Business environment

M.COM(PREVIOUS) II SEMESTERBADRUKA COLLEGE P.G. CENTRE

BUSINESS ENVIRONMENT AND POLICY

BUSINESS ENVIRONMENTBusiness Environment – Concept: Business environment refers to all the forces

which have a bearing on the functioning of a business. It includes all those aspects of the surroundings of a business enterprise and circumstances of a business unit that affect or influence its activities and operations and decide its effectiveness.

UNIT-I : INTRODUCTION

Business environment is aggregative as it includes the totality of all internal and external forces that influence the working and decision making of an enterprise. Different elements of business environment are closely interrelated and interdependent. A change in one element affects the other elements. It is a relative concept as it differs from country to country and region to region.

Nature Of Business Environment

Business environment changes over time and so it is inter-temporal. It is largely uncertain, as it is difficult to forecast the future environment. It is contextual and provides the macro framework within which the business firm operates. The environment in which a business operates exerts a great deal of influence on its the success and working.

Nature Of Business Environment

Long-run survival: Knowledge of Business environment is necessary for the long-run survival of business units.

First Mover Advantage: Awareness of the environment helps

an enterprise to take advantage of early opportunities instead of losing them to competitors.

Early Warning Signal: Environmental awareness serves as an early warning signal and it makes a firm aware of the impending threat or crisis so that it can take timely action.

Customer Focus: Environmental understanding makes the management sensitive to the changing needs and expectations of the customers

Significance of Business Environment

Strategy Formulation: Environmental monitoring provides the relevant knowledge about business environment and this information is useful for strategy making.

Helps Change Agents: In order to decide the direction and nature of change, business leaders, who are the change agents, need to understand the environmental forces through environmental scanning.

Public Image: A business firm which is sensitive to its environment and

responsive to the aspirations of the public has a better public image Continuous Learning: Firms which analyze the environment of business

continuously are never caught unawares, can react in the right way and thereby can increase the success of their organizations.

Significance of Business Environment

Business environment can be broadly divided into internal environment and external environment.

Internal Environment refers to the factors

existing within a business firm. These factors are controllable because the enterprise has control over these factors.

Types of Business Environment:

The internal environmental factors are: the culture and the objectives of the organization, the top management structure, the power relationship between the board and the chief executive, the image of the company and the quality and quantity of human resources of an organization.

The Internal Environmental Factors

External Environment consists of forces and factors outside an enterprise. These factors are beyond the control of a firm and are therefore uncontrollable.

External Environment

The external environment of business can be divided into Micro and Macro environment.

Micro Environment: Micro environment consists of the groups in the company’s immediate operating environment which have a direct bearing on the company.

Micro Environment and Macro Environment:

It includes those individuals, groups and agencies with which the organization comes into direct and frequent contact in the course of its functioning. The micro environment of a firm in an industry may be different from that of another. Players in the micro environment do not affect different players in the same way. For example, suppliers give more concessions to big firms than to small firms.

Micro Environmental Factors:

1.Customers: Customers are the most important

element in the micro environment of a business. The present day customer is educated and aware of his rights. To be successful, a company must understand and meet the needs of its customers. After the opening of the economy, the customer environment is becoming global in India. To sustain the demand for a product, it is better for a company to have a diversified customer base in terms of geographical areas and customer groups such as individuals, corporates and government.

Elements of Micro Environment:

2. Competitors: Business firms face direct competition from other firms that produce similar products (competition among brands) and also indirect competition from firms that try to make the consumer buy one product rather than another. For ex., a refrigerator manufacturing firm faces competition from a washing machine manufacturing firm. With the opening up of the Indian economy, Indian companies are facing competition from both domestic firms and multinational corporations.


3.Suppliers: For a firm to be profitable, it must have uninterrupted supply of raw materials and components of good quality at reasonable prices. Otherwise, production may get disrupted and the company may lose some of its customers permanently. It is risky to depend on a single supplier. So a company must have more than one source of supply of materials.

4.Marketing Intermediaries: Marketing intermediaries like

wholesalers, retailers, distribution firms, agents and advertising companies help a company in promoting its sales. A good distribution network goes a lot way in increasing the sales of a company and hence it is necessary for a company to have an efficient distribution system.


5.Financiers: The financial capacity, policies and attitude towards risk of the financiers affect the availability of finances for a firm in terms of quantity and type of finance. The shareholders, debenture holders, banks and financial institutions are the various financiers of businesses.

6.Publics: Publics include all the groups that have an

actual or potential interest in the company or who influence the company’s ability to achieve its objectives. Environmentalists, media groups, non-governmental organizations and the local community are examples of the publics. These publics can have both a positive and a negative impact on a business firm.


Macro Environment: Macro environment refers to the general environment within which a business firm and the elements in its micro environment operate. Although a firm does not directly interact with the macro environment, macro environmental factors create opportunities for and pose threats to the company. A firm has no control over the macro environmental factors and it has to take them as given. The success of an enterprise depends on its ability to adapt to the macro environment.

Macro Environment

1. Political and Legal Environment: These factors include the constitution of the country, the ideology of the government, nature and extent of bureaucracy, relationship of business with political parties, political stability, election system, law and order, foreign infiltrations, brand image of the country and its leaders , foreign policy, laws governing business, flexibility and adaptability of laws and the judicial system.

Components of Macro Environment :

2. Social and Cultural Environment: The characterizes of the society in which a business firm exists influence its functioning. These factors are: the demographic forces such as the size, composition, mobility and geographical dispersal of the population, social institutions and groups, caste structure and family organization, educational system and literacy rates, customs, beliefs, values and life styles and tastes and preferences of the people.


3. Economic Environment: The main components of the economic environment are: the nature of economic system – capitalist, socialist or mixed economy; occupational distribution of labour force, structure of national output, capital formation, investment pattern, composition of trade and balance/imbalance between different sectors, economic policies such as industrial policy, EXIM policy, monetary policy, fiscal policy etc. The organization and development of the capital market and banking system, economic indices such as gross national product, per capita income, rate of savings and investment, price level, balance of payments position etc. The economic infrastructure and the state of the factor market and product market also influence the environment of business.


4.Technological and Physical Environment: These elements are: the rate of technological change, new processes and equipment, research and development systems.

5.Natural Environment: The climatic conditions, availability of natural and other resources, ecological system and levels of pollution affect the environment of business.

Policy Environment: Economic policies of the government play a very significant role in determining the economic environment of business in a country. Broadly, these policies are classified under four heads: 1. industrial policy 2. trade policy 3. monetary policy and 4. fiscal policy.

POLICY ENVIRONMENT

Industrial policy refers to the government policy towards the establishment, working and management of industries in a country. It covers all those principles, procedures and regulations which control the industrial undertakings of a country. It reflects the government’s attitude towards public and private sectors, foreign capital, technology etc. It defines the respective roles of the public and private sectors and influences the location, size and technology of business undertakings. Industrial policy shapes the pattern of industrialization in a country. A liberal industrial policy is helpful in the development of industries as per the needs of the economy whereas a restricted policy may hamper the establishment and growth of industries.

Industrial Policy:

Trade Policy: Foreign trade policy (trade policy) refers to the policy concerning imports and exports. Therefore, it is also known as EXIM policy. The policy has an important influence on a country’s foreign trade and balance of payments.

Trade Policy

Monetary Policy: Monetary policy refers to the policy regarding money supply and bank credit in the country and it is formulated by the central bank of the country. The monetary policy affects the money supply and the volume of bank credit and thereby influences the volume of demand for goods and services and the price level in the economy. The central bank makes use of various quantitative and qualitative techniques to control the volume of credit. The monetary policy has to reconcile the twin objectives of economic growth and price stability. It also aims at full employment and equilibrium in the balance of payments.

Monetary policy

Fiscal Policy: Fiscal policy refers to the government policy which is concerned with raising public revenue through taxation and other means and deciding on the level and pattern of public expenditure. Fiscal policy aims at price stability, economic growth, full employment and equilibrium in the balance of payments. Fiscal policy operates as a tool of economic stabilization through income and expenditure of the government.

Fiscal Policy:

The first industrial policy of India was enunciated in 1948 and the main thrust of the policy was to lay the foundation of a mixed economy in which both the private and public enterprises would work together to accelerate industrial development in the country. Necessitated by the adoption of the Indian constitution in 1950, initiation of the first five year plan in 1951 and the adoption of the ‘Socialistic Pattern of Society’ as the basic goal of social and economic policy, the government of India came up with a new industrial policy in 1956.

Industrial Policy Resolution, 1956:

to reduce disparities in income and wealth to prevent monopolies and concentration of

economic power to build a large and growing public sector to develop heavy and machine making

industries and to accelerate the rate of industrialization

and economic growth

The objectives of the policy:

Classification of industries: All the industries were classified into three broad categories.

Schedule A – State owned industries. The list includes 17 industries whose future development was the exclusive responsibility of the state. These 17 industries are grouped into five classes: (1) defense industries (2) heavy industries (3) minerals (4) transport and communication and (5) power. Of these, four industries - arms and ammunition, atomic energy, railways and air transport were to be the government monopolies. In the remaining 13 industries, all the new units were to be set up by the state.


Schedule B – Mixed sector to be progressively owned by the state. In this list 12 industries were included. In these industries, the state would increasingly establish new units and the private sector can also set up or expand units.


Schedule C – industries left to the private sector. Even here the state could start any business unit in which it was interested. The main role of the state was to provide facilities to the private sector to develop itself.


The focus of the policy was on cottage and small scale industries, industrial corporates, development of backward areas, education and training of managerial and technical personnel for the growing public sector.

The chief criticisms of the Resolution were that the

private sector was pushed to the background, the right of the state to acquire any industrial undertaking hampered the enthusiasm of the private sector to expand and grow, the state was overburdened and its financial and administrative resources were strained and the private sector took advantage of the loopholes and obtained licenses to set up units in those industries which were the domain of the public sector.


New Industrial Policy, 1991: In tune with the liberalization measures announced during the 1980s, the government announced a New Industrial Policy on July 24, 1991. The major policy changes are as follows:

New Industrial Policy, 1991

Abolition of Industrial Licensing: The policy abolished industrial licensing for 12 of the 18 industries which required licensing. Now licensing is required for only six industries namely alcohol, cigarettes, hazardous chemicals, electronic aerospace, defense equipment and drugs and pharmaceuticals(except bulk drugs). No government approval is necessary for starting a unit in the delicensed industries.


Public Sector’s Role Diluted: This policy reduced the number of industries reserved for the public sector from 17 to eight. Namely (1) arms and ammunition, (2) atomic energy (3) coal and lignite, (4) mineral oils, (5) mining of iron ore, certain other ores, gold and diamonds (6) mining of copper, lead, zinc and certain other metals (7) minerals specified in the schedule to Atomic energy and (8) rail transport. Over the years, five industries were from this list and now the industries that are reserved for the public sector are only three namely, atomic energy, minerals specified in schedule to atomic energy and rail transport.


MRTP Limit Removed: Under the MRTP Act, all firms with assets above a certain limit (Rs. 100 crores since 1985) were termed as monopoly houses. These firms were permitted to enter select industries only and proposals for expansion required separate approvals. The new policy scrapped the threshold limit of assets in respect of monopoly houses and dominant undertakings as it was coming in the way of the growth of these undertakings.


Free Entry to Foreign Investment and Technology: The policy specified a list of high technology and high-investment priority industries wherein automatic permission was to be given for foreign direct investment upto 51 per cent foreign equity. These industries mainly included capital goods industries, metallurgic industries, food processing and certain service sector industries having high export potential. The duties on imports of most capital goods were removed/drastically reduced.


Other Liberalization Measures: The other liberalization measures are liberalization of the industrial location policy, abolition of phased manufacturing programme and the removal of the mandatory convertibility clause whereby banks and financial institutions had the right to convert loans into equity, if necessary.


The benefits expected from the policy include the reduction in project cost, time and labour involved in getting licenses, increase in the efficiency of industries because of foreign technology, freeing the resources locked up in sick public sector units for more productive uses and improved efficiency of the public sector because of the stock market discipline and curbing anti-competitive behaviour by large undertakings.

Appraisal of the New Industrial Policy:

The down side of the policy includes the following aspects:

No evidence of positive impact on industrial growth Decline in the growth rate of capital goods industries threat from foreign investment Dangers of business colonization MNCs operating more as traders and not as

manufacturers and not investing in Research in India and MNCs sending obsolete technology to India

Personalistic relationships with the government influencing the operations of businesses.

Appraisal of the New Industrial Policy:

Business environment

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