Solutions to Assignments
MCO-04 - BUSINESS ENVIRONMENT
Master of Commerce (M.Com) - 2nd Year
Question No. 1
What is the concept of Business environment? Explain the emerging scenario of business environment in India.
Business organisation has to interact and transact with its environment. Hence, both the business
and environment are totally interrelated and mutually interdependent. Business environment
refers to those aspects of the surroundings business enterprise, which affect or influence its
operations and determine its effectiveness.
According to Keith Davis, “Business environment is the aggregate of all conditions, events and
influence that surrounds and affect it”.
According to Andrews, “The environment of a company as the pattern of all external influences
that affect its life and development”.
The business environment is always changing and is uncertain. It is because of dynamism of
environment. As it is already said that the business environment is the sum of all the factors
outside the control of management of a company, the factor, which are constantly changing, and
they carry with them both opportunities and risks or uncertainties which can, make or mark the
future of business.
Business environment encompasses all those factors that affect a company’s operations and
includes customers, competitors, stakeholders, suppliers, industry trends, regulations other
government activities, social and economic factors and technological developments. Thus,
business environment refers to the external environment and includes all factors outside the firm,
which lead to opportunities and threats of a firm.
A business firm is an open system. It gets resources from the environment and supplies its goods and services to the environment. There are different levels of environmental forces. Some are close and internal forces whereas others are external forces. External forces may be related to national level, regional level or international level. These environmental forces provide opportunities or threats to the business community. Every business organization tries to grasp the available opportunities and face the threats that emerge from the business environment. Business organizations cannot change the external environment but they just react. They change their internal business components (internal environment) to grasp the external opportunities and face the external environmental threats. It is, therefore, very important to analyze business environment to survive and to get success for a business in its industry. It is, therefore, a vital role of managers to analyze business environment so that they could pursue effective business strategy. A business firm gets human resources, capital, technology, information, energy, and raw materials from society. It follows government rules and regulations, social norms and cultural values, regional treaty and global alignment, economic rules and tax policies of the government. Thus, a business organization is a dynamic entity because it operates in a dynamic business environment.
The scenario of business environment in India is changing at a fast speed. Some of
these changes are caused by the developments taking place within India and some
have been influenced because of certain global developments. Some of the important
features of emerging scenario of business environment in India have been discussed
hereunder.
1. Political Uncertainty
India is considered to be one of the largest democracy in the world and its
democratic system seems not only to have survived since independence but has
actually strengthened over the years. However, at present, there is a lot of political
instability. There have been coalition governments at the Centre for the last few years
and the trend is likely to continue in the near future also. The coalition governments
because of their political compulsions, are likely to follow ad-hoc economic policies
lacking any kind of long term perspective and vision. In order to remain in power,
these coalition governments have to make many adjustments in their economic
policies owing to pressures from their coalition partners which has had a negative
impact on the overall business environment of the country. One of the reasons for
economic slowdown in India is its continuing political instability. It has slowed
down the pace of economic reforms which is having an adverse impact on the flow of
direct foreign investment and technology in the country.
2. Globalisation
Globalisation in Indian context means integration of Indian economy into the global
economy. Since July 1991, the process of globalisation was initiated by
implementing economic reforms in the country in a big way. There are several ways
through which globalisation can be achieved such as encouraging the inflow of
foreign direct investment and technology, opening up the system of trade (both in
goods and in services), and internationalising markets and corporations in general.
With India becoming the founder member of WTO in 1995, the scenario of trade and
investment, both domestic and international, has considerably changed. Various
clauses of WTO agreements are being implemented in a phased manner strictly in
accordance with the parameters of the agreements. The major response of the Indian
government to WTO agreements has been to reduce the tariffs in a big way. Indian
markets have been opened up to global player and, consequently, many multinational
corporations (MNCs) have entered the Indian market. Internal subsidies are being
reduced in a gradual manner. The procedures are being streamlined and rationalised
for smooth two-way flow of goods, services and investments.
These measures adopted for globalisation had a mixed impact on Indian companies.
Those who managed their affairs efficiently not only survived but became global
players. For example, Ranbaxy an Indian pharmaceutical company is now the first
Indian multinational company in the pharmaceutica’ sector. Reliance Industries has
,also got its business interests in many countries and thus qualifies to be a
~nultinational corporation. But, on the other, the onslaught of multinationals has
wiped out many inefficient Indian companies out of the scene. Indian companies are
iilso making strategic moves to enter into joint ventures with MNC’s so as to gain
global size and take advantage of situation. Mergers and acquisitions are also taking
place in a big way which is shaking out the minor players from the market. The
effects of globalization are still being hotly debated in the country by the people
belonging to different schools of thought who have formed pro and anti globalisation
lobbies. The process of globalisation has also resulted in bringing tremendous
improvement in the overall infrastructure available in the country.
3. Economic Liberalisation
The Indian economy has been a highly regulated and controlled economy since
independence. This is evident from the first Industrial Policy Resolution which was
adopted in April 1948. The government took the responsibility of developing basic
and key industries under its ownership and management in the public sector. Other
important industries were allowed to be developed in the private sector but under the
strict control and regulation of the government. This gave rise to the “License and
Permit Raj” in the country. Thereafter, the Industrial Policy Resolution of 1956
which was regarded as the Economic Constitution of India further expanded the role
of public sector and put the whole of the private sector under the regulation and
control of the government. At the beginning of 1970s the regulatory framework for
the private sector further tightened with the enactment of MRTP Act 1969
(Monopolies and Restrictive Trade Practices Act) and New Licensing Policy of 1970.
By the end of the Seventh Five Year Plan in 1990, the economic situation in the
country was in shambles. P.V. Narsimha Rao’s government initiated the process of
bsinging economic reforms in the country with the announcement of Industrial Policy
Resolution on July 24, 1991. The major policy changes included the reduction in the
I role of public sector, expansion of the private sector, opening-up the economy for
I ircreasing the flow of foreign investment and technology, doing away with some of
the major government regulations and control, and streamlining the relevant policies
arid procedures. The focus of the policies of the government shifted from regulations
arid controls to that of increased liberalisation by allowing greater participation of
private sector and foreign companies. The reforms were not restricted to the
industrial sector but extended to almost all the areas of economy such as reforms in
the area of financial sector, banking sector and trade reforms. MRTP Act which had i restricted the growth of private sector and foreign companies was amended so that ‘ pre-entry approval from the government was no longer required for capacity creation, I mzrgers, amalgamations or acquisitions on the part of such companies. Industrial Licensing was abolished but for a small list of essential industries. Capital Issues
(Control) Act 1947 was abolished and replaced by more liberal SEBI Act (Securities
Exchange Board of India Act).
All these reforms have given a big boost to the economy. The economy which was
characterized as an economy of scarcities suddenly became vibrant and started
showing signs of buoyancy with increased competition and more active play of
market forces. The economy where the buzzword was nationalisation of private
sector suddenly resorted to privatisation of public sector undertakings by way of
disinvestments or by other means.
4. Technological Revolution
The technological developments taking place all over the world have not bypassed
India. The prominent sectors where world class technology is available in India are
the areas of Information Technology, Communications and Computerisation. There
has been a phenomenal increase in the number of mobile phone users in the country.
The automobile sector has also witnessed a boom with production bases setup in
India by almost all major players in the international automobile industry. The lifting
of restrictions on the inflow of technology had a positive impact on almost all the
industrial sectors of the economy. One of the most important beneficiary of this
technological revolution in India is the consumer who now has an access to a large
variety of products and services of international quality at very competitive prices.
Technological revolution has also opened up opportunities for new types of
businesses, particularly in the service industry. Gurgaon is emerging as a global
capital for ‘Call Centers’ for almost all major MNCs in the world.
5. Outsourcing
The size of companies is expanding at a fast rate and they are engaged in diversified
activities. The recent trend in case of a large number of business corporates is to rely
on outsourcing. The firms tend to focus exclusively on the areas where they have
established their competence and the portions of value chain activities are
commissioned to external suppliers on the basis of economics of the situation.
Outsourcing is a variant of make or buy concept. In a manufacturing industry, the
firms relying on outsourcing create captive supply sources by providing a part of the
manufacturing requirements such as design and blue prints, and raw material to the
subcontractors, who then make the parts and supply to the firm. The outsourcing is
resorted to at the global level by the MNCs. India is also a destination for outsourcing
of many MNCs because of the availability of cheap labour and fairly developed
infrastructure in the country.
6. Emerging Rural Market
Rural markets are gaining importance in the marketing planning exercise of many
leading consumer goods manufacturers. Rural markets are tomorrow’s markets and
increasingly large number of companies are today turning to expand the scope of
their business operations. Let us examine the reasons of growing interest of business
enterprises in the rural markets in India.
Urban markets are now becoming increasingly competitive and perhaps are even
getting saturated for many products. In such a situation, the growth oriented firms are
exploring new markets for their existing products. Rural markets are the new markets
which are opening up for most of these goods. Companies like Hindustan Levers,
Brook Bond, Lipton, Colgate Palmolive, etc. have since long realised the potential
that existed for their products in rural areas and had gone out to penetrate rural
markets. These companies developed products and their packages specially to cater
to the needs of rural customers. They expanded their distribution network and even
employed cycle salesmen, who could go out in rural areas and motivate rural buyers
to use the products. Rural markets are today offering growth opportunities to the
firms who have attained saturation in their sales in urban markets because of
intensive competition.
The growth of rural markets can also be attributed to the socio-economic changes
sweeping the rural areas in a big way. The productivity of the farm sector has
increased substantially with the application of modern technology. The yield per acre
of land and per animal has also increased following green revolution and white revolution respectively. The efforts of the government through the Integrated Rural Development Programs have brought about improvements in education, health, modern farming practices and cooperative marketing which have emerged as pillars of rural development. These efforts have also resulted in the development of village
industry and craft. All these changes have resulted in more income, higher aspiration
and changing lifestyles in rural India.
The process of social change in the rural sector has also been fuelled by the reach of
television and radio in these areas which covers more than 90% of the Indian
population. The cable TV, Doordarshan and video culture has brought complete
social transformation in the rural India. Another major technology that has
influenced a socio-economic change in the rural sector is the Gobar Gas Project. This
project recycles the animal and human waste into a fuel which is piped to the
households and used as cooking gas and for electrification purposes. Now the women
folk need not spend several hours in search of fuel for cooking food for the family.
This has given more leisure time to the rural women which they can spend with their
family members and can use it to supplement their household income.
7. Stakeholders’ Expectations
The stakeholders are the various sections of the society which have an interest in the
business and are influenced by the actions of business. These are customers,
employees, suppliers, share holders, investors, local community and society at large.
The expectations of these stakeholders have reached a situation where the question of
responsibility of business to the community can no longer be scoffed at or taken
lightly. The test of social responsiveness of the business is that whether it is coming
up-to the expectations of the society and is fulfilling the needs of the community. The
expectations of the stakeholders are divergent and at times in conflict with each
other. This implies that the claims of various interests will have to be balanced, not
on the narrow ground of what is best for the shareholders alone but from the point of
view of what is best for the community at large.
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