ASSIGNMENT SOLUTIONS GUIDE ( ) E.C.O.-13

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2 ASSIGMET SOLUTIOS GUIDE ( ) E.C.O.-13 Business Environment Disclaimer/Special ote: These are just the sample of the Answers/Solutions to some of the Questions given in the Assignments. These Sample Answers/Solutions are prepared by Private Teacher/Tutors/Authors for the help and guidance of the student to get an idea of how he/she can answer the Questions given the Assignments. We do not claim 100% accuracy of these sample answers as these are based on the knowledge and capability of Private Teacher/Tutor. Sample answers may be seen as the Guide/Help for the reference to prepare the answers of the Questions given in the assignment. As these solutions and answers are prepared by the private teacher/tutor so the chances of error or mistake cannot be denied. Any Omission or Error is highly regretted though every care has been taken while preparing these Sample Answers/ Solutions. Please consult your own Teacher/Tutor before you prepare a Particular Answer and for up-to-date and exact information, data and solution. Student should must read and refer the official study material provided by the university. Attempt all the questions. Q. 1. What is meant by business environment? Describe briefly various components of non-economic business environment. Ans. Business environment is defined as set of factors/variables and forces which tend to affect business activities of a firm. Business environment comprises of internal and external variables. While the former are within the control of organisation, the latter are out of its control. Internal environment includes employees, firm s resources, management, organisation structure, policies and objectives. External environment variables include social, legal, political and economic factors. Business strategy, policies and their implementation largely depends on these external variables. on-economic Environment of Business on-economic environment of business comprises of country s history, social, cultural, legal and political system. The economic and non-economic factors are interdependent and collectively influence a business. 1. Sociological Factors: Sociological factors includes the following: 1. Attitude of society towards authorities, managers, income level, status, spending, achievement, power, wealth delegation and worker participation. 2. Attitude towards Class (social classes) and structure. 3. Prevalent caste system and other social barriers 4. Attitude towards Labour mobility (migration to other states/countries). 5. Attitude towards knowledge acquisition, education, training and development. 6. Social values and beliefs, customs, culture, values (religious and social). 7. Spending, saving, consumption behaviours and patterns. The above social-cultural and socio-educational factors have a profound impact on the way firm conducts its business and it is necessary that strategy of a firm is in accordance with these sociological factors. Sometimes, social inertia or resistance affects marketing of products. In such cases, the market strategy must be aligned along the social system and in long run work to induce gradual changes in the system. Consumerism Consumerism is a latest phenomenon which originated when the expectations of the customers from the business units were more than they were served. Consumerism, in other words, is a term symbolising the customer protection movement which denotes a kind of an organised effort of consumers. These consumers are concerned with increased rights of consumers in society and are also interested in bringing an end to the malpractices of business community. 2

3 Consumer Movement in India Consumer movement exists at a nascent stage in India. It is moving though on a snail s pace. Several consumer organisations have come up in India to make people aware of their rights and duties. There is a consumer protection act that promises right to safety for customers, right to be informed for them, right to choose, right to be heard, right to redressal and right of consumer education. In other words, consumerism could be defined as an organised effort of consumers. These are the people who are concerned with increased rights of consumers in society, who are oriented towards ending the malpractices of business community and so on. It can be defined as a movement that is placing stress on protection of certain economic interest and also on physical safety. Consumerism in India is still at budding stage, It is growing, but at a slow pace. Consumer movement in India marked a silent revolution by making the people aware of their rights at different stages. The first stage was when the consumer was made aware by penning down articles in newspapers and magazines. People was also made speeches in public places. The second stage boycotting of goods and holding demonstrations. Thus, there came a third stage where there was lobbying, advocacy, litigation and laboratory testing done for the products with which the customer was not satisfied. Finally, there came the fourth stage that witnessed the introduction of Consumer Protection Act, 1986 that is a landmark in the Indian history. 2. Demographic Factors: Demographic environment refers to population size and growth rate. Population has two aspects quantitative and qualitative. Quantitative aspect refers to number and depends on demographic composition (age, sex, mortality rate, birth rate). Qualitative aspect of population is determined on basis of literacy/ education level, health, nutrition, general living conditions and experience of population. Population has a direct effect on demand-increase in population increases labour supply on hand and demand on another. Increase in labour, encourages labour intensive techniques. Similarly, labour shortage leads to development of labour-saving technologies. Increased demand and labour supply has encouraged multi-national companies to enter markets of developing countries. 3. Competitive Environment: Competition which exits due to presence of other players in the market, affects the business strategy of a firm. Competition can be of three types: 1. Perfect Competition: In perfect competition, there are n-number of players in the market, and no single player influences the market or has economic power. 2. Monopoly: In monopolistic competition, a single operates in the market and has enormous power. 3. Oligopoly: In oligopoly, there are few players in the market, but no single player influences the market. At times, players come together to form cartel under which members take joint decisions regarding price, output and other factors which influence the market, giving them monopolistic powers. In many countries, including India, the government regulates competition to eliminate monopolistic trade activities. Any trade practices can be taken under monopolistic trade practice if it is quoting unreasonable high price, high cost and unreasonably high profits or if there is prevention of competition, limited technical development and deterioration of quality of goods. MRTP Act is applicable to all undertakings expect the undertakings in J&K, trade associations, undertakings controlled by government and industrial units under the currency and coinage division of ministry of finance. 4. Political and Legal Factors: Legal and political aspects of business environment are closely related. Legal enactments depend on political aspects. Important political-legal factors affecting a business are: 1. Country s image (politically stable/unstable) 2. Bureaucratic attitude and role 3. Legal enactments and rules 4. Foreign policy and relations 5. Constitutional amendments 6. Legal framework and machinery 7. Political climate (stable/unstable) 3

4 8. Ideology of ruling government In India, government policies and rule have a marked influence on various aspects of business like location, pricing, expansion, distribution, licensing, labour relations; etc. Hence, management must critically consider and observe the legal enactments. 5. Physical and Technological Factors: Physical or geographical factors affect the product mix, which must be changed as per the changes in the physical environment. For example, demand for certain electronic goods like geysers, room heaters may be high-in-high attitude areas, where the temperature is less. Location or proximity not only affects business prospects, but also its operations and also the product price and its availability at different places. 6. Technological Factors: Technical advance-ments enable rapid growth and development. However, technology and design varies from country to country. For example, in India there are frequent power cuts and power fluctuations which has created market for power backup devices (investors) and stabilizers respectively. Similarly, in India electronic devices designed to operate at 220 volts, whereas in US and other advanced countries these are designed to operate at 110 volts. Though technology advancements bring economic growth and development, it is often at social cost. It is the responsibility of the business to consider social costbenefits before adopting a new technology. Q. 2. Explain the concept of monetary policy. Describe its objectives. Ans. Monetary policy is macro-economic policy relating to the deliberate measures taken to regulate money supply in the system, with an objective to influence investment, employment, income and price. The primary aim of this policy is price stability by regulation of the money supply in the economy. The liquidity or money supply in the system affects interest rate structure, cost of credit, investment structure, prices, currency and exchange rates. The monetary policy is proposed by The Reserve Bank of India, which is the Central bank of the country and implemented via commercial banks, and other banking and financial institutions. Depending upon the nature of measures taken, monetary policies can be expansionary, contractionary, countercyclical or rule based. The expansionary policy aims at increasing money supply in the system, whereas the contractionary (tight) monetary policy aims at reducing money supply in the system. The counter cyclical policy aims at controlling cyclical fluctuations using counter cyclical measures. In discretionary policy, government provides greater autonomy to the central bank to bring changes in the monetary policy. Some of these measures include changes in reserve ratios, bank rate, Open Market Operations (OMOs), margin requirements and moral suasion. Objectives of Monetary Policy The main objectives of monetary policy in India have been to speed up the process of economic development and induce price stability (controlling inflationary trends) in the economy. Economic development is an assortment of several objectives like economic growth, exchange rate stability, output stability, increase in employment and income level, and economic equality. These have been explained below: Enable Economic Growth: Economic growth requires rational investing. Banks are an important source of fund for industries. RBI regulates the credit flow in various sectors of the economy and helps in economic growth and development. Control price fluctuations: Price stability is important for the overall health of economy. Money supply affects the rate of inflation. If real output is less than the money supply, prices rise. Inflation reduces purchasing power, besides causing decline in exports. On the other hand, deflation causes reduced output and employment. Thus RBI must control the money supply in the system, through monetary policies. Increased rate of employment: RBI helps in creating more employment by increasing credit supply to industries and other priority sectors. Industrial credit in the form of bank loans is an important form investment purposes. The loans extended by commercial banks are regulated by quantitative and qualitative terms by RBI. Bring economic equality: The Reserve Bank of India helps in bringing equitable distribution of income by ensuring credit flow in priority sectors of the economy through selective measures and schemes. The bank constraints greater credit flow to large industries by placing ceilings on bank credit. 4

5 Generate foreign exchange: Fluctuations in exchange rates affects the interests of domestic importers and exporters. For example, depreciation of rupee will cause decrease in value of exports and increase in value of imports. To protect the interests of domestic importers and exporters, RBI regulates the exchange rates by constraining inflow and outflow of foreign exchange. In fact, RBI is the sole authority in India to regulate the exchange rates. Q. 3. Define collective bargaining. Explain its different types. How is it done? What are its pre-requisites. Ans. Collective Bargaining The Concept Collective bargaining is process of negotiation about working conditions and terms of employment between a group of employees and the employers. It aims to avoid confrontation and arrive at a mutual agreement. Some of the important characteristics of collective bargaining are: 1. Bipartite ature: Collective bargaining is bipartite in nature, which means that it involves only parties - employees and employers, and there is no third party intervention. 2. Group Process: In collective bargaining, there are two groups-one representing the employers, and the other, representing the employees. 3. egotiations: egotiation is an important aspect of the process of collective bargaining. It involves fair degree of compromises and mutual give and take. 4. Formal Process: Collective bargaining is a formal process in which employers and independent trade unions negotiate on terms and conditions of employment. 5. Multi-step Process: Collective bargaining comprise of several steps. Beginning with the presentation of charter of demands followed by negotiations, it ends with an agreement. 6. Complementary Process: In collective bargaining, each party needs something that the other party has; hence it is complementary n nature. 7. Continuous Process: It is continuous process that enables industrial democracy to be effective by considering day to day changes in policies, potentialities, capacities and interests. Types of Collective Bargaining Agreements There can be three types of collective bargaining between workers and employers. 1. Voluntary Agreements: These are voluntary/selective agreements for implementation. 2. Registered Agreements: These agreements are negotiated and settled by the concerned parties, but registered before a conciliator. 3. Legal Agreements: These agreements are registered with and settled before a tribunal. Collective bargaining can be done at three levels. 1. Plant Level: Here negotiations are done between management of plant and union of plant. 2. Industry Level: Here several units of the same industry come together to form a recognised industry-union for negotiations at industry-level. 3. ational/economy: Here employees across a sector form a trade union (at national level) to negotiate with the employers. It is not common in India. Plant enterprise level Industrial Sectoral bargaining ational Economy wide level LEVELS OF COLLECTIVE BARGAIIG D E C E T R A L I S A T I O 5

6 Collective Bargaining Process Collective bargaining comprises of a set of different steps. These listed in sequence below: 1. Union presents the demand charter to the management. 2. Establishing collective bargaining relationship to enable on-going negotiations. 3. Identify scope of bargaining The matter on which bargaining is to be done must be specifically identified. 4. Structuring bargaining to reach an agreement. There should be adequate number of representatives in the collective bargaining process. Some of the other necessary aspects relating to the process are. 1. Timing, location and length of bargaining sessions. 2. Members must be equipped with supporting information and relevant facts relating to wages, prevailing rates, working conditions in surrounding firms. 3. Management must consider past agreements and the overall future impact of any decision (including financial terms). Pre-requisites for Collective Bargaining There are certain pre-requisites for collective bargaining, as outlined below: (i) egotiating parties must be mature to involve themselves in the process. (ii) Union participating in the process strong and identified by the management. (iii) Involved parities must have flexibility in making adjustments to demands. (iv) Involved parties must gather relevant wage and other benefits data from a similar industry. (v) Collective bargaining is a complicated process and requires negotiation skills and experience. Q. 4. Distinguish between the following. Ans. (a) Cash Reserve Ratio and Liquidity Reserve Ratio Cash Reserve: Cash reserves are maintained by commercial banks with RBI. The minimum cash reserve ratio fixed by RBI is called Cash Reserve Ratio. In other words, Cash Reserve ratio (CRR) is the minimum percentage of total deposits which commercial banks have to keep with RBI. CRR affects the volume or the price of credit and money supply in the country. Increase (decrease) in Cash Reserve Ratio reduces (increases) money supply, credit supply and liquidity in the system. (b) Liquidity Reserves: Liquid reserves are maintained by commercial banks in form of cash, securities, gold; etc. The minimum liquidity reserve ratio fixed by RBI is called Statutory Liquidity Ratio (SLR). Let us take example of a commercial bank with total deposit of Rs. 100 crores. SLR + CRR = 20% Total reserves = Rs. 200 (obligatory) Lending capacity = Rs Rs. 200 = Rs. 800 If RBI aims at contraction of credit, it raises reserve requirement to say 30%, then. The minimum cash reserve ratio fixed by RBI is called Cash Reserve Ratio. Total reserves = Rs. 300 (obligatory) Lending capacity = Rs Rs. 300 = Rs. 700 We see that by raising reserve requirement, RBI reduces lending capacity of commercial bank. (b) Foreign direct investment and foreign portfolio investment. Ans. Foreign Direct Investment (FDI) The country in which investment is made is called home/destination country. The country which makes the investment is called foreign country. Foreign affiliate is a subsidiary company or an associate company in which the investor has at least 10 percent stake and not more than half voting power/rights. The IMF Manual on Balance of Payment defines FDI as - an investment involving long-term relationship and reflecting a lasting interest and control of a residual entity in one country in an enterprise resident in an 6

7 economy other than that of the direct investor. Such investment involves both initial transactions between them and among foreign affiliates. Some of the important characteristics of Foreign Direct Investments (FDI) are outlined below: The prime motive behind FDI is profit. Profit can be in form of royalty (in case of intellectual property) or in form of dividend payout. FDI is a capital investment made by a foreign company in home country. On decease of firm, the invested foreign capital and assets in the holding company can be repatriated to source country or country of origin. FDI investors control management and investments in different ways such as: Management contracts and memorandums Turnkey arrangements Product pricing Franchising & contracting Licensing Patents, trade marks and controlling other intellectual property Product sharing Sub-contracting Foreign investors can enter home country by making investments in different ways such as: Opening branch(es) Setting up subsidiary (wholly owned or joint venture ) Foreign controlled company Acquire stake in exiting businesses FDI is harmful if the economy is highly protected and foreign investments are made behind high tariffs. Portfolio Investment Portfolio investment refers to an investment in foreign country in which the investor(s) do not seek control over the investment. There are different forms of portfolio investment like equity investments, credit or capital investments in foreign companies. Some of the important features of portfolio investment are: 1. Investors buy equity in foreign stock market. 2. Equity bought is that of a joint stick company. 3. Equity includes-shares (stock) of the company, and creditors capital (bonds/debentures/other securities) 4. The creditor capital can be made by private investors or institutions. 5. Investors are non-resident individuals. 6. Portfolio investments can be liquidated easily 7. Portfolio investments are more sensitive than FDI, and are guided by short-term gains. 8. Investors cannot control investments, unless they are involved in the management of the company In India, there are two main forms of portfolio investment: Foreign Institutional Investors (FIIs) Global Depository Receipts & Foreign Currency Convertible Bonds Q.5. Write short notes on the following (a) Central Bank Ans. The central bank is apex body regulating commercial banks and their functions. In other words it is plays supervisory and regulatory role. The Reserve Bank of India was established under RBI Act, The bank started its operation April 1, 1935 onwards. The main office of the bank was initially in Calcutta. In 1937, the office was moved to Mumbai, the so called financial capital of the country. The main/central office is place where the office of Governor is located. All polcies are formulated at the central office. RBI was originally privately owned. In 1949 it was nationalised and is fully owned by the Government of India since then. Reserve Bank of India has 4 regional offices, 15 branches and 5 sub-offices. 7

8 The bank also has six training institutions: 1. College of Agricultural Banking (part of the Reserve Bank) 2. Bankers Training College (part of the Reserve Bank) 3. Reserve Bank of India Staff College (part of the Reserve Bank) 4. ational Institute for Bank Management (autonomous,) Functions of Central Bank 1. Currency Management: (a) RBI has the sole authority to issue currency. The bank derives its currency management authority under the Reserve Bank of India Act, Section 25 of RBI Act, 1934 mandates approval of banknotes designed by RBI by the Central Government. (b) The bank ensures exchange and obliteration of coins and notes which are not fit for circulation. (c) Ensures circulation of genuine currency in the system. 2. Fractional deposit lending: The bank makes changes in the reserve requirements. These include changes in CRR, repo rate and reverse repo rates. 3. Advisory function: The bank advise government on economic matters and issues. It also looks after the government accounts. 4. Regulatory function: The bank monitor and regulates the lending and borrowing activities of commercial bank. It is also authorised to issue licence to banking authorities and issue parameters for banking operations. 5. Banker to banks: RBI lends to commercial banks in times of extreme need. It is called Discount lending or Lender of last resort. 6. Banker to Government: RBI acts as a merchant banker for government and finances the needs of central and state government. 7. Clearing house function: RBI organises inter-bank fund transfers via EFT and SWIFT. 8. Research function: The Bank conducts research on economic matter which tend to influence the economic system. 9. Foreign exchange regulation: RBI determines the exchange rates for forex transactions and manages foreign exchanges rates under FEMA, Monetary authority: RBI is the monetary authority in the country. The bank along with central government formulates, implements and monitors the monetary policy to ensure credit flow and price stability in the economic system. (b) Public Sector Ans. Public Sector: In public sector the ownership of public units lies in the hands of government, representing the public interests. There are three types of public sector units: 1. General, administrative, social, commercial and personnel service units 2. Departmental Commercial Undertakings (DCU) 3. on-departmental commercial undertakings (DCU) General services are provided by non-corporate sector and provided free or at a rate which is below the actual cost. Such services include tax collection, administration services like law and justice, society; etc and community like education, health, housing, transport; etc. Departmental Commercial Undertakings (DCU) are government owned non-corporate, commercial units. These units provides product/service(s) at commercial rates. Some of the examples of Departmental Commercial Undertakings (DCU) are Indian Post and Telegraph services, Indian Railways, Delhi Milk Scheme; etc. DCUs are prominently present in urban areas. These organisation have only branches in rural areas. on-departmental Commercial Undertakings (DCU) are government companies and statutory organisations, which run like corporate houses on profit motive. A government organisation has 51% or more paid up equity capital. A statutory organisation is one which is set up under a special legislation or act of Parliament. ationalised banks, LIC, OGC, FCI, are some of the on-departmental Commercial Undertakings (DCU). The industrial policy of 1991 limited the role of government in business undertakings. In 1996, there were 243 public sector units in the country. The total investment in the sector stood at Rs. 230 crores in which investment of central government was nearly 75 per cent. Sector-wise, 69% of the investment was against the production of 8

9 goods, 30% against services, while only 1% against construction. The government investment in ational Thermal Power Corporation (TPC) was the highest at Rs followed by OGC (Rs crores) and SAIL (Rs crores). (c) Collective Bargaining Ans. The Concept Collective bargaining is process of negotiation about working conditions and terms of employment between a group of employees and the employers. It aims to avoid confrontation and arrive at a mutual agreement. Some of the important characteristics of collective bargaining are. 1. Bipartite ature: Collective bargaining is bipartite in nature, which means that it involves only parties employees and employers, and there is no third party intervention. 2. Group Process: In collective bargaining, there are two groups one representing the employers, and the other, representing the employees. 3. egotiations: egotiation is an important aspect of the process of collective bargaining. It involves fair degree of compromises and mutual give and take. 4. Formal Process: Collective bargaining is a formal process in which employers and independent trade unions negotiate on terms and conditions of employment. 5. Multi-step Process: Collective bargaining comprise of several steps. Beginning with the presentation of charter of demands followed by negotiations, it ends with an agreement. 6. Complementary process: In collective bargaining, each party needs something that the other party has; hence it is complementary n nature. 7. Continuous process: It is continuous process that enables industrial democracy to be effective by considering day to day changes in policies, potentialities, capacities and interests. (d) Balance of Payments Ans. Balance of Payments (BOP): Balance of payment is a statement showing all economic transaction (visible and invisible) done by a country during a given time period, usually a year. It is primary tool for analyzing international trade and economics of a country. The BOP statement has all the recorded transactions in a given period between residents of a given country with those of another country. Mathematically, BOP is aggregate of current and capital accounts. The current and capital account work in opposite directions, in such a way that surplus in one finances deficit in other. These accounts balance each other, though practically it is rarely achieved. Thus it is merely an accounting equality. If current accounts of a country incur ongoing deficit, which are financed/balanced by capital account surpluses, it means that while the country is repaying its old debts, it is at the same time postponing its current liabilities to future. In this case the external debt keeps mounting, as new loans/borrowings are contracted. BOP account reflects the relation between gross external debt (borrowings), imports and spending of economy. Balance of Payments (BOP) Current Account Capital Account Balance of Trade (BOT) Balance of Services (BOS) In developing economy, a small deficit in current account is necessary to maintain country s reserves and take advantage of foreign savings. 9