Chapter 3 - Business Environment

What is meant by “business environment”? – 2 marks

Business environment means forces and institutions which the members of a firm must deal with in order to achieve the objectives of the organization.

Forces include politic, economic, social, technological, etc (PEST) and Institutions include (competitors, customers, suppliers, etc)

The environment provides both constraints and opportunities. Discuss with examples

• An environment provides constraints (restrictions), which could be in the form of economic conditions, customs, government regulations, availability of natural resources, labour supply.

  Example: Despite many initiatives, foreign direct investment in India is not picking up in the country because of political and bureaucratic reasons.

• On the other hand, environment also provides the firms numerous opportunities in the form of unmet and changing needs of the customer and market.

  Example: the growing demand for air conditioners has attracted many new domestic as well as multinational firms in the industry

What is meant by environment scanning? – 2 marks

• Environment scanning is a process by which organizations monitor their relevant environment so that they can consider the impact different events, trends, issues, expectations have on its strategic management process.
• Example – in the Union Carbide gas leakage incident in Bhopal in Dec-1984,

  The accident and the holocaust that resulted, was an “event”

  The consciousness on the part of the Regulatory Authorities regarding the safety from hazardous exposure to chemicals, was the “trend”

  The rising concern about environmental pollution was the “issue”

  “expectations” of the public from the government was to amend the laws to include safety measures and stricter enforcement through various mechanisms.

Briefly discuss two dimensions of general environment? Classify business environment in two major categories and give one example of each? – 2 marks

The two dimensions of general environment are:

Economic environment : includes fiscal, monetary and industrial policies, etc

Non economic environment : includes social, cultural, political, legal, technological factors, etc

Explain economic environment? – 2 marks

Economic environment consists of (BIG PICCED)

• Balance of payment
• Inflation rate
• Gross national product (GNP)
• Productivity
• Interest rate
• Consumer Income
• Corporate Profit
• Employment rates
• Debt & Spending

Give two examples of the factors and influences that operate in the Indian ECONOMIC ENVIRONMENT and which have had an impact on all business organizations – 2 marks

1. Rapid increase of production capacity after partial decontrol of cement in 1982.
2. Banking sector reforms led to attractive deposit avenues, easier credit terms, better service and above all an effective and reliable banking system
3. Due to changes in economic and fiscal policies, entry for financial institutions and banks in stock trading became easier.

What is meant by SOCIAL ENVIRONMENT of business? – 2 marks

• Social Environment describes the characteristics of the society in which the firm exist.
• The following form a part of the social environment:
  • Customs, Age, Beliefs, Lifestyle, Educational levels (CABLE)
  • Literacy rates, Values, Demographic distribution & mobility of population (VLDM)
• Managers should remember that although the attributes of the society may change slowly or quickly but they will eventually change.
• They should study the social traits of the area before moving in that area otherwise the cost of ignoring the taste, preference, customs, traditions taboos of the society could be very high.
• Examples:
  • Vicks Vaporub is a popular pain balm. If it is used as a mosquito repellant in some tropical areas due to sheer ignorance, the adverse effects can be very severe.
  • Similarly, the slogan of Pepsi Cola “come alive” in some languages is translated as “come out of the grave”. Therefore due to this slogan, the product failed to pick up.

Give 2 examples of factors and influences that operate in the Indian SOCIAL ENVIRONMENT and which have had an impact on all business organizations? – 2 marks

1. Demand to reserve jobs for minorities and women.
2. Equal pay to men and women for equal work performed.
3. When there is an increase in middle class families, there is a continuous demand for various consumer goods and they also influence investment in the corporate sector.

Explain briefly five ways in which Indian managers are responding to changes in the business environment (Sample paper) – 5 marks

Following are the ways in which companies are responding to change in business environment.

1. Acquisition & Mergers:
   • Mergers, acquisition, takeovers, amalgamations (MATA) are a common feature of post liberalized economy.
   • The purpose of these acquisitions and mergers were to achieve entry, dominance in the market, access to technology, etc.
   • Examples: Mergers between ACC Gujarat, Ambuja Cement, Hindustan Aluminum Co and Indian Aluminum Co are examples of merger. Reliance gaining control over management of L&T is an example of acquisition.
2. Consolidation of Multinational Due to liberatisation policy, many multinationals have entered India through joint ventures.

   For example General Motors entered through a joint venture with Hindustan Motors. Ford entered with Mahindra & Mahindra. Multinationals are also entering the core sectors of the Indian economy.

3. Brand building Branding means putting the manufacturer’s name, a picture, etc on the package of the product. Brands create awareness of a product and hence in today’s competitive world, brands have come to occupy an important place. Many companies increased their expenditure to enhance their brands. For example heavy expenditure was incurred on launching of Korean brands such as Hyundai, LG, Samsung, etc. Indian companies are also doing likewise.
4. Distribution & Selling
   • Selling goods through direct marketing of products such as Tupperware, Amway is a recent development.
   • This has increased the selling cost of Indian companies more than foreign company because a large amount is being spent on advertisement.

Capital Structures

• Capital structure of companies has changed more to equity than debt. This is because in the past equity was dominant but thanks to crooks in the stock markets, they have shaken the investors confidence by so many false new issues in the past, companies now have to rely more on debt than equity.
• Indian companies such as Reliance have also started moving towards global market for equity and debt capital