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ISBN: 978-81-317-5449-8
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Published by Dorling Kindersley (India) Pvt. Ltd, licensees of Pearson Education in South Asia.
Head Office: 7th Floor, Knowledge Boulevard, A-8(A), Sector 62, Noida, UP 201309, India.
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Preface xxv
Acknowledgement xxix
About the Author xxxi
Summary 377
Questions 378
Endnotes 378
Summary 414
Questions 416
Endnotes 416
Summary 562
Questions 563
Endnotes 563
Summary 624
Questions 624
Endnotes 624
33. Strategic Change: Managing Change and Renewal 627
33.1 Introduction 628
33.2 Strategic change 629
33.2.1 Defining changes 629 z 33.2.2 Nature of strategic
change 629 z 33.2.3 Need for strategic change 630
33.3 Management of strategic change 631
33.3.1 Factors influencing change 631 z 33.3.2 Planning and
preparation for change 632 z 33.3.3 Anticipating resistance to
change 633 z 33.3.4 Strategies to overcome resistance to change 633
33.4 Implementing changes 634
33.4.1 Technology-based methods 634 z 33.4.2 Organizational redesign
methods 634 z 33.4.3 Task-based methods 635 z 33.4.4 People-
oriented methods 635
33.5 Social change and the entrepreneur 637
Summary 639
Questions 639
Endnotes 640
Index 683
This book is the outcome of my academic journey spanning three decades. The process of transformation
of the business environment of a nation and its management, and the role of innovation in ushering in
this change, have always fascinated me. In the course of my persistent research on these issues, I have
noticed that people, institutions, enterprises and societies in general respond to the forces of change
in two distinct ways. There are some who react to survive; others, probably fewer in number, behave
proactively by anticipating the forces of change and continuously endeavour to strengthen their capa-
bilities and knowledge base by inventing new modes of behaviour, objects and systems to deal with the
unfolding reality. The latter, undoubtedly, add much more value, and create wealth and happiness not
only for them, but for the society at large.
Changes in business environment, business practices and innovative measures are governed by global
competitiveness, institutional initiatives and government policy. In my academic pursuit, somehow,
since the very beginning, I have closely tracked responses of business enterprises to changes in business
environment ushered in by the factors mentioned above. As a young scholar during the 1980s, when the
Government of India initiated long overdue reforms in trade and industrial policies aimed at promot-
ing efficiency and productivity of Indian industries, I wrote an M.Phil. dissertation entitled ‘Managerial
attitude towards change and innovation’. The study found that the middle-level management was most
responsive to the gathering challenges of a new business environment as reflected in the adoption of a
slew of innovative measures by firms aimed at improving their operational efficiencies. Subsequently, my
Ph.D. thesis, ‘Success strategies of Indian enterprises’, examined the issue of business strategy adopted by
firms in view of the changing business climate of the country. The study found that during the latter half
of the 1980s, in order to expand and make profit, large firms, apart from improving their operational
efficiency, went in for sharpening their marketing and competitive strategies. Indian enterprises were
found to have increased their product diversification in the pre-1980s era. However, as the decade of the
’90s unfolded and economic reforms went deep and wide, large firms switched over to acquiring focus by
restructuring and realigning their operations and product lines. Simultaneously, there was an attempt to
modernize their plants, acquire knowledge through strategic alliances and outright purchase of technol-
ogy and knowledge systems. There was increased focus on knowledge acquisition and innovation.
Globalization of national economies and establishment of the World Trade Organization (WTO), with
its own rules for regulating the conduct of international business, has opened up vast world markets for the
Indian firms. However, to cash in on this opportunity, Indian firms, and the economy, in general, will have to
strive hard to develop themselves as a competitive hub of knowledge creation, and set up new institutions and
strengthen existing ones, wherever required—tasks, by no means small, in an era of global competitiveness.
Knowledge, without doubt, will continue to be the key driver in global economic growth throughout
the twenty-first century. No wonder, global firms and nations have, therefore, laid extraordinary emphasis
on knowledge acquisition and innovation. In this context, an important feature of knowledge-related
activity—its spatial distribution—is worth emphasizing. Knowledge and capability creations are clustered
in regions and locales spread all over the world, with strong linkages to each other. Performance of a
firm, today, critically depends on the cluster to which it belongs. Policies and new institutional initiatives
aimed at promoting efficiency and productivity of firms, therefore, needs to take note of this fact. The
study ‘Emerging knowledge-based economy, Canadian competitiveness and strategic response of high-
tech firms’ (2000), sponsored by Shastri Indo-Canadian Institute and conducted by me in the University
of Alberta, Canada, clearly demonstrates the pivotal role of clusters and an intertwined, well-calibrated
government policy towards them, in promoting innovation and knowledge growth. In my own account
of the tale of two cities, I discovered to my delight, how two entirely different routes to industrial growth
were adopted by the cities of Calgary and Edmonton, both located in the state of Alberta.
A window of opportunity to see these ideas in operation in the Indian context came my way when
I had to write a report on the ‘Impact of WTO on small-scale industries in Punjab and Haryana’ as part
of the core group of Y. K. Alagh Committee set up by the Punjab and Haryana governments to examine
the impact of WTO on agriculture and small-scale industries (SSIs) of their respective states. The study
took me to several district industrial centres in Punjab and Haryana and enabled me to have extensive
interaction, among others, with entrepreneurs and representatives of trade associations and government
officials to understand the problems faced by the SSIs, in particular with regard to those with linkages
to WTO, and identify possible solutions. As it turned out, few districts in these states could throw up
vibrant industrial clusters with strong trade associations and quality educational institutions. The vast
majority of districts wore the picture of being a mere agglomeration of industries without any linkage or
interaction with each other. To develop these industrial districts into innovative clusters clearly called for
setting up of institutions such as knowledge parks, along with institutional mechanisms that would allow
greater effective collaboration among the industry, the academia and the government.
The role of policy and institutions in business innovations were further underlined in another study,
‘A strategic approach to innovation and international competitiveness of chemical industry in India’,
sponsored by the Department of Scientific and Industrial Research (DSIR), Ministry of Science and
Technology, Government of India in 2003–04. The chemical industry is a global industry representing
big multinational corporations (MNCs) operating on a global scale. The study led to suggestions of
strengthening of the dynamic capabilities of Indian enterprises and chemical innovation systems along
with the setting up of chemical parks and knowledge parks. In 2006, a visit to innovative clusters in
France, such as ‘Sophia Antipolis’, and automobiles clusters near Paris further strengthened my views
regarding the efficacy of clusters and government policy in promoting innovation.
Insights acquired during all the above-mentioned research projects and my experience of teaching
courses on strategic management, strategic marketing and international marketing to MBE and MBA
students have gone into the writing of this book on Business and Management. The aim has been at
understanding—with the help of real-life cases and illustrations—the defining changes sweeping the
Indian business scenario and the innovations that have taken place in their working and management
during the last few decades. It is especially targeted at undergraduate students of commerce, management
and engineering for strengthening their understanding of Indian business and management. The focus
on change, innovation, capabilities and strategies will be evident in all the chapters.
The book is primarily intended for readers interested to know about business and its management
in the Indian context. Readers may have the ambition to work for a business as an employee, or be a
manager, or a consumer or an investor, or a successful business person. This book would be useful for
students of B.Com. (Hons), B.Com., BBS, BBA and other similar professional and vocational courses. It
would also be a much helpful introductory book for MBA students. For candidates interested in learning
about business and management, it would be an effective aid during training programmes.
Exhibits: In a country like India, with a population of over 1.2 billions and large numbers of consumers
having low to medium level of income, not only a whole range of business opportunities exists but new
opportunities are also being explored by enterprising individuals and groups. In this book, I have attempted
to focus on the entrepreneurial opportunities for businesses and challenges facing them. Each chapter
has an exhibit illustrating entrepreneurial challenge in a real-life Indian enterprise. Indian enterprises
are functioning in a globalized business environment. These enterprises have proved their strength and
competitiveness in a number of industries and services. To achieve their global objectives, they are going
for mergers and acquisitions, and transforming themselves into multinational enterprises. In each chapter,
there is also an exhibit illustrating global business implications for Indian enterprises using a real-life
example. As Indian business is becoming global, these enterprises are expanding in the foreign market,
raising funds from foreign institutional investors and forming strategic alliances with MNCs. All this has
necessitated Indian enterprises to be more transparent and ethical in their functioning. A third exhibit
highlighting the ethical and social responsibilities of different functional areas in business and management
functions is present in each chapter. Such an exhibit also deals with the case study of an Indian enterprise.
Every chapter has been supported by theory and research inputs related to the issues of discussion.
PEDAGOGY
The book has been designed to adopt a pedagogy that would help in understanding the content easily.
Every chapter follows this pedagogy.
Chapter Objectives: These have been outlined at the beginning of each chapter.
Business Insight and Business Insight: A Revisit: Every chapter starts with the feature Business
Insight, focusing on a real-life situation and on managerial issues involved in an Indian company.
The purpose of this is to stimulate students’ thinking and awareness of various aspects of the topic
to be discussed in the chapter.
A second feature, Business Insight: A Revisit, marks the closing of the same case and is presented after
the main text ends, before the summary. This is intended to stir students’ thoughts about the issues and
approaches covered in the chapter they have just read, and then to apply these ideas to the dilemma or
challenge and the decision posed by the case description. The cases are meant to engage students in some
serious consideration of the issues. At the end of this feature are given a set of questions related to the
key aspects of the case.
Exhibits: There are over a hundred exhibits illustrating cases of various Indian enterprises with a
focus on the following areas:
z entrepreneurial challenges
z global business implications
z ethical and social considerations.
Figures and Tables: In every chapter there are figures and tables clarifying the issues discussed in
the text.
Chapter-end Summaries: Each chapter has summarized the main points at the end, keeping in
view the chapter objectives.
Questions: Each chapter has questions that provide a fairly comprehensive coverage of the major
points and topics contained in the text. The purpose of the questions is to encourage thinking vis-à
-vis mere memorizing of the chapter contents.
Endnotes and References: Endnotes and references are given in the chapters as and where neces-
sary, in order to amplify certain points or provide source details.
Case Studies: Each chapter closes with an exercise in the form of a Case Study, with relevant
questions.
TEACHING AIDS
Teaching aids for students and teachers in the form of PowerPoint presentations and case teaching notes
for chapter-end cases are available at www.pearsoned.co.in/vijaykumarkaul/.
A book of this size would have been impossible to complete without the help of friends and well-wishers
who provided much support and encouragement. Although it is difficult to give all the names here,
some who played a key role cannot but be identified and sincerely thanked. At the outset, I would like
to thank all the scholars, writers and academicians who have so far worked in the area of Business and
Management. Some such scholars have been referred to in the book; others are more generally known
for their contribution to the disciplines of Business and Management. I sincerely show my indebtedness
to all such scholars from whose work I have learned and drawn necessary knowledge.
Some of my friends, colleagues and research students have been associated with me throughout the
development of this book. They have helped me by reading and editing the manuscript, and suggesting
missing points. They have provided support at different stages during my writing which helped and encour-
aged me to finish the work at the earliest possible. I will be failing in my duty if I do not mention their names.
Some are associated with various organizations under the University of Delhi: J. K. Bareja, Shyam Lal
College; Surendra Kumar, P.G.D.A.V. College; Anu Pandey, Motilal Nehru College; Dr Poonam Verma,
Principal, S. S. College of Business Studies; Dr Usha Krishna, Janki Devi Memorial College; Dr Gayatri
Verma, Lakshmibai College; Dr M. S. Verma, Ram Lal Anand College; Dr Inderjit, Principal, College
of Vocational Studies; Shekhar Singh, Dayal Singh College; Dr Asif Zamir, Fore School of Management;
Dr Neelam Singh, Lady Shriram College; Anshul Taneja, Maharaja Agrasen College; Dr Raman Kumar,
College of Vocational Studies; Dr P. V. Khatri, Shri Shardhanand College; Dr Rabi Narayan Kar, Shaheed
Bhagat Singh Evening College; and Nomita Sharma, S. S. College of Business Studies. Sharma has helped
me in preparing teaching notes in the form of PowerPoint slides and cases teaching notes.
Others are teachers in various departments at the University of Delhi: Professor V. K. Vasal,
Department of Financial Studies; Professor C. P. Gupta, Department of Financial Studies; Professor
I. M. Pandey, Department of Financial Studies; Professor Surender Kumar Bansal, Department of
Business Economics; Dr Ananya Ghosh Dastidar, Department of Business Economics; and Dr Yamini
Gupt, Department of Business Economics.
This book could not have reached the readers without the help of a good publisher. The editorial sup-
port provided by an excellent team consisting of Anshul Yadav, Praveen Tiwari and Barun Kumar Sarkar
of Pearson Education is worth mentioning. My interaction with this team and their suggestions and
editing has added great value to my work. I express my gratitude to all of them for their support. Anshul
Yadav deserves a special word of thanks for his involvement and help.
I have heard that writing a book involves much patience and hard work; that one needs to incur
certain costs as well. In the course of writing this book, I could not give time to my family, especially to
my two lovely little daughters, Vijayeswari and Rajeshwari. Both of them understand their father well
and are very supportive. My wife Surekha needs special mention. She is not only very supportive and
accommodative, but also a good manager. She would complain but understand quickly. I have gained a
lot of knowledge about management from her experience of establishing and managing several libraries
over the last two decades. Another family member who is closely associated with my all pursuits is my
younger brother Omkar Nath Kaul. Sharing of his managerial experiences in the corporate sector has
helped me to understand the intricacies of management, which largely impacted my writing.
Whatever I am today, it is all because of my guru Paramhansa Advaitanadaji and my parents. I have
learnt my real lesson of life, to face ups and downs and do something for the society, from Paramhansaji.
His blessings will continue to enlighten my soul in the years to come. My father has always been encour-
aging me to read and study more and more. Till his last, he had been by my side and guided me. By the
grace of God, my mother is still with me with her blessings. The present work is the fruit of all their
blessings.
To his credit, Professor Kaul has over fifty research papers and articles published in reputed jour-
nals. He has participated in and presented research papers at various seminars and conferences in India
and abroad. He made a presentation at the UN Commission on Human Rights in Geneva, Switzerland.
As a part of a delegation on Indo-French cooperation, he visited France and made presentations on
the Indian Industry. He has successfully guided and supervised Ph.D. and M.Phil. research students
working in areas such as Business Strategies, Corporate Governance, Innovation, Small Enterprises and
Entrepreneurship and the World Trade Organization.
After taking over Corus, a European steel giant, Tata Steel became the fifth-
largest steel company in the world. The total sales of the company has jumped
to ` 118753 crores by the year ending 31 March 2011. Tata Steel was established
in 1907 by Jamsetji Tata. With the acquisition of Corus in 2007, exactly after 100
years of its existence, the company has expanded both within Asia (by acquir-
ing Thailand’s Millennium Steel and Singapore’s NatSteel Asia) and beyond
Asia (through Corus, UK, as well as a host of smaller acquisitions, joint ventures
and associations). Tata Steel has created a manufacturing and marketing network in Europe, Southeast Asia
and the Pacific Rim countries through investments in Corus, Millennium Steel and NatSteel Holdings.
After Independence in 1947, the Government of India made steel a priority area for industrial development,
but the expansion in this area was primarily reserved for the public sector. Tata Steel was not able to expand
and grow. As liberalization started in 1991, things started changing for the company. During the period 1991
to 2000, Tata Steel launched a modernization programme to replace outdated technologies and processes.
This cost the company ` 9,500 crore, leaving little scope for growth or acquisitions. However, by late-1990s,
its competitiveness was ratified by the industry’s premier analysis firm World Steel Dynamics, which ranked it
third after Korea’s POSCO and China’s Baosteel. The ranking, based on parameters such as management, tech-
nology and cost of production, is one of the most respected benchmarks in the steel industry. The company
started making profits and looking for global acquisitions. The result was several acquisitions after 2000, and
currently it is one of the largest steelmakers in the world.
(Continued )
Tata Steel has witnessed the changes in the Indian economy over a very long period and has also
contributed to bringing about those changes. It was established during pre-Independence period. It faced a
number of problems in setting up its plant, as the country was ruled by the British government. Immediately
after Independence, it wished and endeavoured to grow and expand its activities. But since the public sector
was considered important for the industrial development, only public sector units were allowed to set up steel
business. However, things started changing from 1991 with the liberalization of the Indian economy, and cur-
rently Tata Steel is a global company with steel plants all over the world.
2.1 INTRODUCTION
The case of Tata Steel clearly shows that the government policy in a country affects the growth and per-
formance of the business. The government policy is the most important factor of the overall business
environment, which influences the other constituents of the environment. There are several factors which
contribute to the business environment in a country: economic, competitive, technological, political and
legal, social and cultural, and ecological. The companies which understand this and respond appropri-
ately are successful and survive for a long time, while others struggle to survive. For instance, Hindustan
Motors was enjoying the protected markets under the restrictive economic policy. As the government
liberalized its policy and opened the automobile sector for global players, Hindustan Motors could not
respond to the change and is struggling to survive (see Exhibit 2.1). As the business has become global-
ized, understanding the global environment becomes important for the growth and performance of the
business enterprises.
The business environment has been changing very fast globally. After the Cold War, globalization
has become the most outstanding characteristic of international economic affairs. Started by the US
president Ronald Reagan and the British prime minister Margaret Thatcher, the process of liberalization
and privatization has substantially altered the economic policy and the business environment in which
enterprises operate. The establishment of the World Trade Organization (WTO) has further pushed
the opening up of domestic markets of different countries for the entry of foreign goods and foreign
companies. After the United States, Europe and other Asian countries, India too embarked on the
process of liberalization and globalization. Starting from the 1990s, several sectors have been opened
up for private and foreign participation. State monopolies in some of the sectors
have been removed. A number of public-sector companies have been and are The change in the
being privatized. The change in the global business environment and the five forces global business
affecting it have been outlined in a recent survey of Mckinsey Quarterly.1 These environment and
five forces offer the opportunities for companies to innovate and change: first, the the five forces
emergence of increased growth from the emerging market countries than from affecting it offer the
the developed ones will require new products and innovations; second, developed- richest opportunities
for companies
world economies will need to generate pronounced gains in productivity to
to innovate and
power continued economic growth; third, global economy is growing ever more change.
connected. Complex flows of capital, goods, information and people are creating
an interlinked network that spans geographies, social groups and economies in
ways that permit large-scale interactions at any moment; fourth, a collision is shaping up among the
rising demand for resources, constrained supplies and changing social attitudes towards environmental
protection; and fifth, the often contradictory demands of driving economic growth and providing the
necessary safety nets to maintain social stability have put governments under extraordinary pressure.
It needs to be emphasized here that the business environment of the world is under constant change.
One may look at the history of past 100 years. Change is the permanent feature of the global economy.
The business enterprises should scan the change and accordingly modify and innovate their products
and business model. Let us first understand the different constituents of business environment and how
they influence business enterprises.
The economic
2.2.1 Economic Environment environment
consists of factors
The economic environment consists of factors that affect consumer purchasing
that affect consumer
power and spending patterns. Economic factors include business cycles, inflation,
purchasing power
unemployment, interest rates and income. Changes in major economic variables and spending
have a significant impact on the marketplace. For example, income affects consumer patterns.
spending, which in turn affects sales of organizations. One related dimension is the
Economic
Environment
Competitive Political and
Environment Legal
Industry
Environment
Enterprise
Socio-cultural Ecological
Environment Environment
Technological
Environment
Availability of Substitutes
the case of the global oil and gas market, there were Gas
Seal Oil
The end of the era of cheap oil prompted oil companies to Administration
look for new forms of energy. It was in the early 1980s that
companies in the United States first started looking for shale gas. In 1989, production of shale gas started,
and after 2000, with energy crisis, it drew the attention of big oil companies.
(Continued )
The shale gas is a type of natural gas found in rock formations, below and above the ground. It
is referred to as a non-conventional gas, as it calls for more intricate production techniques. The
production technology is expensive, and the amount of gas produced from each well is low. Hence,
the cost of production of shale gas works out to about two to three times that of conventional gas. Still,
the cost is cheaper than that of producing oil. Development of horizontal drilling has changed the sce-
nario of gas exploration. Only the United States and Canada have explored shale gas seriously. Recently,
Reliance industries acquired three US shale gas assets for US$2 billion, which has attracted the attention
of companies in India towards shale gas. Shale gas has changed the international oil and gas market. It
is likely to change the power of the Organization of the Petroleum Exporting Countries (OPEC) to play
with the price of oil. Shale gas is the future of the oil and gas market and is a game changer that has
taken the market by surprise.
Shale gas is a non-conventional and green gas. It can be used in virtually every energy application—
automobile fuel, industrial feedstock (petrochemicals, power, fertilizer), heating and cooking. It is a sub-
stitute oil, which is likely to change the energy equation in the world. Companies are yet to look into
this direction seriously.
development of national capabilities; the state’s primary role was to step in where
private capital was not forthcoming in actual quantity, and the secondary role was
to correct regional imbalance in industrial development.
However, after 1956, the policy started changing and more restrictions were
imposed on the functioning of business enterprises. The policy started control- After 1956, the policy
started changing
ling the investment, production and technology decisions of the enterprises. In
and more restrictions
1956, a second industrial policy resolution was enunciated. This resolution guided were imposed on
industrial policy making in India for almost a quarter of a century. The principle the functioning of
that the state was to be dominant in industrialization was to be maintained and business enterprises.
extended. Implementation of industrial policy was also extremely ad hoc and con-
fusing to the industry. For instance, the late 1970s were characterized by contra-
dictory policy-related actions. IBM and Coca-Cola, multinational corporations (MNCs), were asked to
leave India. At the same time, Siemens, a major supplier of power-generation equipment projects, was
welcomed to India by the Indian administration.
After 1980, the government again started changing its policy to allow expansion
and investment decisions of the enterprises. The industrial policy began to aim After 1980, the
government again
at pushing progress and development, through enhancement of the competitive
started changing
process. The Seventh Five-Year Plan (1985 to 1990; Government of India, 1985) its policy to allow
document is unique among plan documents in signifying the role of firm-level, expansion and
microeconomic variables that would drive industrial progress and in laying out the investment decisions
appropriate policy regimes that would foster the development of firm-level capa- of the enterprises.
bilities. Thus, the role of firms, particularly private firms, as key microeconomic
variables was explicitly recognized.
In 1990, due to the Gulf War and collapse of the USSR, there was sudden drying
up of inward remittances. This resulted in balance-of-payments problem. India In 1991, bold new
measures were
was forced to go for standby arrangement with the International Monetary Fund
initiated in the
(IMF). The government initiated liberalization and globalization with the vision to industrial policy.
be internationally competitive. Efforts were made to integrate the Indian economy
with the global economy. In 1991, bold new measures were initiated in the indus-
trial policy. In the following section, the policies of globalization, liberalization and
privatization are examined.2
2.4 GLOBALIZATION
2.4.1 Defining Globalization
Globalization means free trade, free flow of capital and people, and free access to ideas
and technology across the world. It is well accepted that wisely managed globalization Globalization
means free trade,
can deliver unprecedented material progress, generate more productive and better
free flow of capital
jobs for all and contribute significantly to reducing world poverty. At the same time, and people, and free
it has been observed that it has widened the gap between the rich and the poor. It is access to ideas and
also widely acknowledged that globalization has been achieved through the combined technology across
effect of two underlying factors: (i) policy decisions to reduce national barriers to inter- the world.
national economic transactions and (ii) the impact of new technology, especially in the
sphere of information and communications. These developments created the enabling
conditions for the onset of globalization. The evolution of globalization has been outlined in Exhibit 2.3.
Table 2.1 shows the main features of globalization waves consisting of growth of population, GDP, trade,
investment and movement of people. Figure 2.3 shows the major drivers of globalization—market drivers,
cost drivers, competitive drivers, technological drivers and government drivers. Market drivers include
common customer needs, global customers and global channels. Cost drivers consist of economies of scale,
economies of scope and sourcing advantages. Competitive drivers include global competition and global
distribution. Technological drivers consist of production technology, telecommunications and the Internet.
Government drivers include free trade, global standards and regulations. All these forces are linked with
each other also and have hastened the globalization of industries over time.3
2.4.2.1 Expansion of Global Trade World trade has expanded rapidly over the past two decades.
Throughout the 1970s, trade liberalization was modest and gradual. However, from the early 1980s,
trade liberalization began to accelerate, especially in the developing countries.
Table 2.1 Globalization waves in the nineteenth and twentieth centuries (percentage change unless
indicated otherwise)
Sources: Maddison, A., The World Economy: A Millennial Perspective, OCED, Paris, 2001.
Lewis, W. A. The rate of growth of world trade, 1830–1973’, In Grassman, S. and Lundberg, E. (eds), The World Economic
Orders: Pasts and Prospects, MacMillan, London, 1981, pp. 11–74.
UNCTAD, UNCTAD Investment Report 2007, UNCTAD, Geneva, 2007.
World Trade Organization (WTO), International Trade Statistics 2007, WTO, Geneva, 2007.
WTO, World Trade Report, WTO, 2008, www.wto.org.
*
Refers to the period 1870–1913.
Globalization Drivers
Market Drivers
Competitive Drivers
• Common customer needs
• Global customers • Global competition
• Global channels Globalization • Global distribution
• Transferable marketing Potential
Technological
Cost Drivers
Government Drivers • Production technology
• Economies of scale
• Telecommunications
• Economies of scope • Free trade • Internet
• Sourcing advantages • Global standards
• Regulations
2.4.2.2 Growth of Foreign Investment Since 1980, the policy environment worldwide has been
far more conducive to the growth of foreign investment. Over the 1990s, the number of countries adopt-
ing significant liberalization measures towards foreign investment increased steadily. Apart from their
increased volume, the nature of these investments has also changed. Figures 2.4 and 2.5 show the total
FDI in the world and also the increasing proportion of developing countries.
2.4.2.3 Integration of Financial Markets The most dramatic element of globalization over the
past two decades has been the rapid integration of financial markets. Although financial liberalization
created the policy environment for expanded capital mobility, the increase in capital flows was greatly
boosted by the revolution in information and communication technologies (ICT).
2,000
World Total
1,800
1,600
Developing Economies
1,400
1,200
Developed Economies
1,000
800
Transition Economies
600
400
200
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: UNCTAD, World Investment Report, 2009.
Figure 2.4 FDI inflows, global and by groups of economies, 1980–2008 (billions of dollars)
90
80
70
60
50
40
30
20
10
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Figure 2.5 Shares of the three major groups of economies in global FDI inflows from
1990 to 2008 (per cent)
2.4.2.4 Technological Revolution The industrialized countries were the source of the technological
revolution that facilitated globalization, but that revolution has also had ripple effects on the rest of the
global economy. This has had a positive effect on the development of the developing economy.
2.4.2.5 Global Competition These changes in trade, foreign investment, financial flows and tech-
nological diffusion are increasingly becoming part of a new systemic whole. An underlying common
factor is that all these elements necessarily evolved in the context of increasing economic openness and
the growing influence of global market forces. This is a profound change affecting the role of the state
and the behaviour of economic agents.
Foreign investment and technology: Progressive opening up of the Indian economy to foreign
investment, both FDI and portfolio investment, has increased the flow of investment to India.
Further, there has been a liberal policy towards technology collaboration.
Reform in foreign exchange management: There have been a number of reforms in foreign
exchange management. All investments are allowed on repatriation basis. Original investment,
profits and dividend can be freely repatriated. Foreign investors can acquire immovable prop-
erty incidental to or required for their activity. Rupee has been made fully convertible on current
account. Companies incorporated in India are treated as Indian companies for taxation. Many
countries adopt a convention on avoidance of double taxation.
Capital market reforms: The reforms include opening up of India’s equity markets in 1992 to
investment by foreign institutional investors and permitting Indian firms to raise capital on inter-
national markets by issuing Global Depository Receipts (GDRs), American Depository Receipts
(ADRs) and Indian Depository Receipts.
Globalization of Indian enterprises: An increasing number of Indian enterprises are using the
opportunity offered by liberalization to expand their activities abroad by acquiring foreign firms,
establishing their subsidiaries abroad and forming joint ventures.
2.5 LIBERALIZATION
2.5.1 Concept and Features of Liberalization
Liberalization, in general, refers to a relaxation of government restrictions in areas of
social or economic policy. Liberalization in the social policy may be a relaxation of Liberalization,
in general, refers
laws relating to social behaviour such as divorce, adoption and abortion. However,
to a relaxation
the term liberalization more commonly refers to economic liberalization. of government
Economic activities such as production and distribution of goods and services restrictions in areas
have been carried out since ages by individuals and firms as well as by the state. In of social or economic
advanced western countries, the role of the state in managing economic affairs of policy.
the society has been declining over time. In these countries, the task of coordination
between consumers and producers is carried out by the market mechanism rather
than by the state bureaucracy. However, in the case of communist countries, the state has been control-
ling and coordinating all the activities. In other countries, the role for both state and entrepreneurs/firms
has been varying. For instance, in India, government control on economy increased during the period of
1956 to 1980. Since 1980, a process of reforms and liberalization started in the country.
Trade liberalization: As mentioned in the preceding section, the government reduced restriction
on export and import. There was reduction of tariffs from an average of 85 to 25 per cent and roll-
ing back of quantitative controls. The rupee was made convertible on current account.
Foreign investment and technology: To encourage FDI, the maximum limit on share of foreign
capital in joint ventures was increased from 40 to 51 per cent with 100 per cent foreign equity permit-
ted in priority sectors. Further, there was relaxation of procedures for FDI approvals, and in at least
35 industries, automatic approval for projects within the limits was given for foreign participation.
Freedom for expansion and mergers of business undertakings: The limit on the monopoly
business was increased substantially. The purpose was to allow the expansion of the business
undertakings so that they can avail the advantages of economies of scale and become more effi-
cient to compete in the globalized market environment.
Public sector reforms: Government decided to allow the privatization of large, inefficient and
loss-making government corporations. Many public sectors have been corporatized to allow them
more flexibility to operate and expand. These units have been allowed to raise money from the
capital markets.
Capital market reforms: In 1992, a decision was taken to abolish the Controller of Capital Issues,
which decided the prices and the number of shares that firms could issue. Further, the Securities
and Exchange Board of India (SEBI) Act of 1992 and the Security Laws (Amendment), which
gave SEBI the legal authority to register and regulate all security market intermediaries, were
enacted. In 1994, a new stock exchange—the National Stock Exchange—was established to allow
a computer-based trading system that served as an instrument to leverage reforms of India’s other
stock exchanges. The NSE emerged as India’s largest exchange by 1996.
Threatening small enterprises: Competition from big sector enterprises and MNCs increased the
difficulties faced by small sector enterprises.
2.6 PRIVATIZATION
2.6.1 Concept and Features of Privatization
A wave of privatization of public sector companies and public utilities has occurred
in the world during the last three decades, embracing the industrial economies, The term ‘privatization’
refers primarily to two
the transition economies of East Europe and large parts of the less-developed
things: any shift of
world. The term privatization refers primarily to two things: any shift of activities activities or functions
or functions from the state to the private sector, and more specifically, any shift from the state to the
of the production of goods and services from the public sector to private sectors.5 private sector, and
Governments have sought to justify privatization in relation to certain objectives. more specifically, any
These objectives include one or more of the following: shift of the production
of goods and services
To promote increased efficiency from the public sector
To raise revenues for the state (and thereby bridge fiscal deficits) to private sectors.5
To reduce government interference in the economy and promote greater
private initiative
To promote wider share ownership and the development of the capital market.
2.6.3 Benefits
The benefits of privatization have been stressed by highlighting the problems faced by the public sector
units. Privatization through disinvestment or selling off has been implemented to overcome these
problems. The problems faced by the public sector companies are as follows:
Continuous losses
Inefficiency
Under-utilization of capacity
Surplus manpower
Lack of professional management
Lack of accountability
2.6.4 Criticism
There have been several criticisms of the privatization and disinvestment process:
First, valuations of public sector enterprises sold off to private companies were unsound and that the
government gave away its stakes too cheaply
Second, disinvestment has been merely a revenue-raising activity for the government, with little
thought being given to the requirements of the firms concerned
Third, it is contended that the government’s reluctance to disinvest more than 51 per cent and
relinquish control over PSUs has meant that the government has been unable to attract suitably
priced bids, as bidders do not believe that the firms’ performance would improve significantly with
small government stakes being offloaded.
Issue of fresh equity: In many public sector enterprises, the government has allowed expansion,
and for that these enterprises have raised fresh equity also from the market.
Phasing out budgetary support: As the government has disinvested some of the companies,
the budgetary support to them has been reduced to the minimum. These companies have been
directed to raise money from the market.
Restructuring: To be more efficient and competitive in the market, public sector enterprises have
been allowed to restructure their operations.
Exit policy: In many companies having surplus labour, the government used voluntary retirement
scheme to reduce the workforce.
Mismatch between targeted and actual disinvestment: Table 2.4 shows that the government has
not been able to achieve its targeted amount of disinvestment. Political hurdles in disinvestment,
intervention of stakeholders and poor financial state of sold-off PSUs have all contributed to this
performance.
The integration of the Indian economy with the global economy has allowed MNCs to enter into the
domestic markets. MNCs with superior technology, better products and management skills have given
tough competition to the domestic players. The opening up and expansion of markets have improved
the profitability of MNCs also.
Opening of new
entrepreneurial 2.7.5 Efficiently Managed Businesses Have
opportunities, easy Global Opportunities
availability of money
and opening and Opening of new entrepreneurial opportunities, easy availability of money and
expansion of global opening and expansion of global markets have provided global opportunities
markets have provided for efficiently and well-managed businesses. Enterprises operating in emerging
global opportunities markets are also expanding and making use of these opportunities. These enter-
for efficiently and prises are internationalizing through merger, acquisitions and other methods of
well-managed
internationalization.
businesses.
transparent, ethical and socially responsible behaviour on the part of enterprises is made.
Different governments have enacted new laws to monitor the behaviour of enterprises and regulate
them. Exhibit 2.4 shows the ethical dilemma resulting from globalization.
Globalization has increased the competition in all markets. As a result, the small firms have been
adversely affected. Small firms have been using simple equipment and machinery and targeting local
markets. They have been facing several problems with regard to labour turnover, quality of their prod-
ucts, marketing of products and financial constraints. The globalization has multiplied their problems.
It has forced many small units out of business and rendered many without jobs.
There is the ethical dilemma for the policy maker to continue with the reservation of several prod-
ucts for small-scale enterprises or discontinue the reservations and allow large enterprises to produce
these products to exploit growing international opportunity. Over time, the government decided to do
away with the reservation, and it allowed large firms to enter into the fields such as textile garments.
However, there is a need to support small enterprises as these units are able to absorb large numbers
of people. There is a solution in terms of providing institutional support to the small enterprises in the
areas such as finance, technology, production and marketing.
Tata Steel is one among the low-cost producers of steel in the world. The
company plans to enhance its capacity to 50 million tonnes by 2015
through organic growth. Jamsetji Tata dreamt of building Tata Steel, but
it was JRD Tata who took it to new heights. JRD Tata had the rare ability to
create leaders. In 1984, he chose Russi Mody, a manager par excellence, to
succeed him.
Russi Mody beefed up marketing operations and started an export
cell. JRD Tata’s successor, Ratan Tata, took over from Mody as chairman in
1992, and J. J. Irani assumed the role of managing director.
As the Indian government announced a number of reform measures to liberalize the economy and
integrate the Indian economy with the world economy, competitive conditions were created in the mar-
ket, which resulted in problems for domestic companies in India. The entry of multinationals into India
exposed the quality problems of many local companies. The whole business environment in the country
started changing. Ratan Tata and other company executives concluded that they would have to revi-
talize their business and move outside India’s borders. Tata Steel started its expansion plan, and drastic
changes were brought about. The company was right-sized with innovative schemes so as not to disturb
the industrial harmony, from about 80,000 to less than 40,000 today. The company also exited a host of
non-core activities. The product mix was changed as Tata Steel moved up the value chain to set up a cold
rolling mill.
B. Muthuraman stepped into J. J. Irani’s shoes in 2001. During 2001–02, steel prices touched rock bottom,
but Tata Steel emerged as one of the five steel manufacturers across the world to post profits. Efforts to break
the commodity cycle with branding initiatives and retailing followed. The steel cycle had also turned. In the
past couple of years, under the leadership of Muthuraman, the company has pulled off several global acquisi-
tions, Corus Group being the most historic one.
Source: Annual Report of Tata Steel for the year 2009–10, www.tata.com
Questions
1. In what way has the business environment in which the company operated changed after the liberalization
of Indian economy?
2. How has the company responded to the changes in its business environment?
SUMMARY
5 Business environment
To study the dynamics of business environment and its impact on enterprises, Tata Steel is the
most appropriate example. The chapter started with the case of Tata Steel. Tata Steel has witnessed
the changes in the economic history of India during the past 100 years. Business environment
refers to the sum of internal and external forces which influence the operation of an enterprise.
The external forces consisting of economic, competitive, technological, political-legal, socio-
cultural and ecological factors affect the operation and performance of enterprises.
The example of Hindustan Motors also shows the impact of environment on the performance.
The changes in technology and its impact on the global business have been illustrated with the
brief write-up on shale gas.
5 Impact of government policy on changing the business environment
In India, the government policy has played an important role in influencing the business environ-
ment. The government policy was deciding and directing investment, production and technology
decisions. After 1980, government started liberalizing the control on Indian business. The process
was further accelerated in the 1990s. The business environment started becoming more liberalized
and globalized.
5 Globalization and its impact on business
Globalization means free trade, free flow of capital and people, and free access to ideas and tech-
nology across the world. Technological development, more open policies by many countries,
WTO etc. have all led to more globalization. Globalization has got its positive and negative dimen-
sions. This has led to the opening up of a number of economies and thereby to increased access
to the market, increased availability of foreign investment, access to advanced technology, avail-
ability of better products and increased consumer welfare. On the negative side, globalization
has increased the gap between poor and rich countries, increased unemployment, inequality and
poverty, and has led to spreading of crisis and risk from one country to others.
5 Liberalization and its impact on business
Liberalization in general refers to a relaxation of government restrictions in the areas of social or
economic policy. More commonly, the term liberalization refers to economic liberalization. After
1980, the Indian government has liberalized its industrial policy and trade policy, reduced restric-
tion on foreign investment and technology and initiated public sector reforms and capital market
reforms. This liberalization policy has led to the growth of Indian business, improved its efficiency
and productivity and new sectors were opened up. However, it also has some negative aspects
such as increased unemployment, increased employment in informal sector and small businesses
facing the problem of survival.
5 Privatization and its impact on business
Privatization refers to shift of production of goods and services from the public sector to the pri-
vate sector, and then shift of activities or function from the state to the private sector. The positive
aspect of the privatization is explained in terms of improving the functioning of the public sector
units which were privatized.
5 Impact of changing business environment and the response of Indian enterprises to the change
The overall impact of globalization, liberalization and privatization on the Indian enterprises has
been positive as it has increased new avenues of entrepreneurial opportunities, increased the com-
petition in the market, forced enterprises to improve their efficiency and productivity, increased
the availability of funds and led to the achievement of the global ambition of Indian companies. The
big enterprises responded to the changed environment by going in for restructuring, expansion,
modernization of their businesses to be more efficient and productive. Further, using the easy
availability of funds helped them to expand their activities abroad by exporting, setting up of
units abroad, joint venturing and acquiring foreign firms. Small-scale enterprises faced problems
of closure and losses. However, there are a large number of small firms which used government
funding and modernized their operations to be competitive. Firms located in clusters in which the
associations are dynamic and which took collective action were better off. The chapter ends with
the discussion of the case of Tata Steel.
QUESTIONS
1. Define business environment. What is the importance of economic environment? How do changes
in it affect the enterprises?
2. What is globalization? Has it affected the Indian business adversely? Give your arguments in
favour of and against globalization.
3. The globalization of the Indian economy has benefited Indian consumers. Do you agree with this
or not? Explain.
4. What do you understand by liberalization in Indian economy? Has it achieved its objectives?
5. Explain the positive and negative impact of liberalization on Indian economy.
6. What is meant by privatization? Explain its various forms.
7. Describe India’s experiences with privatization.
8. How do globalization, liberalization and privatization change the business environment in India?
9. What is the impact of globalization, liberalization and privatization on the Indian enterprises?
10. How has the Indian enterprises responded to the changes in business environment?
ENDNOTES
1. Bisson, P., Stephenson, E., and Viguerie, S.P. Global Forces: An Introduction, Mckinsey Quarterly,
June 2010 Mckinsey Quarterly.
2. Bhagwati, J. N. India in Transition: Freeing the Economy. Oxford University. Press, Oxford,
1993; Government of India, 1951, Industries (Development and Regulation) Act, New Delhi;
Government of India, Seventh Five-Year Plan, New Delhi, 1985; Marathe, S. S. Regulation and
Development: India’s Policy Experience of Controls Over Industry, Sage Publications, New Delhi,
1989; Mohan, R., and Aggarwal, V. Commands and controls: planning for Indian Industrial
Development, 1951–1990, Journal of Comparative Economics, 14, December 1990, 681–712.
India adopted a phased approach for reform- Mobile Growth and Effective Charge per Minute
ing the telecom sector right from the beginning. Effective Charge (INR/Min) Mobile Subscriber Base (in million)
(Continued )
a revenue loss and declining market share. A committee headed by Sam Pitroda suggested that BSNL
should restructure and reduce its workforce to one-third.
Questions
1. Why have public sector companies, such as BSNL and MTNL, facing problems in the telecom sector not
been benefited by the liberalization and globalization policy of the government?
2. How has the private sector benefited from such an environment?
3. What are the factors a company should consider to be successful in a competitive environment?