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Business Environment

DMGT

Edited By

Dr. Pretty Bhalla

www.lpude.in

DIRECTORATE OF DISTANCE EDUCATION

BUSINESS ENVIRONMENT

Edited By

Dr. Pretty Bhalla

CONTENTS

Unit 1: Indian Business Environment 1 Tanima Dutta, Lovely Professional University

Unit 2: Industrial Policy and Regulatory Structure 41 Amit Kumar Sharma, Lovely Professional University

Unit 3: Economic Environment of Business 78 Harvinder Singh, Lovely Professional University

Unit 4: Political Environment 98 Neha Tikoo, Lovely Professional University

Unit 5: Monetary Policy 110 Harvinder Singh, Lovely Professional University

Unit 6: Fiscal Policy 127 Tanima Dutta, Lovely Professional University

Unit 7: Socio-culture Environment 147 Tanima Dutta, Lovely Professional University

Unit 8: Legal Environment 177 Harvinder Singh, Lovely Professional University

Unit 9: Foreign Exchange Management 204 Mahesh Kumar Sarva, Lovely Professional University

Unit 10: Foreign Trade 215 Hitesh Jhanji, Lovely Professional University

Unit 11: EXIM Policy 238 Neha Tikoo, Lovely Professional University

Unit 12: International Monetary Fund 249 Rupesh Roshan Singh, Lovely Professional University

Unit 13: World Trade Organization 269 Amit Kumar Sharma, Lovely Professional University

Unit 14: Changes in Business Environment 283 Neha Tikoo, Lovely Professional University

DCOM105 BUSINESS ENVIRONMENT

DCOM402 BUSINESS ENVIRONMENT

Sr. No. Topics

1. Theoretical Framework of Business Environment: Concept, significance and nature of business environment.
2. Elements of environment - Internal and External; Changing dimensions of business environment, Techniques of environmental scanning and monitoring.
3. Planning in India: Emergence of Planning, Planning Commission, National Development Council, Five Year plans-Achievement and Failures with special reference to 11th^ five year plan.
4. Economic Environment of Business: Significance and elements of economic environment, Economic Trends: Savings and Investment, Industry, Growth of Infrastructure Balance of Payment. Inadequacies of the program of Industrialization.
5. Problems of Growth: Unemployment, Inflation, Regional imbalances and Social Injustice.
6. Government Policies - Industrial policy, Fiscal and Monetary policies, EXIM policy; SEZ policy, LPG 1991, Direct and Indirect Taxes with special reference to GST and VAT.
7. Political and Legal Environment of Business: Changing dimensions of legal environment in India, Brief introduction to Competition Act, 2005, FEMA, Corporate Governance and Social Responsibility of Business.
8. Foreign Investment: FDI, FII, Determinants of Foreign Investment, Multinational Corporations: Favourable and Harmful effect of the operations of MNCs on Indian economy, Liberalization and MNC’s.
9. International Business Environmen t: World bank, IMF, General agreement on Tariff and trade.
10. WTO: the WTO agreement, TRIPS, TRIMS, Non-tariff barriers and Dispute settlement mechanism, Kyoto Protocol.

Sr. No. Topics

1. Indian Business Environment: Theoretical Framework of Business Environment, Recent developments in political, economical and financial environment.
2. Techniques of environment scanning and monitoring, SWOT analysis of Indian Economy.
3. Industrial Policy and Regulatory Structure: Industrial Policies; Industrial Licensing; Stock Exchanges in India; Liberalisation, Privatisation and Globalisation.
4. Economic Environment of business: Economic Trends; National Income; Industrialisation and Economic Development; Inflation, Problems of Growth.
5. Political Environment : India’s Monetary and Fiscal Policy; Foreign Trade Policy and BoP; Direct and Indirect Taxes.
6. Socio – Cultural Environment: Poverty in India; Unemployment in India; Human development, Rural Development, Business Ethics, Corporate Governance and Corporate Social Responsibility
7. Legal Environment: MRTP Act, FERA, FEMA, IPR, RTI.
8. Foreign Trade: Foreign Investment, MNCs; EXIM Policy; SEZ.
9. International Business Environment: International Organisations: IMF, World Bank, ADB, WTO.
10. Contemporary issues in Business Environment.

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Unit 1: Indian Business Environment

Unit 1: Indian Business Environment^ Notes

CONTENTS Objectives Introduction 1.1 Theoretical Framework of Business Environment 1.1.1 Internal Environment 1.1.2 External Environment 1.1.3 Micro Environment 1.2 Recent Developments in Political, Economic and Social Environment 1.3 Techniques of Environmental Scanning and Monitoring 1.3.1 Environmental Analysis 1.3.2 Environment Technology Opportunities Portal 1.3.3 PESTLE 1.3.4 Social, Legal, Economic, Political and Technological (SLEPT) Analysis 1.3.5 Methods of Scanning the Business Environment 1.3.6 Scanning the Macro Environment 1.4 SWOT Analysis of Indian Economy 1.5 Planning in India 1.5.1 Brief View of Five Year Plans 1.5.2 Five Year Plans: Target vs. Achievements 1.6 Summary 1.7 Keywords 1.8 Self Assessment 1.9 Review Questions 1.10 Further Readings

Objectives

After studying this unit, you will be able to: Assess the theoretical framework of business environment Discuss the recent developments in political, economic and financial environment Explain the techniques of scanning the environment Conduct a SWOT analysis of the Indian economy State the achievements of five year plans in India.

Tanima Dutta, Lovely Professional University

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1.1 Theoretical Framework of Business Environment^ Notes

The framework of business environment can be divided into three broad dimensions:

1. Internal Environment
2. Macro Environment (External Environment)
3. Micro Environment (Relevant Environment, Competitive Environment)

1.1.1 Internal Environment

Internal environment is internal to the organization and it is controllable. In brief important internal factors are as follows:

1. Culture and Value System: Organizational culture can be viewed as a system of shared values and beliefs that shape a company' behavioral norms. A value is an enduring preference for a mode of conduct or an end - state. The value system of founders has a great and lasting impact on the value system of organization. Value system not only influences the operations and behavior it also influences the choice of business.
2. Mission and Objectives: The business domain of the company. The mission and objectives of the company guide priorities, direction, of development, business philosophy, and business policy.
3. Management Structure and Nature: Structure is the way in which the tasks and sub tasks are related. Structure is about the hierarchical relationship, span of management relationship between different functional areas. Structure of top management, pattern of share holding etc.
4. Human Resource: It deals with factors like manpower planning, recruitment and selection, and development, compensation, communication, and appraisal. Besides this internal environment includes corporate resources, production/operation of goods and services, finance and accounting system and methods, marketing and distribution.

1.1.2 External Environment

External or Macro or General Environment consists of factors external to the industry that may have significant impact on the firm's strategies. Here we will look at six broad dimensions: Demographic, Socio-cultural, Political/Legal, Technological, Economic and Global.

All these dimensions of general environment are interrelated. These dimensions not only influence businesses, but also influence each other. After a political change in 1991, when Congress government came to power, major economic change took place in the form of LPG, i.e., Liberalization, Privatization, and Globalization. This led to an enhancement in the technological environment of the country. This technological and economical change has transformed the socio-culture environment of the country.

Globalization has also enabled India to become the software superpower of the world. All global organizations now have a new and vast market, as well as cheap manufacturing hub, which has compelled them to change their global marketing and manufacturing strategies.

With this, over the last ten years there has been a drastic change in the India's demography as per capita incomes have risen. The number of young achievers and high earners has increased drastically, which changed the entire demand schedule of products:

1. Political Environment: It is the political environment of the country which decides the fortune of the business in a country.

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Notes

Did u know? (^) After 1917 revolution in USSR suddenly a political change transform the whole equation of business. In India in 1977 Janta government came in power and because of this Coca Cola and IBM have to leave the country. Because of Janta government all liquor company have to close their operations. After the change in the regime in the USSR in late 1980s and early 1990s the whole equation of business changed in Russia. Recently when Dr. Manmohan Singh led UPA government came in power and new economic policy changed the whole definition of business in India on the one hand it gave a bulk of new opportunities for business on the other hand it also brought threat for inefficient organizations. Not only political philosophy but also political stability has a significance importance. More stable will be the political environment of country the more conducive will be the environment for business. The consensus among various political parties on key issues are also relevant in this case.

2. Regulatory and Legal Environment: The political environment governs the legal and regulatory environment of country. The regulatory environment plays a vital role by dictating the do's and don'ts of a business. Every country has a different legal environment. In India we have the Companies Act that governs companies, the MRTP Act which restricts monopoly, various laws regarding shares, the Consumer Protection Act, environmental laws, and the implementation of GATS. GATS has resulted in the implementation of international laws regarding patents. There are also laws for import and export, licensing etc. that have a drastic impact on business and the future of organizations. When an NRI Lord Swaraj Paul, a British citizen, tried to take over Escorts, its owners, the Nandas approached the government to save their company. A law restricting any NRI from purchasing shares of an Indian company came into force, and Escorts was saved.

Demographic Socio-Cultural

Political/ Business

Legal

Economic

Technological

Global

3. Demographic: It is the demographic environment which decides the marketing mix for an organization. It decides the type of product the organization comes out with. In India a lot of research and efforts are undertaken to reduce the cost of products and to launch products at the cheapest possible rates.

Example: A one rupee sachet of shampoo or a five rupee ice-cream cone.

Figure 1.1: Dimensions in External Environment

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Notes India is in a process of laying down a gas pipeline from Iran via Pakistan. All this is just a glimpse of the present international environment. Every new bilateral and multilateral agreement opens new vistas for business and also brings a new threat in the form of global competition.

7. Economic Environment: The economic environment consists of macro level factors related to the means of production and distribution of wealth, which have an impact on the business of an organization. The economic structure of a country, whether it is socialist, mixed or capitalist, has a drastic impact on the economy. Economic policies such as foreign trade policy, industrial policy, fiscal policy, GDP growth rate, policy of licensing, monetary policy, development of financial institutions, development of money and stock market, and the extent of globalization are some of the aspects of an economy that reflect on business in an economy. A slight change in monetary policy can release crores of rupees into the economy that may result in a decrease in interest rate, which further increases investment as well as inflation. Also, banks' lending rates decide the level of investment in any country. The higher the interest rate, the lower the level of investment.

Example: In most industrialised nations like the US, this interest rate is between 4% to 6%. In India in 1991, the PLR (prime lending rate) was 17% to 18%, which was reduced to 8% to 10% by 2000 because of a change in the country's economic policy. The current Prime Lending Rate (PLR) with effect from Jan 1, 2009 is 14.75% p.a.

8. National Competitive Advantage: Despite globalisation, industrialization is clustered in a small and specific number of countries. Most successful computer and biotechnology firms are based in the US, the successful chemical and engineering industry is based in Germany, and the cream of the electronics industry is based in Japan. Similarly, the successful call centers are clustered in India as are many of the customised software companies. This suggests that the nation and its environment in which a company is based may have an important bearing on the competitive position of that company in the global marketplace.

Task (^) Collect some data pertaining to the political and legal framework, that has bought significant changes in India's business environment.

Importance of Environment

1. Environment is complex: The environment consists of a number of factors, events, conditions and influences arising from different sources. All these interact with each other to create entirely new sets of influences.
2. Environment is dynamic: The environment is constantly changing in nature. Due to many and varied influences operating there is dynamism in the environment causing it to change its shape and character continually.
3. Environment is multi faceted: The same environment trend can have different effects on different industries. As the GATS is an opportunity for some companies and threat for some companies.
4. Environment has a far reaching impact: The environment has far reaching impact on the organization. The growth and profitability of an organization depends critically on the environment in which it exists.

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5. The impact of an environmental trend often differs significantly for different firm within^ Notes the same industry: Any change in environment may have different impacts on different firms operating in the same industry.

Example: As in pharmaceuticals industry in India the Impact of new patent law will different on research based pharmacy companies as Ranbaxy and Dr. Reddy's Lab and will be different on small pharmacy companies.

6. The general environment usually holds both opportunities for, and threat to, expansion: Development in general environment often provides opportunities for expansion in terms of both products, and markets.

Example: Liberalization in 1991 opened lot of opportunities for companies and HLL took the advantage of opportunities and acquire many companies like Lakme, TOMCO, Kissan etc.

Changes in environment also pose serious threat to entire industry. As liberalization of 1991 poses serious threat of new entrants in the form of MNC to Indian firms.

7. Development in the general environment change competitive battle line: General environmental changes may alter the boundaries of an industry and change the nature of its competition. This has been the case with deregulation in the telecom sector in India. Where since the deregulation every second year new competitor emerges old foes become friends, M&A take place with every new regulation.
8. Many developments in the general environment are difficult to predict with any degree of accuracy, while others are readily predictable: Macroeconomic development such as interest rate fluctuations, the rate of inflation, and exchange rate variations are extremely difficult to predict on a medium or long-term basis. On the other hand some trends as on demographic, income level, age can be forecast.

1.1.3 Micro Environment

Micro Environment or the competitive environment refers to the environment, which an organization faces in its specific arena. This arena may be an industry, or it may be what is referred to as a strategic group.

Besides looking at primary demand and supply factors, firms examine the state of competition they face because that determines whether they will remain in the same industry or start a new one. All the business decisions – what business, pricing, distribution channel, promotion strategy, product portfolio, etc., depends on the competitive position of the firm.

Example: A new entrant in the glucose biscuit segment will have to study and consider the marketing mix as well as strategy of existing players like Britannia, Parle, Priyagold, etc., before deciding its marketing mix.

Following are the key Micro Environment factors:

The Five Forces of Competition

Professor Michael Porter of the Harvard Business School has demonstrated the state of competition in an industry as a composite of five competitive forces. Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

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stronger companies outside the industry acquire weak firms in the industry and launch^ Notes aggressive, well-funded moves to transform their newly acquired competitors into major market contenders.

Rivalry is weak when most competitors in the industry are relatively well satisfied with their sales growth and market shares. Such companies rarely make concerted attempts to steal customers away from one another, and have comparatively attractive earning and returns on investment. (a) Is it difficult to compare competitors? In a way it's more difficult if competitors are very different. For example you could agree that trains compete with buses in terms of getting from A to B. But actually they are very different I terms of who uses them and why. Equally for our charity if a competitor came along who said disruptive child behaviour is a medical problem - i.e. that the children should stay at home and be given medicine that would change this from a social care challenge to a medical one. If the competition changes this makes it difficult for the childcare charity to decide what to do. (Back to Ritalin?) (b) Is there very high 'exit barriers'? 'Exit barriers' mean that it is difficult - economically, emotionally and legally - to leave the market. In a commercial example there may be a contract or the redundancy costs may be high. For our childcare charity these concerns may also exist - but many charities also have a high emotional commitment to their work. This may exist long after that work has ceased to be relevant.

2. Threat of New Entrants: A new entrant in an industry represents a competitive threat to established firms, sometimes called the incumbents. The entrant adds new production capacity and brings substantial resources that were not previously required for success in the industry. But there are various barriers to entry that the new player has to face. These barriers are a challenge for the new entrant and a protective shield for the established player and include: (a) Economies of Scale: Existing large firms enjoy lower costs per unit. They have enough room to reduce prices as they may enjoy higher profits. Also, they could be selling products at such a low price that new player may not able to produce the same output. (b) Cost Disadvantage Independent of Scale: Besides economies of scale, existing firms have other many cost advantages such as proprietary product knowledge, patents, favorable access to raw material, favourable location, lower borrowing cost and government subsidies. (c) Learning and Experience Curve: Established companies have the advantage of learning curve. Because of this learning curve established firms are in a better position as they have skilled and trained human resource. (d) Product Differentiation: Differences in physical or perceived characteristics make an incumbent's product unique in the eyes of the consumer. (e) Capital Requirement: It is said the offender must have three times the power than that of the defender. Thus, an offender requires capital not only to establish a new business but also to compete with established firms. Even the, cost of capital is higher for a new firm as lenders hesitate to provide capital to new entrant. (f) Switching Costs: Sometimes, the costs (physical, psychological and financial) incurred in switching from one supplier to another also resists the customer from going for a new vendor.

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Notes (^) (g) Access to Distribution: The middlemen are reluctant to deal with a product that is new to the market. This situation becomes more critical in industrial and international markets as there are few middlemen because they usually prefer established products.

Here consider above example of CCC (a) Is it easy to enter the market or are there economic or legal barriers to entry? (b) Does it cost a lot to set up in competition? E.g. it's expensive to start a railroad, and you need a license. For a CCC it's expensive to set up a nationwide network of childcare centres - and they would need licenses/LA approval. (c) Is it difficult to persuade consumers/users to switch from existing providers - because of brand loyalty, cost of switching, or length of contract, E.g. competing against Coca Cola or persuading people to switch from Windows to Macs is a challenge. If the local authority has a 3 year contract with NSC - the existing charity supplier - to provide support for 'difficult' children then CCC getting that contract from that other charity could be very expensive and challenging. (d) Do existing providers have a 'scale-independent' costs advantage? e.g. in a commercial setting this is a unique advantage like a copyright like for Windows, or a broadcast license like ITV which no n eels can have. In the case of CCC if they or their rivals have an accredited training programme for care workers childcare workers, or the ability to use funds from their general fundraising to support local childcare, then these would be similar advantages.

3. Threat of Substitutes: This refers to the market attempts of companies in other industries to win customers over to their own substitute products.

Example: A producer of scooters will compete with motorcycle makers, newspapers compete with television operators, tea competes with coffee, CD players compete with DVD players, Aspirin manufacturers compete with the makers of Acetaminophen, Brufen and other pain relievers. Makers of eyeglasses compete with the makers of contact lenses, road transport services compete with the railways.

Strong competitive pressure from substitute products depends upon three factors: (a) Whether attractively priced substitutes are available? (b) Whether the buyers view the substitutes as being satisfactory in terms of quality, performance, and other relevant attributes? (c) Whether buyers can switch to substitutes easily?

The presence of readily available and attractively priced substitutes creates competitive pressure by placing a ceiling on the prices an industry can charge for its product without giving customers a reason to switch to substitute and thus risk sales erosion. How readily available and cost comparable are substitutes? In the mobile phone industry the big providers are all very similar and the cost of switching very small - except for the contract! For our childcare charity this might be more of a challenge if, for example, the local authority was comparing fostering as an alternative proposition - or even giving out Ritalin to kids in schools

4. Bargaining Power of Suppliers: Suppliers have little or no bargaining power when there are many suppliers and supply exceeds demand. Suppliers compete with each other to grab orders. On the other hand, bargaining power is high when it comes to high technology

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Notes (^) customers and make a profit. A change in any of the forces normally requires a company to re- assess the marketplace.

Caselet Porters five forces at Tesco PLC

T

his section considers how Porters five forces might be applied to the problems facing Tesco PLC, including an investigation of the threat of substitutes from other supermarkets, buyer power in relation to grocery purchases, grocery supplier power, and the power of the customer at the till. Classical economics predicts that rivalry between companies should drive profits to zero. This is partly down to the threat of substitutes. For instance, Tesco has competition from companies like Sainsbury that can provide substitutes for their goods. This drives the price of groceries down for customers of both companies. Buyer power acts to force prices down. If beans are too expensive in Tesco, buyers will move to Sainsbury. Fortunately for Tesco, there are few other large supermarket companies. This means the market is disciplined; that is, the supermarkets have a disciplined approach to price setting. Discipline stops them destroying each other in a profit war. Supplier power is an important part of the Porters five forces model. Implications for Tesco are many. Supplier power is wielded by suppliers demanding that retailers pay a certain price for their goods. If retailers don't pay the price, they don't get the goods to sell. But large supermarkets, like Tesco, have an overwhelming advantage over the small shopkeeper-they can dictate the price they pay the supplier. If the supplier does not reduce the price, they will be left with a much smaller market for their produce. Tesco, Asda, Sainsbury and other supermarket chains put up considerable barriers to entry. Anyone starting up a new supermarket chain has barriers imposed on them, implicitly or explicitly, by the existing supermarkets. For instance, Tesco may have cornered the market for certain goods; the new supermarket will not be able to find cheap, reliable suppliers. Tesco also has the advantage of economies of scale. The amount it pays suppliers, per-item, is a lot less than the corner shop. It achieves this, partly, through buying large volumes of goods. A small supermarket chain can only buy a relatively small volume of goods, at greater expense. Before developing a Porters five forces model of Tesco consider other industries, from real estate agencies to the bicycle manufacturing industry. This will give you the broadest picture of how Porters five forces can be used. Here we'll consider, briefly, two industries outside the supermarket sector.

The Sixth Force

According to Andrew Grove, the former CEO of Intel: "Porter's five forces model ignores a sixth force: the power, vigor and competence of complementors". Complementary products are those products that add value to some other product. They are consumed with some other product. Because they are used together, the demand of one product depends upon the demand and availability of another product.

Example: Like the demand of personal vehicles in a country depends upon the availability and price of fuel. Demand for personal computers depends upon the availability and affordability

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of user-friendly software. In fact the business of accessories like car and motorcycle accessories,^ Notes computer accessories, etc., depends upon the key product.

In fact, both substitutes and complementary products influence the demand for a product. So while studying the environment one should not forget complementary products because at some point in time, they can be the decisive factor for sales and profits.

1. Marketing Intermediaries: Marketing intermediaries are an important part of the micro environment. These are firms and persons, who help in distribution, promotion, selling, and provide services like consultancy. Almost every business has to take the help of these intermediaries. Sometimes they play a decisive role. Like in the FMCG business, distribution is of critical importance and there is intense competition to acquire the support of a strong distributor.

Example: The primary reason Coca-Cola acquired Parle was to gain access to the distribution network of Parle, which was wide and penetrated. Besides this there are brokers, agents, logistics companies, private transporters etc., which play an important role.

There are incidences of retailers boycotting the product of particular companies because of low margins. Companies also spend a significant amount on promotion and advertising firms. For instance, companies like HLL spend as much as 800 crores on advertising as part of their marketing strategy.

2. Financial Institutions (FIs): For any business, FIs plays a critical role, especially at the micro level. FIs not only make available the finance but also create an environment for investment. They also give expert opinion and consultancy to the corporate. Every corporate is dependent on FIs – whether it is banks or consultancies or NBFCs – for its financial needs. They also facilitate the mode of payment. For the industrial development of any country a well-established financial institutions is a prerequisite. These FIs mobilize the savings of the public to the corporate world. An organization that has a good rapport with FIs usually gets finance easily and at easy terms, which makes a lot of difference in this competitive environment.
3. Strategic Group: Strategic groups are conceptually defined as clusters of competitors that share similar strategies and therefore compete more directly with one another than with other firms in the same industry. A strategic group is to identify a more defined set of organizations so that each grouping represents those with similar strategic characteristics. They are not a formal group or an association:, in fact they are conceptual clusters in the sense that they are grouped together for the purpose of improving analysis and understanding of competition within their industry. Strategic groupings look for these similarities: (a) Extent of product diversity. (b) Extent of geographic coverage. (c) Number of market segment served. (d) Distribution channel used. (e) Extent of branding. (f) Marketing effort. (g) Extent of vertical integration. (h) Pricing, etc.