Business Environment Unit I +II

Economic Environment of Business MBA-216 1
Unit-I
Concept of Business Environment
Business Environment consists of all those factors that have a bearing on the
Business. Business Environment can be understood as the combination of two
words: Business and Environment. Business represents the organised effort of
enterprise to supply consumers with goods and service and to make profit in the
process. And environment represents the surroundings in which the business
activity takes place or which affects the functioning of the business.
According to W. L. Gulek and Lawrence “The environment includes the

factors outside the firm which can lead to opportunities or threats to the firm”.
Business decisions are conditioned by the two broad sets of factors, viz., the
internal environment and external environment. The internal factors are generally
regarded as controllable factors because the company has control over these
factors; it can alter or modify such factors as its HR, physical resources, marketing
mix etc., to suit the environment. On the on the other hand the external factors are,
by and large beyond the control of a company. The external factors such as the
economic factors, socio cultural factors, government and legal factors,
demographic factors etc, are therefore generally regarded as uncontrollable factors.
Internal Environment
i. Value System: The value system of the founders has important bearing on
the choice of business, the mission and objectives of the organization,
business policies and practices.
ii. Mission and Objectives: The business domain of the company, priorities,
direction of development, business philosophy etc., are guided by the
mission and objectives of the company.
iii. Management Structure and Nature: The organizational structure, the

composition of the BOD, extent of professionalism of management etc., are
important factors influencing business decisions. Some management
structures and styles delay decision making while some other facilitate quick
decision-making.
iv. Internal Power Relationship: Factors like the amount of support the top
management enjoys from different level of employees; shareholders and
BOD have important influence on the decisions and their implementation.
v. Human Resource: The characteristics of the HR like skills, quality, morale,

commitment etc., could contribute to the strength and weakness of an
organization. Some organizations find it difficult to carry out restructuring or
modernization because of resistance by employees whereas they are
smoothly done in some others.
vi. Company Image and Brand Equity: The image of the company matters
while raising finance, forming Joint Ventures or other alliances, entering
purchase or sales contracts etc. Brand equity is also relevant in several of
these cases.
Miscellaneous Factors: There are a number of other internal factors which

contribute to the business success or failure or influence the decision making.
They include the following
 Physical assets and facilities like the production capacity, technology

and efficiency of the productive apparatus, distribution logistics etc.
 R & D and technological capabilities determine the company’s ability

to innovate and compete.
 Marketing resources like the organization of marketing activities,

quality of marketing manager, brand equity and distribution network
have direct bearing on marketing efficiency.
 Financial factors like financial policies, position and capital structure

are other factors affecting business operations and decisions.
External Environment
The external environment consists of a micro and macro environment.
A GLIMPSE OF BUSINESS ENVIRONMENT

 Micro Environment:
The micro environment is also know as the task environment and operating
environment because the micro environmental forces have a direct bearing on the
operations of the firm.
The micro environment consists of the actors in the company’s immediate

environment that affects the performance of the company. The micro forces need
not necessarily affect all the firms in a particular industry in the same way. The
micro environment consists of the following:
i. Suppliers: Those who supply the inputs like raw-materials and components
to the company. It is very risky to depend on a single supplier because a
strike, lock-out or any other production problem with that supplier may
seriously affect the company. Hence, multiple sources of supply help reduce
such risks.
ii. Customers: The major task of a business is to create and sustain customers.
A business exists only because of its customers. Monitoring the customer
sensitivity is therefore a pre-requisite for the business success.
A company has different categories of customer like individuals,

households, industries and other institutions. Depending on a single
customer is often too risky because it may place the company in a poor
bargaining position, apart from the risk of loosing business consequent to the
winding up of business by the customers.
iii. Competitors: A firm needs to face different types of competition like

generic competition, product from competition, brand competition etc. The
competition among different alternatives which satisfy a particular category
of desire (different categories to choose from like TV, stereo etc.) is called
generic competition.
If the consumer decides to go in for a TV, the next question is which

form of the T.V B&W, Colour, Flat Screen, LCD etc. In other words, there
is a product form competition. The competition between the different brands
of the same product form is known as the brand competition.
iv. Marketing Information: The immediate environment of a company may

consist of a number of marketing intermediaries which are “firm that aid the
company in promoting, selling and distribution of its goods to final buyers”.
These include middlemen such as agents and merchants who help the
company to find customers or close sales with them, physical distribution
firms which assists the company in stocking and moving goods from their
origin to their destination such as warehouses and transportation firms,
marketing service agencies and financial intermediaries which finance
marketing activities and insure business risks. Marketing intermediaries are
vital links between the company and final consumers.
v. Public: A public is any group that has an actual or potential interest in or

impact on the organizations ability to achieve its interest. Media public,
local public are some examples.
Fruitful co-operation between company and the local public may be

established for the mutual benefit of the company and the local community.
 Macro Environment
It is also known as general and remote environment. A company and the forces
in its micro environment operate in a larger macro environment of forces that
shape opportunities and pose threats to the company. The macro forces are
generally more uncontrollable. The success of a company depends on its

adaptability to the environment.
i. Political and Government Environment: It plays a very active role in all

economies. The extent and nature of state intervention vary widely between
nations. The government role varies from a regulator to an entrepreneur and
from planner to a promoter of its economy and trade and commerce.
ii. Natural/ Technological Environment: The natural environment ultimately

is the source and support of everything used by business. Geographical and
ecological factors such as natural resources weather and climatic conditions
etc., are all relevant to business.
Technology is also one of the important determinants of success of a

firm. Technology include the tools both machine and ways of thinking
(soft technology)-available to solve problems and promote progress between
and among societies.
iii. Demographic Environment: Demographic factors such as size of the

population, growth rate, family life cycle, income levels, religions etc., have
very significant implications for business.
The demographic environment differs from country to country and

from place to place within the same country or region. Because of the
diversity of the demographic environment companies are sometimes
compelled to adopt different strategies within the same market.
iv. Cultural Environment: Culture is a very critical component of business

environment. Proper understanding of the cultural dimensions is very
important for product development, promotion, business negotiations, HRM
etc. The culture of a society can directly affect management approaches and
organizational behaviour.
v. Global Environment: It refers to those global factors which are relevant to

business, such as the WTO principles and agreements, other international
treaties/agreements etc., economic and business conditions/ sentiments in
other countries etc.
Similarly, there are certain developments, like a hike in the crude oil
price which have a global impact.
Comparison Chart
BASIS FOR
MICRO ENVIRONMENT MACRO ENVIRONMENT
COMPARISON
Meaning Micro environment is defined Macro environment refers to

as the nearby environment, the general environment, that
under which the firm can affect the working of all
operates. business enterprises.
Elements COSMIC, i.e. Competitors, PESTLE, i.e. Population &

Organization itself, Suppliers, Demographic, Economic, Socio-
Market, Intermediaries and Cultural, Technological, Legal &
Customers. Political and Environmental.
Nature of Specific General

elements
Are these factors Yes No

controllable?
Influence Directly and Regularly Indirectly and Distantly
Basic Philosophy of Capitalism

The capitalist system is also known as Free Enterprise Economy and Market
Economy. The system is having private ownership of the means of production. It is
characterized by the use of individual decision-making and the use of market
mechanism to carry out the business function.
Factors of Capitalism
i. Private Ownership: In a capitalist economy it means that the factor of

production i.e., land, labour, machinery etc., are privately owned and
managed. Production occurs at private initiative.
ii. Free Enterprise: The term free enterprise implies that private firms are
allowed to obtain resources to organize production and to sell their
products in a way they like.
iii. Consumer Sovereignty: Consumers have complete freedom of choice in

the consumption and production decision.
iv. Freedom of Choice of Occupation: In such an economy, the individual is

free to choose any occupation he/she is qualified for but the choice is
practically limited by the extent of the availability of jobs.
v. Freedom to save and invest: Everyone is free to invest any amount in

business or free to save income by reducing consumption.
vi. Free Competition: Since there is freedom to enterprise therefore one can
found a sufficient amount of competition which helps to maintain a
flexible price system.
vii. Absence of a central Plan: In such an economy, the activity of various

economic units are not guided, controlled and coordinated by a central
plan.
viii. Market System: Market mechanism is regulated by the forces of demand

and supply. It is the consumer who decides whether to buy a particular
product or not at a particular price.
ix. Limited Role of Government: The absence of a central plan does not
mean that the government does not play any role in a private enterprise
system. Little government intervention is necessary to ensure the smooth
functioning of a capitalist system.
Evaluation of Capitalism:
i. Generally in capitalism, investment are made in those areas where
profitability is high, therefore sufficient investment are not made in areas
where profitability is low.
ii. The right of property and freedom of enterprise are likely to lead to the
concentration of income and wealth in the hands of few people which cause
income disparities.
iii. Due to capitalism large firms holds the major portion of the market and
creates monopoly position and exploits the consumers.
The modern capitalist economies which are indeed mixed economy regulated
by the state are therefore considered better than pure capitalism.
Basic Philosophy of Socialism:

It is very difficult to clearly define the socialist system because of a variety
of system in socialism. On one hand there are communist countries
characterized by the state capitalism on the other hand there are democratic
socialist nations with a dominant private sector.
Socialism is generally understood as an economic system where the means

of production are either owned or controlled by the state and where the resource
allocation, investment patterns, consumption, income distribution etc are
directed and regulated by state.
Features of Socialism:
i. Government Ownership and Control: In socialist economy the major

means of production are either owned by the government of its use is
controlled by the government for example china.
In some socialist economies the private sector also plays an important

role. In such cases government directs and regulate investment allocation
and production pattern in accordance with national priority.
ii. Central Authority: The socialist economies generally have the central
authority like the central planning agency to formulate the national plans for
development to achieve the planned targets, for example earlier East
Germany, USSR etc.
iii. Restriction on Consumption: There is no consumer sovereignty because

the state decides what may be made available to the consumers.
iv. Fixation of Wages and Prices: The wage rate and the price in such an
economy are fixed by the government and not by the market forces.
v. Restriction on Occupation: The freedom of occupation is restricted and

absent in socialist country. An individual may not have the freedom to
choose any occupation he is qualified for.
vi. Distribution of Income: An equitable distribution of income is an important

factor of socialist economy. Although this distribution is not in perfect
equality.
We can say that in socialism one can find greater government control on the
means of production in comparison to capitalist economy.
Evaluation of Socialism:
Socialism although is a very appealing and flexible system but it suffers
from a number of drawbacks. Some of the important drawbacks are as follows:
i. There is no consumer sovereignty in socialism. The state decides what and

how much should be produced and consumed.
ii. People may lack incentive to work hard in the absence of private authority.
iii. The absence of freedom of choice of occupation is undemocratic.
iv. As private enterprises are not allowed to speak in socialism the talents of
the nation are not fully utilized.
v. The central planning authority commands the resource allocation,

investment and development pattern. But the views of the authority need
not be right.
Because of these drawbacks now so many socialist countries are adopting

broad view and becoming more flexible i.e., they are moving to a mixed system
which can be termed as liberal democratic socialism where private
entrepreneurs are motivated and are provided with democratic rights.
Mixed Economy
Mixed Economy is neither pure capitalism nor pure socialism but a

mixture of the two system. In this system we find characteristics of
both capitalism and socialism. Mixed economy is operated by both,

private enterprise and public enterprise.
ADVERTISEMENTS:
That is private enterprise is not permitted to function freely and

controlled through price mechanism. On the other side, the
government intervenes to control and regulate private enterprise in
several ways. It has been realised that a free functioning of private
enterprise results in several types of problems.
According to J. W Grove, “One of the presuppositions of a mixed

economy is that private firms are less free to control major decisions
about production and consumption than they would be under
capitalist- free enterprise, and that public industry is free from
government restrains than it would be under centrally directed
socialist enterprise.”
Characteristics of Mixed Economy:

The important characteristics of mixed economy are as follows:
1. Co-existence of the public and Private Sectors:

The important characteristics of mixed economy are that in this
economy both private sector and public sector function together. The
heavy industries such as defence equipment, atomic energy, heavy
engineering industries etc., come under the control of public sector, on
the other hand, the consumer goods, small and cottage industries,
agriculture, etc., are assigned to the private sector. The government
helps the private sector by providing several facilities, of their
development.
2. Economic Welfare:
It is the most important criterion of the success of a mixed economy.
Public Sector seeks to avoid regional inequalities, provides large
employment opportunities and often its price policy is guided by
considerations of economic welfare rather than by profit motive.
Private activities are influenced through monetary and fiscal policies
to make them contribute to economic welfare of the society at large
level.
3. Economic Planning:
In Mixed economy, the Government adopts the instrument of
economic planning. This is necessary for the public sector enterprises
which have to work according to some plan and to achieve certain pre-
determined objectives.
In the same way, the Private Sector cannot be left to develop in its own
way. To ensure a co-ordinated and fast economic development the
programmes of both the sector are drawn in such a way that growth in
one complements the growth in the other.
4. Free and Controlled Economic Development:

The Mixed Economic System considered to be more appropriate to
remove the demerits of the capitalist and communist economic
systems. Encouragement is given to free economic activities and at the
same time steps are also taken to control economic activities.
Merits of Mixed Economy:

ADVERTISEMENTS:
The merits of mixed economic system are discussed below:

1. Adequate Freedom:
Mixed economy also permits adequate freedom to different economic
units: (a) Consumers are free to dispose of their incomes in a manner
they want, although the government does try to influence these
decisions through monetary, fiscal and commercial policies, (b)
Factors of production are free to choose their own occupations
although again the Government may strive to create conditions
favourable for the growth of chosen occupations.(c) Private initiative is
always encouraged to find it’s best possible use.
2. Maximum Welfare:
In mixed economic system, the state makes efforts to provide
maximum welfare to workers and other citizens. The government
makes provision for the employees for housing, education, minimum
wages, good working conditions, etc.
3. Modern Technology:
In mixed economy, the modern technology and capital saving method
is used, with the result large- scale production and profit could be
possible. Reserve fund is created to meet any undesired situation in
future. It produces more at the time of trade boom and utilise the
reserve capital when there is recession.
4. Best Allocation of Resources:

The resources are utilised in the best possible manner in the Mixed
Economic System. The Central Government makes economic planning
for optimum use of the resources. Thus shortage is avoided;
productive efficiency increases and cyclical fluctuations are
eliminated.
Demerits of Mixed Economy:

The major disadvantages of mixed economy are:
1. Low inflow of Foreign Capital:

Because of the government policy and the fear of nationalisation there
is less possibility of inflow of foreign capital which is very essential of
the development of private sector.
2. Inefficiency of Public Sector:

In comparison to private sector, public sector efficiency is lacking and
corruption, discrimination and red-tapism are the evils spread in the
public sector.
3. Maximum Control on Private Sector:

On one side, opportunity is given to private sector for development
but, on the other side stringent controlling is exercised by the
government to regulate the functioning of private enterprises. This has
an adverse impact on the development of private sector.
4. Fear of Nationalisation:
The private entrepreneurs are much worried about the government
policy to nationalise private enterprises in certain situations.
5. Problem of Concentration of Economic Power:

Although it is said that the mixed sector minimises economic
concentration but in practice the private-entrepreneurs take the
advantage of government policy and accumulate wealth since both the
private and public sectors co-exist, the government will not be in a
position to impose any stringent steps to prevent economic
concentration.
6. Presence of Imbalance in the Economy:

The mixed economy cannot provide faster development as the
government simply wants to maintain a balance between the private
and public sectors. The policies of the government are not so clear or it
facilitates to give any direction with the result, there exists non-clarity
of objectives and presence of imbalance in the economy.
The importance of private sector in Indian economy has been very commendable in generating employment
and thus eliminating poverty. Further, it also effected the following -
 Increased quality of life
 Increased access to essential items
 Increased production opportunities
 Lowered prices of essential items
 Increased value of human capital
 Improved social life of the middle class Indian
 Decreased the percentage of people living below the poverty line in India
 Changed the age old perception of poor agriculture based country to a rising manufacturing based
country
 Effected increased research and development activity and spending
 Effected better higher education facilities especially in technical fields
 Ensured fair competition amongst market players
 Dissolved the concept of monopoly and thus neutralized market manipulation practices
The importance of private sector in Indian economy can be witnessed from the tremendous growth of Indian
BPOs, Indian software companies, Indian private banks and financial service companies. The manufacturing
industry of India is flooded with private Indian companies and in fact they dominate the said industry.
Manufacturing companies covering sectors like automobile, chemicals, textiles, agri-foods, computer
hardware, telecommunication equipment, and petrochemical products were the main driver of growth.
The Indian BPO sector is more concentrated with rendering services to overseas clients. The KPO sector is
engaged in delivering knowledge based high-end services to clients. It is estimated, that out of the total US $
15 billion KPO service business around US $ 12 billion of business would be outsourced to India by the end of
2010.
Significance of Business Environment:

Environmental analysis has three basic goals. First, the analysis should
provider an understanding of current and potential changes taking place in the
environment. Second, environment analysis should provide inputs for strategic
decision making. Third, environment analysis should facilitate and foster
strategic thinking in any organization. It should challenge the current wisdom
by bringing fresh viewpoints into the organization. To be specific the benefits
of studying Business Environment are:
i. Development of broad strategies and long-term policies of the firm.
ii. Development of action plans to deal with technological advancement.
iii. To foresee the impact of socio-economic changes at the national and

international levels on the firms stability.
iv. Analysis of competitor’s strategies and formulation of effective counter

measures.
v. To keep oneself dynamic.
Limitations of Environmental Analysis:

Environmental analysis does not fore tell the future, nor does it eliminate the
uncertainty for any organization. It however, should reduce the frequency and
extent of surprises that may confront a company.
Interactional Matrix and Environment Scanning
Economic and the Non Economic Environment Interactional Matrix

The economic and non economic environment simultaneously affects the
trade and business of a particular nation. The socio cultural environment which is
the non-economic environment influences and in turn is influenced by the

economic environment. The socio cultural variables like attitude towards business
and management of the people determine the nature, pace of growth and the
entrepreneurial nature of business in that country.
Culture gives rise to economies and in turn economies nurture cultures. The
educational (non economic) environment affects and in turn gets affected by the
economic environment of business. No doubt rich state and economies can afford
costly education but the natural inclination towards better education has to be
dreamt first. Government and business encourage effective education and in turn
take advantage of it. Effective education leads to higher skill and expertise
development that leads to better management of companies.
The political-legal environment (non-economic environment) and economic

environment are also interdependent. Political intelligence and stability leads to
better industrial growth, increased entrepreneurship, and better returns. Political
dampness and instability leads to increased business risk. In pre 1991, the political
thinking was swadeshi and the direction and pace of industrial and economic
growth were entirely different as compared to post 91, where the political thinking
has liberalized together with the economy and has transformed the very nature of
business thinking in India. Therefore it is important to understand the interaction of
economic and non-economic environmental factors through the interaction matrix.
Interaction matrix
Present Economic Environment
Non Economic
1 2 3 4 5 6
Environment
Social
Educational
Legal
Political
Part Economic Environment
(7 by 5 matrix is a 2-way interaction of economic and non-economic
environment)
Similarly n number of interaction matrixes with a variety of economic and non-

economic factors can be prepared for study.
Environment Scanning
Environment scanning related to strategic planning whereby managers try to
determine the best fit between an organization and its external environment. The
environment scanning is aimed at continuous improvement of the company, its
policies and programs. The scanning process leads to search of preliminary
information which is needed to select those priority issues for which specific
business plans will be deployed.
Objectives of Environment Scanning:

1. To determine the important economic, social, environmental, health,
technological and political trends, situations and events.
2. To identify the potential opportunities and threats for the business and
trade.
3. To understand the strength and weakness of the organization.
4. To provide a basis for analysis of future program investments.
Components of Environment Scanning:

1. Summary and analysis of economic, social, environmental, health,

technological and political data.
2. Information collected from external public and private organizations and
agencies on issues involved.
3. Information from existing and potential stakeholders.
4. Assessment of current programmes, future direction, capabilities,
opportunities of business.
Environment scanning can be external or internal and has important bearing

on business and economy as a whole.
External scanning relate to acquisition, analysis and use of information

about events, trends and relationship of the business with its external
environmental variables, the future knowledge of which helps the business and
economy in planning the future course of action.
Internal scanning related to the acquisition, analysis and use of

information, the resources of business like staffing finances, inventory etc.,
communications and other critical business specific elements, the knowledge of
which helps the management in determining the future course of action of
business. Environment scanning describes the environment in which an
organization exists like its constituents, customers workers etc. According to
Milkovich and Boudreah (1994), “Environmental scanning systematically surveys,
identifies, and interprets relevant events and conditions. Its purpose is to answer
two questions- What’s coming in future and what will it mean to the business”.
Basically environmental scanning is done to assess the external conditions

faced by the organization both presently and in the future, to get a better idea of
how the organization should prepare to answer emerging trends and issues.
Scanning Process Involves:

1. Monitoring the environment on a continuous basis.
2. Screening the Information: i.e., finding the relevant information for the
organization.
3. Researching Issues: i.e., once the relevant information has been
identified, one should make further research and analysis so that their
implications are highlighted.
4. Develop Plans: To improve managers’ decisions. The results of
environment scanning must be transmitted to the managers on a timely
basis and in understandable and usable form.
Purpose of scanning is to assess and monitor the environment look for

changes and other factors that can influence the organization as a whole of
partially. The impact can be positive or negative. If planners and decision makers
have early awareness of potentially significant developments, the planning process
becomes proactive rather than reactive. Environmental scanning is an ongoing
process and not a one time event.
Environment scanning is an integral process to organizational effectiveness.

An environmental scanning process that is comprehensive and inter-connected
between all units is an integral component for effectiveness and success.
Additional Reading:
Structure of Indian Economy
At the time of independence Indian economy was predominantly rural and agricultural. The
below table shows the different sectors, there shares and anticipated future share in Indian
economy:
Year 1950-1951 1999-2000 2020
Sector
Primary Sector (Agriculture, 54-56% 27.87% 6%
Forestry & Fishing etc)
Secondary Sector 16.11% 25.98% 34%
(Production etc.)
Tertiary Sector (Service) 29% 46% 60%
Unit-II
Politico-Legal Environment
Major economic policy decisions are often the political decisions. The adoption, in
the early 1950s, of the principle of socialist pattern of society as the socio-
economic philosophy by the Congress party, which ruled India until 1995 except
for a brief period (1977-1980) was mainly responsible for the public sector
dominated development strategy followed in India until the early 1990s. Indeed
important economic policies such as industrial policy, policy towards foreign

capital and technology, fiscal policy and export import policy are often political
decisions.
Many political decisions have certain serious economic and business

implications. The economic policy of the ruling party is very important.
Government and Business Relationships in India:

Government plays an important role in development of business in every
national economy. Since 1991, the industries have been liberalized and the
economy has become competitive and international trade has started due to reforms
undertaken by the Government.
The role of government has become more critical since then. The
de-licensing, devaluation of rupee, reduce import tariffs, liberalized financial
sector, foreign investment and allowed private investment calls for a more dynamic
role of government to control and regulate business practices in India. The
government popularly plays four important roles in Indian economy:
Economic Role of Government: The Government plays an important role in

almost every national economy of the world. Even in the countries described as
capitalist or market economies, “a substantial share of the nation’s product goes to
satisfy public wants, a substantial part of the private income originates in the
public budget and public tax and transfer payments significantly influences the
state of private income distribution.
In the predominantly private enterprise economies, government interference

is necessitated by the fact, besides the socio-political ideological reasons, if any,
“that the market mechanism alone cannot perform all economic functions. Public
policy is needed to guide, correct and supplement it in certain respects.
While the state control of economy is a universal phenomenon, the extent

and nature of the control vary widely between nations, depending upon the nature
and stage of development of the economy, the behaviour of the private sector, the
political philosophy, social attitudes, administrative system etc. Some of the roles
played by the Government are:
Regulatory Role: Government regulation of the business may cover a broad

spectrum extending from entry into business to the final results of a business. The
reservation of industries to small scale, public and co-operative sectors, licensing
system etc., regulate the entry, regulation of product mix, promotional activities
etc., and amount to regulation of the conduct of the business.
Result of business operations may be regulated by such measures as ceilings

on profit margins, dividend etc. The state may also regulate the relationship
between enterprises. These regulations can be broadly divided into direct controls
and indirect controls.
Indirect controls are usually exercised through various fiscal and monetary
incentives and disincentives or penalties. Certain activities may be encouraged or
discouraged through monetary and fiscal policies for example , a high import duty
may discourage imports and fiscal and monetary incentives may encourage the
development of export-oriented industries.
The direct administrative or physical controls are more drastic in their effect.
The distinguishing characteristic of direct controls is their discretionary nature.
They can be applied selectively from firm to firm and industry to industry, at the
discretion of the state.
Promotional Role: The promotional role played by the government is very

important in developed countries as well as in developing countries. In developing
countries where the infrastructural facilities for development are inadequate and
entrepreneurial activities are scarce, the promotional role of the government
assumes special significance. The State will have to assume direct responsibility to
build up and strengthen the necessary development infrastructures, such as power,
transport, finance, marketing, institutions for training and guidance and other
promotional activities.
The promotional role of the State also encompasses the provision of various
fiscal, monetary and other incentives, including measures to cover certain risks, for
the development of certain sectors and activities.
Entrepreneurial Role: In many Economies State also plays the role of an

entrepreneur- establishing and operating business enterprises and bearing the risks.
A number of factors such as socio-political ideologies, dearth of private
entrepreneurship, neglect of certain sector, like the unprofitable sectors, by the
private players, absence of or inadequate competition in certain segments and the
exploitation of consumers, etc., have contributed to the growth of the State owned
enterprises in many countries. In many cases even when the private sector was
prepared to undertake the risk and invest, State ownership of such industries
existed for one reason or other.
However, recently many governments have resorted to privatization in

various degrees and have redefined the role of the public sector.
Planning Role: In developing countries, the State plays a very important role as a
planner. The importance of planning to a less developed economy was often
emphasized by J.L. Nehru. He said “Whatever it may be in other countries, in
under-developed countries like ours, which have to develop fairly rapidly, the time
element is important and the question is how to use our resources to the best
advantage. If our resources are abundant it will not matter how they are used. They
will go into a common pool of development. But where one’s resources are
limited, one has to see that hey are directed to the right purpose so as to help to
build up whatever one is aiming at”.
Government and Legal Environment:

In most countries, apart from those laws that control investment and related
matters, there are a number of laws that regulate the conduct of business. These
laws cover such matters as standards of product, packaging, promotion, ethics,
ecological factors, etc.
Some government specify certain standards for the products to be marketed

in the country: some even prohibit the marketing of certain products. In most
nations promotional activities are subject to various types of controls. Several
Europeon countries restrain the use of children in commercial advertisements. In a
number of countries including India advertisement of alcoholic liquor is prohibited.
Advertisements, including packaging of cigarettes must carry the statutory warning
that “Cigarette smoking is injurious to health”. In the US, the Federal Trade
Commission is empowered to require a company to provide sufficient evidence to
substantiate the claim concerning the quality, performance and comparative prices
of its products.
Many countries today have laws to regulate competition in the public

interest. Elimination of unfair competition and dilution of monopoly power are the
important objectives of these regulations. Certain changes in the government
policies such as the industrial policy, fiscal policy, tariff policy etc., may have
profound impact on business. Some policy developments create opportunities as
well as threats. For example, the industrial policy liberalizations in India have
opened up new opportunities and threats. They have provided number of
enterprises to diversify and to make product mix better however they have also
given rise to serious threats to many existing products by way of increased
competition.
Economic Roles of Government in India:
The Constitutional Environment: The Indian constitution incorporates a number

of matters that are economically very significant and have far-reaching
implications. The socio-economic and political objectives of the Indian Republic
and the basic principles of state functioning have been clearly laid down in the
Preamble to the constitution, the Fundamental Rights and in the Directive
Principles of State Policy. The Constitution also outlines the economic powers and
responsibilities of the Union Government and the State Government.
The Preamble: The preamble to the Indian Constitution states that:

 THE people of India HAVE SOLEMNLY RESOLVED TO CONSTITUTE
India into SOVEREIGN SOCIALIST, SECULAR, DEMOCRATIC
REPUBLIC to secure all its citizens.
 JUSTICS , social , economic and political;
 LIBERTY of thought, expression, belief, faith and worship;
 EQUALITY of status and of opportunity;
 And to promote among them all-

 FRATERNITY assuring the dignity of the individual and the unity and
integrity of the Nation.
The Preamble of a statute conveys the general object and intention of the
legislation in enacting it. Although not an essential feature, whenever a
Constitution contains a Preamble, it expresses the political, religious and socio-
economic values which it envisages to promote. But is does not control the
meaning and scope of the other provisions of the Constitution.
The Preamble to the Indian Constitution lays down that the attainment of
social, economic and political justice and equality of status and of opportunity
should be among the most important basic guiding principles of the fundamental of
State.
The Fundamental Rights: The theory of fundamental rights implies limited

government. It aims at preventing the government and the legislature from
becoming totalitarian, and in doing so it affords the individual an opportunity for
self-development. But these rights are not absolute; they are subject to limitations
imposed by the state in order to secure rights for all individuals or to promote the
greater interest of the community or the state to serve the ends of a planned
society. The Fundamental Rights enumerated in Part III of the Constitution are:
1. Right to Equality
2. Right to Freedom
3. Right against Exploitation
4. Right to Freedom of Religion
5. Cultural and Educational Rights
6. Right to Constitutional Remedies.
The Constitution had also guaranteed, under Article 19(1)(f), the

Fundamental Rights to Property and Article 31 had prohibited the deprivation of
property of any person save by authority of law, and for the deprivation of property
compensated had been payable. The Fundamental Rights also have economic
significance:
The Right to Equality prohibits discrimination against any citizen on

grounds of religion, race, caste, gender or place of birth. In public employment, it
ensures equality of opportunity to all citizens. This is , however, subject to certain
limitations, such as the right of the state to reserve posts for backward classes
which, in opinion of the state are not adequately represented in the service
The Constitution guarantees the citizens the fundamental right to freedom to

practice any profession, carry on any occupation, trade or business. This right is
subject to reasonable restrictions in the interest of general public. Under the First
Amendment to the Constitution (1951) State is empowered to make laws relating
to professional or technical qualifications necessary for practicing any profession
or carrying on any trade, business, industry or service.
The Fundamental Right against Exploitation prohibits traffic in human

beings, and beggary and other form of forced labour; and any contravention of this
provision shall be an offence punishable in accordance with the law. However, this
does not prevent the state from imposing compulsory service for public purposes.
In imposing such services, the state shall not make any discrimination on grounds
of religion, race, caste or class or any of them.
Thus, the Fundamental Rights enumerated in the Constitution guarantee a

number of economic rights to the citizens; but at the same time, the state has the
power to impose reasonable restriction on such rights in public interest.
Fundamental Duties: By the 42nd Amendment of the Constitution adopted in

1976, Fundamental Duties of the citizens have also been enumerated. These enjoin
upon a citizen among other things, to abide by the Constitution, to cherish and
follow noble ideals which inspired our national struggle for freedom to defend the
country and render national service when called upon to do so and to promote
harmony and spirit of common brotherhood amongst all people of Indian
transcending religious, linguistic and regional or sectional diversities.
The Directive Principles: The Directive principles of State Policy are a unique
feature of India’s Constitution. The Directive Principles are in the nature of
directions to the legislature and executive that they should exercise their authority
in such a manner as to ensure due respect for, and observance of, these principles.
Although these directives are not justiceable the courts cannot altogether avoid
taking cognizance of them: The Directive Principles that are economically very
significant are:
1. The State shall strive to promote the welfare of the people by securing
and protecting as effectively as it may a social order in which justice,
social, economic and political, shall inform all the institution of the
national life [Article 38(1)].
2. The State shall, in particular, strive to minimize the inequalities in
income, and endeavour to eliminate inequalities in status, facilities and
opportunities, not only among individuals but also amongst groups of
people residing in different areas or engaged in different vocations
[Article 38(2)].
3. The State shall, in particular, direct its policy towards securing:

a. That the citizens, men and women equally, have the right to an
adequate means of livelihood.
b. That the ownership and control of the material resources of the
community are so distributed as best to sub serve the common
good.
c. That the operation of the economic system does not result in the
concentration of wealth and means of production to the common
detriment.
d. That there is equal pay for equal work for both men and women.
e. That the health and strength of workers, men and women, and the
tender age of children are not abused and that citizens are not
forced by economic necessity to enter a vocation unsuited to there
are or strength.
f. That children are given opportunities and facilities to develop in a
healthy manner and in conditions of freedom and dignity and that
childhood and youth are protected against exploitation and against
moral and material abandonment (Article 39).
4. The state shall ensure that the operation of the legal system promote
justice, on a basis of equal opportunity, and shall, in particular, provide
for legal aid, by suitable legislation of schemes or in any other way, to
ensure that opportunities for securing justice are not denied to any citizen
by reason of economic or other disabilities (Article 39 A).
5. The State shall take steps to organize village panchayats and endow them
with such powers and authority as may be necessary to enable them to
function as units of self-government (Article 40)
6. The State shall, within the limits of its economic capacity and
development, make effective provision for securing the right to work, to
education and to public assistance in cases of unemployment, old age,

sickness and disablement, and in other cases of underserved wants
(Article 41).
7. The state shall make provision for securing just and humane conditions
of work and for maternity relief (Article 42).
8. The state shall endeavor to secure, by suitable legislation or economic
organization or any other way, to all workers, agricultural, industrial or
otherwise, a living wage, conditions of work ensuring a decent standard
of life and full enjoyment of leisure and social and cultural opportunities
and in particular the state shall endeavor to promote cottage industries on
an individual or co-operative basis in rural areas (Article 43).
9. The state shall take steps, by suitable legislation or in any other way, to
secure the participation of workers in the management of undertaking,
establishments or other organizations engaged in any industry
(Article 43 A).
10.The state shall regard the raising of the level of nutrition and the standard
of living of its people and the improvement of public health among its
primary duties and in particular the state shall endeavour to bring about
prohibition of the consumption, except for medicinal purpose, of
intoxication drinks and of drugs which are injurious to health
(Article 47).
11.The state shall endeavour to organise agriculture and animal husbandry
on modern and scientific lines and shall, in particular, take steps for
preserving and improving the breeds, and prohibiting the slaughter of
cows and calves and other milch and draught cattle (Article 48).
12.The state shall endeavour to protect and improve the environment and to
safeguard the forests and wild life of the country (Article 48 A).
These Directive Principles make quite clear how important is the economic
responsibility bestowed on the state by the constitution.
Business Responsibilities towards Government:

All businesses have a number of responsibilities to the government and all
must abide by the central, state and local government’s laws. The many ways by
which business can be responsible towards government and public are:
1. Tax Payment.
2. Providing information related to business and its performance.
3. Help the government in its project related to infrastructure etc.
4. Provide relevant advice to the government on various industry and
business related issues.
5. Political Participation.
6. Take up voluntary programmes for welfare of the people like
school, colleges, temples etc.
7. Provide employment and growth in per capita income of people.
Government Responsibilities to Business:

Government’s responsibilities to business are very important as businesses
thrive and grow in healthy political-legal environment. Government should act as a
promoter, regulator of business activities. The various ways by which government
can be responsible towards business are:
1. Establish, formulate and enforce laws.
2. Maintain law and order in the economy.
3. Make available easy and economical loans to businesses.
4. Provide an effective and efficient monetary and credit policy for
effective flow of funds.
5. Create good infrastructural and communication facilities in the

economy.
6. Special assistance to small scale industries, tiny industries and
export promotion.
7. Assistance in R & D activities.
8. Inspection and licenses for checking.
9. Quality, quantity and validity of businesses.
10.Tariff and quotas to promote and regulate International trade.
11.Restrict monopolistic and unfair trade practices.
12.Initiate healthy competition in business and economy.
13.Promote balanced regional development.
14.Easy access to resources of the country.
15.Assist in optimal utilization of resources, especially critical
resources.
Important Business Laws

Industrial (Development and Regulation) Act 1951, amended from time
to time, is one of the most effective weapons the government possesses to regulate
the development and to control the activities of the industrial sector.
Objectives: The principal objective of the IDRA is to empower the government:

1. To take necessary steps for the development of industries.
2. To regulate the pattern and direction of industrial development.
3. To control the activities, performance and results of industrial
undertakings in the public interest.
Main Provisions:
The IDR act contains provisions to realize the above objectives. Some of the
features are:
1. Development Measures: The act provides for the establishment, by the
central government, of a Central Advisory Council, consisting of
representatives of the owners of industrial undertakings, employees,
consumers etc., for the purpose of advising the central government on
matters concerning the development of the industries.
It also provides for the establishment of a development council consisting

of members representing the interest of the owners, employees, consumers etc.,
and persons having special knowledge of matters relating to the technical or
other aspects of the industries. The purpose of the council is to recommend

measures for improving the performance of the industries.
2. Regulatory Provisions: The IDR act empowers the central government to

regulate the development of industries by means of licensing. Accordingly,
the entry into a business or the expansion of an existing business may be
regulated by licensing.
3. Regulation of Conduct & Management of Business: The government can
make a full and complete investigation if it is of the opinion that:
i. In respect of any scheduled industry there has been or is likely to be
substantial fall in the volume of output, or market deterioration in
the quality of output.
ii. Any industrial undertaking is managed in a manner highly
detrimental to the public interest.
Direction, Investigation and Inspection:

Consequent upon the investigation the government is empowered to issue
such directions to the industrial undertakings for all or any of the following
purpose namely:
i. Regulating the production of any article and fixing the standard of
production.
ii. Requiring the industrial undertaking to take such steps as the central
government may consider necessary to stimulate the development of
industry to which the undertaking relates.
iii. Controlling the prices or regulating the distribution of any article
which has been the subject matter of investigation.
The Act also provides that any direction of the above nature may be issued
by the central government at any time. For the purpose of ascertaining the position
of working of any industrial undertaking, any person authorized by the central
government in his behalf can:
i. Enter and inspect any premise.
ii. Order the production of any document, book or record of any person
having the control of or employed in connection with any industrial
undertaking and
iii. Examine any person having the control of, or employed in
connection with any industrial undertaking.
Take Over of Management:

Under the IDRA, the power of control entrusted to the central government
extends to that of the take over of the management of the whole or the part of an
industrial undertaking which fails to comply with any of the directions mentioned
above.
Further, the central government can take over the management of industrial
undertaking owned buy a company under liquidation, with the permission of the
High Court, if the government is of the opinion that the running or restarting the
operations of such an undertaking is necessary for the maintaining or increasing
the production, supply or distribution in the public interest.
Regulation of Production, Supply, Price and Distribution: For securing the

equitable distribution and availability at fair price of any article related to any
scheduled industry, the central government is empowered by the Act to control its/
their supply distribution and price.
Regulation and Control of Industry: The IDR Act also empowers the central
government to regulate and control the entry of industry or a class of industries
into the business. The growth is also regulated by the provisions of the IDR Act.
MRTP Act (Monopolistic and Restrictive Trade Practices Act)

The MRTP Act 1969 came into force from 1 st June 1970. It has three major
objectives:
1. To control and regulate the concentration of economic power in few
hands of business and industry.
2. To control monopolies and monopolistic trade practices.
3. To prohibit restrictive trade practices unless any one of them can be
justified in the public interest.
Monopolistic Trade Practices: These can be defined as practices related to the

behaviour that may be adopted by any individual or group of firms by virtue of
their dominant market share.
A monopolistic practice is defined as one which has the effect of:
1. Maintaining price by limiting, reducing or otherwise controlling production,
supply and distribution of goods and services.
2. Limiting technical development or capital investment or allowing the quality
of goods and service to deteriorate.
3. Unreasonably preventing competition at any stage by adopting any policy or
practice.
The circumstances in which MTP are deemed to be harmful to public interest

are:
1. An unreasonable rise in the price of the goods sold.
2. Unreasonable profit derived from the production, supply or distribution

of goods and services.
3. Undue reduction in competition in the market.
4. Unreasonable limitation on supply of goods to the consumer.
5. Deterioration in the quality of goods and services.
Control on Monopolistic trade Practices:

Section 31 provides that where it appears to the central government that the
owners of any organization are involved in any MTP for any goods and services,
the government may refer the matter to the MRTP commission for the detailed
enquiry and investigation. If it is found that any monopolistic trade practice is
against the public interest then the central government may pass one of the
following orders:
1. Regulating the production, supply, distribution or control of goods and
services and may fix the terms of sale.
2. Fixing standard for the goods produced by the organization.
3. Ordering any party to enter or not to enter in any agreement as specified.
4. Declaring those MTP unlawful if they cross prescribed limits.
Exemptions of MRTP Act:

1. When it is authorized by the central government for the sake of public
interest.
2. Found it necessary by the central government:
i. For meeting the defense requirements.
ii. Ensure the maintenance of necessary services.
iii. Give effect to the terms of an agreement to which central
government is a party.
Restrictive Trade Practices: The monopoly enquiry commission has defined RTP
as follows: A Practice which:
1. Obstruct the free flow of competitive forces;
2. Control the free flow of capital into the stream of production;
3. Free flow of goods in the stream of distribution at any point before
they reach the hands of ultimate consumer.
The following are the some common kinds of RTP:

 Collective Price Fixation: Means the action on the part of manufacturer or
supplier in fixing prices or terms of sales in order to reduce competition.
 Predatory Pricing: This is the practice of setting prices below the cost with
the intention of driving out the existing competitors from the market.
 Exclusive Dealing: It deals with agreements restricting in any manner the
purchaser in the course of this trade from acquiring any goods that of the
seller or any person. The idea behind this is to prevent the purchaser from
dealing with the goods of competitors.
 Area Restriction: This is a trade practice whereby a restriction is placed by
the manufacturer on the dealers to move or to supply goods within a fixed
area or territory and not to sale outside that area.
Control on Restrictive Trade Practices:

Under the MRTP Act, RTP are also covered through various agreements but
these are required to be registered with the registrar of agreements in order to
ensure the public interest. Once the MRTP commission finds out the RTP are
against the public interest it has power to pass any order directing:
1. The practice should be discontinued and not repeated.
2. The agreement relating to the said practice shall be void.
3. The agreement related to the practice should be modified in a specific

manner. In such a case the commission instead of passing an order
permits the concerned parties to take steps within the specified time
period to ensure that the trade practice is not against the public
interest.
The commission has wide powers:

 To make provisions for the proper execution of orders.
 To amend its own order.
An order made by the commission is generally limited to a particular class of
traders or may be general. An appeal against the order lies only to the Supreme
Court.
Exemptions: The following RTP are exempted under the MRTP Act:
1. Those that take place in J & K
2. Practice to safeguard the right under the Indian Patent Act.
3. Which are expressed authorized by the law.
4. Which are allowed by the Central Government.
For example: The act does not apply to the trade unions.
Unfair Trade Practices:

UTP means a trade practice for the purpose of promoting the sale, use or
supply of any goods and service by adopting any unfair method like
misrepresentation, misleading advertisement and thereby causing a loss or injury to
the consumers of such goods and services whether by eliminating or restricting
competition or otherwise.
Some of the Unfair Trade Practices are: The practice of making any statement
whether orally or in writing which:
1. Falsely represents that the goods are of particular standard, quality and
quantity.
2. Falsely represents that the services are of a particular quality.
3. Falsely represents that goods and services have performance, uses
characteristics and benefits which other goods and services do not have.
4. Make a misleading or false statement concerning the usefulness of any
goods and services.
5. Represents that the seller or supplier has the sponsorship or approval which
that seller does not have.
6. Gives to the public any guarantee of the performance, efficiency, length of
life of the product that are not based on adequate or proper test.
7. Misleading the public concerning the price at which a product or service
have been sold or
8. Permits the publication of any advertisement whether in any newspaper or
otherwise for the sale or supply at a bargain price of the goods and services
that are not intended to be offered for sale or supply.
9. Permits the offering of gifts, prices or other items with the intention of not
providing them or creating an impression that something is being given free
of cost when it is fully or partly covered by the amount charged in whole
transaction.
Control of UTP:
The provisions to control UTP have been incorporated in the year 1985. The
commission may enquire any UTP if:
 Upon receiving a complaint of facts which constitute such practices
from any trade association or from any consumer association or from
any consumer whether such consumer is the member of that consumer

association or not.
 Upon an application made to it by the Director General.
 Upon its own knowledge and information.
 Upon a reference made to it by the central Government.
If after the enquiry commission is of the opinion that UTP have been
adopted and it is against the public interest then it may issue an order directing
that:
 The practice shall be discontinued and shall not be repeated.
 Any agreement relating to such UTP shall be void.
Appeals: Any appeal against the commissions order in respect to UTP lies to the
Supreme Court and has to be made within 60 days from the date of the
commission’s order.
Consumers and Consumer Protection Act in India:

In India and all over the world consumers are treated as the most powerful
factor of the Business Environment. But from last so many decades’ consumers are
being exploited and cheated by most of the firms. Therefore the consumers are
now becoming aware of their rights and consumerism movement is growing
slowly.
Consumers Rights:
1. Right against exploitation by unfair trade practices.

2. Right of protection of health and safety from the goods and services
purchased.
3. Right to be informed for the quality, performance, freshness and side
effects of goods and services purchased.
4. Right to get the grievances redressed.
5. Right to choose the best variety of offer.
Consumerism:
According to Philip Kotler consumerism is: “A social movement seeking to
augment the rights and powers of the buyer in relation to the seller”. Consumerism
can be explained as a collective effort of the consumers to protect their interests.
Consumer Protection
For effective consumer protection a practical response of three parties is
necessary i.e., the business, the government and the consumer.
Firstly, the business comprising of the producers and all the elements of the
channel of distribution has to pay regard to the consumer’s rights. The producer
should be responsible to ensure efficiency in production and quality of output at
the same time. He should also develop an intention to charge reasonable price.
Secondly, the government has to come to the rescue of the helpless

consumers to prevent tem from being cheated, mislead or exploited. The
Government should also intervene strictly on the unfair trade practices of the
entrepreneurs.
Thirdly, the consumers should accept consumerism as a means of

ascertaining and enjoying their rights.
Consumerism is succeeded in making the business and the government more

responsible to the rights of the consumers. In India, the movement of consumerism
is still in the development stage. There are following factors which are becoming a
cause for the development of consumerism:
 Short supply of many goods and services.
 Low literacy level and improper information flow.
 Low awareness among Indian consumers about their rights.
 Legal process in comparatively time consuming in India which
discourages the consumers from seeking the redressel of their
grievances.
 Many products with which consumer in advanced countries are quite
familiar are still new to a large segment of the Indian economy.
Though there are number of laws to safeguard the interest of the consumers
but they are not effectively implemented. There is a need for a effective
intervention in order to protect the rights of the consumers.
Consumer Protection Act, 1986:

An important landmark in the history of consumer protection legislation in
India is the Consumer Protection Act, 1986 which provide a system for the
protection of consumer rights and Redressel of consumer disputes. This Act
applies to all goods and services
Objectives of the Act: The objective of this Act is to provide for the better
protection of the interest of the consumer and to make provision for the
establishment of consumer councils for the settlement of consumer disputes.
Consumer Protection Council: The Act provides for the establishment of

consumer protection council by the central government and a state consumer
protection council by the state government.
The central council shall consist of the minister incharge of the department
of a food and civil supplies who shall be its chairman. The state council shall
consist of such members as may be specified by the state government from time to
time.
Objectives of Consumer Protection Council:

The objective of central council is to promote and protect the rights of the
consumer such as:
 The right to be protected against marketing of those goods which are
harmful to life.
 The right to be informed about the quality, quantity, purity and price of the
goods so as to protect the consumer from UTP.
 The right to be assured whenever possible access to a variety of goods at
competitive prices.
 The right to seek redressel against UTP.
 The right to consumer education,
 The right to be heard and assure that consumer interest will receive due
consideration at appropriate time.
Consumer Dispute Redressel Agencies:

The consumer protection act provides three way consumer dispute Redressel
system i.e., at district, state and national level.
A District Forum in each district of every state.

 A person who is or has been qualified to a district judge nominated by
the state government.
 An eminent person in the field of education, trade or commerce.
 A lady social worker.
A State Commission: Each state commission consists of a person who is or has to

be a judge of high court appointed by the state government (who shall be its
president) and two other people who shall be the person of ability, ambiguity,
understanding and have adequate knowledge or experience or have shown capacity
in dealing with problem relating to economies, law, commerce, accounting and
public affairs etc.
A National Commission: It was established by the central government in August

1988. The responsibility for the establishment of other two agencies rests with the
respective state government (with the prior approval of central government).
If any of the consumer dispute Redressel agency is satisfied that the

allegation contained in the complaint is true it shall issue an order to opposite party
directing him to take one or more of the following actions:
 To remove the defects pointed out by the appropriate laboratory.

 To replace the goods with new goods of similar description this shall
be free from all the defects.
 To return the price and charges paid by the person who has made the
complaint.
 To pay such amount as may be availed by it as compensation to the
consumer for any loss or injury suffered by consumers due to
negligence.
A national commission shall consist of person who is or has to be a judge of

the Supreme court appointed by the central government who shall be the person of
ability, integrity understanding and have adequate knowledge or experience or
have shown interest in dealing with problems relating to trade, industry commerce
and public affairs etc. One of whom shall be a woman.
Jurisdiction:
A complaint where the value of goods and service and the compensation if
any is less than Rs 1 lakh is to be dealt with the district forum when such value
exceeds Rs 10,00,000 is to be dealt with state commission and the cases which
involves cases of more than Rs 10 Lakhs are to be dealt with national commission.

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Economic Environment of Business MBA-216 1

According to W. L. Gulek and Lawrence “The environment includes the

iii. Management Structure and Nature: The organizational structure, the

v. Human Resource: The characteristics of the HR like skills, quality, morale,

Miscellaneous Factors: There are a number of other internal factors which

They include the following

 Physical assets and facilities like the production capacity, technology

 R & D and technological capabilities determine the company’s ability

 Marketing resources like the organization of marketing activities,

 Financial factors like financial policies, position and capital structure

A GLIMPSE OF BUSINESS ENVIRONMENT

The micro environment consists of the actors in the company’s immediate

A company has different categories of customer like individuals,

iii. Competitors: A firm needs to face different types of competition like

If the consumer decides to go in for a TV, the next question is which

iv. Marketing Information: The immediate environment of a company may

v. Public: A public is any group that has an actual or potential interest in or

Fruitful co-operation between company and the local public may be

generally more uncontrollable. The success of a company depends on its

i. Political and Government Environment: It plays a very active role in all

ii. Natural/ Technological Environment: The natural environment ultimately

Technology is also one of the important determinants of success of a

iii. Demographic Environment: Demographic factors such as size of the

The demographic environment differs from country to country and

iv. Cultural Environment: Culture is a very critical component of business

v. Global Environment: It refers to those global factors which are relevant to

Meaning Micro environment is defined Macro environment refers to

Elements COSMIC, i.e. Competitors, PESTLE, i.e. Population &

Nature of Specific General

Are these factors Yes No

Influence Directly and Regularly Indirectly and Distantly

Basic Philosophy of Capitalism

i. Private Ownership: In a capitalist economy it means that the factor of

iii. Consumer Sovereignty: Consumers have complete freedom of choice in

iv. Freedom of Choice of Occupation: In such an economy, the individual is

v. Freedom to save and invest: Everyone is free to invest any amount in

vii. Absence of a central Plan: In such an economy, the activity of various

viii. Market System: Market mechanism is regulated by the forces of demand

Basic Philosophy of Socialism:

Socialism is generally understood as an economic system where the means

i. Government Ownership and Control: In socialist economy the major

In some socialist economies the private sector also plays an important

iii. Restriction on Consumption: There is no consumer sovereignty because

v. Restriction on Occupation: The freedom of occupation is restricted and

vi. Distribution of Income: An equitable distribution of income is an important

i. There is no consumer sovereignty in socialism. The state decides what and

iii. The absence of freedom of choice of occupation is undemocratic.

v. The central planning authority commands the resource allocation,

Because of these drawbacks now so many socialist countries are adopting

Mixed Economy is neither pure capitalism nor pure socialism but a

both capitalism and socialism. Mixed economy is operated by both,

That is private enterprise is not permitted to function freely and

According to J. W Grove, “One of the presuppositions of a mixed

Characteristics of Mixed Economy:

1. Co-existence of the public and Private Sectors:

4. Free and Controlled Economic Development:

Merits of Mixed Economy:

The merits of mixed economic system are discussed below:

4. Best Allocation of Resources:

Demerits of Mixed Economy:

1. Low inflow of Foreign Capital:

2. Inefficiency of Public Sector:

3. Maximum Control on Private Sector: