activities, such as production, distribution,
and consumption. For example, the public sector of an economy,
such as India, is based on the socialist pattern of society.
Economic roles of government

59. 59
1) Regulatory roles Wide Entry into the business conduct of
the business final results
Important for the proper functioning of a market economy
Objective of Regulatory Functions of Government. By
regulating the business, the government aims at:
Developing small scale industries and promote
entrepreneurship. Promote interests of the weaker sections
of society.
2) Entrepreneurial role
Direct participation of government in business
usually in socialist and developing countries .Commonly
occurs when there is lack of private entrepreneurship and
capital
Entrepreneurs occupy a central position in a
market economy. For it's the entrepreneurs who serve as
the spark plug in the economy's engine, activating and
stimulating all economic activity. Because it's
entrepreneurial energy, creativity and motivation that
trigger the production and sale of new products and
services.
3) Planning Roles
National necessity for proper utilization of scarce resources
Formation of development objectives
In its role as a planner, the government indicates various
priorities in the Five Year Plans and also the sectoral allocation
of resources. The government tries to manage the economy and
its business activities through the exercise of planning.
Planning is the most important activity in a modern mixed
economy

60. 60
4) Promotional role
More important in developing countries speedy
development of industry and commerce requires
development of infrastructure
The promotional role played by government is very important
in developed as well as developing countries. Thus, considering
the whole of its activities, a government does more to assist and
to help develop industrial, labour, agricultural and consumer
interests than it does to regulate them.
Economic roles of government in India
What is the economic role of government?
Governments provide the legal and social
framework, maintain competition, provide public goods and
services, redistribute income, correct for externalities, and
stabilize the economy. Over time, as our society and economy
have changed, government activities within each of these
functions have expanded.
Role of Government in Economic Development of a Country
In modern times, State participation in economic
activity can hardly be a matter of disagreement.
The free play of economic forces, even in highly developed
capitalist countries, has often meant large unemployment and
instability of the economic system.
In the advanced countries, State intervention has
been invoked to ensure economic stability and full employment
of resources. State action is all the more inevitable in under-

61. 61
developed economies which are struggling hard to get rid of
poverty and to attain higher living standards.
Accordingly, Governments are playing a vital role in the
development of under-developed economies.
Their role is all the more remarkable in the following respects:
(i) Comprehensive Planning:
In an under-developed economy, there is a circular
constellation of forces tending to act and react upon one another
in such a way as to keep a poor country in a stationary state of
under-development equilibrium. The vicious circle of under-
developed equilibrium can be broken only by a comprehensive
government planning of the process of economic development.
Planning Commissions have been set up and institutional
framework built up.
(ii) Institution of Controls:
A high rate of investment and growth of output
cannot be attained, in an under-developed country, simply as a
result of the functioning of the market forces. The operation of
these forces is hindered by the existence of economic rigidities
and structural disequilibria. Economic development is not a
spontaneous or automatic affair.
On the contrary, it is evident that there are
automatic forces within the system tending to keep it moored to
a low level. Thus, if an underdeveloped country does not wish to
remain caught up in a vicious circle, the Government must
interfere with the market forces to break that circle. That is why
various controls have been instituted, e.g., price control,
exchange control, control of capital issues, industrial licensing.
(iii) Social and Economic Overheads:
In the initial phase, the process of development,
in an under-developed country, is held up primarily by the lack

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of basic social and economic overheads such as schools,
technical institutions and research institutes, hospitals and
railways, roads, ports, harbours and bridges, etc. To provide
them requires very large investments.
Such investments will lead to the creation of external
economies, which in their turn will provide incentives to the
development of private enterprise in the field of industry as well
as of agriculture. The Governments, therefore, go all out in
building up the infrastructure of the economy for initiating the
process of economic growth.
Private enterprise will not undertake investments in social
overheads. The reason is that the returns from them in the form
of an increase in the supply of technical skills and higher
standards of education and health can be realized only over a
long period. Besides, these returns will accrue to the whole
society rather than to those entrepreneurs who incur the
necessary large expenditure on the creation of such costly social
over-heads.
Therefore, investment in them is not profitable from the
standpoint of the private entrepreneurs, howsoever productive it
may be from the broader interest of the society. This indicates
the need for direct participation of the government by way of
investment in social overheads, so that the rate of development
is quickened.
Investments in economic overheads require huge outlays of
capital which are usually beyond the capacity of private
enterprise. Besides, the returns from such investments are quite
uncertain and take very long to accrue. Private enterprise is
generally interested in quick returns and will be seldom prepared
to wait so long.

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Nor can private enterprise easily mobilize resources for building
up all these overheads. The State is in a far better position to
find the necessary resources through taxation borrowing and
deficit-financing sources not open to private enterprise. Hence,
private enterprise lacks the capacity to undertake large-scale and
comprehensive development. Not only that, it also lacks the
necessary approach to development.
Hence, it becomes the duty of the government to build up the
necessary infrastructure.
(iv) Institutional and Organizational Reforms:
It is felt that outmoded social institutions and defective
organisation stand in the way of economic progress. The
Government, therefore, sets out to introduce institutional and
organizational reforms. We may mention here abolition of
zamindari, imposition of ceiling on land holdings, tenancy
reforms, introduction of co-operative farming, nationalisation of
insurance and banks reform of managing agency system and
other reforms introduced in India since planning was started.
(v) Setting up Financial Institutions:
In order to cope with the growing requirements for finance,
special institutions are set up for providing agricultural,
industrial and export finance. For instance, Industrial Finance
Corporation, Industrial Development Bank and Agricultural
Refinance and Development Corporation have been set up in
India in recent years to provide the necessary financial-
resources.
(vi) Public Undertakings:
In order to fill up important gaps in the industrial structure of the
country and to start industries of strategic importance,
Government actively enters business and launches big
enterprises, e.g., huge steel plants, machine-making plants,

64. 64
heavy electrical work and heavy engineering works have been
set up in India.
(vii) Economic Planning:
The role of government in development is further highlighted by
the fact that under-developed countries suffer from a serious
deficiency of all types of resources and skills, while the need for
them is so great. Under such circumstances, what is needed is a
wise and efficient allocation of limited resources. This can only
be done by the State. It can be done through central planning
according to a scheme of priorities well suited to the country’s
conditions and need.
Economic roles of government in India
The constitutional environment Indian constitution incorporates
matters that are economically very significant
The Constitution guarantees six fundamental rights to Indian
citizens as follows:
Fundamental right
(i) Right to equality,
(ii) Right to freedom,
(iii) Right against exploitation,
(iv) Right to freedom of religion,
(v) Cultural and educational rights, and
(vi) Right to property
(vii) Right to constitutional remedies.

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Seven fundamental rights were originally provided by the
Constitution – right to equality, right to freedom, right against
exploitation, right to freedom of religion, cultural and
educational rights, right to property and right to constitutional
remedies.
Fundamental Rights are the basic rights of the
common people and inalienable rights of the people who enjoy it
under the charter of rights contained in Part III(Article 12 to 35)
of Constitution of India. It guarantees civil liberties such that all
Indians can lead their lives in peace and harmony as citizens of
India. These include individual rights common to most liberal
democracies, such as equality before law, freedom of speech and
expression, religious and cultural freedom and peaceful
assembly, freedom to practice religion, and the right to
constitutional remedies for the protection of civil rights by
means of writs such as habeas corpus, Mandamus, Prohibition,
Certiorari and Quo Warranto. Violation of these rights result in
punishments as prescribed in the Indian Penal Code or other
special laws, subject to discretion of the judiciary. The
Fundamental Rights are defined as basic human freedoms that
every Indian citizen has the right to enjoy for a proper and
harmonious development of personality. These rights
universally apply to all citizens, irrespective of race, place of
birth, religion, caste or gender. Though the rights conferred by
the constitution other than fundamental rights are equally valid
and their enforcement in case of violation shall be secured from
the judiciary in a time consuming legal process. However, in
case of fundamental rights violation, the Supreme Court of India
can be approached directly for ultimate justice per Article 32.

66. 66
The Rights have their origins in many sources, including
England's Bill of Rights, the United States Bill of Rights and
France's Declaration of the Rights of Man.
The six fundamental rights recognized by the Indian
constitution are the right to equality, right to live, right to
freedom, right against exploitation, right to freedom of religion,
cultural and educational rights, right to constitutional remedies.
The right to equality includes equality before law, prohibition of
discrimination on grounds of religion, race, caste, gender or
place of birth, and equality of opportunity in matters of
employment, abolition of untouchability and abolition of tit;les.
The right to freedom includes freedom of speech and expression,
assembly, association or union or cooperatives, movement,
residence, and right to practice any profession or occupation,
right to life and liberty, protection in respect to conviction in
offences and protection against arrest and detention in certain
cases. The right against exploitation prohibits all forms of forced
labour, child labour and trafficking of human beings. The right
to freedom of religion includes freedom of conscience and free
profession, practice, and propagation of religion, freedom to
manage religious affairs, freedom from certain taxes and
freedom from religious instructions in certain educational
institutes. Cultural and educational rights preserve the right of
any section of citizens to conserve their culture, language or
script, and right of minorities to establish and administer
educational institutions of their choice. The right to
constitutional remedies is present for enforcement of
Fundamental Rights. The right to privacy is an intrinsic part of
Article 21(Right to Freedom) that protects life and liberty of the
citizens.

67. 67
Fundamental rights for Indians have also been aimed
at overturning the inequalities of pre-independence social
practices. Specifically, they have also been used to abolish
untouchability and thus prohibit discrimination on the grounds
of religion, race, caste, sex, or place of birth. They also forbid
trafficking of human beings and forced labour (a crime). They
also protect cultural and educational rights of religious and
linguistic minorities by allowing them to preserve their
languages and also establish and administer their own education
institutions. They are covered in Part III (Articles 12 to 35) of
Indian constitution. Some features of Indian Constitution:
1. It provides safeguard if any political leader misuses his
power.
2. It also provides safeguard against discrimination.
3. It says "all persons are equal before law."
4. It provides fundamental rights.
Introduction To Human Rights and Fundamental Rights
The Rights and Fundamental Rights are sections of the
Constitution of India that provides people with their rights.
These Fundamental Rights are considered as basic human rights
of all citizens, irrespective of their gender, caste, religion or
creed. etc. These sections are the vital elements of the
constitution, which was developed between 1947 and 1949 by
the Constitution of India.
There are six fundamental rights in India. They are
Right to Equality, Right to Freedom, Right against Exploitation,

68. 68
Right to Freedom of Religion, Cultural and Educational Rights,
and Right to Constitutional Remedies.
1. Right to Equality
Right to Equality ensures equal rights for all the
citizens. The Right to Equality prohibits inequality on the basis
of caste, religion, place of birth, race, or gender. It also
ensures equality of opportunity in matters of public employment
and prevents the State from discriminating against anyone in
matters of employment on the grounds only of religion, race,
caste, sex, descent, place of birth, place of residence or any of
them.
2. Right to Freedom
Right to freedom provides us with various rights.
These rights are freedom of speech, freedom of expression,
freedom of assembly without arms, freedom of movement
throughout the territory of our country, freedom of association,
freedom to practice any profession, freedom to reside in any part
of the country. However, these rights have their own restrictions.
3. Right against Exploitation

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Right against Exploitation condemns human trafficking,
child labor, forced labor making it an offense punishable by law,
and also prohibit any act of compelling a person to work without
wages where he was legally entitled not to work or to receive
remuneration for it. Unless it is for the public purpose, like
community services or NGO work.
4. Right to Freedom of Religion
Right to Freedom of Religion guarantees religious
freedom and ensures secular states in India. The Constitutions
says that the States should treat all religions equally and
impartially and that no state has an official religion. It
also guarantees all people the freedom of conscience and the
right to preach, practice and propagate any religion of their
choice.
5. Cultural and Educational Rights
Cultural and Educational Rights protects the rights of
cultural, religious and linguistic minorities by enabling them to
conserve their heritage and protecting them against

70. 70
discrimination. Educational rights ensure education for everyone
irrespective of their caste, gender, religion, etc.
6. Right to Constitutional Remedies
Right to Constitutional Remedies ensures citizens to go
to the supreme court of India to ask for enforcement or
protection against violation of their fundamental rights. The
Supreme Court has the jurisdiction to enforce the Fundamental
Rights even against private bodies, and in case of any violation,
award compensation as well to the affected individual.
The Supreme Court recently added Right to Privacy in the
fundamental rights.
The directive principles
The Directive Principles of State Policy (DPSP) are the
guidelines or principles given to the federal institutes governing
the state of India, to be kept in citation while framing laws and
policies. These provisions, contained in Part IV (Article 36-51)
of the Constitution of India, are not enforceable by any court,
but the principles laid down therein are considered irrefutable in
the governance of the country, making it the duty of the State[1]
to apply these principles in making laws to establish a just
society in the country. The principles have been inspired by the
Directive Principles given in the Constitution of Ireland relate to

71. 71
social justice, economic welfare, foreign policy, and legal and
administrative matters.
Directive Principles are classified under the following
categories economic and socialistic, political and administrative,
justice and legal, environmental, protection of monuments and
peace and security.
1) Directions to legislature and executive regarding the
exercise of their authority to ensure respect for these
principles
2) Constitution direct the state to apply these principles in
making laws
Classification of directive principles of state policy
Directive principles of state policy
1) Socialist principles
Articles (38, 39, 39A, 41, 42, 43, 43A, 47)
2) Gandhian Principle
Articles (40, 43, 43B, 46, 47, 48)
3) Liberal Principle
Articles (44, 45, 48, 48A, 49, 50, 51)
Economic environment
External factors in a business market and the broader economy
that can influence a business
Microeconomic environment
Affects business decision making such as individual actions of
firms and consumers
Affect an entire economy and all of its participants
Macroeconomic influences are broad economic factors, which
include such things as

72. 72
1) Interest rates
2) Taxes
3) Inflaction
4) Currency exchange rates
5) Consumer discretionary income
6) Saving rates
7) Consumer confidence level
8) Unemployment rate
9) Recession
10) Depression
Economic environment
Nature of economy
The stage of development of the economy
Economic resources
The level of income
The distribution of income and assets
Global economic linkages
Facets of economic environment
Economic environment
Nature of economy
The degree on which the economic activity are performed will
result in the generation of income from resources, this determine
the standard of living and development of the economy.
Nature of
economy
Structure of
economy
Economic
policy
Economic
stability and
instability
Economic
Opportunity
and threats

73. 73
Economy can be classified on the basics of
1) Income
2) GDP
3) Adjusted GNP
4) Industrialization
Structure of economy
Economic structure is a term that describes the changing balance
of output, trade ,income and employment drawn from different
economic sectors –Ranging from primary (farming ,fishing
mining etc) to secondary (manufacturing and construction
industries ) to tertiary and quaternary sectors (tourism ,banking
,software industries )
Types of changes
1) Incremental structural change
2) Innovational structural change
1) Incremental structural change
It results from the extension or integration of
markets or an increase in the possession of various factors of
production
2) Innovational structural change
It is achieved through the establishment or
organization of a new exchange relationship and through the
exercise of entrepreneurship quality
Where do structural change occur?
Sectoral composition

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Sector 2013 2014
Agriculture 17.97 17.01
Industry 30.73 30.02
Tertiary 51.31 52.97
Occupation
Labor force By occupation
Agriculture 49%
Industry 20%
Services 31%(2012 est)
Economic Policies
Economic policy refers to the actions that governments take in
the economic field .It covers the systems for setting levels of
taxation ,government budgets, the money supply and interest
rates as well as the labour market, national ownership, and many
other areas of government interventions into the economy
.Policies have a twofold objective
1) First at macro level
2) Second to control unwanted expansion
Example
New industrial policy 1991
1)The industry have been freed to large extent from the
licenses and others controls
2)Effort to encourage foreign investment

75. 75
3)Policies for correcting regional imbalance
4)Policies to regulate monopolistictendencies
5)Policies for balanceindustrial structure
Economic stability and instability
Economic stability refers to an absence of excessive fluctuations
in the macro economy .An economy with fairly constant output
growth and low and stable inflation would be considered
economically stable
For the success of business, It is essential to understand the
phase of business cycle
1) Recession or depression
a) Financial crises in Thailand -1990
b) Devaluation of Yuan
2) Level of stability
a) Syrian economy coming to a standstill due to political
turmoil
3) Recovery and boom
a) Prices rise
b) Employment
c) Interest rate
Economic opportunities and treats
These are related to domestic economic conditions, polices and
the economic health of the rest of the world sector.
Threats

76. 76
Arise from micro and macro environment that determines the
existence of the business.
Eg. Brain drain affect IT Sector .BPO sector moving from India
Opportunities
Make in India, Design in India, Digital India
Natural economy refers to a type of economy in which
money is not used in the transfer of resources among
people. It is a system of allocating resources through
direct bartering, entitlement by law, or sharing out
according to traditional custom
Nature of the economy
Low income –gross national income ($ 1,045 or less)
High Income –Gross national income ($ 12,376 and above)
Structure of economy
Economic structure is a term that describes the changing
balance of output, trade, incomes and employment drawn from
different economic sectors – ranging from primary (farming,
fishing, mining etc) to secondary (manufacturing and
construction industries) to tertiary and quaternary sectors
(tourism, banking, software industries). Changes in economic
structure are a natural feature of economic life but they bring
challenges in terms of reallocating factors of production. For
example, a shift in production and jobs in one sector can lead to
problems of structural unemployment.

77. 77
Economic conditions
1) Growth
2) Recession
3) Stability
Economic conditions refer to the present state of the
economy in a country or region. ... Economic conditions are
considered to be sound or positive when an economy is
expanding and are seen as adverse or negative when an
economy is contracting
BREAKING DOWN Economic Conditions
A country's economic conditions are influenced by
numerous macroeconomic and microeconomic factors, including
monetary and fiscal policy, the state of the global economy,
unemployment levels, productivity, exchange rates, inflation and
many others.
How Economic Conditions Are Measured
Economic data is released on a regular basis,
generally weekly or monthly and sometimes quarterly. Some
economic indicators like the unemployment rate and GDP
growth rate are monitored closely by market participants, as they
help to make an assessment of economic conditions and
potential changes in them. A plethora of economic indicators
can be used to define the state of the economy or economic
conditions, including the unemployment rate, levels of current
account and budget surpluses or deficits, GDP growth rates and
inflation rates.

78. 78
Generally speaking, economic indicators can be categorized as
leading, coincident or lagging. That is, they describe likely
future economic conditions, current economic conditions or
conditions of the recent past. Economists are typically most
interested in leading indicators as a way to understand what
economic conditions will be like in the next three to six months.
For example, indicators like new orders for manufactured goods
and new housing permits indicate the pace of future economic
activity as it relates to the rate of manufacturing output and
housing construction.
Other indicators that can forecast future economic conditions
include consumer confidence index, new factory orders (the new
orders for goods by retail and other businesses) and business
inventories (the inventories maintained by businesses to keep up
with demand).
Why Economic Conditions Matter for Investors and
Businesses
Indicators of economic conditions provide important
insights to investors and businesses. Investors use indicators of
economic conditions to adjust their views on economic growth
and profitability. An improvement in economic conditions
would lead investors to be more optimistic about the future and
potentially invest more as they expect positive returns. The
opposite could be true if economic conditions worsen. Similarly,
businesses monitor economic conditions to gain insight into
their own sales growth and profitability. A fairly typical way of
forecasting growth would be to use the previous year's trend as a
baseline and augment it with the latest economic data and
projections that are most relevant to their products and services.
For example, a construction company would look at economic
conditions in the housing sector to understand whether

79. 79
momentum is improving or slowing and adjust its business
strategy accordingly.
Economic changes. ... Other economic changes that affect
business include changes in the interest rate, wage rates, and
the rate of inflation (i.e. general level of increase in prices).
Businesses will be more encouraged to expand and take risks
when economic conditions are right, e.g. low interest rates
and rising demand.
Economic policies
1) Industrial policy
2) Trade policy
3) Foreign exchange policy
4) Monetary policy
5) Fiscal policy
6) Foreign investment and technology policy
Economic Policy. An economic policy is a course of action that
is intended to influence or control the behavior of the economy.
... Examples of economic policies include decisions made about
government spending and taxation, about the redistribution of
income from rich to poor, and about the supply of money.
The effectiveness of economic policies can be assessed in one of
two ways, known as positive and normative economics.
Positive and normative economics.
Positive economics attempts to describe how the economy and
economic policies work without resorting to value judgments
about which results are best. The distinguishing feature of
positive economic hypotheses is that they can be tested and

80. 80
either confirmed or rejected. For example, the hypothesis that
“an increase in the supply of money leads to an increase in
prices” belongs to the realm of positive economics because it
can be tested by examining the data on the supply of money and
the level of prices.
Normative economics involves the use of value judgments to
assess the performance of the economy and economic policies.
Consequently, normative economic hypotheses cannot be tested.
For example, the hypothesis that “the inflation rate is too high”
belongs to the realm of normative economics because it is based
on a value judgment and therefore cannot be tested, confirmed,
or refuted. Not surprisingly, most of the disagreements among
economists concern normative economic hypotheses.
Goals of economic policy. The goals of economic policy
consist of value judgments about what economic policy should
strive to achieve and therefore fall under the heading of
normative economics. While there is much disagreement about
the appropriate goals of economic policy, several appear to have
wide, although not universal, acceptance. These widely accepted
goals include:
Economic growth: Economic growth means that the incomes of
all consumers and firms (after accounting for inflation) are
increasing over time.
Full employment: The goal of full employment is that every
member of the labor force who wants to work is able to find
work.
Price stability: The goal of price stability is to prevent increases
in the general price level known as inflation, as well as
decreases in the general price level known as deflation.

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Policy makers undertake three main types of economic policy:
Fiscal policy: Changes in government spending or taxation.
Monetary policy: Changes in the money supply to alter the
interest rate (usually to influence the rate of inflation). Supply-
side policy: Attempts to increase the productive capacity of the
economy.
Scope and role of different sectors like public private ,joint
,cooperative large ,medium ,small, tiny
Trade policy
Trade policy refers to the regulations and agreements
that control imports and exports to foreign countries. Learn more
about trade agreements including NAFTA, CAFTA, and the
Middle Eastern Trade Initiative, as well as regulations, farm
subsidies, and tariffs.
a) Imports and exports
b) Regulations
c) Foreign exchange policy
d) Cross border traffic of capital
What is trade policy?
a) Trade policy (or commercial policy ) is a set of rules and
regulations that are intended to change international trade
flows, particularly to restrict imports
b) The purpose of trade policy is to help a nation’s
international trade run more smoothly by setting clear