EDC - INTERNATIONAL BUSINESS ENVIRONMENT

Class : II MIBHINTSUNIT I

Business environment refers to different forces or surroundings that affect business operations. Such forces include customers, competitors, suppliers, distributors, industry trends, substitutes, regulations, government activities, the economy, demographics, and social and cultural factors. Others are innovations and technological developments. Broadly speaking, theenvironment of businessis composed of the micro environment and macro environment.

Features of business environment

Totalityofexternalforces: Specificandgeneralforces Dynamic nature Uncertainty Relatl2ivityBUSINESS ECOLOGY

Physiological factors to cope up with the environment and the extent to which the environment is conducive to the development of the individual, the survival and success of a business firm depend on its innate strength resources at its command, including physical resources, financial resources, human resources, the inter-linkages and synergy, skill and organization- and its adaptability to the environment and the extent to which the environment is favorable to the development of the organization. The survival and success of a firm, thus, depend on two set of factors, via, the internal factors (the internal environment) and external factors(the external environment).

BUSINESS-ENVIRONMENT INTERRELATIONSHIP

Any meaningful organization has certain mission, objectives and goals and a strategy to achieve them. Business environment has a bearing on the shaping of all these integral and interrelated elements.

TYPES OF ENVIRONMENT

On the basis of the extentof intimacy with the firm, the environmental factors may be classified into different types-internal and external.

INTERNAL ENVIRONMENT

Value system Mission and vision and objectives

Management structure and nature

Internal power relationship

Human resources

Company image and brand equity

Miscellaneous factors

EXTERNAL ENVIRONMENT

Micro Environment

The micro environment consists of the actors in the companys immediate environment that affects the performance of thecompany. These include the suppliers, marketing intermediaries, competitors, customers and the public.

Macro Environment

Macro environment is also known asGeneral environment and remote environment. Someof the macro environment factors are discussed below:

Economic Environment

Social Environment

Political Environment

Legal Environment

Technical Environment

Demographic Environment

Global Environment

Competitive Structure of industriesOverview of the Five Forces Model

Porter identified five factors that act together to determine the nature of competition within an industry. These are the:

Threat of new entrants to a market

Bargaining power of suppliers

Bargaining power of customers (buyers)

Threat of substitute products

Degree of competitive rivalry

He identified that high or low industry profits (e.g. soft drinks v airlines)

Threat of new entrants to an industry

If new entrants move into an industry they will gain market share & rivalry will intensify

The position of existing firms is stronger if there arebarriersto entering the market

Ifbarriers to entryare low then the threat of new entrants will be high, and vice versa

Bargaining power of suppliers

If a firms suppliers have bargaining power they will:

Exercise that power

Sell their products at a higher price

Squeeze industry profits

Bargaining power of customers

Powerful customersare able to exert pressure to drive down prices, or increase the required quality for the same price, and therefore reduce profits in an industry.

Threat of substitute products

A substitute product can be regarded as something that meets the same need

Substitute products are produced in a different industry but crucially satisfy the same customer need. If there are many credible substitutes to a firms product, they will limit the price that can be charged and will reduce industry profits.

Degree of competitive rivalry

If there is intense rivalry in an industry, it will encourage businesses to engage in

Price wars (competitive price reductions),

Investment in innovation & new products

Intensive promotion (sales promotion and higher spending on advertising)

All these activities are likely to increase costs and lower profits.

Strategic Groups

Astrategic groupis a concept used instrategic managementthat groups companies within an industry that have similarbusiness modelsor similar combinations of strategies. For example, the restaurant industry can be divided into several strategic groups including fast-food and fine-dining based on variables such as preparation time, pricing, and presentation.Strategic Group Analysis

Strategic Group Analysis (SGA) aims to identify organizations with similar strategic characteristics, following similar strategies or competing on similar bases.

Competitor Analysis

Competitor analysisinmarketingand strategicmanagementis an assessment of the strengths and weaknesses of current and potentialcompetitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats.

Competitor Array

One common and useful technique is constructing acompetitor array. The steps include:

Define your industry - scope and nature of the industry

Determine who your competitors are

Determine who your customers are and what benefits they expect

Determine what the key success factors are in your industry

Rank the key success factors by giving each one a weighting - The sum of all the weightings must add up to one.

Rate each competitor on each of the key success factors

Multiply each cell in the matrix by the factor weighting.

This can best be displayed on a two dimensional matrix - competitors along the top and key success factors down the side.

Competitor Profiling

The strategic rationale of competitor profiling is powerfully simple. Superior knowledge of rivals offers a legitimate source of competitive advantage. The raw material of competitive advantage consists of offering superior customer value in the firms chosen market.

Media Scanning

Scanning competitor's ads can reveal much about what that competitor believes about marketing and their target market. Changes in a competitor'sadvertisingmessage can revealnew product offerings, new production processes, a newbranding strategy, a newpositioning strategy, a newsegmentation strategy,line extensionsand contractions, problems with previous positions, insights from recent marketing or productresearch, a newstrategic direction, a new source ofsustainable competitive advantage, orvalue migrationswithin the industry.

A competitor's media strategy reveals budget allocation, segmentation andtargeting strategy, and selectivity andfocus. From a tactical perspective, it can also be used to help a manager implement his own media plan. By knowing the competitor's media by, media selection, frequency, reach, continuity, schedules, and flights, the manager can arrange his own media plan so that they do not coincide.

New Competitors

In addition to analyzing current competitors, it is necessary to estimate future competitive threats. The most common sources of new competitors are:

Companies competing in a related product/market

Companies using related technologies

Companies already targeting your prime market segment but with unrelated products

Companies from other geographical areas and with similar products

New start-up companies organized by former employees and/or managers of existing companies

VALUE CHAIN

A value chain is a set of activities that an organization carries out to create value for its customers. Porter proposed a general-purpose value chain that companies can use to examine all of their activities, and see how they're connected.Porter described a chain of activities common to all businesses, and he divided them into primary and support activities, as shown below.

Primary Activities

Primary activities relate directly to the physical creation, sale, maintenance and support of a product or service. They consist of the following:

Inbound logistics These are all the processes related to receiving, storing, and distributing inputs internally. Your supplier relationships are a key factor in creating value here.

Operations These are the transformation activities that change inputs into outputs that are sold to customers. Here, your operational systems create value.

Outbound logistics These activities deliver your product or service to your customer. These are things like collection, storage, and distribution systems, and they may be internal or external to your organization.

Marketing and sales These are the processes you use to persuade clients to purchase from you instead of your competitors. The benefits you offer, and how well you communicate them, are sources of value here.

Service These are the activities related to maintaining the value of your product or service to your customers, once it's been purchased.

Support Activities

These activities support the primary functions above. In our diagram, the dotted lines show that each support, or secondary, activity can play a role in each primary activity. For example, procurement supports operations with certain activities, but it also supports marketing and sales with other activities.

Procurement (purchasing) This is what the organization does to get the resources it needs to operate. This includes finding vendors and negotiating best prices.

Human resource management This is how well a company recruits, hires, trains, motivates, rewards, and retains its workers. People are a significant source of value, so businesses can create a clear advantage with good HR practices.

Technological development These activities relate to managing and processing information, as well as protecting a company's knowledge base. Minimizing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation.

Infrastructure These are a company's support systems, and the functions that allow it to maintain daily operations. Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage.

Benefits of Structural Analysis

Structural Analysis can be used to study any kind of system, text, or material. It applies equally to the Humanities and Social Sciences as well as to the "hard" Sciences, though with different connotations. The methods of Structural Analysis might be different in each discipline.

ENVIRONMENTAL ANALYSISAn environmental analysis instrategic managementplays a crucial role in businesses by pinpointing current and potential opportunities or threats outside the company in its external environment.

The purpose of an environmental analysis is to help in strategy development by keeping decision-makers within an organization informed on the external environment. This may include changing of political parties, increasing regulations to reduce pollution, technological developments, and shifting demographics. If a new technology is developed and is being used in a different industry, a strategicmanagerwould see how this technology could also be used to improve processes within his business. An analysis allows businesses to gain an overview of their environment to find opportunities or threats.The Five Stages of the Strategic Management Process

Goal-Setting

Analysis

Strategy Formulation

Strategy Implementation

Evaluation and Control

STRATEGIC MANAGEMENT PROCESS

UNIT II

GLOBALISATION

The IMF defines globalization as the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology.

GLOBALISATION OF WORLD ECONOMY

The world economy has been emerging as global or transnational economy. A global or transnational economy is one which transcends the national borders unhindered by artificial restrictions like Government restrictions on trade and factor movements.

According toDrucker, the transnational economy is characterized by, interaliathe following features:

The transnational economy is shaped mainly by money flows rather than by trade in goods and services. These money flows have their own dynamics. The monetary and fiscal policies of sovereign governments increasingly react to events in the international money and capital markets rather than actively shape them.

In the transnational economy management has emerged as the decisive factor of production and the traditional factors of production, land and labor, have increasingly become secondary. Money and capital markets too have been increasingly becoming transnational and universally obtainable.

In the transnational economy the goal is market maximization and not profit maximization.

Trade, which increasingly follows investment, is becoming a function of investment.

The decision making power is shifting from the national state to the region. (e.g., European Union, NAFTA, etc.)

There is a genuine and almost autonomous world economy of money, credit and investment flows. It is organized by information which no longer knows national boundaries.

Finally, there is a growing pervasiveness of the transnational corporations which see the entire world as a single market for production and marketing of goods and services.

Drivers of Globalisation

In general, globalisation represents the increasing integration of the world economy, based on five interrelated drivers of change:

International trade (lower trade barriers and more competition)

Financial flows (foreign direct investment, technology transfers/licensing, portfolio investment, and debt)

Communications (traditional media and the Internet)

Technological advances in transportation, electronics, bioengineering and related fields

Population mobility, especially of labor

GLOBALISATION OF BUSINESS

Globalisation is anattitude of mind it is a mind-set which views the entire world as a single market so that the corporate strategy is based on the dynamics of the global business environment.

Globalisation encompasses the following:

Doing or planning to expand business globally.

Giving up the distinction between the domestic market and foreign market and developing a global outlook of the business.

Locating the production and other physical facilities on a consideration of the global business dynamics, irrespective of national considerations.

Basic product development and production planning on the global market considerations.

Global sourcing of factors of production, i.e., raw materials, components, machinery/technology, finance etc., are obtained from the best source anywhere in the world.

Global orientation of the organizational structure and management culture.

FEATURES OF CURRENT GLOBALISATION

The main features of Globalization:

1. Globalization involves expansion of business operations throughout the world.

2. Integration of individual countries of the world into one global market thereby erasing differences between domestic markets and foreign markets.

3. It creates interdependency between nations.

4. Buying and selling of goods and services takes place from to/any country in the world.

5. Manufacturing and marketing facilities are set up anywhere in the world n the basis of their feasibility and viability rather than on national considerations.

6. Products are planned and developed for the world market.

7. Factors of production like raw materials, labor, finance, technology and managerial skills are sourced from the entire globe.

8. Corporate strategies, organizational structures, managerial practices have a global orientation. The entire globe is viewed as a single market.

9. Globalization does not take place overnight. It proceeds gradually through several stages of internationalization.STAGES OF GLOBALISATION

There are 6 stages of globalization. From an international firm it may then develop into a multinational firm and finally into a global firm.

The domestic company which moves into new markets by linking up with local dealers and distributors. Then the company takes over these activities on its own.

Then company begins to carry out its own manufacturing, marketing and sales in the foreign markets.

R&D and engineering have been implemented to involve into the markets deeper.

In the next stage it moves toward a genuinely global mode of operation.

After becoming global firm as a sixth stage, therere serving based on the customers interest not about governments. They invest, they train, they pay taxes, they build up infrastructure and they provide good value to the customers in all the countries. ESSENTIAL CONDITIONS FOR GLOBALISATION

Business Freedom Facilities

Government Support Resources Competitiveness OrientationFOREIGN MARKET ENTRY STRATEGIES

Global marketers have to make a multitude of decisions regarding the entry mode which may include:

(1) the target product/market

(2) the goals of the target markets

(3) the mode of entry

(4) The time of entry

(5) A marketing-mix plan

(6) A control system to check the performance in the entered markets

1. Selecting the Target Market

2. A crucial step in developing a global expansion strategy is the selection of potential target markets (see Exhibit 9-1 for the entry decision process).

3. A four-step procedure for the initial screening process:

1. Select indicators and collect data

2. Determine importance of country indicators

3. Rate the countries in the pool on each

indicator

4. Compute overall score for each country

2. Choosing the Mode of Entry

Decision Criteria for Mode of Entry:

Market Size and Growth

Risk

Government Regulations

Competitive Environment/Cultural Distance

Local InfrastructureImportant foreign market entry strategies are the following.

1. Exporting

2. Licensing / franchising

3. Contract Manufacturing

4. Management Contract

5. Assembly operations

6. Fully owned manufacturing facilities

7. Joint Venture

8. Counter trade

9. Mergers and Acquisitions

10. Strategic alliance

11. Third country locationForeign market entry strategies are numerous and imply a varying degree of risk and of commitment from the international firm. In general, the implementation of an international development strategy is a process achieved in several steps. Indirect exporting is often used as the starting point; if the results are satisfactory, more committing agreements are made by associating local firms.

1. Exporting

Exportingis the process of selling of goods and services produced in one country to other countries. There are two types of exporting: direct and indirect.

Direct Exports

Types

1. Sales representatives

2. Importing distributors

Indirect exportsTypes

1. Export trading companies (ETCs)

2. Export management companies (EMCs)

3. Export merchants

4. Confirming houses

5. Nonconforming purchasing agents

II. LICENSINGAn internationallicensing agreementallows foreign firms, either exclusively or non-exclusively to manufacture a proprietors product for a fixed term in a specific market.

Summarizing, in this foreign market entry mode, a licensor in the home country makes limited rights or resources available to the licensee in the host country. The rights or resources may include patents, trademarks, managerial skills, technology, and others that can make it possible for the licensee to manufacture and sell in the host country a similar product to the one the licensor has already been producing and selling in the home country without requiring the licensor to open a new operation overseas. The licensor earnings usually take forms of one time payments, technical fees and royalty payments usually calculated as a percentage of sales.

FRANCHISING

Thefranchisingsystem can be defined as: A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system.

III. TURNKEY PROJECTSA turnkey project refers to a project when clients pay contractors to design and construct new facilities and train personnel. A turnkey project is a way for a foreign company to export its process and technology to other countries by building a plant in that country. Industrial companies that specialize in complex production technologies normally use turnkey projects as an entry strategy.IV. WHOLLY OWNED SUBSIDIARIES (WOS)Awholly owned subsidiaryincludes two types of strategies:Greenfield investmentandAcquisitions.Greenfield investmentandacquisitioninclude both advantages and disadvantages. To decide which entry modes to use is depending on situations.

Greenfield investmentis the establishment of a newwholly owned subsidiary. It is often complex and potentially costly, but it is able to provide full control to the firm and has the most potential to provide above average return.

Acquisition strategy offers the fastest, and the largest, initial international expansion of any of the alternative. Manymultinational corporationsapply acquisitions to achieve their greater market power require buying a competitor, a supplier, a distributor, or a business in highly related industry to allow exercise of a core competency and capturecompetitive advantagein the market.

V. JOINT VENTUREThere are five common objectives in ajoint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.VI. STRATEGIC ALLIANCEA strategic alliance is a type of cooperative agreements between different firms, such as shared research, formal joint ventures, or minority equity participation.The modern form of strategic alliances is becoming increasingly popular and has three distinguishing characteristics:

1. They are frequently between firms in industrialized nations.

2. The focus is often on creating new products and/or technologies rather than distributing existing ones.

3. They are often only created for short term durations.Motivation for contract manufacturingContract manufacturing is done for three primary reasons:

1. Cost savings

2. More time to focus on core competencies

3.Market entry

VII. CONTRACT MANUFACTURING

Contract manufacturing is a process that establishes a working agreement between two companies. As part of the agreement, one company custom produces parts or other materials on behalf of their client.The basic working model used by contract manufacturers translates well into many different industries. Since the process is essentiallyoutsourcingproduction to a partner that privately brands the end product, there are a number of different business ventures that can make use of this arrangement. There are manypharmaceutical contract manufacturingcurrently functioning today, as well as similar arrangements in food manufacturing, the creation of computer components and other forms of electronics. Even industries like personal care and hygiene products, automotive parts, and medical supplies are often created under the terms of such an agreement.

VIII. MANAGEMENT CONTRACT

Amanagement contractis an arrangement under which operational control of anenterpriseis vested by contract in a separate enterprise which performs the necessary managerial functions in return for a fee. Management contracts involve not just selling a method of doing things (as withfranchisingorlicensing) but involve actually doing them. A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training.

IX. ASSEMBLY OPERATIONS

A market entry strategy in which an organization sends parts for products to a foreign plant for final assembly. The products are then sold in the foreign market or exported to other countries. Assembly plants may allow a company to take advantage of low cost labor in the most labor intensive portion of production. There may also be lower duties and other taxes because unfinished products are imported instead of finished products. Assembly plants also allow a foreign manufacturer to meet host country requests for more domestic production while at the same time allowing the manufacturer to continue control over production by using its own sub products as supplies and materials for the foreign assembly plant. A potential problem, especially with plants located to meet foreign government needs for domestic production, is that the foreign government may institute requirements on the amount of foreign parts which may be used in the host country. These requirements are referred to as domestic content requirements (DCRs).

X. COUNTERTRADE

Countertrademeans exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in counter trade for accounting purposes. In dealings between sovereign states, the termbilateral tradeis used. OR "Any transaction involving exchange of goods or service for something of equal value."

Need for counter trade

Money

Protect local industries

Balance of trade

Competitive advantageSix main types of countertrade1. Offset Direct offset indirect offset

2. Counter purchase3. Tolling4. Barter5. Buyback6. Switch TradingXI. MERGER & ACQUISITION

Theyhave been a very important market entry strategy as well as expansion strategy for maximization of a company's growth by enhancing its production and marketing operations. They are being used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional businesses in order to gain strength, expand the customer base, cut competition or enter into a new market or product segment.

Varieties of Mergers

Horizontal merger

Vertical merger

Market-extension merger

Product-extension merger

ConglomerationAcquisitions Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. In an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies. When an acquisition is 'forced' or 'unwilling', it is called a takeover. In an unwilling acquisition, the management of 'target' company would oppose a move of being taken over. But, when managements of acquiring and target companies mutually and willingly agree for the takeover, it is called acquisition or friendly takeover.

XII. THIRD COUNTRY LOCATION

When there is no commercial transactions between two countries due to various reasons, firm which wants to enter into the market of another nation, will have to operate from a third country base. For instance, Taiwans entry into china through bases in Hong Kong.

Third country location is sometimes used as an entry strategy when there is no commercial transactions between two nations because of political reasons or when direct transactions between two nations are difficult due to political reasons International Marketing

PROS AND CONS OF GLOBALISATION

Advantages of Globalization

1. Wider Markets

Globalization offers larger markets to domestic producers. Domestic firms can export their surplus output. They can understand the nature of foreign markets through direct and indirect marketing channels. Domestic firms can realize higher prices from foreign markets. Global operations help to improve public image which is helpful in attracting better talent.

2. Rapid Industrialization

Globalization helps in the free flow of capital and technology between countries. Global firms can acquire finance at lower cost of capital. Free flows of capital and technology from advanced countries help the developing countries to boost up their industrialization. Industrialization of developing countries leads to balanced development of all the countries.

3. Greater Specialization

Globalization enables the domestic firms to specialize in areas where they enjoy competitive or comparative advantage. By focusing on the functions or products of their core competence domestic firms can compete successfully in the international markets. Specialization also helps to save resources and promote exports of the country.

4. Competitive Gains

Globalization increase competition for domestic firms through imports and multinational corporations. Domestic firms learn about new products, new technologies and new management systems. They are under pressure to increase efficiency, introduce innovations and reduce costs. The domestic entrepreneurs who fail to learn from their foreign rivals suffer in the long run.

5. Higher Production

Globalization leads to spread up of manufacturing facilities in different countries. Firms with worldwide contacts can outsource funds, technology, distribution and other functions from anywhere in the world. They can negotiate subcontracting to remain focused on areas of their core competence. International outsourcing and subcontracting help to improve operational efficiency and o reduce costs.

6. Price Stabilization

Globalization can reduce price differences between countries. Free trade and international competition help to equalize price levels in international markets. Countries with a high degree of globalization can attract greater foreign investment which supplements domestic funds, brings in foreign and improves balance of payments.

7. Increase in Employment and Income

Globalization creates job opportunities in developing countries and the incomes of people increases due to increased industrialization.

8. Higher Standards of Living

Lower prices, better quality and higher incomes help to enhance consumption and living standards of people particularly in developing countries. Moreover, increased economic development enables the governments of these countries to provide better welfare facilities like education, health, sanitation, etc. There is all round increase in welfare and prosperity of public.

9. International Economic Cooperation

Globalization improves economic cooperation between nations in the form of trade agreements, international treaties, standardization of commercial procedures, avoidance of double taxation, intellectual property protection and so on. International cooperation also helps countries to harmonize their macroeconomic policies for their mutual benefit.

10. World Peace

Globalization promotes cultural exchange and mutual understanding among different nations. International cooperation and brotherhood contribute to peace and prosperity in the world.

Disadvantages of Globalization

1. Interdependence

Globalization increases interdependence between nations of the world. As a result, economic sovereignty and control over the domestic economy are reduced. There is a danger of foreign economic dominance over the developing economies.

2. Threat to Domestic Industry

Globalization leads to the establishment of manufacturing and marketing facilities by multinationals n developing countries. The domestic firms in these countries fail to face the onslaught of multinationals. As a result they sell out to foreign firms. Cheap imports from china and other countries also kill domestic business particularly in the small sector. Availability of high quality foreign products reduces the demand for domestic products and domestic production is eroded.

3. Unemployment

Globalization leads to restructuring of industry. Technology upgradation and focus on areas of comparative advantage create unemployment and underemployment among low skilled workers. As a result income inequality, poverty and social unrest may increase.

4. Drain of Basic Resources

Globalization results in exploitation of natural resources and basic raw materials in developing countries. These countries are often the sellers of agricultural and other inputs and buyers of finished products. Talented human resources are also transferred to developed nations which offer better remuneration and career prospects. Economic underdevelopment of poor countries is the result of exploitative character of international trade.

5. Technological Dependence

Globalization offers readymade foreign technology which scuttles domestic research and development. Foreign technologies are available at a high cost and often are not adaptable to local conditions. Developing countries become technologically dependent on developed countries.

6. Alien Culture

Globalization promotes consumption patterns and lifestyles which are inconsistent with the local culture and values. It may lead to shift in the industrialization pattern contrary to the national priorities.

Now after looking at Globalization from both supportive and contradicting point of view; we can now take a stand on whether the claims against globalization are sustainable or not.

Based on the above points, we can firmly say that globalization is not responsible fully for the global economic situations alone. It might have played a part in the crisis, but it did not start the fire.

GLOBALISATION OF INDIAN BUSINESS

Indias economic integration with the rest of the world was very limited because of the restrictive economic policies followed until 1991. Indian firms confined themselves, by and large, to the home market. Foreign investment by Indian firms was very insignificant.

With the new economic policy ushered in 1991, there has, however, been a change. Globalization has in fact become a buzz-word with Indian firms now, and many are expanding their overseas business by different strategies.

Obstacles to Globalization Government policy and procedures High Cost Poor Infrastructure Obsolescence Resistance to Change

Poor Quality Image Supply Problems Small Size Lack of Experience Limited R&D and Marketing Research Growing Competition Trade BarriersFactors Favoring Globalisation

Human Resources

Wide Base Growing Entrepreneurship Growing Domestic Market Niche Markets Expanding Markets Transnationalisation of World Economy NRIs Economic Liberalization CompetitionUNIT III

BUSINESS AND SOCIETY

Changing Concept and Objectives of Business

Traditionally, the term business commonly referred to commercial activities aimed at making a profit or to organizations formed to make a profit. In short, the definition of a business as a commercial activity to make a profit or an organization formed to make a profit is a narrow one. Davis and Blomstorm point out that, in taking an ecological view of business in a systems relationship with society, three ideas are significant in addition to the systems idea. The three ideas are values, viability and Public visibility.

PROFESSIONALISATION

The growth of management education and training has contributed to the growing professionalization which, in turn, has contributed to the growing social orientations of business. Professionalization imparts a certain social responsibility and dignity to management. A professional is one who possesses systematic knowledge and skill to perform certain responsible functions with authority and who is bound but certain ethics in the use of his knowledge and skill .According to Lewis Allen, a professional manager is one who specializes in the work of planning, organizing, leading and controlling the efforts of others and does so through a systematic use of classified knowledge , a common vocabulary and principles, and who subscribes to the standards of practice and code of ethics established by a recognized body.

A professional has enormous responsibilities. He shall not use his knowledge, skill and authority unscrupulously, He shall not knowingly do harm to his customers. He is socially bound by the ethics of his profession.

Professionalization makes business more efficient, dynamic and socially responsible. The growth of management education in the country and the facilities abroad to obtain management education has contributed to professionalization in the business field.

BUSINESS ETHICS

The term business ethics refers to the system of moral principles and rules of conduct applied to business.

That there should be business ethics means that the business should be conducted according to certain self-recognized moral standards. Business, being a social organ, shall not conduct itself in a way detrimental to the interests of society and the business sector itself.

The code, premium non noncore, encompasses most business ethics. We may, however, list the important ethical principles that a business should follow:

1. Do not deceive or cheat customers by selling sub-standard or defective products, by under-measurement or by any other means.

2. Do not resort to hoarding, black-marketing or profiteering.

3. Do not destroy or distort competition.

4. Ensure sincerity and accuracy in advertising, labelling and packaging.

5. Do not tarnish the image of competitors by unfair practices.

6. Make accurate business records available to all authorised persons.

7. Pay taxes and discharge other obligations promptly.

8. Do not form cartel agreements, even informal, to control production, price, etc., to the common detriment.

9. Refrain from secret kickbacks or payoffs to customers, suppliers, administrators, politicians, etc.

10. Ensure payment of fair wages to and fair treatment of employees.

Role of Trade Associations

Trade associations which are voluntary organizations of businessmen formed to promote their common interests can promote business ethics in three important ways:

Education and persuasion

Code of Ethics

Moral Sanctions

BUSINESS AND CULTURE

Meaning of Culture

There are varying definitions of culture:Culture, in its broadest definition, refers to that part of the total repertoire of human action (and its product) which is socially, as opposed to genetically, transmitted. A very popular definition is that of E.B Taylor: Culture of civilization is that complex whole which includes knowledge, belief, art, morals, law, custom, and other capabilities and habits acquired by man as a member of society. On the basis of the various definitions of culture, Francis Merill formulates the concept of culture as follows. Culture:

is the characteristically human product of social interaction;

provides socially acceptable patterns for meeting biological and social needs;

is cumulative, for it is handed down from generation to generation in a given society;

is meaningful to human beings because of its symbolic quality;

is learned by each person in the course of his development in a particular society;

is, therefore, a basic determinant of personality; and

Depends for its existence upon the continued functioning of society but is independent of any individual or group.

Culture consists of both material culture and non-material culture. Material culture involves man-made things (e.g., automobile, television, telephone, etc.) and man-made alternations in the environment. Non-material culture includes such factors as language, ideals, beliefs, values, music, etc.

Elements of Culture

Culture includes at least three elements, namely, knowledge and beliefs, ideals and Preferences.

Organisation of Culture

The term organisation of culture refers to the social structure and the integration of traits, complexes and patterns that make up the cultural system.

Those cultures are organized or integrated does not mean that every single item of each culture is neatly and precisely integrated with everything else. It means rather that it is normal for the parts to be somewhat organized, and that culture traits receive their significance and meaning out of their relation to the rest of the culture.

The organisation of a culture is determined to a large extent by major social institutions. According to MacIver and Page, institutions are established forms or conditions of procedure characteristic of group activity. The group which performs these standardized actions has been termed by them an association. According to Biesanz and Biesanz, institutions are clusters of norms organized and established for the pursuit of some need or activity of a social group, supported by the groups knowledge, beliefs and valued, as well as by the meaningful aspects of material culture.

The important common institutions of modern cultures are the economic system, the political administrative system, the educational system; religion, family, expressionistic, aesthetic and recreational institutions, etc. Such institutions have been established to meet societys common need of a biological, sociological, psychological, economic, and political nature - the type and nature of institutions reflects the common goals, aspirations and the ways of achieving them, definition and regulation of roles, positions, inter- relationships, etc., of the individuals and sub-groups and groups and the overall organisation of the culture.

Cultural Adaptation

The term cultural adaptation refers to the manner in which a social system or an individual fits into the physical or social environment. The social system may be a small group ,such as the family or a larger collectivity ,such as an organisation, or even a total society, like a tribal society.

Adaptation is essential for survival. The type of clothing, food and dwelling, suitable for the climatic and weather conditions, are forms of adapted to the energy crisis caused by the oil price hikes by modifying our energy policy and intensifying oil exploration, developing, alternative source of energy and restricting oil consumption. Humanity adapts to contagious diseases by immunization.

It is often necessary to know the progress and nature of the cultural environment for a successful formulation of business strategies. For example, while introducing new ideas, techniques, product; while segmenting the market; while formulating the product and promotion mix strategies; one should consider the extent to which different categories of consumers adapt to the new things or environment and the factors favoring and disfavoring adaptations.

Cultural Shock

Environmental changes sometimes produce culture shock- a feeling of confusion, insecurity, and anxiety caused by the strangeness of the new environment. For example, if a youngster, born and brought up in a large city; is posted to a bank office I a remote village, he may experience a cultural shock. Similarly, a villager may experience a cultural shock when he takes up a job in a large modern company in a far away metropolitan city or foreign nation. They have, however, to adapt to the new culture in due course if they want to survive.

Executives and other employees on foreign assignments may experience culture shock in alien environment. Sometimes the organisation itself may suffer shock. Proper home work to understand the culture can help avoid the shock. This also highlights the importance of the selection of people for foreign markets.

Cultural Transmission

A very important character of culture is its transmissive quality. The elements of culture are transmitted among the members of the culture, from one generation to the next, and to the new members admitted into culture. Some of the aspects of a culture may be transmitted to other cultures also.

The transmissive quality of culture makes it cumulative. Every generation inherits a stock of cultural elements, many of which have been accumulated over a long period of time. As time goes on, cultures accumulate more techniques, ideas, products and skills. It is also quite obvious that certain old elements are dropped as new ideas and traits are acquired.

Cultural transmission takes place by means of symbolic communication. A symbol is any sign, signal or word that conveys a meaning. The great importance of language in cultural transmission is quite clear. Literature, film, TV and some other electronic gadgets, social institutions, advertising and marketing techniques, and so on, play very important roles in cultural transmission.

Transmission also facilitates cultural diffusion, i.e., the spread of cultural elements from one place to another. Cultural transmission and diffusion are easy in a culture with high educational levels and a well-organized communication system. An effective communication system and high educational levels facilitate socio-economic change through better cultural transmission and diffusion, for new ideas and innovations are easily and quickly transmitted, diffused, and absorbed in such a culture. In the context of the generally low literacy rates in India, the government has realized the importance of the media, such as film TV and radio in transmitting information such as better agricultural practices and techniques, market information, the concept and importance of family planning, and so on.

The nature and process of cultural transmission and diffusion in a society is important to business decision-making. For example, to formulate a promotional policy for a product, a service or an idea, it is important to identify the relevant elements of transmission, to evaluate the relative effectiveness of alternative communication media, to identify the reference groups and the extent of their influence, to identify the channel of influence on the reference groups , and so on.

Cultural conformity

Individuals in a cultural tend either to conform to the cultural norms or to deviate from them. If the culture endures as it is, most people would conform to the norms. As inkless observes, the social order depends on the regular and adequate fulfillment of the role obligations incurred by the incumbents of the major status-positions in a social system. It follows that the most important process in society is that which endures that people do indeed meet their role obligation.

A student who abides by the rules of his school discipline, does his home-works promptly and studies properly is conforming to his role obligation. And an employee who stakes work for a reasonable cause in response to a strike call by his union is also conforming to his role as member of the union. when an individual has incorporated within himself the knowledge and appropriate skills necessary to the fulfillment of a role, and when he accepts the value or appropriateness of the action, sociologists speak of his having internalized the role and its psychological underpinnings. Such internalization helps achieve cultural conformity.

If a society is ,by and large, characterized by blind conformity, it would be very difficult to market new revolutionary ideas ( including products and techniques) in such a society. Special efforts may be required in such a society to change the attitudes of the people in favor of unconventional ideals. It is also important to understand the extent and nature of the snow-balling effects of initial deviation in a society.

Cultural Lag

The culture lag thesis put forward by William F Orgburn says that the various parts of modern culture do not change at the same rate and that since there is a correlation and interdependence of parts, a rapid change in one part of our culture requires readjustments through other changes in various correlated parts of that culture. The cultural lag thus places constraints on the scope of social inertia and religious sentiments come in the way of population control, though a variety of techniques are available for birth control.

International business arena is replete with cases of cultural lag. It indicates that different markets may be in different levels of readiness to accept a new product or ideal. To successfully market a new idea (including product, service, technique), it is necessary to identify the factors causing the lag and to overcome them by taking appropriate measures. It would be a blunder to introduce a product to a market which is not ready to adopt it.

CULTURAL TRAITS

Cultures have some important traits. An understanding of these cultural dimensions will be helpful in business.

Low-Context and High-Context Cultures A high context culture is one that places great value on the intangible aspects of a negotiation or business deal. Individuals from such cultures look beyond the facts and figures and take into consideration such factors as personal relationships, atmosphere and attitudes toward respect, religion and trust.

A low context culture, on the other hand, assumes a high degree of shared knowledge on the behalf of a transaction partner and thus deals only in such tangible aspects of the deal as facts, figures and performance. The atmosphere and the personal relationship with the business partners mean little. In a low-context culture, business can be conducted without ever meeting face-to-face.

Masculine and Feminine Cultures

A masculine culture contrasts with feminine culture which appreciates inter-personal relationships, put quality of life before material acquisition, and applaud concern for individual and society is made up of leaders and followers.

Monochronic and Polychronic Societies

Monochronic is a term that describes how a culture views time. In a monochromic society time is used for ordering ones life, for setting priorities and for doing tasks in a sequential order- one thing at a time. Most of the societies of the developed world are monochromic. It contrasts with a polychromic society which uses time to accomplish diverse goals simultaneously and to interact with as many individuals as possible-even at the same time. Polychromes are a characteristic of emerging societies.

Universal vs. Particularism

This is one of the five cultural dimensions identified by Fons Trompenaars, a Dutch researcher. The other four follows this.

Universalism is the belief that an ideas or practice can be applied as it is universally in contrast to particularism which holds that the environment dictates how ideas should be applied.

In cultures with high universalism, the focus is more on rules than on relationships, business contrasts are adhered to very closely, and people believe that a deal is a deal. In cultures with high particularism, the focus is on relationships and trust than on formal rules. In a particularist culture, legal contracts often are modified, and as people get to know each better, they often change the ways in which deals are executed.

Individualism vs. Communitarianism

In individualism people regard themselves as individuals, while in communitarianism they regard themselves as part of a group. Countries like the United States, Czechoslovakia, and the former Soviet Union have high individualism.

Neutral vs. Emotional

A neutral culture is one in which emotions are held in check whereas an emotional culture is one in which emotions are openly and naturally expressed.

Japan and the United Kingdom are regarded high neutral cultures. People in these countries try not to show their feelings; they act stoically and maintain their composure. People in emotional cultures often smile a great deal, talk loudly when they are excited, and greet each other with a great deal of enthusiasm. Mexico, the Netherlands, and Switzerland are examples of high emotional cultures.

Specific vs. Diffuse

A specific culture is one in which individuals have a large public space they readily let others enter and share and a small private space they guard closely and share with only close friends and associates. A diffuse culture is one in which both public and private space is similar in size and individuals guards their public space carefully, because entry into public space affords entry into private space as well. Austria, the United Kingdom, the United States, and Switzerland all are specific cultures, while Venezuela, China, and Spain are diffuse cultures.

Achievement vs. Ascription

An achievement culture is one in which people are accorded status based on how well they perform their functions. An ascription culture is one in which status is attributed based on who or what a person is. Achievement cultures give high status to high achievers where as ascription cultures accord status based on age, gender, or social connections.

RELIGION

Different peoples have their own religious convictions, beliefs, sentiments, customs, rituals, festivals etc. The cost of ignoring certain religious aspects could be very high, sometimes even fatal, in business.

When an American fast food chain was planning to enter India, one political party stated that it would oppose the marketing of beef product in the country by the multinational. In a country where cow is regarded sacred, although there were some protests against slaughter of cow, beef is consumed by a sizable population and the number of the beef consumers in India is larger than the total population of many countries.Pork is banned in Muslim countries. During the holy Ramzan period, restaurants and the like owned by Muslims remain closed during day time. Muslims would consume the meat of only those animals / birds slaughtered following the prescribed religious rituals. Many Christian do not consume non-vegetarian during the lent (50 days preceding Easter) during the 24 days preceding Christmas and on all Fridays. During these periods, Christians do not conduct marriages and other celebrations like baptism. Hence, the weeks following Christmas and Easter are seasons of such celebrations. However, it is interesting to note that although according to the Bible, Christians are expected to fast on Sundays (the Sabbath day) and devote the whole day to God, and not to indulge in any worldly activities, most of them rather eat merrily and celebrate this holyday. Many business decisions in India and in several other countries are based on astrological advices. These include the decisions regarding the timing of the launch, location of the enterprise, name of the firm, brand name, business portfolio and so on. The only forecasting technique some people depend upon is astrological.

The customs of marriage, naming ceremony of the child, festivals etc, wary significantly between religions. These have implications for many types of business like textiles, jewellery, catering, and consumer durables.

The influence of religion on politics is on the increase in many parts of the world. And politics often plays an important role in shaping economic policies and business regulation and promotion. In a number of countries, religion and government are inseparably united.

ETHNODOMINATION

In many countries one or other industry or trade is dominated by certain ethnic groups. This is particularly true of trade. Ethonodomination in distribution is defined as a situation where an ethnic group occupies a majority position in a channel of distribution with respect to the ownership and control of physical and financial resources, or through the manipulation of social environment. The control is manipulated through the familiar coercive dealing arrangements and discrimination among customers or suppliers.

There are number of cases of ethno domination in India. For example, the automobile spare parts business is dominated by the Sikhs. There is domination of some communities in the wholesale trade in several products. In several parts of the country, there is dominance of some or other community in banking and money lending like the Chettiars in Tamil Nadu and Vysyas in Karnataka and other places.

Many ethnic businesses can go international. For example, Punjabi restaurants, Udupi restaurants, Chinese restaurants etc. are popular in several foreign countries. Several exporters target ethnic population abroad as in the case of Indian curry powders, pickles etc.

LANGUAGE

Difference in the language is a very important problem area in business. Switzerland, for examples is country with three fairly distinct cultures, divided between the French, Italian and German-speaking Swiss and the regional differences are profound. In South America there are more than 40 languages. The African continent has the largest number of languages spoken. Zaire alone has more than 200 languages. Kenya has about 40 ethnic groups, each with its own language and culture. Some 750 languages, each distinct and mutually unintelligible are spoken in Papua New Guinea.

India has numerous languages and their dialects, besides the 18 officially recognized languages. Of the 1652 mother tongues listed by the Census of India, 33 are spoken by people numbering. A lakh or more.

CULTURE AND ORGANISATIONAL BEHAVIOR

The cultural impact on the international management is reflected by several basic beliefs and behaviors. Given below are some specific examples where the culture of a society can directly affect management approaches and organizational behavior, highlighted by Hodgess and Luthans.

Centralized vs. Decentralized Decision Making Safety vs. Risk Individual vs. Group Reward Informal vs. Formal Procedure High vs. low organizational loyalty

Cooperation vs. competition Short-term vs. Long-term Horizon Stability vs. InnovationOTHER SOCIAL- CULTURAL FACTORS

Consumer Preferences, Habits and Beliefs

For a business to be successful, its strategy should be the one that is appropriate in the socio-cultural environment. The marketing mix will have to be so designed as best to suit the environmental characteristics of the market.

Bicycles, for example, are mostly a basic means of transportation in many developing countries whereas on several developed countries they are used largely for exercising and sporting. Honda found that in North America, where motorcycles are used primarily for leisure and sports, consumers look for high horsepower output and speed. Low cost and ease of maintenance are scoring points in South East Asia where motorcycles are a basic means of transportation. The low speed torque is preferred to either high speed or ease of maintenance by the shepherds of Australia who use it to drive sheep. Eating habits, consumer preferences and the resultant demand patterns vary greatly from one market to another. For example, certain seafood species which are in great demand in some markets may be non-existent in certain markets. Even when the same species is widely used in different markets, product forms and product attributes demanded may vary significantly.Etiquettes

There are great differences in the manners of greeting people and physical distance to be kept between people. While embracing, hugging or kissing is common in some cultures they are quite embarrassing, and even highly objectionable in many societies.

Even laughter is interpreted differently around the world. While most countries consider it an expression joy, some cultures discourage it. In many West African countries, laughter indicates embarrassment, discomfort, or surprise. Smiles of people who are not very familiar do not generate smiles in return everywhere; sometimes it may cause suspicion.

Handshake while greeting and bidding good-bye are common in many societies. But it is not common in many others. Some peoples dislike it or object to it. Shaking hands with people of opposite sex should be avoided in some culture. Even in societies where handshake is quite common, the manner of doing it may differ. Some cases presented by Chaney and Martin are reproduced here.

Properly responding to a guests invitation / treat is very important. Knowing well the right response in different occasions is the crux of the problems. While a very profitable opportunity was being negotiated, one U.S. executive innocently made the mistake of refusing a Saudi Arabia. Naturally, the Saudi became much less sociable, and the negotiation process was much less successful than it might have been.

Gift giving has its own place in most cultures. It is indeed customary on many occasions. There are many aspects of gift giving that must be meticulously understood such as what is an appropriate gift, to who should it be given, when it should be given and how should it be given. Failure to take meticulous care of these factors can sometimes produce negative effects. Sometimes gifts are expected and the failure to supply them is seen as insulting. Other times, however, the mere offer of such a token is considered offensive. In many parts of Latin America, cutlery or handkerchiefs should not be given because these gifts imply a cutting off of a relationship or the likelihood of tearful event .And giving a clock to someone in China is not good idea, either. The Chinese word for clock sounds similar to their word for funeral. In fact, even the way in which gift is presented is important. In most parts of Asia gifts should be given privately to avoid embarrassing the Asians, but in the Middle East they need to be offered publicly in order to reduce the possible impression that bribery is being attempted.

Some Social Trends There are also a number of the other social and demographic factors, such as the age and sex composition of population, family size, habitat, attitude towards employment, occupational pattern etc. which influence the business.

The number and promotion of the women in the work force have been rising in most of the countries. However, the percentage of women working outside the household varies significantly between nations. This ratio is generally high in the advanced countries in comparison with the developing countries. Birth control has been a contributory factor in raising the proportion of women employees.

That the wife as well as the husband is working means less time and energy available for cooking at home. It is estimated that, in the US, of the three meals a day, one and a half are eaten away from the home and of the remainder, half are ready prepared. It also means that the family operates differently. It was estimated that $40 billion in family funds was spent by teenagers, mostly for groceries and other household items. This has lot of implications for the marketers: In the developing countries, particularly, the situation would be different from that in the U.S.

The rise in the number of double households increases the demand for a number of products like household appliances. Electronic gadgets, packaged food products etc.

There are also several other demographic trends which have implications for business strategy formulation. While some of these trends are confined to certain countries only, the strength of other trends varies greatly between nations. For example, the number of unmarried couples living together has risen in the two decades ended 1990 from about half million to 2.5 million in the U.S. Such a thing is quite unheard of in several countries like India.

Similarly, the high divorce rate has created over a million single parent families in the U.S. Most of the divorced remarry, leading to the emergence of a large number of blended families. This is not the situation in several countries where people attach more sanctity to marriage so that the marriage lasts lifelong. In countries where the culture is that a marriage relationship is to last life long, a company may advertise that its durable product will be a lifelong companion like ones life partner, but to use such a promotional theme in a culture where divorce rate is high and even unmarried partnerships which normally last for only short periods is common, will be a blunder.

TECHNOLOGICAL DEVELOPMENTS AND SOCIAL CHANGE

According to Han Gerth and Wright Mills, social change refers to whatever may happen in the course of time to the roles, the institutions or the orders comprising the social structure: their emergence, growth and decline. To Morris Ginsberg, social change means a change in the social structure, e.g., the size of a society, the composition or balance of its part or the type of its organization. As Biesanz and Biesanz observe: social change includes significant alterations in social structure, in cultural definitions, and in the products of socio-cultural action. Social structure may change in size, in the degree of formality and informality, in the types of social relationships, and in the system of statuses and roles. Cultural change is reflected in changing knowledge, beliefs, values and norms. Material products will change as a result of advances in science and technology. In short, social change may cause one or more of the following: changes in the size of society: changes in social institutions: changes in occupational patterns; changes in positions, status and roles ,changes in values, beliefs and attitudes, changes in social interactions; changes in social mobility; and so on.

The impact of developments in the field of transport and communications on society is very profound. The automobile and telephone made suburbanization possible in the USA and the other countries. Films, television and radio have become very helpful in the transmission and diffusion of information and in the education of the common man. These media play an important role in bringing about social change. Television or radio enables a person to address, at one time, millions and millions who are geographically widely spread. Free radio and television make possible the rapid rise of new political and social movements. No wonder that, in a number of countries, these media have brought about significant changes in the sphere of family and individual recreation. Such technologies have considerably reduced the social distance between the urban and rural areas.

UNIT IV

POLITICAL ENVIRONMENT

FUNCTIONS OF STATE

There are very divergent perceptions of the functions of the state. On the extreme is the view that the government that governs is the best and on the other extreme is the demand for government ownership or control of almost everything. Further, the philosophy regarding the states role in the society has undergone significant changes over time in many countries over time. A number of countries are, in fact, transitioning from Marx to the market.

The economic role of the state has been recognized for several centuries now. States have come in all shapes and size, depending on a mix of factors including culture, natural endowments, opportunities for trade and distribution of power seventeenth century mercantilists wanted the state to play a major role in guiding trade. In the most modern economies the states regulatory role is now broader and complex than ever before, covering such area as the environment and the financial sector, as well as more traditional area such as monopolies. The design of regulation needs to fit the capability of state regulatory agencies and the sophistication of markets, and give greater emphasis to personal responsibility.

CLASSIFICATION OF FUNCTIONS OF STATE

Functions of state vary from basic minimum requirements to active participation in several other sectors.

The basic functions include the pure public goods such as the provision of property rights, macroeconomic stability, and control of infectious diseases, safe water, roads, and protection of the destitute. In many countries the state is not even providing these. Recent reforms have emphasized economic fundamentals. But social and institutional fundamentals are equally important to avoid social disruption and ensure sustained development. Going beyond these basic services are the intermediate functions such as management of externalities, regulation of monopolies and the provision of social insurance. Here too the government cannot choose whether but only how best to intervene and government can work in partnership with markets and civil society to ensure that these public goods are provided.

States with strong capability can take on more-activist functions, dealing with the problem of missing markets by helping coordination. East Asias experience has renewed interest in the states role in promoting markets through active industrial and financial policy.

Reinvigorating the states capabilityReinvigorating the states capability can be achieved through the following.

Rules and restraints: Mechanisms for enforcing the rule of law such as an independent judiciary are critical foundations for sustainable development. Competitive pressure: Competitive pressure can come from within the state bureaucracy, through recruitment of civil servants on the basis of merit. It can come from the domestic private sector, through contracting out for services and allowing private providers to compete directly with public agencies. Or it can come from the international marketplace, through trade and through the influence of global bond markets on fiscal decisions. Voice and partnership: the means to achieve transparency and openness in modern society are many and varied business councils, interaction groups, and consumer groups, to name a few. Institutional working arrangements with community groups can contribute to greater state effectiveness by giving citizens a greater voice in the formulation of governments policies. And partnerships between levels of government and with international bodies can help in the provision of local and global public goods.THE STATE, INSTITUTIONS AND ECONOMIC OUTCOMES

The state sets the formal rules-laws and regulations-that are part and parcel of a countrys institutional environment. These formal rules along with informal rules of the broader society are the institutions that mediate human behavior. But the state is not merely a referee, making and enforcing the rules from the sidelines; It is also a player, indeed often a dominant player, in the economic game. Everyday state agencies invest resources, direct credit, procure goods and services, negotiate contracts; these actions have profound effects on transactions costs and on economic activity and economic outcomes, especially in developing economies. Played well, the states activities can accelerate development. Played badly, they will produce stagnation or in the extreme economic and social disintegration. The state then in a unique position: not only must it establish, through a social and political process, the formal rules by which all other organizations must abide; as an organization itself. It too, must abide by those rules.

ECONOMIC ROLES OF GOVERNMENT

The government plays an important role in almost every national economy of the world. Even in the countries described as capitalist economies or market economies a substantial share of the nation products goes to satisfy public wants a substantial part of the private income originates in the public budget and public tax and transfer payment significantly influence the state of private income distribution.

In the predominantly private enterprise economies government interference is necessitated by the fact, besides the socio-political ideological reason, if any that the market mechanism alone cannot perform all economic function. Public policy needed to guide correct and supplement it in certain respects. it is important to realize this facts since it implies that the proper size of the public sector is, to a significant degree, a technical rather than ideological issue.

Governments normally play four important roles in an economy, viz., regulation, promotion, entrepreneurship, and planning.

As stated above, the extent and nature of these roles in a given situation depend on a number of factors. Some salient features of these roles are outlined below

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 products mix, promotional activities etc., amount to regulate of the conduct of business.

Government regulation of the economy may be broadly divided into direct control and indirect controls.

Indirect controls are usually exercised through various fiscal and monetary incentives and disincentives or penalties. Certain activities may be encouraged through monetary and fiscal incentives and disincentives. For instance, high 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 control 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 the developing countries, where the infrastructural facilities for development are inadequate and entrepreneurial activities are scare the promotional role of the government assumes special significance. The state will have to assume direct responsibility to build up and strength the necessary development infrastructures, such as power, transport, finance marketing, institution for training and guidance and other promotional activities.

The promotional role of the state also encompasses the provision of the various fiscal, monetary and other incentives, including measures to cover certain risks, for the development of certain priority sector and actives.

Entrepreneurial Role

In many economies, the state also plays the role of an entrepreneur-establishing and operating business enterprise and bearing the risk. A number of factor such as socio-political ideologies; dearth of private

Entrepreneurship; neglect of certain sectors, like the unprofitable sectors, by the private entrepreneurs; absence of or inadequate competition in certain segments and the resultant exploitation of consumers, etc. have contributed to the growth of state owned enterprises in many countries.

There was a tendency in many developing countries to assign a dominant place to the public sector. Public sector dominance was usually established in capital-intensive projects like steel, capital goods, petrochemicals and fertilizers for which investment requirements

Planning Role

Especially in the developing countries the state plays a very important role as a planner. The important of planning to a less developed economy was often emphasized by Jawaharlal Nehru, the chief architect of development planning in India. He rightly observed; 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 ones resources are limited, one has to see that they are directed to the right purpose so as to build up whatever one is aiming at.

TRENDS IN POLITICAL / ECONOMIC PHILOSOPHIES / OUTLOOK

While there are not radical differences in the philosophies of major political parties in some countries, the situation is quite different in some others. The government system in number countries, including several countries which are making rapid economic progress and having liberal policies towards foreign capital and technology is not very democratic. That does not mean that they are not good to make business with. As a matter fact, in several such countries the procedures are simpler and decisions are quicker than in some of the democratic countries.

GOVERNMENT AND LEGAL ENVIRONMENT

Some governments specify certain standards for the products (including packaging) 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 control. Several European countries restrain the use of children in commercial advertisements. in number of countries, including India the advertisement of alcoholic liquor is prohibited. Advertisement, including packaging, of cigarettes must carry the statutory warning that cigarette smoking is injurious to health. Similarly. Baby foods must not be promoted as a substitute for breast feeding. in countries like Germany, products comparison advertisements and the use of superlatives like best or excellent in advertisement is not allowed. in the united states. The federal trade commission is empowered to require a company to provide sufficient evidence to substantiate the claim concerning the quality, performance or comparative prices of its products.

There are a host of statutory controls on business in India. Although the controls have been substantially brought down as a result of the liberalization, a number of controls still prevail.

Many countries today have laws to regulate competition in public interest. Elimination or unfair competition and dilution of monopoly power are the important objectives of these regulations. Certain changes in government policies such as the industrial policy, fiscal policy, tariff policy etc. may have profound impact on business. Some policy development creates opportunities as well as threats. in other words, a development which brightens the prospects of some enterprises may pose e threat to some others. For example, the industries policy liberalizations in India have opened up new opportunities and threats. They have provided a lot of opportunities to a large number of enterprises to diversify and to make their product mix better. But they have also given rise to serious threat to many exiting products by way of increased competition; many sellers markets have given way to buyers markets. Even products which were seldom advertised have come to be promoted very heavily. This battle for the market has provided a splendid opportunity for the advertising industry.

ECONOMIC ENVIRONMENT

ECONOMIC SYSTEM:

The scope of private business depends, to large extent, on the economic system which indeed is rooted in political philosophy. At one end, there are the free enterprise/ market economies or capitalist economies, and at the other end are the centrally planned economies or communist countries. In between these two are the mixed economies. Within the mixed economic system itself, there are wide variations. The freedom of private enterprise in the greatest in the market economy, which is characterized by the following assumptions:

1. The factors of production (labor, land, capital) are privately owned, and production occurs at the initiative of the private enterprise.

2. Income is received in monetary from by the sale of service of the factors of production and from the profit of the private enterprise.

3. Members of the free market economy have free of choice in so far as consumption, occupation, savings and investment are concerned.

4. The free market economy is not planned, controlled or regulated by the government. The government satisfies community or collective wants, but does not compete with private firms; nor does it tell the people where to work /or what to produce.

The completely free market economy, however, is an abstract system rather than a real one. Today, even the so-called market economies are subject to a member of government regulations. Countries like the United States, Japan, Australia, Canada and member countries of the EEC are regarded as market economies.

The communist countries have, by and large, a centrally planned economic system. Under the rule of communist or authoritarian socialist government, the state owns all the means of production, determines the goals of production and controls the economy according to the central master plan. There is hardly any consumer sovereignty in a centrally planned economy, unlike in the free market economy. The consumption pattern in a centrally planned economy is dictated by the state.

China, East Germany Soviet Union, Czechoslovakia, Hungary, Poland, etc., had centrally planned economies. However, recently several of these countries have discarded communist system and have moved towards market economy.

In between the capitalist system and the centrally planned system falls the system of the mixed economy, under which both the private and public sectors co-exist, as in India. The extent of state participation varies widely between the mixed economies. However, in many mixed economies, the strategic and other nationally important industries are fully owned or dominated by the state.

The economic system, thus, is a very important determinant of the scope of private business. The economic system and the policy are, therefore, a very important external constraint on business.

Business fortunes and strategies are influenced by the economic characteristics and economic policy dimensions. The economic environment includes the structure nature of the economy, the stage of development of the economy, economic resources, the level of income, the distribution of income and asset, global economic linkages, economic policies etc.

Important economic factors are described below.

NATURE OF THE ECONOMY:

The general level of development for the economy has lot of implications business it has significant bearing on the nature and size, demand, government policies affecting business etc.

Countries and even different regions within a country, show great differences in the level and pattern of economic development.

A widely used method of classification of the economies is on the basis of the par capital income. Accordingly, countries are broadly classified as low income, middle income and high income economies.

Low Income Economies are economies with low level of per capita income. All economies with per capita GNI (Gross National Income-new term for GNP) of $975 or less in 2008 are regarded as low income economies. There were 43 low income economies in 2008.

Higher income economies are countries with very rich income per capita. Those with a per capita GNI of $11,906 or above in 2008 fall in the category of high income economies. In 2008, there were 67 high income economies. These are mainly two categories of high income economies, namely, industrial economies and oil exporters.

Falling in between the low income economies and high income economies are the middle income economies.

Middle income economies are subdivided into lower middle income and upper middle income economies. In 2008, there were 100 middle income economies

Differences in the income levels between countries is not a true reflection of the purchasing powers are living standard of people. Further, exchange rate changes would give a misleading picture of the economic position of the country when the income is converted into dollar from the national currency. For instance, if the national currency has depreciated against the dollars at a rate higher than the GNI growth rate, when the GNI is converted into dollar, it will show the decline even though the GNI has actually increased in term of the national currency. To overcome such problems, it has become common to estimate the GNI and per capita income at purchasing power parity too. For example, in 2008 the per capita income of India was estimated at $1076; in PPP terms it was estimated at $2960. What is mean is that a bundle of goods which costs $1076 in India will cost $2960 in USA. In other words; having $1076 in India is equivalent to having $2960 in USA.

STRUCTURE OF THE ECONOMY

The structure of the economy factors such as contribution of different sectors like primary (mostly agricultural) secondary (industrial) and tertiary (secondary) sectors , large , medium, small, and tiny sectors to the economy, and their linkages, integration with the world economy etc.- are important to business because these factors indicate the prospects for different types of business, certain factors which affect the business etc. for example, if an economy is highly integrated with the global economy it will be quickly affected by developments in the global economy.

Normally, as an economy develops the share of the primary sector in the GDP and employment declines and those of the other sectors increase. After a certain stage, the share of the manufacturing sector may also decline.

The developed economies are primarily service economics in the sense that the service sector generates bulk of the employment and income. The contribution of services to GDP and employment is substantially high in, particularly, the developed economics.

TABLE 4.2:CONTRIBUTION OF SERVICES TO VALUE ADDED AS PERCENTAGE OF GDP

Region/country 1980 1990 2008

World 56 60 69

High income economies 59 64 73

Low and middle income economies 42 46 53

India 39 42 53

Source: world bank, world development report,1999/2000 and 2010

The nature of each sector has business implications. For example, although india is one of the largest producer of several agricultural product, because of the small and fragmented nature of the land holdings, efficient collection and processing of the produce become difficult.

The land holding pattern also makes productivity improvements difficult. It also has implications for the agricultural input business.

The tremendous growth of trade in services and, more recently, of electronic commerce, is part of a new trade pattern exports of commercial services have been growing on every continent (particularly Asia) throughout the 1990s and later. This change has its own special significance, as services are frequently used in the production of goods and even other services. Enhanced international competition in services means reductions in price and improvements in quality that will enhance the competitiveness of downstream industries. Both industrial and developing economics have much to gain by opening their markets. Developing countries would derive large gains from an easing of barriers to agricultural products and to labor-intensive construction and maritime services. Over the longer term, electronic business