Unit
– 1: Theoretical Framework of Business Environment
Concept:
Business Environment
Business
is an activity undertaken for the purpose of producing or selling a particular
commodity or service and earns a profit. The business has several dimensions
such as purchasing the inputs, converting the inputs into the output, selling that
output at a profitable price. Every dimension of a business depends upon
several factors. Hence a business is influenced by several factors, all them
put together are described as Business Environment. A business can grow and
prosper in a particular environment just as a plant can grow in a particular
soil, climate, water supply etc. Hence
the entrepreneur has to pay attention to the environment in which he has to
conduct his business activities. If he is able to adapt his business to the
environment effectively and efficiently the business can make higher profits.
This makes the study of business environment important.
According
to Keith Davis, “Business environment is the aggregate of all conditions,
events and influences that surrounds and affects the business.”
According
to wheeler, “Business environment is the total of all things external to
business firms and industries which affect their organisation and operations.”
Following
are the features of Business environment:
Business Environment means a collection of all individuals,
entities and other factors, which may or may not be under the control of the
organisation, but can affect its performance, profitability, growth and even
survival. Every business organisation operates in a distinctive environment, as
it cannot exist in isolation. Such an environment influence business and also
gets affected by its activities. Some of the important features of business
environment are given below:
1. Totality of internal and external forces: Business environment
means the surrounding situation within which business organization has to
operate. It is a sum total of cultural, political, economical, social,
physical, technological, legal and global forces which move around the business
organization. These forces collectively create a socio-economic-political
situation called business environment. Environment is an inseparable part of
business which can not operate in vacuum.
2. Specific and general forces: Business environment includes both
specific and general forces. Specific forces (such as investors, customers,
competitors and suppliers) affect individual enterprises directly and
immediately in their day-to-day working. General forces (such as social,
political, legal and technological conditions) have impact on all business
enterprises and thus may affect an individual firm only indirectly.
3. Dynamic nature: Business environment is
dynamic and perpetually evolving. It changes frequently due to various external
forces i.e. economic, political, social, international, technological and
demographic. Such dynamism in the environment brings continuous change in its
character. Business enterprises have no alternative but to operate under such
dynamic environment. The only remedy is adjusting business as per environmental
changes.
4. Complex: Business
environment has now become extremely complex and the government intervention
has become more frequent. Business environment is a complex phenomenon and also
difficult to grasp and face in its totality. This is because it is governed by
external factors. Environment develops by chance and not by choice. In
addition, the environment factors vary from country to country. The business
environment in India and in USA may not be identical.
5. Multi Faceted: Environmental
changes are frequent but their shape and character depends on the knowledge
& experience of the observer. A particular change in the environment may be
viewed differently by different businessmen. This change is welcomed as an
opportunity by some organizations while some others take it as a threat for
their survival.
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: Business environment is a relative concept since it differs from
country to country and even region to region. Political conditions in the USA,
for instance, 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.
8. Environment Influences Business Organization: Business organizations have limited capacity to influence business
environment as it is the result of government policies and social and
technological changes which are basically external variables.
Importance of Business Environment
There
is a close and continuous interaction between the business and its environment.
This interaction helps in strengthening the business firm and using its
resources more effectively. As stated above, the business environment is
multifaceted, complex, and dynamic in nature and has a far-reaching impact on
the survival and growth of the business. To be more specific, proper
understanding of the social, political, legal and economic environment helps
the business in the following ways:
1. Determining
Opportunities and Threats: The
interaction between the business and its environment would identify
opportunities for and threats to the business. It helps the business
enterprises to exploit business opportunities and face the threat associated
with such opportunities. For example, Maruti Udyog became the leader in the
small car market because it was the first to recognize the need for small cars
in India.
2. Continuous
Learning: Environmental analysis makes the task
of managers easier in dealing with business challenges. The managers are
motivated to continuously update their knowledge, understanding and skills to
meet the predicted changes in realm of business.
3. Image
Building: Environmental understanding helps the
business organisations in improving their image by showing their sensitivity to
the environment within which they are working. For example, in view of the
shortage of power, many companies have set up Captive Power Plants (CPP) in
their factories to meet their own requirement of power.
4. Ensures Optimum Utilization of Resources: The study of business environment is needed as it ensures optimum
use of resources available. For this, the study of economic and technological
environment is useful. Such study enables organization to take full benefit of
government policies, concessions provided, and technological developments and
so on.
5. Giving
Direction for Growth: The
interaction with the environment leads to opening up new frontiers of growth
for the business firms. It enables the business to identify the areas for
growth and expansion of their activities.
6. Coping
with rapid changes: All sizes and all types of enterprises are
facing increasingly dynamic environment. In order to effectively cope with
these significant changes, managers must understand and examine the environment
and develop suitable courses of action.
7. Improving
performance and meeting competition: the enterprises that continuously
monitor their environment and adopt suitable business practices are the ones
which not only improve their present performance but also continue to succeed
in the market for a longer period.
8. Identifying
Firm’s Strength and Weakness: Business
environment helps to identify the individual strengths and weaknesses in view
of the technological and global developments.
9. Keeping Business Enterprise Alert: Environment
study is needed as it keeps the business unit alert in its approach and
activities. In the absence of environmental changes, the business activities
will be dull and lifeless. The problems & prospects of business can be
understood properly through the study of business environment. This enables an
enterprise to face the problems with confidence and secure the maximum benefits
of business opportunities available.
10. Understanding Future Problems and Prospects: The study of business environment enables to understand future
problems and prospects of business in advance. This enables business
organizations to face the problems boldly and also take the benefit of
favorable situation.
Environmental Scanning
Environmental scanning is a process by which organizations monitor their
relevant environment so that they can consider the impact of different events,
trends, issues, expectations on its strategic management process. Environment
scanning is one component of the global environmental analysis. Environmental monitoring, environmental
forecasting and environmental
assessment complete the global environmental analysis.
Environmental
scanning can also be defined as ‘the study and interpretation of the political,
economic, social and technological events and trends which influence a
business, an industry or even a total market’. The factors which need to be
considered for environmental scanning are events, trends, issues and
expectations of the different interest groups.
Importance of Environmental Scanning: Following are main importance of
environment scanning:
1.
Identification of strength: Strength of the business firm means
capacity of the firm to gain advantage over its competitors. Analysis of
internal business environment helps to identify strength of the firm. After
identifying the strength, the firm must try to consolidate or maximise its
strength by further improvement in its existing plans, policies and resources.
2.
Identification of weakness: Weakness of the firm means limitations
of the firm. Monitoring internal environment helps to identify not only the
strength but also the weakness of the firm. A firm may be strong in certain
areas but may be weak in some other areas. For further growth and expansion,
the weakness should be identified so as to correct them as soon as possible.
3.
Identification of opportunities: Environmental analyses help to
identify the opportunities in the market. The firm should make every possible
effort to grab the opportunities as and when they come.
4.
Identification of threat: Business is subject to threat from
competitors and various factors. Environmental analyses help them to identify
threat from the external environment. Early identification of threat is always
beneficial as it helps to diffuse off some threat.
5.
Optimum use of resources: Proper environmental assessment helps
to make optimum utilisation of scare human, natural and capital resources.
Systematic analyses of business environment helps the firm to reduce wastage
and make optimum use of available resources, without understanding the internal
and external environment resources cannot be used in an effective manner.
6.
Survival and growth: Systematic analyses of business environment
help the firm to maximise their strength, minimise the weakness, grab the
opportunities and diffuse threats. This enables the firm to survive and grow in
the competitive business world.
7.
To plan long-term business strategy: A business organisation has short
term and long-term objectives. Proper analyses of environmental factors help
the business firm to frame plans and policies that could help in easy
accomplishment of those organisational objectives. Without undertaking
environmental scanning, the firm cannot develop a strategy for business
success.
8.
Environmental scanning aids decision-making: Decision-making
is a process of selecting the best alternative from among various available
alternatives. An environmental analysis is an extremely important tool in
understanding and decision making in all situation of the business. Success of
the firm depends upon the precise decision making ability. Study of
environmental analyses enables the firm to select the best option for the
success and growth of the firm.
Factors of Environmental Scanning: Following are main factors of environment
scanning:
a)
Events: In environment scanning, business organisation study past events. Past
events are the one of the important factors of environment scanning. For
example, gas leakage in Bhopal union carbide factory is a past event
which will helps for environment scanning.
b)
Trends: Trends also are the main factor of environment scanning. Business
Organisation must see what is the trend of past event or trend of action after
happening any event in past.
c)
Issues: Environment scanning also keep eye on important issue of business
environment. For example, pollution is one of important issue.
d)
Expectations of People: Business organisations also check the expectations of peoples. For
more expectations, Organisations will have to enable their product according to
their expectations for surviving in business. That is the reason, why
organisations are interested to know the expectations of people in environment
scanning.
SWOT
analysis
SWOT analysis is a simple
framework for generating strategic alternatives from a situation analysis. It
is applicable to either the corporate level or the business unit
level and frequently appears in marketing plans.
SWOT (sometimes referred to as
TOWS) stands for Strengths, Weaknesses, Opportunities, and Threats.
A SWOT analysis consists of the following two activities:
a) An assessment of the
organization’s internal Strengths and Weaknesses and
b) An assessment of
the Opportunities and Threats posed by its external environment
a) Assessing the Internal Environment
Internal scan or assessment of
the internal environment of the organization involves identification
of its strengths and weaknesses i.e., those aspects that help or hinder
accomplishment of the organization’s mission and fulfillment of its mandate
with respect to the following Four Ps:
1) People (Human Resources)
2) Properties (Buildings, Equipments and other
facilities)
3) Processes (Such as student placement services,
M.I.S etc.)
4) Products (Students, Publications etc.)
b) Assessing the External Environment
External scan refers to exploring the
environment outside the organisation in order to identify the
opportunities and threats it faces. This involves considering the
following:
1) Events, trends and forces in the Social,
Technological, Economical, Environmental and Political areas (STEEP).
2) Identifying the shifts in the needs of
customers and potential clients and
3) Identification of competitors and
collaborators.
Techniques of SWOT analysis
An overview of the four factors
(Strengths, Weaknesses, Opportunities and Threats) is given below:
1)
Strengths:
Strengths are the qualities that
enable us to accomplish the organization’s mission. These are the basis on
which continued success can be made and continued/sustained. Strengths can be
either tangible or intangible. These are what you are well-versed in or what
you have expertise in, the traits and qualities your employees possess
(individually and as a team) and the distinct features that give your
organization its consistency. Strengths are the beneficial aspects of the
organization or the capabilities of an organization, which includes human
competencies, process capabilities, financial resources, products and services,
customer goodwill and brand loyalty.
Examples of STRENGTHS under SWOT
Analysis
a)
Specialist
marketing expertise
b)
Exclusive access
to natural resources
c)
New, innovative
product or service
d)
Location of your
business
e)
Strong brand or
reputation
f)
Quality processes
and procedures
2)
Weaknesses:
Weaknesses are the qualities that
prevent us from accomplishing our mission and achieving our full potential.
These weaknesses deteriorate influences on the organizational success and
growth. Weaknesses are the factors which do not meet the standards we feel they
should meet. Weaknesses in an organization may be depreciating machinery,
insufficient research and development facilities, narrow product range, poor
decision-making, etc. Weaknesses are controllable. They must be minimized and
eliminated.
Examples of WEAKNESS under SWOT
Analysis
a)
Lack of marketing
expertise
b)
Undifferentiated
products and service (i.e. in relation to your competitors)
c)
Competitors have
superior access to distribution channels
d)
Poor quality
goods or services
e)
Damaged
reputation
f)
Lost brand value
3)
Opportunities:
Opportunities are presented by the
environment within which our organization operates. These arise when an
organization can take benefit of conditions in its environment to plan and
execute strategies that enable it to become more profitable. Organizations can
gain competitive advantage by making use of opportunities. Organization should
be careful and recognize the opportunities and grasp them whenever they arise.
Selecting the targets that will best serve the clients while getting desired
results is a difficult task. Opportunities may arise from market, competition,
industry/government and technology. Increasing demand for telecommunications
accompanied by deregulation is a great opportunity for new firms to enter
telecom sector and compete with existing firms for revenue.
Examples of OPPORTUNITIES under SWOT
Analysis
a) Developing market (China, the Internet)
b) Loosening of regulations
c) Removal of international trade barriers
d) A market led by a weak competitor
4)
Threats:
Threats arise when conditions in
external environment jeopardize the reliability and profitability of the
organization’s business. They compound the vulnerability when they relate to
the weaknesses. Threats are uncontrollable. When a threat comes, the stability
and survival can be at stake. Examples of threats are - unrest among employees;
ever changing technology; increasing competition leading to excess capacity,
price wars and reducing industry profits; etc.
Examples of THREATS under SWOT
Analysis
a)
A new competitor
in your home market
b)
Competitor has a
new, innovative substitute product or service
c)
New regulations
d)
Increased trade
barriers
e)
Taxation may be
introduced on your product or service
Advantages of SWOT Analysis: SWOT Analysis helps in strategic planning in
following manner:
a) It is a source of information for strategic
planning which helps in achieving desired objectives at a minimum cost.
b) SWOT analysis plays a big role in forecasting
as it provides important information that might be required in making forecast
for the future.
c) SWOT analysis builds organization’s strengths.
d) Reverse its weaknesses by identifying weak
areas.
e) Maximize its response to opportunities.
f) Overcome organization’s threats.
g) It helps in identifying core competencies of
the firm.
h) It helps in setting of objectives for
strategic planning.
i)
It helps in
knowing past, present and future so that by using past and current data, future
plans can be chalked out.
Limitations of SWOT Analysis: There are certain limitations of SWOT Analysis
which are not in control of management. These include:
a)
Price
increase;
b)
Inputs/raw
materials;
c)
Government
legislation;
d)
Economic
environment;
e)
Searching
a new market for the product which is not having overseas market due to import
restrictions; etc.
f)
Insufficient
research and development facilities;
g)
Faulty
products due to poor quality control;
h)
Poor
industrial relations;
i)
Lack
of skilled and efficient labour; etc
Factors (Components) of business
environment
On
the basis of extent of intimacy with the firm, the environmental factors may be
classified into different levels or types. There are broadly two types of
environment, the internal environment, i.e. factors internal to the firm and
the external environment i.e. factors external to the firm which have relevance
to it.
The
internal factors are generally regarded as controllable factors because the
company has control over these factors; it can alter or modify such factors as
its personnel, physical facilities, organisation and functional means such as
marketing mix to suit the environment.
The
external factors on the other hand are, by and large, beyond the control of a
company. The external or environmental factors such as the economic factors,
socio-cultural factors, government and legal factors, demographic factors etc.,
are therefore generally regarded as uncontrollable factors.
Some
of the external factors have a direct and intimate impact on the firm (like the
suppliers and distributors of the firm). These factors are classified as micro
environment, also known as task environment and operating environment. There
are other external factors which affect an industry very generally (such as
industrial policy, demographic factors etc.). They constitute what is called
macro environment, general environment or remote environment. We may therefore
consider the business environment at three levels:
1. Internal
environment
2. Micro
environment/ task environment/ operating environment
3. Macro
environment/ general environment/ remote environment
Although
business environment consists of both internal and external environments, many
people often confine the term to the external environment of business.
1.
Internal Environment: The factors in internal
environment of business are to a certain extent controllable because the firm
can change or modify these factors to improve its efficiency. However, the firm
may not be able to change all the factors. The various internal factors are:
a)
Value
system: The value
system of an organisation means the ethical beliefs that guide the organisation
in achieving its mission and objectives. It is a widely acknowledged fact
that the extent to which the value system is shared by all in the organisation
is an important factor contributing to its success.
b)
Mission and
objectives: The
business domain of the company, direction of development, business philosophy,
business policy etc are guided by the mission and objectives of the
company. The objective of all firms is assumed to be maximisation of
profit. Mission is defined as the overall purpose or reason for its
existence which guides and influences its business decision and economic
activities.
c)
Organisation
structure: The
organisational structure, the composition of the board of directors, the
professionalism of management etc are important factors influencing business
decisions. The nature of the organisational structure has a significant
influence over the decision making process in an organisation. An
efficient working of a business organisation requires that the organisation
structure should be conducive for quick decision-making.
d)
Corporate
culture: Corporate
culture is an important factor for determining the internal environment of any
company. In a closed and threatening type of corporate culture the
business decisions are taken by top level managers while the middle level and
lower level managers have no say in business decision-making. This leads
to lack of trust and confidence among subordinate officials of the company and
secrecy pervades throughout the organisation. This results in a sense of
alienation among the lower level managers and workers of the company. In an
open and participating culture, business decisions are taken by the lower level
managers and top management has a high degree of confidence in the
subordinates.
e)
Quality
of human resources: Quality
of employees that is of human resources of a firm is an important factor of
internal environment of a firm. The characteristics of the human
resources like skill, quality, capabilities, attitude and commitment of its
employees etc could contribute to the strength and weaknesses of an
organisation. Some organisations find it difficult to carry out
restructuring or modernisation plans because of resistance by its
employees.
f)
Labour
unions: Labour
unions collectively bargains with the managers for better wages and better
working conditions of the different categories of workers. For the smooth
working of a business firm, good relations between management and labour unions
are required.
g)
Physical
resources and technological capabilities: Physical
resources such as, plant and equipment and technological capabilities of a firm
determine its competitive strength which is an important factor for determining
its efficiency and unit cost of production. Research and development
capabilities of a company determine its ability to introduce innovations which
enhances productivity of workers. It is, however, important to note that the
rapid technological growth and the growth of information technology in recent
years have increased the relative importance of intellectual capital and human
resources as compared to physical resources of a company.
2. External Environment: The
external environment is made up of micro and macro environment.
Micro Environment: This
refers to the factors which influence the prospects of a particular firm; the
firm can influence them with certain efforts. They are as follows:
a) Customers: The type
and the nature of the customers influence the rate of growth of any firm. The
firm has to be very particular about choosing the inputs and transforming them
in to the output. The cost factor is subsidiary if the firm is dealing with
such customers. If the customers are more commoners the quality of the
commodity if less important than the cost of production. The customers want the
commodity at a lower price so the firm will have to conscious about the cost in
purchasing the inputs, in employment of labour, in packing and such other
factors influencing the cost.
b) Competitors: In modern age an absolute monopoly is a very
rare thing. Most of the FIRMS have to work in some type of competition such as
Monopolistic Competition or Oligopoly. A Firm has to be particular about the
intensity of the competition. If the competition is severe the firm will have
to be very particular about keeping the costs at the lowest level so that it
can sell the commodity at a competitive price.
c) Suppliers: The quality of the commodity and the cost of
production are considerably influenced by the supplies of the inputs. If the
inputs are supplied at economical prices, are of standard quality and if the
supply is uninterrupted and timely the firm can produce a standard quality of a
commodity and sell it at reasonable prices. Often the firms employ more than
one supplier so as to ensure an uninterrupted supply of inputs. If the supplies
of inputs are regular, consistent and reliable there is no need to keep a
larger quantity in stock.
d) Channel Intermediaries: They
refer to the different levels in the chain from the production unit to the
final customer. The chain incorporates the stockists, the wholesalers, the
distributors, the retailer etc. If there is a high level of efficiency
maintained at every part of the chain the commodity can reach the final
consumer in good condition and at a reasonable price. So the Firm has to select
and maintain efficient intermediaries. The firm has to offer them proper terms
e) Society: The
prospects of a firm depend upon the society in which it has to work and sell
its products. In a homogenous society the job of the firm is easy. The people
have almost the same habits likes and dislikes, values and ethical norms. In a
heterogeneous society the job of the firm is difficult. A particular product
may be acceptable to a particular section of the society but not acceptable to
some other sections. In a country like India a firm has to into consideration
all types of sections of the community such as the religious sections, the
caste, the sect, language, region etc.
Conclusion: All these
forces influence the chances available to a firm to survive and develop.
Macro Environment: The macro
environment comprises of those forces which influence all business firms
operating in an economy. They can be studied under the following categories:
economic environment, political and regulatory environment, social/ cultural
environment, demographic environment and technological. The components of these
environments are discussed as below:
a) Economic Environment: The survival and success of each and
every business enterprise depend fully on its economic environment. The main
factors that affect the economic environment are:
(i)
Economic Conditions: The
economic conditions of a nation refer to a set of economic factors that have
great influence on business organisations and their operations. These include
gross domestic product, per capita income, markets for goods and services,
availability of capital, foreign exchange reserve, growth of foreign trade,
strength of capital market etc. All these help in improving the pace of
economic growth.
(ii)
Economic Policies: All business
activities and operations are directly influenced by the economic policies
framed by the government from time to time. Some of the important economic
policies are: Industrial policy, Fiscal policy, monetary policy, foreign investment
policy and Export –Import policy. The government keeps on changing these
policies from time to time in view of the developments taking place in the
economic scenario.
(ii)
Economic System: The world
economy is primarily governed by three types of economic systems, viz.
Capitalist economy; Socialist economy; and Mixed economy. India has adopted the
mixed economy system which implies co-existence of public sector and private
sector.
b)
Political Environment: This
includes the political system, the government policies and attitude towards the
business community and the unionism. All these aspects have a bearing on the
strategies adopted by the business firms. The stability of the government also
influences business and related activities to a great extent. It sends a signal
of strength, confidence to various interest groups and investors.
c)
Legal Environment: This refers to set of laws,
regulations, which influence the business organisations and their operations.
Every business organisation has to obey, and work within the framework of the
law. The important legislations that concern the business enterprises include:
Companies Act, 1956, Foreign Exchange Management Act, 1999, The Factories Act,
1948, Industrial Disputes Act, 19112, Payment of Gratuity Act, 19112,
Industries (Development and Regulation) Act, 1951 etc. Besides, the above
legislations, the following are also form part of the legal environment of
business:
(i)
Provisions of the Constitution
(ii)
Judicial Decisions.
d) Social Environment: The social environment of business includes social factors like
customs, traditions, values, beliefs, poverty, literacy, life expectancy rate
etc. The social structure and the values that a society cherishes have a
considerable influence on the functioning of business firms. For example,
during festive seasons there is an increase in the demand for new clothes,
sweets, fruits, flower, etc.
e)
Technological Environment: Technological environment include the methods,
techniques and approaches adopted for production of goods and services and its
distribution. The varying technological environments of different countries
affect the designing of products. In the modern competitive age, the pace of
technological changes is very fast. Hence, in order to survive and grow in the
market, a business has to adopt the technological changes from time to time.
f)
Demographic Environment: This refers to the size, density,
distribution and growth rate of population. All these factors have a direct
bearing on the demand for various goods and services.
g)
Natural Environment: The natural environment includes
geographical and ecological factors that influence the business operations.
These factors include the availability of natural resources, weather and
climatic condition, location aspect, topographical factors, etc. Business is
greatly influenced by the nature of natural environment. For example, sugar
factories are set up only at those places where sugarcane can be grown. It is
always considered better to establish manufacturing unit near the sources of
input.
Changing
Dimensions of Indian Business
Business
Environment is the world around a company over which it has no direct control.
It covers many dimensions impacting a company's activities & performance.
It is an aggregate of all forces & factors external to the business
enterprise, but which influence it's functioning. There is a mutual
inter-dependence between business and its environment. A business enterprise is
an open system and it continuously interacts with its environment. Businesses
take inputs like raw material, capital, labour, energy, etc. from the
environment, and transform them into goods & services, and then send them
back into the environment. Interaction between business and environment is in
various ways such as: exchange of information, resources, influence &
power.
There
are several layers of influences surrounding a business. The outermost layer,
called the macro-environment, consists of dimensions that impact almost all
companies in an economy. These factors are the six aspects of business
environment - Political, Economical, Social, Technological, Environmental,
& Legal.
Political environment: Political
environment includes factors like a country's political system, type of
government, centre-state relations, public opinion, law & order, nature of
government policies towards business - particularly those related to taxation,
industrial relations, regulation of business & industry, and foreign trade
regulations. It also relates to the stability of the government in power, the
risk of major political disturbances, or threats from anti-social elements,
terrorists or other countries.
In
the period prior to liberalisation, India's annual growth rate was low at
around 3.5%, only a few licenses were given out for important sectors like
steel, electrical power, energy and communication, and these licence owners
built up powerful corporate empires. India at that time was a socialistic
economy with excessive govt. control. Core industries were directly managed by
the govt. as public sector enterprises and banking and airline industries were
nationalised. A huge public sector emerged and state-owned enterprises made
large losses. There was public sector monopoly and investment in infrastructure
was poor. Licence Raj established the self-perpetuating bureaucracy that still
exists in India and corruption flourished under this system.
GOI
began the process of privatisation in 1991. Privatisation means having private
ownership, management and control into public sector undertakings. The purpose
of privatisation is to improve the efficiency of public undertakings and to
raise funds for public investment. As a result financial institutions have
become more active, working culture is improving and management is being professionalised,
there is improvement in technology, better investment behaviour of Indian
entrepreneurs and companies are aware of the significance of human capital. The
banking, financial services & insurance (BFSI) and airline sectors have
become extremely competitive, but are in need of reforms. There have been some
negative effects like curtailed growth in some industries, reduced employment
opportunities due to adoption of capital intensive technology, sell-outs &
takeovers by foreign companies, losing markets and declining capacity
utilisation.
Economic Factors: Economic
factors relate to the general condition of the economy within which a business
operates. It comprises of the factors and forces concerned with means of
production and distribution of wealth. It refers to the nature of economic
system, economic policies of the country, organisation of capital & money
markets, GDP, income level, growth rate, inflation rate, interest rates, money
supply, and unemployment rate. The Indian economy is currently the 9th largest
in the world by nominal GDP and the 4th largest by purchasing power parity
(PPP). Economic growth rates are projected at around 7.5%-8% for the financial
year 2011-2012.
Economic
Liberalisation was when India adopted free market principles and it included
opening India for international trade and investment, deregulation, initiation
of privatisation, tax reforms and inflation-controlling measures. The fruits of
liberalisation reached their peak in the year 2007 as India reached its highest
GDP growth rate of 9%. With this India became the 2nd fastest growing economy
in the world, next only to China.
However
dealing with powerful lobbies such as the trade unions and farmers, or
contentious issues such as reforming labour laws and reducing agricultural
subsidies, are some areas that still need economic reforms. India will soon
allow foreign direct investment (FDI) in the retail industry, as it has been
passed by the cabinet.
Globalisation
is a process of integration of business activities and growing economic
inter-dependence between countries in the world economy. Growing similarities
of countries in terms of availability of infrastructure led to globalisation.
It has exposed firms to international competition, resulting in an increase in
employment opportunities and widening of competition.
The
impact of these economic reforms was that total foreign investment in India
grew manifold and cities like Ahmadabad, Bangalore, Chennai, Hyderabad, Pune,
NOIDA, Gurgaon, Ghaziabad, Jaipur and Indore have risen in prominence and
economic importance. They have become centres of rising industries and
destination for foreign investment and firms. With GDP growth predicted to be
around 8% over this decade, India is set to reap the benefits of development.
Socio-cultural environment:
Socio-cultural environment covers factors such as social customs, traditions,
culture, lifestyle, attitude of people, saving & spending patterns, size of
population, demographic profile, education level, occupational structure, trade
unions, and other factors that influence and describe the behavioural
characteristics typical of the people. It would also include the Corporate
Social Responsibility initiatives undertaken by companies.
CSR
in India is in a nascent stage. It is still one of the least understood
initiatives in the Indian development sector. A lack of understanding,
inadequately trained personnel, non-availability of authentic data and specific
information on the kinds of CSR activities, coverage, policy etc. further adds to
the reach and effectiveness of CSR programmes. However the situation is
changing as CSR is coming out of the purview of 'doing social good' and is
becoming a 'business necessity'. The business case for CSR is gaining ground
and corporate houses are realising that what is good for workers – their
community, health and environment is also good for business.
Technological Environment:
Technological dimension covers the nature of technology available and used by
an economy. It also covers the extent to which development in technologies are
likely to take place. This may be reflected in factors like expenditure on
R&D and rate of obsolescence. Technical obsolescence occurs when a new
product or technology supersedes the old, and it becomes preferred to utilize
the new technology in place of the old. Some examples of technological
obsolescence are telephone replacing the telegraph, and DVD replacing VCR.
Products are becoming obsolete and getting replaced by newer versions. Not many
people will remember the days of the floppy disk. Computers are becoming
smaller but faster, and TVs are becoming sleeker with more features.
Environmental factor:
Environmental factor refers to the physical or geographical environment
affecting the business. It also includes the considerations like environmental
pollution, climate change, carbon footprint, etc. Carbon footprint is the total
set of greenhouse gas (GHG) emissions caused by an organization, event, product
or person. Greenhouse gases can be emitted through transport, land clearance,
and the production & consumption of food, fuels, manufactured goods,
materials, wood, roads, buildings, and services. The mitigation of carbon
footprints through the development of alternative projects, such as solar or
wind energy or reforestation, represents one way of reducing a carbon footprint
and is often known as carbon offsetting.
Carbon
dioxide emissions into the atmosphere, and the emissions of other GHGs, are
often associated with the burning of fossil fuels like natural gas, crude oil
and coal. The Kyoto Protocol defines legally binding targets and timetables for
cutting the GHG emissions of industrialized countries that ratified the Kyoto
Protocol. Nations which have failed to deliver their Kyoto emissions reductions
obligations can enter Emissions Trading to purchase instruments like Certified
Emissions Reductions (CERs) and Emissions Reduction Units (ERUs) to be sold on
international markets, in order to cover their treaty shortfalls. Within the
next few years China, India and the United States are some of the nations
scheduled to start participating in Emissions Trading Schemes.
Legal Environment: Legal or
regulatory dimension describes the framework of legislation impacting business.
It includes all the laws, legal system and judicial system of the country. A
business has to work within the framework of a country's laws and regulations.
Laws important to business relate to areas like monopolies & restrictive
trade, consumer protection, employment, industrial relations, health &
safety, and joint stock companies. Even today industry is subjected to
harassment by at least 35-40 various inspectors of the GOI. Every city in
Maharashtra has Octroi duty, which leads to long queues at the city borders
causing delays of over 24 hours in deliveries. Excise & Customs duty is
another area of concern. There is practically no internal mechanism to control
corruption in govt. depts. which are manned by high-handed bureaucrats. There
also exists massive political patronage & influence leading to corruption
on unprecedented scale.
Inspite
of dismantling licence raj, for every small thing corporates still need to use
middlemen to lobby the govt. depts. setting up manufacturing units in
excise-free zones has been a popular option for business houses in India.
However there has been random creation of excise-free zones as sops to backward
states. Most of these states (with the exception of Uttarakhand) have not
bothered to create any infrastructure. Baddi in Himachal Pradesh has no
infrastructure to support industries and no sanitation either.
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