Question No. 5 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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                            MBA and MBA (Banking & Finance)

MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 5. What are the main components of Balance of Payments (BoP)? Discuss the factors affecting the BoP.

The Balance of Payments (BoP) for a country can be defined as a systematic record of all the transactions between the economic units of one country (such as households, firms and the government) and the rest of the world in any given period of time. This includes all the transaction records made among the individuals, corporates and the government and helps in keeping the flow of funds in track, to develop the economy as a whole.

There are two main components of Balance of Payments (BoP): 

- Current Account 

- Capital Account 

1. Current Account 

The current account in the BoP, comprises of the transactions in goods and services, alongside transfers during the current time period. 

The net exports are also termed as the trade balance, which is the net sum of a country’s exports and imports in goods as well as in services. Trade in services is often said to be invisible as they cannot be seen to cross national borders. For instance, when a foreign country pays for the maintenance of its factory in the domestic home (or domestic) country or for the services by a home resident who is working in that foreign country, then the home country is said to be exporting a service. Tourism, is one major service export. The trade balance reflects a surplus (positive) if the value of exports of a country exceeds its imports while it is said to reflect a deficit (negative) if the value of imports of a country is higher than its exports. Transfers to and from abroad may be in the form of gifts or remittances that residents of one country might send (receive) to (from) another country. If the net transfers from abroad is positive, it means that transfers from residents in abroad are greater than that sent by domestic residents to abroad. Similarly, the net transfers from abroad is negative, if transfers from foreign countries are lesser than the transfers to abroad. Net foreign aid received by a country during a particular period is also a part of transfers. If the right-hand side of the equation (i) is positive (negative), then the current account is in surplus (deficit). It must be noted that large transfers from abroad may put the current account in surplus, even if the net exports is negative. However, to keep things simple, the term “net transfers” will be ignored in the subsequent analysis and hence, the current account will comprise of net exports or trade balance only. 

2. Capital Account 

The capital account records all transactions in assets. An asset may include any one of the type in which wealth can be held, for instance, stocks, bonds, government debt, etc. Purchase of an asset records a deduction in the capital account. If an Indian is purchasing a US Car company, then it is recorded as debit in the capital account of India (as the Indian has to pay in dollars which means that the foreign exchange is going out of India). The sale of assets, for instance, the sale of share of an Indian company to a US customer is recorded as a surplus in India’s capital account (as sale of assets to foreign country will bring foreign exchange into the country). Taking the two accounts together, the BoP can be summed up as:

Balance of Payments = current account + capital account…… (ii)

BoP is in surplus (deficit) if both the current and the capital account (combined) has a surplus (deficit). Thus, a deficit in current (capital) account doesn’t alone lead to a BoP deficit. It has to be outweighed by a large surplus in the capital (current) account. Thus, it is very important to keep the basic rule of BoP accounting in mind. 

FACTORS AFFECTING THE BALANCE OF PAYMENTS (BoP)

The factors which affect the Balance of Payments (BoP) are divided into two groups: 

A. The factors affecting the current account 

B. The factors affecting the capital account 

A. The factors affecting the Current Account 

The current account may be affected by the following factors:

1. Rate of Inflation in the Resident (domestic) Country: 

A higher rate of inflation in the domestic economy, compared to its trading partners, lead to: 

• cheaper imports which lead to increase in purchase of foreign goods. Imports therefore, tend to rise with rise in the inflation rate; and 

• rise in cost of the exports in the foreign market, as a result of which the foreign nationals will less likely be purchasing the domestic country’s goods. Exports, therefore tend to decline. 

Thus, rise in imports and fall in exports will lead to a current account deficit. 

2. National Income: According to most of the empirical studies, an increase in national income of a country, in comparison with its trading partners, may lead to: 

• higher tendency among domestic residents to purchase more of foreign products which will generate a significant rise in imports and thus, more outflow of foreign reserves from the country leading to current account deficit; and 

• in some exceptional cases, a rise in national income may also lead to improvement in the current account as it may be associated with increase in production capacity in the economy and surplus generation of exports. 

3. Import Restrictions by Government: Imposition of taxes (such as tariffs) by the government on the goods imported, leads to a rise in its prices in the domestic economy. As a result, domestic residents will reduce their purchase of foreign products, thereby improving the current account. Sometimes, the government also imposes quota restrictions on its imports which again, lead to decline in the imports and generates a current account surplus.

 4. Exchange Rate: The Exchange rates measure the prices of the domestic currencies in terms of the foreign currencies. The Current account is a function of Real Exchange Rate (RER). A higher RER is associated with lowering of exports and increase in imports whereas a lower RER is associated with higher number of exports and decline in imports. Thus, it can be interpreted that lowering of RER (which might happen through devaluation of currency) might lead to improvement of current account.

B. The factors affecting the Capital Account 

Capital movement across borders are affected by the following factors: 

1. Imposition of tax by the government on the income accumulated by the domestic investors, who have invested in the foreign markets. This will lead to lower outflow of capital. 

2. Economic liberalization might have an impact on the capital account. 

3. An expected change in the exchange rates may affect the flow of capital as it tends to have an impact on the expected rate of return in the foreign investment. 

4. Changes in the interest rates, in comparison to other countries, may tend to affect capital flows across borders. A higher domestic interest rate may lead to lower capital flows into the country whereas a reduction in domestic interest rates may tend to have greater capital flows into the country.

Question No. 4 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 4. Describe the key players in the agricultural sector and discuss the role and importance of agricultural marketing.    

With growth and increase in production, the active role of middlemen in the movement of agricultural commodities which specialise in performing marketing roles and are involved in marketing of products has increased. The number of mediators can be classified into five groups as follows.

1. Merchant Middlemen 

Merchant middlemen are the ones who take title of the goods they deal in while buying and selling. Their earning or loss depends on the sale and purchase prices. They are of four types:

a) Wholesalers: Those who buy agricultural commodities in large quantities directly from farmers or from other wholesalers. They mainly assemble the goods from various localities and store produce and often release them in the off-season since they store them in the peak arrival season. 

b) Retailers: They buy from wholesalers and sell it directly to consumers in small quantities. Retailers are the closest to consumers in the marketing channel. 

c) Village merchants: The vendors or retailers who move from village to village to directly purchase the produce from the cultivators. Village merchants purchase the produce of those farmers who have either taken finance from them or those who are not able to go to the market. Village merchants also supply essential consumption goods to the farmers. They often act as the financers of poor farmers and sell the collected produce in the nearby market or the villages. 

d) Mashakakhores: It is a colloquial term for big retailers who often act as small wholesalers and majorly deal in fruits and vegetables. They usually sell to bulk consumers like hotels, para-military units or small retailers/vendors. Over the years, they have started dealing with all types of customers without the condition of a minimum quantity and are working like ordinary retailers. 

2. Agent Middlemen 

They are basically representatives of clients and do not own the products. They act as negotiators between sellers and buyers and help them in sale and purchase of products. They usually receive commission or brokerage on sale. Agent middlemen are of two types: 

a) Commission Agents: A commission agent generally operates in the wholesale market and acts as the proxy of either a seller or a buyer by representing them in buying and selling of products. 

b) Brokers: They act as communicators between buyers and sellers to bring them on the same platform while facilitating personal services to their clients in the market. They may claim brokerage from buyer, sellers or both depending upon the market situation as they simply wander to render their services to clients.

3. Speculative Middlemen 

These middlemen are the ones who buy products at a low price when arrivals are sizable usually in off-season when prices are high. They take claim of the product and risk associated with an aim to make a profit on it. 

4. Processors Processors are the ones who hire agents to buy for them from areas where production is high either and bring on their businesses either on their own or on custom basis. Agents may also store the products and may deal with it throughout the year on continuous basis. They often are involved in advertising to generate demand for their managed goods and add form utility to farm goods.

5. Facilitative Middlemen 

As the name suggests, these middlemen facilitate buying and selling while assisting in the marketing process. They get their income in the form of fees or service charge since most of them are labourers who help in physical movement of goods and products while loading and unloading them. Weighmen and graders also fall into this category since they facilitate weighing of produce and grade products according to different categories. They are often termed as the core of the marketing wheel. Transporters who assist in movement of the produce from one market to another and communication agencies including advertising agencies that majorly help in decision making about the purchase of goods are a part of this group. Auctioneers who help in exchange of produce by putting the produce for public sale and bidding by the consumers or buyers are equally important and help in ironing out the marketing system.

ROLE AND IMPORTANCE OF AGRICULTURAL MARKETING

Agricultural marketing has a vital role as it helps in encouraging the process of production and consumption. It equally helps in accelerating the pace of fiscal development since it is an important multiplier of agricultural development. A shift from traditional to modern agriculture system has been a challenge and marketing has been a big experiment in the entire process. But the role of marketing remains utmost important. The importance of agricultural marketing is revealed from the following.

1. Optimization of Resource use and Output Management 

The key role of an efficient marketing system is to help the market in pulling down the losses and accelerating the marketable surplus. The marketing losses often arise due to inefficiency in processing, storage and transportation of products. An efficient marketing wheel will help in optimization of resources and output management and a well-thought out system of marketing can help in even distribution of available stocks. Taking everything into account, it is indeed a modern approach to sustainable growth and sustains it. 

2. Increase in Farm Income 

Reducing the number of middlemen while ensuring higher level of income to restrict the cost of marketing services and the malpractices is what a good marketing system would aim at achieving. An efficient system assures improved prices for farm products and encourages them to invest their surpluses in buying modern inputs so that yield and produce may increase. 

3. Widening of Markets 

When a system widens the market by taking the products to remote corners both within and outside the country is considered profitable since it increases the demand on a continuous basis while guaranteeing a higher income to the producer.

4. Growth of Agro-based Industries 

Agri-dependant industries rely on the supply of raw materials such as cotton, sugar, edible oils, food processing and jute on farm produce and therefore require an efficient system to help in the growth to encourage the overall development process of the economy.

5. Price Signals 

Efficient marketing systems allow farmers in scheduling and arranging their production in accordance with the needs of the economy. This work is carried out through transmitting price signals.

6. Adoption and Spread of New Technology 

Adapting to demands and adopting latest technologies and scientific knowledge always leads to growth. But a technology upgrade requires greater investment and farmers would invest only if they are guaranteed of ago-ahead at remunerative price.

7. Employment Creation 

This is a system of marketing which focuses on employment generation and engages millions of people in activities, such as wrapping, packing, transferring, storing and doling out. Persons like commission agents, brokers, traders, retailers, weighmen, hamals, packagers and regulating staff are directly employed in the marketing system. Apart from them, several others are able to look for employment opportunities when dealing with supply of goods and services.

8. Addition to National Income 

Marketing events are value additions to the product since they increase the nation's gross national product and net national product.

9. Improved Living 

Development that adds to growth while diminishing poverty of the population and adds to foreign exchange while eliminating economic waste should be given special attention. The development of an efficient marketing for food and agricultural products is also vital to overall economic development. The marketing system is the key for the success of the development programmes which are aimed to uplift people.

Question No. 6 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 6. Write notes on the following:                              
a) Measures to reduce barriers to foreign trade. 

Free trade refers to elimination of all barriers to international trade. Several numbers of organizations and trade agreements are working out to ease the barriers to trade, thereby promoting more of trade and mutual economic gains from it. Some of the important initiatives taken to remove those barriers are discussed below:

1. General Agreement on Tariffs and Trade (GATT): Post the Great Depression and World War II, international trade faced stringent cross-border restrictions. To eliminate those, twenty-three nations came forward and united in 1947 to sign the General Agreement on Tariffs and Trade (GATT). GATT encouraged free trade through proper regulation and reduction in tariffs and also provided a forum for resolving trade related disputes among its signatories. 

2. World Trade Organization (WTO) and Regional Trading Agreements (RTAs): Founded in 1995 by the members of GATT, located in Geneva, Switzerland and with approximately 159 member countries at present, WTO encourages global trade through lowering of trade barriers, introducing multilateral trading systems through Regional Trading Agreements (RTAs), enforcement of international trade rules and providing a forum for resolving trade disputes. It is also empowered to monitor a country’s trade policy and can guide the “guilty” members in eliminating all disputed trade restrictions imposed, if any. Non-discrimination is the core principle of WTO, and its members have committed not to favour any one trading partner over others. An exception to these is the Regional Trade Agreements (RTAs), which are discriminatory by nature – in the sense that only its member signatories can enjoy more favourable market-access conditions. The RTAs aim at facilitating trade between its signatories but do not raise trade barriers with the other trading countries. WTO member countries can enter into the RTAs under specific conditions which will cover: i) formation and operations of customs unions and free trade areas covering trade in goods, ii) regional or global arrangements for trade in goods between developing member countries and iii) agreements covering trade in services. In general, RTAs must cover all trade in goods and services and help in promoting more of free trade among the countries under RTA. As of June 2016, all WTO member countries now have an RTA in force. 

3. The World Bank and the IMF: The primary determinant in helping the poorer nations or the less developing economies to involve as active members in the global trading system is by providing financial assistance. This has been a major shared goal of two international organizations – The International Monetary Fund (IMF) and the World Bank. The IMF lends financial assistance to the needy economies, with conditions imposed, which might include some of the tender financial or economic reforms. The World Bank, on the other hand, provides economic assistance to the poor and the least developing economies so as to ameliorate the lives of the people through communitysupport programs which are mainly designed to ensure the provision of better health, education, nutrition, infrastructure and other social services. 

4. Trading Blocs: In some parts of the world, a group of countries have integrated to allow free flow of commodities and services among their mutual boundaries. Such groups of countries are known as Trading Blocs. The North American Free Trade Association (NAFTA) – (agreement signed for mutual flow of trade among the US, Mexico and Canada) and the European Union ( EU) (signed by 27 countries of Europe to open their borders for free trade) are the two most powerful trading blocs at present. 

b) Impact of technological environment on international business.

Every businessman or marketer around the globe is now well aware of how important technology is for the businesses and what are its effects on a business environment? There are both negative and positive effects of technology for a business. Initially, the businesses were dependent on a labour force. But with the rise in technology, businesses do not want to lag behind. They have already started implementing newer technologies to flourish worldwide. Here are some of the ways in which the technology affects the global business environment.

1. Technology helps in diminishing business security risks by hiring best of security specialists for preventing sudden cyber-attacks and with the use of AI and ML, such threats are being minimized. 

2. Technology ensures business growth by enabling almost all business actions to be automated, thereby reducing involvement of human labour. This has helped in increasing the sales, revenue and profit for the businesses and the usage of internet have enabled them to grow online and expand worldwide. 

3. Online presence through social media channels is one of the business-oriented targets that the enterprises are trying to fulfil to grow along with the broadening of its client base. Technological tools that help businesses identify their preferred content, optimum time of posting their service contents, automated posting and location- specific targeting to expand their business, are actually helping to establish the business better in the online world. Tools like Google analytics are playing a major role in this. 

4. Technology helps in increasing employee productivity for a business through various computer programming and software such as AI, ML, and cloud computing that helps businesses to process more information, sitting anywhere in the world, than manual methods, thereby reducing much of human involvement in such tasks. Organizations are also using fundamental business technologies for employee performance appraisal information in the online framework to supervise the performance of its employees and create measurable goals for their employees to achieve and thereby sustain the business objectives. 

5. Business technologies are now allowing companies to outsource certain business functions to other businesses in the national and global business framework. Technical support and customer service are the two most common outsourced functions. Outsourcing therefore helps companies lower their business costs and focus on completing their business functions, which they are best at. With the help of several technological innovations, businesses can also outsource their functions to the least expensive areas possible, including those in foreign countries as well. 

Question No. 3 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 3. Discuss the structure of capital market in detail.   

However, business units and investors need funds for a longer duration also for undertaking business expansions or technology upgrading and in this regard they approach the capital market. A capital market is a market for long term securities or financial instruments having a maturity period of more than one year. Capital markets are important for channelising savings, capital formation and industrial growth. The structure of the capital market in India can be better understood with the help of Figure

Capital markets comprised of two markets i) Primary Market and ii) Secondary Market. The primary market is also known as the New Issue Market (NIM) where the issuer of the securities (shares and bonds) sell the new securities to the investors directly without any intermediaries. Whenever the securities are offered for sale for the first time by the companies they are called Initial Public Offering (IPO). IPO is issued to raise capital for funding purpose. Both the companies and government raise funds by the sale of new stocks in the primary market.

The secondary market is also known as the stock market. It is a place where shares, bonds, options, etc which were sold earlier are sold and purchased. In India, you must have heard about the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) they are some of examples of stock exchanges. The secondary market can be either an auction market or Overthe-Counter. In the auction market, trading of securities is done through the stock exchange. In Over-the-Counter the trading is conducted without using the platform of stock exchange, it does not have any physical location and trading is done electronically

a. Financial Instruments 

Some of the major financial instruments used in capital markets are discussed below. 

i) Shares 

A share indicates a unit of ownership by the buyer of shares called shareholder/holers of the company. A shareholder has ownership in the company and has voting rights and shares the company profit or loss. The benefit which a shareholder receives out of company profit is called a dividend. Let us understand it with an example. Assume that there is a company know as XYZ limited and it needs funds (Rs 100 crore ) for further expansion. For raising this fund the company will go to the public. This capital of Rs 100 crores is divided into 1,000,000 shares of Rs. 1000 per share. Now assume that there are two investors A and B and they want to invest in this company so they will buy some shares. Investor A buys 500 shares and investor B buys 800 shares so they are investing Rs 500000 and Rs 8000000 in this company and have become the shareholders and will share the profit or loss of the company in the proportion to their holdings. Further, shares are of two types namely equity shares and preference shares. 

ii) Bonds 

Bonds are issued by state and central governments, companies and municipalities to raise money for a variety of projects and activities. They are debt instruments in which the entities borrow the funds for a defined period of time at a variable or fixed interest rate. It is fixedincome security and essentially a loan agreement between a bond issuer and an investor. The bondholders unlike shareholders do not have any ownership of the company or have voting rights. 

iii) Debentures

Debentures are also a type of debt instrument which is issued by companies for raising funds but they are not secured by physical assets or collateral. An investor buys debentures based on the reputations and the creditworthiness of the issuer. The interest rate on debentures is higher than that of bonds.

b. Capital Market Intermediaries 

There is a large number of intermediaries in the capital markets some of which are discussed below: 

i) Merchant Bankers 

Merchant Bankers are intermediaries between the investors and the company. They act as an advisor who advises the entrepreneurs from the stage of the conception of the project till the production begins. SEBI defines merchant bankers as “any person who is engaged in the business of issue management either by arranging for buying, selling or subscribing to securities or acting as manager, consultant or rendering corporate advisory services in relation to such issue management”.

ii) Underwriters 

When a company decides to go public to raise funds all of its securities maybe not fully subscribed by the public, so there is a need for someone who can subscribe to those securities. This work is done by the underwriter he agrees with the issuer company that in the case of securities that are not subscribed then the underwriter would subscribe to the securities itself or by others the unsubscribed securities. He is paid a fee called ‘underwriting commission’ for this job. Underwriters can be both institutional (for example IDBI, UTI) or non-institutional. All underwriters need to be registered with SEBI.

iii) Portfolio Managers or Portfolio Management Services (PMS) 

A professional who enters into a contract with the client to advise or direct or undertake investment decisions on behalf of the client. Portfolio managers are of two types discretionary portfolio managers and non-discretionary portfolio managers. When the portfolio manager manages the funds of the client independently according to the needs of the client they are called discretionary portfolio managers. Whereas non-discretionary portfolio manager manages the funds following the directions of the client. Some of the examples of major Portfolio Management Services in India are Motilal Oswal PMS, Kotak PMS, ICICI Prudential PMS, etc.

iv) Stock Brokers 

A stockbroker is an individual or firm which is an intermediary between an investor and a securities exchange. The stockbroker trades in the stock exchange on the behalf of their clients. In return for their services, they are paid commissions of fees. They handle all the paperwork and maintain records of all transaction, manages their client's portfolio and advise the investors on formulating different investment strategies in the dynamic world of financial markets. All stockbrokers are registered with the SEBI.

v) Regulator of the Capital Market /SEBI 

In India, the capital market is regulated by the Securities and Exchange Board of India (SEBI). SEBI was established in 1988 as a non -statutory body but with the passing of SEBI Act 1992, it was accorded statutory power. The major objectives of SEBI are to protect the interest of investors and development and regulation of stock exchange, to prevent deceitful malpractices and to regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc. SEBI performs various functions like registration of stock exchanges, mutual funds, underwriters, brokers and sub-brokers. Levys various fees and other charges promote investors educations, audit and inspection of stock exchanges and various intermediaries, prohibits unfair trade practices relating to the securities market and insider trading.

Question No. 2 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 2. What do you understand by business ethics? Discuss the importance of business ethics and the ethical issues involved in business.  

Business ethics are a kind of applied ethics. It is the application of moral or ethical norms to business. The term ethics has its origin from the Greek word ‘ethos’, which means character or custom- the distinguishing character, sentiment, moral nature, or guiding beliefs of a person, group, or institution. Ethics are a set of principles or standards of human conduct that govern the behaviour of individuals or organisations. Ethics can be defined as the discipline dealing with moral duties and obligations, and explanation regarding what is good or not good for others and for us. Ethics is the study of moral decisions that are made by us in the course of performance of our duties. Ethics is the study of characteristics of morals and it also deals with moral choices that are made in relationship with others. Business ethics comprises the principles and standards that guide behaviour in the conduct of business. Businesses must balance their desire to maximize profits against needs of its stakeholders. Maintaining this balance often requires trade-offs. To address these unique aspects of businesses, rules, articulated and implicit, are developed to guide the businesses to earn profits without harming individuals or society as a whole.

Now, let us understand why Corporate Ethics matter to business. Ethics matter because ethical conduct is the right conduct. However, in the absence of a time-culture, and context-neutral definition of ‘right’, it is very difficult to develop a code of conduct on this basis alone. It basically says that businesses avoid many risks and gain reputation by acting in an ethical manner. A good ethics process, operationalised in such a way that all decision making procedures and structures support it on a day-to-day basis, will give an organisation the best chance possible for finding out about potential problems early so that they can be dealt with before they become a disaster. There are also market advantages to be gained from an ethical reputation.

Ways in which Ethics are Important - Major scandals such as WorldCom, Enron, Lehman Brothers etc., in the US and Satyam in India tell us why ethical business practices are becoming increasingly important. There are several reasons why ethics are important to business:

• To understand reasons behind increasing influence of corporates in society. 
• To ensure that no harm is done to society. 
• To meet ethical expectations more effectively. 
• To enable companies to identify employee and customer concerns at an early stage.
• To improve the quality of a firm’s relationships with its key stakeholders. 

The government is interested in ensuring ethical business practices to ensure a basic level of integrity in the market place. This promotes international competitiveness of the economy and improves a country’s image concerning ease of doing business. Even domestically, predictable levels of ethical behaviour ensures that costs of business such as transaction costs, hedging and insurance etc., are kept to a minimum.

Unethical behaviour imposes costs on the government and taxpayers. Bad behaviour by a few impacts on all businesses and might also have an adverse impact on the country’s international competitiveness. Ethics can help improve decision making by providing managers with the appropriate knowledge and tools that allow them to correctly identify, diagnose, analyse, and provide solutions to the ethical problems and dilemmas they are confronted with.

Ethics help in analysing the reasons behind this, and the ways in which such problems might be dealt with by managers, and regulators in improving business ethics. Business ethics can provide us with the ability to assess the benefits and problems associated with different ways of managing ethics in organisations. Business ethics also equips us with knowledge that goes beyond the traditional boundaries of business studies.

ETHICAL ISSUES IN BUSINESS 

You have understood that business has various motives. Some of the motives are: wealth motive, profit motive, societal benefit and overall benefit of shareholders and stakeholders. The dilemma remains between striking the balance between profits and ethics. The organisations practice ethics as it bolsters their goodwill and reputation of being fair, honest and integral both at the business and the corporate level thereby, fortifying their image. Organisations expect the employees at all levels carry this legacy of identity with utmost care. Ethics provide the framework within which the organisation makes ethical investment. Ethical investment is followed in management of investment portfolio which consists of company shares. Profit is an inherent motive of business. But various economic thinkers have propagated various business motives varying from profitability, wealth, utility maximization, etc. But there are differences of opinion too. On the one hand there is the ideology of Karl Marx, according to which it is unethical to do business to accumulate wealth. On the other hand, Mahatma Gandhi believed in business but preached trusteeship according to which a businessman should look after the welfare of his employees.

Let us discuss this further with examples from various companies. In the early 1980s the Indian automobile industry had two leading brands namely the Ambassador from HM and the FIAT. The Japanese entered with Suzuki and Maruti became a household name. Subsequently we saw a lot of foreign brands like the Daewoo, Hyundai, General Motors, Toyota, etc. entering the fray. Each of these multi-national companies had their own management style and ethic orientation. Few worked on vendor relations, Research and Development aiming at cost reduction, while others worked on advertising and creating a robust distribution network. Within all this high level marketing impact the Indica model from the national brand Tata was launched. Though the model didn’t compete much with the elite MNC brands but it was able to create a significant presence for the customers who believed in Tata’s ethical philosophy. So a low advertised product also garnered a market share as the word of mouth from the customers spread fast thereby creating a brand identity for Tata.

The advantages of being ethical: 

1. Preferred by prospective employees and creation of quality talent pool. 

2. Less number of employees leaving the organisation i.e lower attrition rate. 

3. Less number of employee strike or labour unrest. 

4. Corporate goodwill enables bargaining power which results in cost reduction 

- increase in production

- achieving economies of scale

- more revenue and profits

- longer business viability. 

Question no. 1 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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                            MBA and MBA (Banking & Finance)

MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 1. Define inflation. What are the different methods of measuring inflation and what are the effects of inflation.   

One of the most daunting task before economists is to define Inflation as there are multitudes of problems in penning down one definition. Therefore there is no universal definition for this problem. Many economists have given different definition like according to Coulborn, Inflation can be understood as a situation whereby “too much money chases too few goods”. A situation in which the value of money falls and price rises is inflation according to Crowther. These and other definitions have one or another deficiency. Economists are unanimous that inflation refers to a ‘persistent’ and ‘appreciable’ rise in the general price level. However, the word persistent and appreciable are not clearly defined so there is space for ambiguity. For example, whether the rate of price rise by 1 %, 5 % or 30 % is considerable or there is some other rate which is deemed to be considerable. The issue of inflation is of utmost importance because it is both boon as well as bane. A rise in prices is necessary for producers to induce them to supply more in the market. But higher prices lead to more burden on the consumer pocket and it may also create many political and social problems. So, what an economy needs is a moderate rate of inflation. This takes us to another question, what is a moderate rate of inflation? The answer to this question varies from country to country depending on the level of development. For instance, in the case of India, a committee set up by the Reserve Bank of India (RBI) to review the monetary system which is popularly known as Chakravarty Committee (1985) recommended that 4 percent rate of Inflation is desirable for India’s economic growth.

Different Methods of Measuring Inflation 

There are two common methods of measuring inflation.

Effects of Inflation 

Inflation affects almost all the economic agents of the economy be it consumer, producer or government. The favourable or unfavourable effect depends upon the rate of inflation. In this section, you will understand how does it impact the distribution of income and wealth, producers, wage earners, borrowers and lenders and some other segments of the economy. 

Impact on Income Distribution 

How will inflation affect income and wealth distribution depends upon the prices of the output which the producer produces and the prices of the inputs like labour and land. If output prices rise more than input prices, then income will be distributed in the favour of the producer or the profit earner or the employer. The plausible explanation is when the price of output rises, it translates to higher revenue and profit of the producer. So the revenue-wage gap increases and the larger share of the national income goes to the employer. The overall impact is that firm/producer who was already rich they get even richer and the poor (especially labour) get poorer.

 

Deterioration in the Value of Money 

Inflation erodes the purchasing power of money. It implies that the real wages or real income decline with a rise in prices. For example, let us suppose that the price of good X was Rs 10 per piece and you have Rs 500 as your money income. So if you spend your entire income on good X, you could buy 50 units/pieces. Now keeping other things constant the price of good X rise to Rs 20 per piece. Now the same Rs 500 can fetch you only 25 units of X good. So the currency denomination remains the same but its purchasing power reduces. You can buy fewer goods with the same income. This type of effect is most harmful to daily wage earners, persons with fixed income and employees working in the unorganised sector, as they do not have any safeguard against this price rise.

Impact on Borrowers and Lenders 

It is the borrowers who tend to gain due to inflation and lenders lose. Now suppose you are a borrower and you borrow money at the prevailing rate of inflation. Now when you repay the same amount to your lender no doubt you are paying the same amount with the rate of interest but the real value of money has reduced. More specifically you pay less in terms of purchasing power or goods and services. So you(borrower) gain and your lender losses.

 

Methods of Taming Inflation 

Monetary policy is one of the policy option and direct method of controlling inflation. Reserve Bank of India makes use of monetary policy to regulate the supply of credit in the market.

MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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                            MBA and MBA (Banking & Finance)

MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Note: Attempt all the questions and submit this assignment to the coordinator of your study centre. Last date of submission for July 2022 session is 31st October, 2022 and for January 2023 session is 30th April, 2023. 

Question No. 1. Define inflation. What are the different methods of measuring inflation and what are the effects of inflation.                                 CLICK HERE

Question No. 2. What do you understand by business ethics? Discuss the importance of business ethics and the ethical issues involved in business.                               CLICK HERE

Question No. 3. Discuss the structure of capital market in detail.                               CLICK HERE

Question No. 4. Describe the key players in the agricultural sector and discuss the role and importance of agricultural marketing.                               CLICK HERE

Question No. 5. What are the main components of Balance of Payments (BoP)? Discuss the factors affecting the BoP.                               CLICK HERE

Question No. 6. Write notes on the following:                               CLICK HERE

a) Measures to reduce barriers to foreign trade. 

b) Impact of technological environment on international business.

Question No. 5 - MMPC-003 - Business Environment - MBA and MBA (Banking & Finance)

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                           MMPC-003 -  Business Environment

Question No. 5                                        

Write short notes on the following: 

 a) Balance of Payments (BoP) 

The balance of payments (BOP), also known as the balance of international payments, is a statement of all transactions made between entities in one country and the rest of the world over a defined period, such as a quarter or a year. It summarizes all transactions that a country's individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country.

The balance of payments (BOP) transactions consist of imports and exports of goods, services, and capital, as well as transfer payments, such as foreign aid and remittances. A country's balance of payments and its net international investment position together constitute its international accounts.

The balance of payments divides transactions into two accounts: the current account and the capital account. Sometimes the capital account is called the financial account, with a separate, usually very small, capital account listed separately. The current account includes transactions in goods, services, investment income, and current transfers.

The capital account, broadly defined, includes transactions in financial instruments and central bank reserves. Narrowly defined, it includes only transactions in financial instruments. The current account is included in calculations of national output, while the capital account is not. 

If a country exports an item (a current account transaction), it effectively imports foreign capital when that item is paid for (a capital account transaction). If a country cannot fund its imports through exports of capital, it must do so by running down its reserves. This situation is often referred to as a balance of payments deficit, using the narrow definition of the capital account that excludes central bank reserves. In reality, however, the broadly defined balance of payments must add up to zero by definition.

In practice, statistical discrepancies arise due to the difficulty of accurately counting every transaction between an economy and the rest of the world, including discrepancies caused by foreign currency translations. 

Balance of payments and international investment position data are critical in formulating national and international economic policy. Certain aspects of the balance of payments data, such as payment imbalances and foreign direct investment, are key issues that a nation's policymakers seek to address,

While a nation's balance of payments necessarily zeroes out the current and capital accounts, imbalances can and do appear between different countries' current accounts. The U.S. had the world's largest current account deficit in 2020, at $647 billion. China had the world's largest surplus, at $274 billion.

b) Corporate Social Responsibility (CSR) 

Corporate Social Responsibility (CSR) is the idea that a company should play a positive role in the community and consider the environmental and social impact of business decisions. It is closely linked to sustainability − creating economic, social, and environmental value – and ESG, which stands for Environmental, Social, and Governance. All three focus on non-financial factors that companies, large and small, should consider when making business decisions.

In recent years, there has been a shift from CSR to social purpose. Many companies have pivoted from having a community investment strategy and a ‘nice to have’ mindset to adopting a holistic approach in which their mission is built into everything they do.

CSR can involve a broad scope of approaches and initiatives—everything from sustainable practices to community involvement. Customers increasingly expect responsible behaviour from companies they do business with.

CSR initiatives can range from philanthropy to operational changes and even transforming your entire business strategy or model.

1. Donations and sponsorships

You can donate time and/or money to causes that are meaningful for your business, employees and community.

2. Operational initiatives

Operational CSR initiatives are often oriented around improving business efficiency or performance in ways that also have positive social or environmental impacts in the wider community. Initiatives can fall into several categories, here are a few examples.

Environmental:

reduce your carbon footprint

improve energy efficiency

reduce waste, water use and emissions

Social:

deal with diverse, local and socially responsible suppliers and partners

consult community stakeholders about business decisions

support community initiatives

Workplace:

improve workplace diversity, equity and inclusion

enhance workplace health and safety

develop a code of ethics for your business and eliminate workplace harassment and discrimination

3. Strategic transformation

Some CSR initiatives can involve a wholesale transformation in a company’s business strategy or model to integrate social or environmental goals as a key priority.

Many businesses imbed impact or purpose into their business model. You may hear this referred to as social enterprises, purpose enterprises, and coops. They place social or environmental goals at the heart of their mission and business strategy. These companies are still businesses that seek a profit, but they also formally pledge to focus on a “double bottom line” or even a “triple bottom line”—tracking profits along with social and/or environmental impacts.

An example is B Corps—certified “Beneficial corporations” that follow a rigorous process to assess their environmental, social and governance performance.

Businesses have a variety of reasons for pursuing CSR. Here are some common benefits:

- improved employee productivity, engagement, talent acquisition and retention

- lower costs and reduced waste

- enhanced community support, branding and customer loyalty

 c) Tax Reforms 

Tax reform is generally undertaken to improve the efficiency of tax administration and to maximise the economic and social benefits that can be achieved through the tax system. A tax itself can be defined as ‘a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state, or the functional equivalent of a state’ (Granger, 2013, p. 1). Taxes can include direct taxes on income and wealth (e.g. personal and corporate income taxes, property tax), and indirect taxes on consumption (e.g. Value Added Tax (VAT), excise duties).

There has been increasing global and donor interest in developing country domestic revenue mobilisation, and in particular taxation (Mascagni et al., 2014; Fjeldstad, 2014). There is growing recognition of the role of taxation in state-building, in terms of enhancing state capacity and state-society relations (see Statebuilding). The 2008 financial crisis brought about a temporary fall in aid levels, and a renewed focus by donors on aid effectiveness and ensuring that donors support rather than discourage developing countries’ own revenue-raising efforts. Some activists (e.g. Byanima, 2014) also argue that the current international tax regime is dysfunctional, creating a race to the bottom to offer favourable, but infeasible, tax conditions to attract investment which further exacerbate inequality.

Tax reform can reduce tax evasion and avoidance, and allow for more efficient and fair tax collection that can finance public goods and services. It can make revenue levels more sustainable, and promote future independence from foreign aid and natural resource revenues (see Sustainable revenue and reducing aid and natural resource dependence). It can improve economic growth (see Economic growth) and address issues of inequality through redistribution and behaviour change (see Inequality and redistribution).

Tax reform is the process of changing the way taxes are collected or managed by the government and is usually undertaken to improve tax administration or to provide economic or social benefits. Tax reform can include reducing the level of taxation of all people by the government, making the tax system more progressive or less progressive, or simplifying the tax system and making the system more understandable or more accountable.

Numerous organizations have been set up to reform tax systems worldwide, often with the intent to reform income taxes or value added taxes into something considered more economically liberal. Other reforms propose tax systems that attempt to deal with externalities. Such reforms are sometimes proposed to be revenue-neutral, for example in revenue neutrality of the FairTax, meaning they ought not result in more tax or less being collected. Georgism claims that various forms of land tax can both deal with externalities and improve productivity.

 d) Farm Reforms 2020

In 2020, thousands of farmers and their families camped on the three borders of the country’s capital city for months. They were protesting the government’s three agricultural reform bills that were passed hurriedly through Parliament, without following due process.

In short, the bills:

a) allow farmers to sell directly to private buyers, rather than at the notified government markets, or mandis;

b) provide a legal framework for farmers to enter into contracts with companies and produce for them;

c) allow businesses to store essential commodities, cereals, pulses, etc. without any limits on how much they can store.

These laws were mostly seen as designed to suit the interests of large corporates, and would leave farmers exposed to private buyers with far more money and influence to manage prices.

When the protests broke out, the farmers said they were not consulted before these reforms were made. The government stated that there had been many consultations over the last twenty years, and that the protestors did not represent all farmers. The government also suggested that the protesting farmers had political motivations. Along with the reforms themselves, people were also unhappy with the undemocratic manner in which they were implemented.

Below is an excerpt from an episode on IDR’s podcast, On the Contrary, where host Arun Maira speaks with Kavitha Kuruganti and Siraj Hussain about the agricultural reforms, and the space that was (or was not) created for democratic processes to take shape. Kavitha is a social activist known for her work on sustainable farm livelihoods and farmers’ rights. Siraj is a former secretary of the Department of Agriculture and the Department of Food Processing.

In 2020, thousands of farmers and their families camped on the three borders of the country’s capital city for months. They were protesting the government’s three agricultural reform bills that were passed hurriedly through Parliament, without following due process.

In short, the bills:

a) allow farmers to sell directly to private buyers, rather than at the notified government markets, or mandis;

b) provide a legal framework for farmers to enter into contracts with companies and produce for them;

c) allow businesses to store essential commodities, cereals, pulses, etc. without any limits on how much they can store.

These laws were mostly seen as designed to suit the interests of large corporates, and would leave farmers exposed to private buyers with far more money and influence to manage prices.

When the protests broke out, the farmers said they were not consulted before these reforms were made. The government stated that there had been many consultations over the last twenty years, and that the protestors did not represent all farmers. The government also suggested that the protesting farmers had political motivations. Along with the reforms themselves, people were also unhappy with the undemocratic manner in which they were implemented.

Below is an excerpt from an episode on IDR’s podcast, On the Contrary, where host Arun Maira speaks with Kavitha Kuruganti and Siraj Hussain about the agricultural reforms, and the space that was (or was not) created for democratic processes to take shape. Kavitha is a social activist known for her work on sustainable farm livelihoods and farmers’ rights. Siraj is a former secretary of the Department of Agriculture and the Department of Food Processing.

Question No. 4 - MMPC-003 - Business Environment - MBA and MBA (Banking & Finance)

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Question No. 4                                       

How does technological advancement impact international business environment. Discuss. 

In the past decade, technology has grown exponentially and has affected our everyday way of life and impacted almost every industry, including international business. Technology is ultimately what makes thriving international trade and businesses possible, and without technology, international business would be slow, tedious and time-consuming.

Technology is no longer reserved for specific countries or certain groups of people. These days, even the average person has access to some form of technology, which has aided the technological and international business revolution.

a. Telecommunications

Not so long ago, there was a time where writing letters was the only way to communicate with your international business connections. These letters could take days, weeks, and even months to reach their destination. But now, look at where technology has gotten us! We’re able to send messages and emails instantly and interact through platforms like Skype and Zoom.

Telecommunications technology is what makes running an international business doable. It’s necessary for sending invoices, dealing with customers, communicating with suppliers, and keeping in touch with employees that may live in other parts of the world.

b. Social media

It could be said that social media is a branch of telecommunications, but it deserves attention of its own as social media has given international business a platform from which it can skyrocket. Social media keeps tabs on global trends in fashion, decor, art, furniture, and a wide variety of other products, which provides international businesses with impressive insight.

Whether it be Instagram, Facebook, Linked In, or others, having a social media account allows international businesses to connect with their target audience worldwide and advertise their products to them. Where once people would not be exposed to businesses from other countries, social media has made it easier than ever to stumble upon businesses from all over the world.

c. Transportation

There have been several major advances in transportation in the last 80 years or so. No one wants to wait months for their international order anymore; that’s because commercial jet craft has made transporting products to different areas of the globe affordable and timely.  Customers these days are all about instant gratification, so there is a major emphasis on getting orders shipped as quickly as possible.

The explosion in air travel and airports worldwide has also made travelling for business people more accessible and created a huge rise in the travel industry, creating opportunities for many international businesses.

d. Production

If you’re an international business that sells products, you would have directly benefited from the latest innovations in production. Technology has played a major role in the production processes we know today and associated processes such as production planning, financial planning, and marketing. Thanks to technology, companies may have production and manufacturing plants in several different countries, and you can choose where to create your manufacturing plant based on where materials are easily sourced and where skilled labour is affordable.

e. Market globalisation

Market globalisation began forming its roots when it became more affordable and feasible to transport and sell goods in different countries. The internet is seen as a low-cost market globalisation network in an electronic form. Because of social media, television, and the low costs involved in transporting products around the world, there has become a sort of convergence in consumer preferences and tastes. For instance, there was once a time when only Americans wore jeans, but now people worldwide are interested in buying and wearing jeans, and that is how market globalisation works. The same thing goes for brands such as McDonald’s, Pizza Hut etc.

A global culture is created in which different countries begin having similar lists of wants and demands.

f. eCommerce

eCommerce platforms are platforms or websites that specialise in selling products online, usually to an international audience. Over the years, we have seen many advances in eCommerce technology. As a result, we are at a point where almost anyone can make their own eCommerce site with very little trouble, thanks to all of the templates and applications out there. This gives the average person, as well as multi-million dollar corporations, the opportunity to have their goods online and available to be sold.

eCommerce platforms are usually fully integrated with shipping, payment, customer service, etc.

g. Online banking

Pay instantly with the click of a button! Technology has played a significant role in online banking, and we have seen tremendous growth in just the past few years. Paying online, no matter where you’re located in the world has truly become easier than ever before, and there are so many options available to you! You can use your credit card, payment solutions such as the popular Paypal, as well as digital currencies like Bitcoin in some instances. In addition, exchange rates and payment fees have become lower, making shopping internationally easy and affordable.

Whether you’re a customer buying a pair of shoes online or an international business owner who needs to pay his suppliers and employees, online banking and payment services have made payments exceptionally convenient.

Technology plays a major role in the security behind all online transactions.

The future of international business

Technology is always evolving, and things in the international business landscape won’t ever stay the same for very long. While it is always impossible to predict the future exactly, as business experts, we expect to see trends in international business leaning more towards services than products, the inclusion of digital currencies as forms of payment, and an emphasis on eco-friendliness and transparency.

Question No. 3 - MMPC-003 - Business Environment - MBA and MBA (Banking & Finance)

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Question No. 3                                        

Describe the structure and working of the money market and capital market. 

Capital markets commonly referred to as the stock markets have been in existence for centuries. The British East India Company was the first company to invite the public to buy shares in the company. Since then, over the years, markets have gone through tremendous changes. The way the market works, the asset classes, the framework of the exchanges, and everything has been evolving over time. The changes have been brought in gradually according to the convenience of the investors and market participants. Also in order to prevent market participants to take undue advantage of the information in order to gain monetary benefits, the Securities Regulatory bodies over the world have surveillance methods for mitigation of such acts.

Structure of Capital Market

The capital market in India consists of the following structure:

Capital Market Instruments

There are mainly two types of instruments that are traded in the capital market, which are:

Stocks:  Stocks are sold and bought over a stock exchange, They represnt ownership in the company and the buyer of the share is referred as the shareholder.

 Bonds: The debt securities which are traded in the capital market are known as the bonds. Companies issue bonds for in order to raise capital foe the expansion of the business and growth.

Features of Capital Market:

Here are the features of the Capital Market:

1. Serves as a link between Savers and Investment Opportunities:

The capital market serves as a crucial link between the saving and investment process as it transfers money from savers to entrepreneurial borrowers.

2. Long term Investment:

It helps the investors to invest their hard-earned money in long-term investments.

3. Helps in Capital formation:

The capital market offers opportunities for those investors who have a surplus amount of money and want to park their money in some type of investment and also take the benefit of the power of compounding.

4. Helps Intermediaries:

While transferring shares and money from one investor to another, it takes help from intermediaries like brokers, banks, etc. thus helping them in conducting their business.

5. Rules and Regulations:

The capital markets operate under the regulation and rules of the Government thus making it a safe place to trade.

Example of Capital Market:

Suppose a company says ABC requires capital for expanding its business, so it plans to raise the required fund from the public by issuing new securities in the primary market.

After issuing the new securities, the people who are interesting in buying those shares after doing research of the company, buy those shares through the Initial Public Offering (IPO) process.

After the initial buying, it sharts trading in the secondarily market, where the existing buyers and sellers start trading that security.

Capital Market Intermediaries

Financial Intermediaries are the organizations that help in the transfer or channeling of funds from those who have surplus funds to those who are in need of it. They act as a middleman in connecting the surplus parties to the deficit ones. A classic example can be a bank that accumulates bank deposits and uses them to provide bank loans.

The main Financial Intermediaries of India include:

Stock Exchanges: These include the NSE (National Stock Exchange), BSE (Bombay Stock Exchange), MCX (Multi Commodity Exchange), etc

Banks

Insurance Companies

Pension Funds

Mutual Funds

Money Markets

The money market is a sub-section of the financial market that trades in short term financial funds and financial assets. These instruments and assets usually have a maturity period of less than one year and are highly liquid. So the buying and selling of such instruments, like commercial papers and t-bills, occurs in the money market.

This market is not a physical location. Most of the trading happens over the phone and now over the internet. It is a virtual market for trading in low-risk, liquid, and unsecured instruments to meet short-term financial needs a company may have. Companies turn to monetary market mostly to meet their working capital requirements.

The major players and institutions of this market are the Reserve Bank of India, all the commercial banks of the country, NBFC’s, LIC, Mutual Funds, large corporates, and even the respective state governments. Let us look at some other features of this market.

- Unlike the stock exchange, the money market does not have geographical restrictions. Most transactions happen in the virtual world with institutions that can be spread out over the whole country, the whole world even.

- While the market is quite flexible and unrestricted, it only deals in short-term securities (maturity period between one day and 364 days)

- There is no need for brokers or other intermediaries. The transactions can happen without them.

- There are many securities in the money market like T-bills, commercial bills, call money etc.

Structure of Indian Money Markets

The Indian monetary market has two broad categories – the organized sector and the unorganized sector.

a. Organized Sector: This sector comprises of the governments, the RBI, the other commercial banks, rural banks, and even foreign banks. The RBI organizes and controls this sector. Other corporations like the LIC, UTI, etc also participate in this sector but not directly. Other large companies and corporates also participate in this sector through banks.

b. Unorganized Sector: These are the indigenous banks and the local money lenders and hundis etc. Their activities are not controlled by the RBI or any other body, so they are the unorganized sector.

Question No. 2 - MMPC-003 - Business Environment - MBA and MBA (Banking & Finance)

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                           MMPC-003 -  Business Environment

Question No. 2

What are the important elements of politico-legal environment? How does the government regulate business? Discuss in detail. 

The critical elements of the politico-legal environment of business are:

1. The Form and Structure of the Government: It is a very important and decisive factor for the business sector. Democracy states government of the people, by the people and for the people.

At the enterprise level also people’s participation is very important. We authorize the local Government to collect some business taxes and spend money on local activities, when we accept the principle of democratic decentralization. Thus, the system of government and the structure of administration affects business.

2. The Ideology of the Ruling Party: It influences ownership, management, structure and size of business. The philosophy of the ruling party may help or hurt the course of business activity.

3. The Strength of the Opposition: Opposition has a very important role in democracy.

The party which gets an absolute majority forms the government under the two party system whereas, the party which gets a relative majority forms the Government with the collaboration of some other political parties. The candidates who do not command majority forms the opposition.

The strength of the opposition depends on whether the opposition parties are united or divided. To protect, promote and regulate business in the best interests of society, opposition is as important as a dedicated government.

4. The Role and Responsibility of the Bureaucracy: The work done by the Government is through the bureaucracy Ministers change from time to time, but Government administration must run without any break. Here the bureaucracy comes in.

The bureaucracy is very powerful in enforcing Government rules and regulations, systems and procedures, licenses and restrictions.

The bureaucracy enjoys tremendous power in the context of a system environment based on a host of controls and regulations. When the Government proposes liberalization, relaxation of rules and regulations, streamlining of systems and procedures, control becomes redundant and meaningless.

5. Political Stability: Business grows in a Politically stable region. Whenever the nation becomes politically unstable, the flow of foreign capital and enterprise is adversely affected, and this in turn effect the business, both.national and multinational.

6. The Velocity of Government Policies, Plans and Programs: If policies and programs are stable then business can plan its activities. otherwise it faces a tremendous amount of “non-market” risk and uncertainties. Stable policies help corporate planning and build up business confidence.

Sometimes policies are formulated with a clear “direction” but at snail’s’ “speed” and sometimes “speed” is fast but “direction” is not clear, we suffer on account of lack of “velocity” of such policies and this affects business unfavorably.

When there are so many policies such as policy-thinkers, policy-planners, policy-makers, policy executors, policy-adjudicators and so on, the business sector views policies with suspicion. Policies once formulated have to be implemented.

7. Socio-economic Legislation’s: Laws are needed to protect consumers, workers, managers, owners, shareholders and society at large. MRTP, FERA, IORA and so on are some of the business legislation’s to maintain order in the industrial economy. Industrial order and harmony is a condition for survival and expansion of business.

8. Politico-legal Institutions: These are the parts of the non-economic environment of business’s. The functioning of the legislative, executive and judicial organs of the Government affects business environment directly and indirectly.

In traditional sense, the role of any government has been to maintain law and order, protect the nation from external aggression, provide social security exercise control over public activities, etc. These roles were in the context of providing basic infrastructure to business. But, in course of time, emphasis on planned economic development and various other circumstances prompted the Government to play an active role in promoting and regulating the business activities. 

In order to ensure that balanced economic development is planned within the constitutional framework, the public utilities and infrastructure facilities are duly built up, and the business is run on sound lines, the role of Government has assumed four dimensions as under : 

- Regulatory Role, 

- Promotional Role, 

- Entrepreneurial Role, and 

- Planning Role.

Their distinctive features notwithstanding, these roles are not exclusive to each other. There may be occasions when the Government becomes active in more than one way to serve national or sectoral objectives. For example, the planning and regulatory roles may be mutually complementary and so can be the entrepreneurial, planning and promotional roles. Let us now discuss the implications of each.

Regulatory Role 

Government regulation of business, industry and trade generally refers to all measures and instrumentalities which are aimed at defining and laying down the limits of private enterprise. More specifically, Government may regulate business activities using direct (discretionary) measures and/ or indirect (non-discretionary) measures. Direct regulation refers to measures which are applicable at the discretion of administrative authorities like, for example, - fixation of maximum and minimum prices of commodities, industrial licensing, allocation of foreign exchange for imports , quantitative restrictions on imports and exports, rationing supplies and distribution of particular goods, etc. In many developing countries, Government regulation by way of direct controls has been used after the second world war for various reasons. For instance, industrial licensing has been practiced on the ground that the market mechanism was incapable of allocating scarce resources optimally, and that the State could ensure resources to be allocated in accordance with national priorities. It was believed that the resulting resource allocation would be socially optimal and desirable. 

Promotional Role 

Promotional role of Government has been of great significance in the developed countries and so also in the developing countries. According to Dimock, Governmental function in USA to assist and help develop industrial, labour, agricultural and consumer interests is quite large considering the totality of government activities. This view m'ay be quite surprising. But as Dimock puts it, the surprise is a measure of the degree to which Americans "take for granted some of the most basic duties of the liberal government and fail to appreciate their value adequately". For a developing country the promotional role of government is obviously of greater significance. It may include :

(a) Initiating and promoting the develop~nent of infrastructure to facilitate industrial and comnzercial activities by assuming tlie responsibility to provide and strengthen power supply, transport network, availability of financial resources, training institutions, R&D, guidance for pro~notiolial activities, and so on. 

(b) Providing assistance for development of backward areas by way ofsubsidies, allocation of scarce resources, allotting land at concessional price, power and water supply at concessional rates, making available credit and finance at low interest, and marketing through specialized organisations. 

(c) Providing fiscal and monetary incentives, facilities for insurance of business risks as well as information inputs for the developlnent of priority sectors. 

Entrepreneurial Role 

The entrepreneurial role of Government means that the government itself becomes the entrepreneur which implies its participation in economic activities through public ownership and management of industrial and commercial undertakings. The justification for this role may be found in developed as well as developing countries. Defence production, public utilities, passenger road transport, multi-purpose river-valley projects, railways, airlines operations and strategic industries have been areas of government engagement even in developed countries. Besides these activities, the Government in developing countries assumes the entrepreneurial role even in other areas: 

(a) on account of the necessity of government to step in where private enterprise and private management are not conducive to public good, e.g., providing safe drinking water at affordable rates; 

(b) to secure balanced development of the economy; 

(c) to promote capital intensive industries involving large investments which may not be attractive to private entrepreneurs due to low return in the short run; and (d) to take over and manage private undertakings which become unprofitable but need to be revived and continued so as to prevent large-scale unemployment and waste of resources. 

Planning Role 

The planning role of the Government has been closely related with its regulatory role. In developing countries, the objective of planned economic development has been to secure optimum use of resources for rapid economic growth. Many states in Asia and Africa, free from colonial rule after the second world war, were inspired by the erstwhile Soviet model of centralised planning and control which evolved during the inter-war period. The ideological appeal of the welfare states of western countries also strengthened the idea of state planning. The basic argument in favour of Government's planning role was that exclusive dependence on the market mechanism and freedom of private enterprise has not been conducive to rapid economic development. 

Question No. 1 - MMPC-003 - Business Environment - MBA and MBA (Banking & Finance)

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                           MMPC-003 -  Business Environment

Question No. 1

Describe the nature and scope of Business Environment. What are the various types of Business Environment? Discuss giving examples. 

Nature of Business Environment

The nature of business environment is as follows:

1.   Complex: Business environment is compound in nature. Environment consists of a number of factors, events, conditions and influences arising from different sources which impact business thus making the business complex.

2. Interdependence: The environment of the business is made of social, economic, legal, cultural, technological, and political factors. These factors of the environment are inter-dependable. The economic status of a country affects the development of technology. A rich country can make sufficient expenditure on the research and development.

3.  Dynamic: Business environment is constantly changing process. Business environment is dynamic as it keeps on changing in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market. The various forces in the environment keep on changing from time to time thus making business dynamic and not static.

4. Inter-relatedness: The different factors of business environment are co-related. For example, let us suppose that there is a change in the import-export policy with the coming of a new government. In this case, the coming of new government to power and change in the import-export policy are political and economic changes respectively. Thus, a change in one factor affects the other factor.

5. Impact: Business environment has both long term and short term impact. Environment therefore has different effects on different firms in the same industry, for example, drugs.

6.    Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings, especially when environment changes are taking place too frequently as in the case of information technology or fashion industries.

7.  Relativity: It is a relative concept since it differs from country to country and region to region. Political conditions in the USA, for example differ from those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.

SCOPE OF BUSINESS ENVIRONMENT

Identifies Business Opportunities and Threats

Business environment helps business in identification of various opportunities and threats. When business is able to detect market opportunities timely, they can easily take advantages of such opportunity at earliest. They can earn maximum returns by availing such opportunity before the competitors. By proper interaction between business and its environment all threats can be easily detected. It will enable business in taking corrective measures timely.

Helps in Planning and Policy Formulation

Proper understanding of business environment helps in formulating better policies and strategies. It conveys all current information regarding market conditions to business. All opportunities and threats are scanned through the study of the business environment. Businessmen are properly aware of environment and thereby take all decisions according to it. Their entire plan can be changed effectively and efficiently through environmental awareness.

Provides Useful Resources

Business depends on the environment in which they operate for several resources. Business environment supplies several inputs like raw materials, capital and labour which are used by the business for its operations. These inputs are converted into goods and services for satisfying the needs of the market. Without proper supply of inputs, business cannot continue its operations. It is fully dependent upon environment for taking inputs and delivering the required goods or services.

Improves Performance

Business environment has an effective role in accelerating the overall performance of business organisations. Through continuous environmental awareness, managers update their knowledge and skills. Environmental study serves as the medium of educating management. Monitoring of environment provides qualitative information which helps in developing strategic thinking. It enables managers to adopt suitable management practices to control and improve the performance of business.

Helps in Coping with Rapid Changes

Factors which constitute business environment are dynamic in nature. They keep on changing continuously from time to time. These changes include changes in customer’s preferences, fashion, technology, economic conditions etc.

Proper understanding of the business environment helps business in detecting all these frequently occuring changes easily. It enables them in dealing with these changes efficiently by taking appropriate actions at right time. Managers through continuous monitoring of environment are sensitive to such changes and respond effectively.

Enhances Business Image

Business through proper understanding of its environment are able to improve its public image. They are more responsive and sensitive to the environmental needs through proper knowledge of business environment. Study of environment provides them information for making realistic plans and implementing them effectively. Businesses are able to provide better service and serve the interest of entire society. People are happy with the business and develop confidence towards it. This enables in developing a better image in market.

Assist in Facing Competition

Business environment communicates all details about competitors in market to business. Awareness regarding the actions and strategies of competitors is crucial for every business for meeting competition effectively. It helps business in formulating plans and policies in accordance with the competitor’s actions. Businesses are able to face challenges and competition in market through systematic planning in an efficient way.

TYPES OF BUSINESS ENVIRONMENT

Types of Business Environment

The Business Environment can be classified as follows:

I) Internal Environment

II) External Environment

Internal environment refers to those factors within an organisation e.g Policies and programmes, organisational structure, employees, financial and physical resources. These factors can be changed or altered and hence are known as controllable factors.

External environment  refers to those factors outside the business These factors by and large are beyond the control of a business and hence uncontrollable .e.g economic, political and socio-cultural factors.

1. Internal Environment

Internal Environment Factors

The major internal factors affecting business decisions are

i. Values system: The values of the founder/ owner of the business , percolates down to the entire organisation and has a profound effect on the organisation. The success of an organisation depends upon the sharing of value system by all members. External business associates like suppliers and distributors consider the value system practised by an organisation with strong culture of ethical standards and values.

ii. Vision and objectives: The vision and objectives of a business guides its operations and strategic decisions. Example ‘Amul the taste of India’ Gujarat Co-operative Milk Marketing Federation GCMMF

Two Indian companies TATA Steel and WIPRO have been named as the world’s most ethical companies by American Think tank Ethisphere Institute. Infosys, Murugappa group, TVS group

Vision: Liberate our farmers from economic oppression and lead them to prosperity.

iii. Management structure and ature: The structure of management/board and their style of functioning, the level of professionalism of management, the composition of the board are the various factors which affects the decision making. Since the board is the highest decision making authority, it’s composition, degree of professionalism and style of operations plays a very critical role in the growth and development in an organisation.

iv. Internal power relations: This refers to the internal power relations that exist in an organisation. The relations among board members , between board members and the CEO and the level of support enjoyed by the board from its’ stakeholders namely employees and shareholders are significant factors which affects decision making and its implementation in an organisation.

v. Human resources : The success of an enterprise is solely dependent on its manpower. Therefore the quality, skill competency, right attitude and commitment of its human resources is essential for the success of an organisation.

vi. Company image: The image of an organisation plays an important role in introducing new products, selecting agents and dealers for distribution, forging alliances with suppliers, expanding and entering new markets both domestic and international, raising finance etc.

vii. Other factors: The firm’s ability to innovate reflected by its research and development, the strength of its financial position and the capital structure, the efficiency in managing the marketing and distribution network ,and the physical resources like plant, building technology are the other major factors on which affects the success of a business.

 

2. External environment

All factors outside the business which have a bearing on the working of a business can be termed as the external environment. This is subdivided into micro or task environment and macro or general environment.

 

3. Micro Environment

Micro Environment Factors

This refers to those factors which are in the immediate environment of a business affecting its performance. These include the following:

i) Financiers: The financiers of a business which includes the debenture holders and financial institutions play a significant part in the running of a business. Their financial capability, policies strategies, attitude towards risk and ability to give non–financial assistance are all important to a business.

ii) Suppliers: In any organisation the suppliers of raw materials and other inputs play a very vital role. Timely procurement of materials from suppliers enables continuity in production and reduces the cost of maintaining stock/inventory. Organisations generally obtain supplies from a panel of suppliers instead of relying on a single source. Organisations have realised the importance of nurturing and maintaining good relationship with the suppliers.

iii) Marketing Channel members: The marketing inter-mediaries serve as a connecting link between the business and its customers .The middlemen like dealers, wholesalers and retailers ensure transfer of product to customers .physical distribution is facilitated by transporters, and warehouses help in storing goods. Market research agencies help the firm to understand the needs of the customers while advertising agencies help in promoting the products and services. Insurance firm is another marketing intermediary which provides coverage for risk in business.

iv) Public This refers to any group like media group, citizen action group and local public which has an impact on the business. The public group has the ability to make or mar a business. Many companies had to face closure due to actions by local public.

v) Customers: The aim of any business is to satisfy the needs of its customers. The customer is the king and the fulcrum around which the business revolves. Hence it is essential for any business to understand the needs of its varied customers like individuals, retailers, wholesalers, industries and government sector. Customer relationship management aims at creating and sustaining cordial relations with customers.

vi) Competitors: All organisations face competition at all levels local, national and global. Competitors may be for the same product or for similar products. It is important for a business to understand its competitors and modify their business strategies in the face of competition.

4. Macro Environment:

Macro Environment Factors

This is the general or overall environment in which the business operates. The success of a business is dependent on its ability to adapt to the macro environment, since these are uncontrollable factors. They offer enormous opportunities to business and also poses serious threats to business. The general or remote environment factors are as follows;

I. Economic environment: The business is an integral part of the economic system prevalent in a nation. The multiple variables in the macro environment system which has a bearing on a business include

1) The nature of economy based on the stage of development: The countries across the globe can be categorised on the basis of growth and per capita income as developed nations, developing nations and under developed nations. The USA, Japan, Germany, Canada and Australia developed economies generally have high degree of technological advancement, very strong and robust industrial base, and high standard of living. Many of these developed nations have successfully integrated the computer based technologies with their existing business. Developing nations like India, China, Brazil Mexico are middle income economies are characterised by low to moderate industrial growth, the inequality in the distribution of income, high population, a low standard of living and slow absorption of technology. Under developed nations are low income economies with a very low degree of technology adoption and a very poor standard of living.

2) The nature of economic system: The economic systems can be classified as Capitalistic, Socialistic and Mixed economy. Capitalistic economy is a free enterprise market where individual ownership of wealth is predominant. Socialistic economy is a state controlled with a lot of restrictions on private sector. Mixed economy is a combination of both state owned and private sector ownership.

3) The economic policies of a nation: Monetary policy, fiscal policy, Export-import policy, Industrial policy Trade policy, Foreign exchange policy etc are part of the economic environment.

4) Economic indices: The Economic indices like GDP, GNP national income, per-capita income, balance of payments, rate of savings and investments etc. form an important part of economic environment.

5) Development of financial market: The organisation and development of money market, capital market securities market and, the banking system has a greater impact.

6) Economic structure: The Economic structure includes capital formation, investment pattern, composition of trade balance, occupational distribution of workforce, and the structure of national output.

II. Socio-Cultural environment - Business is a part of the society .Social environment refers to the sum total of factors of the society in which the business is located. Social and cultural environment of society affects the business. It is dynamic and includes the behaviour of individuals, the role and importance of family, customs, traditions, beliefs and values, religion and languages, the ethical values. The literacy level, and the social attitudes of the people of the society. The socio-cultural environment also includes the following;

1) The social institutions and groups

2) Family structure prevalent in the society

3) Role of marriage as an institution

4) Caste system in the society

5) Customs , beliefs and values

6) Demographic factors which includes the size, composition, literacy level, distribution and mobility of the population

7) The lifestyle of people and their tastes, likes and preferences.

III. Political and Legal environment – The framework for running a business is given by the political and legal environment. The success of a business lies in its ability to adapt and sustain to political and legal changes. The legislative, executive and judiciary are the three political institutions which directs and influences a business.The major elements of the legal and political environment are

1) Political stability is reflected by the following parameters like the election system, the law and order situation, the role and structure of Military and Police force, the declaration of President’s rule, civil war etc

2) Political organisation refers to the ideology and philosophy of the political parties, the government, the role and degree of authority of bureaucracy, the level of political consciousness among citizens and the funding of political parties by business houses and the clout wielded by them.

3) The image of the leader and the country in the inter-national arena.

4) Legal framework of business and their degree of flexibility.

5) The constitution of the nation.

6) The Foreign policy of the country with special reference to tariffs and free trade.

IV. Geo-physical environment – The natural, geographical and ecological factors have a bearing on the business. These are as follows;

1) the availability of natural resources like minerals oil .etc, since setting up of industries requires availability of raw materials

2) the weather and climatic conditions and availability of water and other natural resources is essential for the agricultural sector .

3) topographical factors like the terrain impacts type of business since the demand and consumption pattern may vary in these regions. E.g in the the hilly region mode of transport will have to be modified to tackle the terrain.

4) ecological factors are now gaining momentum, since the governments across the globe are framing stringent policies for ecological conservation and prevention of pollution. The ban on use of plastic bags imposed by the Ooty corporation is an example.

5) location of certain industries is influenced by the geographical conditions For e.g In Tamilnadu the concentration of cotton textile industry in Coimbatore is due to conducive weather conditions. .

6) availability of natural harbours and port facilities for transporting goods .

V. Technological environment

The development in the IT and telecommunications has created a global market. Technology is widely used in conducting market research for understanding the special needs of the customer. Digital and social media are used as a platform for advertising and promoting the products/services. Data-mining and data analytics are used to know the customer better. Technology is used in managing inventory, storing goods in warehouses, in distributing goods and in receiving payment. This dynamic environment also includes the following ;

1) the level of technology available within the country

2) rate of change in technology

3) technology adopted by competitors

4) technological obsolescence

VI. Global environment

With the rapid growth of technology the physical boundaries are fast disappearing and the new global market is emerging. The international environmental factors which affects a business are as follows;

1) Differences in language and culture

2) Differences in currencies

3) Differences in norms and practices

4) Differences in tastes and preferences of people

5) The tax structure relating to import and export.

6) Differences in the degree of adoption of technology.