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Porters Five Forces of Competitive Position Analysis

Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael
E Porter of Harvard Business School as a simple framework for assessing and evaluating
the competitive strength and position of a business organisation.
This theory is based on the concept that there are five forces that determine the
competitive intensity and attractiveness of a market. Porters five forces help to identify
where power lies in a business situation. This is useful both in understanding the
strength of an organisations current competitive position, and the strength of a position
that an organisation may look to move into.
Strategic analysts often use Porters five forces to understand whether new products or
services are potentially profitable. By understanding where power lies, the theory can
also be used to identify areas of strength, to improve weaknesses and to avoid mistakes.
Porters five forces of competitive position analysis:

The five forces are:

1. Supplier power. An assessment of how easy it is for suppliers to drive up prices.
This is driven by the: number of suppliers of each essential input; uniqueness of their
product or service; relative size and strength of the supplier; and cost of switching from
one supplier to another.
2. Buyer power. An assessment of how easy it is for buyers to drive prices down. This
is driven by the: number of buyers in the market; importance of each individual buyer to
the organisation; and cost to the buyer of switching from one supplier to another. If a
business has just a few powerful buyers, they are often able to dictate terms.

3. Competitive rivalry. The main driver is the number and capability of competitors
in the market. Many competitors, offering undifferentiated products and services, will
reduce market attractiveness.
4. Threat of substitution. Where close substitute products exist in a market, it
increases the likelihood of customers switching to alternatives in response to price
increases. This reduces both the power of suppliers and the attractiveness of the market.
5. Threat of new entry. Profitable markets attract new entrants, which erodes
profitability. Unless incumbents have strong and durable barriers to entry, for example,
patents, economies of scale, capital requirements or government policies, then
profitability will decline to a competitive rate.
Arguably, regulation, taxation and trade policies make government a sixth force for
many industries.
What benefits does Porters Five Forces analysis provide?
Five forces analysis helps organisations to understand the factors affecting profitability
in a specific industry, and can help to inform decisions relating to: whether to enter a
specific industry; whether to increase capacity in a specific industry; and developing
competitive strategies.

Actions to take / Dos

Use this model where there are
at least three competitors in the
Consider the impact that
government has or may have on
the industry
Consider the industry lifecycle
stage earlier stages will be
more turbulent

Actions to Avoid / Don'ts

Avoid using the model for
an individual firm; it is
designed for use on

Consider the dynamic/changing

characteristics of the industry

12. Quantitative tools used by Reserve Bank of India to control money


Quantitative Method: By Quantitative Credit Control we mean the control of the total
quantity of credit. Different tools used under this method are:
Bank Rate: Bank Rate also known as the Discount Rate is the official minimum rate at
which the Central Bank of the country is ready to rediscount approved bills of exchange
or lend on approved securities.
When the commercial bank for instance, has lent or invested all its available funds and
has little or no cash over and above the prescribed minimum, it may ask the central
bank for funds. It may either re-discount some of its bills with the central bank or it may
borrow from the central bank against the collateral of its own promissory notes.
In either case, the central bank accommodates the commercial bank and increases the
latters cash reserves. This Rate is increased during the times of inflation when the
money supply in the economy has to be controlled.
Open Market Operations: Open Market Operations indicate the buying/selling of
government securities in the open market to balance the money supply in the economy.
During inflation, RBI sells the government securities to the commercial banks and other
financial institution. This reduces their cash lending and credit creation capacities.
Thus, Inflation can be controlled. During recessions, RBI purchases government
securities from commercial banks and other financial institution. This leaves them with
more cash balances for lending and increases their credit creation capacities. Thus,
recession can be overcome.
Repo Rates and Reverse Repo Rates: Repo is a swap deal involving immediate sale
of securities and a simultaneous re purchase of those securities at a future date at a
predetermined price. Commercial banks and financial institution also park their funds
with RBI at a certain rate, this rate is called the Reverse Repo Rate. Repo rates and
Reverse repo rate used by RBI to make liquidity adjustments in the market.
Cash Reserve Ratio: The money supply in the economy is influenced by the cash
reserve ratio. It is the ratio of a banks time and demand liabilities to be kept in reserve
with the RBI. A high CRR reduces the flow of money in the economy and is used to
control inflation. A low CRR increases the flow of money and is used to overcome
Statutory Liquidity Ratio: Under SLR, banks have to invest a certain percentage of
its time and demand liabilities in Government approved securities. The reduction in
SLR enhances the liquidity of commercial banks.
Deployment of Credit: The RBI has taken various measures to deploy credit in
different of the economy. The certain percentage of bank credit has been fixed for
various sectors like agriculture, export, etc.
Qualitative Method:

The qualitative or selective methods of credit control are adopted by the Central Bank in
its pursuit of economic stabilisation and as part of credit management.
(i) Margin Requirements:
Changes in margin requirements are designed to influence the flow of credit against
specific commodities. The commercial banks generally advance loans to their customers
against some security or securities offered by the borrower and acceptable to banks.
More generally, the commercial banks do not lend up to the full amount of the security
but lend an amount less than its value. The margin requirements against specific
securities are determined by the Central Bank. A change in margin requirements will
influence the flow of credit.
A rise in the margin requirement results in a contraction in the borrowing value of the
security and similarly, a fall in the margin requirement results in expansion in the
borrowing value of the security.
(ii) Credit Rationing:
Rationing of credit is a method by which the Central Bank seeks to limit the maximum
amount of loans and advances and, also in certain cases, fix ceiling for specific
categories of loans and advances.
(iii) Regulation of Consumer Credit:
Regulation of consumer credit is designed to check the flow of credit for consumer
durable goods. This can be done by regulating the total volume of credit that may be
extended for purchasing specific durable goods and regulating the number of
installments through which such loan can be spread. Central Bank uses this method to
restrict or liberalise loan conditions accordingly to stabilise the economy.
(iv) Moral Suasion:
Moral suasion and credit monitoring arrangement are other methods of credit control.
The policy of moral suasion will succeed only if the Central Bank is strong enough to
influence the commercial banks.
In India, from 1949 onwards, the Reserve Bank has been successful in using the method
of moral suasion to bring the commercial banks to fall in line with its policies regarding
credit. Publicity is another method, whereby the Reserve Bank marks direct appeal to
the public and publishes data which will have sobering effect on other banks and the
commercial circles.

Elements of Strategic Management

Figure: Elements of Strategic Management

(i) Strategic Analysis

Strategic analysis is concerned with understanding the strategic position of the
organisation. What changes are going on in the environment, and how will they affect
the organisation and its activities? What is the resource strength of the organisation in
the context of these changes? What is it that those people and groups associated with
the organisation -- managers, shareholders or owners, unions and so on -- aspire to, and
how do these affect the present position and what could happen in the future?
The aim of strategic analysis is, then, to form a view of the key influences on the present
and future well-being of the organisation and therefore on the choice of strategy. These
influences are discussed briefly below. Understanding these influences is an important
part of the wider aspects of strategic management.

(a) The environment

The organisation exists in the context of a complex commercial, economic, political,
technological, cultural, and social world. This environment changes and is more
complex for some organisations than for others. Since strategy is concerned with the
position a business takes in relation to its environment, an understanding of the
environments effects on a business is of central importance to strategic analysis. The
historical and environmental effects on the business must be considered, as well as the
present effects and the expected changes in environmental variables. This is a major
task because the range of environmental variables is so great. Many of those variables
will give rise to opportunities of some sort, and many will exert threats upon the firm.
The two main problems that have to be faced are, first, to distil out of this complexity a
view of the main or overall environmental impacts for the purpose of strategic choice;
and second, the fact that the range of variables is likely to be so great that it may not be
possible or realistic to identify and analyse each one.
(b) The resources of the organisation
Just as there are outside influences on the firm and its choice of strategies, so there are
internal influences. One way of thinking about the strategic capability of an
organisation is to consider its strengths and weaknesses (what it is good or not so good
at doing, or where it is at a competitive advantage or disadvantage, for example). These
strengths and weaknesses may be identified by considering the resource areas of a
business such as its physical plant, its management, its financial structure, and its
products. Again, the aim is to form a view of the internal influences -- and constraints -on strategic choice.
(c) The expectations of different stakeholders
The expectations are important because they will affect what will be seen as acceptable
in terms of the strategies advanced by management. However, the beliefs and
assumptions that make up the culture of an organisation, though less explicit, will also
have an important influence. The environmental and resource influences on an
organisation will be interpreted through these beliefs and assumptions; so two groups of
managers, perhaps working in different divisions of an organisation, may come to
different conclusions about strategy, although they are faced with similar environmental
and resource implications. Which influence prevails is likely to depend on which group
has the greatest power, and understanding this can be of great importance in
recognising why an organisation follows or is likely to follow, the strategy it does.
Together, a consideration of the environment, the resources, the expectations, and the
objectives within the cultural and political framework of the organisation provides the
basis of the strategic analysis of an organisation. However, to understand the strategic
position an organisation is in, it is also necessary to examine the extent to which the
direction and implications of the current strategy and objectives being followed by the

organisation are in line with and can cope with the implications of the strategic analysis.
In this sense, such analysis must take place with the future in mind. Is the current
strategy capable of dealing with the changes taking place in the organisations
environment or not? If so, in what respects and, if not, why not?
It is unlikely that there will be a complete match between current strategy and the
picture which emerges from the strategic analysis. The extent to which there is a
mismatch here is the extent of the strategic problem facing the strategist. It may be that
the adjustment that is required is marginal, or it may be that there is a need for a
fundamental realignment of strategy.
(ii) Strategic Choice
Strategic analysis provides a basis for strategic choice. This aspect of strategic
management can be conceived of as having three parts.
(a) Generation of strategic options
There may be several possible courses of action. At a given time a company might face a
decision about the extent to which it has to become a multinational firm. But, at a later
time, the international scope of the company's operations might bring up other choices:
which areas of the world are now the most important to concentrate on; is it possible to
maintain a common basis of trading across all the different countries? Is it necessary to
introduce variations by market focus? All of these considerations are important and
need careful consideration: indeed, in developing strategies, a potential danger is that
managers do not consider any but the most obvious course of action -- and the most
obvious is not necessarily the best. A helpful step in strategic choice can be to generate
strategic options.
(b) Evaluation of strategic options
Strategic options can be examined in the context of the strategic analysis to assess their
relative merits. In deciding any of the options a company might ask a series of questions.
First, which of these options built upon strengths, overcame weaknesses and took
advantage of opportunities, while minimising or circumventing the threats the business
faced? This is called the search for strategic fit or suitability of the strategy. However, a
second set of questions is important. To what extent could a chosen strategy be put into
effect? Could the required finance be raised, sufficient stock be made available at the
right time and in the right place, staff be recruited and trained to reflect the sort of
image the company wants to project? These are questions of feasibility. Even if these
criteria could be met, would the choice be acceptable to the stakeholders?
(c) Selection of strategy

This is the process of selecting those options which the organisation will pursue. There
could be just one strategy chosen or several. There is unlikely to be a clear-cut right or
wrong choice because any strategy must inevitably have some dangers or
disadvantages. So in the end, choice is likely to be a matter of management judgement.
It is important to understand that the selection process cannot always be viewed or
understood as a purely objective, logical act. It is strongly influenced by the values of
managers and other groups with interest in the organisation, and ultimately may very
much reflect the power structure in the organisation.
(iii) Strategy Implementation
Strategy implementation is concerned with the translation of strategy into action.
Implementation can be thought of as having several parts.
(a) Planning and allocating resources
Strategy implementation is likely to involve resource planning, including the logistics of
implementation. What are the key tasks needing to be carried out? What changes need
to be made in the resource mix of the organisation? By when? And who is to be
responsible for the change?
(b) Organisation structure and design
It is also likely that changes in organisational structure will be needed to carry through
the strategy. There is also likely to be a need to adapt the systems used to manage the
organisation. What will different departments be held responsible for? What sorts of
information system are needed to monitor the progress of the strategy? Is there a need
for retraining of the workforce?
(c) Managing strategic change
The implementation of strategy also requires managing of strategic change and this
requires action on the part of managers in terms of the way they manage change
processes, and the mechanisms they use for it. These mechanisms are likely to be
concerned not only with organisational redesign, but with changing day-to-day routines
and cultural aspects of the organisation, and overcoming political blockages to change.

15. Money Market and Capital Market

Money market is distinguished from capital market on the basis of the maturity period,
credit instruments and the institutions:
1. Maturity Period:
The money market deals in the lending and borrowing of short-term finance (i.e., for
one year or less), while the capital market deals in the lending and borrowing of longterm finance (i.e., for more than one year).
2. Credit Instruments:
The main credit instruments of the money market are call money, collateral loans,
acceptances, bills of exchange. On the other hand, the main instruments used in the
capital market are stocks, shares, debentures, bonds, securities of the government.
3. Nature of Credit Instruments:
The credit instruments dealt with in the capital market are more heterogeneous than
those in money market. Some homogeneity of credit instruments is needed for the
operation of financial markets. Too much diversity creates problems for the investors.
4. Institutions:
Important institutions operating in the' money market are central banks, commercial
banks, acceptance houses, nonbank financial institutions, bill brokers, etc. Important
institutions of the capital market are stock exchanges, commercial banks and nonbank
institutions, such as insurance companies, mortgage banks, building societies, etc.
5. Purpose of Loan:
The money market meets the short-term credit needs of business; it provides working
capital to the industrialists. The capital market, on the other hand, caters the long-term
credit needs of the industrialists and provides fixed capital to buy land, machinery, etc.
6. Risk:
The degree of risk is small in the money market. The risk is much greater in capital
market. The maturity of one year or less gives little time for a default to occur, so the
risk is minimised. Risk varies both in degree and nature throughout the capital market.

7. Basic Role:

The basic role of money market is that of liquidity adjustment. The basic role of capital
market is that of putting capital to work, preferably to long-term, secure and productive
8. Relation with Central Bank:
The money market is closely and directly linked with central bank of the country. The
capital market feels central bank's influence, but mainly indirectly and through the
money market.
9. Market Regulation:
In the money market, commercial banks are closely regulated. In the capital market, the
institutions are not much regulated.

17. Role of Stock Exchanges In Capital Market of India

Stock Exchanges play a crucial role in the consolidation of a national economy in
general and in the development of industrial sector in particular. It is the most dynamic
and organised component of capital market. Especially, in developing countries like

India, the stock exchanges play a cardinal role in promoting the level of capital
formation through effective mobilisation of savings and ensuring investment safety.
1. Effective Mobilisation of savings
Stock exchanges provide organised market for an individual as well as institutional
investors. They regulate the trading transactions with proper rules and regulations in
order to ensure investor's protection. This helps to consolidate the confidence of
investors and small savers. Thus, stock exchanges attract small savings especially of
large number of investors in the capital market.
2. Promoting Capital formation
The funds mobilised through capital market are provided to the industries engaged in
the production of various goods and services useful for the society. This leads to capital
formation and development of national assets. The savings mobilised are channelised
into appropriate avenues of investment.
3. Wider Avenues of investment
Stock exchanges provide a wider avenue for the investment to the people and
organisations with investible surplus. Companies from diverse industries like
Information Technology, Steel, Chemicals, Fuels and Petroleum, Cement, Fertilizers,
etc. offer various kinds of equity and debt securities to the investors. Online trading
facility has brought the stock exchange at the doorsteps of investors through computer
network. Diverse type of securities is made available in the stock exchanges to suit the
varying objectives and notions of different classes of investor. Necessary information
from stock exchanges available from different sources guides the investors in the
effective management of their investment portfolios.
4. Liquidity of investment

Stock exchanges provide liquidity of investment to the investors. Investors can sell out
any of their investments in securities at any time during trading days and trading hours
on stock exchanges. Thus, stock exchanges provide liquidity of investment. The on-line
trading and online settlement of demat securities facilitates the investors to sellout their
investments and realise the proceeds within a day or two. Even investors can switch over
their investment from one security to another according to the changing scenario of
capital market.
5. Investment priorities
Stock exchanges facilitate the investors to decide his investment priorities by providing
him the basket of different kinds of securities of different industries and companies. He
can sell stock of one company and buy a stock of another company through stock

exchange whenever he wants. He can manage his investment portfolio to maximise his
6. Investment safety
Stock exchanges through their by-laws, Securities and Exchange Board of India (SEBI)
guidelines, transparent procedures try to provide safety to the investment in industrial
securities. Government has established the National Stock Exchange (NSE) and Over
The Counter Exchange of India (OTCEI) for investors' safety. Exchange authorities try
to curb speculative practices and minimise the risk for common investor to preserve his
7. Funds for Development Purpose
Stock exchanges enable the government to mobilise the funds for public utilities and
public undertakings which take up the developmental activities like power projects,
shipping, railways, telecommunication, dams & roads constructions, etc. Stock
exchanges provide liquidity, marketability, price continuity and constant evaluation of
government securities.
8. Indicator of Industrial Development
Stock exchanges are the symbolic indicators of industrial development of a nation.
Productivity, efficiency, economic-status, prospects of each industry and every unit in an
industry is reflected through the price fluctuation of industrial securities on stock
exchanges. Stock exchange sensex and price fluctuations of securities of various
companies tell the entire story of changes in industrial sector.

8. Social Responsibility model


Carroll devised a four-part model of CSR: economic responsibility, legal responsibility,

ethical responsibility and philanthropic responsibility.
True CSR requires satisfying all four parts consecutively.
From this, Carroll offers the following definition of CSR:
'CSR encompasses the economic, legal, ethical and philanthropic expectations placed on
organisations by society at a given point in time.'
Economic responsibility

Shareholders demand a reasonable return.

Employees want safe and fairly paid jobs.
Customers demand quality at a fair price.

Legal responsibility

The law is a base line for operating within

It is an accepted rule book for company

Ethical responsibility

This relates to doing what is right, just and fair.

Actions taken in this area provide a
reaffirmation of social legitimacy.
This is naturally beyond the previous two levels.

Philanthropic responsibility

Relates to discretionary behaviour to improve the lives of others.

Charitable donations and recreational facilities.
Sponsoring the arts and sports events.

11. Financial System;

The word "system", in the term "financial system", implies a set of complex and closely
connected or interlined institutions, agents, practices, markets, transactions, claims,
and liabilities in the economy. The financial system is concerned about money, credit
and finance-the three terms are intimately related yet are somewhat different from each
other. Indian financial system consists of financial market, financial instruments and
financial intermediation
Role/ Functions of Financial System:
A financial system performs the following functions:
* It serves as a link between savers and investors. It helps in utilizing the mobilized
savings of scattered savers in more efficient and effective manner. It channelises flow of
saving into productive investment.
* It assists in the selection of the projects to be financed and also reviews the
performance of such projects periodically.
* It provides payment mechanism for exchange of goods and services.
* It provides a mechanism for the transfer of resources across geographic boundaries.
* It provides a mechanism for managing and controlling the risk involved in mobilizing
savings and allocating credit.
* It promotes the process of capital formation by bringing together the supply of saving
and the demand for investible funds.
* It helps in lowering the cost of transaction and increase returns. Reduce cost motives
people to save more.
* It provides you detailed information to the operators/ players in the market such as
individuals, business houses, Governments etc.
Components/ Constituents of Indian Financial system:
The following are the four main components of Indian Financial system
1. Financial institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services.
Financial institutions:
Financial institutions are the intermediaries who facilitates smooth functioning of the
financial system by making investors and borrowers meet. They mobilize savings of the

surplus units and allocate them in productive activities promising a better rate of return.
Financial institutions also provide services to entities seeking advises on various issues
ranging from restructuring to diversification plans. They provide whole range of services
to the entities who want to raise funds from the markets elsewhere. Financial
institutions act as financial intermediaries because they act as middlemen between
savers and borrowers. Were these financial institutions may be of Banking or NonBanking institutions.
Financial Markets:
Finance is a prerequisite for modern business and financial institutions play a vital role
in economic system. It's through financial markets the financial system of an economy
works. The main functions of financial markets are:
1. to facilitate creation and allocation of credit and liquidity;
2. to serve as intermediaries for mobilization of savings;
3. to assist process of balanced economic growth;
4. to provide financial convenience
Financial Instruments
Another important constituent of financial system is financial instruments. They
represent a claim against the future income and wealth of others. It will be a claim
against a person or an institutions, for the payment of the some of the money at a
specified future date.
Financial Services:
Efficiency of emerging financial system largely depends upon the quality and variety of
financial services provided by financial intermediaries. The term financial services can
be defined as "activites, benefits and satisfaction connected with sale of money, that
offers to users and customers, financial related value".

22.Mergers and Acquisitions

Though the two words mergers and acquisitions are often spoken in the same breath
and are also used in such a way as if they are synonymous, however, there are certain
differences between mergers and acquisitions.
The case when two companies (often of same size) The case when one company takes over
decide to move forward as a single new company another and establishes itself as the new
instead of operating business separately.
owner of the business.
The buyer company swallows the
The stocks of both the companies are
business of the target company, which
surrendered, while new stocks are issued afresh.
ceases to exist.
For example, Glaxo Wellcome and SmithKline
Dr. Reddy's Labs acquired Betapharm
Beehcam ceased to exist and merged to become a through an agreement amounting $597
new company, known as Glaxo SmithKline.
A buyout agreement can also be known as a merger when both owners mutually decide
to combine their business in the best interest of their firms. But when the agreement is
hostile, or when the target firm is unwilling to be bought, it is considered as an

24. Bilateral Investment Promotion and Protection Agreement (BIPA)

Bilateral Investment Promotion and Protection Agreement (BIPA) is one such bilateral
treaty which is defined as an agreement between two countries (or States) for the
reciprocal encouragement, promotion and protection of investments in each other's
territories by the companies based in either country (or State). The purpose of these
agreements is to create such conditions which are favourable for fostering greater
investments by the investors of one country in the territory of the other country. Such
agreements are beneficial for both the countries because they stimulate their business
initiatives and thus enhance their prosperity.
Generally, these bilateral agreements have, by and large, standard elements and provide
a legal basis for enforcing the rights of the investors in the countries involved. They give
assurance to the investors that their foreign investments will be guaranteed fair and
equitable treatment, full and constant legal security and dispute resolution through
international mechanism.
With liberalisation of the foreign investment policy of India, the Government undertook
negotiations with a number of countries and entered into Bilateral Investment
Promotion & Protection Agreements (BIPAs) with them. This was done with a view to
provide predictable investment climate to foreign investments in India as well as to
protect Indian investments abroad. The Government of India has, so far, signed BIPAs
with 62 countries out of which 50 BIPAs have already come into force and the remaining
agreements are in the process of being enforced. In addition, agreements have also been
finalised and/ or being negotiated with a number of other countries.
The important features of the Bilateral Investment Promotion and Protection
Agreements (BIPAs) signed by India are:

The agreements apply to all investments made by the investors of each

contracting party in the territory of the other contracting party in accordance
with their laws and regulations.

Under the agreement, investment has been defined to include every kind of asset
established or acquired together with changes in the form of such investments in
accordance with the national laws of the contracting parties. In particular, it
includes the following :

Movable and immovable property as well as other rights such as

mortgages, liens or pledges;

Shares in the stocks and debentures of a company and any other similar
forms of participation in a company;

Rights to money or to any performance under the contract having a

financial value;

Intellectual property rights, goodwill, technical processes and know how in

accordance with the relevant laws of the respective contracting party;

Business concessions conferred by law or under contract, including

concessions to search for and extract oil and other minerals.

Investments and returns of the investors of each contracting party shall at all
times be accorded fair and equitable treatment in the territory of the other
contracting party.

The agreements guarantee that the investments from the contracting parties shall
receive treatment atleast as favourable as the treatment which the host country
grants to investments by nationals and companies from any third State.

Each contracting party shall permit all funds of an investor of the other
contracting party related to an investment in its territory to be freely transferred,
without unreasonable delay and on a non-discriminatory basis. Such funds may

Capital and additional capital amounts used to maintain and increase


Net operating profits including dividends and interests in proportion to

their share-holdings;

Repayments of any loan including interest thereon, relating to the


Payment of royalties and service fees relating to the investment;

Proceeds from sales of their shares;

Proceeds received by investors in case of sale or partial sale or liquidation;

The earnings of citizens/nationals of one contracting party who work in

connection with the investments in the territory of the other contracting

All such transfers shall be permitted in the currency of the original investment at
the current exchange rate prevailing in the market on the date of transfer.

The agreement contains elaborate provisions for resolution of disputes between

the investor and a contracting party as well as between the contracting parties. In
the former case, flexibility is provided for settlement of disputes either under the
domestic laws or under international arbitration. In the latter case, if the dispute
relates to interpretation or application of the agreement, it shall, as far as
possible, be settled through negotiations. If it is not settled within 6 months from
the time the dispute arose, it shall be submitted to an Arbitral Tribunal. The
decision of the tribunal shall be binding on both the contracting parties.

The agreement shall initially be valid for a period of ten years and thereafter
continue indefinitely unless either of the contracting parties give a written notice
of its intention to terminate the agreement. The agreement shall stand
terminated one year from the date of receipt of such a written notice. In the event
of termination of the agreement, investments made prior to the termination will
continue to enjoy the provisions of the agreement for a further period of 15 years

25. Family Owned Business Vs Professionally Run Business

Both family owned business and professionally run business contains its own
advantages and disadvantages. First we briefly look at those advantages and
disadvantages and then decide what can be the best one.
The most important advantage of family owned business is that stress less working
environment. All members will be very well known to us and it gives some confidence to
expose our working skill without breakage. Professionally run business people are very
much suffering from this problem. Even though they have sound knowledge in his/her
field, he/she failed to give his/her best because of the shyness. In family owned
business, this problem is avoided because workers may be our mother, father, brother,
sister or someone else who are close to us.
* There is a chance for the working environment to be the home itself. This will reduce
the travelling expenditures.
* Travelling time may be saved.
* Less sincereness. (Surely the sincereness gets reduced. Some members may came late
to the work, may not be regular etc)
*Collapse of home work with business works. (For example at a time they may watch
TV and doing the business work. This may be resulted in missing of concentration in
work, time loss, etc)


* Working time will remain constant. (very low chance for the working time to be
* We can also appoint external people(not a member of our family) as our employees if
they are skilled.
* Some amount of money has to be spent for office building rent, travelling etc.

*External people(not a member of our family) may work only for their salary but not for
the companys development.
Professionally run business is better than the family owned business because the
separate concentration can be given here only. So it can be the better one.

27.Describe the external environment of business

Business & the External Environment (Overview)

Author: Jim Riley Last updated: Sunday 23 September, 2012

External Environment: introduction to the external environment
A business does not operate in a vacuum. It has to act and react to what happens outside
the factory and office walls. These factors that happen outside the business are known
as external factors or influences. These will affect the main internal functions of the
business and possibly the objectives of the business and its strategies.
Main Factors
The main factor that affects most business is the degree of competition how
fiercely other businesses compete with the products that another business makes.
The other factors that can affect the business are:

Social how consumers, households and communities behave and their beliefs.
For instance, changes in attitude towards health, or a greater number of
pensioners in a population.
Legal the way in which legislation in society affects the business. E.g. changes
in employment laws on working hours.
Economic how the economy affects a business in terms of taxation,
government spending, general demand, interest rates, exchange rates and
European and global economic factors.
Political how changes in government policy might affect the business e.g. a
decision to subsidise building new houses in an area could be good for a local
brick works.
Technological how the rapid pace of change in production processes and
product innovation affect a business.
Ethical what is regarded as morally right or wrong for a business to do. For
instance should it trade with countries which have a poor record on human

Changing External Environment

Markets are changing all the time. It does depend on the type of product the business
produces, however a business needs to react or lose customers.
Some of the main reasons why markets change rapidly:

Customers develop new needs and wants.

New competitors enter a market.
New technologies mean that new products can be made.
A world or countrywide event happens e.g. Gulf War or foot and mouth disease.

Government introduces new legislation e.g. increases minimum wage.

Business and Competition

Though a business does not want competition from other businesses, inevitably most
will face a degree of competition.
The amount and type of competition depends on the market the business operates in:

Many small rival businesses e.g. a shopping mall or city centre arcade
close rivalry.
A few large rival firms e.g. washing powder or Coke and Pepsi.
A rapidly changing market e.g. where the technology is being developed
very quickly the mobile phone market.

A business could react to an increase in competition (e.g. a launch of rival product) in

the following ways:

Cut prices (but can reduce profits)

Improve quality (but increases costs)
Spend more on promotion (e.g. do more advertising, increase brand loyalty;
but costs money)
Cut costs, e.g. use cheaper materials, make some workers redundant

Social Environment and Responsibility

Social change is when the people in the community adjust their attitudes to way they
live. Businesses will need to adjust their products to meet these changes, e.g. taking
sugar out of childrens drinks, because parents feel their children are having too much
sugar in their diets.
The business also needs to be aware of their social responsibilities. These are the way
they act towards the different parts of society that they come into contact with.
Legislation covers a number of the areas of responsibility that a business has with its
customers, employees and other businesses.
It is also important to consider the effects a business can have on the local community.
These are known as the social benefits and social costs.
A social benefit is where a business action leads to benefits above and beyond the
direct benefits to the business and/or customer. For example, the building of an
attractive new factory provides employment opportunities to the local community.
A social cost is where the action has the reverse effect there are costs imposed on the
rest of society, for instance pollution.

These extra benefits and costs are distinguished from the private benefits and costs
directly attributable to the business. These extra cost and benefits are known as
externalities external costs and benefits.
Governments encourage social benefits through the use of subsidies and grants (e.g.
regional assistance for undeveloped areas). They also discourage social costs with fines,
taxes and legislation.
Pressure groups will also discourage social costs.

29.What do you mean by mobility barrier? How can it be overcome?


Mobility barriers are factors which impede the ability of firms to enter or exit an
industry, or to move from one segment of an industry to another.
"Mobility barriers" is therefore a general term which includes barriers to entry, barriers
to exit, and barriers to intra-industry changes in market position.
More specifically, mobility barriers may refer to barriers to movement from one strategic
group of firms within an industry to another group.
Mobility Barriers
Mobility barriers are factors which impede the ability of firms to enter or
exit an industry, or to move from one segment of an industry to another. "Mobility
barriers" is therefore a general term which includes barriers to entry, barriers to
exit, and barriers to intra-industry changes in market position. More specifically,
mobility barriers may refer to barriers to movement from one strategic group of
firms within an industry to another group. See R. Gilbert, "Mobility Barriers and
the Value of Incumbency," in R. Schmalensee and R. Willig, (eds), The Handbook
of Industrial Organization, North Holland, Amsterdam, 1989.

30.What is meant by qualitative methods of credit control employed by

Credit Control in India
From Wikipedia, the free encyclopedia

Credit Control is an important tool used by Reserve Bank of India, a major weapon of
the monetary policy used to control the demand and supply of money (liquidity) in the
economy. Central Bank administers control over the credit that the commercial
banks grant. Such a method is used by RBI to bring Economic Development with
Stability. It means that banks will not only control inflationary trends in the economy
but also boost economic growth which would ultimately lead to increase in real national
income with stability. In view of its functions such as issuing notes and custodian of
cash reserves, credit not being controlled by RBI would lead to Social and Economic
instability in the country.
Need for Credit Control
Controlling credit in the Economy is amongst the most important functions of
the Reserve Bank of India. The basic and important needs of Credit Control in the
economy are

To encourage the overall growth of the priority sector i.e. those sectors of the
economy which is recognized by the government as prioritized depending upon
their economic condition or government interest. These sectors broadly totals to
around 15 in number.[1]

To keep a check over the channelization of credit so that credit is not delivered for
undesirable purposes.

To achieve the objective of controlling Inflation as well as Deflation.

To boost the economy by facilitating the flow of adequate volume of bank credit to
different sectors.

To develop the economy.

Objectives of Credit Control

Credit control policy is just an arm of Economic Policy which comes under the purview
of Reserve Bank of India, hence, its main objective being attainment of high growth rate
while maintaining reasonable stability of the internal purchasing power of money. The
broad objectives of Credit Control Policy in India have beenEnsure an adequate level of liquidity enough to attain high economic growth rate along
with maximum utilization of resource but without generating high inflationary pressure.

Attain stability in exchange rate and money market of the country.

Meeting the financial requirement during slump in the economy and in the normal
times as well.
Control business cycle and meet business needs.

Methods of Credit Control

There are two methods that the RBI uses to control the money supply in the economy

Qualitative Method
Quantitative Method

During the period of inflation Reserve Bank of India tightens its policies to restrict
the money supply, whereas during deflation it allows the commercial bank to
pump money in theeconomy.
Qualitative Method
By Quality we mean the uses to which bank credit is directed.
For example- the Bank may feel that spectators or the big capitalists are getting a
disproportionately large share in the total credit, causing various disturbances and
inequality in the economy, while the small-scale industries, consumer goods industries
and agriculture are starved of credit.
Correcting this type of discrepancy is a matter of Qualitative Credit Control.
Qualitative Method controls the manner of channelizing of cash and credit in the
economy. It is a selective method of control as it restricts credit for certain section
where as expands for the other known as the priority sector depending on the situation.
Tools used under this method areMarginal Requirement
Marginal Requirement of loan = current value of security offered for loan-value of loans
granted. The marginal requirement is increased for those business activities, the flow of
whose credit is to be restricted in the economy.
e.g.- a person mortgages his property worth Rs. 1,00,000 against loan. The bank will
give loan of Rs. 80,000 only. The marginal requirement here is 20%.
In case the flow of credit has to be increased, the marginal requirement will be
lowered. RBI has been using this method since 1956.[2]
Rationing of credit
Under this method there is a maximum limit to loans and advances that can be made,
which the commercial banks cannot exceed. RBI fixes ceiling for specific categories.
Such rationing is used for situations when credit flow is to be checked, particularly for
speculative activities. Minimum ofCapital:Total Assets" (ratio between capital and total
asset) can also be prescribed by Reserve Bank of India
RBI uses media for the publicity of its views on the current market condition and its
directions that will be required to be implemented by the commercial banks to control
the unrest. Though this method is not very successful in developing nations due to high
illiteracy existing making it difficult for people to understand such policies and its

Direct Action
Under the banking regulation Act, the central bank has the authority to take strict action
against any of the commercial banks that refuses to obey the directions given by Reserve
Bank of India. There can be a restriction on advancing of loans imposed by Reserve
Bank of India on such banks. e.g. - RBI had put up certain restrictions on the working of
the Metropolitan Co-operative Banks. Also the Bank of Karad had to come to an end in
Moral Suasion
This method is also known as Moral Persuasion as the method that the Reserve Bank
of India, being the apex bank uses here, is that of persuading the commercial banks to
follow its directions/orders on the flow of credit. RBI puts a pressure on the commercial
banks to put a ceiling on credit flow during inflation and be liberal in lending
Quantitative Method

Graph showing variations in the Bank Rate from 1935-2011 (current year) [4]
By Quantitative Credit Control we mean the control of the total quantity of credit.
For Example- let us consider that the Central Bank, on the basis of its calculations,
considers that Rs. 50,000 is the maximum safe limit for the expansion of credit. But the
actual credit at that given point of time is Rs. 55,000(say). Thus it then becomes
necessary for the Central Bank to bring it down to 50,000 by tightening its policies.
Similarly if the actual credit is less, say 45,000, then the apex bank regulates its policies
in favor of pumping credit into the economy.
Different tools used under this method are-

Chart showing effect of increase in Bank Rate

Bank Rate
Bank Rate also known as the Discount Rate is the official minimum rate at which
the Central Bank of the country is ready to rediscount approved bills of exchange or lend
on approved securities.
Section 49 of the Reserve Bank of India Act 1934, defines Bank Rate as the standard
rate at which it (RBI) is prepared to buy or re-discount bills of exchange or
other commercial paper eligible for purchase under this Act.[5]
When the commercial bank for instance, has lent or invested all its available funds and
has little or no cash over and above the prescribed minimum, it may ask the central
bank for funds. It may either re-discount some of its bills with the central bank or it may
borrow from the central bank against the collateral of its own promissory notes.
In either case, the central bank accommodates the commercial bank and increases the
latters cash reserves. This Rate is increased during the times of inflation when the
money supply in the economy has to be controlled.
At any time there are various rates of interest ruling at the market, like the Deposit Rate,
Lending Rate of commercial banks, market discount rate and so on. But, since the
central bank is the leader of the money market and the lender of the last resort, al other
rates are closely related to the bank rate. The changes in the bank rate are, therefore,
followed by changes in all other rates as the money market.
The graph on the right hand side shows variations in the Bank Rate since 1935-2011.
Working of the Bank Rate

This section will answer how Bank Rate policy operates to control the level of prices and
business activity in the country.
Changes in bank rate are introduced with a view to controlling the price levels and
business activity, by changing the demand for loans. Its working is based upon the
principle that changes in the bank rate results in changed interest rate in the market.
Suppose a country is facing inflationary pressure. The Central Bank, in such situations,
will increase the bank rate thereby resulting to a hiked lending rate. This increase will
discourage borrowing. It will also lead to a fall in the business activity due to following

Employment of some factors of production will have to be reduced by

the businessmen.
The manufacturers and stock exchange dealers will have to liquidate their stocks,
which they held through bank loans, to pay off their loans.

The effect of Rise in Bank Rate by the Central Bank is shown in the chart (left side).
Hence, we can conclude that hike in Bank Rate leads to fall in price level and a fall in the
Bank Rate leads to an increase in price level i.e. they share an inverse relationship.