Business Environment Unit 1

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BUSINESS ENVIRONMENT

SYLLABUS

UNIT I

The concept of Business Environmento significance and nature

Environment Scanning:o meaning, nature and scope,o the process of environmental scanning,

Interaction between internal and external environments, Basic philosophies of Capitalism and Socialism with their variants. Concepts of Mixed Economy.

REFERENCES: Mohinder Kumar Shartna - Business Environment in India Adhikary M,

Economic environment of business Amarchand, D. Government and Business

Francis Cheunilam : Business and Government Maheswari & Gupta :

Government, Business and Society Kuchal, S.C : Industrial economy of India

Fredrick Davis : Business and society.


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Business

Though the term business has been defined by different authors in their own ways, there is no much

difference in the essence of their definitions.

For example, according to Urwickand Hunt, Business is any enterprise which makes, distributes, or

provides any article or service which other members of the community need and willing to pay for.

Almost same views have been expressed by Daviswhen he defines business as The organized effort by

individuals to produce goods and services, to sell these goods and services in market place and to

reap some rewards for this effort.

Davis and Blomstrom are very right when they say, Business comprises all profit seeking activities

and enterprises that provide goods and services necessary to an economic system.

Business is the economic pulse of a nation, striving to improve the societys standard of living. Thus

business means the total enterprise of a country in manufacturing, industry, finance and commerce. It

may be public enterprise or private enterprise or a joint enterprise, or the like.

Characteristics of business

1. Profit seeking activity2. Providing goods and services to the society

3.

Participant in society

4. Flow of incomeComponents of business

Industry Trade and commerce

Changing concept of Business

1. Profit concept of Business(Old concept of Business)Profit Maximization

2. Profit- cum- Service concept of BusinessMaking better product at a competitive price


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3. Profit- through- Service concept/ Modern concept/ Business as Social System ConceptToday business is regarded as an integral part of the Social System; the main characteristics of

business as a social system are as follows:

Business is a system having its own sub-systems Business interacts with its external environments Business is a dynamic social system having stabilizing tendencies Social values Viability Public viability Business is related to people

Objectives of business

Objectives give purpose and directions to the work of all employees, they indicate the broad limits within

which action is to be taken. They serve as media by which multiple interests are channeled into joint

effort. Therefore, profitability is the basic economic objective for the survival and growth of an enterprise.

Earning profit as one of the objectives of business can be justified because profit is necessary

I. To pay fair return to shareholders for their investmentsII. To retain some earnings for re- investment which is necessary for its growth, and

III. For profit is the index of efficiency of an enterprise.A. Primary Objectives1. Survival and Growth of Business and Profit to Shareholders2. Service to customerB. Social Objectives1. Employees Satisfaction


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2. Service to Community and to Society in General3. Observance of Governmental Regulations4. Ethical Behaviour

BUSINESS ENVIRONMENT

Business involves activities, which links an organization with outside world. Within an organization, a

business is governed by the behaviour of its employees, management or decision makers. But externally a

business is influenced by a score of factors, which range from customers to competitors and government.

Therefore, a business cannot be independent of (he influence of these external factors. It should also be

noted that a business has absolute control over all the internal factors, it has no control over the external

factors. So often it becomes necessary for business houses to modify their internal decisions and policies,

on the basis of the pressure from external factors This highlights the need to be ever- cognizant of

changes and influences of external factors so as to conduct business on healthy lines. It is in this context

that business environment assumes all significance. Business environment therefore refers to the

influences and pressures exerted by external factors on the business. The following Figure would help to

understand the various factors which constitute the business environment.

1. Demographic environment: This refers to the size and behaviour of population in a country.Suppose a country has a huge size of population, then, the country would provide extensive

business or marketing opportunities for all types of business organizations. On the other hand, a

country with low size of population would force the business organizations to seek external

market for their products or services. Similarly, if the population in a country is well - tuned to


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'use and throw concept [like most of the Western countries] then there would be limited scope

for repair shops and employment scope in that segment would be almost nil. But alternatively

this would give wide marketing opportunities for manufacturing organizations. On the other

hand, if the population is averse to 'use and throw' concept, then the business opportunities

would be limited for manufacturing organizations but the repair shops, self-employed technical

persons and spares manufacturers, would have roaring business. Hence, the size and quality of

population emerges as a vital factor influencing business environment.

2. Economic environment: Economic environment refers to the overall economic factors likeeconomic philosophy of the country, economic structure, planning, economic policies, controls

and regulations, etc. All these have a serious impact on the functioning of business organizations

in a country. For example, in a Capitalistic economic system, business organizations would be

subjected to limited government regulations and controls. They would be more governed by

market forces [demand and supply] rather than by other factors. On the other hand, in a Socialistsystem, the government would determine everything on behalf of the country. In a Communist

set up, the government has absolute control over every aspect over production that private

enterprises may not exist at all. In a Mixed economic system, government would be selective in

allowing die presence of private enterprises in certain activities, reserving some spheres

completely for governmental operations. Hence, the economic philosophy of the country directly

determines the scope and functions of business organizations in that country.

3. Geographical and ecological environment: Geographical environment refers to climaticconditions and natural resources, which determines flu manufacturing scope and the nature ofthe products that could be marketed. For example, a country like Kenya has to manufacture more

of products based on forest resources, while the Gulf countries can produce only crude, Japan

can have business in fish, fruits, etc., Countries in the tropical region would have organizations

specializing in products from geographical resources available in abundant in that region,

while organizations in Mediterranean countries have a Different business scope, Scandinavian

countries have scope for dairy product manufacturing, etc. Similarly ecological imbalance is

taking place at an alarming rate in the world today, that deforestation and hunting of rare species

of animals for food are all prohibited now. Hence, while identifying the business opportunities,

business organizations have to be conscious of the limitations posed by the geographical and

ecological considerations.

4. Legal environment: It is well known that every country has a number of legal regulations toensure that the interests of business organizations do not run counter to national interests.

Right from the stage of incorporation of organizations, their listing in stock exchange, reprisal of


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customer complaints, payment of tax to government, manufacturing practices, human resources

development to pricing of products and services, a number of legal regulations have to be

fulfilled. For example, in USA and several western countries, consumer protection is very active,

that even a medical practitioner is subjected to huge liabilities in limes of deficiency in services.

In India and other countries, very rigorous legal provisions arc in place to prevent hunting of rare

species, that any organization, which manufactures products based on such species, have lo get

legal sanctions. In case of failure to honor cheques issued, organizations are now a days

made to pay hefty compensations. Hence, the deterrence in terms of legal provisions has become

the order of the day. All organizations have to first of all address these provisions become coming

in to steam.

5. Technological environment: This is a very significant external factor determining thedestiny of business organizations. Supported by computerize operations, modem business

organizations have succeeded in analyzing customers, minimizing the defects in products,ensuring service at the right time and place, etc. While communications use to take unduly long

time in those days, business communications are instantaneous these days, thanks to modem

satellite technology. Modern organizations have recognized that research and development

alone can ensure organizational growth and stability. They have become more and more pro-

active and remain as change agents of the economy. Governments have also become more

technology conscious that right from police controls to registration of title deeds,

computerizations has been adopted. Customer servicing through call centers is the latest

necessity of organizations. Manufacturing activities have become more and more technicallysophisticated. Therefore business environment has become highly dynamic.

6. Social environment: Social environment today has brought compulsions on businessorganizations to adhere to certain business ethics and morals. Social responsibility of business is

an important force that modern business organizations cannot wriggle out of their duties and

responsibilities towards the society. For example, every leather manufacturing or process unit is

made to install pollution prevention system. Similarly, the expectations of various interests in the

society have undergone a sea of change. The shareholders, promoters and owners expect a

reasonable return on their investments. The workers expect security of service, terminal

benefits, accident relief and various other compensations from the organizations. Government

expects the business units to pay tax regularly and participate in social improvement. The

distributors and agents expect the organizations to ensure smooth delivery process and demand

more commission and compensation. Suppliers expect the organizations to give them continuous

business and prompt payment of bills. Therefore each social group has a specific interest, the


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combination of all these, exerts enormous pressure on the business unit. A business unit which

succeeds in meeting the interests of all these groups remains successful and grows.

7. Educational and cultural environment:Educational environment in a country determines thequality of population. A country with very high illiterate population would always experience

political and economic instability. Similarly, lack of education may also give scope for the

existence of superstitious beliefs, fatalistic attitude, etc. People's choice of goods and services

would be more governed, by their religious faiths and beliefs. For instance, in the colonial days,

the Indian population was a victim of the Britisher's divide and rule tactics. The economic

development of a country completely depends on the literacy level which alone can pave the way

for improvement in science and technology, modernization, industrialization, etc. In such a

country, the business opportunities are plenty.

8. Cultural environment:Cultural environment refers to the values, norms, customs, ethics, goalsand other accepted behaviour pattern of people in a country. In olden days, religion was the basisof all activities in a society. The religious leaders and institutions determined what business

should do and what people must consume. In India, the existence of caste system has done more

damage than any good. Caste based politics has become the order of the day. Under the pretext

of working for backward and downtrodden people, several persons have amassed fortune. This is

worsened by political support and policies. A modern organization does not have the liberty to

recruit people on merit but it has to follow strictly die reservation policy of the government.

Another serious aspect of the cultural environment is the attitude and behaviour of the people in

urban and rural areas. The urban - rural divide has created enormous problems for administratorsand specifically business organizations prefer urban educated person to persons from rural areas.

9. Political environment:Political stability is one important factor winch determines the businessgrowth or downfall. A country with relative political stability would witness inflow of foreign

capital and collaboration. By political stability we mean that the policies of government

remaining consistent. As the business decisions arc based on government policies, frequent

changes in these policies would force business organizations to change their policies too which,

makes functioning very difficult. Sometimes, when the policies determined by a party in power

are reversed by the succeeding party forming the government, there would be far reaching

changes in business environment For example, India was following a policy of protectionism till

late" 1908's. Hence, the industrial development and economic development could not take place

at a rapid rate. In the absence of competition, the business organizations, made people to accept

inferior quality goods and services. Once, the liberalization policy is adopted, the scene has

completely changed. Today, no business can survive unless it provides quality goods or services


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on par with the multinational corporations. Another aspect of political environment is the

political ideology with which a party is wedded to, would make the government tow the lines of

countries with similar ideologies. Until the disintegration of USSR, India was simply following

USSR's lines, but after the disintegration, India has to literally fend for itself. With the pressures

mounted by the Western countries, India had to accept various trade and monetary policies. This

has brought about a complete change in business environment.

Inter- Action Matrix

Present era is the era of competition. A business is successful only if in the present market place it

anticipates and interprets the development of external environment that is not under the control of the

company. Any change in these forces affects the enterprisers long- term goals. The key to success for any

onganisation is better understanding to the environment.

All economic factors whether economic or non- economic such as (P.E.S.T.), have interaction with each

other, due to this inter action the environment has become extremely dynamic and complex, the

economic and non- economic factors are so closely related and all of these are very confusing that

sometimes it appears very difficult to separate them and any attempt to make any distinction between

them proves to be futile.

The interaction matrix between various economic factors is as shown below:

On the basis of factors

a. INTERACTION MATRIX

Economic

Environment

Non- Economic Environment

Sociological EducationalPolitical

and LegalHistorical

Physical and

geographical

Economic system + + + + +

Economic

structure+ + + + +

Functioning of

economy+ + + + +


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Economic

planning+ + + + +

Economic

programmes+ + + + +

Economic policies + + + + +

Economic control

and regulations+ + + + +

Economic growth

and development+ + + + +

On the basis of Space

b. INTERACTION MATRIXNo- National Environment National Environment

National Economic

Environment

National Non-Economic

Environment

Local Economic Non

Economic++ ++

Regional Economic Non

Economic++ ++

International Economic Non

Economic++ ++

On the basis of time

c. INTERACTION MATRIXNon Present Environment Present Environment


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Present Economic

Environment

Present Non-Economic

Environment

Past Economic Non Economic ++ ++

Future Economic Non

Economic++ ++

Environmental Scanning

The term environmental scanning in business means to Carefully analyze the various factors influencing

the business. Environmental scanning is not once and for all; rather it is a continuous process.

According to Jauch and Glueck, Environmental analysisis the process by which strategists monitorthe environmental factors to determine opportunities for and threats to their firms. Environmental

analysis also consists of managerial decisions made by assessing the significance of the data of the

environmental analysis.

Environmental scanning is needed because of the following reasons:-

1. Effective Utilization of Resources- the key to business success is the most effective utilization ofthe company resources, existing resources as well as the additional resources it can mobilize. All

this involves the evaluation of the companys strengths and weaknesses in the light of the

environmental threats and opportunities and taking appropriate measures to harness the

opportunities or to combat the threats and formulation of strategies accordingly.

2. Constant Monitoring of the Environment- environmental scanning provides a clear cut ideaabout the existing environment. Without environmental scanning it would not be possible to

know the changes in customers taste and preferences, competitors moves, latest innovations,

latest policy developments etc.

3. Strategy Formulation- environmental analysis will indicate the areas for diversification andgrowth as well as measures to face the problems. Knowledge and understanding of its

environment by a firm leads to more effective strategic decision making by permitting proactive

strategy based upon forecast proactive for the business.


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4. Identification of Threats and Opportunities- environmental analysis can help the firm inidentifying its threats and opportunities. After the proper identification, strategies can be

adopted to exploit the environmental opportunities and to overcome the threats.

5. Useful for the Managers- Managers have found much value in environmental analysis in manyways. If we compare the overall economic performance of the companies that made

environmental assessments with those who did not, we will find out that those that did make

such assessment out performed those who did not.

6. Prediction of Future- predicting future has become one of the most important functions andskills of the management. Future managers have to be more anticipative than reactive and

problem solvers.

FACTORS TO BE CONSIDERED FOR ENVIRONMENTAL SCANNING

1. Events- Events are important and specific occurrences taking place in different environmentalsectors e.g. The gas leakage accident at the Union Carbide factory at Bhopal and the resulting

holocaust was an event.

2. Trends- Trends are the general tendencies or the courses of action along which events take place.3. Issues- Issues are the current concerns that arise in response to events and trends.4. Expectations of People- The expectations of the general public from the Government is of

legislating changes in rules and regulating pertaining to safety measures and strict enforcement

through various mechanisms.

APPROACHES TO ENVIRONMENTAL SCANNING

KUBR has suggested 3 approaches:

1. Systematic Approach- The important features of this approach are as follows:- In this approach, information for environmental scanning is collected systematically. Information which is pertaining to business and industry could be collected

continuously to monitor changes and take the relevant factors into account.

Continuous updating such information is necessary not only for strategicmanagement but also for operational activities.

2. Ad-hoc Approach- The important steps involved in this approach are:- Under this approach organization may conduct special surveys and studies to deal

with specific environmental issues from time to time.


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Such studies may be conducted when an organization has to undertake specialprojects, evaluate existing strategies or to devise new strategies.

Changes and unforeseen developments may also be investigated with regard to theirimpact on an organization.

3. Processed Form Approach- The organizations generally use information in processed form i.e. supplied by

government agencies or private institutions.

The organizations also use secondary sources of data, available from differentsources both inside and outside the organizations.

SOURCES OF INFORMATION FOR ENVIRONMENTAL SCANNING

A. Daily Newspapersi. Economic Times

ii. Business Standardiii. Financial Expressiv. The Times of Indiav. The Hindu

vi. International Herald TribuneB. Journals

I. Business IndiaII. Business World

III. UpdateIV. Fortune IndiaV. The Sunday Observer

VI. The Economic and Political weeklyVII. Environmental Trends and Scenarios

VIII. Main StreamIX. India TodayX. Commerce

XI. SeminarXII. Harvard Business Review

XIII. Sloan Management JournalXIV. Long Range Planning JournalXV. Fortune International


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XVI. C.M.I.E PublicationsXVII. Economist

XVIII. I.M.F World Economic OutlookC. Govt. Publications

i. Govt. information sources like census of India reports, five year plan reports,statistical abstracts of India etc.

ii. Periodical reports like economic surveys, annual survey of industries, annualreport of ministries etc.

iii. Occasional reports brought out by various statutory agencies such as guidelinesto industries, policies related to specific industries, export, import, policies.

iv. RBIs department of statistic also publishes valuable occasional papers related todifferent aspects of the economy and industry.

v. References such as India-a-Reference(annual) published by the Ministry ofinformation contains comprehensive information on the geographic and

demographic features of India, its political and social institutions, economy and

culture, plans, programmes etc.

D. Institutional Publicationsi. Bombay Stock exchange Directory

ii. The Centre for Monitoring Indian Economy (CMIE)iii. Kolhares Industrial Directory of India. Published by Kothari Enterprises,

Madras.iv. Publications of market research agencies, such as Operation Research Group

(OPR). The National Council for Applied Economic Research (NCAER).

v. Publications of Trade and Industry federation such as FICCI, ASSOCHAM andindustry associations like ATMA.

vi. Annual company reports.E. Industrial Espionage Agencies

Private agencies provide information and reports on competitors plans and

activities which are essential for strategic planning.

ECONOMIC ENVIRONMENT

Economic environment influences the business to a great extent. It refers to all those economic factors

which affect the functioning of a business unit. The following factors constitute economic environment

of business:-

a. Economic system


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b. Economic planningc. Industryd. Agriculturee. Infrastructuref. Financial and fiscal sectorsg. Removal of regional imbalancesh. Price and distribution controlsi. Economic reforms

j. Human resourcek. Per capita income and national income

The economic system in a country decides the development prospects to a great extent. There are 3 types

of economic systems viz:-

1. Capitalism2. Socialism3. Mixed economy

A. CAPITALISM According to LOUCKS, Capitalism is a system of economic organizationfeatured by the private ownership and use for the private profit man-made and natural made

capital. There are basically two kinds of capitalist system:-

a. Laissez Faire in this type of capitalist system, the government intervention in the economy isabsent.

b. Regulated or Mixed Capitalism- in this type of capitalist system, there is substantial amount ofgovernment intervention in the economic and industrial development.

Characteristics of Capitalism:-

1. Freedom of Enterprise - Individuals and firms have the right to own and use property, and toearn and spend incomes. Here private firms are allowed to obtain resources, to organize

production and to sell the product in any manner to anyone.

2. Private Ownership In this type of system the factors of production i.e. land, labour and capitalare privately owned i.e. one in which there is freedom of private ownership of property. Here

private property is protected, controlled and enforced by law.

3. Profit Motive Under capitalism profit motive acts as a barometer. Persons invest capital intobusiness to earn profit. In a capitalist economy, the person is free to select any occupation he is


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qualified for. This freedom of choice enables the individuals to earn profit from his own started

business.

4. The Market System or Mechanism Of all characteristics of capitalism market, mechanism issaid to be the most important. Profits in a business are related with price mechanism which

guides the allocation of resources under capitalist system.

5. Competition There is a competition among sellers and buyers in an ideal capitalist system. Thetough competition among producers compels them to make best use of factors of production and

produce at minimum cost in order to earn maximum profits.

6. Freedom of Contracts People are free to make contracts and settle transactions. So everyperson is free to sell his goods or services to anyone he feels like.

7. Limited Role of Government In Laissez Faire form of capitalist system, the government doesnot interfere in the working of the economy. Producers and consumers are free to take their own

decisions.8. Absence of a Central Plan Freedom of enterprise, occupation and property rights rule out the

possibility of a central plan. The activities of various economic units in a capitalist system are not

guided or controlled by a central plan.

Merits of Capitalism:-

1. Efficient Utilization of resources every producer tries to use the different factors of productionto the best possible use to minimize cost of production to stand the competition.

2.

Democratic Producers, consumers, the workers, all enjoy economic freedom and are free towork as they like. Goods are produced according to liking and demands of the consumers.

3. Automatic Balance in the System the capitalism works automatically through pricemechanism. The demand and supply i.e. price mechanism balances the imbalances in economy.

4. Efficiency properly rewarded both producers and labourers work hard and with moreefficiency as producers can make more profits and labourers can get better wages.

5. Incentives for risks and uncertainties Entrepreneurs are induced to invest more money even inthe projects involving high risk by providing them incentives. This results in technological

progress and new innovations, which involve great risks.

6. Economic Growth the capitalist countries have become rich and affluent and people of thatcountry enjoy higher standard of living. This is because of presence of competition also where

producer tries to produce at minimum cost and ultimately consumer is benefited.


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7. Encourages Capital Formation the existence of capitalism is dependent upon the right toinherit the property and profit motive, because of which people have incentive to save a part of

their income which they can further invest to make more profits.

Demerits of Capitalism:-

1. Wastage and misallocation of Resources under capitalism most of resources are wasted onadvertisement and salesmanship and products are produced to satisfy profit motive only and

essential commodities are neglected for production.

2. Economic Stability Business cycles affect consumers the most. They suffer both in periods ofinflation and deflation.

3. Inequality of Wealth an unplanned capitalist economy can be compared with a vehicle withoutsteering wheel. Artificial scarcity of goods is created by greedy entrepreneurs who earn profits to

great extent while consumers ultimately suffer.4. No freedom in modern capitalist market one can find presence of group rivalries and price

wars, price arguments etc.

5. Class Struggle rich are becoming richer and the poor poorer. The society gets divided into twoclasses have and have-nots. There is a clash of interests.

6. Unemployment and corruption corruption and unemployment has become a chronic disease inthe capitalist system.

7. Inflation inflation spreads throughout the world because of mutual international relations andtrade. Also inflation is because of nature of modern capitalism in non-productive expenditureprimarily for military purposes by the state.

B. SOCIALISM Socialism in an economic system where the means of production are eitherowned or managed by the state and where the investment structure, consumption, allocation of

resources, distribution of income etc. are regulated and directed by the state. In socialism, there

is in fact a variety of systems. On one hand there are communist countries characterized by state

capitalism and on the other hand, there are the democratic socialist nations with a dominant

private sector.

Features of Socialism

1. Equitable Distribution of Income Socialism is better for peace and happiness. In socialistcountries, an equitable distribution of income is an important feature. Equitable distribution of


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income does not mean that there is perfect equality in income distribution. There may be wage

differentials, depending on the nature and requirements of the nature of the job.

2. Government Ownership here, the main means of production are either owned by thegovernment or its use is governed by the Government. It becomes easy to achieve the desired

patterns of resource allocation if the state owns almost the whole of the means of production.

3. Economic laws in socialist system, all working people have an interest in the fullestunderstanding and application of the economic, laws of socialism. The main change in economic

conditions in a country that has taken the road of building socialism leads to the economic laws

of socialism coming into being and beginning to operate.

4. Plan of action or Central Authority the liberal socialist economy preserves to a considerableextent free choice of consumption. The socialist economies generally have a uniform plan of

action or central authority like the central planning agency to formulate the national plan for

development.

Merits of Socialism

1. Better Allocation and utilization of Resources In socialist economy resources are owned andcontrolled by the state, so no wastage and duplication takes place. There is no self interest of

private individuals and so no profit motives.

2. Elimination of Unemployment Central planning authority on behalf of state gives boost toemployment. It also ensures that all resources are put to their best use.

3.

No Cyclic Fluctuations as socialist economy is a planned economy, there is no surplus anddeficiency which results in smooth working of the economy. There are no business fluctuations.

4. No Class Struggle there is a collective ownership of different factors of production whichensures the best utilization of available resources of economy and equal distribution. So there is

no gap between haves and have-nots.

5. Reduction in Inequality of Income since there is no gap between haves and have-nots there isequality of income. Equal chances are given to all in all the fields like occupation, education etc.

Demerits of Socialism

1. Bureaucratization the owners in private enterprises take interest in their work in capitalism.But in socialism government gets all the work done through their people who do not take so

much interest and lack enthusiasm as people of private enterprise.


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2. Lack of Incentives major disadvantage of socialism is that people do not have incentives forgreater work, efficiency and enterprise. People get fixed wages and salaries from government so

they lack initiatives and incentives.

3. Red Tapism in socialist system the decisions are delayed as files go on moving from one place toanother which results in wastage of time and money also.

4. Concentration of Economic Power in the hands of State the power gets concentrated in thehands of government or state, and thus government may not do work according to desires and

preferences of the consumers.

5. Promotes Corruption the government being ultimate authority the govt. servants often becomedishonest and corrupt while doing work of the people.

6. Misallocation of Resources allocation of resources is made according to the desires anddemands of the consumers since there is no place for price mechanism.

Mixed Economy

There was no reference to the mixed economic system in Economic literature in the past. Economists

were mainly familiar and advocated the Laissez faire or free enterprise system, as several countries could

develop fast following the free enterprise system, in which there was no or little government

intervention. The entire economic system operated with the price mechanism at its center point. The

producers produced what the consumers wanted and this provided very little scope for the government

to intervene in the system. The Classical economists and their ardent supporters believed that the

invisible hand will direct the economy and with private initiative and enterprise, every country should beable to record a faster growth as proved in the case of UK, USA, Europe, Australia, and other countries.

But over a period under the leadership of Karl Marx, a new economic system was developed called

socialism, in which there is no scope for any private enterprise as everything owned and controlled by the

government. The government decided the type of developmental activities and me requirements of the

society and used the available resources in the provision of these requirements. Several countries like

USSR, Communist China, Vietnam, Cuba and others preferred this socialist system in which government

is made the custodian of the society. The main reason for Die emergence of this new economic system

was the failure of capitalism during the 1929 depression to revive every economy from depression. Keynes

himself thought that capitalism without some of its evils could certainly help economic recovery. Hence,

a time came when economists felt that cent per cent free enterprise or cent per cent government

governed economic development cannot work satisfactorily. A compromise between these extremes was

thought of as an ideal economic system. The new system called 'mixed economic system' contained the


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merits of both the capitalism and socialism and appeared to be full of promise. This mixed economic

system is adopted by India as indicated by the First Industrial Policy Resolution 1948.

Characteristics of mixed economy:

1. Co-existence of public and private sectors:In a mixed economy, one will find the existence of both the private and public sectors. In such a system,

the government will undertake the responsibility to build and develop certain sector activities and leave

the other activities for the private initiative. In India, the government announced the adoption of the

mixed economy system through its 1948 Industrial Policy Resolution. The government clearly earmarked

the industries to be completely under the state control, the industries which are to owned and controlled

by the state as well as the private sector and industries which are completely left for the private sector. In

this way the Resolution provided for the simultaneous existence of both private and public sectors.

2. State participation in economic development:This is the second feature of mixed economy, according, to which the state reserves its right to design

and decide the type of development to be achieved. In such a set up, the government strives to promote

the welfare of the country by ensuring social order, social justice and establishing all the necessary

institutions which are required to achieve the desired pattern of growth and development.

3. Distribution of ownership and control of resources:This is the next feature of mixed economy. In this system, the government itself enters the field of

production so that the available resources are fully utilized. This will also help to avoid concentration of

wealth in the hands of a few and enable distribution of ownership and control of productive activities. As

a result there is no scope for exploitation of any group, say labor, by any other group. In this way the

weaker section of the community is well protected and taken care of. Only the mixed economy will

enable the government to attain the objectives of the Directive Principles of the Indian Constitution.

4. Directing the investment in socially desirable projects and channels:Mixed economy facilitates the flow of investment into channels which confers the society with several

benefits. For example, the Indian government has invested huge amount in several projects to develop the

infrastructural facilities. This forms the basis for the development of other sectors. The investment in

these infrastructural areas will not come forth from the private sector as the return is nil. Hence, the

government in a mixed economic set up provides the thrust by developing the necessary background and


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of development it wants to achieve and closely monitor the activities of the private sector to ensure that

the social interest is never at stake. Obviously, planning is a very difficult exercise in a mixed economy set

up. The success of planning will depend upon; i) the extent to which the public sector is able to rise to

achieve the social gains aimed for, ii) the success of the state in guiding and regulating the private sector

activities towards social goals and iii) the extent lo which (lie state is able (o check the distortions taking

place in investment by private sector affecting (he interest of the public sector. Hence in the planning

process the state has taken up the following steps to ensure the accomplishment of the objectives of the

mixed economy,

a. By holding complete ownership of defense and heavy industries, the government has providedan industrial base with which the private sector is expected to plan its investment activities.

b. The state also has made huge investments in economic infrastructures so as to help theextension of market for goods, raising the productivity in agricultural and industrial sectors,encouragement of further productive investment

c. The government has complete control of the financial institutions including banks so that itcan ensure that the banks and other institutions play a key role in the development activities of

the state. The government could also realize the expected gains by encouraging the priority

activities in every sector. The economic institutions are made to support the weaker sections of

the community.

d. Through powerful legislations like MRTP Act, FERA, etc., the government could ensure thatthere is no scope for exploitation of the common people by the private enterprise. Such a legal

framework lays down the rules of the game and ensures fair play in a mixed economic set up.

e. As a method of protecting the weaker and downtrodden people, the government has policieslike rationing, price controls, etc. Such regulations are built in the planning mechanism itself,

so that the private sector cannot exploit the community.

f. Towards the improvement of welfare in the economy, the state has undertaken several specificprograms aimed at specific target groups. For example schemes aimed at the backward andschedule tribe providing them reservation in educational, employment and other opportunities,

rural oriented schemes for the rural folks, health for all schemes, provision of free educational

and medical facilities up to a certain level, etc. All these schemes aim at improving the social

welfare. In all these activities the private sector is also welcome to play its role.


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g. The government makes effective use of the tools of fiscal policy viz. taxation and publicexpenditure, so as to achieve the objectives of economic planning.

Marxism

Marxism is essentially socialism in different garb. The pure socialism is proved to be impractical and it

made role of government the center point. Most of the government could not fit in this role effectively.

Further capitalism with its explicit goals threatened the success of socialism. It was at this juncture that

Karl Marx came up with his ideology, which led to the evolution of Marxian socialism. Marx succeeded

through his logical reasoning that economics dominates every activity of a society. This leads to class

struggle. When one struggle is tackled another one crop up. The continued onslaught of the capitalist on

the society would result in the creation of haves and have-nots. This division of the society would widen

with the continuance of capitalism, which ultimately will result in class struggle. Marx explained

through his theory of value that every product should be valued in accordance with the value of laborcontained in it. But the laborers are rewarded at a very much lesser rate than what they create. That is,,

every laborer contribute more by way of his work to produce the product but he is paid a very low wages.

The difference is the gain realized by the capitalists. The capitalists would accumulate profits this way at

the cost of worsening labor condition. Over a period the divide between the proprietary class and the

labor class would widen that much, that there would be social upheaval. Karl Marx predicted class war

and argued that unless the capitalist class realizes this, there would be severe impact on production and

economic condition of a country. His argument came true in the case of France that the French

revolution broke out in 1789. There were similar problems in different parts of the globe, like inerstwhile USSR [Scissor's crisis], and China. China, especially remained a closed economy till early

I990's. But in China, the Marxism led to the emergence of communism. This is discussed in detail below.

Though Marxism held sway over a number of countries for some time, yet it has inherent defects. Firstly,

Marx's view that all activities in all countries are basically economic in nature is not true. Secondly, his

argument that class struggle continuously takes place in every country did not hold water. A number of

other reasons of economic, social and cultural nature led to the struggle and not the way Marx predicted.

Thirdly, the theory of surplus value could not be applied in practice in service industry. Fourthly, Marx

never took into the interference that a government could make in case of exploitation of society by the

capitalists.

Communism

Communism is Marx's prediction at the fall of capitalism. Marx argued that the widening inequalities in

a society coupled with class struggle should ultimately sound the death knell of capitalism. He is of the


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view that when capitalism falls, the communism will emerge in which, the laborers will lead the country.

The government will own all the resources and determine the needs of the society. It will also decide

various other issues of macro and micro importance. Government will turn out to be the custodian of the

society and in a pure communistic society; people will lead a life where basic necessities are provided by

the government. Unemployment will be very low as every one is occupied in some avocation or other.

But the way in which communism was practiced in China created an impression that the government

would be oppressive in its approach that the people will lead a life of slavery. One has to work to earn his

bread. Military type of regimentation was enforced that common people were subjected to absolute

control and regulation by government. The economy remained closed without any international

relations, both economic and social. There were no two party systems that the nominated representatives

of the Communist party attended to all the governmental responsibilities. Market mechanism is

completely absent in such a system, as government determined everything on behalf of the country.

As has been already pointed out depending upon the economic system, the business environment will

change. In a capitalist system, the environment provides opportunities for every one who wants to

maximize gains. In a socialist system, the government undertakes the responsibility of providing

everything to the citizens. In a Marxist economy, it is ultimately the laborers who will hold the reins. In a

Communist economy, it is the group of administrators who run the economy in the interest of the

economy.

Strategies to deal with the environment

Uncertainty and interdependence.Uncertainty: Uncertainty arises because managers can neither fully predict nor control what will happen

out of the interface. The managers do not get adequate information of right quality to take decisions to

deal with environmental forces, thus, they have to devise their actions under partial ignorance.

Interdependence: while doing business managers develop a variety of exchange relationships with people

such as suppliers, customers etc. these relationships neither are nor uniform also. Therefore, the

organization has to evolve different strategies to deal with different segments of environment.

If the managers of an organization are successful in reducing environmental uncertainty and reducing

their dependence on external forces, they will gain control over their environment. A number of

strategies have been devised to help managers minimize the power of task environment over the

organization. These strategies may be classified in to three categories.


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1. Strategies for insulating the organization from the environmental forces2. Strategies for gaining control over certain aspects of external environment3. Strategies for organizational adaptation

Strategies for insulation of the organization

According to James Thompson An open system can avoid the influence of external forces through

the process of Boundary Spanningin Boundary Spanning the org devises the mechanism to anticipate

the environmental events to minimize the impact of environmental uncertainties. The spanners filter the

information from the environment and only the relevant information is allowed to reach the core of the

org. the org can also adopt the following strategies based on the environmental anticipation that insulate

the org from erratic and potentially damaging environmental demands

1. Buffering Buffering absorbs the environmental fluctuations of the org.(Stocking the raw materials

and finished goods) this enables the management to maintain the operations when there

are shortages of raw materials and when there are peaks and valleys in demand for these

products

2. Leveling: Leveling aims at maintaining the sales at uniform level throughout the year, during

periods of high demand, a premium rate may be charged for the product and during

periods of low demands, incentives may be given to the customers in the form of free

gifts, discounts, lucky coupons etc.

3. Rationing: Rationing is a devise used to establish a set of priorities for using the organizations

scarce resources, it is a method of curtailing demand for input/ output according to the

environmental situations

Strategies for gaining control over certain aspects of external environment

These strategies focus on reducing the organizational dependence on the environment by increasing its

power or control over some aspects of the environment. These strategies are as follows:


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1. Creation of prestige Through advertisement, public relation with press etc.

2. Agreements With suppliers of materials, banks and financial institutions, labour unions, customers,

competitors etc.

3. Co- potation According to James Thompson, Co- Optation is the process of absorbing new

elements in to the policy making structure of an organization as a means of averting

threats or maintaining its stability in the changed circumstances.

4. Procurement of key personnel5. Lobbying

Lobbying is the process of convincing the various powerful elements of the environmentto act in favour of the organization. For instance, the top management of the

organization may resort to lobbying with some members of the ruling party to gain

control over the external environment of the business. They may play an active role to

convince the government to enact laws and modify its monetary, licensing and foreign

trade policies. Political lobbying is also done by the organizations, generally by giving

hefty donations, to increase the domain of their influence in the environment, moreover

there are apex associations of industries like CII, who takes the actions to safeguard the

interest of their member organizations. Most of the industries nowadays have their own

associations.

6. Coalescing Two or more organizations nay merge their organizations to have better control over the

environment as various resources are pooled together. The merged organizations are

generally those which have some sort of interdependency like procurement of raw

materials

Strategies for organizational adaptation


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Managers can anticipate changes in environmental conditions and adapt accordingly. With information

gathered from forecasting, market research etc. managers can help their organizations adapt internally to

anticipate environmental demands. This is one of the most adapted strategies. This strategy involves two

types of adaptations:

1. Adaptation of Organizational Structure Organizations may adopt suitable corporate strategy to match opportunities and

strengths like Growth, Stability, Profit and combination strategies.

2. Adaptation of systems and processesOrganizations design their systems and processes according to the needs of the environmental so that

they are in a better position to cope with the environmental needs and challenges.

REVIEW QUESTIONS:

1. Discuss the features of modern business2. What is business environment? What are the constituents of business environment?3. Write a short note on : a] political environment b] social and cultural environment c] economic

environment d] religious environment

4. Why should the environment be scanned? What purposes would it serve?5. Explain in detail (he features and elements of economic environment.6. What is an economic system? Discuss various economic systems with their merits and

limitations.

7. What are the features of mixed economic system? Explain in detail the working of mixe-1economy in India.

8. What type of distortions could take place in planning in a mixed economic system?9. Analyse the strengths and weaknesses of capitalism and socialism.10. Distinguish between Marxism and communism. Trace their evolution.


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Business Environment Unit 1

Documents

Transcript of Business Environment Unit 1