BE Session 1

8/3/2019 BE Session 1

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Session-1Business

Environment


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Meaning of Business

Environment

Business Environment consists of all those factorsthat have a bearing on the business, such as the

strengths, weaknesses, internal powerrelationships and orientations of the organization ;government policies and regulations; nature of theeconomy and economic conditions; socio-culturalfactors; demographic trends; natural factors; and,

global trends and cross-border developments.


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Types of Environment


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External Environment

Micro Environment

The micro environment consists of the actors in thecompanys immediate environment that affect the

performance of the company. These include the suppliers,marketing intermediaries, competitors, customers and the

publics. the macro environment consists larger societalforces that affect all the actors in the companys microenvironment namely, the demographic, economic, natural,

technical, political and cultural forces.


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Suppliers

An important force in the micro environment of a company is thesuppliers, i.e., those who supply the inputs like raw materials andcomponents to the company. The importance of reliable source/sourcesof supply to the smooth functioning of the smooth functioning of the

business is obvious.

Because of the sensitivity of the supply, many companies give highimportance to Vendor development. Vertical integration, wherefeasible, helps solve the supply problem. For example, Nirma hasalways been a believer of the logic that captive production plants for

raw materials is the best way to production costs in check and it hasgone for a mammoth backward integration. In many cases, however,outsourcing is more beneficial.


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Customers

A business exists only because of its customers. Monitoring the customer

sensitivity is, therefore, a prerequisite for the business success.

In choosing the customer segments a company should considers suchfactors as the relative profitability dependability, stability of demand,growth prospects and the extent of competition.

Competitors

A firms competitors include not only the other firms which market thesame or similar products but also all those who compete for thediscretionary income of the consumers.

Competition has different levels and dimensions.


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Marketing Intermediaries

The immediate environment of a company may consist of a number of

marketing intermediaries which are firms that aid the company inpromoting, selling and distributing its good to final buyers.

Different marketing intermediaries can be very helpful in formulatingand operationalizing the marketing strategy.

Financiers

Another important micro environmental factor is the financiers of thecompany. Besides the financing capabilities, their policies and strategies,attitudes (including attitude towards risk), ability to provide non-

financial assistance etc. are very important.


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5/5/12Publics

A company may encounter certain publics in its environment. A public

is any group that has an actual or potential interest in or impact on anorganisations ability to achieve its interests. Media publics, citizensaction publics and local publics are some examples.Some companies are seriously affected by such publics. For example,one of the leading companies in India was frequently under attack by themedia public, particularly by a leading daily which was allegedly bent on

bringing down the share prices of the company by tarnishing its image. Such exposures or campaigns by the media might even influence thegovernment decisions affecting the company. Many companies are alsoaffected by local publics.Environmental pollutions is an issue often taken up by a number of local

publics. Actions by local publics on this issue have caused some

companies to suspend operations and/or take pollution abatementmeasures. Non-government organisations (NGOs), particularly indeveloped countries, have been mounting up protests against childlabour,, cruelty against animals, environmental problems,deindustrilisation resulting from imports and so on. Exports ofdeveloping countries, particularly, are affected by such developments.


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5/5/12Economic Environment of Business

Economic SystemEconomists define an economic system as the sum total of thedevices by which the preference among alternative purposes ofeconomic activity is determined and by which individual activitiesare coordinated for the achievement of these purposes. Thecentral problem of an economic system is the allocation of

resources.Capitalism, an economic system characterized by private orcorporate ownership of capital goods, by investments that aredetermined by private decision, and by prices, production, and thedistribution of goods that are determined mainly by competition

in a freemarketSocialism:any of various economic and political theoriesadvocating collective or governmental ownership andadministration of the means of production and distribution of

goods
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5/5/12Macroeconomic Scenario

Rates of GrowthSteadily rising incomes in a period of high rates of growth increase

demand for various goods, but the rise in the demand for consumerdurables is most notable. This naturally induces business activity inthis sector. IIt has been observed that in a period of high growth, demand forautomobiles, motorbikes, air-conditioners, music systems, televisions,refrigerators, and such other articles increases rapidly and industries

producing these commodities register high rates of growth. This pushesup growth in capital goods industries and intermediate goods industries swell. In a period of slow growth, the industrial sector suffers a setback asthe aggregate demand is very much reduced. This has an adverse impacton business sentiment and investment is reduced.

The most recent example of this phenomenon has been the year 2008-09 when the rate of economic growth fell in the Indian economyprimarily on account of the global meltdown. As a result, businessactivity was adversely affected and industrial growth in this year wasjust 2.7 per cent (down from 8.5 per cent in 2007-08).


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Rates of Saving and InvestmentSavings and investment in a country determine its business potential.Investment can be undertaken in directly productive activities or in

infrastructure. Industries and agriculture are directly productive activities.Their growth requires massive investment in them. In less developedcountries like India, a substantial part of agricultural output is consumed byfarmers themselves and thus only part of it is available for business.Industrial output, before reaching the final users passes through various

business operations. Hence, as investment in industries increases, the scope

for business activity grows. Growth of agricultural incomes as a result oflarger investment in the farm sector results in increased demand forindustrial goods and thereby contributes to growth and business. Investmentin transport, power and communication system facilitates business activity.In fact, shortage of power or poor transport and communication system dueto inadequate investment in them can prove to be a major obstacle to

business growth. During the 1980s and mid-1990s China, Republic ofKorea and some South-East Asian countries, notably Malaysia, Thailand,and Indonesia had gross rate of investment as high as 30 per cent ormore. This enabled them to register rapid economic growth as a result ofwhich there as spectacular expansion in their business activity. Low

investment results in slower economic growth and lower business potential.


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5/5/12Inflation

Inflation is commonly defined as a persistent and

appreciable rise in general level of prices. For aneconomy producing below its potential, manyeconomists have long maintained that inflation ofcreeping variety will have a positive effect on output

and employment. This implies that inflation of a mildsort increases aggregate demand which, in turn,opens up fresh opportunities for business growth. Insuch as environment not only the demand for existing

goods increases but the business can also introducenew items for which demand may be created throughdynamic marketing

Fiscal Imbalance


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Prosperity, Recession, Depression and Stagflation

Prosperity

From the point of view of business, the prosperity phase ofbusiness cycle is ideal. In this phase the economy expandsin response to growing aggregate demand and business

firms have many options. Expectations of rising profits

induce firms to expand the scope of their activities. Newproducts are introduced in this period and markets are createdfor these products. In the prosperity phase, rapidly risingincomes of the people allow them to increase theirconsumption substantially and whichever firm can take

advantage of this situation by taking appropriate policydecisions will register rapid growth.

Recession

Forces of contraction get strengthened during recession.


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Depression

Following recent recessions some economies have movedinto a period of sustained recovery. In cases whenrecessions persisted over a long period, economies got

pushed into depression. Depression is characterised by loweconomic activity, a notable fall in production and

employment, decline in general price level, deterioration inbusiness prospects and continuous erosion in the profits of

producers and traders. During the depression phase, there isan atmosphere of pessimism. These are the conditions inwhich certain firms suffer heavy losses and finding uncertain

situation, these firms are not very hopeful of earning profits.


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StagflationStagflation is a relatively new phenomenon. It is characterised by

inadequate growth, inflation and unemployment. Stagflation has been a

common phenomenon in many Latin American countries but did not

exist in the developed countries before the 1970s. In India, there have

been just two periods when inflation was accompanied by little growth.

In these periods unemployment was also quite large. Stagflation resultsfrom wrong fiscal policies of the government. When some government

attempts to achieve a high rate of economic growth by resorting to

inflationary policy, the results may be encouraging in the short-period

but in the long-run such an economy plunges into stagflation. During

stagflation individual firms can do little to expand the market for their

products as most buyers attempt to defer purchases of all the goods other

than necessities.


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5/5/12The Money Market

The Money market refers to a mechanism wherebytransactions in short-term claims on banks,

financial institutions and corporate sector areeffected. Thus it is a market for short-term monetaryassets. It is not an integrated unit. The Indian money

market is broadly divided into two parts, viz., theunorganised and the organised. In the unorganisedsector of the Indian money market, indigenous

bankers, unregulated non-bank financial

intermediaries and money lenders operate. Corporatesector of business does not seek funds from the


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Institutions in the unorganised segment of the money market. Theorganised sector of the Indian money market comprises IndianCommercial banks, foreign banks, cooperative banks, finance

corporations and Discount and Finance House of India Limited.Though the organised sector of the Indian money market is fairlyorganised, it is still far less developed than the London or NewYork money market. The main constituents of the Indian moneymarket are:

(i) The Call Money Market

(ii) The Commercial Bill Market

(iii) The Treasury Bill Market

(iv) The Repo Market

(v) The Certificates of Deposits Market

(vi) The Commercial Paper Market

(vii) The Money Market Mutual Funds.


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The Capital Market

The Capital market is concerned with long-term funds.Broadly speaking it can be divided into two constituents:

(1) The financial institutions, and

(2) The securities market.

The Industrial Finance Corporation of India Ltd. (IFCI),The Industrial Development Bank of India (IDBI),Industrial Investment Bank of India (IIBI), State FinancialCorporations (SFCs), State Industrial DevelopmentCorporations (SIDCs), the Life Insurance Corporation ofIndia (LIC) and The General Insurance Corporation ofIndia (GIC) and its subsidiaries are the principal financial


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In India, since at the time of Independence therewere no institutions of long-term corporate

finance, the government took initiative to set updevelopment banks as gap fillers.

The securities market has two constituents : (i)the new issue market (the primary market), and(ii) the stock exchange (the secondary market).Everywhere in the world, capital markets haveoriginated as the new issue markets. Oncecorporate enterprises are set up in a large number,secondary market for outstanding issues develops.


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The stock exchange provides a channel throughwhich savings of the people who wish to part

with them for only short periods, becomeavailable to companies for long-term utilisation.In fact, while business enterprises retain thecapital permanently, the shares keep on changing

hands.

From the brief description of Indias financialsystem, it is possible to follow the basic functionsof the financial system. However, in order tounderstand the role of financial system in

business, it is necessary to explain elaborately


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The basic function of financial markets-bothmoney market and capital market is the

collection of savings and their transfer tobusiness enterprises for investment purposesand thereby stimulating capital formation whichin turn accelerates the process of business

growth. The effective channelisation of domesticsavings and obtaining finance from abroad are theimportant activities in the transfer process. In the

transfer process the principal activity is allocationof funds from the savings-surplus to the savings-deficit units. Financial markets, if they are welldeveloped, allocate financial resources

efficiently among the various business

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Economic Policies

Industrial Policy

In the last few decades, various economist have favouredincreased involvement of the government in the allocation of

capital to industries. This practice is known as industrial policyin the United States. This policy has already been practiced inJapan where Ministry of Trade and Industry picked the automobileindustry very early on and decided to expand its role in worldmarkets. The strategy has worked well and the Japanese automobile

industry has been remarkably successful. Those who believe that theUS should also adopt a similar policy argue that adoption of thisstrategy has become necessary to avoid losing out in internationalcompetitiveness.

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Trade Policy

Trade policy is an important factor in theeconomic environment of business. Foranalytical convenience, trade policies areclassified into two categories - Outward-

oriented and inward-oriented. An outward-oriented trade policy does not discriminatebetween production for domestic market andexports. It is also non-discriminatory betweenproduction for domestic market and exports. It isalso non-discriminatory between purchases ofdomestic goods and foreign goods.

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Hence, outward-oriented trade policy provides asomewhat liberalised economic environment to

business. In this environment domestic firmshave the freedom to decide whether they wish toproduce for exports or they will confine theiractivities only to the domestic market. But in

both cases they have to be efficient andinternationally competitive . An inward-orientedtrade policy is biased in favour of domestic

market. This approach is also known as theimport substitution strategy. Protection is theprincipal instrument of inward-oriented tradepolicy. Business firms operating under protective

umbrella do not feel any compulsion to raise

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Indias trade policy was inward-oriented for aboutfour decades since 1951. As a result, its share was

less than half a percent in the world trade. Thispolicy neither made India less dependent on theexternal world nor allowed it to prosperindustrially. The growth of Indian business was

quite poor by international standards in thisperiod. Beginning in 1992, the government haseffected some major changes in import and exportpolicies. These policy changes have reducedexport pessimism. The openness in trade hascreated compulsions for the Indian business toimprove its competitiveness internationally. If it

fails on this front, it will definitely suffer a severe

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Monetary Policy

Monetary policy, according to C. Rangarajan, is an armof macroeconomic policy and, as such as, its role andimportance are determined in any economy be the overall

policy framework and the various instruments available forimplementing policy. Monetary policy influences cost and

availability of credit and money and is thus of great relevanceto business. The increasing openness of the Indian economy inrecent years, the need to service external debt and thenecessity to improve countrys exports in world trade in ahighly competitive external environment require stability inthe domestic price level and monetary policy is often used torealise this objectives.

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Fiscal Policy

Fiscal policy refers to the process of shaping taxation and public

expenditure in order to dampen the swings of the business cycle and tocontribute to rapid economic growth and high employment and stableprices. This policy when mismanaged leads to fiscal imbalances which attimes become unsustainable. This has actually happened in India duringthe last two decades. At present Indias fiscal situation is mostunsatisfactory. On account of continuously increasing non-development

expenditure throughout the 1980s the fiscal situation deteriorated somuch that the Central Governments fiscal deficit was as high as 7.8 percent of GDP in 1990-91. fiscal deficit at this level is unsustainable.Under the FRBM (Fiscal Responsibility and Budget Management) Act,2004, the government announced its commitment to reduce fiscal deficitto 3.0 per cent of GDP by March 2009. In accordance with this, the gross

fiscal deficit was brought down to 2.7 per cent of GDP in the year 2007-08. however, because of economic slowdown in the year 2008-09, thegovernment had to increase public expenditures considerable. As aresult, the fiscal deficit of the Centre rose to as high as 6.2 per cent ofGDP in 2008-09 and might touch the level of 6.8 per cent of GDP in

2009-10.

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Risk Overview

The risk factors are as follows:

Security risk.

Political stability risk.

Government effectiveness risk. Legal and regulatory risk.

Macro-economic risk.

Foreign trade and payments risk.

Tax policy risk.

Labour market risk.

Financial risk.

Infrastructure risk

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