RICHIK DADHICH

1742
UG IV
BUSINESS ENVIRONMENT
END TERMS EXAMINATION 2021
TOTAL PAGES – 15

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ANSWER 1

Blue Star is an Indian company which primarily deals with Air Conditioners. Being a
company dealing with consumer durables targeting middle and upper class income
households, its competitors include Voltas, Daikin, LG Electronics, O General etc. There are
a multiplicity of environmental factors which affect Blue Star Air Conditioners. These could
be laid down as follows:

 Recently, there has been an increase in the cost of supply materials such as steel and
aluminium coils for air conditioners. According to the Consumer Electronics and
Appliances Manufacturers Association, the overall impact of the increase in the input
material is between 10 to 12%. This increased cost in the supply materials could lead to
decreased profits, and an effective strategy would have to be formulated by Blue Star to
tackle this.
 The customs duty on gas compressors for air conditioners has been increased from 10%
to 12.5% in the union budget. This increased customs duty would make the imports more
expensive for Blue Star.
 In addition to these, there has also been an increase in the logistical costs including the
freight and transportation prices. This increase in costs has been affirmed by the
Managing Director at Blue Star, B. Thiangarajan. In order to counter this increased cost
of supply, the company will have to increase the prices.
 In June 2020, the Indian Government imposed a complete ban on import of air-
conditioners and refrigerants from China, in order to tighten the norms on ‘non-essential
imports’ and to encourage local manufacturing and reduce imports. Since China was one
of the largest exporter of ACs to India, the ban would be beneficial for Blue Star, which is
an Indian company, as it would reduce the competition.
 After the outbreak of COVID-19, the global supply chains have been disrupted and
several manufacturing plants were shut down for a few months in 2020. This led to a
delay in the delivery of supplies for air conditioners such as controllers, compressors and
other materials which are imported mainly from China, Thailand and Malaysia.
 April-June season is said to be the most crucial for the air conditioning industry as the
industry accounts for 40-45% of annual sales during this period. Unfortunately, the
COVID-19 pandemic was at its peak during the summer season for 2020. Similarly, a
second and stronger wave of the virus is also present in the current summer season for

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 2021. This factor could adversely affect the sales of Blue Star because of the lower
footfall of customers as compared to the pre-pandemic era.
 Another impact of COVID-19 is the lockdown measures imposed by different States in
India. Such strict measures were imposed in 2020 and have again been implemented in
May 2021. Due to this, the retail stores in various States have been shut which drastically
affects the sales. Blue Star Air Conditioners are also available online on websites such as
Amazon and Flipkart. However, in most of the States, the e-commerce are only allowed
to deliver essential products and the air conditioners are being shown as ‘non-
deliverable’.
 Customers are also avoiding the purchase of air conditioners because the instalment
procedure requires the expert workers to come inside the house and set-up all the parts.
Considering the increasing spread of COVID, people are high vigilant and are taking up
sanitization and social distancing measures. Thus, allowing the people to come inside the
house and carry out the procedure for 30-60 minutes would be highly risky.
 Human Development Index reports show that the standards of living in India are
increasing constantly. As a result of this, people are inclined towards living luxuriously
and hence, they would purchase more air conditioners for all the rooms in their house.
Recent trends show an increasing urbanisation in India. A lot of Indians consider split
ACs as a luxury products and they would thus want to purchase them and even install
them in drawing room or living room as an indicator of their status symbol.
 IMF's World Economic Outlook for 2020 showed that the income of the rural middle
class is increasing significantly. In addition to this, the disposable income of Indians has
increased by over 30% in the last 6 years. Due to these factors, there is projected to be an
increase in the sale of air conditioners. This, combined with the increasing global
temperatures, would lead to a compounded annual growth of 15% for the next 3 years in
this sector.
 The Bureau of Energy Efficiency (BEE) have set new energy performance standards for
air conditioners. Blue Star would have to comply with these guidelines and make the
necessary software or hardware changes, else, it might face legal action.
 Research shows that the pattern of consumer durable purchase in Indian is as follows:
mixer grinder-colour TV-Refrigerator-Washing Machine-2 wheelers-car-air conditioners.
This indicates that ACs are given less priority and are purchased at a later stage when a
person’s wealth increases. This could be a significant factor affecting Blue Star.

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 Recently, Blue Star customers have been complaining about issues related to bad smell
from the AC, noise from lose flaps, unskilled workers not providing professional service,
untrained technicians, and the lack of availability of repair parts. Thus, Blue Star needs to
resolve these issues, else it might tarnish their goodwill and affect market position.
 Certain companies such as Samsung and Panasonic have launched smart ACs which are
compatible with AI assistants such as Amazon Alexa and Apple’s Siri. This feature of AI
assistance technology is not yet available for Blue Star and this might prove to be a
technological disadvantage.
 Other competitors such as Lloyd and LG also provide Wifi direct control for AC and this
feature is only available in a few Blue Star models. LG also launched Anti-Mosquito and
bacteria free AC and this technology is yet to be used by other companies.
 Air Conditioners usually require a servicing to be done every season. However, unlike
Voltas, Blue Star does not have its own employees which are trained to do the servicing.
Rather, this is outsourced to third-parties. Customers may not be satisfied with this and
might decide to opt for a different brand.
 Considering the increasing electricity charges, customers would opt for energy efficient
ACs. Companies like O General, Voltas and Daikin are more energy efficient at similar
prices to that of Blue Star.
 Various large offices and organisations are shifting from centralised ACs to individual
split ACs for environmental concerns. This might be an opportunity for Blue Star.

ANSWER 3

(a) Functions of Retailers

Philip Kotler defines retailing as all the activities involved in selling the goods or services
directly to final consumers for their personal non business use. It could also be defined as the
set of business activities carried out to exchange goods and services for personal use, through
store or non-store retailing. The functions of a retailer are as follows-

 The retailer identifies the consumer needs by interacting them on a daily basis. Hence,
the retailer possesses a nuanced understanding of all the likes and dislikes of the
customer and their attitude towards certain products and the performance of products
sold. While doing this market research, the retailer also identifies the preferable

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 shopping hours for the customers. Since the retailers have personal contacts with their
consumers, they can guide manufacturers to produce those articles which are likely to
be in great demand in the near future due to changes in the tastes and habits of
consumers. The manufactures can then modify defective or unsatisfactory
merchandise and service.
 The retailer provides various services. This includes the credit facilities and discounts
offered to the consumers. Hire-purchase facilities are also provided for consumers to
enable them to buy a product now and pay for it later.
These services could also include the home delivery of products and other essentials,
which is highly prevalent during the COVID pandemic. In addition to this, the
retailers also provide after sales services for certain durable products.
 The retailer performs the function of providing and arranging an assortment of
products and services. This means that there must be a wide range of choice enabling
the consumers to select the products of their choice.
This assortment must mean a vast variety of products in terms of various products
lines as well as the depth of the product lines. Thus, the consumer will have a large
number of brands and product types to choose from.
 Another function performed by retailer is breaking the bulk. Manufacturers and
wholesalers typically ship large cartons of the product. These large packages which
the retailer receives would be broken down into smaller units such as packets for the
purpose of selling them to individual customers.
 The retailer also has the function of holding the stock. They maintain an inventory
that allows for instant availability of the product to the customers in order to ensure
the regular availability of the products. This inventory should also meet the regular or
seasonal fluctuations in the demand.
 Another function of retailers includes the creation of demand for the product by
promotion. This could be done through attractive display of products on the shelves,
giving out pamphlets, appealing through banners and posters or even word of mouth
advice.
 In certain cases, retailers also carry out the function of transporting the goods from the
wholesalers themselves in order to prevent any delay. This is usually done by large
retailers such as Big Bazar or Shopper’s Stop.

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  Because of their direct contact with the consumers, the retailers could be said to
function as a connecting link between wholesaler and the consumers.

(b) Government measures to curb inflation in India

Inflation could be defined as the rise in the prices of various goods and services due to the
decline in the purchasing power of a currency over time. There are primarily two approaches
through which the issue of inflation could be tacked – monetary policy and fiscal policy.
Monetary policy refers to the use of monetary instruments under the control of the central
bank to regulate magnitudes such as interest rates, money supply and availability of credit. In
India, this is under the control of the Reserve Bank of India. On the other hand, fiscal policy
deals with the taxation and expenditure decisions of the government. This includes aspects
such as budget, taxation, public expenditure, public revenue, public debt, and fiscal deficit in
the economy.

Now, the present question pertains to the government measures to control inflation. Hence,
the solution has to be focused on the fiscal policy measures, rather than the monetary policy
measures of the Reserve Bank of India (such as repo rate, reverse repo rate changes, CRR
increase etc.) Thus, the measures to control inflation by the government are as follows-

 A contractionary fiscal policy reduces the amount of money available for businesses
and consumers to spend and thus leads to a contraction of the economy. Here, the
government collects more money in tax revenue than it spends.
During times of high economic growth, inflation can often jump to high rates, quickly
devaluing currency. To slow inflation, governments may enact contractionary fiscal
policy in order to decrease the money supply and aggregate demand, which will lead
to decreased output and lower price levels.
 Such policy reduces the spending because when there is less money available to the
population, people will tend to keep it and save it, instead of spending it. It also means
there is less available credit and disposable income, which can reduce spending.
Reducing spending is important during inflation because it helps halt economic
growth and, in turn, the rate of inflation.
 Similarly, the government could increase the taxes as a part of the fiscal policy. Once
an increased direct and indirect taxation is imposed, the people would decrease their
spending. As a result of decreased spending, the prices would drop and inflation could
be curbed.

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 As a part of this policy, there also needs to be a decrease in government spending.
Spending by the government constitutes a large part of the circular flow of income in
the economy. Thus, reduced government spending in activities such as capital
expenditure, subsidies etc. would decrease the amount of money in circulation, which
would in effect lower the spending by the population.
 Another means of reducing the disposable income is through measures such as
compulsory deposit schemes or motivating the employees to allocate certain part of
the income to provident funds. This policy is already being implemented by the
Government of India considering the increased interest rates for returns in savings
accounts, which motivates people to save more. In addition to this, government
employees are also given tax exemptions if they indulge in savings.
 The money supply could also be reduced by the government by collecting funds or
calling in the debts owed. The government could also issue securities and bonds at a
high rate of interest. This would encourage more investors to buy them. As a result,
the money supply would be reduced. In addition to this, the increased interest returns
such bonds and securities would also increase the demand, hence improving the
exchange rate for Rupees. This would decrease inflation.
 While the government could not be said to have a direct influence over RBI’s
monetary policy, it could persuade or suggest the RBI to increase the repo rates and
the Cash Reserve Ratio to decrease the money supply in the economy. Alternatively,
the government could bring in an amendment to the relevant sections of the Reserve
Bank of India (Amendment) Act, 2006 so that it is vested with the power of changing
these rates in certain circumstances.

ANSWER 4

a) Importance of Suppliers

A supplier could be defined as the person from whom the organisation procures the raw
materials required to manufacture the goods. Naturally, the suppliers play a highly crucial
role for the organisations. Their importance could be understood as follows-

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 Firstly, it must be noted that a manufacturer could not perform the tasks such as
extracting the raw material and processing them. Thus, directly procuring this raw
material from the supplier would save time as well as costs.
 Suppliers are also essential in ensuring that the production process takes place without
any issues. If the raw material from the supplier is of high quality, it would lead to a
better product.
 Further, a better quality of raw material supply would also mean that no finished
goods would have to be rejected as they would meet the required quality check
without any imperfections. Thus, the organisation would be able to meet its targets
efficiently.
For example, if a guitar manufacturer receives a poor quality of mahogany and maple
wood, the finished product may still not pass through the quality check because of
inconsistencies in the texture or strength of the wood supplied. This will imply a loss
of cost and time. On the other hand, superior quality of wood from the supplier will
provide the right tone, resonation and durability, leading to customer satisfaction.
 Timely delivery of raw materials by the supplier also implies that there would be no
shortage of required material in manufacturing, and no delay in the overall
production. Without these raw materials, equipment and essential supplies, a company
cannot continue production.
This timely delivery must also involve the aspect of lead time, which is the time taken
between the order being placed and the order being received.
 The price offered by the supplier is also a significant factor for the organisation. Most
suppliers offer discount in case of bulk purchases. A lower cost of supply will lead to
a lower cost of production. This could help the organisation in increasing the profits.
 It is also important that the supplier provides the right quantity of consignments or
raw materials requested. If the delivery is delayed or lower than expected, the
manufacturer may not be able to meet the required quantity to be produced.
 The process of dealing with the supplier is also important for the organisation. If the
supplier is customer friendly and is actively involved in removing any bottlenecks
involved, it would be highly beneficial for the organisation.
 The quality of human resources offered by the supplier also affects the production
process. If the employees of the supplier are in a position to educate the customer on

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 proper usage, or could maintain and repair the machinery, it would decrease the
chances of any technical issues in the future.
 Similarly, if there is a poor quality of logistics and packaging provided by the
supplier, the material would inferior in nature which would again have a direct impact
on the quality of products.
 In the times of exceptional circumstances, such as the COVID-19 pandemic, the co-
operation of the supplier becomes important. If the supplier is willing to help the
manufacturer in financial distress, or co-operating with their needs in a way that the
manufacturing process is least affected, it would be beneficial for both organisations.

b) Risk and return ratio of foreign investment

The risk and return ratio is a significant factor which has to be considered by the investors
while going for a foreign investment, in order to ensure that the best decision is taken while
entering the global market.

Now, in order to develop a complete understanding of the risk and return ratio of foreign
investment, we first need to understand the nature and types of risks present. These risks are
evaluated on the basis of various economic, political and social factors. While there are a lots
of risks, they can broadly be categorised as follows-

 Political Risk

This risk concerns any potential or actual change in the political system, civil or external
war and also includes any democratic evolution that may disrupt the foreign business.
This means that a newly elected political party may have a policy which does not favour
foreign investments and might even want to acquire and nationalise them. This also
includes government policy relayed issues such as foreign exchange controls, trade
restrictions or trade agreements that could favour some foreign competitors at the expense
of others. Certain governments might also promote investments by giving corporate tax
exemptions, creation of Specialised Economic Zones etc. In addition to all these, the
existence of corruption in the government and other authorities is also a significant factor.

Factors such as transfer risk and ownership risk would also be considered under this. This
concerns the uncertainty after transferring the investment in the foreign country, because
exit mode could be risky.

 Social Risk

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 Social or societal-related risk corresponds to collective actions from organizations such as
trade unions, non-governmental organizations or more informal sets of people that,
peacefully or not, democratically or not, lobby the local authorities and directly the
foreign firms, in order to influence their policy or their actions. Apart from that there
might also be terrorism associated risks in certain Islamic countries such as Iraq,
Afghanistan etc.

 Financial and Economic Risk

This includes the presence of a sound monetary and fiscal policy. A country with stable
finances and a stronger economy should provide more reliable investments than a country
with weaker finances or an unsound economy. This evaluation could be done by
considering factors such as currency exchange rates, access to affordable capital,
unemployment rate, solvency of banks, rate of inflation etc.

Now, on the basis of these risks, we could look into the risk and return ratio. There can be
two scenarios for this- homeostatic investors and hyper static investors.

 Homeostatic Investors

These investors have a high risk and low return portfolio. This means that even though they
are getting low returns, they would be satisfied with it because the long term gains would be
continuous, which could also aid in business expansion. These include media firms, business
consultancy firms such as Accenture, Greenvissage etc.

 Hyperstatic Investors

These investors have a high risk and high return portfolio. These include mutual funds,
startup firms, real estate investments etc. Examples include firms such as Mindspace,
Brookefield Real Estate etc.

Further, the risks in foreign investment could also be evaluated on the basis of the foreign
investment risk decision matrix, which involves three possible scenarios on the basis of
political risk and financial risks, which have been discussed previously-

i) High Political Risk and High Financial Risk

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 If there exists a combination of high political risk along with high financial risk, such a
country must be rejected even if it might be the best due to other reasons. This is because
the existence of high political risk could be a major impediment for the business.

ii) Moderate Political Risk and Moderate financial risk

Even though this might be the second best option available, it can be chosen as even
though the financial risk is less the political risk has also been reduced.

iii) Low Financial Risk and Low Political Risk

Naturally, this would be the best country for investment. Even though there might not be
high returns, there is stability and security in terms of reduced political and financial risk.

ANSWER 5

In order to develop a complete understanding on the impact of COVID-19 on business cycles

in India, we first need to look into the nature of business cycles.

Business cycle refers to the economy wide fluctuations affecting the income, employment
levels and economic growth. The business cycle can also be defined as the downward and
upward fluctuations of gross domestic product along with its natural growth rate over a long
period of time.

The duration of a business cycle is the period of time containing a single boom and
contraction in sequence. The time it takes to complete this sequence is referred to as the
length of the business cycle. According to the National Bureau of Economic Research, the
business cycle includes four stages – boom, recession, depression and recovery.

 During the boom phase, there is an increased level of investment. Owing to the spread
of a wave of optimism in business, the level of production increases and the boom
gathers momentum. More investment is possible only through credit creation. During
a period of boom, the economy surpasses the level of full employment and enters a
stage of over full employment.
 Recession includes falling levels of customer spending, confidence and profits. A
wave of pessimism spreads in business and those markets which were sometime
before sellers markets become buyer’s markets now.

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  During depression there is general fall in economic activity. Production, employment
and income decline. The prices fall and the main factor responsible for it is, a fall in
the purchasing power.
 The recovery phase is a turning point for depression and there is a slow rise in
employment, income and prices. This is because employment increases purchasing
power and this leads to an increase in demand for consumer goods. As a result,
demand for goods will press upon their supply and it shall, thereby, lead to a rise in
prices. The demand for consumer’s goods shall encourage the demand for producer’s
goods. The banks are willing to give loans and there is a move from pessimism to
optimism.

Now, in light of this understanding, the impact of COVID19 pandemic on business cycles in
India could be understood as follows-

 The COVID-19 pandemic has significantly impacted most economies in the world. Most
countries, including India, are still struggling to contain the virus, as the waves seem
unending, while the costs on both lives and livelihoods will have long-term repercussions.
As a result of this, there has been a drastic change in the business cycle in India. This
change in business cycle is also rapid in nature and is constantly changing.
 It has to be noted that prior to the onset of COVID19, the Indian economy was already in
a slowdown or recession stage. Even before the pandemic, since FY 2018–19, India's
growth was falling, 8% in Q4 FY18 to 4.5% in Q2 FY20. In January 2020 itself, well
before India's lockdown or reactions to the pandemic, the International Monetary Fund
reduced India's GDP estimates for 2019 and also reduced the 2020 GDP forecast. This
implies that even before the onset of the pandemic, the business cycle in India was on a
downwards trend.
 Economic activity in India was hit hard after a complete national lockdown announced by
end of March 2020, with the economy only gradually opening up in the second half of the
financial year. As a result, GDP growth contracted 16 percent in the first half of the
financial year, with only marginal recovery (0.4 percent) in the third quarter of FY2020-
21. This initial decrease in the GDP could be said to have two implications on the
business cycle-
(i) The previous flow and speed of the business cycle was completely disrupted
as there was a rapid decrease in the economic output and GDP.

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 (ii) The decreased economic growth accelerated the process of business cycle
from recession stage to a stage of slump or depression.
 In a report titled ‘COVID-19 and the world of work: Impact and policy responses’ by
International Labour Organization, it is explained that the crisis in India has already
transformed into an economic and labour market shock, impacting not only supply such
as production of goods and services but also demand including the consumption and
investment. As discussed earlier, these are the clear indicators that the business cycle is in
the stage of slump.
 Interestingly, by September 2020, the cases had decreased and the government introduced
various policy measures such as unlock, introduction of NEP and other revival plans for
the economy. This lead to optimism and stimulated economic growth. This means that
there was an entry into the recovery stage of the business cycle. In fact, The Economic
Survey 2020-21 had also stated that since June 2020, India has experienced a V-shaped
economic recovery.
 However, just when there was growing optimism over India’s economic rebound, the
second COVID-19 wave disrupted all the growth. Since the number of cases and total
deaths is much higher in second wave, it is bound to have a severe impact on the
economy. In light of this, several States have imposed strict lockdowns and extended
them till 31 May 2021.
 These new developments imply that the business cycle would again be disrupted. The
recovery phase would not be able to proceed and there would be recession or slump, at
least in this financial quarter.
 Thus, it could be said that the typical business cycles has been broken down because of
the COVID19 pandemic. The brief interval between the two waves was a period of
economic growth and recovery, however, this has again been interrupted by the second
wave and the cycle is again moving in the recession stage, with the possibility of reaching
a slump or depression.
 In the long term, it might be possible that this stage of slump would lead to the recovery
phase, like it did last year. Considering the fact that 10% of the Indian population has
been vaccinated at least once, the chances of a third wave of recession would be reduced
in future. Once the lockdown measures are removed, there would be a slow movement
towards the recovery stage through an increase in employment and consumer spending.
This would eventually lead to a boom stage.

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ANSWER 6

While it is true that brownfield investments are nothing but a process of acquisition, we first
need to look into the nuances and the pros and cons of this statement in order to fully
understand the rationale behind it.

A Foreign Direct Investment (FDI) is a cross-border investment. In FDI, an investor invests

in a business opportunity in some country other than his own. The investor can invest by
means of a merger, acquisition, or building a new business from scratch. Brownfield
Investment is a type of FDI.

Under brownfield investment, the organisation makes use of the existing infrastructure of an
ailing company by either merging, acquiring or leasing, instead of developing a completely
new one, thereby saving costs and time in beginning the production. Also, it helps in the
efficient utilization of already deployed resources in the business. Hence, the word
‘brownfield’ implies that that an activity is already being performed on the land even before
the new investment has taken place.

It must be noted that here, there is mostly no fresh need of taking regulatory approvals from
the authorities as the plant was already operational one. Such investments are most popular in
cases where the planned new activity is similar to the activity that was being performed
earlier.

There are various advantages due to which an organisation might want to invest in a
brownfield. A brownfield investment is easy to set up since the facility already exists.
Further, an investor can start his business activities without wasting much of his precious
time since the market is already set. The use of already available resources would also save
up costs for the investor. Similarly, the new investor gets easy access to local knowledge
from the skilled human resource already on the payrolls of the former company.

On the other hand, there are various disadvantages to brownfield investments too, which are
as follows-

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  The old structure might have functionality issues which might increase the costs. The
machinery may be outdated and not in sync with modern technology. Hence, the
investor may have to face a lot of problems with adjustment in the new set-up. He
may also have to go out of the line and make heavy unplanned capital expenditure on
new plant and machinery.
 Due to issues with the operational inefficiency of the old structure or plant, the
maintenance cost might also increase.
 The foreign company would have to deal with any violation of legal or regulatory
requirements.
 The plant may also be situated at place which is at a strategically disadvantaged
location.
 It might be possible that the customers of the old company are dissatisfied with their
service and they still hold the same sentiments for the new one.

Now, on the basis of a combined reading of the factors mentioned above, it could be
reasonably inferred that brownfield investment is nothing but a process of acquisition. This is
because-

Firstly, the foreign company is investing in an already existing structure. This is in contrast
with greenfield investment where business is done totally from scratch including the
construction, manufacturing etc. For instance, in 2008, Tata motors acquired Jaguar Land
Rover. In this way, the Indian automaker was able to get the property rights, authorization to
setup a manufacturing plant in the United Kingdom along with two design centres.

Secondly, once the foreign firm takes control of the existing infrastructure of other company,
it is responsible for taking care of all the factors such as operational costs and maintenance,
along with other disadvantages as pointed out above.

An acquisition is when one company purchases a large stake in the other company to gain
control of that company. Similarly, under brownfield investment, it is evident that the foreign
firm takes control of all the infrastructure of the other firm and continues to run it. Thus, it is
nothing but an indirect acquisition.

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