Notes from Business Environment SIGNIFICANCE OF BUSINESS ENVIRONMENT

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Nigel Reeves
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1 UNIT-1 Notes from Business Environment SIGNIFICANCE OF BUSINESS ENVIRONMENT The survival and success of any enterprise depends upon its inherent capabilities (Physical, financial, human and other resources) and its ability to adapt to the changing environment. Some Direct benefits of the environments are:- First Mover advantage Early Warning Signal Customer focus Strategy Formulation Change Agent Public Image Continuous Learning TYPES OF BUSINESS ENVIRONMENT / ELEMENTS OF BUSINESS ENVIRONMENT Internal Environment o Cultural o Mission and Objectives o Top Management Structure o Power Structure o Company Image and Brand Equity o Human and Other Recourses External Environment o Micro Environment Customers Competitors Suppliers Marketing intermediaries Financiers Publics Works and Trade Union o Macro Environment Political and Legal Environment Social and cultural environment Economic Environment Financial environment Technological and physical environment Global environment NATURE OF BUSINESS ENVIRONMENT Aggregative Inter-Related Dynamic General and Specific Forces Relative Inter- Temporal Uncertain Contextual

2 THE CONCEPT OF BUSINESS ENVIRONMENT (DEFINITION) The aggregate of all conditions, events and influences that surround and affect business. Keith Devis Thus, Business Environment means all those internal and External Factors that have an impact on Business. POLITICAL AND LEGAL ENVIRONMENT It comprises the elements relating to government affairs. It serves as the regulatory framework of business. The main constituents of a country s as follows:- The constitution of the country Political organisation Political Stability Image of the country and its leaders Foreign policy Defence and military policy Laws governing business, and legal system SOCIAL AND CULTURAL ENVIRONMENT It refers to the characteristics of the society in which a business firm exists. Demographic forces- (Size, composition, mobility and geographical) Social institutions and groups Caste structure and family organisation Educational system and literacy rates Customs, attitudes, beliefs, values and life styles Tastes and preferences of people and Buying Behaviour ECONOMIC ENVIRONMENT It comprises all those economic forces which influence the functioning of business enterprises. The Main components of economic environment are as follows: The nature of economic system (Capitalist, socialist or Mixed) Economic structure Economic policies Organisation and development of the capital market Economic indices Economic infrastructure Product markets and Factor Markets IMPACT OF ENVIRONMENT ON BUSINESS AND STRATEGIC DECISION A business enterprise is a part of society and changes in environment influence its functioning and performance. The environment may pose constraints on the enterprise as well as open new opportunities for it. Impact in Economic System Impact in Social and cultural forces Impact in Political and legal environment Impact in Technological and Geographical Environment Impact in Physical and Natural Environment

3 UNIT-2 (Political Environment) GOVERNMENT BUSINESS RELATIONSHIP IN INDIA Government and Business are the two most powerful institutions in society. The two together determine public policy, both domestic and foreign, for a country. The policies, practices and regulations of the government influence to a large extent the nature, growth and functioning of the business system. Changes in the nature and extent of government intervention in business matters lead to changes in the pattern of industrial growth. When public sector was in a dominant position and industrial licensing was widely applicable, scale of operations and the location of projected were decided by the government. PROVISIONS OF INDIAN CONSTITUTION PERTAINING TO BUSINESS In any country, business can be started and operated within the framework of th legal system. The laws influencing business may be classified as follows: General Laws Financial Laws Labour Laws Taxation Laws Other Laws Some of the Laws are given below:- The Contract Act, 1872 Partnership Act, 1932 The Company Act, 1956 The Industries Act, 1951 The Competition Act, 2002 The Income Tax Act, 1961 The Customer Protection Act, 1986 The Foreign Exchange Management Act, 1999 The Patents Act, 1970 The Trade Marks Act, 1999 The Environment Protection Act, 1986 UNIT-3 (Social and Cultural Environment) CULTURAL HERITAGE Cultural Heritage refers to the cultural background of a society. It is transmitted from one generation to another. For example, classical music and artifacts are parts of India s cultural heritage, Culture is the system in which people live their lives. Cultural heritage comprises not only infinite facts of culture but also involves the use of these facets by people. Cultural heritage is developed through experience and cannot easily be taught. Objects of cultural heritage are symbolic, E.g., Taj Mahal. important and provides identity to the society. These objects indicate what is

4 SOCIAL ATTRIBUTES Attitudes are a significant aspect that helps people to understand their social world. Attitudes reflect how we think and perceive others and behave towards them. A popular definition of attitudes is evaluations of various objects that are stored in memory. An attitude is composed of three components: Affect (a Feeling) Cognition (a Thought) Behaviour (an action) CASTES AND COMMUNITIES The Term Caste means a closed group consisting of people who specialize in a particular occupation and are severely restricted in terms of social participation. The caste system originated in ancient times in India. The society, particularly the Hindu society, was divided into four categories on the basis of caste. Kshatriya Brahmanas Vaishyas Sudras JOINT-FAMILY SYSTEM Joint-Family System is a unique feature of Indian Society. Joint Hindu Family is a group of persons lineally descendant from a common ancestor. The share a common estate, live under one roof and are joint in food and worship. The eldest male member acts as the KARTA. The Karta has several responsibilities. His main responsibility is to manage the family s property and to act as the custodian of the family s assets and income. His liability is Unlimited. LINGUISTIC AND RELIGIOUS GROUP Language is the medium of interaction in both society and business. Like most countries, India is Multi-linguistic. There are 18 officially recognized languages and the census of India lists 1,652 mother tongues. Each language has its own dialect. Religion may be defined as any specific system of belief about deity, often involving rituals, a code of ethics and a philosophy of life. Religious beliefs, convictions, customs, rituals and festivals differ from one group of people to another. TYPES OF SOCIAL ORGANISATION There are several types of social organisations and the social structure in India is very Complex. India is a land of great diversity. We have so many religions and ethnic groups, religious sects and cults. Family Clan Tribe Community Association The composition of society is changing causing a social change in terms of I) New occupational patterns II) Change in the size of the family III) Changes in institutions IV) Change in social attitudes and beliefs V) New lifestyles and social interactions

5 SOCIAL RESPONSIBILITIES OF BUSINESS In India, Business by and large does not enjoy a good public image. A few leading business houses have made significant contributions to the economic and social well-being of the country. Government Community Customers Employees Shareholders Others UNIT-4 (Economic Environment) Economic System An Economic system or economy is a system designed by a nation to utilize her resources for the purpose of satisfying the needs and wants of people. Basic Units of an Economic System 1. Household 2. Firm 3. Industry 4. Government Characteristics of an Economic System 1. National Entity 2. Institutional 3. Interdependence 4. Scarcity of Resources 5. Need Satisfaction 6. Dynamic Functions of an Economic System 1. What to Produce 2. How to Produce 3. For whom to Produce 4. Choice between Current Needs and Future Needs 5. Economic Growth Types of Economic System 1. Capitalism 2. Socialism 3. Mixed Economy Per Capita Income National income figures conceal the effect of rise in population. To eliminate this effect, per capita income (NNP per person) is calculated. Whereas the growth of NNP at constant prices indicates the rate of growth in the economy, growth of per capita income at constant prices indicates changes in the standard of living of people. Per capita income means the average annual income per person. It is calculated by dividing the national income with total population.

6 URBANIZATION An urban area is all places with a municipality, corporation, cantonment board or notified town area committee; all other places satisfy a minimum population of 5,000; at least 75% of male working population engaged in non-agricultural pursuits; a density of population of at least 400 persons per sq. Km. Urbanization means the proportion of a nation s population living in urban areas. It is different from urban growth which refers to increase in total urban population. Urban growth is an absolute term whereas urbanization is a relative term. FISCAL DEFICIT An underdeveloped country like India has to spend huge amounts of money on development plans. It is not always possible to raise the required financial resources internally through taxation. Then the country obtains aids and loans from abroad. The Term fiscal deficit is generally used to refer to the excess of public (Govt.) expenditure over public revenue. Concepts of Deficit Budget 1. Revenue Deficit (Revenue Expend. Revenue Receipts) 2. Budget Deficit (Total Expend. Total Receipts) 3. Fiscal Deficit (Budget Deficit + Market borrowings and Liabilities of the Govt.) 4. Primary Deficit (Fiscal Deficit Int. payments by the Govt.) Role of Fiscal Deficit 1. Finances Development 2. Bridges Budgetary Deficit 3. Stimulates Economy Effects of Fiscal Deficit 1. Inflation 2. High cost Economy 3. Inequalities in Income Distribution 4. Generates Employment 5. Wasteful Expenditure 6. Burden of Debt FIVE YEAR PLANNING 1. First Five year Plan ( ) 2. Second Five-Year Plan ( ) 3. Third Five-Year Plan ( ) 4. Fourth Five-Year Plan ( ) 5. Fifth Five-Year Plan ( ) 6. Sixth Five-Year Plan ( ) 7. Seventh Five-Year Plan ( ) 8. Eight Five-Year Plan ( ) 9. Ninth Five-Year Plan ( ) 10. Tenth Five-Year Plan ( ) 11. Eleventh Five-Year Plan ( ) 12. Twelfth Five-Year Plan ( )

7 PLAN INVESTMENT India has sought to achieve economic growth through five-year planning. The level of economic activity in the country, therefore, depends to a large extent on total investment during a plan or the amount of Plan outlay. UNIT-5 (Financial Environment) FINANCIAL SYSTEM Meaning The financial system of a country means a set of financial arrangements by which the savings in the economy are mobilized for investment in productive assets. The financial system deals with all types of finance agricultural, industrial, and developmental and government finance. It concerned with borrowing and lending of funds or the demand for and the supply of funds all individuals, institutions, companies and the Government. Indian Financial System 1. Financial Markets 2. Financial Institutions 3. Financial instruments 4. Financial Services Financial Markets:- 1. Capital market (Primary and Secondary market) 2. Money Market (Organized and Unorganized Sector) 3. Foreign Exchange Market (RBI) 4. Government Securities Market ( Treasury Bills & Bonds) FINANCIAL INSTITUTIONS:- 1. Banking Institutions Central Bank (RBI) Commercial Banks Co-operative Banks Development Banks Agricultural Banks Merchant Banks Indigenous Banks 2. Non- Banking Institutions Hire purchase and Leasing Companies Investment Companies Housing Finance Companies Factoring companies Venture Capital Funds Mutual funds Non-Banking finance Companies (NBFCs) Non- Banking Finance Companies In recent years, non-banking finance companies have made rapid progress in India. These companies raise deposits from the public by offering attractive rates of interest and other incentives. It provides unsecured loans and, therefore, charge high rates of interest.

8 Types of NBFCs 1. Loan companies 2. Investment companies 3. Leasing companies 4. Chit Funds 5. Hire-Purchase Finance companies 6. Housing Finance Companies 7. Housing finance Companies 8. Mutual Benefit Companies 9. Residuary Non-Banking companies COMMERCIAL BANKS A bank is an institution which deals in money and credit. It accepts deposits for the public, lends money to those who need, helps in the remittance of money from one place to another, and performs other auxiliary functions. Functions of Commercial Banks Primary Functions o Accepting Deposits Fixed Deposit Saving Deposit Current Deposit Recurring Deposit o Lending Money Overdraft Cash Credit Bills Discounting Loans Secondary Functions o Agency Functions Collection of bills, Int., Rent, Dividend, Etc., Making payments as per Instructions Buying and Selling Securities Acting as Trustee and Executor Transfer of Funds o General Utility Functions Issuing Letters of Credit, Travellers cheques, etc Underwriting shares and Debentures Safe custody of Valuables Providing ATM and Credit card Facilities Providing Credit Information Role of Commercial Banks in Economic Development 1. Capital Formation 2. Entrepreneurship Development 3. Utilization of Latent Resources 4. Assist priority Sectors 5. Employment Generation 6. Social Welfare 7. Implementation of Monetary Policy

RESERVE BANK The RBI is called Central Bank it supervises and regulates the entire banking system in the country and carries out the monetary policy.

9 RESERVE BANK The RBI is called Central Bank it supervises and regulates the entire banking system in the country and carries out the monetary policy. It controls supply of money and credit and serves as the lender of the last resort. It is generally granted monopoly of note issue. Functions of Reserve Bank of India 1. Issue of Bank Notes 2. Banker to Government 3. Banker to Bank 4. Controller of Credit 5. Custodian of Foreign Exchange Reserves 6. Clearing House facility 7. Collection and Publication of Data 8. Supervisory Functions 9. Developmental Functions 10. Other any Functions Credit Control by RBI I) Bank rate II) Cash Reserve Ratio (CRR) III) Statutory Liquidity Ratio (SLR) IV) Open Market Operations Role of RBI in Economic Development 1. Development of Banking system 2. Development of Financial Institutions 3. Economic Stability 4. Economic Growth 5. Proper Interest Rate Structure 6. Miscellaneous STOCK EXCHANGE A stock exchange is an organized market where shares, stocks, debentures and other Securities are bought and sold. Under the Securities contract Act, Functions of Stock Exchange 1. Ready Market 2. Evaluation of Securities 3. Protection of Investors 4. Mobilization of savings Thank You!

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