Module 1 - Foundation of Indian Business

I. Introduction to the Three Sector Theory

The three-sector theory is an economic theory which divides economies into three sectors of
activity: extraction of raw materials (primary), manufacturing (secondary), and services
(tertiary). It was developed by Allan Fisher, Colin Clark and Jean Fourastié
According to the theory, the main focus of an economy's activity shifts from the primary,
through the secondary and finally to the tertiary sector.
Countries with a low per capita income are in an early state of development; the main part of
their national income is achieved through production in the primary sector. Countries in a
more advanced state of development, with a medium national income, generate their income
mostly in the secondary sector. In highly developed countries with a high income, the tertiary
sector dominates the total output of the economy.
The primary, secondary and tertiary sectors represent various business types and the goods
they produce and sell. It's easiest to think of them as a chain of production, from extracting
the raw materials (primary) through manufacturing (secondary) and finally to servicing the
end consumers (tertiary). Each sector relies on the others to function properly and efficiently
within the economy. Under the three-sector economic theory, every job, in every industry,
falls into one or more of these sector types.

Primary Sector:
The primary sector of the economy can be classified as the "extractive" industry as it involves
producing or extracting raw materials. These can be renewable resources, such as fish, wool
and wind power. Or it can be the use of non-renewable resources, such as oil extraction,
mining for coal.
In traditional economies, the primary sector usually represents the largest sector of
employment. Typically as an economy develops, increased labour productivity will enable
workers to leave the agricultural sector and move to other sectors, such as manufacturing and
the service sector.

Secondary Sector:
The secondary sector or the manufacturing sector of the economy is comprised of
manufacturing industries. The manufacturing industries take raw materials and produce
products. For example, carpenters take wood and make furniture and cabinetry,
manufacturing of food, cosmetics, clothes, home electronics, etc.. Not all manufacturing
companies manufacture a complete product. Semi-manufacturing companies produce parts to
be used in other products that have several stages of production, such as automobiles.
The manufacturing industries use raw material from the primary sector and process it to the
point where the resulting products can be used by other companies for further production or
by consumers as finished goods. Many of the industries associated with the secondary sector
require heavy machinery, consume large quantities of energy and produce a lot of waste
during the production process. Nevertheless, the secondary sector is usually the strongest
sector in transitional economies that are changing from traditional to market economies.

Tertiary Sector:
The tertiary sector describes all industries that provide services to other businesses or final
consumers. It is sometimes also referred to as the service sector or service industries.
Examples of tertiary sector industries include health care, financial services, entertainment
and many others. Unlike the two preceding sectors, the tertiary sector focuses on interactions
between people rather than the production of goods. However, many of the service industries
still rely on goods produced in the primary and secondary sector to offer their services. As
economies develop, more processes can be industrialized and automated. As a result, an
increasing number of industries shift their focus towards the tertiary sector.
Service companies do not provide a physical good like the primary or secondary sectors do,
but they still provide value. For example, banks, insurance and the police are examples of the
service industry. Industries included in the primary or secondary sectors will typically have
employees that provide tertiary services such as advertising, accountants and warehousing
employees. The tertiary sector is usually strongest in advanced market economies.
In the twentieth century, the service sector has grown due to improved labour productivity
and higher disposable income. More disposable income enables more spending on ‘luxury’
service items, such as tourism and restaurants.

In Conclusion:
The sectors all work together to create an economic chain of production. The primary sector
gathers the raw materials, the secondary sectors puts the raw materials to use, and the tertiary
sector sells and supports the activities of the other two. Many companies will have
components of all three sectors, such as a dairy farmer that makes cheese and ice cream and
distributes the products to stores for sale. Other companies may strictly focus on one
particular aspect, such as manufacturing a particular kind of product only. Together these
sectors make up the backbone of the modern economy.

The Indian Scenario of the Manufacturing and Service Sector:

Manufacturing has emerged as one of the high growth sectors in India. Prime Minister of
India, Mr Narendra Modi, launched the ‘Make in India’ program to place India on the world
map as a manufacturing hub and give global recognition to the Indian economy. India is
expected to become the fifth largest manufacturing country in the world by the end of year
2020.
With the help of the Make in India drive, India is on the path of becoming the hub for hi-tech
manufacturing as global giants such as GE, Siemens, HTC, Toshiba, and Boeing have either
set up or are in the process of setting up manufacturing plants in India, attracted by India's
market of more than a billion consumers and increasing purchasing power.
The Government of India has taken several initiatives to promote a healthy environment for
the growth of manufacturing sector in the country. Some of the notable initiatives and
developments are:

• In Union Budget 2018-19, the Government of India reduced the income tax rate to 25
per cent for all companies having a turnover of up to Rs 250 crore.
 • The Government of India has launched a phased manufacturing programme (PMP)
aimed at adding more smartphone components under the Make in India initiative
thereby giving a push to the domestic manufacturing of mobile handsets.
• The Government of India is in talks with stakeholders to further ease foreign direct
investment (FDI) in defence.
India is an attractive hub for foreign investments in the manufacturing sector. Several mobile
phone, luxury and automobile brands, among others, have set up or are looking to establish
their manufacturing bases in the country.

With impetus on developing industrial corridors and smart cities, the government aims to
ensure holistic development of the nation. The corridors would further assist in integrating,
monitoring and developing a conducive environment for the industrial development and will
promote advance practices in manufacturing.

Service Sector:
The services sector is a dominant sector in India’s GDP and has attracted significant foreign
investment flows, contributed significantly to exports as well as provided large-scale
employment. India’s services sector covers a wide variety of activities such as trade, hotel
and restaurants, transport, storage and communication, financing, insurance, real estate,
business services, community, social and personal services, and services associated with
construction.
Some of the developments and major investments by companies in the services sector in the
recent past are as follows:

• The domestic and foreign logistic companies are optimistic about prospects in the
logistics sector in India, and are actively making investments plans to improve
earnings and streamline operations.
• Leisure and business travel and tourism spending are expected to increase.

The Government of India recognises the importance of promoting growth in services sectors
and provides several incentives in wide variety of sectors such as health care, tourism,
education, engineering, communications, transportation, information technology, banking,
finance, management, among others.

II. Micro, Small and Medium Enterprises (MSMEs)

The Micro, Small and Medium Enterprises (MSMEs) are small sized entities, defined in
terms of their size of investment. They are contributing significantly to output, employment,
export, etc; in the economy. They perform a critical role in the economy by providing
employment to a large number of unskilled and semi-skilled people, contributing to exports,
raising manufacturing sector production and extending support to bigger industries by
supplying raw material, basic goods, finished parts and components, etc.

As per the ‘MSME at a Glance’ Report of the Ministry of MSMEs, the sector consists of 36
million units and provides employment to over 80 million persons. The Sector produces more
than 6,000 products contributing to about 8% of GDP besides 45% to the total manufacturing
output and 40% to the exports from the country.

Though the primary responsibility of promotion and development of MSMEs is of the State
Government’s, the centre has passed an Act in 2006 to empower the sector and has also
formed a Ministry of MSMEs. It was the Micro, Small and Medium Enterprises
Development (MSMED) Act which was notified in 2006 that defined the three tiers of micro,
small and medium enterprises and set investment limits.

Classification of MSMEs:

The MSMEs are classified in terms of investment made in plant and machineries if they are
operating in the manufacturing sector and investment in equipment for service sector
companies. These definitions are governed by Micro, Small & Medium Enterprises
Development (MSMED) Act, 2006

Enterprises Micro Small Medium

Manufacturing –
Above Rs 25 Lakh Above Rs 5 Crore and
Investment in Plant & Upto Rs 25 Lakh
and upto Rs 5 Crore upto Rs 10 Crore
Machinery

Services –
Above Rs 10 Lakh Above Rs 2 Crore and
Investment in Upto Rs 10 Lakh
and upto Rs 2 Crore upto Rs 5 Crore
Equipment

Some of the Government Policies/Schemes for MSMEs:

1. Coir Vikas Yojana – It provides for the development of domestic and export
markets, skill development and training, empowerment of women,
employment/entrepreneurship creation and development, enhanced raw
material utilization, trade related services and welfare activities for coir
workers.
The scheme is concentrated in three states: Karnataka, Tamil Nadu and
Kerala. Products such as coir mats, mattresses, furniture, geo-textile related
products etc. are produced under this scheme.

2. Technology Center Systems Programme (TCSP) – Technological support

to MSMEs is provided under this scheme by making available access to state-
of-the-art manufacturing technologies. Construction of 15 new and
upgradation of 18 existing Technology Centers (TCs) through World Bank
assistance has happened over the past few years and more than 1.5 Lakh
persons are being trained every year under this scheme.

3. Aspire (Scheme for promotion of Innovation and Rural

Entrepreneurship) – It aims at automation of agricultural practices and
activities related thereto; Creating value addition to agriculture and forest
produce; Recycling of agricultural pre/post-harvest wastages; Business models
for aggregation and value addition relevant for rural areas; Business models
for creation of local employment in rural areas; and Business models for social
impact.
Problems faced by MSMEs:

1. Access to modern technology

2. Access to markets
3. Access to infrastructure
4. Access to skilled manpower
5. Awareness creation
6. Delay in payments to MSEs

III. Liberalization, Privatization and Globalization

The economic crisis of 1991 did not occur all of a sudden. This crisis occurred due to the
careless macro management of the economy during the 1980s. The gap between the revenue
and expenditure widened and assumed uncontrollable proportions. The Government also did
not exhibit its prudence in the macro management of the economy. Political instability at this
juncture added fuel to the mismanagement. The cumulative effect of all this was that the
international community lost confidence in the Indian economy.

The new government which assumed office at the end of 1991 quickly responded to the
situation to control inflation, to correct the fiscal position and improving the balance of
payments situation. The action was to introduce the New Economic Policy (NEP), which
included three major actions: Liberalization, Privatisation and Globalisation.

Globalization:

In the simplest sense, globalization is the expansion of economic activities across political
boundaries of nations. It refers to the process of deepening economic integration, increasing
economic openness and growing economic interdependence between the countries in the
world economy.

Thus, globalisation means integrating the economy with the rest of the world. It has the
following features:

i. Free flow of goods and services between the nations of the world.
ii. Capital freely moves between the nations as per the needs and agreements well within
the framework of international legislations.
iii. Free flow of information, technology, and movement of people without violating
concerned national laws and ruling international legislations concerning such
economic or business activities.

Liberalization:

The simple meaning of liberalization is to make a thing or person free from the clutches of
another individual. In this context, it is spoken in the sense of Economic Liberalization. This
was a major policy decision taken by the Government of India in 1991 under the New
Economic Policy.

The concept of Economic Liberalization means the virtual withdrawal of the State from
economic activities. In a narrow sense, it means the withdrawal of direct discretionary
controls by the government in favour of market forces.
The policy of economic liberalization initiated in the early years of 1990s aimed at removing
impediments to growth. The basic idea was to change the nature of government control over
the economy to promote competition and efficiency.

The policy of economic liberalization contained the following aspects:

i. Liberalization of imports.
ii. Reduction in controls on foreign investment.
iii. Substantial easing of bureaucratic red-tapism by adopting a liberal license policy.
iv. Privatization of public sector undertakings
v. Liberalization of the financial sector.
vi. Considerable withdrawal of State from the economic activity. The nature and extent
of State intervention has changed.

Privatization:

Privatization means transferring government businesses to private ownership or to outsource

the government service activities to the private people. It is a concept which tells us about the
reduction of the role of the State and assigns a larger role to private enterprises in the
economic growth of the country.

Privatization is a policy decision of the Government of India to deregulate business activities

and allow private sector to operate in a bigger way in manufacturing and trade activities and
having sufficient regulatory mechanisms to control these private enterprises. This is a process
of converting a socialist economy to a market economy.

Privatization in India took place in four stages – Deregulation, Dereservation, Privatization

and Disinvestment.

a) Deregulation – It was initiated by allowing automatic enhancement of licensing

capacities and regularizing excess capacities established by industries in
contravention of the then existing laws.
Accordingly, industrial licensing system was virtually abandoned. Restrictions on
large industrial houses under MRTP were removed. Customs duties were reduced to
increase competition. Quantitative restrictions were removed. Thus, deregulation
process freed private sector from regimentation.

b) DE-reservation – Removing of the names of industries which were in the reserved list
took place as per the provisions of the Industrial Policy. Accordingly, the industries
reserved for the public sector were reduced from 17 to 4. However, defence
equipment production, atomic energy, minerals and railways are retained by the
government for security purposes.

c) Privatization – Public Sector Undertakings which functioned with all protection since
independence could not reach the expectations of the Government of India. All PSUs
were subjected to criticism for their poor financial performance. The financial losses
incurred by PSUs were a heavy burden to the exchequer.
 d) Disinvestment - It refers to the transfer of public enterprise shares to the private
sector. Disinvestment can take place in the following forms:
i. Disinvestment of government held equity
ii. Promotion of joint-ventures for further expansion
iii. Entering into management contracts with private professional groups or
entrepreneurs
iv. Nomination of private individuals on Board of Directors of public sector
enterprises

Impact of Liberalization, Privatization and Globalization on the Indian Business:

1. The Indian economy is opened for foreign direct investment – FDI.

2. Removing constraints and obstacles to the entry of MNCs into the Indian economy by
scrapping off or not strictly enforcing restrictive laws like FERA (Foreign Exchange
Regulation Act). This facilitated MNCs to enter into good number of crucial sectors to
which their entry were previously restricted.

3. Foreign trade policies and foreign investment policies were liberalized. By 1991, the
situation was alarming and hence liberalization of trade policy took place. The
government thought that the competition with foreign countries would improve the
performance of producers within the country in terms of quality.

4. Import liberalization process was accelerated considerably. Quantitative restrictions

on imports were removed. Custom tariffs were reduced to 30% from 300%.

5. In order to smoothen the globalization and privatization, the protection policy adapted
to protect PSUs was removed gradually by adopting the disinvestment policy and
paved way to sell a portion of equity to the private sector. The MRTP Act was
abolished.

6. The silver line is that the GDP growth rate improved substantially.

7. Technology improvement at a faster rate has taken place. It is more visible in

transportation technology which has made much faster delivery of goods across
distant places at lower costs.

8. Information and Communication Technology has developed at an amazing speed and

is more visible in telecommunication, computer and internet divisions.

9. Accepting the privatization policy, private sector was allowed to expand substantially.
Disinvestment policy adapted by the government paved way for a portion of equity to
private people. This means that private people were allowed to participate in the PSU
at a reasonable degree.

10. Far reaching financial sector reforms were introduced in Banking, Capital Markets
and Insurance sectors. This included deregulation of interest rates, stringent
regulations and a supervisory system.
 11. Major significant change that is clearly visible is that the service sector has grown in
leaps and bounds.

In Conclusion:

The impact of liberalization, privatization and globalization has intensified interdependence.

Keen competition between the countries in the world market is existing. LPG has influenced
economic development of the country. The growth is determined by both domestic and
international policies. As far as India is concerned, growth is very positive. It has created
strong incentives that induce productivity, increase efficiency, provide fiscal relief and
encourage wider ownership.

IV. Skill Development

Skill development and vocational training programs are conceptualized, executed and
monitored by various organizations, working closely with the government of India. There are
various plans and schemes that are dedicated to achieve scalable skilling with quality and
higher productivity, particularly in the unorganized or informal sector which accounts for
83% of India’s workforce. Various organizations, missions and schemes are striving towards
sustained livelihoods and gainful employment through skilling, up skilling and reskilling.

Ministry of Skill Development and Entrepreneurship:

The Ministry is responsible for co-ordination of all skill development efforts across the
country, removal of disconnect between demand and supply of skilled manpower, building
the vocational and technical training framework, skill up-gradation, building of new skills,
and innovative thinking not only for existing jobs but also jobs that are to be created.

The Ministry aims to Skill on a large scale with speed and high standards in order to achieve
its vision of a 'Skilled India'.

It is aided in these initiatives by its functional arms – National Skill Development Agency
(NSDA), National Skill Development Corporation (NSDC), National Skill Development
Fund (NSDF) and 33 Sector Skill Councils (SSCs).

The Ministry also intends to work with the existing network of skill development centres,
universities and other alliances in the field. Further, collaborations with relevant Central
Ministries, State governments, international organizations, industry and NGOs have been
initiated for multi-level engagement and more impactful implementation of skill development
efforts.

Schemes Introduced to facilitate Skill Development:

1. Pradhan Mantri Kaushal Vikas Yojana –

Pradhan Mantri Kaushal Vikas Yojana (PMKVY) is the flagship scheme of the Ministry of
Skill Development & Entrepreneurship (MSDE). The objective of this Skill Certification
Scheme is to enable a large number of Indian youth to take up industry-relevant skill training
that will help them in securing a better livelihood. Individuals with prior learning experience
or skills will also be assessed and certified under Recognition of Prior Learning (RPL). Under
this Scheme, Training and Assessment fees are completely paid by the Government.

The scheme imparts training in Soft Skills, Entrepreneurship, Financial and Digital
Literacy. Duration of the training varies per job role, ranging between 150 and 300 hours.
Upon successful completion of their assessment, candidates shall be provided placement
assistance by Training Partners. It is expected to benefit candidates of Indian nationality who
are either school/college dropouts or unemployed.

2. SANKALP (Skills Acquisition and Knowledge Awareness for Livelihood

Promotion) –

The main objectives of the project include strengthening institutional mechanisms at both
national and state levels, building a pool of quality trainers and assessors, creating
convergence among all skill training activities at the state level, establishing robust
monitoring and evaluation system for skill training programs, providing access to skill
training opportunities to the disadvantaged sections and most importantly supplement the
Make in India initiative by catering to the skill requirements in relevant manufacturing
sectors. SANKALP is an outcome oriented project supported by World Bank. The project
will focus on the overall skilling ecosystem covering both Central and State agencies.

The SANKALP program consists of four objectives: (i) Strengthened institutional

mechanisms at National and State levels to guide planning, delivery and monitoring of
market relevant training; (ii) Improved Quality and Market Relevance of Skill Development
programs; (iii) Improved access to and completion of skills training for female trainees and
other disadvantaged groups; and (iv) Expanding skills training through private-public
partnerships.

3. Udaan –

Udaan is a special industry initiative for Jammu & Kashmir in the nature of partnership
between the corporates of India and Ministry of Home Affairs and implemented by National
Skill Development Corporation. The programme aims to provide skills training and enhance
the employability of unemployed youth of J&K. The Scheme covers graduates, post
graduates and three year engineering diploma holders. It has two objectives: (i) To provide an
exposure to the unemployed graduates to the best of Corporate India; (ii) To provide
Corporate India, an exposure to the rich talent pool available in the State.

The Scheme aims to cover 40,000 youth of J&K and Rs. 750 crore has been earmarked for
implementation of the scheme over a period of five years to cover other incidental expenses
such as travel cost, boarding and lodging, stipend and travel and medical insurance cost for
the trainees and administration cost.

4. Standard Training Assessment and Reward (STAR) Scheme –

The scheme is for encouraging skill development among the youth by providing monetary
rewards for successful completion of approved training programmes. The scheme will
motivate the youth to acquire a vocational skill as it provides job-specific technical training.
The scheme envisaged a monetary reward to financially help those who wish to acquire a
new skill or upgrade their skills to a higher level. It was operational between August 2013
and September 2014.

NSDC was the designated implementing agency of the scheme and worked through various
Sector Skill Councils, Training Providers and independent Assessment Agencies.

5. Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) –

NREGA guarantees right to work in rural areas by providing wage employment to unskilled
manual workers. People are ensured of at least 100 days of employment in every household
to a member who is willing to do unskilled work. Employment under NREGA has legal
clauses and the employment schemes are directly implemented by the gram panchayats.

Apart from providing economic security and creating rural assets, NREGA also aims in
protecting the environment, empowering rural women, reducing rural-urban migration and
fostering social equity, among others.

6. National Rural Livelihood Mission – Ajeevika skills –

It is an initiative launched by Ministry of Rural Development, Government of India. Its aim is

to understand the professional aspirations and interests of youth and to also increase their
daily income.

This mission provides young people from poor communities an opportunity to upgrade their
skills and enter the skilled work force of the country. Some key features of the scheme
include, post placement support, food and transport during training and assured placement.
The scheme wishes to bring a change by supporting entrepreneurial skills of the poor by
creating appropriate platforms through dedicated and sensitive support structures.

7. Ministry of Labour and Employment

The Ministry of Labour and Employment is one of the oldest and important Ministries of the
Government of India. The main responsibility of this Ministry is to protect the interests of
workers in general and also the rural and urban poor.

The Government’s attention is also on the promotion of welfare and providing social security
to the labour forces both in organized and unorganized sectors. The ministry majorly focuses
on women and child welfare and has also started schemes to support various initiatives. The
National Career Services deals with providing job matching services to youth in an easy
manner.

8. Director General of Training – Modular Employable Skills

Government of India and the Ministry of Labour together have launched Modular
Employable Skills (MES). Under this scheme, school dropouts and existing workers,
specially, in the unorganized sector are to be trained for employable skills. The scheme has
been in operation since 2007.

The basic objective of the scheme is to provide vocational training to school dropouts, ITI
graduates, rural and unemployed youth to improve their employability. Also, priority is given
 to those above the age of 14 years who have suffered in the form of child labour to enable
them to learn employable skills in order to get gainful employment.

V. ‘Make In India’ Movement

Make in India is the BJP-led NDA government's flagship campaign intended to boost the
domestic manufacturing industry and attract foreign investors to invest into the Indian
economy. The initiative was launched by Prime Minister Narendra Modi in September 2014
as part of a wider set of nation-building initiatives. Devised to transform India into a global
design and manufacturing hub, Make in India was a timely response to a critical situation.

It is seen as a powerful, galvanising call to action to India’s citizens and business leaders, and
an invitation to potential partners and investors around the world. But, Make in India is much
more than an inspiring slogan. It represents a comprehensive and unprecedented overhaul of
out-dated processes and policies.

Make in India needed a different kind of campaign: instead of the typical statistics-laden
newspaper advertisements, this exercise required messaging that was informative, well-
packaged and most importantly, credible. It had to (a) inspire confidence in India’s
capabilities amongst potential partners abroad, the Indian business community and citizens at
large; (b) provide a framework for a vast amount of technical information on 25 industry
sectors; and (c) reach out to a vast local and global audience via social media and constantly
keep them updated about opportunities, reforms, etc.

The obsolete and obstructive frameworks of the past have been dismantled and replaced with
a transparent and user-friendly system that is helping drive investment, foster innovation,
develop skills, protect Intellectual Property and build best-in-class manufacturing
infrastructure. The most striking indicator of progress is the unprecedented opening up of key
sectors – including Railways, Defence, Insurance and Medical Devices – to dramatically
higher levels of Foreign Direct Investment.

It targets 25 sectors of the economy which range from automobile to Information Technology
(IT) & Business Process Management (BPM). The logo of ‘Make in India’ – a lion made of
gear wheels – itself reflects the integral role of manufacturing in government’s vision and
national development.

The initiative is built on four pillars which are as follows:

1. New Processes: The government is introducing several reforms to create possibilities for
getting Foreign Direct Investment (FDI) and foster business partnerships. Some initiatives
have already been undertaken to alleviate the business environment from outdated policies
and regulations. This reform is also aligned with parameters of World Bank's 'Ease of Doing
Business' index to improve India's ranking on it.

2. New Infrastructure: Infrastructure is integral to the growth of any industry. The government
intends to develop industrial corridors and build smart cities with state-of-the-art technology
and high-speed communication. Innovation and research activities are supported by a fast-
paced registration system and improved infrastructure for Intellectual Property Rights
registrations. Along with the development of infrastructure, the training for the skilled
workforce for the sectors is also being addressed.
3. New Sectors: ‘Make in India’ has identified 25 sectors to promote with the detailed
information being shared through an interactive web-portal. The Government has allowed
100% FDI in Railway and removed restrictions in Construction. It has also recently increased
the cap of FDI to 100% in Defence and Pharmaceutical industries.

4. New Mindset: Government in India has always been seen as a regulator and not a facilitator.
This initiative intends to change this by bringing a paradigm shift in the way Government
interacts with various industries. It will focus on acting as a partner in the economic
development of the country alongside the corporate sector.

Benefits and Drawbacks of the initiative:

Advantages of Make in INDIA
• Development of job opportunities
• Increase in GDP
• Development of rural areas
• Availability of Young Minds
• Upgradation of technology

Disadvantages
• Depletion natural resources
• Threat to small entrepreneurs
• International brand
• Government regulation

VI. Social Responsibility and Ethics

Social responsibility refers to such decisions and activities of a business firm which provide
for the welfare of the society as a whole along with the earning of profit from the firm. It also
refers to the ability and willingness of the management to relate its plans and policies to the
social environment so that it is mutually beneficial to the organization and the society.

In simple terms, a business enterprise must interact with and live in the society as a
responsible citizen. As an organ of the society and as an economic institution dependent on
the society for its existence, survival and growth and using the physical and human resources
of the society for its day-to-day functioning, business has a definite responsibility to the
society.

Since every business firm is closely related to the environment, they must give back to the
society by contributing towards the development of roads, providing drinking water, housing
facilities, street lights, maintaining parks and public spaces, providing education, etc;

In the words of H E Bownen, “Social Responsibility is the obligation to pursue those

policies, to make those decisions or to follow those lines of action which are desirable in
terms of objectives and values of our society”

Thus, every enterprise must interact and survive as a responsible citizen in the society and
that the existence, survival and growth of any firm is based on its acceptance by the society
and the business environment.
Need/Factors responsible for Social Responsibility:

1. Concern towards Society – The main objective of a business is profit maximisation

but the business earns its profits with the help of the society. Therefore, the business
owes it back to the society as resources come from the society.

2. Government Intervention – The government aims at protecting the interest of the

people and have therefore passed various legislative norms which regulate activities
of businesses and prevent them from indulging in anti-social business practices.

3. Co-operative Societies – Cooperative societies have come into existence for the
purpose of protecting the interests of consumers from the exploitation of
unscrupulous businessmen. This factor has also influenced businessmen to think in
terms of their responsibility towards the society.

4. Consumerism – A social movement called consumerism has come into existence

with the aim of protecting the interest of consumers against producers and traders.

5. Realization by Businessmen – Realization by businessmen that they cannot survive

in the long run if they do not supply quality products at reasonable rates and ensuring
that they do not indulge in malpractices.
6. Labour Unions – The development of well organized labour unions has increased the
bargaining power of employees which reduces the scope of exploitation by their
employers. This has increased social consciousness of the entrepreneurs.

Arguments for Social Responsibility:

a. Changed Public Expectations of Business – It is reasoned that business exists only

because it satisfies the valuable needs of the society. Society gave business its charter
to exist and the charter can be revoked or amended at any time as per the society’s
expectations.

b. Better Environment for Business – This concept rationalizes that a better society
produces environmental conditions more favorable for business operations. The firm
which is responsive to the improvement of the community will as a result, have a
better community to conduct its business.

c. Public Image – Every firm seeks an enhanced public image so that it can gain more
customers and better employees. A firm must discharge its social obligation to earn a
good public image.

d. Business has the Resources – Business has a vast pool of resources in terms of men,
talent, functional expertise and money. With these resources in possession, businesses
are in a good position to work towards social goals.

e. Moral Responsibility – It is said that the acceptance of CSR is the morally correct
position for a business to hold. This notion suggests that our modern industrial society
 faces many serious social problems brought on, to a large extent, by large
corporations. The corporations therefore have a moral responsibility to help solve
these problems.

f. Duty of Gratitude – Business units benefit from the society. On the basis of the
commonly accepted principle that one owes debts of gratitude toward those who
benefit from it, the corporation has certain debts to the society.

g. Citizenship Argument – Corporations are institutional members of the society. If

individual members of the society have an obligation to improve society, then
corporations have this responsibility too.

Arguments against Social Responsibility:

a. Profit Maximization – Businesses’ function is economic, not social and economic

values should be the only criteria to measure success. The business is most socially
responsible when it attends to its interests and leaves other activities to other
institutions.

b. Lack of Social Skills – Business managers are best at managing matters relating to
business. They are not as good at solving social problems. Their outlook is primarily
economic in nature.

c. Lack of Accountability – Businessmen have no direct accountability to people. Until

the society develops mechanisms which establish direct lines of social accountability
from the business to the public, businesses will pursue only their goal of profit
maximization.

d. Friedman’s View – Economist Milton Freidman based his argument on legal

grounds. He said that managers are legal agents of stockholders. Hence, if they spend
corporate funds for social purposes, they are essentially stealing from the
stockholders. He suggested that if the stockholders want money spent on social
causes, they are free to do so themselves with the dividends earned.

Responsibilities of Business towards Various Interest Groups/Areas of Social

Responsibility:

1. Towards Owners of the Enterprise –

i. Payment of fair rate of dividend regularly
ii. Ensuring full participation of owners in the management
iii. Disclosing of financial information and clarifying information
Employees
2. Towards Owners of the Enterprise –
i. Security of job with fair wages, bonus, etc
ii. Fair promotional practices
iii. Equal opportunity for growth and development within the organization
iv. Protecting employees from occupational hazards
 v. Encouraging participation in the management of the company

3. Towards Customers –
i. To ensure that products of right quality are available at the right place and at the
right time
ii. Reasonable pricing of the product
iii. Prompt after sales services
iv. Avoiding unfair trade practices that exploit consumers
v. Encouraging formation of associations for consumer welfare

4. Towards Society –
i. Optimized use of resources
ii. Controlling the economic well being of the society
iii. Participating in social welfare programs such as adopting villages, providing
medical facilities, providing educational scholarships, constructing bus stops
iv. Adopting anti pollution resources

5. Towards Government –
i. Strictly observing the provisions of various policies and laws laid down by the
government
ii. Extending full support to the government in its efforts to solve national problems
such as unemployment, poverty, etc

Business Ethics:

Ethics is derived from the Greek word ‘Ethos’ which means a person’s fundamental
orientation towards life. The Oxford dictionary defines Ethics as “moral principles” or “rules
of conduct”.

The concept has come to mean various things to various people but generally it’s coming to
know what is right or wrong in the workplace and doing what’s right.

Ethics refers to a system of moral principles. It is the study of good and evil, right and wrong,
and just and unjust actions for businesses. Business ethics is an extension of values of
personal life to business.

Business ethics refers to moral values, rules of conduct and professional morality of the
business. In other words, they are moral principles which are considered right by the society
and so, should govern and guide the activities of business.

In the words of W O Wheeler, “Business ethics is an art and science of maintaining proper
harmonious relationship with society and various groups and institutions as well as
recognizing the moral responsibility for the rightness and wrongness of business conduct”.

In short, they are the moral principles and rules of conduct which should govern and guide
the activities of business.
Unethical Practices:

It is difficult to differentiate between ethical and unethical practices. Usually decisions

concerning ethical behaviour are complex. The following are some examples of unethical
practices:

a) Inflating business expenses

b) Revealing confidential information or trade secrets
c) Giving or accepting gifts or favours
d) Using company property or materials for personal use
e) Price discrimination and unfair pricing
f) Cheating customers and unfair trade practices

Importance of Business Ethics:

1. Ethics corresponds to basic human needs - It is a human trait that man desires to be
ethical not only in private life but also in business affairs. Most people want to be a
part of an organization which they respect and are proud of, because they perceive its
purpose and activities to be honest and beneficial to the society.

2. Ethics create credibility with the public – A company perceived by the public to be
ethically and socially responsive will be respected. They will be inclined to buy their
products since people believe that they would get value for money.

3. Values help better decision making – Ethical attitude helps the management make
better decisions. Decisions in the interest of the public, their employees and in the
company’s own long term interest will be taken on ethical principles.

4. Values give management credibility with employees – Values bring employers and
employees closer. Organizational ethics when perceived by employees as genuine
goals, creates credibility.

Factors influencing Business Ethics:

1. Government Rules and Regulations – Rules regarding working conditions, product

safety, statutory warnings are all supported by laws. These provide guidelines to
managers in determining what are acceptable standards and practices.

2. Company’s Ethical Code of Behaviour – Most companies have specific guidelines

for managers which serve as ethical codes of behaviour.

3. Social Pressure – Social forces have considerable influence on ethics in business.

Boycotting products, threats to prevent construction of manufacturing plants, etc may
in fact force the management to alter certain decisions by taking a broader view of the
environment and the needs of the society.
 4. Conflict between Personal Values and Needs of the Firm – Many a times,
managers may be forced to compromise their personal ethical and moral values in
order to achieve organizational goals. Everyday, ethical decisions are usually made
between the lesser of the two evils rather than the obvious right and wrong.

5. Industry Norms – Industry norms affect business ethics in the sense that there is a
code of conduct for each class of industry and each class of industry has to observe
the specific code of conduct set for it.

VII. Emerging Opportunities in Business

A. Franchising:

A continuing relationship in which a franchisor (owner) provides a licensed privilege to the

franchisee (dealer) to do business and offers assistance in organizing, training,
merchandising, marketing and managing in return for a monetary consideration.

Franchising is a form of business by which the owner (franchisor) of a product, service or

method obtains distribution through affiliated dealers (franchisees).

It is an agreement where the franchisor gives the right to use its trademark or trade-name as
well as certain business systems and processes, to produce and market a good or service
according to certain specifications. The franchisee usually pays a one-time franchise fee plus
a percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried
and tested products, (3) standard building design and décor, (4) detailed techniques in
running and promoting the business, (5) training of employees, and (6) ongoing help in
promoting and upgrading of the products.

In India, franchising has been popular in fast food chains, beauty parlors, fitness centres,
computer education, clothing, shoes, hotels, health care etc. APTECH, McDonalds, Khadims
are some popular examples of franchise.

Characteristics/Features/Nature of Franchise

1. Well Established Business - A franchise is a readymade and well established

business that needs expansion. It is a ready form of business seeking expansion in
new market areas with the help of a local representative.

2. Limited Investment - As franchise business is already set up by the franchisor, the

initial investment required by the franchisee to enter and establish is relatively low.

3. Easy Entry - As the goodwill and reputation is already set up in other

cities/countries, franchisor does not require more efforts to enter in new markets. He
is easily accepted in the new markets.

4. Large Establishments - Franchise has large establishments around the world and
operates through a network of local representatives in different market areas.
 5. Diversify Business Risks - By establishing outlets in different parts of the world
franchise helps the owner of the firm to diversify his business risks.

6. Large Turnover - Franchise results in large volume of sales. Society is benefited by

the management of franchisor and service skills of franchisee. Brand name and
publicity results in a large turnover.

7. Separates Labour and Specialization - Franchise results in division of labour and

specialisation. The franchisor concentrates on production, whereas franchisee looks
after distribution and service at a unit level. The advantages of division of labour and
specialization benefits both.

8. Use of Brand Name and Trademark - In franchise selling, the franchisor allows the
franchisee to use his brand name, trademark, service mark and management skills for
developing and expanding franchise business.

9. Mutual Agreement - Franchise business is based on mutual agreement or contract

setting out terms and conditions for franchising. Agreement is based on the
understanding between franchisor and franchisee. To avoid disputes, agreement
should be drafted in a detailed manner.

10. Long Term Relationship - For the successful functioning of a franchise business,
both franchisor and franchisee have to remain committed in their long-term
relationship, only then business will be mutually rewarding. Strong franchise
relationship enables the franchisor to sell a franchise more effectively, introduce
needed changes into the system very easily and motivate franchisee and their
managers to provide a consistent level of products and services to their customers.

Merits and Demerits of Franchise

Merits of Franchise
To the Franchisor To the Franchisee
Expansion of Business Less Investment
Regular Income Goodwill
Economical Advertising Management Assistance
Market Feedback Research & Development

To the Franchisor:

i. Expansion of Business - The franchisor is able to expand his business, and gain
wider acceptance of his brand name or trademark, because of franchise agreement.
The franchisor can enter into foreign markets also and enhance his goodwill and
business.
 ii. Regular Income - The franchisor receives a regular income by way of royalty from
the franchisee at no extra cost; as cost of new premises and extra staff is borne by the
franchisee.

iii. Economical Advertising - Advertising done by the franchisee benefits the franchisor
also. Thus, under franchise, advertising proves very economical, in the long-run.

iv. Advantage of Market Feedback - The franchiser gets market feedback about
product popularity, needs, preference of local customers from the franchisees.

To the Franchisee:

i. Less Investment - The franchisee can start business with lesser investment than what
would be required to start an independent business of his own.

ii. Goodwill - Franchisee gets the immense advantage of the goodwill created by the
franchisor. Higher success rate is found in cases of franchise; as the franchisee averts
the risk of starting a new business of his own and gets an income higher than possible
from his own independent business.

iii. Management Assistance - The franchisor provides many types of assistance to the
franchisee such as store layout guidance, training to personnel, marketing support,
financial assistance, etc;

iv. Research & Development - The parent company makes huge investment in research
and innovations; the advantage of which goes to franchisee in the normal course of
functioning of business.

Demerits of Franchise
To the Franchisor To the Franchisee
Image Tarnishing Lack of Freedom
Problems & Costs Limited Range of Products
- Fixed Royalty Payment

To the Franchisor:

i. Image Tarnishing - If the franchisee does not maintain standards of quality and
service; there is a danger that the goodwill and image of the reputed franchisor is
tarnished.

ii. Problems & Costs - In franchise, the franchiser faces many problems and costs such
as problems and costs of communicating with franchisees located at distant places or
costs of training, financing and advertising, done for the franchisees.
To the Franchisee:

Lack of Freedom - The franchisee does not have the freedom to run his business in an
independent manner. He has to abide by management and operational policies of the
franchisor – whether suitable to him or not.

i. Limited Range of Products - The franchisee cannot introduce new products in his
business; except those permitted by franchisor. This may mean loss of business to
franchisee amidst local conditions surrounding his business.

ii. Fixed Royalty Payment - The franchisee has to make payment of royalty to the
franchisor on a regular basis. This considerably reduces the income of the franchisee.

Types of Franchise

Franchises can be differentiated and categorized in many ways based on their size,
geographical location, etc, however it can be broken down depending on how franchisors let
franchisees use their trademarks and names to distribute their products. There are three main
types of franchises:

1. Business Format Franchise - In business format franchises, the franchisor sells the
rights to the trademark and trade name as well as the business processes and systems
to the franchisee to develop products and services for the customers. The franchisee
buys the complete business system from the franchisor which results in a sustained
and successful end-product.
For example, McDonald’s food will almost taste the same no matter which outlet you
buy it from. Fast food franchises like Pizza Hut and Burger King are also notable
examples of business format franchises. This is the most common type of franchise in
which the brand grows and expands by selling elements of an already operating
business, to business owners to distribute their products. The franchisor provides
considerable support and assistance to the franchisee and in return, the franchisee
pays a royalty fee.

2. Product Franchise - In product franchises, manufacturers have control over the retail
stores that distribute their products. In this contract, manufacturers allow store owners
to use their trade name and trademark. Store owners must pay a certain fee to obtain
this privilege or buy a specified number of products to qualify for a franchise.
Example includes computer shops where the owner is selling HP desktops. In this
business relationship, the manufacturer benefits more than the dealer.

3. Manufacturing Franchise - In manufacturing franchises, the franchisоr allows a

franchisee to produce items using their brand name and trademark.
The best example of this would be a soft drinks company. The parent company will
produce the concentrated syrup and then sell it, as well as the right to use their brand
name and trademarks, to a bottling company. That company will then mix the syrup
with water and bottle the finished product before selling it on to various suppliers.
 B. Outsourcing:

Outsourcing is a business practice in which a company hires another company or an

individual to perform tasks, handle operations or provide services that are either usually
executed or had previously been done by the company's own employees.

The outside company, which is known as the service provider or a third-party provider,
arranges for its own workers or computer systems to perform the tasks or services either on
site at the hiring company's own facilities or at external locations.

Companies today can outsource a number of tasks or services. They often outsource
information technology services, customer service and call service functions. They can
outsource other types of work as well, including manufacturing processes, human resources
tasks and financial functions such as bookkeeping and payroll. Companies can outsource
entire divisions, such as its entire IT department, or just parts of a particular department.

Outsourcing can involve using a large third-party provider, such as a company like IBM to
manage IT services or FedEx Supply Chain for third-party logistics services, but it can also
involve hiring individual independent contractors and temporary office workers.

Reasons/Need for Outsourcing

1. Lower Cost – Reducing costs remains the number one reason that organizations elect
to outsource. Cheap labour is available in the south eastern part of the world which
makes outsourcing a lot easier for the parent company.

2. Cross and Up Sell Opportunities – Outbound calling is intrusive, disruptive and

ultimately damaging to customer relationship whereas inbound calls are a powerful
and productive way to generate revenue. It drives additional revenue in sales
campaigns, creates lead generation and manages customer inquiries.

3. Customer Retention – The combination of creative programs, informed and talented

agents and timely execution can lead to dramatic increases in customer retention.
Agents think of every customer interaction as an opportunity to increase satisfaction
and retention. Customer retention is an integral part of every company’s business
model, making outstanding customer care a critical part of the company’s ultimate
success.

4. Diversification – Some companies want to keep part of their operations internal and
outsource other parts, often because they have experienced success running their
operations internally but are looking to supplement the program with outside
expertise. Diversifying operations in this manner is an excellent way for companies to
keep internal benchmarks in place to maximize outsourcing results.

5. Time Factor – Time is money when it comes to the management’s involvement in

routine, secondary tasks in the organization. The management can focus on their key
areas that demand intelligent, path breaking ideas and give their attention to top
 priority processes by outsourcing the mundane, repetitive activities to outside
vendors.

6. Skill Resource Shortage – In case of some companies, complex process oriented

projects demand expertise that may not be present in a company. At the same time,
the requirement may not be full-time. Hence, the only solution is to get the job
outsourced.

Types of Outsourcing

1. Business Process Outsourcing (BPO) – It is the delegation of an intensive business

process to an outside service provider who owns, administers and manages it
according to a defined set of metrics. BPO is generally for back-end administrative
functions that are necessary to run a business but is not a part of the core business.
The various services are Customer Support Services, Technical Support Services,
Telemarketing Services, Employee IT Help-desk Services, Insurance Processing, etc;

2. Knowledge Process Outsourcing (KPO) – It is a form of outsourcing in which

knowledge and information related work is carried out by workers in a different
company or by a subsidiary of the same organization. This subsidiary may be in the
same country or in an off-shore location to save costs or other resources. Companies
resort to KPO when they have a shortage of skilled professionals or have the
opportunity of hiring skilled workers at lower costs.
Examples of KPO include long-term jobs for intellectual, analytical and
knowledgeable people within industries such as research & development, financial
consultancy & services, business & technical analysis and many others.

3. Human Resource Outsourcing (HRO) – It means that the HR function is outsourced

to another company that specializes in HR. Therefore, the company that outsources
human resources does not have its own HR Department.
HRO focuses on the rapidly growing market for services across payroll, benefit
administration, HR Information System and other major HR functions.

C. E-commerce:

It is the buying and selling of products or services over electronic systems using the internet.
Electronic Commerce draws on technologies such as electronic funds tranfer, electronic data
interchange, inventory management systems and automated data collection systems.

E-commerce is generally considered to be the sales aspect of E-business. It also consists of

exchange of data to facilitate financing and payment aspects of business transactions. Even
today, some considerable time after the internet revolution, E-commerce remains a relatively
new, emerging and constantly changing area of business management and IT.

The World Trade Organization defines E-commerce as, “The production, distribution,
marketing, sales or delivery of goods and services by electronic means”.
Vladimir Zwass defines E-Commerce as, “The sharing of business information, maintaining
business relationships, and the conducting of business transactions by means of
telecommunication networks”

Features/Characteristics/Nature of E-commerce

E-commerce refers to a wide range of online business activities for products and services. It
is associated with buying and selling over the internet. Example, E-banking, ATMs, buying
railway tickets, etc;

The key features of E-commerce are:

i. Ensures Accurate Information – E-commerce companies across the world are

doling out product information that is accurate and to the point which helps customers
make better buying decisions. The information is free from hidden facts that are very
much used in the traditional retail models of selling. Accurate information is also
provided regarding billing and shipment.

ii. Ubiquity – Ubiquity means the state of being everywhere at once. With
unprecedented growth in the sale of smart phones, tablets, laptops and other internet
gadgets, E-commerce companies literally follow their customers wherever they go.
Shopping can be done at any point in time and anywhere as long as there is access to
an internet connection.

iii. Breaks Geographical Barriers – Unlike traditional retail business, E-commerce is

not bound by geographical boundaries. Today, a company can easily sell its products
to consumers residing in any part of the world.

iv. Saves Time – E-commerce helps in saving time as consumers can shop from the
comfort of their homes or offices. They do not have to spend hours in traffic, walking
around shops, going to multiple shops as it can all be done virtually.

v. Impersonal Interaction – Since E-commerce depends completely on the internet to

reach out to its customers, the interaction with customers will always be impersonal in
nature as it does not involve a face-to-face interaction.

vi. Power of Accessibility – Since E-commerce is easily accessible, customers have the
power to buy anything they desire for from any part of the world. A mere impulsive
desire or slight craving for a product can lead to acquiring the product.

vii. Cuts Supply Chain – E-commerce has immensely helped in cutting the cumbersome
supply chain of wholesalers and retailers and over reliance on the sales force team.
This helps in reducing the cost of the product for the customer and increasing profit
margins for producers.

viii. Technology as a Barrier – Although technology has helped companies break

geographical and other barriers, over reliance on technology and absence of face-to-
face interaction has created a trust barrier between E-commerce companies and
customers.
Types of E-commerce/E-commerce Business Models
Business – to – Business (B2B) Business – to – Government (B2G)
Business – to – Consumer (B2C) Government – to – Business (G2B)
Customer – to – Customer (C2C) Government – to – Citizen (G2C)
Customer – to – Business (C2B) Peer – to – Peer (P2P)

1. Business – to – Business (B2B) – It relates to commerce transactions that exist between

businesses, such as those involving a manufacturer and a wholesaler or a wholesaler and
a retailer. In B2B, a business sells its products to an intermediate buyer who then sells
the product to the final consumer. As an example, a wholesaler places an order from a
company’s website and after receiving the consignment, sells the product to the final
consumer who comes to buy the product at an outlet.

2. Business – to – Consumer (B2C) – It is a business paradigm in which the business sells

directly to the consumer. A customer can view the products shown on websites of
business organizations, choose a product and order the same. The business organization
gets notified of the order and dispatches the same to the consumer.

3. Customer – to – Customer (C2C) – It is a business model where two individuals

transact or conduct business with each other. Generally, an intermediary/third party is
involved but the purpose of the intermediary is only to facilitate the transaction and
provide a platform for people to connect. The intermediary would receive a fee or
commission but is not responsible for products exchanged. Example OLX, 99acres.com,
etc;

4. Customer – to – Business (C2B) – In this type of business, reverse pricing models are
used where the customer determines the price of products or services. It is a reverse
auction where buyers bid for the product/service. Individual customers offer to sell
products or services to companies who are willing to purchase them. For example, a food
company paying a food blogger to market their products and services, an organization
buying photographs from a photographer, etc;

5. Business – to – Government (B2G) – It provides a way for businesses to bid on

government projects or products that governments might purchase or need for their
organizations. It refers to the use of internet for public procurement, licensing procedures
and other government related operations.

6. Government – to – Business (G2B) – Government uses this model to approach business

organizations. Such websites support auctions, tenders and application submission
functionalities.

7. Government – to – Citizen (G2C) – Government uses this model to approach citizens

in general. They provide services such as registration of birth, marriage, death
certificates. The main objective is to reduce the average time for fulfilling requests of
citizens.

8. Peer – to – Peer (P2P) – It is a decentralized model whereby two individuals interact to

buy or sell goods and services directly with each other, without an intermediary third-
 party, or without the use of a company of business. The buyer and the
seller transact directly with each other. Examples include Air BnB, Etsy, Bitcoin, etc;

Advantages & Disadvantages of E-commerce

Advantages Disadvantages

Delivery cost & shipping cost

24/7 Operation

Global Reach Lack of Confidence

Increase Sales and Profits Credit/Debit Card Frauds

Knowledge of Customer Behaviour Lack of tactile experience

Technological hiccups
Improved Customer Services

Time Saving Network Failure