Class12 BusinessStudies1 Unit03 NCERT TextBook EnglishEdition

7/30/2019 Class12 BusinessStudies1 Unit03 NCERT TextBook EnglishEdition

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3BUSINESS ENVIRONMENT CHAPTERAfter studying thischapter you will be ableto:

n Explain the meaning ofbusiness environment;

n Discuss theimportance of

business environment;n Describe the various

elements of businessenvironment; and

n Examine theeconomicenvironment in Indiaand the impact ofGovernment policieson business andindustry.

L E A R N I N G

O B J E C T I V E SThe soft-drinks giants, Pepsico and Coca-Cola,suffered a decline in sales of colas in India in thebeginning of the year 2006 after an environmental

group, Centre for Science and Environment (CSE)claimed to have found pesticides in their drinksupto 50 times the permissible health limits. Thesecompanies issued a number of press statements andconducted many publicity compaigns in India claiming

that their beverages were perfectly safe. The UnionHealth Ministrys expert committee also observes thatCoke and Pepsi were safe. CSE, in turn, criticised theexpert committees findings and said that 11 of Cokeand Pepsi drinks contained average pesticide levels

that were 24 times higher than the limits agreed bythe Indian government. Despite health ministrysclean chit to colas, several States continue to banor restrict Coke and Pepsi. However, the pesticidecontroversy adversely affected the sales of both Cokeand Pespi as consumers started watching their dietmore closely. Organic food products suddenly becamepopular as the healthier option. By definition, organicmeans fruits, vegetables, foodgrains and processedproducts that have been produced with no pesticide

or inorganic fertilisers. Meanwhile the soft drinksgiants have been continuously advertising and tryingto convince the consumers about the safety of theirproducts.

The Pepsi Cola controversy raisesan interesting question: Why aresoft drinks giants, Coca-Cola and

Pepsico putting in so much effort onpublicity campaigns in India after the

decline in their sales? The answerlies in the fact that their successis dependent not merely on their

internal management, but also onmany external forces as, for example,


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Business Environment 73

decisions and actions of governments,consumers, other business firms andeven non-government organisations(NGOs) like CSE. In this chapter,

we shall identify certain importantexternal forces (or environmentalconditions) and their impact on theoperations of business enterprises.

MeaningofBusiness

environMentThe term business environmentmeans the sum total of all individuals,institutions and other forces thatare outside the control of a businessenterprise but that may affect itsperformance. As one writer has putit Just take the universe, subtractfrom it the subset that representsthe organisation, and the remainderis environment. Thus, the economic,social, political, technological andother forces which operate outsidea business enterprise are part of itsenvironment. So also, the individualconsumers or competing enterprisesas well as the governments, consumergroups, competitors, courts, media

and other institutions workingoutside an enterprise constitute itsenvironment. The important point isthat these individuals, institutionsand forces are likely to influence theperformance of a business enterprisealthough they happen to exist outsideits boundaries. For example, changesin governments economic policies,

rapid technological developments,political uncertainty, changes in

fashions and tastes of consumersand increased competition in themarket all influence the workingof a business enterprise in important

ways. Increase in taxes by governmentcan make things expensive to buy.

Technological improvements mayrender existing products obsolete.Political uncertainty may create fear

in the minds of investors. Changesin fashions and tastes of consumersmay shift demand in the marketfrom existing products to new ones.Increased competition in the marketmay reduce profit margins of firms.

On the basis of the foregoingdiscussion, it can be said businessenvironment, has the followingfeatures:

(i)Totality of external forces:Business environment is thesum total of all things externalto business firms and, as such,is aggregative in nature.

(ii) Specific and general forces:Business environment includes

both specific and general forces.Specific forces (such as investors,

customers, competitors and supp-liers) affect individual enterprisesdirectly and immediately in theirday-to-day working. General forces(such as social, political, legal andtechnological conditions) haveimpact on all business enterprisesand thus may affect an individualfirm only indirvectly.

(iii) Inter-relatedness: Differentelements or parts of business


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environment are closely inter-related. For example, increasedlife expectancy of people andincreased awareness for healthcare have increased the demandfor many health products andservices like diet Coke, fat-freecooking oil, and health resorts.New health products and serviceshave, in turn, changed peopleslife styles.

(iv) Dynamic nature: Businessenvironment is dynamic in thatit keeps on changing whetherin terms of technological imp-rovement, shifts in consumerpreferences or entry of newcompetition in the market.

(v) Uncertainty: Business envir-

onment is largely uncertain as itis very difficult to predict futurehappenings, especially whenenvironment changes are takingplace too frequently as in thecase of information technologyor fashion industries.

(vi ) Complexity: Since business env-ironment consists of numerous

interrelated and dynamic cond-itions or forces which arise fromdifferent sources, it becomesdifficult to comprehend at once

what exactly constitutes a givenenvironment. In other words,environment is a complex pheno-menon that is relatively easierto understand in parts but

difficult to grasp in its totality.For example, it may be difficult

to know the extent of the relativeimpact of the social, economic,political, technological or legalfactors on change in demand ofa product in the market.

(vii) Relativity: Business environmentis a relative concept since itdiffers from country to countryand even region to region.

Political conditions in the USA,for instance, differ from thosein China or Pakistan. Similarly,demand for sarees may be fairlyhigh in India whereas it may bealmost non-existent in France.

iMportanceofBusiness

environMent

Just like human beings, businessenterprises do not exist in isolation.Each business firm is not an islandunto itself; it exists, survivesand grows within the contextof the element and forces of itsenvironment. While an individualfirm is able to do little to changeor control these forces, it has

no alternative to responding oradapting according to them. A goodunderstanding of environment by

business managers enables themnot only to identify and evaluate, butalso to react to the forces externalto their firms. The importanceof business environment and itsunderstanding by managers can

be appreciated if we consider thefollowing facts:


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(i) It enables the firm to identifyopportunities and gettingthe first mover advantage:Opportunities refer to the positiveexternal trends or changes that

will help a firm to improve itsperformance. Environment prov-ides numerous opportunities for

business success. Early identi-

fication of opportunities helps anenterprise to be the first to exploitthem instead of losing them tocompetitors. For example, MarutiUdyog became the leader in thesmall car market because it wasthe first to recognise the needfor small cars in an environmentof rising petroleum prices anda large middle class populationin India.

(ii) It helps the firm to identifythreats and early warningsignals: Threats refer to theexternal environment trends andchanges that will hinder a firmsperformance. Besides oppor-tunities, environment happensto be the source of many threats.

Environmental awareness canhelp managers to identify variousthreats on time and serve as anearly warning signal. For example,if an Indian firm finds that aforeign multinational is enteringthe Indian market with newsubstitutes, it should act as a

warning signal. On the basis of

this information, the Indian firmscan prepare themselves to meet

the threat by adopting suchmeasures as improving thequality of the product, reducingcost of the production, engagingin aggressive advertising, andso on.

(iii) It helps in tapping usefulresources: Environment is asource of various resources for

running a business. To engagein any type of activity, a businessenterprise assembles variousresources called inputs likefinance, machines, raw materials,power and water, labour, etc.,from its environment includingfinanciers, government andsuppliers. They decide to providethese resources with their ownexpectations to get something inreturn from the enterprise. The

business enterprise supplies theenvironment with its outputssuch as goods and services forcustomers, payment of taxes togovernment, return on financialinvestment to investors and so on.Because the enterprise depends

on the environment as a sourceof inputs or resources and as anoutlet for outputs, it only makessense that the enterprise designspolicies that allow it to get theresources that it needs so that itcan convert those resources intooutputs that the environmentdesires. This can be done better

by understanding what theenvironment has to offer.


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(iv) It helps in coping with rapidchanges:Todays business envir-onment is getting increasinglydynamic where changes aretaking place at a fast pace. It is notthe fact of change itself that is soimportant as the pace of change.

Turbulent market conditions,less brand loyalty, divisions and

sub-divisions (fragmentation)of markets, more demandingcustomers, rapid changes intechnology and intense globalcompetition are just a few of theimages used to describe todays

business environment. All sizesand all types of enterprises arefacing increasingly dynamicenvironment. In order to eff-ectively cope with these signifi-cant changes, managers mustunderstand and examine theenvironment and develop suit-able courses of action.

(v) It helps in assisting in planningand policy formulation: Sinceenvironment is a source of

both opportunities and threats

for a business enterprise, itsunderstanding and analysiscan be the basis for decidingthe future course of action(planning) or training guidelinesfor decision making (policy). Forinstance, entry of new playersin the market, which meansmore competition may make an

enterprise think afresh abouthow to deal with the situation.

(vi) It helps in improvingperformance: The final reasonfor understanding businessenvironment relates to whether ornot it really makes a difference inthe performance of an enterprise.

The answer is that it does appearto make a difference. Manystudies reveal that the future of

an enterprise is closely boundup with what is happening inthe environment. And, the enter-prises that continuously monitortheir environment and adoptsuitable business practices arethe ones which not only improvetheir present performance butalso continue to succeed in themarket for a longer period.

DiMensionsofBusiness

environMent

Dimensions of, or the factors cons-tituting the business environmentinclude economic, social, techno-logical, political and legal conditions

which are considered relevant for

decision-making and improving theperformance of an enterprise. Incontrast to the specific environment,these factors explain the generalenvironment which mostly influencesmany enterprises at the same time.However, management of everyenterprise can benefit from beingaware of these dimensions instead

of being disinterested in them. Forinstance, scientific research has


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discovered a technology that makesit possible to produce an energyefficient light bulb that lasts at leasttwenty times as long as a standard

bulb. Senior managers in the lightingdivisions at General Electric and

Phillips recognised that this discoveryhad the potential to significantly affecttheir unit growth and profitability,So they have carefully followedthe progress on this research andprofitably used its findings. A brief

BusinessEnvironment

EconomicEnvironment

SocialEnvironment

LegalEnvironment

TechnologicalEnvironment

PoliticalEnvironment

Elements of

Business Environment

Components of Economic Environment

n Existing structure of the economy in terms of relative role of privateand public sectors.

n The rates of growth of GNP and per capita income at current and

constant pricesn Rates of saving and investment

n Volume of imports and exports of different items

n Balance of payments and changes in foreign exchange reserves

n Agricultural and industrial production trends

n Expansion of transportation and communication facilities

n Money supply in the economy

n Public debt (internal and external)

n Planned outlay in private and public sectors

Components of Economic Environment


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discussion of the various factorsconstituting the general environmentof business is given below:

(i) Economic Environment: Int-erest rates, inflation rates,changes in disposable incomeof people, stock market indicesand the value of rupee are someof the economic factors that can

affect management practicesin a business enterprise. Shortand long term interest ratessignificantly affect the demandfor product and services. Forexample, in case of constructioncompanies and automobilemanufacturers, low longer-term

rates are beneficial because theyresult in increased spending byconsumers for buying homesand cars on borrowed money.Similarly, a rise in the disposableincome of people due to increasein the gross domestic productof a country creates increasingdemand for products. High

inflation rates generally resultin constraints on businessenterprises as they increasethe various costs of businesssuch as the purchase of rawmaterials or machinery andpayment of wages and salariesto employees.

Activity IECONOMIC ENVIRONMENTRead the newspapers of the past fifteen days and note the changes in any fiveeconomic policies made by the government. Analyse their impact on the workingof business enterprises.RBI is a key regulator of the countrys economic environment since it: n Influences the interest rates n Controls the flow of money in the economy n Regulates the working of banks

(An Extract)n Abolition of Service Tax on all exports of goods and servicesn Simplification of export proceduresn Establishment of Bio-Technology Parks and Special Economic Zones for

handicraftsn Establishment of Fresh Trade and Warehousing Zonesn Doing away with requirement of Bank Guarantee in case of exporters with

turnover of above Rs. 5 Crores.

Salient Features of New Trade Policy (1)Salient Features of New Trade Policy (1)

Based on newspaper reports of August 31st, 05


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and non-discriminatory employ-ment practices. Social trendspresent various opportunities andthreats to business enterprises.For example, the health-and-fitness trend has become popularamong large number of urbandwellers. This has created ademand for products like organic

food, diet soft drinks, gyms,bottled (mineral) water andfood supplements. This trendhas, however, harmed businessin other industries like dairyprocessing, tobacco and liquor.

(iii)Technological Environment:Technological environment inc-ludes forces relating to scientificimprovements and innovations

which provide new ways of prod-ucing goods and services andnew methods and techniques ofoperating a business. For exa-mple, recent technological, adva-nces in computers and electro-nics have modified the ways in

(ii) Social Environment: The socialenvironment of business includethe social forces like customs andtraditions, values, social trends,societys expectations from

business, etc. Traditions definesocial practices that have lastedfor decades or even centuries.For example, the celebration of

Diwali, Id, Christmas, and GuruParv in India provides significantfinancial opportunities for gree-tings card companies, sweets orconfectionery manufacturers,tailoring outlets and many otherrelated business. Values refer toconcepts that a society holds inhigh esteem. In India, individualfreedom, social justice, equalityof opportunity and nationalintegration are examples ofmajor values cherished by allof us. In business terms, these

values translate into freedom ofchoice in the market, businesssresponsibility towards the society

Major Elements of Social Environment

n

Attitudes towards product innovations, lifestyles, occupationaldistribution and consumer preferencesn Concern with quality of lifen Life expectancyn Expectations from the workforcen Shifts in the presence of women in the workforcen Birth and death ratesn Population shiftsn Educational system and literacy ratesn Consumption habitsn

Composition of family

Major Elements of Social Environment


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80 Business Studies

Fashion industry(shifts towards

formal wear)

Food habits(shift towards packed food)

Electronic gadgets(increase in demand

of these gadgets)

Cosmetic industry(increase in demand)

Activity IISOCIAL ENVIRONMENTContact any ten families known to you. Find out the changes in their consumptionhabits over the last five years. Analyse the impact of these changes on the workingof business enterprises.

Impact of shifts with the presence

of women in the workforce


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Because of technological advancement, it has become possible to bookrailway tickets through Internet from home, office etc..

inDian railwaycateringanD tourisM corporationltD.(A Government of India Enterprise)

E-TICKET BOOKING ON THIS WEBSITE - A GUIDE n Register as an individual. Registration is FREE. n Login by entering your user name and password. n The Plan my travel and Book tickets page appears. n Use HELP option for any help required to book tickets.

n Fill in the details, by following

the guidelines given below.


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which companies advertise theirproducts. It is common now tosee CD-ROMs, computerisedinformation kiosks, and Internet/

World Wide Web multimediapages highlighting the virtues ofproducts. Similarly, retailers havedirect links with suppliers whoreplenish stocks when needed.

Manufacturers have flexible man-ufacturing systems. Airline com-panies have Internet and World

Wide Web pages where customerscan look for flight times, desti-nations and fares and book theirtickets online. In addition, cont-inuing innovations in differentscientific and engineering fieldssuch as lasers, robotics, biotech-nology, food preservatives, medi-cine, telecommunication andsynthetic fuels have providednumerous opportunities andthreats for many differententerprises. Shifts in demand

from vaccum tubes to transistors,from steam locomotives to die-seland electric engines, from fou-ntain pens to ballpoint, frompropeller airplanes to jets, andfrom typewriters to computer

based word processors, have allbeen responsible and creatingnew business.

(iv) Political Environment: Politicalenvironment includes politi-cal conditions such as generalstability and peace in the coun-try and specific attitudes thatelected government representa-tives hold towards business.

The significance of politicalconditions in business successlies in the predictability of

business activities under stablepolitical conditions. On the otherhand, there may be uncertaintyof business activities due topolitical unrest and threats tolaw and order. Political stability,

Major Elements of Political Environment

n The Constitution of the countryn

Prevailing political systemn The degree of politicisation of business and economic issuesn Dominant ideologies and values of major political partiesn The nature and profile of political leadership and thinking of

political personalitiesn The level of political moralityn Political institutions like the government and allied agenciesn Political ideology and practices of the ruling partyn The extent and nature of government intervention in businessn The nature of relationship of our country with foreign countries

Major Elements of Political Environment


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thus, builds up confidenceamong business people toinvest in the long term projectsfor the growth of the economy.Political instability can shakethat confidence. Similarly, theattitudes of government officialstowards business may have eitherpositive or negative impact upon

business. For example, even afteropening up of our economy in1991, foreign companies found itextremely difficult to cut throughthe bureaucratic red tape to getpermits for doing business inIndia. Sometimes, it took monthsto process even their applicationfor the purpose. As a result thesecompanies were discouraged

from investing in our country.The situation has improved overtime.

(v) Legal Environment: Legal envi-ronment includes various legis-lations passed by the Governmentadministrative orders issued

by government authorities,court judgments as well as the

decisions rendered by variouscommissions and agencies atevery level of the governmentcentre, state or local. It isimperative for the managementof every enterprise to obey thelaw of the land. Therefore, anadequate knowledge of rulesand regulations framed by the

Government is a pre-requisitefor better business performance.

Non-compliance of laws can landthe business enterprise into legalproblems. In India, a workingknowledge of Companies Act1956; Industries (Developmentand Regulations) Act 1951;Foreign Exchange Management

Act and the Imports and Exports(Control) Act 1947; Factories Act,1948; Trade Union Act; 1926;

Workmens Compensation Act,1923; Industrial Disputes Act,1947, Consumer Protection Act,1986, Competition Act, 2002and host of such other legalenactments as amended fromtime to time by the Parliament,is important for doing business.Impact of legal environment

can be illustrated with the helpof government regulations toprotect consumers interests. Forexample, the advertisement ofalcoholic beverages is prohibited.

Advertisements, including pac-kets of cigarettes carry thestatutory warning Cigarettesmoking is injurious to health.

Similarly, advertisements ofbaby food must necessarilyinform the potential buyer thatmothers milk is the best. Allthese regulations are requiredto be followed by advertisers.

econoMic environMentin

inDia

The economic environment in Indiaconsists of various macro-level factors


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84 Business Studies

related to the means of productionand distribution of wealth which havean impact on business and industry.

These include:(a) Stage of economic development of

the country.(b) The economic structure in the

form of mixed economy whichrecognises the role of both public

and private sectors.(c) Economic policies of the Govern-ment, including industrial, mone-tary and fiscal policies.

(d) Economic planning, includingfive year plans, annual budgets,and so on.

(e) Economic indices, like nationalincome, distribution of income,rate and growth of GNP, per capitaincome, disposal personal income,rate of savings and investments,

value of exports and imports,balance of payments, and so on.

(f) Infrastructural factors, such as,financial institutions, banks,modes of transportation commu-nication facilities, and so on.

Business enterprises in India dorealise the importance and impactof the economic environment ontheir working. Almost all annualcompany reports presented by theirchairpersons devote considerableattention to the general economicenvironment prevailing in the countryand an assessment of its impact ontheir companies.

The economic environment ofbusiness in India has been steadily

changing mainly due to thegovernment policies. At the time ofIndependence:(a) The Indian economy was mainly

agricultural and rural in character;(b) About 70% of the working population

was employed in agriculture;(c) About 85% of the population was

living in the villages;

(d) Production was carried outusing irrational, low productivitytechnology;

(e) Communicable diseases werewidespread, mortality rates werehigh. These was no good publichealth system.

In order to solve economic problemsof our country, the government tookseveral steps including control by theState of certain industries, centralplanning and reduced importance ofthe private sector. The main objectivesof Indias development plans were:(a) Initiate rapid economic growth to

raise the standard of living, reduceunemployment and poverty;

(b) Become self-reliant and set upa strong industrial base with

emphasis on heavy and basicindustries;

(c) Reduce inequalities of income andwealth;

(d) Adopt a socialist pattern ofdevelopment based on equalityand prevent exploitation of man

by man.In accordance with the economic

planning, the government gave alead role to the public sector for


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Crisis of June 1991Major elements of the crisis situation which led the Government of India toannounce economic reform were:n A serious fiscal crisis in which the fiscal deficit reached the level of 6.6 per

cent of GDP in 1990-91.n Heavy internal debt which rose to about 50 per cent of GDP with interest

payments draining about 39 per cent of total revenue collections of thecentral government.

n Low GNP growth rate which fell to 1.4 per cent from the peak level of 10.5per cent in 1988-89 (at 1980-81 prices).

n Low overall agricultural production, foodgrain production and industrialproduction showed negative growth rates of 2.8 per cent, 5.3 per centand 0.1 per cent respectively.

n Soaring inflation rate based both on wholesale price index and consumerprice index (for industrial workers) at 13-14 per cent.

n Shrinkage of foreign trade, imports (in $ terms) fell by 19.4 per cent andexports by 1.5 per cent.

n Depreciation of rupee by 26.7 per cent vis--vis US dollars.n Fall of foreign exchange reserves to such a low level that they were

barely adequate to meet the import requirements of a few weeks.

Non-resident Indians (NRIs) were withdrawing their deposits at an alarminglyhigh rate.

n The confidence of the international financial institutions was badly shakenand in just over a year its creditworthiness rating fell from AAA to BB+(put on credit watch).

n The country was on the verge of defaulting on international financialobligations and the situation warranted immediate policy action to save

the situation. In May 1991, the Government had to lease 20 tones of goldout of its stock to the State Bank of India to enable it to sell the gold withrepurchase option after six months. In addition, Reserve Bank of India was

allowed to pledge 47 tones of gold to the Bank of England to raise a loan of$600 million.

Crisis of June 1991

infrastructure industries whereasthe private sector was broadly giventhe responsibility of developingconsumer goods industry. At thesame time, the government imposed

several restrictions, regulations andcontrols on the working of private

sector enterprises. Indias experiencewith economic planning has deliveredmixed results. In 1991 the economyfaced a serious foreign exchangecrisis, high government deficit and a

rising trend of prices despite bumpercrops.


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As a part of economic reforms, theGovernment of India announced anew industrial policy in July 1991.

The broad features of this policywere as follows:(a) The Government reduced the

number of industries undercompulsory licensing to six.

(b) Many of the industries reserved

for the public sector under theearlier policy, were dereserved.The role of the public sector waslimited only to four industries ofstrategic importance.

(c) Disinvestment was carried outin case of many public sectorindustrial enterprises.

(d) Policy towards foreign capital wasliberalised. The share of foreignequity participation was increasedand in many activities 100 percent Foreign Direct Investment(FDI) was permitted.

(e) Automatic permission was nowgranted for technology agreements

with foreign companies.(f ) Foreign Investment Promotion

Board (FIPB) was set up to

promote and channelise foreigninvestment in India.

Appropriate measures weretaken to remove obstacles in the

way of growth and expansion ofindustrial units of large industrialhouses. Small-scale sector wasassured all help and accorded duerecognition.

In essence, this policy hassought to liberate industry from the

shackles of the licensing system(liberalisation), drastically reduce therole of the public sector (privatisation)and encourage foreign privateparticipation in Indias industrialdevelopment (globalisation).

Liberalisation: The economic reformsthat were introduced were aimed atliberalising the Indian business and

industry from all unnecessary controlsand restrictions. They signalled theend of the licence-pemit-quota raj.Liberalisation of the Indian industryhas taken place with respect to:

(i) abolishing licensing requirementin most of the industries excepta short list,

(ii) freedom in deciding the scale

of business activities i.e., norestrictions on expansion orcontraction of business activities,

(iii) removal of restrictions on themovement of goods and services,

(iv) freedom in fixing the prices ofgoods services,

(v) reduction in tax rates and liftingof unnecessary controls over the

economy,(vi) simplifying procedures forimports and experts, and

(vii) making it easier to attractforeign capital and technologyto India.

Privatisation: The new set of econo-mic reforms aimed at giving greaterrole to the private sector in the nation

building process and a reduced roleto the public sector. This was a reversal


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Some of the early major steps taken to manage the economic crisis were the following:n Fiscal correction aimed at reducing fiscal deficit by about Rs. 7,700 crore in

1991-92 (compared to 1990-91);n Announcement of New Industry Policy in July 1991 seeking to deregulate the industry

with the objective of promoting the growth of a more competitive and efficient industrialeconomy;

n Abolition of industrial licensing for all industrial projects except 18 industries of highstrategic and environmental importance and with high import content. About 80 per cent

of the industries were delicensed;n Amendment of the MRTP Act to eliminate the need for prior approval of the Central

Government by large companies for capacity expansion, diversification and merger andamalgamation.

n Nine areas in basic and core industries earlier reserved for the public sector were openedto the private sector;

n Limit of foreign equity holding raised from 40 per cent to 51 per cent in a wide range ofpriority industries;

n Foreign Investment Promotion Board (FIPB) established to negotiate proposals from largeinternational firms and expedite clearances of the investment proposals;

n Rupee devaluation by 18 per cent during July 1-3, 1991 supported by a standby credit of$2.3 billion from the IMP over a 20 months period negotiated in October 1991;

n Negotiation of $500 million Structural Adjustment Loan from the World Bank in April1992 and a loan totalling SDR 1.3 billion from the International Monetory Fund (IMF)between January-September 1991;

n Introduction of India Development Bond Scheme and Immunity Scheme for repatriationof funds held abroad in October 1991, under which more than $2 billion were mobilisedduring 1991-92;

n Bringing back of gold earlier pledged to the Bank of England and the Bank of Japan;n Continuance of the measures of import control and credit squeeze;n Administered licensing of imports replaced by freely tradeable import entitlements (called

Eximscrips) linked to export earnings. The measure was expected to introduce self-balancing mechanism in Indias foreign trade;

n Introduction of Liberalised Exchange Rate Management System (LERMS) under whicha dual exchange rate system was established, one rate being effectively floated in themarket; and

n Import licensing in most capital goods, raw materials, intermediates and componentseliminated. Advance Licensing System considerably simplified.The initial series of measures set the tone for the future economic reforms. Any of the

measures taken above was continued to form a part of the ongoing reform process.

Early Crisis Met : Reform MeasuresEarly Crisis Met : Reform Measures


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of the development strategy pursuedso far by Indian planners. To achievethis, the government redefined therole of the public sector in the NewIndustrial Policy of 1991, adoptedthe policy of planned disinvestmentsof the public sector and decidedto refer the loss making and sickenterprises to the Board of Industrial

and Financial Reconstruction. Theterm disinvestments used heremeans transfer in the public sectorenterprises to the private sector.It results in dilution of stake of theGovernment in the public enterprise.If there is dilution of Governmentownership beyond 51 percent, it

would result in transfer of ownershipand management of the enterprise tothe private sector.

Globalisation: Globalisation meansthe integration of the various eco-

nomies of the world leading towardsthe emergence of a cohesive globaleconomy. Till 1991, the Governmentof India had followed a policy ofstrictly regulating imports in valueand volume terms. These regulations

were with respect to (a) licensing ofimports, (b) tariff restrictions and(c) quantitative restrictions. The

new economic reforms aimed attrade liberalisation were directedtowards import liberalisation, exportpromotion through rationalisationof the tariff structure and reforms

with respect to foreign exchangeso that the country does notremain isolated from the rest of the

world. Globalisation involves an

increased level of interaction andinterdependence among the variousnations of the global economy.Physical geographical gap or political

A Truly Globalised Economy

A truly global economy implies a boundaryless world where thereis:(i) Free flow of goods and services across nations;(ii) Free flow of capital across nations;

(iii) Free flow of information and technology;(iv) Free movement of people across borders;(v) A common acceptable mechanism for the settlement of

disputes;(vi) A global governance perspective.

Activity 3

GLOBALISATION

Make a list of five Indian companies which have global operations today. Findout the major products they sell and the countries where they operate.

A Truly Globalised Economy


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boundaries no longer remain barriersfor a business enterprise to serve acustomer in a distant geographicalmarket. This has been madepossible by the rapid advancementin technology and liberal tradepolicies by Governments. Throughthe policy of 1991, the governmentof India moved the country to this

globalisation pattern.

iMpactofgovernMent

policychangeson

BusinessanD inDustry

The policy of liberalisation, privati-sation and globalisation of theGovernment has made a significantimpact on the working of enterprisesin business and industry. The Indiancorporate sector has come face-to-face with several challenges due togovernment policy changes. Thesechallenges can be explained as follows:

(i) Increasing competition: As aresult of changes in the rules ofindustrial licensing and entryof foreign firms, competition

for Indian firms has increasedespecially in service industrieslike telecommunications, airlines,

banking, insurance, etc. whichwere earlier in the public sector.

(ii) More demanding customers:Customers today have becomemore demanding because theyare well-informed. Increased

competition in the market givesthe customers wider choice in

purchasing better quality of goodsand services.

(iii) Repidly changing technologicalenvironment: Increased com-petition forces the firms to developnew ways to survive and grow inthe market. New technologies makeit possible to improve machines,process, products and services.

The rapidly changing technologicalenvironment creates tough challe-nges before smaller firms.

(iv) Necessity for change: In aregulated environment of pre-1991 era, the firms could haverelatively stable policies andpractices. After 1991, the marketforces have become turbulent asa result of which the enterpriseshave to continuously modifytheir operations.

(v) Need for developing humanresource: Indian enterprises havesuffered for long with inadequatelytrained personnel. The new marketconditions require people withhigher competence and greatercommitment. Hence the need for

developing human resources.(vi) Market orientation: Earlier

firms used to produce first andgo to the market for sale later. Inother words, they had productionoriented marketing operations.In a fast changing world, there isa shift to market orientation in asmuch as the firms have to study

and analyse the market first andproduce goods accordingly.


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90 Business Studies

Meaning of business environment:The term business environmentmeans the totality of all individuals, institutions and other forces thatare outside a business but that potentially affect its performance.Business environment can be characterised in terms of(a) totality of external forces

(b) specific and general forces(c) inter-relatedness(d) dynamic nature(e) uncertainty(f ) complexity(g) relativityImportance of business environment: Business environment andits understanding are important for (i) enabling the identification ofopportunities and getting the first mover advantage, (ii) helping inthe identification of threats and early warning signals, (iii) coping

with the rapid changes, (v) assisting in planning and policy and(vi) improving the performance.

Summary

(vii) Loss of budgetary support tothe public sector: The centralgovernments budgetary supportfor financing the public sectoroutlays has declined over the years.

The public sector undertakingshave realised that, in order tosurvive and grow, they will have to

be more efficient and generate theirown resources for the purpose.

On the whole, the impact of Gove-rnment policy changes particularly in

respect of liberalisation, privatisationand globalisation has been positiveas the Indian business and industryhas shown great resilience in dealing

with the new economic order. Indianenterprises have developed strategiesand adopted business processes andprocedures to meet the challengeof competition. They have becomemore customer-focused and adoptedmeasures to improve customerrelationship and satisfaction.

Key Terms

Business environment Opportunities Threats Economic

Environment Political environment Social environment

Technological environment Legal environment Liberalisation

Privatisation Globalisation


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Elements of business environment: Business environmentconsists of five important dimensions including economic, social,technological, political and legal.Economic environment includes such factors as interest rates,inflation rates, changes in disposable income of people, stockmarket indexes and the value of rupee.Social environment includes social forces like traditions, values,social trends, societys expectations of business, and so on.

Technological environment includes forces relating to scientific

improvements and innovations which provide new ways of producinggoods and services and new methods and techniques of operatinga business.Political environment includes political conditions such as generalstability and peace in the country and specific attitudes that electedgovernment representatives hold toward business.Legal environment includes various legislations passed bythe government, administrative orders issued by governmentauthorities, court judgments as well as decisions rendered by

various commissions and agencies at every level of the government

center, state or local.Economic environment in India: The economic environment inIndia consists of various macro-level factors related to the meansof production and distribution of wealth which have an impact on

business and industry. The economic environment of business inIndia has been steadily changing since Independence mainly dueto government policies. In order to solve economic problems ofour country at the time of Independence, the government tookseveral steps including control by the state of key industries,central planning and reduced importance of the private sector.

These steps delivered mixed results until 1991 when Indianeconomy happened to face serious foreign exchange crisis, highgovernment deficit and a rising trend of prices despite bumpercrops.Liberalisation, privatisation and globalisation: As a part of economicreforms, the Government of India announced a new industrial policyin July 1991 which sought to liberate the industry from the shacklesof the licensing system (liberalisation), drastically reduce the roleof the public sector (privatisation) and encourage foreign privateparticipation in industrial development (globalisation).Impact of Government policy changes on business andindustry: The government policy of liberalisation, privatisation


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92 Business Studies

Multiple Choice

1. Which of he following does not characterise the businessenvironment?(a) Uncertainty(b) Employees(c) Relativity(d) Complexity

2. Which of the following best indicates the importance ofbusiness environment?(a) Identification(b) Improvement in performance

(c) Coping with rapid changes(d) All of them

3. Which of the following is an example of social environment?(a) Money supply in the economy(b) Consumer Protection Act(c) The Constitution of the country(d) Composition of family

4. Liberalisation means(a) Integration among economies(b) Reduced government controls and restrictions

(c) Policy of planned disinvestments(d) none of them

Exercise

and globalisation has made a definite impact on the working ofenterprises in business and industry in terms of

(a) increasing competition

(b) more demanding customers

(c) rapidly changing technological environment

(d) necessity for change

(e) need for developing human resource

(f ) market orientation

(g) loss of budgetary support to the public sector. In the neweconomic environment, the Indian enterprises have developed

various strategies to meet the challenge of competition


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5. Which of the following does not explain the impact ofGovernment policy changes on business and industry?(a) More demanding customers(b) Increasing competition(c) Change in agricultural prices(d) Market orientation

Short Answer Type

1. What do you understand by business environment?

2. Why it is important for business enterprises to understandtheir environment? Explain briefly.

3. Mention the various dimensions of business environment.

4. Briefly explain the following:(a) Liberalisation(b) Privatisation(c) Globlisation

5. Briefly discuss the impact of Government policy changes onbusiness and industry.

Long Answer Type1. How would you characterise business environment? Explain,

with examples, the difference between general and specificenvironment.

2. How would you argue that the success of a businessenterprise is significantly influenced by its environment?

3. Explain, with examples, the various dimensions of businessenvironment.

4. What economic changes were initiated by the Government

under the Industrial Policy, 1991? What impact have thesechanges made on business and industry?

5. What are the essential features of (a) Liberalisation,(b) Privatisation and (c) Globalisation?

1. Select a business enterprise with which you are familiar.From your recollection of current events (events you mayhave read about in newspapers or magazines or have heardabout on television or radio) identify some of the important

environmental force, which have had impact on thisenterprise.

Activities


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94 Business Studies

2. Select a major Indian company for which there is considerableinformation available in your school library. Analyse theimpact of changes in the Government policies on the workingof this company.

Lately many companies have planned for significant investment inorganised retailing in India. Several factors have prompted theirdecisions in this regard.

Customer income is rising. People have developed a taste for

better quality products even though they may have to pay more.The aspiration levels have increased. The government has alsoliberalised its economic policies in this regard and permitted evencent percent foreign direct investment in some sectors of retailing.

Questions

1. Identify changes in business environment under differentheads economic, social, technological, political andlegal that have facilitated the companies decisions to plansignificant investments in organised retailing.

2. What has been the impact of these changes with regard toglobalisation and privatisation?

Case Problem

Class12 BusinessStudies1 Unit03 NCERT TextBook EnglishEdition

Documents

Transcript of Class12 BusinessStudies1 Unit03 NCERT TextBook EnglishEdition