Business and Legal Environment

By:-Dr.Divya ChowdhryMBA Ist Semester

Course Contentn Unit – I 08 hours

n Meaning of Business Environmentn Economic and Non-economic factors influencing

business and their interactionn Economic systemsn Historical Perspective on public control of business

Constitutional framework of state control of businessn Constitutional framework of state control of businessn Unit – II 12 hours

n Planning and Economic Policiesn Unit – III 24 hours

n Business Legislationn Unit – IV 12 hours

n Overview of Economic Legislation

Books Recommended

n Kuchhal, M.C., Prakash, Deepa(2009),Business Legislation for Management,Vikas Publishing HouseVikas Publishing House

n Saleem, Shaikh (2010). BusinessEnvironment, 2nd edition, PearsonEducation.

n Tulsian, P C(2009) , “Business Laws,”Tata Mc Graw Hill, New Delhi

SESSION OVERVIEW

n Meaning of Business Environmentn SALIENT FEATURESn SALIENT FEATURESn IMPORTANCE OF STUDYn NATURE OF BUS ENVn TYPES OF B ENV

4

An Overview Of Business Environment

Introduction to Businessn Business is the organized efforts of enterprises to supply consumers with goods

and services. Businesses vary in size as measured by number of employees or by sales volume.

n All businesses share the same purpose to earn Profits. However, the purpose of business goes beyond earning profits.

n It is an important institution in society and the role of business is crucial.n Be it for the supply of goods and servicesn Creation of job opportunitiesn Offer of better quality of lifen Contributing to the economic growth of the country and putting it on the n Contributing to the economic growth of the country and putting it on the

global map

Scope of Businessn Business included all activities connected with production, trade,

banking, insurance, finance, agency, advertising, packaging and numerous other related activities. Businesses include all efforts to comply with legal restrictions and government requirements and discharging obligations to consumers, employees, owners and to other interest groups which have stakes in business directly or indirectly.

Society cannot do without business and vice versa.

Business

Information

Competition

Change - TransitionOpportunities

Diversification

Globalisation

Technology

Characteristics of Today’s Business

Information Globalisation

Concept Of Business Environment

n Environment refers to all external forces which have a bearing on the functioning of business. ”Environment are largely if not totally external, and ”Environment are largely if not totally external, and beyond the control of individual industrial enterprises and their management. These are essentially the givers within which firms and their managements must operate in a specific country and they vary, from country to country”.

Meaning of Business Environment

n A set of surroundingfactors/ conditions thataffects (helps/ hinder)affects (helps/ hinder)the functioning/development of thebusiness/ organization.

Scope of The Business Environment

n The multidimensional activities involved in bringing raw material to the factory and the end product from there to the market constitute the scope of the there to the market constitute the scope of the Business Environment.

Environment

n However, the term business environment refers to the External Factors. The external environment has two components ie business opportunities and threats to business.

n Simmilarly, the organisational environment has two components ie. strengths and weaknesses of the organisation. A SWOT analysis is thus the first step in strategy formulation

Business DecisionInternal Environment External Environment

Factors influencing Business Decision

Why Study Business Environment

n Development of broad strategies to ensure sustainability

n To foresee the impact of socio-economic changes at the To foresee the impact of socio-economic changes at the national and international levels on firm’s ability

n Analysis of competitor’s strategies and formulation of effective counter measures

n To keep oneself dynamic

Nature of Business Environment

n Aggregative: totality of all the external forces which influence the working and decision making of an enterprise.

n Inter-related: various elements are closely interdependent and any change in one element affects the other elements.

n Relative: it differs from country to country and even region to region.

Contd.

n Inter-temporal: it changes over time, specially in long run, it changes certainly.Uncertain: business environment is n Uncertain: business environment is volatile so it becomes very difficult to forecast.

n Contextual: business environment provides the macro framework within which the business firm (a micro unit) operates.

Need and Importance Of Business Environment

n An analysis of business environment helps to identify strength, weakness, opportunities & threats. Analysis is very necessary for the survival and growth of the business enterprise. The importance of business environment is briefly enterprise. The importance of business environment is briefly explained in an analysis below.

n (1) Identification of Strength: n (2) Identification of Weakness: n (3) Identification of Opportunities: n (4) Identification of Threats: n (5) Exploitation of Business Opportunities: n (6) Keeping Business Enterprise Alert:

Cont……..

n (7) Keeping Business Flexible and Dynamicn (8) Understanding Future Problems and Prospects: n (9)Making Business Socially Acceptable:

(10) Ensures Optimum Utilization of Resources: n (10) Ensures Optimum Utilization of Resources: n (11) Ensures Survival and Growth: n (12) Maintaining adaptability to changesn (13) Image Building:

Types of Business Environment

Business environment

Internal environment External environment

Micro environment Macro environment

Internal Environment

Mission / ObjectivesManagement StructureInternal Power RelationshipPhysical Assets & facilities

FinanciersSuppliersCustomersCompetitors

Micro Environment

EconomicTechnologicalGlobal

Macro Environment

BUSINESS ENVIRONMENT

BusinessDecision

Physical Assets & facilities

Company imageHuman resourcesFinancial CapabilitiesTechnological CapabilitiesMarketing Capabilities

CompetitorsPublicMktg Intermediaries

GlobalDemographicSocio-CulturalPolitical

n Business Environment has a direct relation with the environment.

n Effectiveness of interaction of anenterprise with its environment primarilydetermines the success or failure of abusiness.

Factors of Internal Environment

Factors

culture

Mission & objectivesMission & objectives

Top management structure

Power structure

Company image & brand equity

Human & other resources

Elements of Micro Environment

Micro Environment

customers

CompetitorsCompetitors

suppliers

Marketing intermediaries

financiers

publics

Various components of Macro EnvironmentEnvironment

Macro EnvironmentThe macro environment consists of factorswhich are beyond the control of thebusiness. There is a symbiotic relationshipbetween business and the environmentalfactors, environmental factors are dynamicand a particular business firm, by itself, mayand a particular business firm, by itself, maynot be in a position to change it’senvironment.

Macro Environment :-§ Economic§ Non Economic

Economic and Non-economic factors influencing business and their influencing business and their interaction

ECONOMIC ENVIRONMENT n Economic environment influences the business to great

extent. Economic environment consists of macro level

patterns related to the areas of production and distribution of

wealth that have an impact on the business of an

organization. Following factors constitute economic

environment of business-:environment of business-:

Ø Economic system

Ø Economic planning

Ø Industry

Ø Agriculture

Ø Human resource

Ø

Economic Environmentn Economic stages that exists at a given time in a countryn Economic system that is adopted by a country for

example. Capitalistic, Socialistic or Mixed Economyn Economic planning, such as five year plans, budgets, etc.n Economic policies for example, monetary, industrial and

fiscal policiesfiscal policiesn Economic Indices such as National Income, Per Capital

Income, Disposable Income, Rate of growth of GNP, Distribution of Income, Rate of savings, Balance of Payments etc.

n Economic Problemsn Functioning of economy

Non Economic Environment

n Political & Legal Environment

n Socio- Cultural Environment

n Technological & Physical Environment

n Natural Environment

n Demographic Environment

n Global Environment

Political & Legal Environment

n The constitution of the country

n Political organization n Political stability n Defence & military

policyn Laws governing

businessn The judicial system

Social & Cultural Environment

n Demographic forcesn Caste structure &

family organization n Educational system

& literacy ratesn Customs, beliefs &

life stylesn Taste & preference

of people.

Technological & Physical Environment

n Rate of technological change

n Approaches to production of goods production of goods & services

n Research & development systems

n New approaches & equipments

Natural Environment

n Climatic conditionsn Agricultural,

commercial & other natural resources natural resources

n Ecological systemn Levels of pollution

Demographic Environment

n Growth of population

n Age Composition

n Life Expectancy

n Sex Ratio

n Fertility and Mortality rates

n Inter-state migration

Global Environment

Important factors that operate at global level which havean impact on organization are:

¨ Growth of world economy

¨ Distribution of world GDP

¨ International institutions IMF,WTO ILO

Economic relations between nations¨ Economic relations between nations

¨ Global human resource-nature and quality of skills,mobility of labor

¨ Global technology and quality standards

¨ Global demographic patterns

Economic Systems

Meaning

n It is a system designed by a nation toutilize her resources for the purpose ofsatisfying the needs and wants of itssatisfying the needs and wants of itspeople.

Basic units of an Economic System

n Householdn Firm

Industryn Industryn Government

Characteristics

n National entity: economic systemalways covers the entire country.

n Institutional: it comprises variousn Institutional: it comprises variousinstitutions which a nation has devisedand adopted for satisfying the needs ofits people. Such as firm, industry, govt.,economic planning.

Contd.

n Interdependence: different institutions are interdependent and interacting.interacting.

n Scarcity of resources: limited resources in comparison to the demand for these resources.

n Need satisfaction:n Dynamic: some economic systems

change slowly while others change fast.

Functions of An Economic System

n What to produce?n How to produce?n For whom to produce?n For whom to produce?n Choice between current needs & future

needsn Economic growth

Problems All Economies Face

Scarcity forces all countries to answer these 3 questions

Scarcity leads to conflict

Do All Countries Answer These Questions The Same Way?

n NoConflicts arise in all economiesn Conflicts arise in all economies

Different Countries Use Different Systems To Answer These Questions

Major Economic Systems Include:

Market /Capitalisticv Market /Capitalisticv Command/ Socialistic v Mixed Economic System

CAPITALISM: n Also known as free enterprise economy.

Capitalism is a system of economic organisation featured by the private ownership and use for the private profit of man made and nature made capital.Current World Examples:n Current World Examples:

Switzerland Canada Australia Chile Argentina South Africa USA

CHARACTERISTICS

n FREEDOM OF ENTERPRISE

n PRIVATE OWNERSHIPn PRIVATE OWNERSHIP

n PROFIT MOTIVE

n CONSUMER SOVEREIGNTY

n FREEDOM OF CONTRACTS

SOCIALISM

n Socialism is an economic system where the means ofproduction are either owned or managed by the means ofproduction are either owned or managed by the state andwhere the investment structure, consumption are regulatedand directed by the stateand directed by the state

n Current and Former World ExamplesCuba North Korea China Former Soviet Union

CHARACTERISTICS

q EQUITABLE DISTRIBUTION OF INCOME

q GOVERNMENT OWNERSHIPq GOVERNMENT OWNERSHIPq ECONOMIC LAWSq PLAN OF ACTION

No Pure System Is Perfect: Capitalistic

Strengths:n Able to change

graduallyn Individual freedom for

alln Lack of government

Weaknesses:n Does not protect the

young, sick, old who cannot work

n Market failures n Lack of government

Interferencen Variety of goods and

servicesn High consumer

satisfactionn Promotes economic

freedom and growth

n Market failures happen leading to lots of ups and downs

n Doesn’t promote economic security, equity, or efficiency as well as other systems

No Pure System Is Perfect: Socialistic

Strengths:

n Things can be changed dramatically in a short time

Weaknesses:n Does not meet the needs

and wants of consumersn Lacks effective

incentives to get people to work

n Needs a large n Promotes economic

security, efficiency, and equity

n Needs a large bureaucracy which consumes resources

n Inflexible for day-to-day changes

n New and different ideas discouraged, people can’t be individuals

n Doesn’t promote: economic growth or freedom

If No Pure System Is Perfect Then What?

n Most countries in the world are a blend of different elements

n They are called mixed or combination n They are called mixed or combination systems

n Market Command

Economies

Mixed Economic Systemn In mixed economy there is policy of compromise between capitalist

and socialist system. There is an existence of public and private

sector and overall government regulation of the economy..

n Current World Examples:England Germany Sweden EgyptEngland Germany Sweden Egypt

France Italy Hungary Mexico

characteristics

§ PUBLIC SECTOR

§ DECISIVE ROLE

§ SOCIAL SECURITY§ SOCIAL SECURITY

§ ABOLITION OF FREE TRADE

§ PRIVATE OWNERSHIP OF THE MEANS OF PRODUCTION

Historical Perspective on public control of business

n Civilizationn Monarchyn Tax Collection

Monarchy to Parliamentary Set-upn Monarchy to Parliamentary Set-upn Societal controln Parliamentary dynamics resulting in

inclination towards rich candidaten Resultant entrepreneurship promotionn Low labour intensive units

CONSTITUTIONAL FRAMEWORK OF STATE CONTROL OF OF STATE CONTROL OF BUSINESS.

Characteristics of Indian Constitution

1) Sovereignty: India is an independentrepublic and not subordinate to anyother nation.other nation.

2) Democracy: govt. is run byrepresentatives who are elected bythe people of the nation.

3) Secularism: complete freedom to itscitizen to preach & practice theirreligion.

Contd.

4) The parliamentary system:ministers and the prime minister are answerable to the parliament.answerable to the parliament.

5) Separation of powers:

Federal System of the Govt.

n Meaning: where the powers of thecentral govt. and State govt. are well-defined.defined.

n Division of powers between the Central& State govt. has been done throughthree lists :n The Union Listn The State Listn The Concurrent List

Functions of the StateFunctions of State

The basic functionsActivities that are Undertaken only by the State

Intermediate FunctionsGovt. can work in collaboration with civil Society & markets

Activist functionsActive participation of Govt. for promoting markets

The Basic Functionsi. Providing pure public goodsii. Defense iii. Law & order iv. Property rightsiv. Property rightsv. Public healthvi. Protecting the poorvii. Macroeconomic stabilityviii. Antipoverty programmesix. Disaster relief

Intermediate Functions

i. Addressing externalities:- basiceducation, environmental protection

ii. Regulating monopolies:- consumerii. Regulating monopolies:- consumerprotection, financial regulations.

iii. Providing Social Insurance:-pensions, family allowances,unemployment insurance.

Activist Functions

i. Coordinating private activityii. Fostering marketsiii. Asset redistributioniii. Asset redistribution

Economic Roles of the Govt.

Economic roles of Govt.

Regulatory roles

Promotional roles

Entrepreneurial roles

Planning roles

Regulatory Roles

i. Grant of license, restriction onlocation of industry

ii. Regulating the conduct of businessii. Regulating the conduct of businessventures

iii. Controlling the accrual & disposal ofbusiness income

iv. Regulating the relationship with itsstakeholders

Promotional Roles

i. Development of infrastructureii. Assistance by way of subsidiesii. Assistance by way of subsidiesiii. Allocation of scarce resourcesiv. Fiscal, monetary and other incentives

Entrepreneurial Roles

n Govt.’s participation in business through public ownership and management of industrial and commercial undertakings.industrial and commercial undertakings.

n Balanced regional development n Promotion of capital intensive industries

Planning Roles

n Socio-economic developmentn Social justicen Balanced regional developmentn Balanced regional developmentn Rapid industrializationn Employment generationn Development of agriculture & small

scale industries

Rationale of State Intervention

1) Legal framework2) Imperfect competition3) Externalities3) Externalities4) Social objectives5) Industrial base6) Balanced regional development7) Self reliance