The Social and Political Environment of Business

Business Environment and Law
Block
I
THE SOCIO-POLITICAL ENVIRONMENT
OF BUSINESS
UNIT 1
Business Environment: An Introduction 1-26
UNIT 2
Demographic and Social Environment 27-51
UNIT 3
Cultural Environment 52-74
UNIT 4
Political Environment 75-98
© The ICFAI Foundation for Higher Education (IFHE), Hyderabad,
May, 2015. All rights reserved
No part of this publication may be reproduced, stored in a retrieval system, used in
a spreadsheet, or transmitted in any form or by any means – electronic,
mechanical, photocopying or otherwise – without prior permission in writing from
The ICFAI Foundation for Higher Education (IFHE), Hyderabad.
Ref. No. BELIFHE – 052015 B1
For any clarification regarding this book, the students may please write to The
ICFAI Foundation for Higher Education (IFHE), Hyderabad giving the above
reference number of this book specifying chapter and page number.
While every possible care has been taken in type-setting and printing this book,
The ICFAI Foundation for Higher Education (IFHE), Hyderabad welcomes
suggestions from students for improvement in future editions.
Our E-mail id: [email protected]

COURSE INTRODUCTION
Business organizations are increasingly exposed to various challenges in the
environment they function. Businesses have come to appreciate the fact that with
increasing concentration of property and people and increasingly complex
servicing, manufacturing, and industrial processes, they are exposed to greater
risk and that they must manage risks’ more efficiently and effectively in order to
be competitive.
Managers require relevant skills to comprehend the legal risks that are associated
with transactional and functional aspects of business. Awareness of legal and
regulatory risks and their evaluation in taking decisions helps in the proper
orientation of business strategies to meet the competition.
Business Environment and Law examines key issues in the environment and the
legal and regulatory framework that affect organizations and their businesses.
The course is divided into two major parts.
The first part of the course introduces students to the various components of the
business environment. The course enables students to gain an understanding into
the social, demographic, cultural, political, economic, financial, trade,
technological, legal, regulatory, tax, and ethical environments, and how these
environments play a vital role in affecting the business of an organization.
The second part of the course provides the foundation that is essential for
managers to take the dynamic decisions within the legal and regulatory
framework. The course discusses the legal issues in substantive business areas
such as the law of contracts that deals with the classification, validity, essential
features, parties to a contract, remedies to various parties, and other
miscellaneous aspects. It also provides the provisions pertaining to special
contracts such as contract of agency, indemnity and guarantee and, bailment and
pledge. The course also introduces the current provisions pertaining to the
companies Act, 2013, and the tax laws such direct and indirect tax law.
BLOCK I: THE SOCIO-POLITICAL
ENVIRONMENT OF BUSINESS
The first block deals with the fundamental concepts relevant to business
environment and consists of four units. The first unit provides an introduction to
business environment. The second unit discusses the demographic and social
environment, the third unit deals with the cultural environment, and the fourth
unit examines the political environment of business.
Unit 1 discusses the dimensions and components of business environment. These

include the external and internal environments. The unit also explains the
importance of business environment.
Unit 2 deals with the demographic environment and social environment of

business. The unit examines the definition of these environments and their
impact on business.
Unit 3 describes the cultural environment of business, which is also another

external environment factor. The unit conveys the essence and manifestation of
culture, while explaining its elements such as language, aesthetics, religion and
education. The unit also examines various concepts related to culture such as
culture change, cultural analysis, cultural adaptation, and the cultural sensitivity
of the industrial and consumer markets.
Unit 4 gives an overview of the political environment of business, and how it

affects business (domestic or international). The unit examines the classification
of government based on political systems and economic systems. It discusses the
complexities involved in business due to the political environment. The unit also
explains the factors contributing to political instability, and the concept of
political risk.
Unit 1
Business Environment: An Introduction
Structure
1.1 Introduction
1.2 Objectives
1.3 Dimensions of the Business Environment
1.4 Importance of the Business Environment
1.5 Components of the Business Environment
1.6 External and Internal Environment
1.7 Summary
1.8 Glossary
1.9 Self-Assessment Test
1.10 Suggested Readings/Reference Material
1.11 Answers to Check Your Progress Questions
1.1 Introduction
In this unit, we introduce you to the business environment. Businesses operate in the
society and continue to grow by using resources from it. It also faces unprecedented
harm, generally called as the risk, from the dynamics of society. Individuals,
businesses, and the society face possibilities of risk, as they continue to grow
economically. Business operations are greatly influenced by various vibrant factors
surrounding it. The environmental factors surrounding the business and its operations
are known as the business environment. The factors may be internal or external to the
business. Risk is an outcome of the dynamic environment. The environment
comprises external and internal factors. These factors make up the business
environment of an organization, and hence it is required to study it in order to
understand how to manage risk.
This unit will give you an overview of business environment, and explain the
importance of business environment. We shall then move on to discuss the dimensions
and components of business environment. Finally, we would be discussing about
external and internal factors influencing the business environment.
1.2 Objectives
By the end of this unit, you should be able to:
 Define the dimensions of the business environment.
 Recognize the importance of the business environment.
 Explain the components of the business environment.
 Identify the external factors and the internal factors in the environment.
1.3 Dimensions of the Business Environment

The dictionary meaning of the term ‘Environment’ is: (1) surrounding external objects
and (2) influences of circumstance under which someone or something exists. The
environment of an organization is constituted by an “aggregate of all conditions,
events and influences that surround and affect it”. Due to its complex, dynamic,
1
multifaceted nature, and far reaching impact, the business environment exhibits many
characteristics. Consequently, it is necessary to study and understand the factors,
external and internal factors, to understand the complex nature of each business
operation. Thus, the business environment is the situation where the business operates
and the combination of various factors that influences the day to day operations of a
business. Every business enterprise has to cope with internal as well as external
factors.
Internal factors are the conditions and events that exist within the business
organization. These factors exist, operate and influence the business. The company’s
personnel, strategy, structure, and its functional, operations, marketing, and technical
capabilities are all internal factors. These factors can be modified with greater ease to
suit the environment. External factors are beyond the control of a company such as
economic, socio-cultural, regulatory and legal, and demographic factors.
Business environment can also be categorized into economic and non-economic
environment. The economic environment consists of factors such as the fiscal policy,
monetary policy, industrial policy, the physical limits on output, the price and income
equations, nature of the economic system, and the pace of economic development.
The non-economic environment includes social, cultural political, legal, and
technological factors. The economic environment has non-economic implications just
as the non-economic environment has economic implications.
Environmental factors influencing the business vary from country to country and
region to region. The business environment is a highly complex and dynamic
phenomenon. Managers often take a lifetime to understand the complex nuances of
business environment of a particular country. Considerable skill and dexterity is
required in adjusting, coping with, and managing the business environment. A study
of the critical elements of the business environment is required to facilitate the
development of these skills. An understanding of this turbulent and dynamic
environment also helps in effective decision-making by business managers.
1.4 Importance of the Business Environment

Organizations are open systems as they are affected by, and in turn affect, their
external environment. External environment refers to all the relevant forces outside
the firm’s boundaries. The word ‘relevant’ indicates those factors which managers
must pay attention to help their organizations compete effectively and survive.
Irrelevant forces are generally not of immediate importance, though they might be
relevant in future.
As many of these factors are of an uncontrollable nature, companies are often affected
by recession, government interference, competitor’s actions, etc. Managers cannot
ignore these forces as they are uncontrollable, and use them as excuses for poor
performance. They should instead stay well-informed on the external developments
and react accordingly.
Of late, change is invading all areas of our life at a dramatically accelerating rate. It is
in this ever-changing environment that managers must take decisions. Based on the
impact of the external and the internal environment on the organization, managers
make certain business decisions. These decisions may sometimes, in turn, affect the
external environment.
In spite of the uncertainties of the present age, managers must choose investment
programs, organize facilities, set prices for products, and design advertising
campaigns. Also, before making any decision, the business environment must be
taken into consideration.
2
Unit 1: Business Environment: An Introduction
Check Your Progress-I

Indicate your choice of the correct answer from the options given by circling it.
1. ____________ is constituted by an aggregate of all conditions, events, and

influences that surround and affect it.
a. Risk
b. Change
c. Environment
d. Demography
2. In which of the following basic categories can business environment be divided?
a. Local and Regional
b. Regional and National
c. External and Internal
d. Financial and Non-Financial
3. Which among the following comprises factors such as the fiscal policy, monetary
policy, industrial policy, the physical limits on output, the price and income
equations, nature of the economic system, and the pace of economic
development?
a. Internal environment
b. Economic environment
c. Non-economic environment
d. Both (b) and (c)
4. ___________ includes social, cultural, political, legal, and technological factors.
a. Economic environment
b. Non-economic environment
c. Internal environment
d. None of the above
5. By which other term can internal factors affecting a business environment also be
referred to?
a. Controllable factors
b. Uncontrollable factors
c. Relevant factors
d. Global factors
6. By which other term can external factors affecting a business environment also be
known as ?
a. Controllable factors
b. Uncontrollable factors
c. Relevant factors
d. Global factors
3
1.5 Components of the Business Environment

Organizations have to classify the relevant environment into components or sectors in
order to cope with its complexity, comprehend the different influences operating on
the organization, and relate the environmental changes to its strategic management
process. To do so, it is necessary to consider a variety of relevant factors in the
environment, such as the size of the organization, level and scope of the organization
to perform a variety of activities, geographical spread of markets, nature of products,
type of technology used, and managerial philosophy. An organization’s environment
can be classified into -- demographic, social, cultural, political, economic, financial,
trade, technological, legal, regulatory, tax, and ethical.
As external factors are beyond the control of the firm, the success of the firm will
depend to a large extent on its adaptability to the environment. In other words, the
ability of the firm to properly design and adjust the internal (controllable) variables to
take advantage of the opportunities and to control the threats from the environment
determines the success of the firm.
A firm may achieve external economies of scale if there are changes in the external
environment such as improvements in the transport facilities and communication. A
firm can also achieve internal economies of scale if there are changes in the internal
environment such as introduction of advanced equipment, use of mass production
techniques, etc.
Activity: Karthik owns a small firm in India that conducts training programs for
individuals and companies from time-to-time to introduce them to the current
trends in the field of business. Started in 2009, due to recession, the firm began
facing problems. Karthik couldn’t understand the reason why this happened as he
believed that his firm would not be affected by any such happenings. How would
you make Karthik understand the impact of such occurrences on any business
including his own?
Answer:
1.6 External and Internal Environment

All the factors outside the organization which provide opportunities or pose a threat to
the organization make up the external environment. And all the factors within an
organization which impact strengths or cause weaknesses constitute the internal
environment. Refer to figure 1.1 for a graphic representation of the external and
internal environments of an organization. Understanding the external environment
with regard to the Opportunities and Threats and the internal environment with regard
to the Strengths and Weaknesses is crucial for the growth and profitability of any
organization. These are described as follows.
 Opportunity: A favorable condition in the environment of an organization which
enables the organization to consolidate and strengthen its position.
4
 Threat: An unanticipated condition in the organization’s environment which

creates a risk for or causes damage to the organization.
 Strength: The inherent capacity which an organization can use to gain strategic
advantages over its competitors.
 Weakness: An inherent limitation or constraint which creates strategic
disadvantages.
Figure 1.1: The Business Environment
Source: ICMR.
Check Your Progress-II

7. Which of the following factors may contribute to the external economies of scale
for an organization?
a. Use of advanced technology in the manufacturing process
b. Seeking expert advise for re-launching a product
c. Improvement in the air and road links
d. Increasing bulk purchases of raw materials and components
5
8. __________ refers to a favorable condition in the environment of an organization

which enables the organization to consolidate and strengthen its position.
a. Strength
b. Weakness
c. Opportunity
d. Threat
9. What is the inherent capacity of an organization which can be used to gain
strategic advantage over its competitors known as?
a. Strength
b. Weakness
c. Opportunity
d. Threat
1.6.1 External Environment

Broadly, the external environment encompasses a variety of factors such as social
changes, demographic variables, political system, technology, government policies,
legal regime, or public attitude toward business, energy sources, availability of raw
materials and other resources, and several other macro level factors operating at
international, national and local levels’
The individual factors of the external environment are demographic environment,
social environment, cultural environment, political environment, economic
environment, financial environment, trade environment, technological environment,
legal environment, regulatory environment, tax environment and ethical environment.
These are described below in detail.
Demographic Environment
Demographic environment factors include size, growth rate, age composition, and
gender composition of the population. They also include family size, educational
levels, and economic stratification of the population. All these demographic factors
are relevant to business. The demand for goods and services is affected by
demographic factors such as the size of population, population growth rate, age and
gender composition, life expectancy, family size, spatial dispersal, occupational
status, and employment pattern.
For instance, a rapidly increasing population leads to growing demand for many
products. A high population growth rate also indicates an enormous increase in the
supply of labor. Therefore, population growth rate is an important environmental
factor that affects business. Many multinational corporations have been encouraged to
invest in developing countries like India and China as a result of the cheap labor and
presence of a growing market.
The occupational and spatial mobility of the population have their own implications
for business. Easy mobility of labor between different occupations and regions makes
its supply relatively smooth, which in turn affects the wage rate.
Heterogeneity of labor in terms of language, caste, religion, and ethnicity makes
personnel management a complex task. Also, heterogeneity of population in terms of
varied tastes, preferences, beliefs, and temperaments results in differing demand
patterns and calls for different marketing strategies.
6
Social Environment
Social environment factors include human relationships and its developments. The
form and function of such relationships have a bearing on the organization’s business.
Buying and consumption habits of people, their languages, beliefs, values, customs,
tradition, tastes, and preferences are some vital factors and influences operating in the
social environment.
Primarily, social environment affects the strategic management process within the
organization in the areas of mission, setting of objectives, and decision-making related
to products and markets. Some of these factors that affect business are given below.
 Social concerns such as the role of business in society.
 Social attitudes and values such as the society’s expectations from business.
 Family structures and changes in them such as the increase in the number of nuclear
families.
 Role of women in society, and their status in it.
 Educational levels and gender inequality in the levels.
 Awareness and work ethics.
Cultural Environment
Knowledge of the cultural environment is important to understand the business
environment in its totality as cultural norms largely drive consumer needs and buyer
behavior. Cultural elements such as language, education, and religion play a vital role
in shaping a company’s marketing mix program. Analysis of these elements helps in
finding out market opportunities. Companies often gain a competitive edge by
meeting cultural needs that have been so far ignored by their competitors.
Cultural blunders may prove expensive for multinational companies. Such blunders
may lead to embarrassment, lost customers, legal consequences, missed opportunities,
expensive damage control, and tarnished reputation. Thus, it is imperative to gather a
deep understanding of cultural differences and grasp the intricacies of foreign markets
in this era of globalization.
Example: McDonald’s Strategies in India

In 2004, Business world selected McDonald’s India Private Ltd (McDonald’s), as
the most respected company in the food service sector in India. Many factors can
be attributed to the success of McDonald’s Indian operations.
McDonald’s focused on products and changed its menu to suit the tastes of Indian
consumers. It launched India specific items including McVeggie burger, McAloo
Tikki burger, Veg. Pizza McPuff, and Chicken McGrill burger. Considering the
Indian preferences and sensibilities, the company excluded pork and beef items in
its menu. It offered eggless sandwich sauces for vegetarian customers and
vegetarian items were prepared at a separate counter at the outlets.
On the pricing front, McDonald’s adopted customized pricing for each of the cities
depending upon the tax structure, demand, and purchasing power of the population.
To attract mass-market customers, it launched a new menu called Happy Price
Menu in which select items are priced at Rs. 20 across all the outlets in the country.
Contd…
7
Contd…
McDonald’s also focused on creating a right ambience in its outlets. The company
positioned its outlets as a restaurant that catered to the typical Indian family, and
the physical environment reflected that image with the atmosphere being informal
and bright. The outlets were spacious for kids to play around and families had the
facility to conduct events like birthday parties. In addition, the outlets were made
non-smoking zones to reflect the sensibilities of Indian families. McDonald’s also
laid special emphasis on kids. The outlets had low counters for easy accessibility to
the kids. Besides, vibrant colors and theme-based paintings that were pleasing to
the kids were used.
McDonald’s developed localized ads in line with the advertising strategy of the
parent company. Localized ads with the punch line “I’m lovin it” were created.
Humorous ads with the theme “What Your Bahana is” were developed to put the
message across to the consumers. The protagonists in the ads cite weird reasons for
eating out at McDonald’s. In addition, McDonald’s also ran various sales
promotion activities to keep up the interest in the brand like offering toys and other
accessories, and conducting contests.
Adapted from “Case Study – McDonald’s in India.” The ICMR Center for Management
Research, 2005. www.icmrindia.org.
Check Your Progress-III

10. Which of the following is studied with reference to the size, growth rate, age
composition, gender composition, life expectancy, etc., of the population?
a. Social environment
b. Cultural environment
c. Ethical environment
d. Demographic environment
11. The study of factors such as family structures and changes in them, role and
status of women in society, and educational levels and gender inequality in
educational levels which affect a business organization is part of
a. Demographic environment
b. Social environment
c. Cultural environment
d. Internal environment
12. In Japan, a company began selling its golf balls in packs of four. The company
felt that these convenient packs would help in increasing its sales. However, the
sales failed to do well. It was later found that the word ‘four’ when pronounced in
Japanese sounded like the word ‘death’. These kinds of cultural blunders may
prove expensive for multinational organizations, and may lead to __________.
i. Missed opportunities
ii. Lost customers
iii. Legal problems
iv. Costly damage control
8
a. Only i, ii, and iii

b. Only i, iii, and iv
c. Only ii, iii, and iv
d. i, ii, iii, and iv
Political Environment
The term ‘political environment’ refers to factors related to the management of public
affairs and their impact on an organization’s business. The political environment is
closely related to the economic system and the economic policy. It is the aggregate of
government actions. It is a set of political factors and government activities operating
at local, regional, national and international level. Political environments may range
from a democratic system to communism with other variations between these
ideological extremes.
The government makes, amends, alters, repeals various business laws and policies in
consistence with their political mandate or manifesto. In most countries, a number of
laws regulate business conduct apart from those that control investment and related
matters. These laws cover issues like standard of product, packaging, and promotion.
Some governments specify certain standards for the products, including packaging,
while others prohibit the marketing of certain products. Promotional activities are
subject to various types of controls in most nations.
For instance, India is a democratic country with a stable political system. The
government plays an active role as a planner, promoter, and regulator of economic
activity. The Indian government has considerable influence over the various business
aspects in the country.
Economic Environment
Economic environment factors include macro level factors related to the areas of
production and distribution of wealth that affect an organization’s business. A few
important factors and influences operating in the economic environment are given
below.
 Economic stages that exist at a given time in a country.
 The economic structure that is adopted by a country, i.e., capitalistic, socialistic,
or mixed economy.
 Economic planning such as 5-year plans and budgets.
 Economic policies, i.e., monetary, industrial, and fiscal policies.
 Economic indices such as national income, per capita income, disposable
personal income, GDP (Gross Domestic Product), distribution of income, rates of
savings and investment, value of imports and exports, and balance of payments.
 Infrastructural factors such as financial institutions, banks, communication
facilities, modes of transport, and energy sources.
Business managers are aware of the importance and impact of the economic
environment on their organizations. In the annual reports of most companies,
information is provided on the prevailing economic environment and the specific
aspects of the environment that have an impact on their organization and the business
they are in.
9
The economic policy of the government also has a great impact on business (adverse,
favorable, or neutral). The incentives and disincentives offered in the government
policies affect businesses. The government may provide concessions and other forms
of support to an industry belonging to the priority sectors (in terms of the government
policy). On the other hand, the government policy may not support industries that are
regarded as non-essential. Thus, economic system is a very important determinant of
the scope of private business and is therefore a very important external factor
influencing business.
Financial Environment
The international financial environment is constantly changing with growth in income,
balance of payments position, inflation, fluctuations in exchange rate, and
unpredictable political events in various countries. Business enterprises are closely
linked with the financial markets and institutions. The financial system constitutes an
integral part of the economic system. It consists of the flow of savings, financial
intermediaries, financial instruments, and securities that facilitate the transfer of funds.
Reforms and regulations in the money and capital markets have contributed greatly to
the changing business environment. Professional financial managers are trying to
tackle these factors, and reduce the uncertainty arising out of the dynamic nature of
the financial environment.
Trade Environment
Due to globalization, businesses are now compelled to look beyond the physical
boundaries of their home countries. The need to think and act from a global
perspective has become a universal rule of business. Globalization refers to the
process of integration of the world into one huge market. The aim today is to reduce
the gap between domestic prices and world prices, and to lower the trade barriers,
tariff and non-tariff, and liberalize the trade regime. A tariff is a tax levied by the
government on the exports and imports in a country. Non-tariff barriers are trade
barriers that are used to control imports. These include import bans, export subsidies,
countervailing duties, and anti-dumping measures (Countervailing duties and anti-
dumping measures are actually non-tariff barriers. However, they take the form of
tariffs once they are enacted).
Technological Environment
The technological environment factors are related to applied knowledge and the
materials and machines used in the production of goods and services. Given below are
some factors and influences operating in the technological environment.
 Sources of technology (company, external, and foreign sources), cost of
acquisition of technology, and collaboration in and transfer of technology.
 Technological development, stages of development change, rate of change of
technology, and research and development.
 Impact of technology on human beings, the main-machine system, and the effects
of technology on environment.
 Communication and infrastructural technology and technology in management.
In the Indian context, there is variation in the state of technological development
among various industry sectors. Generally, the technological aspect of competition is
considered to vary with customer needs and government policy.
10
Foreign technical collaborations at the macro level are popular in India. This is
because companies operating in a highly competitive environment often use
technology as a weapon to compete. The development of technology in a particular
company, and also in the industry as a whole, is affected by collaboration in and
transfer of technology.
Activity: Mobi International is a US-based mobile phone supplier. The company is

planning to set up a manufacturing facility in India. Before doing this, the company
wants to analyze the external business environment in India. How should the
company go about it, and what factors of the external environment should the
company consider?
Answer:
Check Your Progress IV

13. Which of the following factors given below is (are) not part of the economic
environment?
i. Monetary, industrial, and fiscal policies
ii. Capitalist, socialistic, or mixed economy
iii. Factors related to the management of public affairs and their impact on an
organization’s business
iv. Infrastructural factors such as financial institutions, banks, communication
facilities, modes of transport, and energy sources.
a. Only ii and iv
b. Only iii
c. Only i, ii, and iii
d. Only iv
14. Which of the following environments includes macro level factors such as
national income, per capita income, and balance of payments that affect an
organization’s business?
a. Trade environment
c. Financial environment
d. Political environment
15. ______________ refers factors related to the management of public affairs and
their impact on an organization’s business.
a. Political environment
11
c. Trade environment
d. Financial environment
16. What is the process of integration of the world into one huge market referred to
as?
a. Liberalization
b. Privatization
c. Globalization
d. Capitalization
17. _____________ factors are related to applied knowledge and the materials and
machines used in the production of goods and services.
a. Trade environment
b. Technological environment
c. Economic environment
d. Financial environment
Legal Environment
Organizations being corporate entities have to abide by the law of the land. Legal
systems with varied complexity and dimension differ from country to country, thus
making it essential for the multinational companies to cope with the widely differing
laws in the countries where they are operating. In some countries, the laws specify
virtually every detail, while in others, they serve only as a broad guideline and their
interpretation is left to the courts. Therefore, a foreign enterprise has to be
scrupulously careful to abide by the local laws and regulation.
While businesses have crossed national boundaries, there is no international body to
make rules and oversee their fulfillment by different parties. The jurisdiction of laws
gains importance when a conflict occurs between contracting parties and the question
arises as to which nation’s laws be applied to resolve the problem. In order to control
foreign businesses in their economies, host countries enact laws, which take several
forms such as tariffs, antidumping laws, export/import licensing investment
regulations, legal incentives, and restrictive trading laws.
Regulatory Environment
The regulatory environment factors are related to the planning, promotion, and
regulation by the government, of those economic activities that affect an
organization’s business. Given below are some of the important factors and influences
operating in the regulatory environment.
 The constitutional framework, directive principles of state policy, fundamental
rights, and division of legislative power between central and state governments.
 Policies related to distribution and pricing, and their control.
 Policies related to imports and exports.
 Policies related to the public sector, small-scale industries, sick industries, development
of backward areas, control of environmental pollution, and customer protection.
12
The economic activities of a country are regulated by public authorities in the larger
interests. Business and industry operate within a regulatory environment. A two-way
relationship exists between industry and the regulatory environment. The industry
functions according to the policies, procedures, and rules laid down by the
government. However, the industry tries to influence the government through
lobbying, creation of public awareness, press advertisements, and the parliamentary
process. Thus, the regulatory environment is one of the most important components
that the strategic managers of any organization have to consider.
The exercise of the regulatory mechanism takes place through various administrative
controls over business. Some of these controls include industrial policy and licensing;
capital issues control and control over stock exchanges; control over foreign exchange
and import and export control; control over foreign investment and foreign
collaboration; control over commodities’ pricing and distribution; control over
development and regulation of industries; control through consumer protection; and
control of environmental pollution.
The government is often blamed by the industry for exercising excessive control
through a plethora of rules and regulations. On the other hand, companies are
sometimes accused of failing to work within the framework of national priorities, and
failing to live up to the expectations of society in general.
The Indian government also framed a number of regulations to restrict the
concentration of economic power, monopolistic undertakings, and large industrial
houses in the country. For instance, the Competition Act was passed in 2002 to ensure
economic development of the country. The act was framed to protect consumers’
interests, ensure freedom of trade carried on by others, promote and ensure
competition in market, and prevent practices having adverse effect on competition.
Tax Environment
Governments design tax systems in order to raise revenue and to promote economic
and social goals. At times, governments try to stimulate overall national economic
activity through tax reduction, while at other times, they try to increase tax revenues
through tax hikes. The government may extend tax concessions to certain industries to
stimulate productive activity. Similarly, tariffs maybe imposed by the government on
imported manufactured goods to discourage the outflow of foreign exchange reserves
or to shelter a domestic industry from the onslaught of foreign competition.
The tax system may be so designed as to discourage or encourage certain social
behavior. The heavy taxation imposed on tobacco and alcohol, and fines on pollution
help in not only raising revenue, but also discourage use of such products. They are
also imposed as a type of social levy for the perceived harm that their use causes
society.
Ethical Environment
Ethics denotes what is wrong and what is right. Ethics in business is application of
ethical standards during business operations and includes ethical behavior of the
people participating in the business. There are certain dos and don’ts in every society.
The principles of morality or rules of conduct are referred to as ethics. Ethics aims to
identify the rules that should govern the behavior of people as well as “goods” that are
worth seeking. An ethical issue is a situation, problem, or opportunity in which an
individual must choose among several actions that must be evaluated as right or
wrong. Similarly, the moral principles and standards that guide behavior in the world
of business comprise business ethics and corporate governance. The demand for
ethical behavior in business has increased due to the unethical activities of various
13
organizations. Decisions made on the basis of ‘what is right’ and ‘what is wrong’
constitute an organization’s ethical environment. Managers are realizing the
importance of separating management from ownership of a company to ensure the
observance of a code of conduct.
Example: Google in China

In September 2000, Google began operating a search engine in China by offering
24 million web pages in Chinese language. It had gained lot of popularity in China
owing to its simplicity and ability to carry out searches effectively. During that
time, the Chinese government was blocking several websites through IP filters
intermittently. Users trying to search using Google were redirected to other local
search engines.
In early September 2002, a new filtering system based on keywords was introduced
by the Chinese government. Filtering software containing specified words was
installed in four public access networks that blocked access to websites including
Google. When these words were searched for on Google, the browsers indicated
‘Page cannot be displayed’. Access to Google’s search services was fully restored
by September 12, 2002. After restoration of services, some search terms that were
banned by the authorities returned a standard results page. When users clicked on
the page, they were directed to websites approved by the Chinese government and
on some occasions access to Google was blocked for sometime.
By 2003, Google was ranked #1 in China’s search engine market with a share of
34.8%. But in the next two years, its market share started dropping. Google was
unable to maintain its lead as it did not have a local presence and its services
became slow and unreliable. Google soon realized that some of the queries that
were politically sensitive were not reaching the company’s servers. It was not
prepared to host its search engine on servers inside China as that would require self
censorship of the content.
In September 2004, on the launch of Chinese version of Google News, the
company announced that news sources that were banned by the Chinese
government would not be included in Google News. By November 2004, the
Chinese authorities blocked Google news in English, forcing users to switch to the
censored Chinese version of the news.
Google users in China continued to face many problems with the search engine.
Many services like Google images were not available. Google was unreachable 10
percent of the time. This was due to extensive filtering carried out by the ISPs in
China. ISPs used their own filtering methods resulting in inconsistent results. By
early 2004, users in China had thought that Google was unreliable and started
using alternative search engines. Google was seven times slower than its rival
Baidu and the company itself was not happy with the way its services were being
operated in the country.
Google felt that only a local presence could help it to provide better and more
reliable services to customers. To operate in China, Google needed an Internet
Content Provider license, which required it to filter its content. In April 2005, after
obtaining permission from the Ministry of Information Industry in China, Google
announced the opening of a representative office in Shanghai (Mainland China),
and registered the URL – www.google.com.cn. Google also announced that its
China R&D Center would be opened by the third quarter of 2005.
Contd…
14
Contd…
These steps by Google were aimed at localizing its operations and expanding the
company’s presence in the online search market in China. Earlier, Google had
operated its office from Hong Kong, which limited its ability to provide advertising
services to companies located in Mainland China. Google’s business was therefore
limited to the revenues earned from AdWords and AdSense.
Filtering search results was against Google’s policy; but, in order to reach Chinese
users effectively, the company said it had decided to agree to Chinese
Government’s terms and conditions, which included China’s local content
restrictions. Google agreed to remove some sensitive information and content that
was objectionable to the ruling Chinese Communist Party from its search results.
The company agreed to the censorship because even if it had provided uncensored
content, the content was filtered at the ISP level and users could only access that
content which was approved by the Government.
In January 2006, google.cn was officially launched. Google announced that it
would place disclosure on all the pages from where the search results were filtered
out. Google maintained its stand on protecting user privacy. User generated content
including e-mail, chat, and blogs were not made available on google.cn, to avoid
disclosing user information to the authorities. Google decided to store the search
records from google.cn, outside the country. In this way, Google wanted to prevent
the Chinese government from accessing the data without its consent. Google would
get better access to the market as it would be able to place its servers in China.
With the Chinese government not blocking the search, the site would speed up.
Adapted from “Case Study – Google’s Problems in China.” The IBS Center for Management
Research, 2006. www.icmrindia.org.
Check Your Progress – V

18. Which of the following statements is false regarding legal environment?
a. Organizations being corporate entities have to abide by the law of the land.
b. Legal systems are broadly the same and do not differ from country to
country, thus making it easy for the multinational companies to cope with the
laws in the countries where they are operating.
c. In some countries, the laws specify virtually every detail, while in others,
they serve only as a broad guideline and their interpretation is left to the
courts.
d. Host countries enact various laws in order to control foreign businesses in
their economies.
19. Identify from the following the factors that operate in the regulatory environment.
i. The constitutional framework, directive principles of state policy and the
fundamental rights.
ii. Policies related to distribution and pricing, and their control.
iii. Policies related to imports and exports.
15
iv. Policies related to small-scale industries, sick industries, development of

backward areas, control of environmental pollution, and customer protection.
20. The exercise of the regulatory mechanism takes place through various
administrative controls over business. Which of the following controls are used as
part of the regulatory mechanisms?
i. Industrial policy and licensing
ii. Capital issues control and control over stock exchanges
iii. Control over foreign investment and foreign collaboration
iv. Control over commodities’ pricing and distribution
v. Control through consumer protection
b. Only i, iii, iv, and v
c. Only ii, iv, and iv
d. i, ii, iii, iv, and v
21. ___________ refers to the principles of morality or rules of conduct.
a. Change
b. Ethics
c. Culture
d. Politics
22. Tariffs are imposed by the government to
i. to discourage the use of certain products as their use is perceived to harm the
society.
ii. to raise revenue and to promote economic and social goals.
iii. to discourage the outflow of foreign exchange reserves in case of imports.
iv. to shelter a domestic industry from the onslaught of foreign competition.
23. Decisions made on the basis of ‘what is right’ and ‘what is wrong’ constitute an
organization’s _____________ environment.
a. Political
b. Trade
c. Ethical
d. Economic
16
1.6.2 Internal Environment

The internal environment comprises resources, synergy, and distinctive competencies
of a firm. These factors together determine its organizational capability in terms of its
strengths and weaknesses existing in the different functional areas of marketing,
operations, personnel, financial, and technical. Thus the firm’s capabilities in the
above mentioned functional areas in addition to the firm’s strategy and structure make
up the dynamics of its internal environment.
Strategy
The word strategy is derived from the Greek work ‘strategia’, which connotes the art
and science of directing military forces. Thus, strategy constitutes a well thought out
systematic plan of action to defend oneself or to defeat rivals. Glueck defined strategy
as a unified, comprehensive, and integrated plan relating the strategic advantages of
the firm to the challenges of the environment. It is designed to ensure that the basic
objective of the enterprise is achieved.
Strategy involves establishing the proper organization-environment fit or matching the
organizational factors with the environmental factors. It involves an analysis of the
organizational factors (strengths and weaknesses) and the environmental factors
(opportunities and threats) in the business environment. Thus strategy serves as a
blueprint indicating the courses of action to achieve the desired objectives. Strategy
influences an organization’s internal environment in the following ways.
 It determines organizational tasks.
 It influences the choice of technology in the organization as well as the people
responsible for accomplishment of tasks.
 It determines the specific environment within the organization as well as that
within which the organization operates. In other words, strategy defines a
business environment and gets defined by the latter.
Organizational Structure
Some of the important factors influencing business decisions are the organization
structure, composition of the Board of Directors, the extent of professionalization of
management, etc. The structure of an organization is affected by a number of factors
like the size of the business, the nature of the business, the diversity of the business,
the characteristics of the market, the characteristics of the strategy, and the future
plans of the organization.
Changes in the strategy of an organization may necessitate changes in the structure.
Organization structures need to be flexible so as to enable the organization to quickly
and effectively respond to market changes. A hierarchical and rigid system leads to
slower decision making, thus affecting the company’s position in the highly
competitive business environment where decisions and actions have to be taken
quickly.
Marketing Capability
These factors are related to pricing, promotion, and distribution of products or
services, and all related aspects that have an impact on the organization’s capacity and
ability to implement strategies to market its products or services. The factors that
influence the marketing capability of an organization are given below.
 Product-related factors such as variety, differentiation, positioning, and
packaging.
17
 Price-related factors like pricing objective, policies, changes, and protection.

 Promotion-related factors such as promotional tools, sales promotion, advertising,
and public relations.
 Integrative and systematic factors like marketing mix, distribution systems,
company image, marketing organization, marketing system, marketing
management, and information system.
Operation Capability
These factors are related to the production of products or services, use of material
resources, and all related aspects that have a bearing on the organization’s capacity
and ability to implement strategies to produce its products or services. The factors that
influence the operations capability of an organization are given below.
 Factors related to the production system such as capacity, location, layout,
product or service design, degree of automation, and extent of vertical integration.
 Factors related to the operation and control system such as aggregate production
planning, material supply, inventory, cost and quality control, and maintenance
system and procedure.
 Factors related to R&D such as product development, patent right, level of
technology used, and technical collaboration and support.
Personnel Capability
These factors are related to the existence and use of human resources and skills, and
all related aspects that have a bearing on the organization’s capacity and ability to
implement strategies to attract and retain its human resources. The factors that
influence the personnel capability of an organization are given below.
 Factors related to the personnel system such as manpower planning system,
selection, development compensation, communication and appraisal, and the
personnel department’s position within the organization procedures and
standards.
 Factors related to organizational and employees’ characteristics such as corporate
image, quality of managers, staff and workers, employer’s perception about and
image of the organization, availability of development opportunities for
employees, and working conditions.
 Factors related to industrial relations such as the relationship between union and
management, collective bargaining, safety, welfare and security, employee
satisfaction, and employee morale.
Financial Capability
These factors relate to the availability, usage, and management of funds and all related
aspects that have a bearing on the organization’s capacity and ability to implement its
strategies towards procurement and disbursement of funds. The factors that influence
the financial capability of an organization are given below.
 Factors related to the sources of funds such as the capital structure, procurement
of capital, financing pattern, availability of working capital, borrowings, capital
and credit availability, reserves and surplus, and relationship with banks, lenders,
and financial institutions.
 Factors related to the use of funds, capital investment, fixed assets acquisition,
current assets, loans and advances, dividend distribution, and relationship with
shareholders.
18
 Factors related to management of funds such as financial accounting and

budgeting, management control system, state of financial health, cash, inflation,
credit, return and risk management, cost reduction and control, and tax planning
and control.
Technical Capability
Organizations cannot face challenges of the 21st century by replacing existing work
structures, procedures, and technologies. They need a strategy for organizational
fitness including leveraging on limited resources to achieve dramatic, rapid, and
continuous improvement. Most product development organizations recognize that the
capability of their technical staff is critical to improving their productivity and quality
in achieving their business goals.
Activity: TPL, a tyre manufacturing company has been facing problems with
regard to its products. The company was receiving several complaints regarding the
poor quality of its tyres from its customers. Upon investigation, the company’s top
Management found that the problems occurred due to a poor quality control
system. It also found out that the machinery at the manufacturing facility was
poorly maintained. What is this area of internal environment that has been looked
into by the management? What are the other areas that make up the dynamics of
the company’s internal environment?
Answer:
Check Your Progress-VI

24. ____________ can be defined as a unified, comprehensive, and integrated plan
relating the strategic advantages of the firm to the challenges of the environment.
a. Strategy
b. Structure
c. Ethics
25. Which among the following involves an analysis of the organizational factors,
that is, strengths and weaknesses, and the environmental factors, that is,
opportunities and threats, in the business environment?
a. External environment analysis
b. Strategic analysis
c. Economic environment analysis
d. Structural analysis
19
26. In which of the following ways does strategy influence an organization’s internal
environment?
i. It determines organizational tasks.
ii. It influences the choice of technology in the organization as well as the
people responsible for accomplishment of tasks.
iii. It determines the specific environment within the organization as well as that
within which the organization operates. In other words, strategy defines a
business environment and gets defined by the latter.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
27. The _____________ is affected by a number of factors like the size of the
business, the nature of the business, the diversity of the business, the
characteristics of the market, the characteristics of the strategy, and the future
plans of the organization.
a. organizational personnel
b. organizational structure
c. organizational size
d. organizational strategy
28. ___________ type of organization structures lead to slower decision making,
affecting the organization’s position in the highly competitive business
environment where decisions and actions have to be taken quickly.
a. Rigid
b. Flexible
c. Hierarchical
d. Both (a) and (c)
29. Which among the following is not a factor that influences the marketing
capability of an organization?
a. Positioning
b. Pricing objective
c. Distribution system
d. Return and risk management
30. __________ factors are related to the production of products or services, use of
material resources, and all related aspects that have a bearing on the
organization’s capacity and ability to implement strategies to produce its products
or services.
a. Marketing capability
b. Financial capability
c. Operations capability
d. Personnel capability
20
31. Identify the factors that influence the operations capability of an organization.
i. Extent of vertical integration
ii. Risk management
iii. Cost and quality control
iv. Manpower planning system
a. Only i and ii
b. Only i and iii
c. Only ii and iv
d. Only i, ii, and iii
32. _________ factors are related to the existence and use of human resources and
skills, and all related aspects that have a bearing on the organization’s capacity
and ability to implement strategies to attract and retain its human resources.
a. Technical capability
b. Personnel capability
c. Marketing capability
d. Operations capability
33. Which of the following statements is false regarding financial capability factors?
a. These factors relate to the availability, usage, and management of funds and
all related aspects that have a bearing on the organization’s capacity and
ability to implement its strategies towards procurement and disbursement of
funds.
b. It includes factors related to the sources of funds such as capital structure,
procurement of capital, financing pattern, availability of working capital,
borrowings, and capital and credit availability.
c. It includes integrative and systematic factors like marketing mix, distribution
systems, company image, marketing organization, marketing system,
marketing management, and information system.
d. It includes factors related to the use of funds, capital investment, fixed assets
acquisition, current assets, loans and advances, dividend distribution, and
relationship with shareholders.
1.7 Summary
 Environment can be defined as surrounding external objects or influences of
circumstance under which someone or something exists. The environment of an
organization is constituted by an aggregate of all conditions, events, and
influences that surround and affect it.
 Every business enterprise has to cope with internal as well as external factors.
 Business environment is complex and dynamic. Managers have to consider the
impact of the external and the internal environment on the organization while
making decisions.
 All the factors outside the organization which provide opportunities or pose a
threat to the organization make up the external environment.
 All the factors within an organization which impact strengths or cause
weaknesses constitute the internal environment.
21
 The individual factors of the external environment are demographic environment,

social environment, cultural environment, political environment, economic
environment, financial environment, trade environment, technological
environment, legal environment, regulatory environment, tax environment and
ethical environment.
 The individual factors of the internal environment exist in the functional areas of
marketing, operations, personnel, financial, and technical, in addition to the
firm’s strategy and structure.
1.8 Glossary
 Economic environment: It comprises factors such as the fiscal policy, monetary
policy, industrial policy, the physical limits on output, the price and income
equations, nature of the economic system, and the pace of economic
development.
 Environment: Surrounding external objects or influences of circumstance under
which someone or something exists. The environment of an organization is
constituted by an aggregate of all conditions, events and influences that surround
and affect it.
 External environment: All the factors operating outside the organization which
provide opportunities or pose a threat to the organization.
 Internal environment: All the factors operating within an organization which
impact strengths or cause weaknesses.
 Non-economic environment: It includes social, cultural political, legal, and
technological factors.
 Opportunity: A favorable condition in the environment of an organization which
enables the organization to consolidate and strengthen its position.
 Strategy: It can be defined as a unified, comprehensive, and integrated plan
relating the strategic advantages of the firm to the challenges of the environment.
 Strength: The inherent capacity which an organization can use to gain strategic
advantages over its competitors.
 Threat: An unanticipated condition in the organization’s environment which
creates a risk for or causes damage to the organization.
 Weakness: An inherent limitation or constraint which creates a strategic
disadvantages.

1. “Before making any decision, managers have to take into consideration the
business environment.” Explain the importance of business environment in
managerial decision-making.
2. “An organization’s growth and profitability depends on its understanding of the
external and the internal environment.” Explain the external environment factors
and the internal environment factors that affect an organization.

1. The International Business Environment: Text And Cases; Sundaram, Anant K.,
Black, J. Stewart; Paper Back PHI learning
22
2. Francis Cherunilam, “Global Economy and Business Environment,” Himalaya

Publishing House, 2012
3. V K Puri, S K Misra and & “Economic Environment of Business,” Himalaya
4. Namita Gopal, “Business Environment,” Tata McGraw-Hill, Second Edition,
2010.
5. “Economic Environment”<http://www.fao.org/docrep/W5973E/w5973e03.htm>

Following are the answers to the Check Your Progress questions given in the Unit.
1. (c) Environment
Environment can be defined as surrounding external objects and influences of
circumstance under which someone or something exists. The environment is
constituted by an aggregate of all conditions, events, and influences that surround
and affect it.
2. (c) External and Internal
Business environment can be divided into external and internal environment.
Internal factors are generally considered controllable factors as the business
enterprise has control over these factors. External factors are beyond the control
of a company.
3. (b) Economic environment
Business environment can be categorized into economic and non-economic
environment. Economic environment comprises factors such as the fiscal policy,
monetary policy, industrial policy, the physical limits on output, the price and
income equations, nature of the economic system, and the pace of economic
development.
4. (b) Non-economic environment
Business environment can be categorized into economic and non-economic
environment. The non-economic environment includes social, cultural political,
legal, and technological factors.
5. (a) Controllable factors
Internal factors are generally considered controllable factors as the business
enterprise has control over these factors. The company’s personnel, strategy,
structure, and its functional, operations, marketing, and technical capabilities are
all internal factors.
6. (b) Uncontrollable factors
External factors are beyond the control of a company such as economic, socio-
cultural, regulatory and legal, and demographic factors. Therefore, they are called
as uncontrollable factors.
7. (c) Improvement in the air and road links
A firm may achieve external economies of scale if there are changes in the
external environment such as improvements in the transport facilities and
communication. The other three options help a firm in achieving internal
economies of scale.
23
8. (c) Opportunity
All the factors outside the organization which provide opportunities or pose a
threat to the organization make up the external environment. Opportunity refers to
a favorable condition in the environment of an organization which enables the
organization to consolidate and strengthen its position.
9. (a) Strength
All the factors within an organization which impact strengths or cause
weaknesses constitute the internal environment. Strength is the inherent capacity
of an organization which can be used to gain strategic advantage over its
competitors.
10. (d) Demographic environment
Demographic environment is studied with reference to the size, growth rate, age
composition, gender composition, life expectancy, etc., of the population.
Demographic environment factors affect the demand for goods and services.
11. (b) Social environment
Social environment factors include human relationships and the developments. The
form and function of such relationships have a bearing on the organization’s business.
The study of factors such as family structures and changes in them, role and status of
women in society, and educational levels and gender inequality in educational levels
which affect a business organization is part of social environment.
12. (d) i, ii, iii, and iv
Cultural blunders may prove expensive for multinational companies. Such
blunders may lead to embarrassment, lost customers, legal consequences, missed
opportunities, expensive damage control, and tarnished reputation. Thus, it is
imperative to gather a deep understanding of cultural differences and grasp the
intricacies of foreign markets in this era of globalization.
13. (b) Only iii
All the given options are part of the economic environment, except option iii.
Option iii is part of the political environment.
14. (b) Economic environment
The economic environment factors include macro level factors such as national income,
per capita income, and balance of payments that affect an organization’s business.
15. (a) Political environment
Political environment refers factors related to the management of public affairs
and their impact on an organization’s business. It is closely related to the
economic system and the economic policy.
16. (c) Globalization
Economic reforms worldwide have compelled businesses to come out of their domains
and see beyond the physical boundaries of the country, thus leading to globalization.
Globalization is the process of integration of the world into one huge market.
17. (b) Technological environment
Technological environment factors are related to applied knowledge and the
materials and machines used in the production of goods and services. Some of the
24
factors and influences operating in the technological environment include sources

of technology, cost of acquisition of technology, technological development,
effects of technology on environment, and technology in management.
18. (a) Legal systems are broadly the same and do not differ from country to
country, thus making it easy for the multinational companies to cope with
the laws in the countries where they are operating.
All the statements are true regarding legal environment, except statement (b). The
correct statement is ‘legal systems with varied complexity and dimension differ
from country to country, thus making it essential for the multinational companies
to cope with the widely differing laws in the countries where they are operating.’
All the statements given are factors that operate in the regulatory environment.
20. (d) i, ii, iii, iv, and v
All the statements given are controls used as part of the regulatory environment.
21. (b) Ethics
The principles of morality or rules of conduct are referred to as ethics. Ethics
aims to identify the rules that should govern the behavior of people as well as
“goods” that are worth seeking.
Tariffs are imposed by the government to discourage the use of certain products
as their use is perceived to harm the society; to raise revenue and to promote
economic and social goals; to discourage the outflow of foreign exchange
reserves in case of imports; and to shelter a domestic industry from the onslaught
of foreign competition.
23. (c) Ethical
Decisions made on the basis of ‘what is right’ and ‘what is wrong’ constitute an
organization’s ethical environment. An ethical issue is a situation, problem, or
opportunity in which an individual must choose among several actions that must
be evaluated as right or wrong.
24. (a) Strategy
Strategy can be defined as a unified, comprehensive, and integrated plan relating
the strategic advantages of the firm to the challenges of the environment. It
involves establishing the proper organization-environment fit or matching the
organizational factors with the environmental factors.
25. (b) Strategic analysis
Strategy involves an analysis of the organizational factors, that is, strengths and
weaknesses, and the environmental factors, that is, opportunities and threats, in
the business environment. Strategy serves as a blueprint indicating the courses of
action to achieve the desired objectives.
26. (d) i, ii, and iii
Strategy influences an organization’s internal environment in the following ways
-- it determines organizational tasks; it influences the choice of technology in the
organization as well as the people responsible for accomplishment of tasks; and it
determines the specific environment within the organization as well as that within
which the organization operates. In other words, strategy defines a business
environment and gets defined by the latter.
25
27. (b) organizational structure

The organizational structure is affected by a number of factors like the size of the
business, the nature of the business, the diversity of the business, the
characteristics of the market, the characteristics of the strategy, and the future
plans of the organization. Organization structures need to be flexible so as to
enable the organization to quickly and effectively respond to market changes.
28. (d) Both (a) and (c)
Organizational structures which are rigid and hierarchical lead to slower decision
making, affecting the organization’s position in the highly competitive business
environment where decisions and actions have to be taken quickly. They need to
be flexible to enable the organization to quickly and effectively respond to market
changes.
29. (d) Return and risk management
Positioning, pricing objective, and distribution system are all factors that
influence the marketing capability of an organization. Return and risk
management is a factor that influences the financial capability of an organization.
30. (c) Operations capability
Operations capability factors are related to the production of products or services,
use of material resources, and all related aspects that have a bearing on the
organization’s capacity and ability to implement strategies to produce its products
or services. Some of the factors and influences affecting operations capability of
an organization are capacity, location, layout, aggregate production planning,
patent right, level of technology used, etc.
31. (b) Only i and iii
Extent of vertical integration, and cost and quality control are the factors that
influence the operations capability of an organization. Risk management is a
factor that influences the financial capability of an organization, while manpower
planning system is a factor that influences the personnel capability of an
organization.
32. (b) Personnel capability
Personnel capability factors are related to the existence and use of human
resources and skills, and all related aspects that have a bearing on the
organization’s capacity and ability to implement strategies to attract and retain its
human resources. Some of the factors and influences affecting personnel
capability are manpower planning system, corporate image, quality of managers,
working conditions, collective bargaining, safety, employee morale, etc.
33. (c) It includes integrative and systematic factors like marketing mix,
distribution systems, company image, marketing organization, marketing
system, marketing management, and information system.
All the statements are true regarding financial capability factors except statement
(c). Integrative and systematic factors like marketing mix, distribution systems,
company image, marketing organization, marketing system, marketing
management, and information system are part of the marketing capability.
26
Unit 2
Demographic and Social Environment
Structure
2.1 Introduction
2.2 Objectives
2.3 Understanding Demographies
2.4 Demographic Classification
2.5 Society
2.6 Social Class
2.7 Group
2.8 Family
2.9 Summary
2.10 Glossary
2.1 Introduction
In the last section of the previous unit, we have discussed about the external and
internal environments of a business organization. We have learnt that the external
environment is constituted by several individual factors. In this unit, we will discuss
two of the external environment factors – demographic environment and social
environment – and understand their importance in the study of business environment.
An understanding of the demographic environment is important for a business as it
involves people for whose consumption goods and services are produced.
Demographics influence consumption behaviors directly and indirectly by influencing
other attributes of individuals such as their personal values and decision styles (which
in turn influence consumption).
Social stratification has always existed in one form or the other in all societies. A
study of social class differences helps marketers understand consumer behavior,
segment markets appropriately, and subsequently, develop marketing strategies.
Man, being a social animal, interacts with others regularly. Most times, our social
behavior and relationships are motivated by the desire to satisfy our needs. Thus, the
impact of social groups affects many buying decisions. The family provides an
opportunity to jointly examine demographic, economic, sociological, and biological
variables. Family demography is concerned with the factors that determine the
number, size, composition and change in families.
This unit will give you an overview of the demographic environment, and discuss the
classification of demographics. We shall then move on to discuss aspects of the social
environment. We will discuss social class and social status, and then study how social
classes are determined. Finally, we would discuss the importance of analyzing the
family life cycle in business.
27
2.2 Objectives
 Define the demographic environment.
 Identify the various demographic variables such as income, lifestyle, education,
gender, social class, occupation, and age.
2.3 Understanding Demographies

Demographics are the studies of a population based on factors such as age, race, sex,
economic status, level of education, income level and employment. It helps the
business organization to understand the quantum and quality of business and potential
opportunities of business. It describes a population in terms of its size, structure, and
distribution. Size means the number of individuals in a population; structure describes
the population in terms of age, income, education, and occupation among other things;
and distribution of the population describes the location of individuals in terms of
geographic region and rural, urban, or suburban location.
A sound knowledge of different demographic variables such as age, income, lifestyle,
and education is essential for designing and marketing products and services.
Demographic variables are the most popular bases for distinguishing consumer groups
and their behavior. Consumer wants, preferences, and usage rates are often associated
with demographic variables. They influence consumer behavior and contribute to the
overall demand for various products and services.
2.4 Demographic Classification

Markets comprise innumerable buyers. Buyers differ in their wants, purchasing
power, buying attitudes, and buying habits. So, it may not be practically feasible to
develop a single product or service that would appeal to all consumers. The concept of
market segmentation proves helpful in this situation. Market segmentation aims at
dividing the market into distinct subset of consumers with homogeneous needs or
characteristics and selecting one or more segments to target them. Income, lifestyle,
education, gender, social class, occupation, and age are the demographic variables.
These have been traditionally used by marketers to segment the market.
2.4.1 Income
Income determines both purchasing power and status. Higher the income, greater the
purchasing power. However, income per se generally does not cause or direct
consumption to nearly the extent that education and occupation do. Occupation and
education influence preferences for products and services; income only provides the
means to acquire these products and services. Income is generally more effective as a
segmentation variable, when used along with other demographic variables.
2.4.2 Lifestyle
The lifestyle of an individual is the pattern of living expressed through his/her
activities, interests, and opinions. Lifestyle patterns include the ways people spend
time, the extent of their interaction with others, and their general outlook on life and
living. People determine their own lifestyles, but the pattern is also affected by
demographic factors such as age, education, income, and social class. Lifestyles
impact the consumer buying decision process in many ways. They also influence the
consumers’ product needs and brand preferences.
28
Unit 2: Demographic and Social Environment
2.4.3 Gender
Gender has always been a distinguishing segmentation variable. Firms design
products that are specifically meant for either men or women. Of late, gender roles
have changed in many ways; it is no longer an accurate way to distinguish consumers
in some product categories. Demographic classification on the basis of gender has also
changed with time in the case of many products. Many product categories have been
affected by the increased number of women in the workforce. For product
manufacturers or service providers, study of this classification is very important to
help them position the product properly.
4.4 Education
Education has traditionally been a highly valued factor in many cultures, and is a
direct measure of status. The higher one’s educational level, the more status one has in
the society. Education has a strong influence on one’s tastes and preferences. It also
influences how one thinks, makes decisions, and relates to others. It also influences
what one can purchase by partially determining one’s income and occupation.
4.5 Social Class
A social class is a hierarchical division of a society into relatively distinct and
homogeneous groups whose members have similar attitudes, values, and lifestyles. An
individual’s education, occupation, ownership of property, income level, and heritage
(racial/ethnic background, parents’ status) influence his/her social standing. Social
standing ranges from the lower class (those with few or none of the socioeconomic
factors desired by society) to the upper class (those with many of the socioeconomic
characteristics considered desirable by society). Individuals with different social
standings tend to have different needs and consumption patterns. Many companies
design products and services for specific social classes.
4.6 Occupation
Occupation provides status and is linked to education and income. The type of work
one does and the types of individuals one works with over time also directly influence
one’s values, lifestyles, and all aspects of the consumption process. Media
preferences, hobbies, and shopping patterns are also influenced by occupational class.
4.7 Age
Age is used as a basis for understanding and segmenting a market as the product and
service needs vary with consumer age. It is also the most frequently used demographic
variable in market segmentation. This is because the life cycle has been divided up by
society into easily recognizable groups that are clearly differentiated from each other
– infants, children, teenagers, young adults, and so on. Also, knowing someone’s age
can often tell you a lot about them. Disposable income generally increases with age (at
least until retirement).
Example: Dominos’ Pizza in Japan

Domino’s Pizza was established in 1960, when two brothers purchased
Dominick’s, a pizza store in Ypsilanti, Michigan. The company was renamed as
Domino’s Pizza in 1965. In order to expand globally, franchisers were invited to
open their own stores and this paved the way for Domino’s Pizza to mark its
presence in various countries across the world. However, the company’s operations
in various countries outside the US were a failure. Many analysts opined that the
failure was mainly due to the company’s failure to comply with the requirements of
local customers.
Contd…
29
Contd…
The company started carefully analyzing the local environment and adapting its
practices to suit the needs of customers. Further, it also trained its franchisees to
meet the company’s standards. This was evident in the case of its franchisees in
Japan who won the hearts of Japanese consumers by meeting their demands.
The dramatic changes in the demographics of the Japanese market in the 1980s
gave scope for a lot of business opportunities. The emergence of the working
woman who found little time for cooking gave rise to the need for ready to eat
food. Further, the teen population in Japan had developed an interest in western
habits and styles. These demographical changes in Japan encouraged Domino’s
Pizza to open its first pizza store in Japan in 1985. It proved to be a success.
Domino’s Pizza did a lot of groundwork before it entered the Japanese market. It
conducted extensive market research, which revealed that the food habits and tastes
of the Japanese were quite different from that of the US consumers. The research
found that the Japanese preferred raw fish, rice, and seaweed in their diets to pizza
with common ingredients like tomato and cheese. It was also found that among the
various segments of the Japanese market, the teen segment was the one that liked
pizza the most. But the segment couldn’t afford to consume the product in huge
quantities as it had the least disposable income. Another potential segment was the
premium segment, but the problem was that the people of this segment preferred to
go out to expensive restaurants rather than having a pizza at home. Thus, the
Japanese market threw many challenges in Domino’s way.
Domino’s tried many strategies to win the patronage of the Japanese consumers.
The first among these was changing the size of the pizza. It made the pizzas smaller
– into 10 and 14 inch pies from the 12 and 16 inch versions, along with toppings
preferred by the Japanese. Domino’s introduced toppings such as squid, shimeji
mushrooms, pineapple and corn, catering to the tastes of the Japanese consumers.
One major hurdle for the company in reaching its customers was the heavy traffic
in Japan that made it impossible to deliver the product in time. However, the
company was able to overcome the problem of by using three-wheeled scooters
with a pizza-warming container on the rear of the vehicle. These vehicles were able
to zip past the traffic on Japan’s congested roads, allowing the delivery boys to rush
even during the heavy traffic hours to keep to their delivery times. Another
difficulty Domino’s faced in Japan was locating addresses as the houses in Japan
were not numbered according to location, but according to when they had been
constructed. Therefore, the franchisee outlets in Japan were provided with the area
maps to easily locate the customers and deliver the pizzas in time. Also, the
employees of the stores were given intensive training on behavioral aspects. The
training programs taught the staff about the Japanese standards of politeness by
providing samples of polite phrases. The staff was also supposed to use polite
phrases when they answered phone calls from customers.
Adapted from “Case Study – Dominos’ Pizza: Challenges Faced in Japan.” The ICMR Center
for Management Research, 2005. www.icmrindia.org.
Activity: A consumer appliances company was planning to bring out microwaves,

air conditioners, and washing machines for the low-end consumer market in Andhra
Pradesh. The marketing research department of the company was assigned the task
of finding out the potential markets where the company can sell its products. The
market research team selected few places, and teams were sent to collect the
demographic information about the places. In this regard, what kind of information
should the team look out for? Why?
Contd…
30
Contd…
Answer:

1. Which of the following is correct with reference to the demographics?
a. Size describes the population in terms of age, income, education, and
occupation among others.
b. Structure means the number of individuals in a population.
c. Distribution of the population describes the location of individuals in terms
of geographic region and rural, urban, or suburban location.
d. All of the above
2. Which of the following statements is true with reference to demographics in the
environment?
i. Demographics describe a population in terms of its size, structure, and
distribution.
ii. A sound knowledge of different demographic variables such as age, income,
lifestyle, and education is essential for designing and marketing products and
services.
iii. Demographic variables are the most popular bases for distinguishing
consumer groups.
iv. Consumer wants, preferences, and usage rates are often associated with
demographic variables.
3. Which of the following aims to divide the market into distinct subsets of
consumers with homogeneous needs or characteristics?
a. Socialization
b. Segmentation
c. Stereotyping
4. ______________ is a hierarchical division of a society into relatively distinct and
homogeneous groups whose members have similar attitudes, values, and
lifestyles.
31
a. Social class
b. Socialization
c. Social standing
d. Social mobility
2.5 Society
Society is composed of a group of people. A society is the largest membership group.
Typically, it has territorial boundaries, but these may not be precise. Societal
boundaries are often marked by language and religion, which are important features
by which societies are identified. Members belonging to a society must coordinate
their actions with each other. No individual can do ‘his /her own thing’ without any
concern for others.
2.6 Social Class

Social class can be defined as the classification of members of a society into distinct
classes, so that a member of each class has approximately equal position in society
with other members of the same class. Though all people in this world may be created
equal, society gives different status to different people. Some people have a high
status in society, while others are given a lower status. These statuses are referred to
as social strata or classes. Social stratification is the ranking of people by the other
members of a society into higher and lower positions. The status and respect given to
the people in the society depends on this ranking.
2.6.1 Characteristics of Social Class

Social classes have the following characteristics.
Social Classes are Multidimensional
Social classes are based on various components, and parameters. They are not
determined by a single parameter such as occupation and income. Certain parameters
are more reliable than others. For instance, although money is often a misleading
indicator of social class or position, in the US, it is largely associated with the idea of
social class. Occupation is one of the best indicators of social class. In every society,
some jobs are given higher status than others. Housing is another important variable
that helps determine a person’s social class.
Social Classes are Hierarchical
Social class categories are ranked vertically ranging from higher status to lower status.
Members of a particular social class may perceive the members of other social classes
as either equal or as of higher or lower status. This aspect is very important for
marketers. Consumers prefer to buy the product which they think is being used by
their equals or higher classes. They usually avoid products that are perceived to be
lower class products.
Social Classes are Restrictive
Members of a social class interact with each other as their values, behavior, activities,
and interests match. They interact less with members of other social classes because
of differences in educational background, lifestyle, and income level. People also
think that it is below their dignity to interact with persons of lower status. This kind of
restricted behavior makes it difficult for marketers to communicate their message
across different social classes.
32
Social Classes are Homogeneous

People within a social class are homogeneous as they have similar interests, attitudes,
and purchasing behavior patterns. They are exposed to similar media, and buy similar
products and services. This homogeneity helps marketers in segmenting the market
effectively.
Social Classes are Dynamic
The social stratification system can be divided into open and closed systems. In an
open system, people have the opportunity to move vertically in the society, i.e., they
can move from a lower status to a higher one or vice-versa. In a closed system, the
status of a person is determined by their birth. That is, status is inherited and social
mobility is restricted. Changes in social status, however, take place over a long period
of time.

5. Which of the following statements is not true regarding society?
i. Society is composed of a group of people who share institutions which we
classify as political, economic, religious, etc.
ii. Society has very precise territorial boundaries marked by language and
religion, which are the important features by which societies are identified.
iii. Members belonging to a society may or may not coordinate their actions with
each other.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. Only iii and iv
6. All the statements given below are true regarding social classes, except:
a. Social classes are multidimensional.
b. Social classes are heterogeneous.
c. Some people have a high status in society, while others are given a lower
status.
d. Social classes are restrictive.
7. The social stratification system can be divided into:
a. Open and closed system
b. Formal and informal system
c. Primary and secondary system
d. Economic and non-economic system
8. In which of the following systems do people have the opportunity to move
vertically in the society, i.e., they can move from a lower status to a higher one or
vice-versa?
33
a. Formal system
b. Open system
c. Closed system
d. Informal system
2.7 Group
A group can be defined as, “two or more individuals who share a set of norms, values
or beliefs and have certain implicitly defined relationships to one another such that
their behaviors are interdependent.” A group consists of two or more people who
interact to accomplish either individual or mutual goals.
2.7.1 Group Properties

In order to understand the concept of group, one has to be aware of the concepts of
status, norms, role, socialization, and power.
Status
Status is the achieved or recognized position of an individual in a group. This can be
attained through aspects like education, income level, occupation, or family
background. It is one’s rank in the social system, as perceived by the other members
of the society. Status goes with certain rights and duties associated with that position.
Sometimes, few members who have similar status in the society may come together to
form a group.
Norms
Norms are the rules and standards of conduct set by a group. Group members are
expected to abide by these norms. In informal groups, norms are generally unwritten,
but are well understood.
Role
The term ‘role’ is usually designated to the behavioral patterns associated with a
particular status. Role is the dynamic aspect of status, and includes the attitude,
values, and behavior ascribed by society to people having a particular status. The
structure existing in the society decides what sort of role behavior is acceptable. The
behavior expected of an individual depends on the position held by him/her, rather
than on the individual himself.
For instance, generally all students are expected to attend classes and study. However,
the levels to which these expectations are fulfilled vary dramatically. While some
students come into the class early, take notes, and ask several questions, there are
others who come late to class and never ask questions. All of us perform several roles.
The roles may change over time, sometimes even within a day. A student may be
playing the role of a son in the house, a part-time employee in a restaurant, and a
basketball team player. His behavior in each role will be different.
Roles in groups are learned, but each individual does not learn in the same way.
Society allows some variation in role performance. Role parameters represent the
range of behavior acceptable within a given role. If the behavior varies too much,
sanctions are imposed. Sanctions are punishments imposed on an individual for
violating role parameters. That is, individuals are rewarded for conformity and
punished for non-conformity. Role overload occurs when an individual tries to
perform too many roles in the limited available time, energy, or money. Individuals
34
who try to do this may also face role conflict, that is, two or more of their roles are
incompatible with each other. For example, working women who are married often
have to face conflict between their roles as a home-maker and as an employee.
A role stereotype is a shared visualization of the ideal performer of a given role. We
share a common view about the behavioral characteristics of doctors, lawyers, and
teachers. Managers can use these stereotypes in their promotional messages.
Socialization
Socialization is a process by which new members learn the values, norms, and
expected behavior patterns of the group they are becoming a part of. Socialization is a
process by which members of the groups learn the social skills and value to conform
to the norms and roles required for integration into group or community. It is an act
of adapting behavior to the norms of a culture or society. In short, it is a process of
making social.
It is intense in childhood, but people go through the process whenever they meet new
groups that impact their lives. Consumer socialization is a process by which
individuals acquire the skills, knowledge, and attitudes required to function as
consumers.
Power
Power can be defined as a force that results in behavior that would not have occurred
in the absence of the force. It also refers to the degree of personal choice a person
enjoys or his/her influence over others. Various social powers may be operative in
different social groups. Some of these are reward power, coercive power, legitimate
power, expert power and referent power.
Reward power
It is based on the perception one has about another’s ability to reward him/her. The
strength of reward power increases as the one perceives the size of reward another can
assess. Rewards may either be tangible (money, gifts) or intangible (recognition,
praise). Social groups have a great deal of reward power, which they dispense to their
members. This motivates members to exhibit the desired behavior. Marketers use
reward power, directly (by providing quality products and services) or indirectly (by
promising the reward of group acceptance through the use of a particular product), to
influence consumers.
Coercive power
It is the power to influence behavior through punishment or by withholding rewards.
Punishment may not be physical punishment, but subtle psychological sanction.
Coercive power is used by marketers to show the unfortunate consequences that a
consumer may face if he/she doesn’t own the product or service (life insurance,
deodorants, mouthwash, etc.), thus coercing them to buy the product or service.
Legitimate power
It stems from a member’s perception that the group has the legitimate right to
influence him/her. Some of these feelings are internalized by parents, teachers, and
religious institutions. An individual accepts some sort of code, and the group he/she
belongs to can assert its power to see that he/she abides by the code. Family is a small
group in which we can see legitimate power operating. Each member performs some
role that is legitimized by other members. Marketers use this power by appealing to
consumer values. Words like ‘should’, ‘ought to’, are used to express such behavior.
35
Expert power
It results from the expertise gained in due course of time, either by an individual or a
group. Consumers are always influenced by those whom they perceive having
superior knowledge, better skills, and more experience. Many advertisements rely on
expert opinion about the product. Information power, which is often related to expert
power, comes from logic, reasoning, and importance of communication.
Advertisements which use information power, explain why their product is good by
providing evidence on aspects like price, quality, features, and performance.
Referent power
It is based on a person’s, a firm’s, or a product’s attractiveness or appeal. It flows
from the feeling of belongingness of an individual to a group. As a result of the
feeling, one develops a desire to gain closer association with the group. The
individual’s identity with the group can be established or maintained only if the
individual behaves in the way a group does. The more this identification will be, the
more will be its referent power.
Advertisers use referent power in promotions to encourage consumers to be like, or do
the same thing as, the individual advertising the brand. Using celebrities in
advertisements is especially popular. Marketers also use testimonials from ‘ordinary’
consumers to show that they experienced same problems and have found satisfaction
with the recommended brand.
2.7.2 Classification of Groups

Groups can be classified based on the dimensions of function, degree of personal
involvement, and degree of organization.
Function
These groups are classified in terms of their functions such as students and workers.
Each major group has subcategories that could generally be categorized into family,
age, gender, education, and religion.
Degree of Personal Involvement
Based on the degree of personal involvement, we can identify two different groups --
primary and secondary. In the primary group, interpersonal relationships are based on
frequent face-to-face interaction. These groups have shared norms and interlocking
roles. Families and work groups are examples of such groups. Secondary groups are
those in which the members have relatively impersonal and formalized relationships.
This is a residual category that includes all groups that are not primary such as
political parties and trade unions. Even in secondary groups, there may be face-to-face
interaction. The distinction lies in the lack of intimacy or personal involvement.
Degree of organization
Groups range from unorganized to highly structured groups. Depending on where they
fall in the range, groups are classified as formal and informal groups. Formal groups
have definite structure such as they have president, vice-president, general manager,
and secretary in an organization. These groups are typically secondary groups, and are
developed to accomplish specific goals, whether economic, political, or social.
Informal groups are typically primary groups. They have a relatively loose structure
and lack clearly defined goals and objectives. These groups influence an individual’s
values and attitudes.
36
Primary groups greatly impact the customers, and therefore are important to
marketers. It is from such groups that consumers develop their consumption patterns
and media preferences. Hence, advertisers present their products within a primary
group setting, such as among family members or friends. Secondary groups also
influence consumers, and they are also used in advertising.
Activity: Health Foods Incorporated is a company providing health drinks, healthy

snacks, and nutritious supplements to school and college going students. To market
its products to the group, the company rolled out certain ads. The ads featured well-
known nutritionists and doctors talking about the company’s products and
comparing them with similar products from other companies. What kind of an
advertising strategy did the company adopt? Explain the probable reasons for the
company to use this strategy.
Answer:

9. ___________ can be defined as two or more individuals who share a set of norms
values or beliefs and have certain implicitly defined relationships to one another
such that their behaviors are interdependent.
a. Group
b. Role
c. Power
d. Status
10. Which among the following terms can be defined as the achieved or recognized
position of an individual in a group?
a. Role
b. Status
c. Power
d. Norm
11. Norms can be defined as:
a. the behavioral patterns associated with a particular status.
b. the degree of personal choice a person enjoys or his/her influence over others
c. the rules and standards of conduct set by a group.
d. a process by which new members learn the values, norms, and expected
behavior patterns of the group they are becoming a part of.
37
12. Identify the statements which are false regarding ‘role’.

i. It is the degree of personal choice a person enjoys.
ii. It is the dynamic aspect of status, and includes the attitude, values, and
behavior ascribed by society to people having a particular status.
iii. It is usually designated to the behavioral patterns associated with a particular
status.
a. Only i
b. Only ii
c. Only iii
d. Only i and iii
13. Match the following terms with their respective definitions.
Term Definition
i. Role parameter p. A shared visualization of the ideal
performer of a given role.
ii. Role overload q. It represents the range of behavior
acceptable within a given role.
iii. Role stereotype r. It occurs when an individual tries to
perform too many roles in the limited
available time, energy, or money.
a. i/q, ii/r, iii/p
b. i/r, ii/p, iii/q
c. i/q, ii/p, iii/p
14. Identify the statements that are true regarding socialization.
i. It is the process by which new members learn the values, norms, and
expected behavior patterns of the group they are becoming a part of.
ii. It is an ongoing process.
iii. It is intense in childhood, but people go through the process whenever they
meet new groups that impact their lives.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
15. Which among the following terms can be defined as a force that results in
behavior that would not have occurred in the absence of the force?
a. Group
b. Norm
c. Power
d. Role
38
16. Which of the following is referred to as the power to influence behavior through
punishment or by withholding of rewards?
a. Coercive power
b. Legitimate power
c. Reward power
d. Expert power
17. ‘Their power flows from the feeling of belongingness of an individual or group.’
Which power is being referred here?
a. Legitimate power
b. Expert power
c. Referent power
d. Reward power
18. Which of the following statements is false regarding legitimate power?
a. The power flows from the feeling of belongingness of an individual or group.
b. It stems from a member’s perception that the group has the legitimate right to
influence him/her.
c. Some of these feelings are internalized by parents, teachers, and religious
institutions.
d. An individual accepts some sort of code, and the group he/she belongs to can
assert its power to see that he/she abides by the code.
19. Advertisements which use information power, explain why their product is good
by providing evidence on aspects like price, quality, features, and performance.
Information power is related to __________.
a. legitimate power
b. referent power
c. coercive power
d. expert power
20. Which of the following statements is true regarding the classification of groups
based on the degree of organization?
i. Groups range from unorganized to highly structured groups.
ii. Each major group has subcategories that could generally be categorized into
family, age, gender, education, and religion.
iii. Formal groups have definite structure, while informal groups have relatively
loose structure and lack clearly defined goals and objectives.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
39
2.8 Family
The term ‘family’ has been defined by different authors in different ways. Given
below are some of the well-known definitions of the term.
 A social unit living together.
 Two or more persons related by blood, marriage, or adoption who reside together.
 A household of people related by blood or marriage. More especially, we can
define a family as husband and wife (or one parent), with or without never-
married children, living together in the same dwelling.
A household may contain more than two generations of people. A nuclear family is
made up of husband and wife together with their children, born or adopted. A kinship
group is an extension of the parent-child relationship through three or more
generations, including grandparents, grandchildren, cousins, uncles, and aunts. Sib is a
group of individuals unilaterally descended from a single (real or postulated) common
ancestor. It is sometimes called a “consanguineous group”.
2.8.1 Functions of Family

A family has the responsibility to ensure the economic well being of its members, to
provide emotional support, to establish suitable family lifestyles, and to ensure the
socialization of members. These four functions are of relevance to business.
Economic Well-being
In an affluent country, family is no longer formed primarily for economic security.
Giving some kind of financial support to the members is a basic family function. In
the last few decades, division of responsibilities in the family for ensuring economic
well-being has changed significantly. The traditional roles of husband as provider and
wife as homemaker have changed with an increase in the number of working women.
The role of children has also changed with more number of teenagers working part-
time to earn their pocket money. They rarely support the family financially, while
their education costs are met by the other family members.
Emotional Support
Providing emotional support (love, affection, and intimacy) and encouragement to the
members is an important function of the family that helps the members cope with
personal and social problems. If the family does not provide this kind of support when
it is required, individuals may end up taking the help of professional counselors or
psychologists.
Suitable Family Lifestyle
Establishing a suitable lifestyle is another important function of the family.
Upbringing, experience, and the personal and jointly held goals of the spouses
determine how much importance they give to education, career, reading, and
television viewing; how frequently they dine out; and what recreational and
entertainment activities they choose. Family lifestyle commitments that include the
allocation of time influence the consumption pattern to a great extent.
Socialization of Children and Other Family Members
Socialization of family members, especially young children, is an important family
function. This process involves teaching children the basic values and modes of
behavior that are consistent with the prevailing culture. These usually include moral
and religious principles, interpersonal skills, dress and grooming standards,
appropriate manners and speech, and the selection of suitable educational and
occupational goals.
40
Socialization skills can be imparted. Children are socialized directly through

instructions, and indirectly through observing the behavior of their parents and other
siblings. Marketers usually target parents looking for assistance in the task of
socializing pre-adolescent and post-adolescent children. Socialization of young
children is important because it provides a foundation for their behavior in the future.
Consumer socialization of children
Consumer socialization refers to the process by which an individual acquires the skills
necessary to function in the marketplace as a consumer. It has two different
components -- socialization directly related to consumption, and socialization
indirectly related to consumption. An example of socialization directly related to
consumption is the acquisition of skills and knowledge related to budgeting, pricing,
and brand attitudes. An example of socialization indirectly related to consumption is
the motivation that spurs a young man to purchase his first razor. The indirect
component of consumer socialization is of great interest to marketers as it helps them
to understand why people buy specific products.
Consumer socialization of children is a process by which children acquire the skills,
knowledge, and attitudes necessary to function in the marketplace as consumers.
Studies have shown that children develop consumption skills by observing their
parents who function as role models. Children and young adults learn the rational
aspects of consumption from their parents while the mass media teaches them to give
social meaning to products; schools teach the importance of economic wisdom and
finally peers exercise varying social pressures Children get opportunities to learn in-
store shopping skills through shared shopping experiences. Working mothers usually
opt for ‘coshopping’ with their children. Coshopping is a means of spending time with
one’s children, and accomplishing an important task at the same time.
2.8.2 Family Life Cycle

The concept of the Family Life Cycle (FLC) facilitates the classification of family
units into distinct segments. FLC analysis helps marketers to segment families in
terms of a series of stages spanning the life course of a family unit. FLC studies
demographic variables such as marital status, the size of family, the age of family
members, the employment status of the members, and the disposable incomes of the
members. The family-life-cycle concept is broadly categorized into two sections. The
first section studies the traditional family-life-cycle. As the first failed to analyze
important family living arrangement, the second emerged to focus on alternative
stages, including the non-traditional family.
Traditional Nuclear Family Life Cycle
The traditional family life cycle has been divided into the following five different
segments on the basis of various stages in the family.
i. Bachelorhood: The major task during this period is to disconnect and reconnect
with one’s family on a different level while simultaneously establishing oneself
as a person. During this stage, individuals strike out on their own taking full
responsibility for their actions and choices. Meeting, dating, and mating are
prominent concerns during this period.
ii. Honeymooners: During this stage, newly married couples learn to adjust, adopt,
or share space, meals, work, leisure, and other activities. This process takes time,
energy, good will, and the ability to compromise. During this stage, couples opt
for a pleasure seeking lifestyle.
41
iii. Parenthood: Parenthood can be divided into two distinct parts. They are:
 Families with young children: When a newborn enters a family, the family
becomes temporarily unbalanced. Couples have to adjust the time they spend
working outside the house, socializing with friends, and engaging in
recreational activities. They also have to decide between activities, and
between themselves who will take the responsibility of the child. A
rebalancing and renegotiation occurs between husband and wife concerning
their investment of energy, time, and focus. Couples at this stage are the best
targets for companies that serve the baby market.
 Families with adolescents: Couples who take care of adolescents must take
care of themselves, the relationships, their teenagers, and often their aging
parents. This time can be turbulent if parents have difficulty setting limits
and defining relationships. This stress is usually marked by increased number
of arguments and disagreements between parents, and difference in terms due
to an inconsistency between what the parents want for their children and
what the children want for themselves.
iv. Post-parenthood (an older married couple with no children living at home):
As children leave home for college, careers, or marriage, parents experience an
ideal time to rediscover each other and have fun together. Many women are likely
to be attending to their own interests and thankful for the freedom to pursue them
at last. For those women who have primarily defined themselves as mothers and
invested heavily in their children, this time can be marked by sadness and
depression.
v. Dissolution: Couples in this stage are either in the final years of employment or
in retirement. Finances are the major concern for this population. Health and loss
of spouse are major concerns.
Modern Family Life Cycle
In the last few decades, the structure of families has changed. They have become
smaller in size. People have started postponing their marriages and divorce rates have
risen. So, it has become necessary to include divorced single parents, and middle-aged
married couples without children in the family lifecycle. The various stages in this
modern cycle are given in below.
 Bachelor I: Age of head is between 18 and 34; single (never married, divorced,
separated, or widowed); no dependent children
 Young Couple: Female head is aged between 18 and 34; couple (married or
unmarried); no children
 Full Nest I: Female head is aged between 18 and 34; couple (married or
unmarried); youngest child is under 6
 Full Nest II: Female head is aged between 18 and 34; couple (married or
unmarried); youngest child is 6 or over
 Single Parent I: Age of head is between 18 and 34; single (never married,
divorced, separated, or widowed); youngest child is under 6.
 Single Parent II: Age of head is between 18 and 34; single (never married,
divorced, separated, and widowed); youngest child is 6 or over.
 Bachelor II: Age of head is between 35 and 64; single (never married, divorced,
separated, or widowed); no dependent children.
42
 Childless Couple: Female head is aged between 35 and 64; couple (married or
unmarried); no dependent children.
 Delayed Full Nest: Female head is aged between 35 and 64; couple (married or
unmarried); youngest child is under 6.
 Full Nest III: Female head is aged between 35 and 64; couple (married and
unmarried); youngest child is 6 or over.
 Single Parent III: Age of head is between 35 and 64; youngest child is 6 or over.
 Bachelor III: Age of head is 65 or over; single (never married, divorced,
separated, or widowed); no dependent children.
 Older Couple (Empty Nest): Female head is aged 65 or over; couple (married or
unmarried); no dependent children.
Activity: Anvitha is a 32 year old woman working with Nike as a quality control
manager. She has two kids -- one aged 8 and the other aged 6. She is the sole earner
in the family. Anvitha belongs to which stage in the modern family life cycle?
Name the other stages in the life cycle. Also, compare the modern family life cycle
with the traditional one.
Answer:
Check Your Progress-IV

21. Which of the following statements are false regarding family?
i. It is a social unit living together.
ii. It is a household of people who are related only by blood, and not by
adoption or marriage.
iii. It contains only two generations of people comprising of father, mother, and
children.
iv. It has to ensure the economic well being of its members by providing
emotional support, establishing suitable family lifestyles, and socializing
members.
a. Only i and ii
b. Only i and iv
c. Only ii and iii
d. Only iii and iv
22. _______ can be defined as an extension of the parent-child relationship through
three or more generations, including grandparents, grandchildren, cousins, uncle,
and aunts.
43
a. Sib
b. Kinship group
c. Nuclear group
d. Post parenthood
23. Which of the following are the functions of a family?

i. Provide emotional support
ii. Ensure economic well-being
iii. Establish suitable lifestyles
iv. Socialize children and other family members
b. Only i, ii, and iv
24. Which of the following statements is not true, in terms of Socialization?
a. It involves teaching children the basic values and modes of behavior that are
consistent with the prevailing culture.
b. These skills cannot be imparted through instructions or observation.
c. It provides a foundation for the behavior of children in the future.
d. It usually includes moral and religious principles, interpersonal skills, dress
and grooming standards, appropriate manners and speech, and the selection
of suitable educational and occupational goals.
25. Which of the statements is true regarding consumer socialization of children?

a. It refers to the process by which an individual acquires the skills necessary to
function in the marketplace as a consumer.
b. An example of socialization indirectly related to consumption is the
acquisition of skills and knowledge related to budgeting, pricing, and brand
attitudes.
c. The direct component of consumer socialization is of great interest to
marketers as it helps them to understand why people buy specific products.
d. All of the above
26. From the following, identify the statement that is not true regarding family life
cycle analysis.
a. It helps marketers to segment families in terms of a series of stages spanning
the life course of a family unit.
b. It does not study aspects like the income, expenditure, or disposable income
of family members.
c. It studies demographic variables such as marital status, the size of family, the
age of family members, and the employment status of the members.
d. It facilitates the classification of family units into distinct segments.
44
27. The traditional family life cycle has been divided into five different segments on
the basis of various stages in the family. All the segments given below are part of
the traditional nuclear family life cycle, except:
a. Bachelorhood
b. Families with adolescents
c. Dissolution
d. Single Parent I
28. Mr. Singh is 57 years old and is about to retire in another 3 years. He stays along
with his wife. His children are married and well-settled. Mr. and Mrs. Singh are
in which stage of the traditional family life cycle?
a. Bachelorhood
b. Dissolution
c. Parenthood
d. Delayed full nest
29. Yogita is a 32 year old mother of two daughters, one aged 9 and the other aged 5.
Her husband, an army officer, died two years back while on duty. Yogita had to
take care of the kids by herself. Considering her husband’s sacrifice to the
country, the Indian army gave her a job at the Army Dental Hospital. Yogita is
going through which stage in the modern family life cycle?
a. Full Nest I
b. Empty Nest
c. Single Parent I
d. Single Parent III
2.9 Summary
 Demographics describe a population in terms of its size, structure, and
distribution.
 Income, lifestyle, education, gender, social class, occupation, and age are
demographic variables.
 Society is composed of a group of people who share institutions which we
classify as political, economic, religious, etc.
 Social class can be defined as the classification of members of a society into a
hierarchy of distinct classes, so that a member of each class has approximately
equal position in society with other members of the same class.
 Social classes are multidimensional, restrictive, homogeneous, and dynamic.
 A group can be defined as two or more individuals who share a set of norms
such that their behaviors are interdependent.
 Groups can be classified based on the dimensions of function, degree of personal
involvement, and degree of organization.
 A family is a social unit living together. It comprises two or more persons related
by blood, marriage, or adoption who reside together.
45
 A family ensures the economic well being of its members, provides emotional
support, establishes suitable family lifestyles, and socializes members.
 The concept of the family life cycle facilitates the classification of family units
into distinct segments. Family life cycle analysis helps marketers to segment
families in terms of a series of stages spanning the life course of a family unit.
2.10 Glossary
 Coercive power (classification of power): The power to influence behavior
through punishment or by withholding rewards.
 Demographics: Description of a population in terms of its size, structure, and
distribution. The demographic variables are income, lifestyle, education, gender,
social class, occupation, and age.
 Distribution (in demographics): Description of the location of individuals in
terms of geographic region and rural, urban, or suburban location.
 Expert power (classification of power): The power that results from the
expertise gained in due course of time, either by an individual or a group.
 Family: A social unit living together. It comprises two or more persons related by
blood, marriage, or adoption who reside together.
 Group: Two or more individuals who share a set of norms values or beliefs and
have certain implicitly defined relationships to one another such that their
behaviors are interdependent.
 Legitimate power (classification of power): The power that stems from a
member’s perception that the group has the legitimate right to influence him/her.
 Lifestyle: The pattern of living expressed by an individual through his/her
activities, interests, and opinions.
 Market segmentation: Dividing the market into distinct subset of consumers
with homogeneous needs or characteristics and selecting one or more segments to
target them.
 Norms: The rules and standards of conduct set by a group. Group members are
expected to abide by these norms.
 Power: A force that results in behavior that would not have occurred in the
absence of the force. It also refers to the degree of personal choice a person
enjoys or his/her influence over others.
 Reward power (classification of power): The power based on the perception
one has about another’s ability to reward him/her.
 Role: The dynamic aspect of status, and includes the attitude, values, and
behavior ascribed by society to persons having a particular status.
 Size (in demographics): Number of individuals in a population.
 Social class: A hierarchical division of a society into relatively distinct and
lifestyles.
 Social class: The classification of members of a society into a hierarchy of
distinct classes, so that a member of each class has approximately equal position
in society with other members of the same class.
 Socialization: A process by which new members learn the values, norms, and
expected behavior patterns of the group they are becoming a part of.
46
 Society: A group of people who share institutions which we classify as political,

economic, religious, etc. People identify a particular society by determining what
identifies themselves as members and generally by others as members.
 Status: The achieved or recognized position of an individual in a group. It is
one’s rank in the social system, as perceived by the other members of the society.
 Structure (in demographics): Description of the population in terms of age,
income, education, and occupation among others.

1. ‘An understanding of the demographic environment is important for a business as
it involves people for whose consumption goods and services are produced.’
Explain this statement.
2. Demographic variables are used by marketers to segment a market. What are
these variables? Describe in detail.
3. Though, people may be created equal, society gives different status to different
people. Some people have a high status in society, while others are given a lower
status. What is a social class? Explain its characteristics.
4. In order to understand the concept of group, one has to be aware of the concepts
of status, norms, role, socialization, and power. Explain the concept of group in
this regard.
5. Describe the following in detail.
 Society
 Classification of groups
 Family and its functions

1. Namita Gopal, “Business Environment,” Tata McGraw Hill, Second Edition, 2010
2. The International Business Environment: Text And Cases; Sundaram, Anant K.,
Black, J. Stewart; Paper Back PHI learning
3. Francis Cherunilam, “Global Economy and Business Environment,” Himalaya
4. V K Puri, S K Misra and & “Economic Environment of Business,” Himalaya

1. (c) Distribution of the population describes the location of individuals in
terms of geographic region and rural, urban, or suburban location.
Demographics describe a population in terms of its size, structure, and distribution.
Size means the number of individuals in a population; structure describes the
population in terms of age, income, education, and occupation among others; and
distribution of the population describes the location of individuals in terms of
geographic region and rural, urban, or suburban location.
47

All the statements are true regarding the study of demographics in the
environment. Demographics influence consumption behaviors directly and
indirectly by influencing other attributes of individuals such as their personal
values and decision styles (which in turn influence consumption).
3. (b) Market segmentation
Market segmentation aims at dividing the market into distinct subset of
consumers with homogeneous needs or characteristics and selecting one or more
segments to target them. Demographic variables like income, lifestyle, education,
gender, social class, occupation, and age have been traditionally used by
marketers to segment the market.
4. (a) Social class
A social class is a hierarchical division of a society into relatively distinct and
lifestyles. An individual’s education, occupation, ownership of property, income
level, and heritage (racial/ethnic background, parents’ status) influence his/her
social standing.
5. (c) Only ii and iii
Society is composed of a group of people who share institutions which we
classify as political, economic, religious, etc. Typically, it has territorial
boundaries, but these may not be precise. Members belonging to a society must
coordinate their actions with each other. No individual can do ‘his/her own thing’
with no concern for others.
6. (b) Social classes are heterogeneous.
All the statements are true except statement (b). Social classes are
multidimensional, homogeneous, and restrictive. People within a social class are
homogeneous as they have similar interests, attitudes, and purchasing behavior
patterns. They are exposed to similar media, and buy similar products and
services. This homogeneity helps marketers in segmenting the market effectively.
7. (a) Open and closed system
The social stratification system can be divided into open and closed system. In an
open system, people have the opportunity to move vertically in the society, i.e.,
they can move from a lower status to a higher one or vice-versa. In a closed
system, the status of a person is determined by their birth. That is, status is
inherited and social mobility is restricted.
8. (b) Open system
The social stratification system can be divided into open and closed system. In an
open system, people have the opportunity to move vertically in the society, i.e.,
they can move from a lower status to a higher one or vice-versa. In a closed
system, the status of a person is determined by their birth. That is, status is
inherited and social mobility is restricted.
9. (a) Group
A group can be defined as two or more individuals who share a set of norms
such that their behaviors are interdependent. It comprises two or more people
who interact to accomplish either individual or mutual goals.
48
10. (b) Status

Status is the achieved or recognized position of an individual in a group. It is
one’s rank in the social system, as perceived by the other members of the society.
11. (c) the rules and standards of conduct set by a group.
Norms are the rules and standards of conduct set by a group. Group members are
expected to abide by these norms. In informal groups, norms are generally
unwritten, but are well understood.
12. (a) Only i
The term ‘role’ is usually designated to the behavioral patterns associated with a
particular status. Role is the dynamic aspect of status, and includes the attitude,
values, and behavior ascribed by society to people having a particular status. Power
is the degree of personal choice a person enjoys or his/her influence over others.
13. (b) i/q, ii/r, iii/p
Role parameters represent the range of behavior acceptable within a given role.
Role overload occurs when an individual tries to perform too many roles in the
limited available time, energy, or money. A role stereotype is a shared
visualization of the ideal performer of a given role.
Socialization is a process by which new members learn the values, norms, and
expected behavior patterns of the group they are becoming a part of. Socialization
is an ongoing process. It is intense in childhood, but people go through the
process whenever they meet new groups that impact their lives.
15. (c) Power
Power can be defined as a force that results in behavior that would not have
occurred in the absence of the force. It also refers to the degree of personal choice
a person enjoys or his/her influence over others.
16. (a) Coercive power
Coercive power is the power to influence behavior through punishment or by
withholding rewards. Punishment may not be physical punishment, but subtle
psychological sanction.
17. (c) Referent power
Referent power is based on a person’s, a firm’s, or a product’s attractiveness or
appeal. It flows from the feeling of belongingness of an individual to a group. As a
result of the feeling, one develops a desire to gain closer association with the group.
18. (a) The power flows from the feeling of belongingness of an individual or
group.
Legitimate power stems from a member’s perception that the group has the
legitimate right to influence him/her. Referent power flows from the feeling of
belongingness of an individual to a group.
19. (d) expert power
Expert power results from the expertise gained in due course of time, either by an
individual or a group. Consumers are always influenced by those whom they
perceive having superior knowledge, better skills, and more experience. Many
advertisements rely on expert opinion about the product.
49

Statement ii is false as it is related to the classification of groups based on
function. In this, groups are classified in terms of their functions such as students
and workers. Each major group has subcategories that could generally be
categorized into family, age, gender, education, and religion.
Statements i and iv are true regarding family, while statements ii and iii are false.
In a family, two or more persons related by blood, marriage, or adoption reside
together. A household may contain more than two generations of people.
22. (b) Kinship group
A kinship group is an extension of the parent-child relationship through three or
more generations, including grandparents, grandchildren, cousins, uncles, and
aunts. Sib is a group of individuals unilaterally descended from a single (real or
postulated) common ancestor. A nuclear family is made up of husband and wife
together with their children, born or adopted. Post parenthood is a stage in the
traditional family cycle that comprises an older married couple with no children
living at home.
A family has the responsibility of ensuring the economic well being of its
members by providing emotional support, establishing suitable family lifestyles,
and socializing members.
24. (b) These skills cannot be imparted through instructions or observation.
The process of socialization of family members, especially young children, is an
important family function. It involves teaching children the basic values and
modes of behavior that are consistent with the prevailing culture. Socialization
skills can be imparted. Children are socialized directly through instructions, and
indirectly through observing the behavior of their parents and other siblings.
25. (a) It refers to the process by which an individual acquires the skills
necessary to function in the marketplace as a consumer.
Consumer socialization refers to the process by which an individual acquires the
skills necessary to function in the marketplace as a consumer. It has two different
components -- socialization directly related to consumption, and socialization
indirectly related to consumption. An example of socialization directly related to
consumption is the acquisition of skills and knowledge related to budgeting,
pricing, and brand attitudes. An example of socialization indirectly related to
consumption is the motivation that spurs a young man to purchase his first razor.
The indirect component of consumer socialization is of great interest to marketers
as it helps them to understand why people buy their products.
26. (b) It does not study aspects like the income, expenditure, or disposable
income of family members.
The concept of the Family Life Cycle (FLC) facilitates the classification of family
units into distinct segments. FLC studies demographic variables such as marital
status, the size of family, the age of family members, the employment status of
the members, and the disposable incomes of the members.
50
27. (d) Single Parent I

The traditional family life cycle has been divided into the following five different
segments on the basis of various stages in the family. These are bachelorhood,
honeymooners, parenthood, post parenthood, and dissolution. Single Parent I is a
stage in the modern family life cycle.
28. (b) Dissolution
Mr. and Mrs. Singh are going through dissolution, a stage in the traditional family
life cycle in which the couples are either in the final years of employment or in
retirement. Finances and health are the major concerns in this stage.
29. (c) Single Parent I
Yogita is a single parent. She is 32 years old and her youngest child is 5 years
old. Therefore, she belongs to the Single Parent I stage in the modern family life
cycle.
51
Unit 3
Cultural Environment
Structure
3.1 Introduction
3.2 Objectives
3.3 Understanding Culture
3.4 Essence of Culture
3.5 Elements of Culture
3.6 Manifestation of Culture
3.7 Culture Change
3.8 Cultural Analysis
3.9 Cultural Adaptation
3.10 Cultural Sensitivity of Markets
3.11 Summary
3.12 Glossary
3.1 Introduction
In the previous unit, we discussed the importance of the demographic and the social
environments in understanding the environment where the business operates. In this
unit, we will discuss the cultural environment, an external environment factor.
In today’s business environment, companies do business both within a country and
across national boundaries, interacting with people, institutions, and organizations
nurtured in different cultural environments. Different nations have striking and
significant differences of attitude, belief, ritual, motivation, perception, morality,
truth, superstition and an almost endless list of other cultural characteristics. Values
that are important to one group of people may mean little to another. These cultural
differences deeply affect market behavior. Today’s organizations need to be as
familiar with the cultural traits of the countries they want to do business with.
This unit will help you understand meaning and nature of culture and its essence. We
will then move on to discuss the elements of culture and the manifestation of culture.
We will also discuss aspects like culture change, cultural analysis, and cultural
adaptation. Finally, we will discuss how the markets are sensitive to the various
cultures.
3.2 Objectives
 Define culture, and explain the essence of culture.
 Identify the elements of culture.
52
Unit 3: Cultural Environment
 Recognize the influence of culture on consumption, thinking process, and

communication processes.
 Explain the concepts of culture change, cultural analysis, and cultural adaptation.
 Determine the cultural sensitivity of markets.
3.3 Understanding Culture

E. Adamson Hoebel defined culture as, “the integrated sum total of learned behavioral
traits that are shared by members of a society.” Sir Edward Tylor 1 defined culture as,
“that complex whole which includes knowledge, belief, art, morals, law, customs, and
any other capabilities and habits acquired by individuals as members of society.”
Other definitions of culture are given below.
 Culture is a total pattern of behavior that is consistent and compatible in its
components. It is not a collection of integrated random behaviors, but behaviors
that are internally related and integrated.
 Culture is a learned behavior, it is not biologically transmitted. It depends on
environment, not heredity. Thus it can be called the man-made part of our
environment.
 Culture is behavior that is shared by a group of people, a society. It can be
considered as the distinctive way of life of people.
Culture thus includes all learned behavior and values that are transmitted to an
individual living within a society, through shared experiences.
3.4 Essence of Culture

Different people have varied views on culture. Many regard it as something a country,
a region, or a firm has, or as something that you can see, hear, touch, smell, or taste.
This approach to culture identifies the ceremonies, clothing, historical landmarks, art,
and food as examples of a country’s culture. Irrespective of the various views, it is a
commonly accepted fact that culture develops through recurrent social relationships
that form patterns that are eventually internalized by members of the entire group.
Three vital characteristics are integral to the definition of culture.
1. It is learned: It is acquired by people over time through their membership in a
group that transmits culture from generation to generation.
2. It is interrelated: One part of the culture is deeply connected with another part
such as religion and marriage, and business and social status.
3. It is shared: The tenets of a culture extend to other members of the group.
Culture as a concept encompasses every part of a person’s life. It meets virtually all
human needs, both physical and psychological. Its evolution is not complete. Through
constant embellishment and adaptation, culture continues to evolve, partly in response
to environment needs and partly through the influence of outside forces.
1
(Sir Edward Burnett Tylor was an English anthropologist. Tylor is representative of cultural
evolutionism)
53

1. _________ can be defined as the integrated sum total of learned behavioral traits
that are shared by members of a society.
a. Ethics
b. Culture
c. Business
d. Politics
2. Which of the following statement is not true with relation to culture?
i. It is the integrated sum total of learned behavioral traits that are shared by
members of a society.
ii. It is a collection of integrated random behaviors which are not related in any
way.
iii. It is a learned behavior and it is biologically transmitted.
iv. It can be considered as the distinctive way of life of people, which is
dependent on the environment.
a. Only i and ii
b. Only i and iv
c. Only ii and iii
d. Only iii and iv
3. Which of the following characteristics is not related to culture?
a. It is acquired by people over time through their membership in a group that
transmits culture from generation to generation.
b. Cultures are rarely connected with each other as each culture is very different
from others.
c. Culture can be shared, i.e., the tenets of a culture can extend to other members of
the group.
d. Culture develops through recurrent social relationships that form patterns that are
eventually internalized by members of the entire group.
3.5 Elements of Culture

Culture can be understood by examining the cultural elements within a country. Given
below are four cultural elements that are vital to any country.
3.5.1 Language
Language differentiates human beings from animals. Human beings speak in so many
languages that it becomes a part of the cultural environment of the region to which
they belong. Language is used to communicate and to interpret the environment.
There are two facets of language which have a bearing on business organizations.
These are -- the use of language as communication across, and often within, national
boundaries, and the huge diversity of languages across, and often within, national
boundaries.
54
Most languages do not literally translate from one to another. Added to this, it is
extremely difficult to understand the symbolic and physical aspects of the
communication of different cultures. The language used for communication has two
parts -- the spoken part and the silent part. Communication through vocal sounds or
written symbols forms the spoken part, while silent language refers to the numerous
non-verbal communication mechanisms such as gestures, grimaces, body language,
eye contact, and conversation distance that people use to get a message.
Different gestures convey different meanings across cultures. Thus managers should
familiarize themselves with the various aspects of foreign cultures. Language is often
described as the mirror of a culture. The diversity of languages across the globe poses
a serious problem for multinationals. In countries such as India, there are many
languages. The problem is further aggravated when the meanings and expressions
vary a great deal between countries that share the same language.
3.5.2 Aesthetics
Aesthetics includes aspects like art, drama, color, music, folklore, and architecture
present in a society. This aspect usually captures the ideas and expressions that are
inherent in a culture. For example, colors carry different meanings across the globe.
Aesthetics could mean a lot to a business manager designing a product to suit the local
cultural setup.
3.5.3 Religion
Managers should understand and appreciate buying motives, customs, practices, and
religious beliefs of people. According to Terpstra and David, religion refers to a
community’s set of beliefs that relate to a reality that cannot be verified empirically.
These beliefs usually involve reflection about after-life, but not always. An MNC has
to adapt itself to the local religious taboos and sentiments. The location and design of
stores and office buildings are also influenced by religious beliefs.
3.5.4 Education
Education can be considered as a vehicle to channel culture from one generation to
another. There are two facets of education that impact multinationals -- the level and
quality of education, and the level of education in comparison with other countries. In
most developed countries, education up to a certain age is compulsory. The illiteracy
rate is a powerful tool for assessing the education level of a country. In countries
having a very low to moderate literacy rate, managers have to be careful in matters
pertaining to product labeling, print ads, and survey research. Even simple labels can
be misunderstood in such countries.
Companies are also concerned about the quality of education in the country. They
need to know whether the education level of a country meets their business needs and
whether the labor force within a country possesses the necessary skills to make the
transition from labor-intensive to capital-intensive industries. Even within countries
having similar levels of economic development, there are huge differences in the
blend of skills the labor forces possesses. Shortage in certain fields might force the
companies to employ expatriates or bid against one another for the scarce talent
available.
55
Example: Differing Elements of Culture – US vs. India

Karine Schomer identified five challenges that offshore teams in India face while
working with Americans. These are given below.
i. Management hierarchy and issues like rank and title are given a lot of
importance in India. According to the culture in the US, authority is delegated,
and members in the team are expected to take responsibility and are
accountable for the results. American managers expect that the team members
open up, offer suggestions, and take initiative rather than listen to and do what
they’re told.
ii. Americans strictly adhere to time related commitments such as appointments,
meetings, and deadlines. They schedule everything in such a way that a delay in
a particular thing would have a serious ripple effect on the other things. Indians
are more flexible and follow an open-ended approach. This attitude sometimes
creates tension at the last moment especially regarding project deadlines.
iii. Americans prefer clear, detailed agreements. They are uncomfortable with
vague expressions. Commitments are taken literally and seriously adhered to. If
a person fails to follow them, he/she is considered as unreliable. Indians usually
have a flexible attitude toward agreements. They consider them as guidelines
for acting in the future.
iv. Indians give importance to following the rules and implementing correct
processes. Americans, on the other hand, are highly result-oriented. They don’t
prefer to be told about why certain things (while following the processes) are
not possible or can’t happen.
v. Americans are direct, candid, and not worried about conflict, while
communicating. They have an open and straightforward way of agreeing and
disagreeing. Indians usually try to avoid conflict. It is very difficult for them to
say ‘no’ or disagree effectively as they fear loss of face.
Adapted from Karine Schomer, “Culture Matters: 5 Challenges India Offshore Teams Face in
Working with Americans,” <http://www.sourcingmag.com/content/c060814a.asp>.
Activity: The cultures in India, US, and UK differ in many ways. Take at least two
cultural elements and explain the differences between these three cultures.
Answer:
3.6 Manifestation of Culture

The diffusion theory of innovation refers to an acceptance of a product or idea by
consumers over time, linked to a given social structure and a given system of values
or culture. The diffusion process varies from culture to culture. While some cultures
are very conservative, others demand innovativeness from the employees in every
aspect of their business.
56
Culture not only affects the diffusion process in general, but also exerts a great deal of
influence on the adoption of a product in particular. A product that is suitable for one
culture may be totally inappropriate elsewhere. Therefore, marketers should avoid
using a global standardized campaign to introduce new products in foreign markets.
The innovators, who are usually the opinion leaders, prompt the adoption of a product.
Hence, international marketers should identify them in the given market.
3.6.1 Influence of Culture on Consumption

Culture refers to the set of values, ideas, and attitudes that are accepted by a
homogeneous group of people and transmitted to the next generation. The priority of
needs, consumption patterns, and consumption habits and lifestyles are all dictated by
culture. Culture influences what is to be purchased; it also affects what should not be
purchased. Understanding the influence of culture is very important for conducting
business effectively in various countries of the world. Because of the enduring aspect
of culture, it is easier and profitable for marketers to make products consistent with
the culture in which products are marketed than to try to change the culture to fit the
product.
3.6.2 Influence of Culture on Thinking Process

Culture affects the thinking processes of individuals, groups, and organizations due to
the Self-Reference Criteria (SRC) that binds an individual to his/her cultural
assumptions. It becomes important for the manager/researcher to make objective
evaluations about such assumptions. Managers have to examine the applicability of
these initial assumptions in terms of another culture. This makes them think in
international terms and not in terms of his/her native culture. An awareness of the
influence of culture on thinking processes is valuable as it helps a manager prevent a
transfer of personal cultural norms on a wholesale basis to an overseas market. This
awareness should make a manager more consumer-oriented, and the marketing
strategy developed will more likely reflect true market needs.
3.6.3 Influence of Culture on Communication Processes

Edward T. Hall, an anthropologist made a vital distinction between high and low-
context cultures and how it impacted communication. A high-context culture uses
high-context communication, i.e., information that is either in the physical context or
internalized in the person, with little being communicated in the explicit words or
message. The context of communication is high as it includes a great deal of
additional information such as message sender’s values, positions, background, and
associations in society. A low context culture employs low-context communication, in
which most information is contained in explicit codes, such as words. Unless global
leaders are aware of the subtle differences, communication misunderstandings might
occur between low- and high-context communicators.
Hall also distinguished between monochronic and polychronic cultures. Some cultures
handle information in a direct, linear fashion and are thus monochronic in nature.
Other cultures are relatively polychronic as people work on several fronts
simultaneously instead of pursuing a single task. The cultural context and the manner
in which information is processed can be combined to describe the communication
process of a particular country.
57

4. Which of the following statements is not true regarding language, as an element

of culture?
a. It is used to communicate and to interpret the environment.
b. It is described as a mirror of culture.
c. Most languages do not literally translate from one to another.
d. The language used in communication has only the spoken part, which involves
communication through vocal sounds and/or written symbols.
5. Which among the following is not a form of communication used in silent
language?
a. Gestures
b. Body language
c. Written symbols
d. Eye contact
6. Which of the following elements of culture usually captures the ideas and
expressions that are inherent in a culture, and includes aspects like art, drama,
color, music, and architecture?
a. Language
b. Religion
c. Education
d. Aesthetics
7. ___________ is an element of culture that refers to a community’s set of beliefs
that relate to a realty that cannot be verified empirically.
a. Language
b. Religion
c. Education
d. Aesthetics
8. Which of the following facets of education (as an element of culture) has a vital
bearing on a multinational business organization?
i. Blending of skills of the labor in the country.
ii. The level and quality of education.
iii. The level of education in comparison with other countries.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
58
9. Which type of culture handles information in a direct, linear fashion, according to

Edward Halls’ theory?
a. Polychronic
b. Monochronic
c. High-context
d. Both (a) and (b)
10. The _________ refers to an acceptance of a product or idea by consumers over
time, linked to a given social structure and a given system of values or culture.
a. self-reference criterion
b. cultural adaptation
c. cross-cultural analysis
d. diffusion theory of innovation
11. Which of the following statements is not a high-context culture?
a. Information used is in the physical context
b. Information contained is mostly in explicit codes, such as words
c. Information used is internalized in the person, with little being
communicated in the explicit words or messages
d. Includes a great deal of additional information such as message sender’s
values, positions, background, and associations in society
3.7 Culture Change

Companies should be aware of culture change. This characteristic of culture brings in
a variety of possibilities. Products and services, which might not have been accepted
at one point of time due to a particular culture, may become acceptable at a later time
due to a change in the culture.
3.7.1 Basics of Cultural Change

Many theories have been propounded on the basis on which cultural transition takes
place. One such proposition is based on Maslow’s hierarchy of needs theory. Refer to
figure 3.1 for the Maslow’s Hierarchy of Needs. In this theory, Maslow ranked five
human needs in ascending order. Starting with the lowest, these needs are --
physiological needs (food, water, shelter); safety needs (protection, security, stability);
social need (affection, friendship, acceptance); ego needs (prestige, success, self-
esteem); and finally the need for self-actualization (self-fulfillment). As a country
moves from a subsistence level economy, where the major goal has been the basic
fulfillment of physiological needs, to a stage where basic needs are achievable easily,
new needs take precedence. Thus, when an economy satisfies one level of needs, it
automatically gives rise to new needs, whose satisfaction requires cultural change.
59
Figure 3.1: Maslow’s Hierarchy of Needs
Another proposition, based on Hall’s classification of culture, examines the formal,

informal, and technical aspects of cultural change. According to Hall’s classification,
the formal aspects are the core cultural aspects of an economy. These core aspects are
very deeply rooted and are totally resistant to change. They are considered absolute
rights and wrongs in a society. But informal aspects refer to traits that the members of
the society learn over time. These are also common norms that everyone is supposed to
be aware of. If an informal aspect is not adhered to, an expression of disapproval or
concern is shown. Technical aspects are transmitted in the form of instruction and have
valid reasons underlying them. As there is little emotional bondage to this aspect, it is
easily prone to change. All the three cultural aspects vary from country to country.
3.7.2 MNCs as Agents of Change

In today’s globalized era, MNCs contribute considerably to industrialization in
various economies. As a result, MNCs are effective in rapidly transferring features of
one society to another, perhaps a very different society. They are uniquely capable of
forcing cultural change. MNCs transmit their home country values in two different
ways:
60
Through the vast network of affiliates, which introduces, demonstrates, and

disseminates new behaviors while increasing and shaping the manufacturing sector of
host countries, and
Through the business services structure, including advertising and business education.
Activity: According to the Maslow’s hierarchy of needs theory, suggest the

appropriate level for the following needs.
 At the New Year’s party, Jonathan drove in a brand new hybrid car, imported from
the US.
 Having gained enough experience working in the cities, Vaishnavi, a doctor, now
wants to work in the villages to help the people over there.
 As soon as he shifted to a new house, Karthik joined the local sports and cultural
clubs.
Answer:
3.8 Culture Analysis

In order to understand the cultural environment in the international business scenario,
it is vital to analyze the various cultural setups in different countries. Cultural analysis
can be based upon any of these three approaches.
 Ethnocentrism approach: Companies following this approach adopt a strategy
which is more appropriate to the domestic market. They assume that what is good
at home would also work the same way in foreign markets.
 Assimilation approach: This approach is similar to the ethnocentrism approach.
Most companies consider that the US market is a cultural melting pot. They
assume that the cultural traits demonstrated in the US market should work
everywhere in the world. They believe that if the product or the service clicks in
the US market, the same will click in any other part of the world.
 Primacy of host country approach: Companies following this approach
consider the market composition and base decisions on the cultural traits of the
host country. This approach is based on the assumption that the home country’s
cultural traits are inappropriate for successful operation in markets outside the
home country.
The Hall’s map of culture teaches us how to understand the different aspects of
foreign culture.
3.8.1 Hall’s Map of Culture

Hall has devised a two-dimensional matrix containing different human activities,
which he calls primary message systems. Ten activities fall under this category. These
are --
61
 Interaction: Interaction with the environment through various modes like speech
and writing.
 Association: Structure and organization of the society and its various components
 Subsistence: Activities through which the society satisfies the basic needs of
people such as food and water, and the attitude toward such needs.
 Bisexuality: Differences between the roles and functions of men and women.
 Territoriality: Ownership, use, and protection of land territory.
 Temporality: Division and allocation of time and its use for various activities.
 Learning: Pattern of transmitting knowledge.
 Play: Process of enjoying through relaxation and recreation.
 Defense: Protection against natural and human forces in the environment
 Exploitation: Using skills and technology to turn natural resources to people’s
needs.
According to him, a person interested in the cultural analysis of a particular region
need not necessarily study all the ten aspects, but can study any one of them and grasp
adequate understanding of the culture. Based on Hall’s framework, Robock and
Simmond have analyzed the play activities of a toys and games company. The
analysis showed that perspectives of play vary from one culture to another. Hall’s
framework created 18 categories of questions in this case. Some of the questions are --
How do people interact during play as regards competitiveness, instigation, or
leadership? (Interaction/Play) What games are played involving acting, role playing,
or other aspects of real-world interaction? (Play/Interaction) Who organizes play and
how do the organization patterns differ? (Association/Play), etc.
Thus through Hall’s map of culture, one can understand the overall nature of a culture
by studying one or two primary message systems. Such an analysis works very well in
the context of international business because only a particular element of culture
related to an international business decision needs to be analyzed.

12. Which of the following is a required approach to a company to understand the
market composition and decision making about host country cultural habits?
a. Cross-cultural
b. Assimilation
c. Primacy of host country
d. Self-reference criteria
13. Which of the following philosophies of [ ??] approach does work in domestic
markets and also in foreign markets
a. Assimilation approach
b. Ethnocentrism approach
c. Primacy of host country approach
62
14. Which of the following is the proper sequence of needs in Maslow’s hierarchy
beginning from low to high?
a. Physiological – Social – Security – Esteem – Self-actualization
b. Physiological – Security – Esteem – Social – Self-actualization
c. Physiological – Security – Social – Esteem – Self-actualization
d. Physiological – Social – Esteem – Security – Self-actualization
15. The major goal of a subsistence level economy is to meet the _________ needs of
its people.
a. social
b. esteem
c. security
d. physiological
16. Many theories have been propounded on the basis on which cultural transition
takes place. One of these propositions is based on Edward Hall’s classification of
culture that examines all the following aspects of cultural change, except the
_______ aspects.
a. formal
b. security
c. informal
d. technical
17. Match the following aspects of cultural change proposed by Hall with their
respective description.
Aspect Description
i. Formal p. These are transmitted in the form of instruction and
have valid reasons underlying them.
ii. Informal q. These are absolute rights and wrongs in the society.
iii. Technical r. These are traits that members of the society learn over
time.
a. i/p, ii/q, iii/r

b. i/r, ii/p, iii/q
c. i/q, ii/r, iii/p
d. i/r, ii/q, iii/p
18. Which one of the following statement is not true relating to formal aspects of
cultural changes according to the Hall’s classification of culture?
i. These are traits that the members learn over time.
ii. They are considered absolute rights and wrongs in a society.
iii. These are easily prone to change as there is little emotional bondage.
iv. These core aspects are very deeply rooted and are totally resistant to change.
a. Only i and ii
b. Only i and iii
c. Only ii and iv
d. Only iii and iv
63
19. Match the following human activities defined according to Hall with their
respective descriptions.
Activity Description
i. Subsistence p. Division and allocation of time and its use for
various activities
ii. Exploitation q. Perspectives of activities of individuals and groups
that deal with livelihood and living
iii. Temporality r. Using skills and technology to turn natural
resources to people’s needs.
iv. Defense s. Structure and organization of the society and its
various components
v. Association t. Protection against natural and human forces in the
environment
a. i/r, ii/s, iii/q, iv/p, v/t

b. i/q, ii/r, iii/p, iv/t, v/s
c. i/p, ii/t, iii/r, iv/s, v/q
d. i/t, ii/q, iii/s, iv/r, v/p
3.9 Cultural Adaptation

Cultural adaptation refers to business decision making appropriate to the cultural traits
of a society. It involves adapting one’s decisions to the local cultural sentiments of the
society and ensuring that the native customs, traditions, and taboos offer no
constraints to their implementation.
The concept of cultural adaptation is difficult to practice. One major constraint in the
process is the tendency to use the Self-Reference Criteria (SRC), which means,
whenever people are faced with unique situations, their own values take precedence
for their understanding of the circumstances. Cultural analysis of global markets is
vital, whether a firm is pursuing a business locally or globally. Companies should be
capable of conducting cross-cultural analysis. Such a capability will help companies
position themselves in the best competitive place in the marketplace.
3.9.1 Cross-cultural Analysis

Cross-cultural analysis is the symbolic comparison of similarities and differences in
the material and behavioral aspects of different cultures. It is used by managers to
understand the different market segments within and across national boundaries. It
helps in determining whether a marketing program can be used in more than one
foreign market or must be modified to suit local conditions. This analysis uses
methods and approaches used in social sciences such as anthropology, linguistics, and
sociology, and other standard marketing research techniques like multi-attribute and
psychographic techniques.
3.9.2 Misinterpreting Cross-Cultural Assessments

While conducting cross-cultural assessments, one serious issue confronting business
decisions is cultural bias. Managers should be aware of the influence of their own
culture on the interpretation of given events, behaviors, and information. While our
64
past experiences and the way we interpret them are culturally defined, it is still
possible to be aware of the influences culture has had in our lives, on our behavior,
and on the decisions we make.
3.9.3 Sources of Cultural Misinterpretation

According to Adler, there are three sources of cross-cultural misinterpretation --
subconscious cultural blinders, lack of cultural self-awareness, and projected
similarity and parochialism.
Subconscious Cultural Blinders
These refer to the tendency to subconsciously draw assumptions about events, people,
and behavior. It is important to consider this type of misinterpretation while
developing advertising material, whether visual or verbal, for example.
Lack of Cultural Self-awareness
These refer to the awareness of one’s own cultural characteristics. Usually, we tend to
interpret the actions of others in terms of our own cultural framework.
Misunderstandings can arise if we fail to see how others see us, and lack
understanding as to how our culture influences our behavior and decisions.
Projected Similarity and Parochialism
It refers to our tendency to assume that people from other cultures (or situations in
other cultures) are similar to people belonging to our own culture.
3.9.4 Self-Reference Criteria

Self-Reference Criteria (SRC) is an unconscious tendency to refer to one’s own
cultural values when evaluating situations in other cultural environments. According
to Lee, it is the root cause of most international business problems. In order to remove
errors in judgment or interpretation, a conscious effort has to be made by the
managers. Lee proposed four steps for identifying and correcting SRC.
i. Define the business problem or goal in terms of your own cultural traits, habits, or
norms.
ii. Define the business problem or goal in terms of the foreign cultural traits, habits,
or norms. Make no value judgments.
iii. Isolate the SRC influence in the problem, and examine it carefully to see how it
complicates the problem.
iv. Redefine the problem without the SRC influence, and solve for the optimum
business goal situation.
To use this framework to one’s advantage, one should have an intimate knowledge of
other cultures as well as one’s own culture. This cross-cultural analysis of markets
requires cultural empathy or an ability to understand the inner logical buyer behavior
in other cultures, and an ability to be non-judgmental about the values underlying
buyer behavior in other cultures. The former goal is achievable only as a result of
exposure to other cultures, sensitivity training, and a conscious effort to see the world
as others see it. The latter goal is achievable after a conscious effort is made to
understand one’s own culture and to overcome the natural tendency to make
judgments based on this culture.
65
Example: Cultural Adaptation at Coca-Cola Company

Coca-Cola Company (Coca-Cola) was established in 1892. Since its inception, Coca-
Cola had traveled a long way and today the name ‘Coca-Cola’ is a familiar one in
more than 200 countries around the world. Coca Cola’s customized marketing and
promotional strategies have enabled the company to overcome cultural and language
differences it encountered and to succeed in the global market.
Coca-Cola depended heavily on marketing research to develop products and plan
promotional campaigns that catered to the needs of consumers in the target market.
Though Coca-Cola was a global brand, it approached various markets around the
world in different ways without relying on a standardized strategy. It identified the
regional and cultural differences in various countries and tailored the marketing
strategies accordingly. While developing various promotional strategies for the
new markets, the company took utmost care not to hurt the sentiments and
emotions of local consumers. The differentiated strategy of the company was
reflected in the fact that its products contained different flavors, packaging, prices,
and advertising. Thus, Coca-Cola successfully applied its principle “think locally
and act locally” in its operations.
The company used the ‘Always Coca-Cola’ campaign theme worldwide to restore
the universality of the brand. But at the same time, it analyzed the differences in
culture and preferences of various countries and adapted its ad campaigns for each
specific market. For instance, the ‘Eat Football, Sleep Football, Drink Coca-Cola’
campaign in Great Britain attracted the consumers. This campaign was based on
the British consumers’ strong inclination to the football game, reinforcing the link
between Coca-Cola and football while continuing the brand’s support for the game
and the fans. Another instance of adapting its ad campaigns was its “Mean Joe”
Green TV ad campaign in the US which was introduced in other countries where
the ad contained the same theme but the athletes who acted in the ad were from the
respective countries where the ad campaign was launched.
The regional managers of Coca Cola in various countries were responsible for
adapting the product and other elements of marketing to meet the demands of the
local people. In China, the taste of Coca-Cola was developed and modified to suit
the Chinese palates. The company tried to associate its brand with the traditional
Chinese art by participating in the China International Beverage Festival that took
place in September 1982. The regional managers in different countries were also
responsible for the sales and distribution program of Coke. This program aimed at
reflecting the differences in the tastes and preferences of consumers in various
countries. In Spain, Coke was taken along with wine; whereas in Italy, it was
served with meals. In China, Coke was served at special government occasions.
Adapted from “Case Study – Differentiation Strategies of Coca-Cola,” The ICMR Center for
Management Research, 2005. www.icmrindia.org.
Activity: Chips International is a US-based potato chips making company. The

company was well-known for its good quality, crispy, and flavored chips. In 2005,
the top management of the company decided to foray into India and Japan. The
company entered into these markets in 2007. The company felt that using the same
flavors used in the US would attract the Indian and the Japanese consumers, and
therefore, did not make any changes to the products. What do you call this
approach of cultural analysis by the company? How is it different from the other
approaches of cultural analysis?
Contd…
66
Contd…
Answer:
3.10 Cultural Sensitivity of Markets

Markets can be broadly classified into consumer markets and industrial markets.
Consumer markets can be further classified into durable goods market and non-
durable goods market. Durable goods can be further divided into technological
products and non-technological products.
3.10.1 Industrial Markets

Industrial markets consist of industrial buyers. These buyers are generally interested
in solving problems that are related to reducing costs, increasing production and
administrative efficiency, producing a particular type of product, or achieving a
combination of these goals. As most industrial buyers tend to emphasize economic
goals, cultural and social considerations play a relatively less significant role in a
purchase decision. In terms of a global perspective, there are differences that need to
be considered when selecting the products to be marketed and the marketing program
to be used. Other variables that might come into the picture are – government
regulations, the size and sophistication of the potential buyer’s operations, and the
context within which the product or service is to be used. All these variables have an
impact on the marketing effort of the company.
3.10.2 Consumer Markets

Consumer markets comprise individual buyers who are interested in satisfying a
person’s need or want. These are more susceptible to cultural and social forces than
industrial markets; the purchase of non-durable products such as clothing, food, and
cosmetics is driven by numerous socio-cultural factors. But these factors have little
effect on the purchase of durable goods such as television sets, radios, and small and
large household appliances.
There are exceptions, however, that make the job of an international business manager
more interesting and challenging. The purchase of refrigerators, for example, is
sensitive to both spatial and social factors such as room size and shopping habits.
Europeans tend to live in smaller rooms and hence purchase smaller refrigerators in
contrast to Americans. Not only this, they also shop for food more frequently and in
smaller amounts than most Americans do. Such differences occur due to the social
functions of meetings friends, non-ownership of automobiles, and inadequate parking
facilities. Mexicans, on the other hand, purchase large refrigerators as status symbols
and to meet the needs of their large families. It is important for managers to
understand the influence of social and cultural factors on buyer behavior.
67
Check Your Progress-IV

20. Jiten is a quality control specialist working at AG Motors. He was sent to Japan to
attend a training program at the company’s headquarters. Jiten had never been to
Japan. He had several views about the country and its people. He thought that the
food over there was weird and expensive, there would be Japanese signboards
everywhere, and people did not know how to speak English. What is the tendency
to assume certain things known as?
a. Conscious cultural blinders
b. Subconscious cultural blinders
c. Parochialism
d. Self-reference criteria
21. Which of the following refers to an act of making decisions based on the cultural
traits of the society?
a. Cross-cultural analysis
b. Cultural adaptation
c. Self-reference criteria
22. What is the tendency that assumes that people from other cultures (or situations in
other cultures) are similar to people belonging to our own culture?
a. Parochialism
b. Comparative similarity
c. Maslow’s hierarchy of needs
23. What is the unconscious tendency to refer to one’s own cultural values when
evaluating situation in other cultural environments known as?
a. Parochialism
b. Cultural adaptation
c. Self-reference criteria
d. Subconscious cultural blinders
24. What do you call a systematic comparison of similarities and differences in the
material and behavioral aspects of different cultures?
a. Parochialism
b. Cross-cultural analysis
c. Hall’s map of culture
d. Maslow’s hierarchy of needs
68
25. Which of the following statement is true regarding cross-cultural analysis?

i. It is used by managers to understand the different market segments within
and across national boundaries.
ii. It helps in determining whether the marketing program can be used in more
than one foreign market or must be modified to suit local conditions.
iii. It binds an entity (individuals, groups, and organizations) to its cultural
assumptions, thus affecting the thinking process of the entity.
iv. It gives rise to the tendency to assume that people from other cultures (or
situations in other cultures) are similar to people belonging to one’s own
culture.
a. Only i and ii
b. Only i and iv
d. Only iii and iv
26. Which of the following is not a source of cross-cultural misinterpretation as given
by Adler?
a. Subconscious cultural blinders
b. Lack of cultural self-awareness
c. Projected similarity
d. Needs’ hierarchy
27. Which of the following statements is not true regarding cultural adaptation?
a. It involves business decision making appropriate to the cultural traits of the
society.
b. The use of self-reference criteria helps in the process of cultural adaptation.
c. It is very difficult to practice.
d. It involves adapting one’s decisions to the local cultural sentiments of a
society and ensuring that the native customs, traditions, and taboos offer no
constraints to their implementation.
3.11 Summary
 Culture refers to the set of values, ideas, and attitudes that are accepted by a
homogeneous group of people and transmitted to the next generation.
 Three vital characteristics of culture are -- it is learned, it is interrelated, and it is
shared.
 The elements of culture are language, aesthetics, religion, and education.
 Culture influences consumption, thinking processes, and communication processes.
 Many theories have come up on the basis on which cultural transition takes place.
One theory has used the Maslow’s hierarchy of needs theory as the basis. Another
theory is based on Hall’s classification of culture. MNCs also act as agents of
change.
 Cultural analysis can be based upon any of these three approaches --
ethnocentrism approach, assimilation approach, and primacy of host country
approach.
69
 Cultural adaptation refers to business decision making appropriate to the cultural

traits of a society.
 As most industrial buyers tend to emphasize economic goals, cultural and social
considerations play a relatively less significant role in purchase decisions.
Consumer markets are more susceptible to cultural and social forces than
industrial markets.
3.12 Glossary
 Cross-cultural analysis: It is the symbolic comparison of similarities and
differences in the material and behavioral aspects of different cultures.
 Cultural adaptation: It refers to business decision making appropriate to the
cultural traits of the society.
 Culture: The set of values, ideas, and attitudes that are accepted by a
homogeneous group of people and transmitted to the next generation.
 Diffusion theory of innovation: An acceptance of a product or idea by
consumers over time, linked to a given social structure and a given system of
values or culture.
 Maslow’s Hierarchy of Needs theory: In this theory, Maslow ranked five
human needs in increasing order. Starting with the lowest, these needs are --
physiological needs (food, water, shelter); safety needs (protection, security,
stability); social need (affection, friendship, acceptance); ego needs (prestige,
success, self-esteem); and finally the need for self-actualization (self-fulfillment).
 Monochronic and polychronic cultures: Monochronic cultures handle
information in a direct, linear fashion. People belonging to polychromic cultures
work on several fronts simultaneously instead of pursuing a single task.
 Self-reference Criteria (SRC): An unconscious tendency to refer to ones own
cultural values when evaluating situations in other cultural environments.
 Subconscious cultural blinders (source of cultural misinterpretation): These
refer to the tendency to subconsciously draw assumptions about events, people,
and behavior.

1. Organizations need to be familiar with the cultural traits of the countries they
want to do business with. Define culture. Explain its characteristics.
2. Culture can be understood by examining the cultural elements within the country.
What are these elements?
3. Culture not only affects the diffusion process in general, but also exerts a great
deal of influence on other aspects. Explain this statement.
4. Companies should be aware of culture change as it brings in a variety of
possibilities. What factors contribute to changes in culture?
5. To understand the cultural environment in the international business scenario, it is
vital to analyze the cultural setups in different countries. How can one analyze the
cultures of different countries?
6. Organizations should ensure that their decisions adapt to the cultural sentiments
of the societies in which they are operating. Explain the importance of cross-
cultural analysis. What are the major constraints in the process?
7. Culture affects purchase decisions in the consumer and industrial markets.
Explain this statement.
70
3.14 Suggested Readings/Reference Material [ Needs formatting]

1. Gary Ferraro, “Cultural Dimension of International Business,” Dorling
Kindersley (India) Pvt Ltd, 7th Edition, 2012
2. “Culture and Hall’s Map of Culture” <http://www.it.murdoch.edu.au/
~sudweeks/catac98/pdf/27_lee.pdf>
3. “Cultural Environment” <http://www.fao.org/docrep/W5973E/w5973e07.htm>
4. “Cross-cultural Analysis” <http://www.as.ua.edu/ant/ Faculty/murphy/
crosscut.htm>
5. “Cross-cultural analysis” <http://www.dot-connect.com/
How_to_understand_cross-cultural_analysis.html>
6. “Cultural Issues in International Marketing” http://www.dot-
connect.com/How_to_understand_cross-cultural_analysis.html
7. Ethnocentrism and Cultural Relativism” http://www.boundless.com/ sociology
/textbooks / boundless-sociology-textbook/culture-3/culture-and-society-
29/ethnocentrism-and-cultural-relativism-186-4770/,

1. (b) Culture
E. Adamson Hoebel defined culture as, “the integrated sum total of learned
behavioral traits that are shared by members of a society.”
Culture is not a collection of integrated random behaviors, but behaviors that are
internally related and integrated. It is a learned behavior, and it is not biologically
transmitted. It depends on the environment, and not heredity.
3. (b) Cultures are rarely connected with each other as each culture is very
different from other.
All the statements are true about the characteristics of culture, except (b). Culture
is interrelated. One part of the culture is deeply connected with another part such
as religion and marriage, and business and social status.
4. (d) The language used in communication has only the spoken part, which
involves communication through vocal sounds and/or written symbols.
All the statements are true regarding language, except statement (d). The
languages used for communication has two parts -- the spoken part and the silent
part. Communication through vocal sounds or written symbols forms the spoken
part, while silent language refers to the numerous non-verbal communication
mechanisms such as gestures, grimaces, body language, eye contact, and
conversation distance that people use to get a message.
5. (c) Written symbols
The languages used for communication has two parts -- the spoken part and the
silent part. Communication through vocal sounds or written symbols forms the
spoken part.
71
6. (d) Aesthetics
Aesthetics includes aspects like art, drama, color, music, folklore, and
architecture present in a society. This aspect usually captures the ideas and
expressions that are inherent in a culture.
7. (b) Religion
Language, aesthetics, religion, and education are the elements of a culture.
Terpstra and David defined religion as a community’s set of beliefs that relate to
a reality that cannot be verified empirically.
Education can be considered as a vehicle to channel culture from one generation
to another. There are two facets of education that impact multinationals -- the
level and quality of education, and the level of education in comparison with
other countries.
9. (b) Monochronic
Edward Hall, an anthropologist, identified cultures to be monochronic or
polychromic. Some cultures handle information in a direct, linear fashion and are
thus monochronic in nature. Other cultures are relatively polychronic as people
work on several fronts simultaneously instead of pursuing a single task.
10. (d) Diffusion theory of innovation
The diffusion theory of innovation refers to an acceptance of a product or idea by
consumers over time, linked to a given social structure and a given system of
values or culture. The diffusion process varies from culture to culture. While
some cultures are very conservative, others demand innovativeness from the
employees in every aspect of their business.
11. (b) Information contained is mostly in explicit codes, such as words
A high-context culture uses high-context communication, i.e., information that is
either in the physical context or internalized in the person, with little being
communicated in the explicit words or message. A low context culture employs
low-context communication, in which most information is contained in explicit
codes, such as words.
12. (c) Primacy of host country
Companies following the primacy of host country approach consider the market
composition and base decisions on the cultural traits of the host country. This
approach is based on the assumption that the home country’s cultural traits are
inappropriate for successful operation in markets outside the home country.
13. (b) Ethnocentrism approach
Companies following the ethnocentrism approach adopt a strategy which is more
appropriate to the domestic market. They assume that what is good at home
would also work the same way in foreign markets.
14. (c) Physiological – Security – Social – Esteem – Self-actualization
Maslow in his theory of hierarchy of needs ranked five human needs in increasing
order. Starting with the lowest, these needs are -- physiological needs (food,
water, shelter); safety needs (protection, security, stability); social needs
(affection, friendship, acceptance); ego needs (prestige, success, self-esteem); and
the need for self-actualization (self-fulfillment).
72
15. (d) physiological

A subsistence level economy’s major goal is to fulfill the basic physiological
needs of its people. As it grows by achieving its basic needs, new needs take
precedence.
16. (b) security
The Hall’s classification of culture examines the formal, informal, and technical
aspects of cultural change.
17. (c) i/q, ii/r, iii/p
The formal aspects are the core cultural aspects of an economy. They are
considered absolute right and wrongs in a society. Informal aspects refer to traits
that the members of the society learn over time. These are also common norms
that everyone is supposed to be aware of. Technical aspects are transmitted in the
form of instruction and have valid reasons underlying them. As there is little
emotional bondage to this aspect, it is easily prone to change.
Statements ii and iv are true regarding the formal aspects of cultural change based
on the Hall’s classification of culture. Statements i and iii are false. Statement i
refers to informal aspects, while statement iii refers to technical aspects.
19. (b) i/q, ii/r, iii/p, iv/t, v/s
Hall has devised a two-dimensional matrix containing 10 different human
activities, which he calls primary message systems. The other five activities are --
learning (pattern of transmitting knowledge); play (process of enjoying through
relaxation and recreation); interaction (interaction with the environment through
various modes like speech and writing); bisexuality (differences between the roles
and functions of men and women), and territoriality (ownership, use, and
protection of land territory).
20. (b) Subconscious cultural blinders
Subconscious cultural blinders refer to the tendency to subconsciously draw
assumptions about events, people, and behavior. It is important to consider this
type of misinterpretation while developing advertising material, whether visual or
verbal. In the given situation, Jiten has certain misconceptions about Japan and its
people. These are in reality not true.
21. (b) Cultural adaptation
Cultural adaptation refers to business decision making appropriate to the cultural
traits of the society. It involves adapting one’s decisions to the local cultural
sentiments of the society and to ensure that the native customs, traditions, and
taboos offer no constraints to their implementation.
22. (a) Parochialism
Projected similarity or parochialism refers to the tendency to assume that people
from other cultures (or situations in other cultures) are similar to people
belonging to one’s own culture.
23. (c) Self-reference criteria
Self-Reference Criteria (SRC) refers to an unconscious tendency to refer to one’s
own cultural values when evaluating situations in other cultural environments.
Culture affects the thinking processes of individuals, groups, and organizations
due to the Self-Reference Criteria (SRC) that binds an individual to his/her
cultural assumptions.
73
24. (b) Cross-cultural analysis

Cross-cultural analysis is the symbolic comparison of similarities and differences
in the material and behavioral aspects of different cultures. It is used by managers
to understand the different market segments within and across national
boundaries.
25. (a) Only i and ii
Statements i and ii are true, while statements iii and iv are false. Statement iii
refers to self-reference criteria, while statement iv refers to projected similarity
and parochialism.
26. (d) Needs’ hierarchy
According to Adler, there are three sources of cross-cultural misinterpretation --
subconscious cultural blinders, lack of cultural self-awareness, and projected
similarity and parochialism. The hierarchy of needs theory was proposed by
Maslow. It is one of the theories on the basis of which cultural transition takes
place. One such proposition is based on Maslow’s hierarchy of needs theory.
27. (b) The use of self-reference criteria helps in the process of cultural
adaptation.
All the statements given above are true regarding cultural adaptation, except
statement (b). The concept of cultural adaptation is difficult to practice. One
major constraint in the process is the tendency to use the Self-Reference Criteria
(SRC), which means, whenever people are faced with unique situations, their own
values take precedence for their understanding of the circumstances.
74
Unit 4
Political Environment
Structure
4.1 Introduction
4.2 Objectives
4.3 Types of Government
4.4 Multiplicity of Political Environments
4.5 Factors Contributing to Political Instability
4.6 Political Risk
4.7 Interface of Politics with Business
4.8 Impact of International Political Environment on Domestic Business
4.9 Summary
4.10 Glossary
4.1 Introduction
In the previous unit, we discussed the cultural environment of business. In this unit,
we will cover the political environment of business. The term political environment
includes diverse happenings such as civil difficulties, acts of terrorism against
businesses, and conflicts between countries in a particular region, which may be one-
time occurrences like the war between India and China or perennial problems like the
enmity between Israel and its Arab neighbors.
The political environment forms one of the most important facets of the business
environment for any business today, since business is influenced by the political
happenings within the country and internationally. A significantly rich foreign market
may not warrant entry if the political environment is characterized by instability and
uncertainty. Therefore, today’s organizations rely on a thorough review of the political
environment before committing themselves to a new market in a foreign country. The
political environment of a country does not remain static; political changes and
upheavals may occur at any point of time after an international marketer has made a
commitment and has established his/her business.
Political stability has been found to be one of the most crucial variables that
companies consider when planning overseas ventures. Unstable political activity
subjects foreign businesses to risks such as violence, expropriation, restriction of
operations, and restrictions on repatriation of capital and remittances of profits.
This unit will discuss the types of governments, the multiplicity of political
environment, and the factors contributing to political instability. We will then move
on to discuss political risk and the political risk considerations in emerging markets.
Finally, we will discuss the interface of politics with business, and the impact of the
international political environment on domestic business.
75
4.2 Objectives
 Classify the various types of governments
 Recognize the multiplicity of political environments
 Identify the factors contributing to political instability
 Define political risk
 Assess the political risk considerations in emerging markets
 Explain the interface of politics with business
 Recognize the impact of the international political environment on domestic
business
4.3 Types of Government

Governments are generally classified on the basis of political systems or economic
systems. Refer to Figure 4.1 for the classification of governments.
4.3.1 Political Systems

Knowledge of the different forms of government can help one evaluate political
climates. The different forms of government can be classified as either parliamentary
(open) or absolutist (closed). Parliamentary governments consult citizens from time to
time to learn their opinions and preferences. The policies of such governments reflect
the desires of the majority of members of the society. Absolutist governments include
monarchies and dictatorships, where the ruling regime dictates government policies
without considering the needs or opinions of the citizens. These are found in newly
formed nations or those undergoing some kind of political transition. Such
governments are relatively rare now.
The political systems of different countries do not fall neatly into one of these two
categories. The UK is a good example of a constitutional hereditary monarchy; despite
the monarch, the government is classified as parliamentary. Some monarchies and
dictatorships have parliamentary elections. The former Soviet Union for example was
not classified as parliamentary voting, because the ruling party never allowed an
alternative on the ballot.
Governments can also be classified on the basis of the number of political parties that
are represented in it, as two-party, multiparty, single-party, and one party dominant
systems.
Two-party system: In this, there are typically two strong parties that take turns
controlling the government, though there may be several other parties. The two parties
are generally governed by different philosophies, which results in a change in the
government policy when one party succeeds the other. The US, Japan, and Sri Lanka
have a two-party system of government.
Multiparty system: In this form of government, there are some large parties, but
these are unable to form the government because they fall short of the required
majority. In such cases, the government is formed through coalitions between the
various parties, each one of which wants to protect its own interests. The longevity of
the coalition depends largely on the cooperation of the party partners. A change in a
few votes may bring down the coalition government. If the government does not
survive a vote of no confidence (i.e., does not have the support of the majority of the
representatives), the government is disbanded and a new election is called. India,
Germany, France, and Israel have a multiparty system of government.
76
Unit 4: Political Environment
Single-party system: In this system, only one political party is legally allowed to
form the government. Opposition to the ruling party in any form is banned by law.
Countries like Cuba and Vietnam have single-party systems.
Dominant-party system (or one party dominant system): In this, only one political
party can become the ruling government. This is because the party is so strong that it
becomes dominant within the political structure of the country. The other parties are
allowed to operate freely, but are weak or ineffective to challenge the power of the
dominant party. In Britain, the Conservative party was the dominant party for a period
of 18 years (1979-1997) under the leadership of Margaret Thatcher and John Major.
Countries like Egypt, Malaysia, Singapore, and Zimbabwe have a dominant-party
system of government.
Figure 4.1: Classification of Governments
Source: ICMR.
4.3.2 Economic Systems

This system of classification is concerned with business ownership -- whether
businesses are privately owned, or government owned, or whether there is a
combination of private and government ownership. The economic system can be
further subdivided into three types – communism, socialism, and capitalism. Based on
the government’s control over business activity, the various economic systems can be
placed along a continuum, with communism at one extreme and capitalism at the
other. The transition from communism to capitalism is accompanied by a decrease in
government interference and lower control over the factors of production. No nation
operates under pure communism or pure capitalism. Most countries find it necessary
to make some compromise between the two extremes.
The communist philosophy holds that all resources should be owned and shared by all
people (i.e., not for profit seeking enterprises) for the benefit of society. The degree of
government control that occurs under socialism is somewhat less than under
communism. A socialist government owns and operates the basic, major industries,
but allows private ownership of small businesses. The degree of control exercised by a
socialist government can vary. The philosophy of capitalism provides for a free-
market system that allows business competition and freedom of choice for both
consumers and companies. It is a market-oriented system in which individuals,
motivated by private gains, are allowed to produce goods or services for public
consumption under competitive conditions. The results include diverse products,
product quality, efficiency, and relatively lower product prices.
77
Activity: Identify the types of governments in the following countries both in terms
of the political systems as well as in terms of the economic systems.
a. India
b. People’s Republic of China
c. United States of America
d. United Kingdom
Answer:
Check Your Progress - I

1. The single-party system of government is classified based on ____________ form
of government classification.
a. Political system
b. Economic system
c. Parliamentary system
d. All the above
2. Identify the types of political systems, where only one political party is legally
allowed to form the government, and opposition to the ruling party in any form is
banned by law.
a. Two-party system
b. Multiparty system
c. Single-party system
d. Dominant-party system
3. Which of the following statement is not true regarding the dominant party
political systems?
a. Only one political party can become the ruling government.
b. Opposition to the ruling party in any form by the other parties is banned by
law.
c. The ruling party is very strong that it becomes dominant within the political
structure of the country.
d. There are other parties, which are allowed to operate freely, but are weak or
ineffective to challenge the power of the dominant party.
4. What form of government includes monarchies and dictatorships, where the
ruling regime dictates government policies without considering needs or opinions
of the citizens?
78
a. Single-party
b. Absolutist
c. Communist
d. Capitalist
5. The ___________ government philosophy holds that all resources should be
owned and shared by all people for the benefit of society.
a. Absolutist
b. Capitalist
c. Socialist
d. Communist
6. What form of government consults citizens from time to time for the purpose of
learning their opinions and preference?
a. Capitalist
b. Communist
c. Socialist
d. Parliamentary
7. Which of the following is a socialist form of government?
a. The government form that owns and operates the basic, major industries but
allows private ownership of small business.
b. The degree of government control that occurs under communism is
comparatively less than the same under socialism.
c. The resources are owned and shared by all people (i.e., not for profit seeking
enterprises) for the benefit of society.
d. In this, the individuals, motivated by private gains, are allowed to produce
goods or services for public consumption under competitive conditions.
8. Which government philosophy provides for a free market system that allows
business competition and freedom of choice for both consumers and companies?
a. Parliamentary
b. Communist
c. Absolutist
d. Capitalist
4.4 Multiplicity of Political Environments

Today, businesses have to face a complex political environment, mainly because they
have to cope with the political situation in more than one nation. This complexity has
forced MNCs to consider the political environment from different angles like foreign
politics, domestic politics, and international politics.
4.4.1 Foreign Politics

Foreign politics refers to the politics that are associated with the host country. The
association in this form of politics might range from being favorable and friendly to
being hostile and dangerous. The political and economic circumstances in the host
country will determine the kind of political climate a company may face when doing
business in that country.
79
A government supports or discourages foreign investment, considering the balance of

payments (BOP), economic development, and political realities. The host government
may view imports negatively because they adversely affect the host country’s balance
of payments. This is generally true in the case of import of luxury and nonessential
products, especially when those items can be or are already produced locally. The
government may also favor policies that improve the country’s exports and encourage
investment in industries that stimulate employment. Similarly, foreign ownership of
vital or sensitive businesses may be prohibited considering national interests.
The host country may be for or against foreign firms. To win foreign capital and new
technology, the host country may promise cooperation, and provide various tax and
financial incentives. On the other hand, it may criticize the foreign firms for making
excessive profits and draining the nation of its wealth. Further, it may also restrict the
repatriation of profits to corporate headquarters abroad.
4.4.2 Domestic Politics

Domestic politics refers to the politics that exist in the company’s home country, also
known as the parent or source country. These politics are usually thought as causing
minimal problems. This is not true. Apart from dealing with political problems
overseas, companies should pay close attention to political developments at home.
Labor and political organizations criticize a local company’s international activities by
accusing it of exporting capital and jobs. At times, this opposition is based on moral
principles. The government, instead of providing support, can become a hindrance in
international trade. For instance, it may impose regulations that interfere with the free
flow of trade. This action may be motivated more by political considerations rather
than by sound economic reasoning. Also, when national interests are at stake, a
government may use certain companies as instruments to achieve its political goals.
4.4.3 International Politics

International politics refers to the interaction of the overall political environment
factors of two or more countries. The environment becomes highly complex when the
interest of the company, host country, and the home country do not coincide. And,
sometimes, the problems cannot be solved.
Example: HM’s Problems due to Domestic Politics

In April 1998, Hindustan Motors (HM) announced a Voluntary Retirement Scheme
(VRS) as part of cost-cutting exercise. Again, in November 1998, it offered a Rs.
0.1 million package. Employee unions, which were backed up by Center of Indian
Trade Union (CITU) and the Indian National Trade Union Congress (INTUC)
resisted the scheme. Unions demanded VRS package at par with VRS offered by
the Fiat management at its Kurla, plant.
The political patronage that the employee unions enjoyed worsened the situation. The
unions were pretty sure of the support from the West Bengal State Government, led
by a communist party. With employee protests getting intensified, HM approached
the state government with a proposal to run the plant for only three days in a week, so
that it could save Rs. 0.32 million every week. The company also promised that it
would continue to pay the workforce full wages for an entire week.
The state government rejected this proposal, and this led to more problems for the
company. In January 1999, HM filed a writ petition in the Calcutta High Court,
claiming that its decision was not prompted by industrial relations, but by the
company’s poor financial position.
Contd…
80
Contd…
In a counter move, the state government filed an appeal before the division bench of
the Calcutta High Court, claiming that HM had suppressed facts and figures during
its meeting with them to settle the issue. The division bench directed that the matter
be referred to the Industrial Tribunal. In July 1999, the Industrial Tribunal dismissed
the company’s proposal. HM again filed a writ petition against the Tribunal’s order in
the division bench of Calcutta High Court and the division bench upheld the
Tribunal’s order. In response to the division bench’s order, HM moved the Supreme
Court in July 1999. During all this time, productivity at the plant suffered
considerably, this added to the company’s woes.
The Company is producing Cars and with brand names Winner and Ambassador.
Adapted from “Case Study – Hindustan Motors’ Struggle for Survival,” The IBS Center for
4.5 Factors Contributing to Political Instability

It is vital to identify and evaluate the relevant factors contributing to political
instability in order to assess a company’s potential political environment. The
potential sources of political complications include social unrest, the attitudes of
nationals, and the policies of the host government.
4.5.1 Social Unrest

Social disorder is caused by underlying conditions as economic hardship, internal
discord and revolt, and ideological, religious, racial, and cultural differences. These
cause social unrest, adversely affecting the companies which get involved in the
process.
4.5.2 Attitude of Nationals

The government and the attitudes of the citizens of the host country should be
investigated to assess how hospitable they can be to foreign enterprises and citizens.
Citizens of the host country are often concerned about the intentions of the foreign
enterprises and citizens with regard to exploitation and colonialism. These concerns
are often linked to the foreign government’s actions in the past that may be seen as
being improper. Such inherent hostility will lead to major problems because of their
relative permanence. The governments may change, but citizen’s hostility may remain
the same.
4.5.3 Policies of the Host Government

The host government’s attitude toward foreigners may be short lived. This attitude
may change with time or change in leadership, and this change could be either for
better or worse. Government policy formulation can affect business operations in two
ways -- internally and externally. The effect is internal when the policy regulates the
firm’s operations within the home country. It is external when the policy regulates the
firm’s activities in another country. The external government policy does not affect
those firms doing business only in one country, but such a policy can create complex
problems for firms doing business in countries that are in conflict with each other.
81
Check Your Progress II

9. Identify the factor(s) which can contribute to political instability in a country
where a foreign company is operating.
i. Social unrest
ii. Policies of the host government
iii. Attitudes of the nationals
a. Only i
b. Only i and ii
c. Only ii and iii
d. i, ii, and iii
10. Which of the following statements is true regarding domestic politics?
a. It refers to the politics that exist in the company’s home country.
b. These politics do not cause any trouble to the local companies.
c. Governments of home countries always lend complete support to local
companies.
d. Governments of home countries never use local companies to achieve their
political goals.
11. Which of the following parties are involved or get affected due to international
politics?
a. Company
b. Host country governments
c. Home country governments
d. All of the above
4.6 Political Risk

Political risk refers to any government action that diminishes the value of a firm’s
operations within the political boundaries or influence of that government. It also
includes any action by the government that differentiates between foreign and
domestic firms. Political risk is distinct from terrorism and credit risks arising from
international operations. However, risk that arises due to restrictions on currency
convertibility is classified as political risk.
4.6.1 Elements of Political Risk

Political risk may arise due to one or more of the following elements. Firms should
look for ways to manage their political risk.
Confiscation, Expropriation and Nationalization
These are the most severe government actions against foreign firms. Confiscation
occurs when a government takes ownership of a property without providing
compensation. Expropriation is a similar to confiscation but differs with regard to
compensation. In expropriation, there will be some compensation, though not
82
necessarily adequate. Usually a company whose property is being expropriated agrees

to sell its operations not because it has a choice, but because of some coercion. This
sale is made to the government or a nominee of the government, by order. Under
nationalization, an entire industry within a country is transferred from public to
private ownership, with no discrimination as to foreign or local ownership. When
firms are nationalized, the compensation provided by the government does not
adequately reflect the going-concern value of the firm. After a property has been
confiscated or expropriated, it can either be nationalized or domesticated.
Contract Repudiation and Frustration
Firms engaged in building infrastructure projects (turnkey facilities) and those which
are in joint ventures with a government sometimes enter into disputes with the host
country government, often on matters of payment. The government may repudiate a
contract because of financial reasons; real or imagined non-performance; or failure to
fulfill the contract due to conditions beyond the firm’s control. Most times, payment
will be made up to the point of the dispute.
Unfair Regulatory Environment
Foreign firms are discriminated against in many ways such as discriminatory capital
requirements; differing tax structures; and limitations on access to necessary
materials, components, or distribution systems. An advantage for foreign firms in
recent years has been the right to bid on host government contracts. However this
again can be a reason for discomfort for the firm within the host country.
Restrictions on Currency Convertibility
Currency convertibility has grown with a growth in the world trade. Some governments
believe that convertibility regulation and the rate at which currency is converted are
important economic tools. In order to preserve foreign exchange reserves, some
governments either do not allow foreign firms to repatriate profits to their home
countries or force them to convert currency at rates less than the market rate.
War risk
A foreign firm’s assets are potentially at risk at the advent of war, either civil or against
another country. War refers to hostile contention by means of armed forces carried out
between nations or factions. It includes civil war and armed insurrection. The question
here is, when does civil commotion become civil war? In most countries, unions are
political parties, or at least they are politically active in some way or the other. Though
violent strikes may occur, injuries and damages that result from them are generally not
thought of as political risk. The term insurrection, commonly referred to an uprising,
may also refer to any resistance to the lawful authority of the state.
4.6.2 Analysis of Political or Country Risk

Various methods have evolved to measure, analyze, and predict potential political
risks. Simon provides a good overview of the political risk assessment in terms of
definition, approach, database, and variables. He classified the variables for assessing
political risk along several dimensions -- societal-related, government related, external
or internal, based on the origin of risk, based on whether they are macro or micro, or
based on whether government actions are directed at all foreign firms or only selected
industries in the host country.
The level of economic development and the type of political systems can be used as
additional variables for assessing political risks. According to the level of economic
development, countries may be either industrialized or developing, having either open
or closed political systems. A society is termed as open when people voice their
83
approval or discontent in the form of voting, protests, or boycotts. In closed societies,

the government does not encourage these forms of expression publicly, and the
repression of the people can lead to violent encounters.
Douglas and Craig proposed another model which comprises four distinct, vital
dimensions for the assessment of political risk. These dimensions could be objectively
measured, and had some indicators or variables associated with each of them. They
are domestic stability (riots, purges, assassinations); foreign conflict (diplomatic
expulsions, military violence); political climate (size of the country’s communist
party, number of socialist seats in the legislature); and economic climate (gross
national product, inflation, external debt levels, and frustration levels).
Small and medium-sized firms might not be in a position to do a country-risk analysis
due to factors such as cost, and lack of expertise and resources required. However,
there are ways to do so. One way is to interview people who have some knowledge or
experience with the countries of interest including business persons, bankers, and
government officials. Another alternative is to subscribe to reports prepared by an
organization that has studied the country’s risks. However, this form of risk analysis is
not entirely reliable.
Another relatively simple method for evaluating political risk is based on the LIBOR
(London Interbank Offer Rate). The LIBOR rate is the interest rate charged between
banks and is relatively risk free. Non-bank borrowers have to pay a premium over
LIBOR, where the premium (i.e., the spread between the loan rate and LIBOR)
indicates the extent of risk involved. A borrower has to pay a high premium, if he/she
is from a country with a high risk of default. Thus, the premium is a good indicator of
risk as it reflects a lender’s assessment of the country in terms of debt levels and
payment records, after adjusting for volume and maturity.
Activity: Delta Limited is a Finland-based furniture manufacturing company, well-

known for its innovatively designed and good quality furniture. The company
forayed into Asia by setting up an outlet in an Asian country in 1999. The
company’s products were unique, which attracted the country’s consumers. By
2003, the company started earning profits. It also expanded its presence by setting
up several outlets in the other provinces of the country. In 2006, the country’s
government ordered the company to sell off its local operations, and quit the
country. The company negotiated with the government several times regarding the
issue, but failed. Ultimately, the company sold off its operations to a local
manufacturer for a very low price. What kind of a political risk brought the
company to this situation?
Answer:
84
Check Your Progress - III

12. Which of the following statements best defines political risk?
a. Official seizure of foreign property by a host country whose intention is to
use the seized property in the public interest.
b. It refers to any government action that diminishes the value of a firm’s
operations with the political boundaries or influence of that government.
c. A process by which controls and restrictions placed on the foreign firms to
gradually reduce the control of the owners.
d. Any resistance to the lawful authority of the state.
13. Which of the following is not an element of political risk?
a. War risk
b. Contract repudiation
c. Fair regulatory environment
d. Restrictions on currency convertibility
14. When government takes ownership of a firm’s property without providing
compensation, it results in__________.
a. Confiscation
b. Expropriation
c. Domestication
d. Cancellation
15. In which of the following processes is an entire industry within a country
transferred from private to public ownership, with no discrimination as to foreign
or local ownership?
a. Nationalization
b. Unforeseen takeover
c. Domestication
d. Expropriation
16. Which of the following is not a feature of an open political system?
a. Protests
b. Voting
c. Boycotts
d. Repression
17. All the statements given below were true regarding LIBOR (London Interbank
Offer Rate), except:
a. It is a simple method for evaluating political risk.
b. It is the interest rate charged between banks.
c. A borrower pays a low premium over the LIBOR, if he/she is from a country
with a high risk of default.
d. The premium in LIBOR is a good indicator of risk as it reflects a lender’s
assessment of the country in terms of debt levels and payment records, after
adjusting for volume and maturity.
85
4.6.3 The Management of Political Risk

There are two important stages in the management of political risk -- identification
and measurement.
Identification
As political risk results from potential governmental action that reduces the firm’s
value, the risk manager should familiarize himself/herself with the host-country’s
government. The study, with respect to the host government, should include its
history, how it came to power, how power was transferred, who are the participants in
the political process (are large groups disenfranchised?), and the organization of the
political structure (what are the powerful ministries or agencies? who are the
influential political leaders?).
A major portion of this analysis is available through a variety of media including the
Internet. The risk manager should be careful about the fact that political analysts can
and do disagree. The risk manager should go in for internal analysis after gathering as
much publicly available information as possible. There are three sources from which
the risk manager should gather information before conducting an internal analysis --
international managers located at headquarters; field managers on assignment in
foreign affiliates; and information specialists assigned to monitor political activity
from the firm’s headquarters.
A major source of concern is the information regarding political subdivisions within
the country, such as the provincial, state, or city governments. These smaller entries
may also offer economic inducements or tax incentives which, if withdrawn, could
have significant financial consequences.
Measurement
Many organizations, private as well as government, offer political risk assessment in
various forms. In developed economies, political polling, market research, and attitude
surveys are used to examine the preferences and feelings of consumers toward
political parties. But developing countries are relatively less open to analysis. In these
countries, information is not only scarce but also confusing as economies undergo
rapid political and economic changes.
Embassies of most countries regularly file reports with their state departments or other
national agencies or ministers. Also, most governments maintain a “Country Desk”
within their state department or other agency or ministry, wherein country-specific
information is available to national firms and citizens.
A company should not only collect information from various sources, but it should
also assess the impact of political risk with respect to a particular company or
industry, as events which matter very little to one company may mean the very
existence to another.
The most difficult task in political risk analysis is predicting the timing of events. It
may be relatively easy to predict that a particular disenfranchised group will attempt
to seize power in the future, but the means and the time of the seizure may not be
known even to the group itself.
4.6.4 Measures to Minimize Political Risk

Political risk cannot be eliminated, but it can be minimized. Given below are some of
the measures that a company can take to discourage a host country from taking control
of its assets.
86
Stimulating the local economy

This is a defensive investment strategy in which a company links its business
activities to the host country’s national economic interests. There are a number of
different ways in which the local economy can be stimulated. One strategy might be
the purchase of local products and raw materials by the company for its production
and operations. By assisting the local firms, the company can develop local allies who
can provide valuable political contacts in time of need.
Sometimes local sourcing is compulsory. Some governments may require products to
contain locally manufactured components because local content improves the
economy in two ways -- it stimulates demand for domestic components and it obviates
the need for a foreign exchange transaction. The company can also assist the host
country by being export-oriented.
Employment of Nationals
Companies try to minimize their political risk by hiring local workers into their
workforce. Automation is not encouraged in some countries (where there is cheap
labor and high unemployment) as it leads to job losses or job elimination. In such
countries, opting for automation would be a serious mistake.
Sharing Ownership
Firms can tackle political risk by sharing ownership with others, especially local
companies. This can be done by converting from a private to a local company, and by
converting from a foreign company to a local one. Another common technique for
sharing ownership is to enter into a joint venture, a loss in control is compensated by
some benefits. Joint ventures in international business not only help in reducing
exposure, but also make it difficult for the host government to takeover without
offending a number of nations all at once. Alternatively, firms can also opt for
domestication. That is, the foreign companies can reduce their holdings in the local
companies if the host government places any such restrictions.
Being Civic Minded
A company, apart from doing business in a foreign country, should strive to be a good
corporate citizen. This can be done by making small investments in civic projects.
This may prove to be costly initially, but can help the company earn goodwill in the
long run. MNCs can help in building schools, hospitals, roads, and water systems as
these projects benefit the host country as well as the company.
Political Neutrality
Companies should primarily focus on economic development. They should keep a low
profile and avoid political disputes among local groups or between countries.
Behind-the-scenes Lobbying
Political risk can be managed in a civilized manner through lobbying. At times,
lobbying quietly behind the scenes could become necessary. Lobbying is not
necessarily carried out in the home country alone; such kind of activity can also be
done in the host country, either by the concerned company or by the government.
However, it should be conducted in such a way that it attracts the least political
clamor.
Observation of Political Mood and Reduction of Exposure
Companies can reduce their exposure to political risk by making right decisions at the
right time. They should always watch for changes in political situation, and keep a
contingency plan ready for when the political situation turns hostile.
87
Check Your Progress - IV

18. Which of the following is a measure used by firms to minimize political risk in
which the company would primarily focus on economic development and avoid
political disputes among local groups or between countries?
a. Sharing ownership
b. Being civic minded
c. Political neutrality
d. Simulation of the local economy
19. Which of the following measures does not help a foreign firm to discourage a
host country from taking control of its assets?
a. By lobbying
b. By sharing ownership
c. By being politically neutral
d. By employing people only from its home country
20. Which of the following is the source of information that the risk managers can
use to conduct an internal analysis?
i. International managers located at the company headquarters
ii. Field managers on assignment in foreign affiliates
iii. Information specialists assigned to monitor political activity from the firm’s
headquarters
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
4.7 Interface of Politics with Business

Though overseas markets may offer substantial opportunities for business, these
opportunities are coupled with risks of intervention by the host governments. Today
nations consist of different groups, each of which seeks to maximize their individual
interests. In countries where foreign investments play a significant role in shaping the
economy, the goals of special interest groups frequently necessitate interference in the
operation of foreign firms. Political intervention can be defined as a decision on the
part of the host country government that may force a change in the operations,
policies, and strategies of a foreign firm. This intervention may range from some sort
of control to complete takeover or annexation of the foreign enterprise. There are
different forms of intervention like expropriation, domestication, exchange control,
import restrictions, market control, tax control, price control, and labor problems.
4.7.1 Expropriation
Eiteman and Storehill defined expropriation as, “official seizure of foreign property
by a host country whose intention is to use the seized property in the public interest.
Expropriation is recognized by international law as the right of sovereign states,
provided the expropriated firms are given prompt compensation, at fair market value,
in convertible currencies.”
88
Other terms used interchangeably with expropriation are nationalization and

socialization. Nationalization refers to a transfer of the entire industry or assets within
that country from private to public ownership, with no discrimination as to foreign or
local ownership. After nationalization, the property is controlled or owned by the
government and the nationals of the host country. Socialization is similar to
nationalization. Here the property that has been taken over or transferred is kept with
the government. That is, private ownership, either foreign or local, is completely
excluded. Nationalization is also referred to as socialization, when used with reference
to socialist or communist programs designed to put an end to private ownership of
property. Expropriation without compensation is called confiscation. Expropriation
patterns might vary according to the industry, geographic region, type of ownership,
technology, degree of vertical integration, asset size, and politico-economic situation.
4.7.2 Domestication
Domestication is a process by which controls and restrictions placed on the foreign
firms gradually reduce the control of the owners. Domestication may lead ultimately
to expropriation. This process offers a compromise to both parties. That is, the
multinational company continues to operate in the country, while the host government
is able to maintain control on the foreign firms through different restrictions and
regulations.
Domestication includes gradual transfer of ownership to nationals; promotion of a
large number of nationals to higher levels of management; greater decision-making
power accorded to nationals; more products produced locally rather than imported for
assembly; and specific export regulations designed to dictate participation in world
markets.
4.7.3 Other forms of intervention

Apart from expropriations and domestication, there are other means of government
intervention in foreign enterprises.
Exchange Control
Foreign exchange regulations are imposed by countries facing difficulties regarding
their balance of payments. These exchange control regulations are intended to
encourage domestic industry. As a result of exchange control, foreign businesses --
cannot return profit and capital to the parent company from the host country at will,
and cannot freely import raw materials, spare parts, and machinery for operating
purposes.
The exchange control regulations in most developing countries are meant to protect
and regulate their hard currency balances. This in turn can lead to restrictions on the
import of some consumer goods (for example, cars, appliances, clothing, perfumes).
Not only the developing countries, but even the developed countries sometimes resort
to exchange control.
Import Restrictions
Import restrictions are usually imposed to support the domestic industry. Generally
governments impose import restrictions for an entire industry, and not a particular
company. When a country wants to encourage domestic industry as a matter of
industrial policy, import restrictions are adopted even if it is realized that the local
product will be inferior, at least initially. From the point of view of the government,
import restrictions may be reasonable; but they jeopardize the function of foreign
business.
89
Market Control
Governments of certain countries impose restrictions on foreign firms to prevent them
from competing in certain specified markets.
Tax Control
Government may impose certain excessive and unconventional taxes on foreign firms
for the following reasons --
 An unconventional tax burden on foreign firms indicates that they are not wanted
there any longer.
 When a country is in a dire need of revenue inflows, it is quite possible that
foreign firms will become the target of attack, as it is more economical,
convenient, and politically prudent to do so.
 If the government comes to know that the foreign firm has abused differences in
international taxation to deprive the host country of its due revenues, retaliatory
taxes can be imposed.
Price Control
Price control is usually taken up in public interest when the country faces with
economic difficulties. Many countries have resorted to price controls to improve their
economies. For example, a government might set an official price on essential
products such as drugs, heating oil, sugar, and cereals. When applied randomly, price
control brings its own set of problems. It also hampers the working of the foreign firm
if the firm has been singled out by such regulations that are not based on a sound
economic rationale.
Labor Restrictions
In many countries, labor unions are so strong that they may be able to negotiate terms
with the government to pass very restrictive laws that support labor at a heavy cost to
business. Their demands and the laws supporting them can pose major problems for
foreign enterprises. In such situations, the foreign firms may have no choice but to leave.
4.8 Impact of International Political Environment on Domestic Business

A company originating in the US will continue to be known as a US company even
though it derives a major portion of its revenues from operations outside the country.
The relationship between the host country and home country’s government will also
affect the MNC, either directly or indirectly. Questions such as -- Do the governments
agree on issues debated by international agencies? Are there any points of discord
between the host country and the home country? Is there reason to believe that
relations between them will improve or deteriorate in the future? -- should be
addressed before commencing operations in an unknown foreign market.
Example: Nationalization of the Bolivian Oil & Gas Sector

On May 01, 2006 at the annual May Day function, Evo Morales Ayma (Morales),
President of Bolivia, announced the nationalization of the country’s oil and gas sector. As
a symbolic gesture of ownership, Morales sent the military to take over the oil and gas
installations. As per the nationalization decree, all foreign companies were required to
give up their ownership of oil and gas sector. The foreign companies were given six
months’ time to renegotiate their contracts with the government. All the future sales of the
foreign companies would be channeled through the state-owned oil company, YPFB
(Yacimientos Petroliferos Fiscales Bolivianos). The Morales government believed that
nationalization would help in enhancing revenues, promoting greater social welfare,
creation of more jobs to Bolivians, and increasing Bolivian nationalistic pride.
Contd…
90
Contd…
The decision regarding nationalization received criticism from various quarters. The
decision of Morales to send military troops to take control of the oil and gas fields
attracted heavy criticism from foreign investors and industry analysts. It was
estimated that 56 oil and gas fields had been occupied by the military troops with a
copy of the presidential decree and banners stating ‘Nacionalizado: Propiedad de los
Bolivianos’ (Nationalized: Property of the Bolivians) being immediately displayed
outside the fields. The government justified the use of the military troops on the
ground that their presence would deter foreign companies from destroying important
documents necessary for the proposed audit and renegotiation of the contracts.
After the nationalization was announced, the European Union (EU) criticized the move
and said that it might affect the volatile world energy markets. It said that it would study
the nationalization and its effect on those foreign companies that were most likely to be
affected. The nationalization was also expected to lead to a direct confrontation with the
largest investor in the oil and gas sector in Bolivia, Petrobras, which had already
announced a freeze on all its proposed future investments in Bolivia and criticized the
nationalization. The Spanish government also expressed concern over the nationalization
in Bolivia as Respol-YPF was the biggest player in the oil and gas sector after Petrobras.
Nationalization was expected to affect production severely, if foreign companies chose to
leave Bolivia. Foreign companies bring in the latest techniques and technologies in
exploration and production that would help in easy location and quality production of oil
and gas. Bolivia was not self-reliant in those areas. It was only after the privatization of the
sector in 1996, that oil and gas exploration and production grew sharply in Bolivia.
Therefore without private participation, active exploration and production could be
severely affected in Bolivia. Upon their withdrawal, Bolivia would be unable to supply
gas to Brazil and Argentina as per the original contracts. This would result in loss of
revenues and termination of contracts. Further, it was also expected to create a shortage of
gas domestically for Bolivia. According to an estimate, it might necessitate the import of
12,000 barrels of natural gas per day by 2010. Hugo Chavez (Chavez), President of
Venezuela promised to offer technical help for refining and production through
Venezuelan state-owned oil company, Petroleos de Venezuela SA (PDVSA) in the event
of exit of foreign companies. This move was also criticized by analysts as they said that
PDVSA did not possess the required competence to help YPFB and therefore it was
unwise for Bolivia to rely on it.
Adapted from “Case Study – Bolivia Nationalizes the Oil and Gas Sector,” The IBS Center for
Activity: ABP International (ABP) is a UK-based drug manufacturing company.

The company set up a manufacturing facility in Brazil in 2006. It employed the
local people in the manufacturing unit. It also entered into partnership with local
Brazilian manufacturers to fulfill its raw material requirements. In late 2008,
ABP joined with Aliança da Terra, an NGO in Brazil that supports
environmentally responsible land management in the Amazon rainforest, and
Instituto Jacques Walter, an NPO that aims to preserve and recoup Atlantic
Forest in Espirito Santo, Brazil. In what way can these initiatives help the
company in the host country?
Answer:
91
Check Your Progress - V

21. Which of the following process are used by the government in which controls
and restrictions placed on the foreign firms gradually reduce the control of the
owners?
a. Nationalization
b. Socialization
c. Domestication
d. All of the above
22. In which of the following forms of intervention does the government impose
restrictions on foreign firms to prevent them from competing in certain specified
markets?
a. Import restrictions
b. Market control
c. Exchange control
23. ______________ refers to official seizure of foreign property by a host country
whose intention is to use the seized property in public interest, in which the
foreign firms are given some compensation.
a. Confiscation
b. Nationalization
c. Expropriation
d. Socialization
24. Which of the following statements is not true regarding the import restrictions?
a. These are usually imposed to support the domestic industry.
b. Governments generally, impose import restrictions on a particular company
in an industry, and not for the entire industry.
c. These restrictions may restrict the functioning of the foreign businesses.
d. When a country wants to encourage domestic industry as a matter of
industrial policy, import restrictions may be adopted even if it is known that
the local product will be inferior, at least initially.
25. Under which of the following circumstances do governments impose excessive
and unconventional taxes on foreign firms?
i. When the foreign firms are not wanted in a country any longer
ii. When a country is in a dire need of revenue inflows
iii. When the government comes to know that the foreign firm has abused
differences in international taxation to deprive the host country of its due
revenues.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
92
4.9 Summary
 The political environment forms one of the most important facets of the business
environment for any business today, since business is influenced by the political
happenings within a country, and internationally.
 Governments can be classified according to their political systems or their
economic systems. They can also be classified on the basis of the number of
political parties present -- two-party, multiparty, single-party, and dominated one-
party.
 The economic system of classification is concerned with business ownership --
whether businesses are privately owned, or government owned, or whether there
is a combination of private and government ownership. The economic system can
be further subdivided into three types -- communism, socialism, and capitalism.
 MNCs should consider the political environment from different angles -- foreign
politics, domestic politics, and international politics.
 Political risk refers to any government action that diminishes the value of a firm’s
domestic firms.
 The elements of political risk include confiscation, expropriation, and
nationalization; contract repudiation and frustration; unfair regulatory
environment; currency inconvertibility; and war risk.
 Simon, Douglas, and Craig have proposed various methods to measure, analyze,
and predict potential political risks. The LIBOR rate can also used to assess
political risk.
 There are two important stages in the management of political risk --
identification and measurement.
 Foreign companies can take certain measures to discourage a host country from
taking control of the assets. These are -- by stimulating local economy, employing
nationals, sharing ownership, by being civic minded, by being politically neutral,
by lobbying, and by observing political situations.
 Political intervention can be defined as a decision on the part of the host country
government that may force a change in the operations, policies, and strategies of a
foreign firm.
 There are different forms of political intervention like expropriation,
domestication, exchange control, import restrictions, market control, tax control,
price control, and labor problems.
 The relationship between host country and home country’s governments will
affect MNCs, either directly or indirectly. Questions like – whether the
governments agree on issues debated by international agencies and are there any
points of discord between the host country and the home country should be
addressed before commencing operations in a foreign market.
4.10 Glossary
 Absolutist governments (closed) (sub-type of political system): These include
monarchies and dictatorships, where the ruling regime dictates government
policies without considering citizens’ needs or opinions.
93
 Capitalist philosophy (sub-type of economic system): Under this, a free-market

system is provided that allows business competition and freedom of choice for
both consumers and companies.
 Communist philosophy (sub-type of economic system): Under this, all
resources should be owned and shared by all people for the benefit of society
(i.e., not for profit seeking enterprises).
 Confiscation: It occurs when a government takes ownership of a property
without providing compensation. Expropriation without compensation is called
confiscation.
 Domestic politics: Politics that exist in the company’s home country, also known
as the parent or source country.
 Domestication: It is a process by which controls and restrictions placed on the
foreign firms gradually reduce the control of the owners. Domestication may lead
ultimately to expropriation.
 Dominant-party system (sub-type of political system): In this, only one
political party can become the ruling government. This is because the party is so
strong that it becomes dominant within the political structure of the country. The
other parties are allowed to operate freely, but are weak or ineffective to
challenge the power of the dominant party.
 Expropriation: Official seizure of foreign property by a host country whose
intention is to use the seized property in the public interest. In expropriation, there
will be some compensation, though not necessarily adequate.
 Foreign politics: Politics that are associated with the local or host country. The
association in this form of politics might range from being favorable and friendly
to being hostile and dangerous.
 International politics: It refers to the interaction of the overall political
environment factors of two or more countries. The environment becomes highly
complex when the interest of the company, host country, and the home country
do not coincide.
 Multiparty system (sub-type of political system): In this, there are some large
parties, but these are unable to form the government because they fall short of the
required majority. The government is formed through coalitions between the
various parties, each one of which wants to protect its own interests.
 Nationalization: It refers to a transfer of the entire industry within that country
from private to public ownership, with no discrimination as to foreign or local
ownership.
 Parliamentary government (open) (sub-type of political system): These
governments consult citizens from time to time for the purpose of learning of
their opinions and preferences. The policies of such governments reflect the
desires of the majority of members of the society.
 Single-party system (sub-type of political system): In this system, only one
political party is legally allowed to form the government. Opposition to the ruling
party in any form is banned by law.
 Socialist philosophy (sub-type of economic system): Under this, the
government owns and operates the basic, major industries, but allows private
ownership of small businesses.
94
 Socialization: In this, the property that has been taken over or transferred is kept
with the government. That is, private ownership, either foreign or local, is
completely excluded.
 Two-party system (sub-type of political system): In this, there are typically two
strong parties that take turns controlling the government, though there may be
several other parties. The two parties are generally governed by different
philosophies, which results in a change in the government policy when one party
succeeds the other.

1. Knowledge of the different forms of government can help one appraise the
political climate in any country. What are the different types and sub-types of
governments?
2. Businesses have to face a complex political environment as they have to cope
with the political situation of more than one nation. Discuss the impact of the
international political environment on domestic business. How should the
multinationals look at the complexities in the political environment?
3. Various factors contribute to political instability. Explain these factors in detail.
4. Political risk refers to any government action that diminishes the value of a firm’s
operations within the political boundaries or influence of that government. It may
arise due to one or a combination of certain elements.Describe these elements in
detail.
5. Describe the ways in which the political risk can be analyzed. Explain the stages
involved in the management of political risk. What are measures that a foreign
company can take to discourage a host country from taking control of its assets?
6. Overseas markets offer substantial opportunities and at the same time are coupled
with risks of intervention by the host government. Identify the various forms of
political interventions.

1. “Types of Government” http://depts.alverno.edu/ dgp/GEC/ Types%20of% 20
Government.html
2. “Managing Political Risk”<http://internationalinvest.about.com/
od/globalmarkets101 /a/countryresearch.htm >

1. (a) Political system
According to the political system, governments are classified on the basis of the
number of political parties that are represented in it -- two-party, multi-party,
single-party, and dominated one-party. In a single-party system, only one political
party is legally allowed to form the government. Opposition to the ruling party in
any form is banned by law.
2. (c) Single-party system
In a single-party political system, only one political party is legally allowed to
form the government. Opposition to the ruling party in any form is banned by
law. Countries like Cuba and Vietnam have single-party systems.
95
3. (b) Opposition to the ruling party in any form by the other parties is banned
by law.
All statements are true regarding dominant-party system, except statement ‘b’. In
a single-party political system, opposition to the ruling party in any form is
banned by law.
4. (b) Absolutist
Absolutist governments include monarchies and dictatorships, where the ruling
regime dictates government policies without considering needs or opinions of the
citizens. These are found in newly formed nations or those undergoing some kind
of political transition. Such governments are relatively rare now.
5. (d) Communist
The economic system can be further subdivided into three types -- communism,
socialism, and capitalism. The communist philosophy holds that all resources
should be owned and shared by all people (i.e., not for profit seeking enterprises)
for the benefit of society.
6. (d) Parliamentary
Governments can be classified as either parliamentary or absolutist.
Parliamentary governments consult citizens from time to time for the purpose of
learning their opinions and preferences. The policies of such governments reflect
the desires of the majority of members of the society.
7. (a) The government form of government owns and operates the basic, major
industries but allows private ownership of small business.
A socialist government owns and operates the basic, major industries, but allows
private ownership of small businesses. The degree of government control that
occurs under socialism is comparatively less than the same under communism.
8. (d) Capitalist
The economic system can be further subdivided into three types – communism,
socialism, and capitalism. The philosophy of capitalism provides for a free-
market system that allows business competition and freedom of choice for both
consumers and companies. It is a market-oriented system in which individuals,
motivated by private gains, are allowed to produce goods or services for public
consumption under competitive conditions.
To assess a company’s political environment, it is vital to identify and evaluate
the relevant factors contributing to political instability in order to assess a
company’s potential political environment. Potential sources of political
complication include social unrest, the attitudes of nationals, and the policies of
the host government.
10. (a) It refers to the politics that exist in the company’s home country.
Domestic politics refers to the politics that exist in the company’s home country.
These politics are usually thought as causing minimal problems, which is not true.
Labor and political organizations criticize a local company’s international
activities by accusing it of exporting capital and jobs. The government, instead of
providing support, can become a hindrance in international trade. Also, when
national interests are at stake, a government may use certain companies as an
instrument to achieve its political goals.
96
11. (d) All of the above

International politics refers to the interaction of the overall political environment
factors of two or more countries. The environment becomes highly complex when
the interest of the company, host country, and the home country do not coincide.
And, sometimes, the problems cannot be solved.
12. (b) It refers to any government action that diminishes the value of a firm’s
operations with the political boundaries or influence of that government.
domestic firms.
13. (c) Fair regulatory environment
operations within the political boundaries or influence of that government. The
elements of political risk include confiscation, expropriation, and nationalization;
contract repudiation and frustration; unfair regulatory environment; currency
inconvertibility; and war risk.
14. (a) Confiscation
Confiscation is an element of political risk. In this, the host government takes
ownership of a property of the foreign company without providing any
compensation. After a property has been confiscated, it can either be nationalized
or domesticated.
15. (a) Nationalization
Nationalization is one of the elements of political risk. It refers to a transfer of the
entire industry within that country from private to public ownership, with no
discrimination as to foreign or local ownership.
16. (d) Repression
A society is termed as open when people voice their approval or discontent in the
form of voting, protests, and boycotts. In closed societies, the government does
not encourage these forms of expression publicly, and the repression of the
people can lead to violent encounters.
17. (c) A borrower pays a low premium over the LIBOR, if he/she is from a
country with a high risk of default.
All the statements are true regarding LIBOR, except statement (c). LIBOR is the
interest rate charged between banks and is relatively risk free. A borrower has to
pay a high premium, if he/she is from a country with a high risk of default.
18. (c) Political neutrality
Political neutrality is a measure used by firms to minimize political risk. In this,
the foreign company should primarily focus on economic development. They
should keep low profile and avoid political disputes among local groups or
between companies.
19. (d) By employing people only from its home country
In order to discourage a host country from taking control of its assets, a foreign
firm can take up the following measures -- stimulation of the local economy,
employment of nationals, sharing ownership, being civic minded, political
neutrality, behind-the-scenes lobby, and observation of political mood and
reduction of exposure.
97

The risk manager should go in for internal analysis after gathering as much
publicly available information as possible. There are three sources from which the
risk manager should gather information before conducting an internal analysis --
international managers located at headquarters; field managers on assignment in
foreign affiliates; and information specialists assigned to monitor political activity
from the firm’s headquarters.
21. (c) Domestication
Domestication is a process by which controls and restrictions placed on the
foreign firms gradually reduce the control of the owners. This process allows the
multinational to continue to operate in the country. Also, the host government is
allowed to maintain control on the foreign firms through various restrictions and
regulations.
22. (b) Market control
Market control is a form of political intervention in which the host government
may force a change in the operations, policies, and strategies of a foreign firm. In
market control, governments of certain countries impose restrictions on foreign
firms to prevent them from competing in certain specified markets.
23. (c) Expropriation
Expropriation is a form of political intervention. Eiteman and Storehill defined
expropriation as, “official seizure of foreign property by a host country whose
intention is to use the seized property in the public interest. Expropriation is
recognized by international law as the right of sovereign states, provided the
expropriated firms are given prompt compensation, at fair market value, in
convertible currencies.”
24. (b) Governments generally, impose import restrictions on a particular
company in an industry, and not for the entire industry.
All the statements are true regarding import restrictions, except statement (b).
Governments impose import restrictions for the entire industry, and not a
particular company.
Government may impose certain excessive and unconventional taxes on foreign
firms for the following reasons -- an unconventional tax burden on foreign firms
indicates that they are not wanted there any longer; when a country is in a dire
need of revenue inflows, it is quite possible that foreign firms will become the
target of attack, as it is more economical, convenient, and politically prudent to
do so; and if the government comes to know that the foreign firm has abused
differences in international taxation to deprive the host country of its due
revenues, retaliatory taxes can be imposed.
98
Course Components
BLOCK I The Socio-Political Environment of Business

Unit 1 Business Environment: An Introduction
Unit 2 Demographic and Social Environment
Unit 3 Cultural Environment
Unit 4 Political Environment
BLOCK II The Economic and Technological Environment of Business
Unit 5 Economic Environment
Unit 6 Financial Environment
Unit 7 Trade Environment
Unit 8 Technological Environment
BLOCK III The Legal and Ethical Environment of Business
Unit 9 Legal and Regulatory Environment
Unit 10 Tax Environment
Unit 11 Ethical Environment
BLOCK IV Business Contracts
Unit 12 Law of Contracts
Unit 13 Special Contracts
BLOCK V Law Relating to Corporate Business Entities
Unit 14 Formation and Organization of Companies
Unit 15 Company Management and Winding Up
BLOCK VI Tax Laws
Unit 16 Direct Taxes
Unit 17 Indirect Taxes

The Social and Political Environment of Business

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Social and Political Environment of Business

Uploaded by

Copyright:

Available Formats

Business Environment and Law

Ref. No. BELIFHE – 052015 B1

Our E-mail id: [email protected]

Unit 1 discusses the dimensions and components of business environment. These

Unit 2 deals with the demographic environment and social environment of

Unit 3 describes the cultural environment of business, which is also another

Unit 4 gives an overview of the political environment of business, and how it

1.3 Dimensions of the Business Environment

1.4 Importance of the Business Environment

Check Your Progress-I

1. ____________ is constituted by an aggregate of all conditions, events, and

1.5 Components of the Business Environment

1.6 External and Internal Environment

 Threat: An unanticipated condition in the organization’s environment which

Figure 1.1: The Business Environment

Check Your Progress-II

8. __________ refers to a favorable condition in the environment of an organization

1.6.1 External Environment

Example: McDonald’s Strategies in India

Check Your Progress-III

a. Only i, ii, and iii

Activity: Mobi International is a US-based mobile phone supplier. The company is

Check Your Progress IV

Example: Google in China

Check Your Progress – V

iv. Policies related to small-scale industries, sick industries, development of

1.6.2 Internal Environment

 Price-related factors like pricing objective, policies, changes, and protection.

 Factors related to management of funds such as financial accounting and

Check Your Progress-VI

 The individual factors of the external environment are demographic environment,

1.9 Self-Assessment Test

1.10 Suggested Readings/Reference Material

2. Francis Cherunilam, “Global Economy and Business Environment,” Himalaya

1.11 Answers to Check Your Progress Questions

factors and influences operating in the technological environment include sources

27. (b) organizational structure

2.3 Understanding Demographies

2.4 Demographic Classification

Example: Dominos’ Pizza in Japan

Activity: A consumer appliances company was planning to bring out microwaves,

Check Your Progress-I

2.6 Social Class

2.6.1 Characteristics of Social Class

Social Classes are Homogeneous

Check Your Progress-II

2.7.1 Group Properties

2.7.2 Classification of Groups

Activity: Health Foods Incorporated is a company providing health drinks, healthy

Check Your Progress-III

12. Identify the statements which are false regarding ‘role’.

2.8.1 Functions of Family

Socialization skills can be imparted. Children are socialized directly through

2.8.2 Family Life Cycle

Check Your Progress-IV

23. Which of the following are the functions of a family?

25. Which of the statements is true regarding consumer socialization of children?

 Society: A group of people who share institutions which we classify as political,

2.11 Self-Assessment Test

2.12 Suggested Readings/Reference Material

2.13 Answers to Check Your Progress Questions

2. (d) i, ii, iii, and iv

10. (b) Status