BUSINESS ENVIRONMENT

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What is Business?
Business is an economic activity,
which is related with continuous and regular
production and distribution of goods and services
for satisfying human wants.

Stephenson defines business as, "The regular

production or purchase and sale of goods
undertaken with an objective of earning profit and
acquiring wealth through the satisfaction of human
wants.”

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WHAT IS ENVIRONMENT?
Environment refers to all external forces that have a bearing on
the functioning of a business

“The environment includes factors outside the firm which can

lead opportunities and threat to the firm, although there are
many factors , the most important of them are
•Socio-economic
•Technological
•Market demand and supply
•Competitors
•Government
•geography

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CHARACHTERISTICS OF
ENVIRONMENT
1. Complex: it contains number of factors, events, conditions
and influences arising from different sources and all theses
interact with each other to create new set of influences
2. Dynamic: it constantly changes
3. Far-reaching impact: affects different areas of business
4. Impact on different firms in same industry is different: eg I
pharma sector impact of new IPR law will be different on big
research based pharmaceutical co and different on smaller co
5. It may be an opportunity or threat: eg. globalization.
6. Changes in environment can change entire scenario

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Types of environment

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INTERNAL
INTERNAL

MANAGEMENT
CULTURE AND MISSION AND HUMAN
STRUCTURE
VALUE SYSTEM OBJECTIVE RESOURCE
AND NATURE

1. CULTURE AND VALUE SYSTEM: inherited from seniors, founders and old
experienced workers
2. MISSION AND OBJECTIVE: guide the priorities, direction of development,
business philosophy and business policy
3. MANAGEMENT STRUCTURE AND NATURE : Decides the freedom to work
and participates and take responsibility
4. HUMAN RESOURCE: deals with factors like planning, recruiting,training,
appraisal

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MACRO ENVIRONMENT: PESTEL FACTORS

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1. POLITICAL environment includes factors like the nature of government
policies particularly those related to taxation, industrial relations,
regulation of internal business and industry, and foreign trade
regulations. It also relates to the stability of the government in power
and risk of major political disturbances.

2. ECONOMIC FACTORS, as the name implies related to the general

condition of the economy within which a business operates and
conducts business. It will include factors like GNP, economic growth
rate, interest rates, inflation rate, moneys supply, and unemployment
rates.

3. SOCIOCULTURAL factor cover the nature of the life style, culture,

attitude and other such common factors that influence an describe the
behavioral characteristics typical of the people. It will include factors
like demographic profile of the people, culture, and life style.

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4.TECHNOLOGICAL dimension covers the nature of technology
available and used by an economy or industry in general. It also
covers the extent to which development in technologies are likely
to take place. This may be reflected in factors like expenditure on
R&D and rate of obsolescence.

5. ENVIORNMENTAL factor refers to the physical or

geographical environment affecting the business. It also includes
the considerations like environmental pollution.

6. LEGAL dimension describes the framework of legislation

impacting the business. The kind of laws more important to
business relate to areas like monopolies and consumer
protection, employment and industrial relations, health and
safety, and joint stock companies.

7. DEMOGRAPHICS
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MICRO BUSINESS ENVIRONMENT

Micro
environmen
t

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Micro environment or the competitive environment refers to
environment which an organization faces in its specific field

1. Suppliers These people supply the goods to company. We can

control them, if we pay them on the time. We should also keep
contacts with multiple sources because it is very less risky. If one
supplier stops to supply us, we can get raw material from other
supplier.

2. Customers: also affect on company's business. If we do not care

our customers, our customers will buy from other company. Due
to this, our sale will decrease. We should make good relation with
our customers.

3. Market Intermediaries Middlemen, physical distribution firms

and marketing service agencies are main market intermediaries.
We should choose best market intermediaries for fast distribution
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4.Competitions Company also have to face competition. If company
has to win competition, it has to sell good quality product at lower
price

5.Public:
Public is any group that has an actual or potential interest in or
impact on an organisations ability to achieve its interests.
Examples are

a) Media

b) Citizen

c) Local public

If we have to make public happy, we have to protect our

environment. We have to produce our products in less polluted
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system.
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Barriers to entry
Entry barriers depend on the advantages
that existing companies have relative to
new entrants. There are seven major
sources:
i. Economies of scale
ii. Product differentiation
iii. Capital requirements
iv. Switching costs
v. Access to distribution channels
vi. Cost disadvantages independent of size
vii. Government policy

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Economic reforms
Reasons:
1. steep fall in foreign exchange reserve to about $ 1
billion
2. Inflation was 12% and high
3. Oil prices increased following the Iraqi invasion of
Kuwait
4. Poor performance of public sector
5. Trade deficit &balance of payment crisis
6. heavy burden of domestic and foreign debt.
7. Fall in exchange rate
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objectives
Reduce inflation
Improve BOP
Improve efficiency& productivity of economy
Have sustainable growth

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features
Liberalization
Privatization
globalization

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liberalization
Means to free the economy from direct /physical
controls imposed by government
OR
To give relaxation to enable the entrepreneurs to make
decision themselves & open freedom to economic
activities at all levels.

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Objective of liberalization
To free Indian economy from controls
To improve tech.
Promote entrepreneurial
Produce variety of goods
Develop international competitiveness

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 License and Permit Raj

Low C
concentration Sub Standard
Investment of Wealth Product

Unemployment Low Exports

Poverty Population Adverse

Balance of
Payment
Illiteracy

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Measures

Fiscal Policy
 The tax reform committee (1994) headed by R.J. Chelliah gave the goals of
tax policy which became the base for tax reforms.
1. Reduction of rates of all major taxes, viz., customs, income tax and
central tax.
2. Widening of the basis of all taxes by removing or curtailing exemptions
and concessions drastic simplification of the laws and procedures.
3. Replacement of the existing taxes on domestic production and trade by a
value added tax.
4. modernization of the administration.
 The immediate aim of fiscal policy must be to improve to eliminate the
pressure from the budget deficit.
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Phasing out of Subsidies/Dismantling of
Price Controls
Economic liberalization phased out and dismantled
the subsidies and price control.. The subsidies on
fertilizers and petro-products were reduced to the
extent possible.
The government is in the process of dismantling
administered price mechanism in the petroleum
sector. The present policy of the government in
petroleum is to keep prices at par with international
prices.
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Delicencing
Presently, only five industries required licensing they
are : -
(1) Alcoholic Drinks,
(2) Cigars and Cigarettes of tobacco, and manufactured
tobacco substitutes,
(3) Electronic aerospace and defence equipment
(4) Industrial explosives including detonating fuses,
safety fuse, gun powder, and matches box
(5) Hazardous chemicals,.

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De- Reservation
The list of industries reserved for the public sector to
eight from 17, and further four more areas were de-
reserved, which trimmed the list to four. By 1994 only
three areas in manufacturing remained reserved,
defence, strategic concern and petroleum
Presently only two sectors are under public sector
monopoly: Atomic Energy and Rail Transport

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Privatization Defined

 Privatization is the process of involving the private sector in the

ownership or operation of a state-owned or public sector
undertaking.
 Privatization can take three forms:
a. Ownership Measures; total decentralization, joint venture
b. Organizational Measures ;lease, given autonomy but govt control
at operative level
c. Operational Measures; freedom to acquire to inputs from market

 Dereservations
 Disinvestment

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Impact of Liberalisation

Reduction of fiscal deficit.

Inflation control
Sovergnity to consumer
Foreign exchange reserve
FDI increase.
India as a emerging economic power
Neglect of agriculture
More imp. to urban population
Dominance of MNCs
Economic colonialism
Spread of consumerism.
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New Trade Policy (1991)

 The new policy substantially eliminates licensing, quantitative restrictions,

and other regulatory and discretionary controls.
 The main features of the new trade policy are:
1. Free Import and Export
2. Rationalization of Tariff Structure(chelliah committee)
3. Decanalization
4. Exchange Rate Reforms
a. Partial Convertibility of Rupee
b. Fully Convertible on Current Account
5. Phased Manufacturing Programme(PMP according to which import part to
be substituted with Indian part was abolished )
6. Trading House(to import wide range of items)
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Monetary Policy

Monetary policy is all about supply of currency in the

country.. It is a country's central bank that controls the supply
of money. Monetary policy has direct bearing on inflation and
commercial bank interest rate. So even the slightest change in
the monetary policy affects inflation and bank interest rate.
The central bank designs the monetary policy in keeping with
the government's economic policy. Monetary policy is about
expansion and contraction of money and the central bank is
the implementing body of the monetary policy.

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Need to Regulate the Supply of Money

The supply of money has a direct impact on inflation,

level of investment, employment generation, interest
rate, etc. It is clear that supply of money has an effect
on every aspect of the economy and has a close
relationship with development. Supply of money is a
sensitive issue as even a slight imbalance can create
havoc in the form of deflation or hyperinflation in the
country.
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Monetary Policy
 The instrument of monetary policy (methods of credit control) may be
broadly divided into the following parts:
a. Open Market Operations
b. Bank Rate
c. Cash Reserve Ratio (CRR)
d. Statutory Liquidity Ratio (SLR)
e. Repo (Repurchase) rate& Reverse Repo rate(Liquidity Adjustment facility)
f. Direct Regulation of Interest Rates on Commercial Banks' Deposits and
Loans
g. Credit Authorization Scheme (CAS)
h. Selective Credit Controls (SCC)
i. Fixation of Inventory and Credit Norms
j. Moral Suasion
k. margin requirement

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What is Bank Rate? This is the rate at which central
bank (RBI) lends money to other banks or financial
institutions. If the bank rate goes up, long-term
interest rates also tend to move up, and vice-versa.
 Thus, it can said that in case bank rate is hiked, in all
likelihood banks will hikes their own lending rates to
ensure and they continue to make a profit.

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CRR means Cash Reserve Ratio. Banks in India are
required to hold a certain proportion of their deposits in the
form of cash. However, actually Banks don’t hold these as
cash with themselves, but deposit such case with Reserve
Bank of India (RBI) / currency chests, which is considered
as equivalent to holding cash with themselves..This minimum
ratio (that is the part of the total deposits to be held as cash) is
stipulated by the RBI and is known as the CRR or Cash
Reserve Ratio. .
Therefore, higher the ratio (i.e. CRR), the lower is the amount
that banks will be able to use for lending and investment.
 Thus, it is a tool used by RBI to control liquidity in the banking
system.
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SLR stands for Statutory Liquidity Ratio. This term is
used by bankers and indicates the minimum
percentage of deposits that the bank has to maintain
in form of gold, cash or other approved securities.
Thus, we can say that it is ratio of cash and some other
deposits
It regulates the credit growth in India.

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 Repo (Repurchase) rate is the rate at which the RBI lends
shot-term money to the banks. When the repo rate increases
borrowing from RBI becomes more expensive. Therefore, we
can say that in case, RBI wants to make it more expensive for the
banks to borrow money, it increases the repo rate; similarly, if it
wants to make it cheaper for banks to borrow money, it reduces
the repo rate
 Reverse Repo rate is the rate at which banks park their short-
term excess liquidity with the RBI. The RBI uses this tool when
it feels there is too much money floating in the banking system.
An increase in the reverse repo rate means that the RBI will
borrow money from the banks at a higher rate of interest. As a
result, banks would prefer to keep their money with the RBI
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 Direct Regulation of Interest Rates on Commercial Banks' Deposits and
Loans: when bank rate loses its importance in regulating market rates RBI is
forced to directly regulate interest rate on bank deposits & credit
since 1985 deregulation in interest began on the recommendation of
Chakravarty committee

 Credit Authorization Scheme (CAS) : it was introduced in 1965 to control

volume of credit to large borrowers. In the beginning limit was 1crore
sanctioned to single party by bank it requires prior sanction of RBI then limit
increased to 2cr in 1975 ,4cr in 1983, 6cr thereafter.
 In 1988 RBI withdrew the scheme &place a credit monitory arrangement
according to which now requirement is post sanction scrutiny

 Fixation of Inventory and Credit Norm( committee of direction)

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Fiscal policy
Fiscal policy is the projected balance sheet of the
country, prepared by the chief finance officer of the
country i.e. the finance minister of the State.
Components of a Budget
Typically, a budget includes the following four
components:
a. A review of the economy
b. Major policy announcements
c. Expenditure proposal
d. Tax proposal
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functions of fiscal policy
There are three major functions of a fiscal policy:
 The first is the function of allocation in the budget policy to make
provisions for social goods. It is a process by which the total
resources are divided between private and social goods and by
which the mix of social goods is chosen.
 The Second is the distribution function of budget policy. This
includes distribution of income and wealth in accordance with
what the society considers a ‘fair’ or ‘just’ distribution.
 The third is the stabilization function of a budget policy, that is
having high employment, a reasonable degree of price stability,
an appropriate rate of economic growth, with due considerations
of its effects on trade and the balance of payment.
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Concept of International Business
International Trade: Exports of goods and services by a firm
to a foreign-based buyer (importer)

International Marketing: It focuses on the firm-level

marketing practices across the border, including market
identification and targeting, entry mode selection, and
marketing mix and strategic decisions to compete in
international markets.

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 International Business: All those business activities which

involves cross border transactions of goods, services, and

resources between two or more nations

 Global Business: Conduct of business activities in several

countries using a highly co-ordinated and single strategy across

the world.

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Reasons for International Business
Expansion
Market-Seeking Motives
 Marketing opportunities due to life cycles
 Uniqueness of product or service

Economic Motives
 Profitability
 Achieving economies of scale
 Spreading R&D costs

Strategic Motives
 Growth
 Risk spread

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Differences Between Domestic and International
Business

Economic Environment
Socio-Cultural Environment
Legal Environment
Political Environment
Competition
Infrastructure
Technology

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Barriers to international trade
 Cultural and social barriers: A nation’s cultural and social forces can restrict international business.
Culture consists of a country’s general concept and values and tangible items such as food, clothing,
building etc. Social forces include family, education, religion and custom. Selling products from one
country to another country is sometimes difficult when the culture of two countries differ significantly.
 Political barriers: The political climate of a country plays a major impact on international trade. Political
violence may change the attitudes towards the foreign firms at any time. And this impact can create an
unfavorable atmosphere for international business.
 Tariffs and trade restrictions: Tariffs and trade restrictions are also the barriers to international trade.
They are discussed below:
 Tariffs: A duty or tax, levied on goods brought into a country. Tariffs can be used to discourage
foreign competitors from entering a digestive market. Import tariffs are two types-protective tariffs
and revenue Tariffs.
 Quotas: A limit on the amount of a product that can leave or enter a country.
 Embargoes: A total ban on certain imports or exports.

 Boycotts: A government boycott is an absolute prohibition on the purchase and importation of certain
goods from other countries. For example: Nestle products were boycotted y a certain group that
considered the way nestle promoted baby milk formula to be misleading to mothers and harmful to their
babies in less development counties.
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Barriers to international trade
 Standards: Non-tariff barriers of this category include standers to protect health, safety and product quality.
The standards are sometimes used in an unduly stringent or discriminating way to restrict trade.
 Anti dumping Penalties: It is one kind of practice whereby a producer intentionally sells its products for
less than the cost of product in order to undermine the competition and take control of the market.
 Monetary Barriers: There are three such barriers to consider:
 Blocked currency: Blocked currency is used as a political weapon is response to difficult balance
payments situation. Blockage is accomplished by refusing to allow importers to exchange their
national currency for the seller’s currency.
 Differential exchange rate: The differential exchange rate is a particularly ingenious method of
controlling imports. It encourages the importance of goods the government deems desirable and
discourage importation of goods the government does not want. The essential mechanism requires the
importer to pay varying amount of domestic currency for foreign currency with which to purchase
products indifferent categories. Such as desirable and less desirable products.
 Government approval for securing foreign exchange: Countries experiencing severe shortages of
foreign exchange often use it. At one time or another, most Latin American and East European
countries have required all foreign exchange transactions to be approved by central bank. Thus
importers who want to by foreign goods must apply of ran exchange permit that is permission to
exchange an amount of local currency for foreign currency

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