Business Environment
Business Environment
UNIT - I
Section – A
1. What is meant by Business environment?
Business environment may be defined as the total surroundings, which have a direct or indirect bearing
on the functioning of business. It may also be defined as the set of external factors, such as economic factors,
social factors, political and legal factors, demographic factors, and technical factors etc., which are
uncontrollable in nature and affects the business decisions of a firm.
Section – B
1. Explain the importance of Business environment?
a) 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 for meeting the challenges
successfully.
(b) 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.
(c) 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.
(d) 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.
(e) Meeting Competition: It helps the firms to analyse the competitors’ strategies and formulate their own
strategies accordingly.
(f) Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual strengths
and weaknesses in view of the technological and global developments.
Section – C
1. Explain the types of Business Environment?
I) Economic Environment
(a) 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.
(b) 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:
(i) Industrial policy
(ii) Fiscal policy
(iii) Monetary policy
(iv) Foreign investment policy
(v) Export –Import policy (Exim policy)
Ii) Non-Economic Environment
The various elements of non-economic environment are as follow:
(a) 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. Due to increase in literacy rate the consumers are becoming
more conscious of the quality of the products. Due to change in family composition, more nuclear families with
single child concepts have come up. This increases the demand for the different
types of household goods. It may be noted that the consumption patterns, the dressing and living styles of people
belonging to different social structures and culture vary significantly.
(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. Further, ideology of the political party also influences the
business organisation and its operations. You may be aware that Coca-Cola, a cold drink widely used even now,
had to wind up operations in India in late seventies. Again the trade union activities also influence the operation
of business enterprises. Most of the labour unions in India are affiliated to various political parties. Strikes,
lockouts and labour disputes etc. also adversely affect the business operations. However, with the competitive
business environment, trade unions are now showing great maturity and started contributing positively to the
success of the business organisation and its operations through workers participation
in management.
UNIT - 2
SECTION - A
1. What is Political Environment?
Political decisions inevitably affect the economic environment. Political decisions also influence the social and
cultural environment of a country. Politicians can influence the pace at which new technologies appear and are
adopted. The political environment is one of the less predictable elements in an organisation's business
environment. The fact that democratic governments have to seek re-election every few years has contributed
towards a cyclical political environment.
A legislature is a deliberative assembly with the authority to make laws for a political entity such as
a country or city. Legislatures form important parts of most governments; in the separation of powers model,
they are often contrasted with the executive and judicial branches of government. Laws enacted by legislatures
are known as legislation. Legislatures observe and steer governing actions and usually have exclusive authority
to amend the budget or budgets involved in the process. The members of a legislature are called legislators. In
a democracy, legislators are most commonly popularly elected, although indirect election and appointment by the
executive are also used, particularly for bicameral legislatures featuring an upper chamber.
SECTION-B
1. What are the importance of monitoring the political environment?
It is important for organisations to monitor their political environment, because change in this environment can
impact on business strategy and operations in a number of ways:
The stability of the political system affects the attractiveness of a particular national market.
Governments pass legislation that directly affects the relationship between the firm and its customers, its
suppliers and other firms.
Governments see business organisations as an important vehicle for social reform.
The government is additionally responsible for protecting the public interest at large.
The economic environment is influenced by the actions of government.
Government is itself a major consumer of goods and services.
Government policies can influence the dominant social and cultural values of a country.
1. Enacting and Enforcing Laws: Enacting and enforcing laws is the prime responsibility of the Government of
each country. This is because laws and regulations only enable the businesses to function smoothly. Further,
Government provides a system of court for adjudicating differences between firms, individual or Government
agencies.
2. Maintaining Law and Order: Maintaining law and order and protecting persons and property is another
responsibility of the Government of the country. It would be impossible to carry on business in the absence of a
peaceful atmosphere.
3. Providing Monetary System: The Government has to provide monetary system so that business transactions
can be effected. Further, it is also the responsibility of the Government to regulate money and credit, and protect
the money value of the currency in terms of other currencies.
4. Balanced Regional Development and Growth: It is the responsibility of the Government to make sure that
there are balanced regional developments and growth.
5. Provision of Basic Infrastructure: Government should provide basic infrastructural facilities such as
transportation, power, finance, trained personnel and civic amenities, which are indispensable for the effective
functioning of business concerns.
6. Supply of Information: It is the responsibility of the Governments to provide information, which is useful to
businessmen in carrying out their business activities. Government agencies publish and provide a large volume
of information, which is used extensively by business firms. This information normally relates to economic and
business activity, specific lines of business, scientific and technological developments, and many other things of
interest to business houses or business leaders.
7. Assistance to Small-scale Industries: It the responsibility of the Government to provide the required facilities
and encourage the development
8. Transfer of Technology: It is the responsibility of the Government to transfer to private industries whatever
discoveries are made by the Government – owned Research Institutions so that they can be used for commercial
production.
9. Conducting Inspections: It is the responsibility of the Government to inspect the private business concerns in
order to make sure that they produce quality products, and also to prevent the production and sale of sub-standard
goods.
10. Incentives to Home Industries: It is the responsibility of the Government to encourage the development of
home industries by providing them various incentives and subsidies.
3. List out the reasons for governments intervention into private business?
Certain products and services are necessary for the very existence of the society. They include nation’s defense
and related services, price protection, flood control, protection of public monuments, buildings etc. These
services are called non-excludable public services or goods. The market mechanism cannot and shall not provide
such services. Hence, they cannot be left to the market mechanism.
Some of the services or activities can be carried on by voluntary agencies and service organizations like Red
Cross etc. But it is difficult to promote and administer such organizations. Again the difficulties involved in
collecting the fees from the beneficiaries are not also very easy. Only a competent Government can organize
such activities and provide finance to carry on them.
The provision of basic infrastructure like power, communication, port facilities, banking and other institutional
facilities is sin qua non for the growth of the national economy. It involves a huge capital outlay.
At the same time, the return is very poor when compared to the capital investment involved in them. Moreover, it
is not also advisable to leave them in the hands of private individuals or market participants to bear the burden.
Moreover, they may also exploit the society if they have a free hand in them.
In such a situation, the Government and its organisations alone should be called upon to finance such activities
particularly in underdeveloped countries and even in the developing economies.
Perfect market in its original sense, does not exist anywhere in the world. Even developed economies are no
exception to this. The Government cannot correct the imperfections in the market absolutely. However, as
pointed out by Gerald Sirkin, these imperfections are capable of at least partial correction by the Government
action. He further declared that the state might help to correct some of the imbalances.
SECTION-C
1. State the directive principles that have economic significance.
It is true that Directive Principles are non-justiciable. These are not backed by legal sanctions. However, these
are backed by public opinion, which is in reality the real sanction behind every law.
The Directive Principles clearly lay down the philosophical foundations of a welfare polity. These make it a
responsibility of the State to secure it through welfare legislation. These also provide that a welfare state stands
for securing of Justice—social, economic and political for all the people.
Directive Principles are indeed of the nature of moral ideals. They constitute a moral code for the State. This
does not reduce their value. Through these the founding fathers placed before the nation the goals and ideals
which are to be achieved through future legislation.
State is a human social institution. Government is always made and managed by the people. Just as people have a
moral code which guides their behavior in society, likewise there is every justification for the existence of a
moral code for the men who form and run the government of the state.
Directive Principles act as a guide to the government for making policies and laws for the purpose of securing
justice and welfare
The Directive Principles are a source of continuity in the policies of the government. In a democratic system, the
governments change after regular intervals and each new government has to make policies and laws. The
presence of Directive Principles ensures that every government, whether it is formed by a rightist or a leftist
party, will exercise its power for implementing Directive Principles.
Directive Principles are the positive directions to the State for securing and strengthening the socio-economic
dimension of Indian democracy. These aim at the establishment of socio-economic democracy. These are
supplementary to Fundamental Rights which provide for civil and political rights and freedoms.
Directive Principles of State Policy constitute a yardstick with which the people can measure the worth of a
government. A government which ignores the task of implementing the Directive Principles can be rejected by
the people in favour of a government by another political party which can be expected to give due importance to
the task of securing the Directive Principles.
Government plays a very important role in developing entrepreneurship. Government develop industries in rural
and backward areas by giving various facilities with the objective of balances regional development. The
government set programs to help entrepreneurs in the field of technique, finance, market and entrepreneurial
development so that they help to accelerate and adopt the changes in industrial development. Various institutions
were set up by the central and state governments in order to fulfill this objective.
Political factors affecting business are closely tied to legal factors affecting business. Stable political
environment creates confidence of citizens and companies investing or planning to invest in particular country.
So they have very strong influence on economy and development of business. Political decisions have also strong
influence on social and cultural environment in a country. Decisions of politicians may also affect pace (promote
or disturb) of new technology adoption within economy.
Political factors involving central government organization level of bureaucracy (procedures, permits, etc.), level
of corruption (tradition of bribing government officials) government stability and probability of changes of
political systems, form of government: totalitarianism/autocracy/democracy or other type of political system.
cyclical nature of democratic countries (elections can change politics from time to time) power structure,
regional government powers, private or government owned companies dominate on the market, presence of state
monopolies, government interfere (or not) with business, existence of pressure groups influencing government
(farmers, miners, etc.), activities of lobbyists,
safety and security, public protection, military, level of government spending, Political factors involving freedom
of citizens freedom of the press, radio and television, free elections, Internet censorship, freedom of association,
freedom to protest, freedom of public assembly accountability of government and transparency, access to
information about government actions, social unrest (rioting, looting), index of political and economic freedom
within country, influence of media and public opinion on policy and decision making, Political factors included
in various legal regulations role of a constitution or similar national legal document, education regulation,
regulation vs deregulation preferences, social and environmental policy, reforms and pressures to change, more
at: legal factors affecting business Political factors connected to international relations trade control (tariffs
policy, regulation) involvement in international trade unions and agreements (trade blocks, EU, WTO, NAFTA,
etc), import/export restrictions on quality and quantity of product diplomatic activities promoting investment
possibilities (good business climate) abroad, tax-free zones for newly created international businesses
involvement in military conflicts thorough the world and regional, exchange rate manipulations through political
decisions, possibility of expropriation (government taking over assets of foreign business due to no constitutional
protection of ownership law).
Cultural heritage is the legacy of physical science artefact’s and intangible attributes of a group or society
that are inherited from past generations, maintained in the present and bestowed for the benefit of future
generations.
Joint family system is a very old concept. Under this system, all members of the family would live
together and enjoy the income of the family. Here the father, mother, sons, daughters, sons-in-law, daughters-in-
law, grand children, uncles, Aunts and other close relatives live as one big family. The land and properties are
commonly owned and they work together to fulfil their wants. Generally, there is a kind of social security for the
weak and poor. It provides an insurance against unemployment.
A caste system is a class structure that is determined by birth. Loosely, it means that in some societies, if
your parents are poor, you're going to be poor, too. Same goes for being rich, if you're a glass-half-full person.
Child marriage, defined as a formal marriage or informal union before age 18, is a reality for both boys
and girls, although girls are disproportionately the most affected. Child marriage is widespread and can lead to a
lifetime of disadvantage and deprivation
A social attitude was defined as "a behaviour pattern, anticipatory set or tendency, predisposition to
specific adjustment or more simply, a conditioned response to social stimuli"
A community is a small or large social unit (a group of living things) who have something in common,
such as norms, religion, values, or identity. Communities often share a sense of place that is situated in a given
geographical area (e.g. a country, village, town, or neighbourhood) or in virtual space through communication
platforms. Durable relations that extend beyond immediate genealogical ties also define a sense of community.
People tend to define those social ties as important to their identity, practice, and roles in social institutions like
family, home, work, government, society, or humanity, at large.
A social custom is any form of expression or identification that masquerades as personal, but is anything
but personal. Amazingly, many people copy a pattern, behaviour or act thinking (to themselves) that it is "me
being me" while it is really a social custom that has been adopted..
Social responsibility is the idea that businesses should balance profit-making activities with activities that
benefit society; it involves developing businesses with a positive relationship to the society in which they
operate.
Religious beliefs, customs, rituals and practices have been known to impact consumer buying behavior.
These include practices, such as, not purchasing certain types of assets during certain periods of the year to
heightened buying sprees during others. Hindus generally do not buy assets during the ‘shraadh’ period whereas
hectic buying is seen during Diwali, due to the practice of gifting. Same is the case among Christians, across the
world.
Section – B
Religion:
Religious beliefs, customs, rituals and practices have been known to impact consumer buying behavior. These
include practices, such as, not purchasing certain types of assets during certain periods of the year to heightened
buying sprees during others. Hindus generally do not buy assets during the ‘shraadh’ period whereas hectic
buying is seen during Diwali, due to the practice of gifting. Same is the case among Christians, across the world.
Christmas season witnesses huge upsurge in sales. The same trend is seen among Muslims during Eid.
Religious beliefs can be seen to drive decisions around launch of new products or services. Business can lose
substantial sales if they are not cognizant of these factors and run promotions during such periods of boom or do
not stock well during periods of abstinence.
Similarly, religious beliefs and practices dictate that certain foods, like, beef or pork are not consumed either
entirely or during certain periods of the year. Businesses, especially restaurants, run the risk of offending sections
of societies if they promote such products.
Weekly offs are also often based on religious practices. While Sunday is observed as a weekly off in many
countries, it is Friday in the Islamic world. The practice of offering „Namaaz’ several times during the day means
that many businesses must tune their work hours in these countries to allow their employees time to do so.
Naturally, this impacts the hours during which business can be conducted. Not tuning business practices
accordingly will create negative perceptions about the organization among the local population and adversely
impact their business potential.
Historically, certain religious beliefs have also determined work ethics. The Protestant (in USA), Confucian (in
certain Asian countries), and Shinto (in Japan) believe in working hard and often long hours. Businesses must
respect such beliefs and tune work practices that are in harmony with such beliefs.
Language:
Language presents a big challenge for businesses in reaching out to its target audience. There are financial
implications in addressing a large population that speaks and understands different languages. There are
sensitivities that result from different meanings attributed to the same word or phrase in different cultures and
geographies.
Businesses are limited by the reach of each language. They must therefore translate their messages into multiple
languages and use multiple channels of communication to reach larger audiences. There are 18 officially
recognized languages in India, 40 languages are spoken in South America, and over 700 different languages
across the African continent. The numbers are far more if one were to consider the variety of dialects within
languages.
While translating a message into different languages may seem an obvious solution to improving the reach, the
problem isn‟t as simple. A harmless word or phrase in one language may mean something very objectionable in
another. Sometimes a particular sentiment cannot be expressed in another language. Many times the same word
in one language has a very different and sometimes derogatory meaning or connotation in another language. This
has significant implications when choosing brand names which businesses would prefer to maintain irrespective
of geographies in which they operate.
Business must be very cautious when using advertisements meant for English speaking audiences in Arabic
countries especially while conveying „before‟ and „after‟ scenarios. While English is read from left to right,
Arabic is read from right to left. Hence images that depict before and after scenarios must be suitably juxtaposed
to convey the intended message.
Challenges for business are not just limited to verbal communication. Non-verbal symbols, like, „thumbs up‟ or
the „OK‟ sign formed by the thumb and index fingers forming a circle and the other three fingers have different
connotations in different cultures. Similarly, a pat on the back is considered a gesture of recognition and
encouragement in most countries but offensive in Thailand. Shaking head from left to right means yes in most
countries but no in countries like Malaysia, Saudi Arabia and Bulgaria.
Consumer Preferences:
Businesses must develop relevant and appropriate strategies to address diverse markets based on consumer
preferences and beliefs. India is a vast multi-cultural country. Businesses cannot address this market with one
strategy that fits all. This may be true of other countries as well. Companies that fail to understand the cultural
environment – religious beliefs, customs, traditions, tastes, preferences, buying habits etc. – will fail to develop
appropriate business strategies.
While people in USA prefer large sized cars, US auto manufacturers have realized that the same strategy will not
work in India, as the dominant market in India is for small and midsized cars. The Japanese have led the Indian
market with multiple options for small cars.
Bajaj led the scooter market for many years. Consumer tastes gradually changed and people started to prefer
bikes over scooters. Bajaj was a little late in waking up to this shift in consumer preference and lost market share
for some time till it finally responded to the changing environment.
Fairness creams are another example of how consumer tastes change. The Indian woman‟s penchant for fairness
has spawned a whole new segment of products that was at one time scoffed at by the established players. Unable
to face up to the challenge from „Fair and Lovely‟, these businesses have been forced to introduce their own
fairness creams.
Markets vary by taste and this is evident from the fact Indians in the northern region prefer tea and those in the
Southern region prefer coffee. Breakfast habits also vary from region to region and thus dictate business
strategies.
Varying packaging size is a great example of how organizations have expanded markets. For a long time,
shampoo was sold only in bottles. Certain organizations introduced shampoos in sachets so that low-income
groups could also afford them. However, shampoos in sachets also appealed to other consumers looking for
convenience of use. Hotels too prefer using smaller packs to place in rooms for their customers.
Increasing consumer consciousness towards health has seen lifestyle changes and the demise of many products.
Businesses that did not see the change coming saw their market share erode. Dalda, once a dominant cooking
medium brand, is hardly to be seen anywhere and has been replaced with other healthier options. Lifestyle
changes have brought about the biggest change in consumer buying patterns – both good and bad. We now have
healthier options such as fruit juices available in tetra-packs eating into the market for aerated drinks. We also
have a lot of junk food such as chips doing well. People are shifting from ammonia based hair dyes to ammonia
free colors. Businesses must respond to these shifts in consumer preferences.
Environment conscious countries, like, the Netherlands prefer to use clean energy and nonpolluting means of
transport. Bicycles are the preferred mode of commuting. Energy and auto companies can ignore these facts only
to their peril when framing business strategies for this country.
Etiquettes:
Etiquettes vary vastly across cultures. Businessmen not sensitive to etiquettes will end up embarrassing
themselves or others or jeopardizing their business prospects.
Greetings are common way of welcoming or saying goodbye. These are often quite different in different cultures.
While shaking hands is common in most cultures it is not so in some others. One also needs to be sensitive to
shaking hands with the opposite sex and finer nuance of how much pressure is exerted while shaking hands. In
some cultures, kissing is acceptable while in others, like, in Japan, you greet by bowing. In Bengal, it is
customary for a host to ask the guest to visit again rather than saying goodbye.
Social Trends:
Many trends are driven by the geography‟s demographics and have implications for businesses. Companies must
monitor these trends to suitably frame strategies.
India comprises a vastly young population as compared to many developed nations. Businesses must factor this
in their product and marketing strategy. Women are increasingly taking up jobs and the family profile has been
steadily undergoing change from joint families to nuclear families. This impacts buying behavior and we see a
lot more offtake of household goods like washing machines, microwave ovens, etc. There is also heightened
demand for housing as more youngsters decide to stay away from parents. In large cities in India, we have seen a
mushrooming of crèches and play schools, as young working mothers do not have their parents around to look
after their children.
With increasing number of working couples, we also see an increasing trend of eating out. This has resulted in
opportunities for restaurants and take-away outlets and we see many new businesses spawning in the hospitality
sector. The options for ready to eat food „cookeasy‟ food have exploded. Businesses with a keen eye on spotting
trends have been able to come up with new strategies to address this fast developing market segment.
In many developed countries, like, the USA, there has been an increase in divorce rates. Commitment to
marriage is low and this results in greater stress induced binge buying.
Businesses must carefully monitor evolving social trends and position their products based on several diversity
factors if they have to sustain credible performance.
1. Determination by birth: The membership of caste is determined by birth. A person remains the member of
the caste into which he is born and his membership does not undergo any change even if changes take place in
his status, occupation, education, wealth etc.
2. Rules and regulations concerning food: Each individual caste has its own laws which govern the food habits
of its members. Generally there are no restrictions against fruit, milk, butter etc. but kachcha food (bread etc.)
can be accepted only from a member of one’s own or of a higher caste.
3. Definite occupation: In the Hindu scriptures there is a mention of the occupation of all castes. According to
Manu the functions, of the Brahmin, Kshatriya, Vaishya and Sudras were definite. The functions of
the Brahmin were to study, teach, guide and perform religious rituals and to give and receive alms, that of
the Kshatriya to study, perform religious rituals, give alms, punish the evil and to go to war; that of the Vaishyato
study, perform religious rituals, give alms, work in agriculture, trade and animal husbandry; that of Sudrato do
menial work for all the other castes. Having developed from Varna system the occupations in caste system are
definite. In Hindu society even today in most cases the son of a cobbler pursues the occupation of his father; the
son of a carpenter becomes a carpenter.
4. Endogamous group: The majority of persons marry only within their own caste. Brahmin, Kshatriya, Vaishya
and Sudra all marry within their respective castes; Hindu community does not approve inter-caste marriage even
now.
5. Rules concerning status and touchability: The various castes in the Hindu social organisation are divided
into a hierarchy of ascent and descent one above the other. In this hierarchy the Brahmins have the highest and
the untouchables the lowest position. The sense of superiority among the Brahmin is much exaggerated and
manifests in the South. The stringent observation of the system of untouchability has resulted in some low castes
of the Hindu society being called untouchables who were consequently forbidden to make use of places of
worship, cremation grounds, educational institutions, public roads and hotels etc. and were disallowed from
living in the cities.
6. Authority: The last feature of caste worth considering is the existence within it of an organ wielding a varying
degree of authority which compels obedience from caste members. In the high castes it is public opinion which
exercises this control over its members, though in modern times this may be eluded. In most cases the authority
invested in a board called the panchayat which is supposed to be composed of five members, but in fact there are
many more social groups who meet whenever its decisions are needed.
Family:
It is the earliest and the most universal of all social institutions. It is also the most natural, simplest and
permanent form of social organization. In society, individuals are primarily organized into separate families and
households.
Family is generally composed of husband, wife and their children. It may be defined as a group of persons,
united either by the ties of marriage or blood relationship, having a common household, a common tradition or
culture.
The form and features of family may be different from place to place and country to country but family as a
social group exists everywhere. It may rightly be described as the keystone of the social arch. It performs a
variety of functions like biological, emotional, economic, educational and cultural.
Clan:
The members of a clan are supposed to be the descendants of common ancestors. They usually bear common
surname. They are usually found among primitive people and members act through the guidance of a chieftain.
They are associated through common social, religious and cultural ceremonies. Members practice exogamy; they
do not marry a person belonging to the same clan. All members worship a totem or a symbolic object like cow,
bull, bird etc.
Tribe:
A tribe is a wider social organization than clan and has been defined as "a social group of a simple kind, and
members of which speak a common dialect, have a common government and act together for such common
purpose as welfare." Tribe is usually formed after a stronger clan subordinates a weaker one.
Tribe has a government with a tribal chief as its head. It is organized for military purposes and has a common
dialect and language. Though devoid of blood relationship, a tribe maintains solidarity among its members.
Community:
One way of organizing individuals on secular lines is through formation of communities and associations. A
community is defined as "the total organisation of social life within a limited area." A community is a self-
sufficient group based on common life. The area of a community may range from narrow to very broad (even
global) limits.
Association:
MacIver defines, "An association as a group organized for the pursuit of an interest or group of interests in
common." Associations may be of various types including kinship, religious, cultural, recreational, philanthropic,
vocational, political groups. Primarily political associations like the state and its coercive agency, the government
are part of society.
UNIT – IV
SECTION – A
1. What is economic environment?
Current situation that an economy is in. This can include inflation, unemployment rates, interest
rates, consumer sentiment, and many other measures in order to make up the sphere of the economy that
businesses, government, and consumers find themselves operating in.
2. What is Capitalism?
Capitalism is one of economic systems in which means of production are owned and managed by private
individuals and institutions. They are at liberty to use any technique of production and produce anything they
like. State is to take care of only internal and external security of the country. Normally the activities related to
Defence, Police, administration and Courts of Justice are controlled by the Government.
An economic system is a system of production, resource allocation, and distribution of goods and
services within a society or a given geographic area. It includes the combination of the various institutions,
agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure
of a given community. As such, an economic system is a type of social system. The mode of production is a
related concept. All economic systems have three basic questions to ask: what to produce, how to produce and in
what quantities, and who receives the output of production.
5. What is Urbanisation?
Urbanization refers to the population shift from rural to urban areas, "the gradual increase in the
proportion of people living in urban areas", and the ways in which each society adapts to the change It is
predominantly the process by which towns and cities are formed and become larger as more people begin living
and working in central areas.
SECTION – B
Population control
Generating employment by giving priority to agriculture and rural development
Reduction of poverty
Ensuring proper availability of food and water for the poor
Availability of primary health care facilities and other basic necessities
Primary education to all children in the country
Empowering the socially disadvantaged classes like Scheduled castes, Scheduled tribes and other backward
classes
Developing self-reliance in terms of agriculture
Acceleration in the growth rate of the economy with the help of stable prices
Performance
The Ninth Five-Year Plan achieved a GDP growth rate of 5.4% against a target of 6.5%
The agriculture industry grew at a rate of 2.1% against the target of 4.2%
The industrial growth in the country was 4.5% which was higher than that of the target of 3%
The service industry had a growth rate of 7.8%.
An average annual growth rate of 6.7% was reached.
The Ninth Five-Year Plan looks through the past weaknesses in order to frame the new measures for the overall
socio-economic development of the country. However, for a well-planned economy of any country, there should
be a combined participation of the governmental agencies along with the general population of that nation. A
combined effort of public, private, and all levels of government is essential for ensuring the growth of India's
economy.
The target growth was 7.1% and the actual growth was 6.8%.
Economic Growth.
Economic activities refer to the level of buying and selling activities happening in an economy over a
time period. It is a highly complex activity and keeping accurate track of it is beyond comprehension.
Economic activity is not constant and can change rapidly, thereby affecting the business.
Economic activity changes could happen due to the following reasons: Changes in income levels Future
prospects of individuals. Future of the economy The level of economic activity in the world as a whole Political
activities around the world Natural disasters - like hurricanes, earthquakes, or flood etc Changes in prices of raw
materials - oil, metals, fuel, energy and so on Changes in world stock markets The level of economic activity is
usually measured by GDP (Gross Domestic product).
It refers to the total amount of goods and services a country produces.
Businesses are greatly influenced by the economic activities.
When GDP rate falls or slows down, there will be a fall in demand for good or services offered by businesses.
As a result, businesses will witness a fall in revenues and profit margins. To curb this business will have to
reduce their prices to increase the sales. This could further lead to increase in unemployment. On the other hand
when there is an increase in GDP, the demand for products will automatically increase and hence the prices will
go up. To cope with the increase in demand business will need to employ new people resulting in reduction in
Unemployment rates.
Inflation: With the increase in Inflation there will be an increase in the level of prices of products and services
over a specific period of time As a result the firms will have to incur higher costs of operations. This will be also
due to the increase in wages of the employees.
Interest Rates: Interest rates are the charges levied by the banks for lending a loan. Increase in Interest rates will
directly influence the business as businesses borrow money from the banks from time to time. Increase in interest
rates will lead to higher interest expense: Businesses will have to incur higher costs to repay the loan. Interest
rate changes also affect customers who in turn will affect the business. In case of increase in interest rates the
amount that individuals need to pay to borrow the money will increase thereby, reducing the demand for large
products in the market. Further, if the interest rates decrease then the charges on a loan to buy larger items like
cars, electrical equipments are likely to fall. As a result, a large number of people might be willing to buy such
items. There will be a sudden increase in the demand for the products offered by such businesses.
SECTION – C
1. Explain the Five year plan?
It aimed to increase the enrollment in higher education of 18-23 years of age group by 2011-12.
It focused on distant education, convergence of formal, non-formal, distant and I.T. education institutions.
Rapid and inclusive growth. (poverty reduction)
Emphasis on social sector and delivery of service therein.
Empowerment through education and skill development.
Reduction of gender inequality.
Environmental sustainability.
To increase the growth rate in agriculture, industry and services to 4%, 10% and 9% respectively.
Reduce total fertility rate to 2.1.
Provide clean drinking water for all by 2009.
Increase agriculture growth to 4%.
Twelfth Plan (2012–2017)
The Twelfth Five-Year Plan of the Government of India has been decided to achieve a growth rate of 8.2% but
the National Development Council (NDC) on 27 December 2012 approved a growth rate of 8% for the Twelfth
Five-Year Plan.[10]
With the deteriorating global situation, the Deputy Chairman of the Planning Commission Montel Singh
Ahluwalia has said that achieving an average growth rate of 9 percent in the next five years is not possible. The
Final growth target has been set at 8% by the endorsement of the plan at the National Development Council
meeting held in New Delhi.
"It is not possible to think of an average of 9% [in the 12th plan]. I think somewhere between 8 and 8.5 percent is
feasible,” Ahluwalia said on the side lines of a conference of State Planning Boards and departments. The
approached paper for the 12th Plan, approved last year, talked about an annual average growth rate of 9%.
“When I say feasible... that will require major effort. If you don’t do that, there is no God given right to grow at 8
percent. I think given that the world economy deteriorated very sharply over the last year...the growth rate in the
first year of the 12th Plan (2012–13) is 6.5 to 7 percent.”
He also indicated that soon he should share his views with other members of the Commission to choose a final
number (economic growth target) to put before the country’s NDC for its approval.
The government intends to reduce poverty by 10% during the 12th Five-Year Plan. Ahluwalia said, “We aim to
reduce poverty estimates by 9% annually on a sustainable basis during the Plan period". Earlier, addressing a
conference of State Planning Boards and Planning departments, he said the rate of decline in poverty doubled
during the 11th Plan. The commission had said, while using the Tendulkar poverty line, the rate of reduction in
the five years between 2004–05 and 2009–10, was about 1.5%points each year, which was twice that when
compared to the period between 1993–95 to 2004–05.[11] The plan aims towards the betterment of the
infrastructural projects of the nation avoiding all types of bottlenecks. The document presented by the planning
commission is aimed to attract private investments of up to US$1 trillion in the infrastructural growth in the 12th
five-year plan, which will also ensure a reduction in the subsidy burden of the government to 1.5 percent from 2
percent of the GDP (gross domestic product). The UID (Unique Identification Number) will act as a platform for
cash transfer of the subsidies in the plan.
Political factor
The political environment affects the economic environment of businesses. Legislators at the local, state and
federal levels may provide incentives or tax breaks to companies or they can impose regulations that restrict
business transactions. In the latter case, for example, if a political body states that a company must include a
certain chemical in its product, the cost of the product differs. The company passes those costs on to the customer
in the form of higher prices. The customer must determine whether he wants to purchase that product. If he does
not purchase the product, then the company does not receive the revenue. If a large number of customers decide
not to purchase the product, the company may need to lay off employees.
Economic factor
The larger economic environment of a society is a factor that can affect a company's business environment.
During a recession, consumers spend less on optional items such as cars and appliances. As a result, the business
environment suffers. On the other hand, if the economic environment is one of prosperity, consumers are more
likely to spend money, not just on necessities, but larger items as well.
Social factors
Social factors that affect the economic environment of a business are the cultural influences of the time. For
example, a fashion designer that creates bell bottom, striped pants will not succeed in an environment where
straight-leg, solid coloured pants are desired. A social environment that tends to be more conservative will not
support styles that appear to be trendy. The fashion designer's business will suffer if he does not change the
clothing style. The same would apply to the manufacturers that produce and stores that sell these wares.
Legal factor
Often, a business will need to change how it operates for legal reasons. This is often done when a company's
lawyers anticipate a change in legislation, or it may be due to lawsuits, already filed or anticipated. For example,
if a part in a machine is found to be defective, the company may need to issue a recall. If other companies in the
same industry are being sued over something like a data breach of confidential information, a business may need
to change how information is collected and stored.
Technological factor
Innovation and technology affect business environments. As technology advances, a business is forced to keep
pace. For example, when computers were first invented, they were the size of a room. Users were forced to
employ punch cards to perform basic functions. Today, computers that are much more powerful can fit into the
palm of a hand. Businesses that do not keep up with technology risk increased costs of production and higher
prices. If the company's cost to produce a product or service outpaces competitors, the company may soon find
itself out of business.
Environmental factor
The environment can have a direct and indirect affect on how a business operates. Businesses in the food
industry are routinely affected by the environment. Droughts or disease can affect pricing models and even the
ability of food processors, grocery stores and restaurants in obtaining sufficient supplies to meet consumer
demands. Indirect environmental factors can affect any business by creating changes in societal expectations and
government laws and regulations in efforts to protect the environment. For example, in 2016, California citizens
voted for a law to ban the use of single-use plastic bags, affecting the majority of retailers in that state.
UNIT – V
SECTION – A
1. What is forex Environment?
Foreign exchange also refers to the global market where currencies are traded virtually around the clock.
The largest trading centres are London, New York, Singapore and Tokyo. The term foreign exchange is usually
abbreviated as "forex" and occasionally as "FX." Foreign exchange is the exchange of one currency for another
or the conversion of one currency into another currency.
A financial environment is a part of an economy with the major players being firms, investors, and
markets. Essentially, this sector can represent a large part of a well-developed economy as individuals who retain
private property have the ability to grow their capital.
A commercial bank is a type of financial institution that accepts deposits, offers checking account
services, makes business, personal and mortgage loans, and offers basic financial products like certificates of
deposit (CDs) and savings accounts to individuals and small businesses. A commercial bank is where most
people do their banking, as opposed to an investment bank.
4. What is meant by financial institution?
A financial institution (FI) is a company engaged in the business of dealing with monetary transactions,
such as deposits, loans, investments and currency exchange. Financial institutions encompass a broad range of
business operations within the financial services sector, including banks, trust companies, insurance companies,
and brokerage firms or investment dealers.
5. Define RBI
The Reserve Bank of India (RBI) is the central bank of India, which was established on April 1, 1935,
under the Reserve Bank of India Act. The Reserve Bank of India uses monetary policy to create financial
stability in India, and it is charged with regulating the country's currency and credit systems
Monetary policy is how central banks manage liquidity to create economic growth. Liquidity is how
much there is in the money supply. That includes credit, cash, checks and money market mutual funds. The most
important of these is credit. It includes loans, bonds and mortgages.
A stock exchange is an exchange (or bourse) where stock brokers and traders can buy and
sell shares of stock, bonds, and other securities. Stock exchanges may also provide facilities for issue and
redemption of securities and other financial instruments and capital events including the payment of income
and dividends. Securities traded on a stock exchange include stock issued by listed companies, unit
trusts, derivatives, pooled investment products and bonds. Stock exchanges often function as "continuous
auction" markets with buyers and sellers consummating transactions at a central location such as the floor of the
exchange.
8. What is IDBI?
IDBI is the apex institution in the area of long term industrial finance. It was established under the IDBI Act
1964 as a wholly owned subsidiary of RBI and started functioning on July 01, 1964. IDBI is engaged in direct
financing of the industrial activities as well as in re-finance and re-discounting of bills against finance made
available by commercial banks under their various schemes. The objectives of this institution are to create a
principal institution for long term finance, to coordinate the institutions working in this field for planned
development of industrial sector, to provide technical and administrative support to the industries and to conduct
research and development activities for the benefit of industrial sector.
Non-banking financial companies, or NBFCs, are financial institutions that provide certain types of
banking services, but do not hold a banking license. Generally, these institutions are not allowed to take deposits
from the public, which keeps them outside the scope of traditional oversight required under banking regulations.
NBFCs can offer banking services such as loans and credit facilities, retirement planning, money
markets, underwriting, and merger activities.
A financial system (within the scope of finance) is a system that allows the exchange of funds between
lenders, investors, and borrowers. Financial systems operate at national, global, and firm-specific levels. Money,
credit,and finance are used as medium of exchange in financial systems.
SECTION – B
1. What are function of IDBI?
i) Direct Financial Assistance:
The IDBI provides direct financial assistance to the industrial concerns in the form of (a) granting loans and
advances; and (b) subscribing to, purchasing or underwriting the issues of stocks, bonds or debentures
.
(ii) Indirect Financial Assistance:
The IDBI provides indirect financial assistance to the small and medium industrial concerns through other
financial institution, such as, State Finance Corporations, State Industrial Development Corporations,
Cooperative banks, regional rural banks, commercial banks. The Assistance to these institutions
include :(a) refinancing of loans given by the institutions; subscribing to their shares and bonds; (c)
rediscounting of bills
.
(iiI) Development Assistance:
The creation of the Development Assistance Fund is the special feature of the IDBI. The Fund is used to provide
assistance to those industries which are not able to obtain funds in the normal course mainly because of heavy
investment involved or low expected rate of returns. The financial resources of the Fund mainly come from
contributions made by the government in the form of loans, gifts, donations, etc; and from other sources.
Assistance from the Fund requires the prior approval by the government.
Besides providing financial assistance, the IDBI also undertakes various promotional activities such as marketing
and investment research, techno- economic surveys. It provides technical and administrative advice for
promotion, expansion and better management of the industrial concerns.
SECTION – C
1. Explain the factors determining global environment
Businesses are affected by an external environment as much as they are affected by the competitors. Global
factors influencing business are legal, political, social, technological and economic. Understanding of these
factors is important while developing a business strategy.
a. Social factors - These factors are related to changes in social structures. These factors provide insights into
behaviour, tastes, and lifestyles patterns of a population. Buying patterns are greatly influenced by the changes in
the structure of the population, and in consumer lifestyles. Age, gender, etc all determine the buying patterns and
understanding of such changes is critical for developing strategies which are in line with the market situations. In
a global environment it is important that business strategies are designed keeping in mind the social and cultural
differences that vary from country to country. Consumer religion, language, lifestyle patterns are all important
information for successful business management.
b. Legal factors - These factors that influence business strategies are related to changes in government laws and
regulations. For a successful business operation it is important that the businesses consider the legal issues
involved in a particular situation and should have the capability to anticipate ways in which changes in laws will
affect the way they must behave. Laws keep changing over a period of time. From the point of view of business
it is important that they are aware of these changes in the areas of consumer protection legislation, environmental
legislation, health & safety and employment law, etc.
c. Economic factors - These factors involve changes in the global economy. A rise in living standards would
ultimately imply an increase in demand for products thereby, providing greater opportunities for businesses to
make profits. An economy witnesses fluctuations in economic activities. This would imply that in case of a rise
in economic activity the demand of the product will increase and hence the price will increase. In case of
reduction in demand the prices will go down. Business strategies should be developed keeping in mind these
fluctuations. Other economic changes that affect business include changes in the interest rate, wage rates, and the
rate of inflation. Incase of low interest rates and increase in demand Businesses will be encouraged to expand and
take risks. Therefore, business strategies should have room for such fluctuations.
d. Political factors - This refers to the changes in government and government policies. Political factors greatly
influence the operation of business. This has gained significant importance off late. For example: companies
operating in the European Union have to adopt directives and regulations created by the EU. The political arena
has a huge influence upon the regulation of businesses, and the spending power of consumers and other
businesses. Business must consider the stability of the political environment, government’s policy on the
economy etc
e. Technological factors - These factors greatly influence business strategies as they provide opportunities for
businesses to adopt new innovations, and inventions. This helps the business to reduce costs and develop new
products. With the advent of modern communication technologies, technological factors have gained great
impetus in the business arena. . Huge volumes of information can be securely shared by means of databases
thereby enabling vast cost reductions, and improvements in service. Organisations need to consider the latest
relevant technological advancements for their business and to stay competitive. Technology helps business to
gain competitive advantage, and is a major driver of globalization. While designing the business strategies firms
must consider if use of technology will allow the firm to manufacture products and services at a lower cost.
Firms can select new modes of distributions with the help of technology. It has become easier for companies to
communicate with their customer in any part of the world.
2. Explain the function of commercial banks?
1) Primary Function:
1. Accepting Deposits:
It is the most important function of commercial banks. They accept deposits in several forms according to
requirements of different sections of the society.
3. Banks do not pay any interest on these accounts. Rather, banks impose service charges for running these
accounts.
2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves, the
balance is given to needy borrowers and interest is charged from them, which is the main source of income for
these banks.
Cash credit refers to a loan given to the borrower against his current assets like shares, stocks, bonds, etc. A
credit limit is sanctioned and the amount is credited in his account. The borrower may withdraw any amount
within his credit limit and interest is charged on the amount actually withdrawn.
3. Agency Functions:
Commercial banks also perform certain agency functions for their customers. For these services, banks charge
some commission from their clients.