MODULE 1

Meaning of business
Modern business covers a complex field of industry & commerce which involve activities related to both production & distribution. These activities on the one hand satisfy societies needs & desires & on the other hand bring profits to business firm

NATURE OF MODERN BUSINESS

1. LARGE SIZE
Business that matters today's is large in size Indian company in terms of sales revenue , profits, assets & stockholders equity are relatively small as compared to companies in developed countries Indian oil ranked 189 in the top 500 with a revenue of $ 25.3 billion Indian private sector companies in terms of sales & assets may not look as impressive as the companies in developed countries In 2006 Reliance industries was ranked first in India. Assets were Rs. 96871 crore, sales Rs. 80055 crore Larsen & Toubro, Tata motors, Tata steel, Maruti Udyog, Sterlite industries, Hindal co & Bharati , Airtel with sales exceeding Rs. 11000 crore

2. OLIGOPOLISTIC CHARACTER
 Small number of firms selling a homogeneous or a differentiated product  Each firm in an oligopolistic market believes that any change in its price & sales, or in the quality of its product , advertising expenditure or any other or any other variable whose value is under its control  Oligopolistic business usually emerges from a number of factors COST ADVANTAGE ECONOMIES OF LARGE SCALE PRODUCTION CAPITAL REQUIREMENTS MERGERS & ACQUISITION PRODUCT DIFFERENTION

3.DIVERSIFICATION
Today not many corporate enterprise confine their activity to production of a single commodity Some business firms prefer to add new related products to their existing production concentric diversification Adding new unrelated products or services for existing customers is known as horizontal diversification Some business houses usually expand their activity by establishing new companies which undertaken production of unrelated new products or services. This is conglomerate

diversification

4.GLOBE REACH
Companies that matter have expanded their revenue & assets base across countries & engage in cross border flows of capital , goods & know how There are multinationals corporations like Nestle, Unilever, Philips electronics & Electrolux with over twothirds of their activities outside their home country

5.TECHNOLOGY ORIENTATION
People always wish to consume more & more of new goods Quality of products should improve overtime & the real cost fall All this can be accomplished by the business if it pays attention to sophistication of technology On account of increased liberalization, there is now acute completion at global level between companies In this state of business rapid technological change has become a precondition for the survival of a company

6.CHANGE
Existing economic system depends largely on effective demand Business knows that physical life of almost all consumer durables is such that most people may not feel the need to buy them several times in their lifetime The business has thus invented the strategy of making changes in product quality, design or packaging speedily. This strategy of offering differentiated products periodically has been found quite effective A modern firm must be attentive all the time & be ready for change The business through its innovative moves can always create synthetic wants & thus find space to produce new goods to satisfy them

7.GOVERNMENT CONTROL
Since the late 1980s role of govt in both developed & underdeveloped economies has diminished Widely advocated that the interferences of the govt in business diminishes allocative efficiency & thus hampers economic growth Control in business is required to correct market failures in the form of monopoly & pollution Governments through monetary & fiscal regulation attempt to create stable business conditions

ENVIRONMENT OF BUSINESS

MEANING
ENVIRONMENT IS SOMETHING EXTERNAL TO AN INDIVIDUAL OR AN ORGANIZATION. IT REFERS TO ALL EXTERNAL FACTORS WHICH HAVE A DIRECT OR INDIRECT BEARING ON THE ACTIVITIES OF BUSINESS. SOME EXPERTS HAVE USED THE TERM BUSINESS ENVIRONMENT IN A BROAD SENSE. THESE EXPERTS TALK OF BOTH INTERNAL & EXTERNAL ENVIRONMENT OF BUSINESS. EXTERNAL ENVIRONMENT OF BUSINESS CAN BE SUB-DIVIDED INTO MICRO ENVIRONMENT & MACRO ENVIORNMEMT

INTERNAL ENVIRONMENT

EXTERNAL ENVIRONMENT

VALUE SYSTEM MICRO ENVIRONMENT GOALS & OBJECTIVES MANAGEMENT STRUCTURE INTERNAL POWER RELATIONSHIP PHYSICAL RESOURCES & TECHNOLOGY HUMAN RESOURCES MACRO ENVIRONMENT

INTERNAL ENVIRONMEMNT VALUE SYSTEM, GOALS & OBJECTIVES, MANAGEMENT STRUCTURE, RELATIONSHIP AMONG THE VARIOUS CONSTITUENTS, PHYSICAL ASSETS, TECHNOLOGICAL CAPABABILITIES & HUMAN , FINANCIAL & MARKETING RESOURCES MAKE THE INTERNAL ENVIRONMENT OF BUSINESS

1.VALUE SYSTEM
BUSINESS IS NORMALLY UNDERTAKEN FOR PROFIT MAXIMISATION PERSONS HOLDING TOP POSITIONS IN CERTAIN MODERN CORPORATE ENTERPRISES HAVE SOME VALUES WHICH INFLUENCE THEIR POLICIES & OVERALL INTERNAL ENVIRONMENT EXAMPLE: JRD TATA, HAD VOLUNTARILY ACKNOWLEDGED THAT AS AN EMPLOYER HE HAD CERTAIN RESPONSIBILITIES TOWARDS HIS EMPLOYEES COMPANIES OF THE TATA GROUP DID SOME COMMENDABLE WORK IN THE FIELD OF LABOUR WELFARE

CONTIuuuuuu.
NOW THESE VALUES ARE NOT SHARED BY THOSE WHO ARE AT THE WHEEL OF AFFAIRS IN THE COMPANIES THE ATTITUDE OF THE TATA COMPANIES BOSSES IS UNAMBIGUOUSLY CLEAR AS THESE COMPANIES EMPLOY JUST 8 DISABLED PERSONS OUT OF THEIR TOTAL WORK FORCE

CONTIuuuuu
THE VALUE SYSTEM OF A COMPANY NEED NOT ALWAYS BE POSITIVE . IT CAN BE TOTALLY NEGATIVE SOME COMPANY DOES NOT EXPECT FROM ITS EXECUTIVES TO CARE MUCH FOR THE CONSUMERS, EMPLOYEES, AND PEOPLE IN GENERAL EX: PHARMACEUTICAL CO SELLING BANNED DRUGS WORLD OVER ARE NOW TOO WELL KNOWN

2.GOALS AND OBJECTIVES

IN THE TRADITIONAL THEORY OF BUSINESS, PROFIT MAXIMIZATION HAS BEEN ASSUMED TO BE THE SOLE OBJECTIVE OF THE FIRM MANAGERIAL THEORIES OF FIRM, STATE THAT SALES MAXIMIZATION & THE BALANCED RATE OF GROWTH MAXIMIZATION RATHER THAN PROFIT MAXIMIZATION ARE THE REAL GOALS OF MODERN BUSINESS FIRMS

3.MANAGEMENT STRUCTURE
 A corporate enterprise may be professionally managed or family controlled  On its board of directors there may be dynamic entrepreneurs capable of taking quick decisions

4. INTERNAL POWER RELATIONSHIP

Strength of management depends upon largely on the relationship between the companys shareholders, board of directors & the senior executives Conflicts between certain members often vitiate the companys internal working conditions

5.PHYSICAL RESOURCES & THE TECHNOLOGY

The functioning of a company & its competitiveness are very much influenced by its physical resources, technology, R&D work & logistics R&D activity of the company & the speed at which technological changes occur in it determine companys internal environment which in turn influence business decisions

6. HUMAN RESOURCES
Quality of human resources depends upon skill, commitment, attitude & morale of the employees This quality makes all the difference in the work culture of the company & its environment the company in return is also required to pay attention to concerns of the employees Work hours in modern companies have increased. all these factors have jointly created pressure on employees, in turn leading to unnecessary tensions in the internal environment

EXTERNAL ENVIRONMENT
EXTERNAL ENVIRONMENT OF BUSINESS CONSISTS OF INSTITUTIONS, ORGANIZATIONS & FORCES OPERATING OUTSIDE THE COMPANY. ALL THESE INDIVIDUALLY AS WELL AS COLLECTIVELY EXERCISE THEIR INFLUENCE ON THE LATTER. EXTERNAL ENVIRONMENT MAY BE CLASSIFIED INTO MICRO ENVIRONMENT MACRO ENVIRONMENT

Micro environment THE MICRO ENVIRONMENT REFERS TO SUCH PLAYERS WHOSE DECISIONS & ACTIONS HAVE A DIRECT BEARING ON THE COMPANY. SINCE MODERN BUSINESS BROADLY HAS TWO ASPECTS , VIZ, PRODUCTION & SELLING OF GOODS

The most prominent performers in the micro environment are the following

SUPPLIERS OF INPUTS WORKERS & THEIR UNIONS CUSTOMERS MARKET INTERMEDIARIES COMPETITORS PUBLICS

SUPPLIERS OF INPUTS
Low cost of production Has to be an ensured & uninterrupted supply of inputs If Supply of raw materials is uncertain , it puts financial burden on the company & lowers profit margin Monopoly control over supply of materials It is not sound policy to depend upon single supplier Maintenance of good relationship with supplier

Workers & their unions

Labour is an important input in production Labour unions organized at the company level are not equally strong Some unions adopt negative attitude towards the company management Constant conflict between labour & management will not allow the company to grow & overtime may transform it into a sick unit

CUSTOMERS
Most important element Customers loyalty to product depends on the degree of their satisfaction Demand for the product may come from individuals, business enterprises, institutions etc Better to have customers from various group & region Attempt to launch products which are relatively recession proof basic necessities

Marketing intermediaries Wholesalers, retailers, distribution firms, agents constitute an important element Most co find it too difficult to reach their consumers Marketing intermediaries render useful service in popularizing a product

COMPETITORS
Most common competition which a companys product now faces is from differentiated product ex: Voltas AC faces competition from other branded Ac such as LG, VIDEOCON , HITACHI, CARRIER This type of competition is known as the brand competition

PUBLIC
 The word public refers to people in general  According to PHILIP KOTLER a public is any group that has an actual or potential interest in or impact on a companys ability to achieve its objectives  ENVIRONMENTALISTS, CONSUMER PROTECTION GROUPS, MEDIA PERSONS examples of publics  These groups by their actions pose a threat to certain companies

MACRO ENVIRONMENT Macro environment of a company refers to all those economic & non-economic factors which exercise their influence on the business activity in general & thus determine opportunities that a company may have to promote its business

Macro environment of business can be broadly classified into ECONOMIC ENVIRONMENT & NON-ECONOMIC ENVIRONMENT

ECONOMIC ENVIRONMENT

GLOBAL

NATIONAL

Non economic environme nt

Political legal

Demogr aphic

Technologi cal

Natural

SOCIOCULTURAL

ECONOMIC ENVIRONMENT OF BUSINESS: NATIONAL

 In a modern economy, there are broadly five sectors o BUSINESS SECTOR o HOUSEHOLD SECTOR o CAPITAL MARKET o GOVERNMENT o EXTERNAL SECTOR  These sectors together create the structure of the economy  The activities which keep on going in these sectors create both jointly & separately the economic environment in which the business firm operate

CONTIuuu. Individually business firms can do little to change their economic environment Capitalist economy business firms can do a lot Business firms now organize their associations through which they attempt to influence policies of the organization In India CII ( Confederation of Indian Industry) FICCI (Federation of Indian Chamber Of Commerce & Industry) ASSOCHAM ( Associated Chambers Of Commerce & Industry Of India)

CONTIu..
They exercise considerable influence on the govt & thereby attempt to mould economic environment in their favor They extract tax concessions & subsidies from the govt, influence fiscal, monetary trade policies & get economic laws enacted in the favor of business & industry

ECONOMIC SYSTEM
Economists define an economic system as the sum total of devices by which the preference among alternative purposes of economic activity is determined & by which individual activities are coordinated for the achievement of these purposes. These economic devices differ according to the customs & institutions of society & need not always be the same in any two countries

CONTI~uuuu. Economic system of the USA, JAPAN, GERRMANY, FRANCE, & the UK is capitalistic SOVIET UNION & CHINA they can both be called as socialist The three central problems of an economy viz, What to produce How to produce For whom to produce

CONTIuuuu
Those three problems are solved by the business in a capitalist economy freely in the framework of market mechanism Little bit difficult in socialist economy because economic planning occupies the central stage

CAPITALISM
Capitalism is a system of private property in both producer & consumer goods, freedom of contract & competition, with limited govt intervention in economic affairs. Capitalism of today is a mixed economic system in which the private as well as the public sectors coexist side by side. Due to the emergence of big corporations in the private sector it could no longer retain its competitive character & has, therefore, transformed itself into a monopolistic set-up.

CONTIuu..
USA which is a leading capitalist economy , production takes place in the private & the public sectors side by side The govt through its fiscal policies & various restrictive policies tries to control the activities of private sector India which is an underdeveloped country, does not differ significantly from the USA in the organization of its economy Now mergers & acquisition are quite common in both developed & underdeveloped countries

CONTIuuu
The recent acquisition of CORUS & ANGLO-DUTCH STEEL COMPANY by the TATA STEEL COMPANY has now made the Indian company the fifth largest producer of steel in the world Now TATAs have become a major global player in the steel production In India, both private & public sectors co-exist In the private sector the big business houses like those of BIRLAS, REALIANCE, & TATA & MNCs like HINDUSTAN LEVER , NESTLE INDIA have powerful grip over the market

SOCIALISM
In a Socialist economy the responsibility of taking all decisions related to production & economic development lies with the state

CONSIDERATION
Apart from labour, all the other means of production are owned by the state & not by individuals in their private privacy Production in a socialist economy is guided by the objective of social welfare rather than private profit

Conti.
The decision regarding production pattern, quantities, the choice of technique & the distribution pattern are all taken by the govt Just as under capitalism, in a socialist economy, people have complete freedom to spend their disposable income on goods & services of their choice

MACRO-ECONOMIC SCENARIO
MACRO-ECONOMIC SCENARIO DETERMINES THE PROSPECTS OF BUSINESS IN A COUNTRY LIKE
RATES OF GROWTH STABLE PRICES HIGH RATE OF SAVINGS & INVESTMENT FISCAL STABILITY FAVOURABLE BALANCE OF PAYMENTS

RATES OF GROWTH
Steadily rising incomes in a period of high rates of growth increase demand for various goods But rise in the demand for consumer durables is most notable. This naturally induces business activity in this sector In a period of high growth , demand for automobiles, motorbikes, AC, music systems register high rates of growth In a period of slow growth, this sector is most adversely affected

Conti..
Ex: economic growth in India slowed down over the period 1997-98 to 2002-03 The GDP rose in 2000-01 by 4.4% only Even in 2002-03 GDP growth remained low at 4.0% The overall industrial growth in 2001-02 stood at 2.7% which rose only to 5.7% in 2002-03 As a result, there was a fall in the demand for consumer durables so much so that this sector registered a negative growth rate of (-6.3%) in 200203

Conti.
However there was a recovery in 2003-04 with GDP rising by 8.5% & industrial production by 7.0% This pushed up the demand for consumer durables with the result that their production rose by as much as 11.6% in 2003-04 During last three years overall economic growth in india was around 8% per annum When overall economic growth remains quite high, the economic environment is conducive to business development

INFLATION
Inflation is commonly defined as a persistent & appreciable rise in general level of prices During inflation, prices of various commodities do not rise at a uniform rate This sometimes causes misallocation of resources & in turn, a decline in output & income When inflation rate is high , there is a drastic redistribution of income, which , in turn, reduces the aggregate demand

RATES OF SAVING & INVESTMENT

Savings & investment in a country determine its business potential Industries & agriculture are directly productive activities, their growth requires massive investment in them As investment in industries increases, the scope foe business activity grows Growth of agricultural incomes as a result of larger investment in the farm sector results in increased demand for industrial goods & thereby contributes to growth & to business

Conti Shortage of power or poor transport & communication system due to inadequate investment in them can prove to be a major obstacle to business growth A high investment rate is sustained by an equally high domestic savings rate Sometimes foreign capital is obtained in large amounts to boost up investment rate to accelerate both economic growth & business activity In economies where rates of gross domestic savings are as high as 30% or more ,conditions exist foe self-sustained growth & expansion of business

BALANCE OF PAYMENTS DEFICIT

Excessive current account deficit in a countrys balance of payments is not desirable for business activity. Such a situation leads to a shortage of foreign exchange which, in turn, forces restrictions on imports. Restriction on imports of consumer goods in less developed countries have given protection to domestic industries These industries have felt no compulsion to improve their efficiency

CONTIuu..
The cost in these industries have been high & quality of products inferior International competitiveness of these industries is low & therefore once they are exposed to global competition their survival chances are dismal The net inflows from external assistance & direct foreign investment should be fairly large

PROSPERITY
In this phase the economy expands in response to growing aggregate demand & business firms have many options Expectations of rising profits induce firms to expand the scope of their activities New products are introduced in this period Rapidly rising incomes of the people allow them to increase their consumption & whichever firm can take advantage of this situation by taking appropriate policy

RECESSION
The recession usually gets reflected in the form of stock market crash The aggregate demand gradually declines & thus incentive for investment is killed The demand for consumption goods fall with a lag because people try to stick to their consumption which they had achieved in the expansion period NESTLE INDIA, HINDUSTAN LEVER, & COLGATEPALMOLIVE INDIA have greater chances of survival during recession periods These firms produce a variety of consumer goods for which there is substantial demand in India

DEPRESSION
Depression is characterized by low economic activity, a notable fall in production & employment , decline in general price level, weakening in business prospects & continuous erosion in the profits of producers & traders These are the conditions in which certain firms suffer heavy losses & finding uncertain situation, these firms are not very hopeful of earning profits These firms are reluctant to make investment

STAGFLATION
Stagflation is a relatively new phenomenon. It is characterized by inadequate growth, inflation & unemployment Stagflation results from wrong policies of the govt When some govt attempts to achieve a high rate of economic growth by resorting to inflationary policy, the results may be encouraging in the shot-period but in long run such an economy plunges into stagflation

Financial system
Finance is a basic requirement of business, the level of development of the financial system is of crucial importance for business. In India , the financial system is broadly divided into two segments

1. THE MONEY MARKET 2. THE CAPITAL MARKET

MONEY MARKET
The money market refers to a mechanism whereby transaction in short-term claims on banks, financial institutions & corporate sector are effected. Thus it is a market for short-term monetary assets.  The Indian money market is broadly divided into two parts, UNORGANISED SECTOR & ORGANIZED SECTOR  In the unorganized sector, indigenous bankers, unregulated non-bank financial intermediaries & money lenders operate  Corporate sector of business does not seek funds from the unorganized sector

CONTI..
 The organized sector of Indian money market comprises Indian commercial banks, foreign banks, co-operative banks, finance corporations & discount and finance house of india limited  The main constituents of the IMM THE CALL MONEY MARKET THE COMMERCIAL BILL MARKET THE TREASURY BILL MARKET THE REPO MARKET THE CERTIFICATES OF DEPOSITS MARKET THE COMMERCIAL PAPER MARKET MONEY MARKET MUTUAL FUNDS

THE CAPITAL MARKET

The capital market is concerned with long-term funds & it can be divided into two constituents

1. THE FINANCIAL INSTITUTIONS 2. THE SECURITIES MARKET

1.THE FINANCIAL INSTITUTIONS

THE INDUSTRIAL FINANCE CORPORATIONS OF INDIA LTD (IFCI) THE INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI) INDUSTRIAL INVESTMENT BANK OF INDIA (IIBI) STATE FINANCIAL CORPORATIONS (SFCs) STATE INDUSTRIAL DEVELOPMENT CORPORATIONS (SIDCs) LIFE INSURANCE CORPORATIONS OF INDIA (LIC) THE GENERAL INSURANCE CORPORATION OF INDIA (GIC) and its subsidiaries are the principal financial institutions

2.THE SECURITIES MARKET

It has two constituents 1. New issue market 2. Stock exchange
The stock exchange provides a channel through which savings of the people who wish to part with them for only short periods, become available to companies for long term utilization The basic function of money & capital market is the collection of savings & their transfer to business enterprises for investment purposes & thereby stimulating capital formation which in turn accelerates the process of business growth

ECONOMIC POLICIES
1. INDUSTRIAL POLICY
Increased involvement of the govt in the allocation of capital to industries is called as industrial policy The new industrial policy of 1991 has deregulated the industrial economy in a substantial manner It has abolished all industrial licensing except for some industries related to strategic & social concerns

2. TRADE POLICY
TRADE POLICIES ARE CLASSIFIED INTO TWO CATEGORIES 1. OUTWARD-ORIENTED 2. INWARD-ORIENTED An outward oriented industrial policy does not discriminate between production for domestic market &exports It is also non-discriminatory between purchases of domestic goods & foreign goods It provides liberalised economic environment

CONTIuuu. An inward-oriented trade policy is biased in favor of domestic market Protection is the principal instrument of inwardoriented trade policy Business firms operating under protective umbrella do not feel any compulsion to raise their efficiency level

3. MONETARY POLICY
Monetary policy influences cost & availability of credit & money & is thus of great relevance to business Monetary policy is an arm of macro economic policy & as such, its role & importance are determined in any economy by the overall policy framework & the various instruments available for implementing policy

4.FISCAL POLICY
Fiscal policy refers to the process of shaping taxation & public expenditure in order to reduce the swings of the business cycle & to contribute to rapid economic growth with high employment & stable prices

LIBERALIZATION Liberalization means removing all sorts of restriction, regulation & system of licensing in the initiation & development of any economic enterprise In simple words it means telling good-bye to licence The policy of liberalization was adopted in the industrial policy act of 1991 Indian economy was under tight control of both central & state govt

CONTIuuu
It restricted the system of licensing to only few industries like AUTOMIC ENERGY, CIGAR &
CIGARATES, DEFENCE EQUIPMENTS, DRUGS & PHARMACETICALS, DISTRIBUTION OF ALCHOLIC LIQUOR

Liberalization policy has given scope for excessive inflow of foreign capital into India Free convertibility of currency It has given scope for the big industrialist to invest any amount of capital & development of any number of industries

PRIVATIZATION
It means giving more & more scope to private sector industries in the initiation, development & expansion of various industrial activity Induction of private ownership & control in the management of public sector undertakings Many of the public sector industries are working under loss only one hand & are heaving inefficient management

CONTIuuu It is also called as BOOT

    BUILD OWN OPERATE TRANSFER

Complete utilization of all idle resources

GLOBALIZATION
The term globalization stands for treating the whole world as a single unit of production In the Indian context it means linking Indian economy with the world economy Scope for more& more foreign direct investment by changing the % share of equity from 48% to 51% Globalization has given scope for joint venture undertakings b/w Indian & foreign investors, govt of India & that of any other foreign govt

ECONOMIC ENVIRONMENT OF BUSINESS: GLOBAL  The world economy registered at best a modest rate of growth in terms of GDP during the three year period from 2002-2004  The growth rate rose from 0.5% in 2002 to 2.9% in 2004  In 2005, the world growth rate declines to 2.4%per annum  It continued to fall in the subsequent period despite of impressive growth rates registered in CHINA, INDIA & RUSSIA

THE US SLOWDOWN
The economic slowdown in the USA that started some years back & still continue Economic growth in 2001 was 1.2% In 2005-06 it was 2.4% In 2007-08 has been particularly bad for the US economy where economic growth was 1.6% The main reasons for a likely recession in US economy are
 Housing prices were falling  Oil prices were rising

CONTIuuu

At present the US economy occupies a strategic position in the global economy as far as its share in worlds GDP is concerned. It also occupies commanding heights on international capital, financial markets & international trade

THE RECESSION IN THE JAPANESE ECONOMY GDP growth rate was as low as 1.2% per annum during 1995-2001 Financial Times reported on 26 Feb 2005, that Japans economy slipped into recession for the fourth times in 10 years Data released in Feb 2005 showed that the GDP contracted by 0.1% in the fourth quarter of 2004 Main reasons were Stock market moves in spirals Banking system lacks money to write off bad loans Exports were not increasing Industrials companies were becoming bankrupt

ROLE OF THE WTO IN GLOBAL ECONOMIC ENVIRONMENT

Came into existence in 1995 The main focus of the WTO is on cutting down trade barriers among countries with the objective of encouraging free trade among all the countries This is expected to bring about substantial growth in world trade & increased income from liberalization, improved market access, & greater export opportunities

NON-ECONOMIC ENVIRONMENT
The non-economic environment of business can be broadly classified as follows

POLITICAL & LEGAL ENVIRONMENT SOCIO-CULTURAL ENVIRONMENT DEMOGRAPHIC ENVIRONMENT TECHNOLOGICAL ENVIRONMENT NATURAL ENVIRONMENT

POLITICAL ENVIRONMENT What constitutes political environment? In capitalists who own or manage most of the business have control over the state power Hence the policies of the govt serve the interests of the capitalist class This kind of political environments is conducive to business activity