___________

BAOU
Dr. Babasaheb Ambedkar
Educa on
for All
Open University
(Established by Government of Gujarat)

BBA
SEMESTER - 3
BBAR24301
Business Environment
 Message for the Students

Dr. Babasaheb Ambedkar Open (University is the only state Open University,
established by the Government of Gujarat by the Act No. 14 of 1994 passed
by the Gujarat State Legislature; in the memory of the creator of Indian
Constitution and Bharat Ratna Dr. Babasaheb Ambedkar. We Stand at the
seventh position in terms of establishment of the Open Universities in the
country. The University provides as many as 54 courses including various
Certificate, Diploma, UG, PG as well as Doctoral to strengthen Higher
Education across the state.

On the occasion of the birth anniversary of Babasaheb Ambedkar, the Gujarat government secured a
quiet place with the latest convenience for University, and created a building with all the modern
amenities named ‘Jyotirmay’ Parisar. The Board of Management of the University has greatly contributed
to the making of the University and will continue to this by all the means.

Education is the perceived capital investment. Education can contribute more to improving the quality of
the people. Here I remember the educational philosophy laid down by Shri Swami Vivekananda:

“We want the education by which the character is formed, strength of mind is
Increased, the intellect is expand and by which one can stand on one’s own feet”.

In order to provide students with qualitative, skill and life oriented education at their threshold. Dr.
Babaasaheb Ambedkar Open University is dedicated to this very manifestation of education. The
university is incessantly working to provide higher education to the wider mass across the state of Gujarat
and prepare them to face day to day challenges and lead their lives with all the capacity for the upliftment
of the society in general and the nation in particular.
The university following the core motto does believe in offering
enriched curriculum to the student. The university has come up with lucid material for the better
understanding of the students in their concerned subject. With this, the university has widened scope for
those students who
are not able to continue with their education in regular/conventional mode. In every subject a dedicated
term for Self Learning Material comprising of Programme advisory committee members, content writers
and content and language reviewers has been formed to cater the needs of the students.

Matching with the pace of the digital world, the university has its own digital platform Omkar-e to
provide education through ICT. Very soon, the University going to offer new online Certificate and
Diploma programme on various subjects like Yoga, Naturopathy, and Indian Classical Dance etc. would
be available as elective also.

With all these efforts, Dr. Babasaheb Ambedkar Open University is in the process of being core centre of
Knowledge and Education and we invite you to join hands to this pious Yajna and bring the dreams of Dr.
Babasaheb Ambedkar of Harmonious Society come true.

Prof. Ami Upadhyay

Vice Chancellor,
Dr. Babasaheb Ambedkar Open University,
Ahmedabad.
Name of Program: BBA
Course Code with Title: BBA: BBAR24301 Business Environment

Course Writer: Content Editor: Dr. N.Saranya Devi

Dr.G.Balu Assistant Professor,
Assistant Professor, School of Management Studies,
Department of Corporate Secretary ship, Tamil Nadu Open University, Chennai - 600015.
DRBCCC Hindu College, Pattabiram,
Chennai-600015
Co Editor and Reviewer:
Editor and Reviewer:
Dr.Khushbu Kishorbhai Jadav
Dr.Kamal K. Agal Assistant Professor (Management)
Associate Professor School of Commerce and Management
School of Commerce and Management Dr Babasaheb Ambedkar Open University,
Dr Babasaheb Ambedkar Open University, ‘Jyotirmay’parisar
‘Jyotirmay’parisar S G Highway Ahmedabad
S G Highway Ahmedabad
M/S Bijal K.Raval
Assistant Professor(Management)
School of Commerce and Management
Dr Babasaheb Ambedkar Open University,
‘Jyotirmay’parisar, S G Highway Ahmedabad
Acknowledgement: The content in this book is modifications based on the work
created and shared by the Tamil Nadu Open University
(TNOU) for the subject Business Environment used
according to terms described in Creative Commons
Attribution-Share Alike 4.0 International (CC BY-NC SA
4.0)
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Commons
Attribution-Non Commercial-Share Alike 4.0 International
(CC BY-NC-SA 4.0)
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ISBN :

Printed and published by Dr. Babasaheb Ambedkar Open University, Ahmedabad

While all efforts have been made by editors to check accuracy of the content, the representation of facts, principles,
descriptions and methods are that of the respective module writers. Views expressed in the publication are that of the
authors, and do not necessarily reflect the views of Dr. Babasaheb Ambedkar Open University. All products and services
mentioned are owned by their respective copyrights holders, and mere presentation in the publication does not mean
endorsement by Dr. Babasaheb Ambedkar Open University. Every effort has been made to acknowledge and attribute all
sources of information used in preparation of this learning material. Readers are requested to kindly notify missing
attribution, if any.
 CONTENT
BLOCK-1
UNIT 1 BUSINESS ENVIRONMENT – AN INTRODUCTION 3
1.1 Introduction
1.2 Definition
1.3 Nature of Business Environment
1.4 Objectives of Business Environment
1.5 Significance of Business Environment
1.6 Importance of Business Environment
UNIT 2 TYPES OF BUSINESS ENVIRONMENT 11
2.1 Introduction
2.2 Types of Environments
2.3 Internal Environment
2.4 External Environment
UNIT 3 ENVIRONMENTAL ANALYSIS 27
3.1 Introduction
3.2 Importance of Environment Analysis
3.3 Steps in Environment Analysis
3.4 Benefits and Limitations of Environment Analysis
3.5 Techniques of Environment Analysis
BLOCK-2
UNIT 4 MANAGING DIVERSITY AND NATURE, SCOPE OF 39
BUSINESS
4.1 Introduction
4.2 Dimensions of Managing Diversity
4.3 Significant of Workforce Managing Diversity
4.4 Techniques of Managing Diversity
4.5 Challenges of Diversity management
4.6 Introduction to Business
UNIT 5 POLITICAL ENVIRONMENT 53
5.1 Introduction
5.2 Basic Principles of Our Constitution
5.3 Federal System of the Government
5.4 The Directive Principles of The State
5.5 The Fundamentals Rights and Duties
5.6 Difference Between Fundamental Rights and
Directive Principles
5.7 Criticism of The Directive Principles
UNIT 6 BUSINESS AND GOVERNMENT 63
6.1 Introduction
6.2 Reason for Intervention by State Government
6.3 Responsibility of Business towards Government
6.4 Economic Roles of Government in Business
UNIT 7 LEGAL ENVIRONMENT 71
7.1 Introduction
7.2 Concept of Political System
7.3 Main Institutions in Political System
7.4 Various Laws that Governs the Business Environment in
India
7.5 Meaning of Legal Environment
7.6 Scope and Objectives of Legal Environment
7.7 Impact of Business on Legal Environment
BLOCK-3
UNIT 8 DEMOGRAPHIC ENVIRONMENT 84
8.1 Introduction of Demographic Environment
8.2 Importance of Demographic Environment
8.3 Falling Birth Rate and Changing Age Structure
8.4 Migration and Ethnic Aspects
UNIT 9 CULTURE AND BUSINESS 95
9.1 Introduction
9.2 Definition of Culture
9.3 Dimensions of Culture
9.4 Elements of Culture
9.5 Indian Languages and Their Classification
9.6 Meaning of Business
9.7 Definition of Business
9.8 Characteristics of Business
UNIT 10 SOCIAL RESPONSIBILITY OF BUSINESS 104
10.1 Introduction
10.2 Definition
10.3 Social Responsibility of Business towards different
Groups
10.4 Arguments against Social Responsibility of Business
10.5 Arguments for Social Responsibility of Business
10.6 Social Responsibility – The Indian Situation
BLOCK-4
UNIT 11 BUSINESS ETHICS AND VALUES 117
11.1 Introduction
11.2 Meaning and Definition
11.3 Needs for Business Ethics
11.4 Nature of Business Ethics
11.5 Sources of Business Ethics
11.6 Scope of Business Ethics
11.7 Elements of Business Ethics
11.8 Principles of Business Ethics
11.9 Unethical Practices
UNIT 12 CORPORATE GOVERNANCE 130
12.1 Introduction
12.2 Definition
12.3 Main Objectives of Corporate Governance
12.4 Types of Corporate Social Responsibility
12.5 Principles of Corporate Governance
12.6 Need for Corporate Governance
12.7 Benefits of Corporate Governance
12.8 Perspective and Important Issues in Corporate
Governance
12.9 Types of CSR Activities Under Schedule VII of The
Companies Act,2013
12.10 Corporate Government in India
12.11 SEBI Code of Corporate Governance
12.12 The Institute of Company Secretaries of India (ICSI)
12.13 The Institute of Chartered Accountants of India (ICAI)
UNIT 13 ECONOMIC SYSTEMS 150
13.1 Introduction
13.2 Capitalism
13.3 Socialism
13.4 Mixed Economy
UNIT 14 ECONOMIC PLANNING 164
14.1 Introduction
14.2 The Planning Commission
14.3 Five Year Plans
14.4 Salient Features of Five-Year Plan
14.5 Failures of Planning in India

1
 BLOCK -1

Unit 1 : Business Environment – An Introduction

Unit 2 : Types of Business Environment

Unit 3 : Environmental Analysis

2
UNIT 1

BUSINESS ENVIRONMENT – AN
INTRODUCTION
STRUCTURE

Overview

Learning Objectives
1.1 Introduction

1.2 Definition
1.3 Nature of Business Environment

1.4 Objectives of Business Environment

1.5 Significance of Business Environment
1.6 Importance of Business Environment
Let Us Sum Up

Check Your Progress

Glossary
Suggested Readings
Web Resources

Answer to Check Your Progress

OVERVIEW
Every business organisation has to interact and transact with its
environment. Hence, the business environment has a direct relation with
the business organisation. Obviously, the effectiveness of interaction of
an enterprise with its environment primarily determines the success or
failure of a business. The environment imposes several constraints on an
enterprise and has considerable impact and influence on the scope and
direction of its activities. The enterprise, on the other hand, has very little
control over its environment. The basic job of the enterprise, therefore, is
to identify with the environment in which it operates, and to formulate its
policies in accordance with the forces which operate in its environment.
LEARNING OBJECTIVES

After studying this unit, you will be able to;

 define Business Environment

3
  explain the Nature of Business Environment
 explain the Objectives of Business Environment
 describe the significance and importance of business environment.
1.1 INTRODUCTION

Environment, in its literal sense, refers to the surroundings, influences,

and conditions in which someone or anything exists. Any organisation's
environment can be defined as "the totality of all circumstances,
occurrences, and influences that surround and have an impact on it." The
fact that the business environment is complicated, dynamic, diverse, and
has a broad impact causes it to exhibit a variety of characteristics. Due to
all of these factors, breaking down the environment into its internal and
external components helps us better understand it. Thus, each business
has a unique set of internal elements and encounters a unique set of
external forces.
The life and success of an individual depend on his innate capability to
cope with the environment, including physiological factors, traits, and
skills, the survival and success of a business firm depend on its resources,
including physical resources, financial resources, skills, and adaptability
to the environment.
1.2 DEFINITION

Bayard – O. Wheeler defines that the total of all things external to firms
and industries that affect the functioning of the organisation is called
Business Environment. Arther Weimer says that the business
environment encompasses the ‗Climate‘ or set of conditions, economic,
social, political or institutional in which business operations are conducted
and organized.
Marry, M.Richman and MelvgnCoopen, feel that ―Environmental factors
or constraints‖, are largely if not totally, external and beyond the control of
the individual enterprise and their managements.‖ ―These are essentially
the givers‖ within which firms and their managements must operate in a
specific country and they vary often greatly, from country to country‖.
William F. Glueck and Lawrence R. Jauch wrote that the environment
includes factors outside the firm which can lead to opportunities for or
threats to the firm. Although, there are many factors, the most important
of the factors are socio – economic, technological, supplies, competition
and government.

David Keith defines the Environment of business as ―the aggregate of all

conditions, events and influences that surround and affect it‖

4
1.3 NATURE OF BUSINESS ENVIRONMENT

Business Environment is characterized by the following features

i) Aggregative: Business environments are the totality of all the external
forces which influence the working and decision – making of an enterprise.
ii) Inter-related: Different elements of business environment are closely
interrelated and interdependent. A change in one element affects the
other elements. Economic environment influences the non-economic
environment which in turn affects the economic conditions. For example,
economic liberalisation in India since 1991 has opened up new
opportunities for private sector and foreign entrepreneurs.
iii) Relative: Business environment is a relative concept. It differs from
country to country and even region to region. Capitalist economics like
those of USA and UK have a different kind of environment than communist
economies. The nature of economic system in a country affects the
environment of business.
iv) Inter-temporal: Business environment is also an inter-temporal
concept as it changes over time. For example, business environment in
India today is much different from that prevailing before 1991. In the short
run business environment may remain static. But in the long run, it does
change.
v) Uncertain: Business environment is largely uncertain because it is very
difficult to forecast the future environment. When the environment is
volatile. i.e., changes very fast, uncertainty increases.
vi) Contextual: Business environment provides the macro framework
within which the business firm (a micro unit) operates; the environmental
forces are largely given within which an individual enterprise and its
management must function.
1.4 OBJECTIVES OF BUSINESS ENVIRONMENT
i) Identify Business Opportunities: The business environment helps the
business to find opportunities in the market. Businesses must look for new
opportunities when the market and consumer trends, technological
advancements, and other factors change.
ii) Improving Performance: Sales and profit are influenced by the
business environment. Any business' primary goal is to earn a profit. Profit
increases when sales increase. A higher profit indicates improved
performance.

5
iii) Basis of Decisions: The business environment provides information
about inside and outside of the organisation. The information related to
change in culture, fashion, trends, customer purchasing power, etc.,
becomes the basis of the decision of any organisation.

iv) Survive in the Business: Survive in the market is very difficult at the
time of competition. The business environment helps the business to find
out information about the internal and external environment which
facilitates the business can makegood decisions to survive in the market.

v) Making of Policies: The business makes policy according to the

market conditions. The market condition can find out by analyzing the
environment of the business. This is how the business environment helps
in the making policies of the organisation.
vi) Assistance in Planning: Planning is the fundamental management
function, which involves deciding beforehand, what is to be done, when is
it to be done, how it is to be done, and who is going to do it. The business
environment provides enough information to make a plan for the future.
1.5 SIGNIFICANCE OF BUSINESS ENVIRONMENT

It is very important for business firms to understand their environment and

changes occurring in it. Business enterprises which know their
environment and are ready to adapt to environmental changes would be
successful. On the other hand, firms which fail to adapt to their
environment are unlikely to survive in the long run, For example. some
Indian firms suffered considerably because they failed to appreciate the
tightening regulations against environmental pollution, Knowledge of
environmental changes is very helpful in the formulation and
implementation of business plans.
Some of the direct benefits of understanding the environment are given
below:
i) First Mover Advantage: Awareness of environment helps an
enterprise to take advantage of early opportunities instead of losing them
to competitors. For example, Maruti Udyog became the leader in small car
market because it was the first to recognise the need for small car on
account of rising petroleum prices and a large middle class.
ii) Early Warning Signal: Environmental awareness serves as an early
warning signal. It makes a firm aware of the impending threat or crisis so
that the firm can take timely action to minimize the adverse effects.
iii) Customer Focus: Environmental understanding makes the
management sensitive to the changing needs and expectations of

6
consumers. For example, Hindustan Lever and several other FMCG
companies launched small sachets of shampoo and other products
realizing the wishes of customers. This move helped the firms to increase
sales.

iv) Strategy Formulation: Environmental monitoring provides relevant

information about the business environment. Such information serves as
the basis for strategy making. For example, ITC realised that there is a
vast scope for growth in the travel and tourism industry in India and the
Government is keen to promote this industry because of its employment
potential. With the help of this information, ITC planned new hotels both
in India and abroad.
v) Change Agent: Business executives bring changes and transforming
the industry to a higher level. Hence, they generate strong desire to
change at the root level; Leaders must do environmental scanning in order
to comprehend the aspirations of people and other environmental forces
for example. Contemporary environment requires prompt decision-
making and power to people. Therefore, business leaders are increasingly
delegating authority to empower their staff and to eliminate procedural
delays.
vi) Public Image: A business firm can improve its image by showing that
it is sensitive to its environment and responsive to the aspirations of
public. Leading firms like Tata, Bajaj Industries. Have built good image by
being sensitive and responsive to environmental forces. Environmental
understanding enables business to be responsive to their environment
vii) Continuous Learning: For business executives, environmental
analysis provides broad-based, continual education. They are never
caught off guard since it keeps them informed of how the situation is
changing. Managers may respond appropriately to environmental
changes with the aid of environmental learning, thereby enhancing the
success of their enterprises.

1.6 IMPORTANCE OF BUSINESS ENVIRONMENT

Following are the significance of business environment.

i) The study of the business environment helps an organisation to
ii) develop its broad strategies and long-term policies.
iii) It enables an organisation to analyse its competitors‘ strat-egies

iv) and thereby formulate effective counter strategies. Knowledge about

the changing environment will keep the organisation dynamic in its
approach.

7
v) Such a study enables the organisation to foresee the impact of the
socio–economic changes at the national and international level on its
stability.
vi) Finally, as a result of the study, executives are able to adjust to the
prevailing conditions and thus influence the environment in order to
make it congenial to business
LET US SUM UP

We reside in a dynamic environment that is constantly changing. Business

owners need to be aware of how the environment is changing and how it
is affecting their operations. In this unit, we have learnt about definition of
business environment, nature and significance of business environment,
the importance of business environment.

CHECK YOUR PROGRESS

Choose the Correct Answer:

1. Which of the following is not a feature of business environment?

a) Inter-relatedness
b) Dynamic nature

c) The totality of external forces

d) Identify threats and early warning signals
2. Which of the following is not includes elements of social environment?

a) Social Values b) Tax Laws

c) Customs and Traditions d) Literacy Rates
3. The present and future viability of an enterprise are impacted by
.

a) Environment b) Culture
c) Time d) None of the Above

4. nature of business environment suggests that

environment keeps on changing.
a) Dynamic b) Pervasive

c) Continuous d) Multidimensional
5. Which of the following is not a feature of business environment?
a) Uncertainty b) Interdependent

c) Complexity d) Stability

8
GLOSSARY

Business Environment : The sum of all conditions, events, and

influences that surround and affect
business activities and growth.

Business Opportunities : Business Opportunity refers to

opportunities for self-development
through trade or commerce. It also refers
to opportunities to improve one‘s business
growth and expansion.

Customer Focus : Customer focus is a business philosophy

that places the customer at the center of
all business development and
management decision.

Strategy Formulation : Strategy formulation is the process of

offering proper direction to a firm.

Change Agent : A change agent is an individual from

inside or outside of a company whose job
is to help revitalize a company in response
to changing circumstances.

Public Image : What the general impression of a famous

person or organisation is; what most
people think of a person or organisation,
which may differ from what they are like in
private.

SUGGESTED READINGS

1. K. Aswathappa, (2011), Business Environment for Strategic

Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.

9
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES

1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.d) 2.b) 3.a) 4. a) 5. d)

10
UNIT 2

TYPES OF BUSINESS ENVIRONMENT

STRUCTURE

Overview

Learning Objectives
2.1 Introduction

2.2 Types of Environments

2.3 Internal Environment
2.3.1 Financial Capability

2.3.2 Marketing Capability

2.3.3 Operations Capability
2.3.4 Personnel Capability
2.3.5 General management Capability

2.4 External Environment

2.4.1 Micro Environment
2.4.2 Macro Environment

Let Us Sum Up

Check Your Progress

Glossary
Suggested Readings

Web Resources
Answer to Check Your Progress
OVERVIEW
Every Business Organisation has to tackle its Internal and External
environment. For example, a committed labour force provides an internal
environment of any business while the ecological environment represents
the external environment. While the internal environment reveals an
organisation‘s strengths and weakness, the external environment reflects
the opportunities available to the organisation and the threats it faces.
India is a developing economy with abundant natural resources along
large population. A low standard of living by a vicious cycle of poverty for
a considerable section of population, and about 250 million people under

11
the poverty line coupled with a considerable concentration of economic
power in few hands characterize the Indian economy.
LEARNING OBJECTIVES

After studying this unit, you will be able to;

 explain the meaning of internal and external business environment
 analyze the internal and external factors affecting the business
environment
 examine the comparison of micro and macro environment.
2.1 INTRODUCTION

A business environment is an ecosystem which consists of factors,

people, and resources used to manage operations and problems and
deliver solutions to clients. Activities related to supply chain management,
logistics, HR recruitment, economic changes, market analysis, company
ownership, etc., are included in this.

Business environments may directly or indirectly affect how a company

runs, thus impacting the corporate culture of the place. Many internal and
external factors affect business environments, and good business
environments help to identify new revenue opportunities and improve their
overall business planning, performance, and profitability.
2.2 TYPES OF ENVIRONMENTS

On‘ the basis of the extent of intimacy with the firm, the environmental
factors may be classified in to different types or levels. As indicated below,
there are, broadly,
i) Internal Environment: It represents the factors internal to the firm. The
internal factors are generally regarded as controllable factors because the
company has control over these factors; it can alter or modify such factors.
For example, human resource factors, physical facilities and functional
areas of management are affecting the business widely.
ii) External Environment: The factors external to the firm is known as
external environment. The external factors are beyond the control of a
company. The external or environmental factors such as the economic
factors, socio-cultural factors, government and legal factors, demographic
factors, geo-physical factors etc., generally regarded as uncontrollable
factors.
2.3 INTERNAL ENVIRONMENT
The Main Internal factors which influence business decisions are as
follows:

12
 1) Financial Capability
2) Marketing Capability
3) Operations Capability
4) Personnel Capability
5) General Management Capability
2.3.1 Financial Capability

Financial capability factors relate to the availability, usage and

management of funds. Some of the important factors which influence the
financial capability of any organisation are as follows:

i) Factors related to the sources of funds like capital structure,

procurement of capital, financing pattern, working capital availability,
borrowing capital and credit availability, reserves and surplus,
relationship with lenders, banks and financial institutions.
ii) Factors related to uses of funds in capital investment, fixed assets
acquisition, current assets, loans and advances, dividend distribution
and relationship with shareholders.
iii) Factors related to management of funds like financial accounting and
budgeting management control system, state of financial health, cash,
inflation, credit, return and risk management, cost reduction and
control & tax planning and control its advantages.
Based on the above factors, a number of strengths and weaknesses can
be found that affect the financial capability of an organisation. The
absence or unavailability of these factors leads to the occurrence of
weakness.
2.3.2 Marketing Capability

Marketing capability factors relate to the pricing, promotion and

distribution of products or services and all the allied aspects to implement
its strategies. Some of these important factors which influence the
marketing capability of an organisation are as follows: -

i) Product related factors like design, colour, usage, mixed quality,

packaging, etc.
ii) Price-related factors like pricing objective, policies followed in pricing,
changes made in competitor‘s pricing etc.
iii) Promotion related factors like promotional tools, sales promotion,
advertising, public-relations etc.
iv) Integrative and systematic factors like marketing mix, distribution
system, market standing, company image, marketing organisation,
marketing system, marketing management, information system, etc.

13
An example of how weakness could be transformed to strength is the
case of the Vicks range of products made by Procter & Gamble. During
1981-1982, the company faced a boycott from the chemists‘ association
which demanded higher trade margins, a step which could have resulted
in loss of sales and lower profitability. The company reclassified its
products as ayurvedic since herbs and plants were being used as raw
materials. Several advantages accrued from this, one being that the
products could be sold by the non-chemists also.

2.3.3 Operations Capability

Operations capability factors relate to the production of the products or
services, use of material resources and all allied aspects that have a
bearing on an organisation‘s capacity and ability to implement its
strategies. Some of the important factors which influence operations
capability of an organisation are as follows.
i) Factors related to the production system like capacity, location, layout,
product or service design, work system, degree of automation, extent
of vertical integration, etc.
ii) Factors related to the operation and control system like aggregate
production planning, material supply, inventory, cost and quality
control, maintenance system and procedure, etc.
iii) Factors related to the R & D system like personnel facilities, product
development, patent right, level of technology used, technical
collaboration and support, etc.
Mumbai Dyeing, a manufacturer of DMT used in the production of
polyester filament yarn, used paraxylene as its basic raw material. Due to
an unfavorable policy, it was not allowed to set up a paraxylene plant, as
a result of which itches to depend on costly imports. Competitors like IPCL
and Bongaiga on refineries have access to captive paraxylene units,
creating a strategic disadvantage for Mumbai Dyeing and making it a high-
cost producer of DMT
2.3.4 Personnel Capability

Personnel capability factors relate to the existence and use of human

resources and skills and all allied aspects that have a bearing of an
organisation‘s capability and capacity to implement its strategies. Some
of the important factors which influence the personnel capability of an
organisation are as follows.

i) Factors related to the personnel system like system for manpower

planning, selection, development, compensation, communication and

14
 appraisal, position of the personnel department within the
organisation, procedures and standards, etc.
ii) Factors related to organisational and employees‘ characteristics like
corporate image, quality of managers, staff and workers, perception
about and image of the organisation as an employer, availability of
developmental opportunities for employees, working conditions, etc.
iii) Factors related to industrial relations like union-management
relationship, collective bargaining, safety, welfare and security,
employee satisfaction and morale, etc

Apollo Tyres has been adversely affected in the past due to the industrial
relations‘ problems. Its plant is situated in Kerala which has a highly
literate, militant and unionized work force. Due to this the company has
been plagued with a number of problems, including that of low productivity
of workers. In order to overcome this weakness which have affected its
personnel capability, Apollo Tyres has formulated a personnel selection
policy under which it has decided to hire plant workers who are above 28
years of age, are financially needy, married and settled. This is being done
on the reasonable assumptions that older and settled workers would be
less militant and would be keen to hold on to their jobs. Besides the
selection policy, three-year agreements were signed with the unions to
bring them under the purview of collective bargaining. All these steps have
led to a situation where the company has been largely successful in
overcoming its weaknesses in the personnel area.

2.3.5 General Management Capability

General management capability relates to the integration, coordination
and direction of the functional capabilities towards common goals and all
allied aspects that have a bearing on an organisation‘s ability to implement
its strategies. Some of the important factors which influence the general
management capability of an organisation are as follows:
i) Factors related to the general management system like strategic
management system, process related to mission, purpose and
objective setting, strategy formulation and implementation machinery,
strategy evaluation system, management information system,
corporate planning system, rewards and incentives system for top
managers, etc.
ii) Factors related to general managers like orientations, risk propensity,
values, norms, personal goals, competence, capacity for work, track
record, balance of functional experience, etc.,

15
2.4 EXTERNAL ENVIRONMENT

The external environment can be divided into two viz.,

1) Micro Environment
2) Macro Environment
2.4.1 Micro Environment

The micro environment comprises the forces close to the company that
affect its ability to serve its customers. This includes the suppliers,
marketing intermediaries, competitors, customers and the public.
i) Suppliers: These are the firms and individuals who supply the inputs
like raw materials and components to the company. Development in the
suppliers‘ environment can have a substantial impact on the company‘s
business and marketing operations. Supply shortages or delays, labour
strikes and other events can affect sales in the short run and damage
customer goodwill in the long run. It is very risky to depend on a single
supplier. Hence, the company should have multiple sources of supply.
ii) Marketing Intermediaries: These are the firms that help the company
to promote, sell and distribute its goods and services to the final buyers.
They include middlemen, physical distribution firms, marketing service
agencies and financial intermediaries. Middlemen such as wholesalers
and retailers buy merchandise and resell. Physical distribution firms such
as warehouse and transportation firms help the company to stock and
move goods from their point of origin to their destination. Marketing
service agencies such as marketing research firms, advertising agencies
and marketing consulting firms help the company in targeting and
promoting it products to the right markets. Financial intermediaries such
as banks, credit companies and insurance companies help in financial
transactions or insure against the risks associated with the buying and
selling of goods. The company has to develop strong relationships with all
these for the successful operation of its business.

iii) Customers: Every business enterprise must study its customer

markets closely. The success of an enterprise depends upon its ability to
create and sustain markets, viz., consumer markets, business markets,
reseller markets, Government markets and international markets.
Consumer markets consist of individuals and households. They buy
goods and services for personal consumption. Business markets consist
of producers and organisations who buy goods and services for further
processing or for use in their production process. Reseller markets buy
goods and services with a view to resell at a profit. Government markets
consist of Government agencies who buy goods and services with a view

16
to produce public services or transfer the goods and services to others
who need them. International markets consist of foreign buyers, including
con•sumers, producers, resellers and Governments. Each customer
market has its own special characteristics. Hence, the seller should study
each type of market carefully.
iv) Competitors: The success of an enterprise depends upon its ability
to satisfy the needs and wants of consumers better than its competitors.
Hence, the business concern should gain strategic advantage by
positioning its goods strongly against the competitors‘ goods in the minds
of consumers. The strategists should examine the state of competition the
firm must face. The following three factors should be analysed: entry and
exit of major competitors, substitutes and complements for current
products services and major strategic changes by current competitors.
v) Public: A company‘s environment is surrounded by several types of
public. Philip Kotler defines the term public as follows:
 ―A public is any group that has an actual or potential interest in or
impact on an organisation‘s ability to achieve its objectives.‖
 There are several types of public, such as financial public, media
public, citizen-action public, local public, general public and internal
public.
 Financial public includes banks, financial institutions and stock
holders. They influence the company‘s ability to obtain funds.
 Media public consists of newspapers, magazines, radio and T.V. They
carry news, features and editorial opinion.
 Citizen-action public represents consumer organisations,
environmental groups and others. A company‘s decisions may be
questioned by these groups.
 Local public is constituted of neighborhood residence and community
organisations. Large enterprises appoint a community relations officer
to deal with the local public.
 A company should consider the general public‘s attitude towards its
products and services.
 The internal public of a company consists of its workers, managers,
volunteers and the board of directors. Some organisations use
newsletters and other means to inform and motivate their internal
public.
It is to be noted that all these groups are not threats to business; some
actions may create problems to the business while others may create
opportunities.

17
2.4.2 Macro Environment

The macro environment consists of the larger social factors that affect the
whole micro environment. Let us examine the important macro
environmental factors.
i) Social Environment: The social environment factors consist of human
relationships and the development, form and function of such a
relationship having a bearing on the business of an organisation. Some
of the important factors and influences operating in the social environment
are the buying and consumption habits of people, their languages, beliefs
and values, customs and tradition, tastes and preferences, education and
all factors that affect the business. These factors are listed below:
 Demographic characteristics such as population, its density and
distribution, etc.
 Social concern such as the role of business in society, etc.
 Social attitudes and values such as the expectations of the society
from business.
 Family structures and changes in them.
 Role of women in society.
 Educational levels
 Awareness and work ethics
Vicks VapoRub which is a popular pain balm but is also used as a
mosquito repellent in some of the tropical areas. Similarly, in some
languages Pepsi Cola‘s slogan ―Come Alive‖ translates as ―Come out of
the grave‘.
ii) Political Environment: The political environment consists of factors
related to the management of public affairs and their impact on the
business of an organisation. Political environment has a close relationship
with the economic system and the economic policy. For example,
communist countries have a centrally planned economic system. In most
countries apart from those laws that control investment and related
matters, there are a number of laws that regulate the conduct of the
business. These laws cover such matters as standard of product, packing,
promotion, etc. India is a democratic country having a stable political
system where the government plays an active role as a planner, promoter
and regulator of economic activity. Businessmen therefore are conscious
of the political environment that their organisation faces. Most government
decisions related to business are based on political considerations in line
with the political philosophy followed by the ruling party at the Centre and
the state level.

18
The Political Environment had a direct impact on a company is of Apollo
Tyres Ltd. Set up in 1972 in Kerala, the company suffered on account of
hostile political environment which was taken over by the Janata
Government in 1978. Legal battles ensured till 1982 when management
was restored to its promoter Raunaq Singh. After that the company has
turned around and is now on the path of stability and growth.
iii) Economic Environment: The Economic environment consists of
macro level patterns related to the areas of production and distribution of
wealth that have an impact on the business of an organisation. Some of
the important factors and influences operating in economic environment
are:

 Economic stages existing at a given time in a country

 The economic structure adopted such as capitalistic, socialistic or
mixed economy.
 Economic planning, such as 5-years plans, annual budgets, etc
 Economic policies, such as industrial, monetary and fiscal policies.
 Economic indices like national income, distribution of income rate
of growth and growth of GNP, per capita income, disposable
personal income, rate of saving, investment value of imports and
exports, balance of payments, etc
Infrastructural factors as financial institutions, banks, modes of
transportation, communication facility, energy sources, etc
Public savings in India have been traditionally invested in fixed assets and
precious metals. The share of savings invested with the Government has
been channeled through post – offices and banks. However, of late the
investors have increasingly turned to other avenues like stock markets
and company deposits. Recent changes in economic and fiscal policies
have led to many significant developments. Leasing and financing
companies, public sector bonds‘ mutual funds, venture capital business,
newer financial instruments, entry of banks and financial institutions in
stock trading are some of the developments which provide the resources
for capital market and project financing.
iv) Regulatory Environment: The regulatory environment consists of
factors related of the planning, promotion and regulation of economic
activities by the government that have an impact on the business of an
organisation. Some of the important factors and influences operating in
the regulatory environment are as follows: -

19
  The Constitutional framework, Directive principles, Fundamental
rights and distribution of legislative power between Central and
state Governments.
 Policies related to licensing monopolies, foreign investment and
financing or industries.
 Policies related to distribution and pricing and their control
 Policies related to imports and exports
 Other policies related to the public sector, small – scale
industries, sick industries, development of backward areas,
control of environmental pollution and customer protection.
There are a number of administrative controls over business that are
exercised through the regulatory mechanism. Some of the important
areas of control are:
 Industrial policy and licensing
 Monopolies and restrictive trade practices
 Legislation related to a company‘s operation
 Capital issues control and control over stock exchanges;
 Import and export control and control over foreign exchanges
 Control over foreign investment and collaboration
 Control over distribution and pricing of commodities
 Control over development and regulation of industries
 Control through consumer protection
 Control of environmental pollution.
v) Market Environment: The market environment consists of factors
related to the groups and other organisations hat compete with and have
an impact on an organisations market and business.
 Customer or client factors such as the needs, preferences,
perceptions, attitudes, values, bargaining power, buying
behaviour and satisfaction of customers.
 Product factors such as the demand, image, features, utility,
function, design, life cycle, price, promotion, distribution,
differentiation and availability of substitutes of products or
services.
 Marketing intermediary factors such as needs, preferences,
perceptions, attitudes, levels and quality to customer service,
middlemen, distribution channels, logistics, costs delivery
systems and financial intermediaries.
 Competitor related factors such as the different types of
competitors, entry and exit of major competitors, nature of
competition and relative strategic position of major competitors.

20
Many companies make a special effort to be in touch with their market
environment. For instance, Richardson Hindustan Ltd (now Producer &
Gamble) has made it mandatory for its executives to visit the market once
a year, talk to twenty dealers and twenty housewives as a precondition to
their annual salary reviews.
vi) Supplier Environment: The supplier environment consists of factor
related to the cost, reliability and availability of the factors of production or
service that have an impact on the business of an organisation.

Some of the important factors and influences operating in the supplier

environment are as follows:
 Cost, availability and continuity of supply of raw materials, sub-
assemblies, parts and components.
 Cost and availability of finance for implementing plans and projects.
 Cost, reliability and availability of energy used in production.
 Cost availability and dependability of human resources
 Cost availability and the existence of source and means for supply
of plant and machinery, spare parts and after – sales service.
 Infrastructural support and case of availability of the different factors
of production, bargaining power of suppliers and existence of
substitutes.
A specific example where the supplier environment threatened the very
existence of a company is of Grasim Industries pulp unit at Mavoor in
Kerela. It has faced, besides industrial relations problems, acute shortage
of raw material and its availability at high cost. It used bamboo and other
softwood supplied by the Kerala government as its main raw material. The
price charged was thought to be unreasonably high and the supply was
not only erratic but much less than required. Due to such an unfavorable
supplier environment, the company had to temporarily close its factory in
1985.
vii) Technical Environment: The technological environment consists of
those factors related to knowledge applied and the materials and
machines used in the production of goods and services that have an
impact on the business of an organisation.

Some of the important factors and influences operating in the

technological environment are as follows: -
 Sources of technology like company sources, external sources and
foreign sources, cost of technology acquisition, collaboration in and
transfer of technology.

21
  Technological development, stages of development change and
rate of change of technology and research and development.
 Impact of technology on human beings the man – machine system
and the environmental effects of technology.
 Communication and infrastructural technology and technology in
management.
In line with its concern for the technological environment, the Industrial
Credit and Investment Corporation of India (ICICI) has set up the
Technology Development Corporation (TDC) to finance ventures that
have a high risk but possess growth resulting ideas coming from research
institutions. The TDC also intends to provide a technology information
service facility for industry.

viii) Natural Environment: Natural environment is the ultimate source of

many inputs such as raw materials, energy which business firms use in
the productive activity. In fact, availability of Natural resources in a region
or country is a basic factor in determining business activity in it. Natural
environment which includes geographical and ecological factors such as
minerals and oil reserves, water and forest resources, weather and
climatic conditions, port facilities are all highly significant for various
business activities. For example, the availability of minerals such as iron.
coal etc. in a region influence the location of certain industries in that
region. Thus, the industries with high material contents tend to be located
near the raw materials sources. For example, Steel producing industrial
units are set up near coal mines to serve cost of transporting coal to
distant locations.
ix) Global Environment: Even domestic business is affected by certain
global factors. The global environment refers to those global factors which
are relevant to business such as the WTO principles and agreements;
other international conventions / treaties / agreements, declarations/
protocols etc., economic and business conditions / sentiments in other
countries etc. Similarly, there are certain developments, like a hike in the
crude oil price, which have global impact.
The WTO principles and regulations have far reached implications for
Indian business. Acceptance of product patents, for example, seriously
impacts the Indian pharmaceutical industry. The import and investment
liberalisations mandated by WTO have substantially changed the
competitive environment in India.
Economic conditions in other countries may affect the business. For
example, if the economic conditions in a company‘s export markets are
very good, export prospects are generally very good and vice versa.

22
Recession in other countries can increase the import threats, including
dumping. International political factors can also affect business, like
war or political tensions or uncertainties, strained political relations
between the nation and other countries (which some time even culminates
in sanctions). Developments in information and communication
technologies facilitate fast cross border spread of cultures, significantly
influencing attitudes, aspirations, tasters, preferences and even customs,
traditions and values. This has significant implications for business.

LET US SUM UP
The environment in which an organisation exists could be broadly divided
into two parts: external and internal environment. We began by gaining an
understanding of the concept of environment. This is done through a
description of four important characteristics of the environment leading its
external and internal parts.
As the company, generally has control over the internal factors, they are
generally regarded as controllable factors because it can alter or modify
such factors as financial capability, marketing capability, to suit the
environment. The external environment has broadly, two components, viz
Micro and Macro environment.

We see how the external environment, specially that part which is more
relevant to an organisation can be divided into different components. For
the purpose of understanding and analysis we have discussed seven
components of the external environment – social, political, economic,
regulatory, market, supplier and technological. For each component we
have explained through appropriate illustrations, the type of factors and
influences which operate in that part of the environment. The significance
of these factors for the strategic management of the organisation has also
been highlighted.

CHECK YOUR PROGRESS

Choose the Correct Answer:
1. Business Environment classified into .

a) Two b) Three c) Four d) Five

2. Find out an element which is not a part of Business Environment

.

a) Legal b) Technology
c) Medical d) Finance
3. Two broad Types of Environments refers .

a) Internal and External b) Business and Non-Business

23
c) Micro and Macro d) None of the above

4. Environment sets the basis for developmental activity of business

system .

a) Financial Environment b) Technological Environment

c) Global Environment d) Macro Environment
5. Business across several countries with some decentralisation of
management decision making to subsidiaries is .

a) Global business b) Multinational business

c) Transnational business d) multi-regional business
GLOSSARY

Micro Environment : The micro environment comprises the

forces close to the company that affect
its ability to serve its customers. This
includes the suppliers, marketing
intermediaries, competitors, customers
and the public

Macro Environment : The macro environment consists of the

larger social factors that affect the whole
micro environment

Marketing : These are the firms that help the

company to promote, sell and distribute
Intermediaries
its goods and services to the final
buyers. They include middlemen,
physical distribution firms, marketing
service agencies and financial
intermediaries

Public Environment : A public is any group that has an actual

or potential interest in or impact on an
organisation‘s ability to achieve its
objectives

Political : The political environment consists of

factors related to the management of
Environment
public affairs which has close
relationship with the economic system
and the economic policy.

24
 Social Environment : The social environment factors consist
of human relationships in buying and
consumption habits of people, their
languages, beliefs and values, customs
and tradition, tastes and preferences,
education and all factors that affect the
business

Economic : The Economic environment consists of

macro level patterns related to the areas
Environment
of production and distribution of wealth
which includes income, distribution of
income rate of growth and growth of
GNP, per capita income, disposable
personal income, rate of saving,
investment value of imports and
exports, balance of payments, etc.

Technological : The technological environment consists

of those factors related to knowledge
Environment
applied and the materials and machines
used in the production of goods and
services that have an impact on the
business of an organisation

SUGGESTED READINGS

1. K. Aswathappa, (2011), Business Environment for Strategic

Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai

25
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES

1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8

ANSWER TO CHECK YOUR PROGRESS

1.a) 2.d) 3.a) 4.a) 5.b)

26
UNIT 3

ENVIRONMENTAL ANALYSIS
STRUCTURE

Overview

Learning Objectives
3.1 Introduction

3.2 Importance of Environment Analysis

3.3 Steps in Environment Analysis
3.4 Benefits and Limitations of Environment Analysis

3.5 Techniques of Environment Analysis

Let Us Sum Up
Check Your Progress
Glossary
Suggested Readings
Web Resources
Answer to Check Your Progress
OVERVIEW

Environment Analysis plays a vital role to assess the factors which affect
the performance of an organisation. Hence it is used as a strategic tool to
spot all the external and internal factors, in order to measure the amount
of threat or opportunities which the organisation faces in every walk of
business life. These evaluations are later translated into the decision-
making method. The analysis helps to align strategies to cope with the
firm‘s atmosphere. It is the process of collecting and analyzing the data
and conditions outside of a business. A business environment analysis is
also commonly known as a marketing environment analysis and is
typically conducted and presented in the form of a report
To perform environmental analysis, a constant stream of relevant
information is required to find out the best course of action. Strategic
planners use the information gathered from the environmental analysis
and forecasting trends for future in advance. The information can also be
used to assess operating environment and set up organisational goals.

27
 LEARNING OBJECTIVES

After studying this unit, you will be able to;

 describe the meaning of environmental analysis
 discuss the importance of environmental analysis
 state the steps involved in environmental analysis
 explain the benefits and limitations of environmental analysis
 analyze the techniques used for environmental analysis.
3.1 INTRODUCTION
Environmental analysis is the process through which an organisation
monitors and comprehends various environmental forces so as determine
the opportunities and threats that lie ahead. This process is also known
as environmental appraisal or environmental scanning. Environmental
analysis is an exploratory process undertaken to ascertain what could
happen it future. It is a holistic exercise in which total view of the
environment is taken rather that viewing the environmental forces in a
piecemeal manner. This is necessary because different elements of
business environment are interrelated and interdependent. Environmental
analysis has to be a continuous process so that the enterprises can pick
up signals in time and is not caught unaware.
3.2 IMPORTANCE OF ENVIRONMENTAL ANALYSIS

Environmental analysis offers the following benefits:

i) Environmental analysis makes managers aware of the linkage
between organisation and its environment and keeps them alert and
informed.
ii) Environmental analysis helps the company to identify the threats and
opportunities before it. It serves as an early warning signal allowing
the company to develop appropriate responses.
iii) Through environmental analysis an organisation can gain
understanding of how the industry ‗s environment is being
transformed.
iv) The environment changes so fast that an organisations equilibrium
with its environmental may be disturbed quickly. With the help of
environmental analysis, the organisation can know the causes of
disequilibrium. Suitable changes can then be made to create the new
equilibrium.
v) Environmental analysis helps the planners to narrow the range of
available alternatives and eliminate options that are clearly
inconsistent with forecast opportunities or threats. The analyses

28
 permit elimination of unsuitable alternatives and thereby concentrate
on more important options.
vi) Environmental analysis is essential for the formulation of right
strategies and for modification of existing strategies as and when
necessary
3.3 STEPS IN ENVIRONMENTAL ANALYSIS

Environmental analysis consists of four important steps

i) Scanning of Information
ii) Collection of Data
iii) Forecasting
iv) Monitoring and Assessment
i) Scanning of Information: It is a very important step in Environmental
analysis. This includes demographic factors like age, sex, family size,
income, education and occupation. Psychographic factors include
personality and life style of customers. Many organisations have MIS
(management information system), to collect data on economic, cultural,
social, political, legal, competitive, demographic, Technological and
international environments. Searching and scanning are very essential for
systematically gathering processing, storing and disseminating
information.
ii) Collection of Data: It Involves identification of sources of information,
determination of the types of information to be collected, selection of the
suitable method for data collection and required information.
iii) Forecasting: A business requires effecting formulation of plans and
strategies since forecasts of important business environments, viz
economic environment, social environment and political environment. The
economic forecasts include general economic conditions, GDP Growth
rate, per capita income, distribution of income, structural changes in GDP
investment and output trends in different sectors and sub – sectors
industries, price trends, trade and balance of payment trends etc, the
sources of such data can be drawn from published information of World
Bank, IMF, UNO, WTO, ADB, and planning commission. Social forecasts
include population growth, age, structure of population, occupational
pattern, rural urban distribution of population, migration, factors related to
family, life style, income levels expenditure pattern and social attitudes
etc. Political forecast includes changes on the relative power of political
alliances, political ideologies, and changes in internal power structural of
political parties for e.g., Pre- election option polls help certain political
forecasts. The Afghanistan– US war made a dent in the economy of many

29
countries. The lran –Iraq war determine the petroleum oil prices.
Technological Forecasting, Innovation, and technological development
can affect business environment. The penetration of computer and
internet has direct implication for business.

iv) Monitoring and Assessment: This step is an important step in

measurement of changes in the current environmental variables and
projection of environmental changes.
3.4 BENEFITS AND LIMITATIONS OF ENVIRONMENT ANALYSIS
Benefits Of Environmental Analysis

 A firm can plan for its current or future business.

 A firm can develop long – term strategies with respect to the
environmental factors.
 To be dynamic
 Formulation of strategies to counter the strategies of competitors.
 To foresee the impact of socio-economic changes of the firm.
Limitations Of Environmental Analysis

 Environmental analysis cannot predict the future precisely

 Environmental analysis is one of the inputs in strategy development
and testing
 Wrong data or insufficient data may lead to confusion.
 Too much of dependence on Environmental scanning may push the
executives to ―Inactive mode‖
3.5 TECHNIQUES OF ENVIRONMENTAL ANALYSIS

The following Techniques used of Environmental Analysis in the business

such as

1. Quick Environmental Scanning Technique Analysis (QUEST)

2. Strengths Weaknesses, Opportunities and Threats Analysis
(SWOT)
3. Political Economic Social and Technological Analysis (PEST)
1. Quick Environmental Scanning Technique Analysis (QUEST)

QUEST is an environmental scanning technique that is designed to assist

with organisational strategies by keeping adheres to change and its
implications. Different steps involved in this technique are as follows:

 The process of environmental scanning starts with the observation

of the organisation‘s events and trends by strategists.
 After observation, important issues that may impact the
organisation are considered using environment appraisal.

30
  A report is created by making a summary of these issues and their
impact.
 In the final step, planners who are all responsible for deciding the
feasibility of the proposed strategy, review reports.
2. Strengths Weaknesses, Opportunities and Threats Analysis
(SWOT)

SWOT analysis stands for strengths, weaknesses, opportunities and

threats analysis of a business environment. Strengths and weaknesses
are an organisation‘s internal factor while threats and opportunities are
considered as external factors. So, the process of SWOT analysis
includes the systematic analysis of these factors to determine an effective
marketing strategy. It is a tool that is used by the organisation for auditing
purposes to find its different key problems and issues.
These are identified through internal and external environmental analysis.
Internal Environment Analysis
Different factors are considered while analyzing the internal environment
of an organisation like the structure of the organisation, physical location,
the operational capacity and efficiency of the organisation, market share,
financial resources, skills and expertise of employees, etc. Internal
Environment Analysis consist of two factors

 Strength
 Weakness
Strengths

The strength of any organisation is related to its core competencies i.e.

efficient resources or technology or skills or advantages over its
competitors. For example, the marketing expertise of a firm can be its
strength. Apart from this, an organisation‘s strength can be:
▪ Strong customer relations
▪ Market leader in its product or services
▪ Sound market image and reputation

▪ Smooth cash-flows
Weaknesses

A weakness or limitation of an organisation is related to the scarcity of its

resources or skill-set of staff or capabilities that creates an adverse effect
on its performance. For example, limited cash-flow and high cost are

31
considered as a financial weakness of the organisation. Similarly, other
weaknesses can be:
▪ Poor product quality

▪ Low productivity
▪ Unrecognized brand name or poor brand image
External Environment Analysis or Scanning

Different factors that are considered while scanning the external

environment of the organisation like Competitors, customers, suppliers,
technology, social and economic factors, political and legal issues, market
trends, etc. It consists of two factors namely:

 Opportunities
 Threats
Opportunities

An opportunity of the organisation‘s environment is considered as its most

favorable situation. These are the circumstances that are external to the
business and can become an advantage to the organisation. For example,
different opportunities for a firm can be:
▪ Social media marketing
▪ Mergers & acquisitions
▪ Tapping of new markets

▪ Expansion in International market

▪ New Product Development
Threats

Threats of an organisation are current or future unfavorable situations that

may occur in its external environment. For example, below are a few major
threats for a firm:
▪ A new competitor in the market
▪ The slow growth of the market

▪ Changing customer preferences

▪ Increase in the bargaining power of consumers

▪ Change in regulations or major technical changes

32
3. Political Economic Social and Technological Analysis (PEST)

PEST technique for a firm‘s environmental scanning includes analysis of

political, economic, social, and technical factors of the environment.

Political Economic
Factors Factors

Identifying
Opportunities
and Threats REACT

Social Technological
Factors Factors

Figure 3.1 Political Economic Social and Technological Analysis

(PEST)
a) Political or Legal Factors

Changes in political/legal factors affect the business widely. The various

economic factors affecting the business are as follows:

 Tax Policy,
 Labor Law,
 Environmental Law,
 Trade restrictions, tariffs
So, scanning of these factors is very important for taking the strategic
decision of the business.

b) Economic Factors

Different economic Factors which affect the business are listed below:
 Economic Growth Rate,
 Interest Rate,
 Exchange Rate,
 Inflation,
 Unemployment Rate,
 Cost Of Labor,
 Economic Trends,
 Disposable Income of Consumers,
 Monetary Policies Etc.,

33
For example, in the case of high unemployment, a company may
decrease the prices of its products or services and in opposite situation
i.e., when the unemployment rate is low then prices can be high. This
happens because if more customers are unemployed then by lowering the
prices, an organisation can attract them.
c) Social or Cultural Factors

PEST analysis also takes into consideration social factors, which are
related to the cultural and demographic trends of society. Social norms
and pressures are key to determining a society‘s consumerist behavior.
Factors to be considered include the following
 Attitude, trends, and behavioral aspects of society
 Cultural Aspects
 Health Consciousness
 Age distribution
These factors create an impact on the functioning of the organisation.
Studying and understanding the lifestyle of consumers is very much
required to target the right audience and to offer the right product or
services based on their preferences.
For example, Issues and policies related to the environment like pollution
control are also being considered by organisations to ensure that it
operates in an environment-friendly atmosphere. Taking care of the
cultural aspect of different countries while doing business at the
international level, is also an important factor.
d) Technological Factors:

Technological Factors are linked to innovation in the industry, as well as

innovation within the overall economy. Not being up to date on the latest
trends of a particular industry can be extremely harmful to operations.
Technological Factors include the following:
 Research & Development Activity
 Automation
 Technological Incentives
 The rate of change in technology
To maximize profits, production should be handled most cost-effectively
and this, technology has an important contribution.
For example, an increase in computer and internet-based technology is
playing a major role in the way organisations are distributing and
marketing their products and services. Also, different advancements in
technologies like automation of the manual process and use of machinery

34
based on more advanced and latest technologies, more investment in
research & development by organisations have increased their efficiency
by increasing production in less time, cost reduction and better investment
in the long run.

LET US SUM UP

This unit provides a comprehensive knowledge of the many methods used

by the organisation to assess the environment and how successful
strategists seek to foresee what will happen next or attempt to affect the
environment in a positive direction. It provides a detailed breakdown of
the stages involved in environmental analysis. It provides an outline of the
advantages associated with environmental analysis as well as its limits.
CHECK YOUR PROGRESS

Choose the Correct Answer:

1. Environmental analysis includes .
a) Ideologies b) Geographical, Economic, Political

c) Scriptures d) Marketing and Finance

2. Environmental analysis consists .
a) Scanning of Information

b) Collection of Data
c) Forecasting, Monitoring and Assessment
d) All the above

3. The quick techniques used for environmental scanning is .

a) PEST b) SWOT
c) QUEST d) None of the above

4. The Factors are linked to innovation in the industry, as well as

innovation within the overall economy .
a) Political Factors b) Social or Cultural Factors

c) Economic Factors d) Technological Factors.

5. The factors are considered while analyzing the internal environment
of an organisation is .
a) Strength and Weaknesses b) Opportunities and Threats

c) Strength and Opportunities d) Weaknesses and Threats

35
GLOSSORY

Environmental : Environmental analysis is the process through

Analysis which an organisation monitors and
comprehends various environmental forces that
affect the organisation and determine the
opportunities and threats that lie ahead

Forecasting : Forecasting is a technique that uses historical

data as inputs to make informed estimates that
are predictive in determining the direction of
future trends.
Scanning of : It is the process of gathering information about
Information events and their relationships within an
organisation's internal and external
environments. It helps management determine
the future direction of the organisation.

Quest Analysis : The QUEST Analysis, or ―Quick environmental

scanning Technique,‖ describes a procedure
that allows for the estimation of diverse
environmental variables and evaluates their
impact on an organisation.

Swot Analysis : SWOT analysis stands for strengths,

weaknesses, opportunities and threats analysis
of a business environment. Strengths and
weaknesses are an organisation‘s internal
factor while threats and opportunities are
considered as external factors
Pest Analysis : PEST technique for a firm‘s environmental
scanning includes analysis of political,
economic, social, and technical factors of the
environment.

SUGGESTED READINGS

1. K. Aswathappa, (2011), Business Environment for Strategic

Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,

36
 26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES
1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A |
INTRODUCTION TO BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.b) 2. d) 3. c) 4. d) 5. a)

37
 BLOCK -2

Unit 4 : Managing Diversity and Nature, Scope of Business

Unit 5 : Political Environment

Unit 6 : Business and Government

Unit 7 : Legal Environment

38
UNIT 4

MANAGING DIVERSITY AND NATURE,

SCOPE OF BUSINESS
STRUCTURE

Overview

Learning Objectives
4.1 Introduction

4.2 Dimensions of Managing Diversity

4.3 Significant of Workforce Managing Diversity

4.4 Techniques of Managing Diversity

4.5 Challenges of Diversity management
4.6 Introduction to Business
4.6.1 Definition to Business

4.6.2 Nature of Business

4.6.3 Objectives of Business
4.6.4 Significance or Important of Business
4.6.5 Scope of Business

Let Us Sum Up
Check Your Progress

Glossary
Suggested Readings

Web Resources
Answer to Check Your Progress
OVERVIEW

Managing for diversity is a management strategy that intends to make

productive use of human resources and remove the ethnic and other
differences between individuals. It is based on the principle that if they are
well managed, diverse teams will produce better results and diverse
companies will gain market advantage. The basic concept of managing
diversity accepts that the workforce consists of a diverse population of
people. The diversity consists of visible and non-visible differences among

39
employees such as sex, age, education, religion, language, family
background, race, disability, personality and work style etc., Hence
diversity in management focuses for taking effective measures in
harnessing these differences or balancing these differences effectively,
which would create a productive environment in which everybody feels
they are valued properly, their talents are being fully utilized whereby the
organisational goals are met easily and successfully.

LEARNING OBJECTIVES

After studying this unit, you will be able to;

 explain meaning of managing diversity

 discuss the dimensions of managing diversity
 describe the significance of workforce managing diversity
 examine the techniques of managing diversity
 analyze the challenges of diversity management
 explain the meaning of business
 discuss the nature of business
 describe the objectives of business
 explain the significance or importance of business
 discuss the scope of business.
4.1 INTRODUCTION

It means creating an organisational climate in which a heterogeneous

workforce performs to its best potential; without the organisation favoring
or un-favoring any particular segment of workforce with a view to
facilitating the best attainment of organisational goals.

4.2 DIMENSIONS OF MANAGING DIVERSITY

Diversity exists in the organisation due to the following

factors/dimensions.
i) Age: People belonging to different age groups cause diversity in
workforce. Young people may be enriched with health, merit, capacity for
hard-work etc.; while elderly people may possess more maturity than their
junior counterparts and are full of experiences of life.
ii) Gender: Male workers are usually aggressive, bold and materialistic;
while female workers possess sympathy for others and are more
concerned with quality of life. What is important to observe is that people
of both sexes have material differences in outlook, nature, habits etc.; as
differences between males and females are the design of God who
created mankind.

40
iii) Education: In an organisation people may range from less educated
to highly educated. Educated people have a broad outlook and are open-
minded. They are endowed with logic and rationality and usually dislike
discrimination among individuals on petty grounds of caste, color, religion
etc.
iv) Culture: Culture is a complex of race, religion, language, social
traditions and values etc. People from different cultural backgrounds may
have ethnic orientations i.e., a sense of favoritism towards their nation,
race or tribe, which they belong to.
v) Psychology: In an organisation, there are people with different
psychology. Some may be optimistic or pessimistic; some may be bold or
timid or so on. Psychology may be a gift of Nature or a manifestation of
family background or social affiliations.

4.3 SIGNIFICANCE OF WORKFORCE DIVERSITY MANAGEMENT

Workforce diversity management is significant for the following reasons:
i) Ability to Deal with Diverse Market: Culturally diverse workforce can
better appreciate the needs, feedings, and attitudes of culturally diverse
consumers. Thus, workforce diversity increases the competence of a
corporation to deal with a market; that consists of diverse consumer
groups in respect of age, sex, culture etc.
ii) Better Decision-Making: People from heterogeneous backgrounds
may aid management in better decision-making, by offering suggestions
from a wide range of perspectives and orientations. In fact,
heterogeneous groups of people may be more creative and innovative;
when they pool their knowledge and experiences and agree on a common
solution to a tricky problem; which might aid management in making
excellent decisions for the organisation.
iv) Better Human Relations: Workforce diversity management aims at
developing and nurturing a common organisational culture and climate;
which enable people from diverse culture and backgrounds to co-exist
peacefully. Such a common organisational culture and climate leads to
better human relations in the enterprise and produces all-round
organisational and managerial efficiency.
v) Preventing Unnecessary Labor Turnover: When in an organisation
there is good workforce diversity management; women and other
dissatisfied people are prevented from leaving the organisation. In case
otherwise, when there is large labor turnover because of poor workforce
diversity management; investment made in manpower may go waste, with

41
other bad consequences for the organisation. In fact, employees leave the
organisation when they do not feel comfortable and duly cared for by
management.
vi) Building of Goodwill of the Enterprise: Companies with excellent
workforce diversity management build goodwill in the society. As such,
talented people of society with diverse backgrounds and culture get
attracted towards it for seeking suitable employment. Such companies
never have a problem of the scarcity of skilled, educated and talented
human capital.
4.4 TECHNIQUES OF MANAGING DIVERSITY
i) Creating Awareness of Diversity: Management must create
awareness in the organisation that differences among people as to age,
sex, education, culture etc. exist in workforce; so that people may try to
understand one another in a more rational and friendly manner.
ii) Creating Conditions for Common Organisational Culture:
Organisation must develop cross-cultural training programmes creating
conditions for development of a common organisational culture and
climate. Such common culture will create an environment in which a
diversified work force can co-exist comfortably, peacefully and happily.
iii) Programmes of Special Care for Diversified Workforce:
Management must design programmes of special care, like the following:
 Care for elderly people
 Special work schedules to provide convenience to female
workers etc.
iv) Career Development Programmes: There must be programmes for
identifying each individual‘s strengths, weaknesses and potential for
career development; so that the organisation can capitalize on the
peculiar features of a diversified workforce.
v) Avoiding Discriminations: A very significant technique for excellent
workforce diversity management is to avoid any sort of discrimination
among people on the basis of age, culture and specially sex. In the most
developed country the U.SA, the Glass Ceiling Commission states that
between 95% and 97% of senior managers in the country‘s biggest
corporations are men. (The term ‗glass ceiling‘ describes the process by
which women are barred from promotion by means of an invisible barrier).
vi) Prevention of Sexual Harassment: With the entry of a large number
of women in organisations, the phenomenon of sexual harassment is
usually witnessed; which management must prevent by all means and at

42
all costs. Sexual harassment includes a range of actions, like –
unwelcome touching, joking, teasing, innuendoes (indirectly bad and rude
remarks), slurs, and the display of sexually explicit materials.
vii) Committees of Diverse Members: Committees of diverse members
must be formed for evaluating and addressing complaints of people,
regarding their sad experience of working in the organisation
4.5 CHALLENGES OF DIVERSITY MANAGEMENT

Embracing and managing diversity in today's business world is not a

recommendation – it's an essential part of successful business practices.
Even when business leaders understand and value the differences in the
people in their companies, they face challenges when managing diversity
programs. Leaders need to spend the time necessary to fully understand
the issues that can lead a w ell-intended diversity program to backfire and
create problems.

i) Understanding the Value of Differences: Business leaders know that

embracing diversity brings various voices to a team, improves morale and
increases overall productivity. However, when they develop and manage
diversity programs, managers have difficulty understanding the value of
each person's unique abilities or voice. This may be the result of
unintended personal bias and differences. Even with diversity programs
in place, some team members may be reluctant to share ideas or provide
feedback based on historical cultural experiences.
ii) Help Employees Understand their Value: Managers work with
employees to help them understand their own value to the team. Holding
team-building exercises encourages every member to work on a task that
is not job-related while getting to know other employees in different ways.
They schedule diversity potlucks where employees share their culture
through food. By going beyond policies and creating diversity-building
programs, business leaders motivate everyone on the team to share and
celebrate.

iii) Combating and Managing Discrimination: While a business leader

may try to develop a diversity program to build team spirit and morale,
there may be instances where certain employees still have conflicts.
Discrimination not only kills team morale and negatively impacts
performance, but it is a human resources issue that companies need to
address before facing lawsuits. Managing discrimination is challenging.
There may be times where someone claims to be discriminated against
by another employee when no discrimination occurred.

43
iv) Publishing and Implementing Workplace Rules: Business leaders
protect themselves against discrimination and effectively manage
diversity platforms by publishing and implementing workplace rules and
protocols that are the same for every complaint. Employee handbooks
need to clearly explain the company diversity and anti-discriminatory
policies. They should also give employees protocol to follow when they
feel there is an infraction of the policy. Investigations should be thorough
and unbiased with documentation and actions taken when necessary.

v) Including and Celebrating Everyone: Diversity by its definition

attempts to celebrate people for who they are, their backgrounds and what
makes them unique. Managing programs runs the risk of incidentally
leaving out one particular group whether it be religious, ethnic or lifestyle.
What business leaders have come to realize is that in growing diversity
programs to celebrate one group, there is the risk of offending another.
For example, as businesses moved toward gender-neutral restroom
policies, some groups celebrated the progress being made toward the
transgender community while others became outraged. It is this fine line
that managers must walk when they develop policies and programs that
support office diversity.
4.6 INTRODUCTION TO BUSINESS

Literally speaking, the term ‗business‘ means ‗busy‘ or ‗occupied‘. In

practice, business includes certain economic activities in which people are
busy or engaged. Such activities relate to production, distribution, trading
or exchange of goods and services to satisfy the needs of people so as to
earn income or profit. A business is created to provide products or
services to customers. If it can conduct its operations effectively, its
owners earn a reasonable return on their investment in the firm. In
addition, it creates jobs for employees. Thus, businesses can be beneficial
to society in various ways.
A business (or firm) is an enterprise that provides products or services
desired by customers. Along with the large, businesses such as Tata,
Reliance, there are many thousands of small businesses by the people
which provide employment opportunities and produce products or
services which satisfy the customers in great way.
4.6.1 Definition

―Business may be defined as human activity directed towards or acquiring

wealth through buying and selling of goods.‖ – Lewis H. Haney

44
―Business may be defined as an activity in which different persons
exchange something of value, whether goods or services, for mutual gain
or benefit‖ – Peterson and Plowman

―Business is an enterprise engaged in the production and distribution of

goods for sale in the market or rendering service for a price.‖ – R. N.
Owens

4.6.2 NATURE OF BUSINESS

i) It is a Human Activity: Business is a human activity which makes

available goods and services to the society. It is not engaged for mere
production but expecting the exchange value known as return for their
supplies made to the people. Hence giving gifts to somebody will not be
treated as business.
ii) Continuous Economic Activity: In business an economic activity
must be repeated again and again. For example, if a person sells his own
house, this activity does not come under the framework of business
iii) Profit Motive: Any economic activity which leads to generation of profit
is considered as business. Suppose if a person is engaged in social
service or preaching about the religion cannot be treated as business.
iv) Entrepreneurship: One cannot run any sort of business without the
element of entrepreneurship irrespective of the size of the business.
Business can only be run by a daring person who has the ability to face
risk of loss.
v) Creation of Utility: Man, only converts the form of resources which are
provided by the nature according to his need and preferences. The
business changes the form, place and possession of utility of goods and
makes them available in usable form. Hence it is stated that the business
creates the utility of the things so that these can be consumed.

4.6.3 OBJECTIVES OF BUSINESS

Success in business depends on proper formulation of its objectives.

Objectives must be clear, and attainable. Thus, the objectives of business
may be classified as –

 Economic objectives
 Social objectives
 Human objectives
 National objectives
 Global objectives
Now let us discuss these objectives in detail.

45
Economic Objectives

The first and predominant objective of any business is to earn profit. All
the activities which he undertakes aim to reach the goal of earning profit.
Some of the main economic objectives of business are:
 Earning of adequate profits;
 Exploring new markets and creation of more customers;
 Growth and expansion of business operation;
 Diversification of business operations.
 Making innovations and improvements in goods and services; and
 Making use of available resources in the best possible manner.
Social Objectives

Social objectives are those, which are desired to be achieved for the
benefit of the society. Some of the major social objectives are:
 Production and supply of quality goods and services to the society;
 Selling goods at reasonable prices;
 Avoidance of unfair practices like hoarding, black-marketing, over-
charging, etc.;
 Contributing towards the general welfare and upliftment of the
society;
 Ensuring fair return to the investors;
 Taking steps in the direction of consumer education; and
 Conserving natural resources and wild life and protecting the
environment.
Human Objectives

It primarily refers to the objectives aimed at safeguarding the interest of

its employees and their welfare. Some of the major human objectives are:
 Providing fair remuneration and incentives to the employees;
 Arrangement of better working conditions and proper work
environment for the employees;
 Providing job satisfaction by making the jobs interesting and
challenging, putting the right persons in right job;
 Providing the employees with more and more promotional
opportunities;
 Organizing training and development programs for the growth of
the employees; and
 Providing employment to the backward classes of the society and
people who are physically and mentally challenged.

46
National Objectives

These are the objectives of fulfilling the national goals and aspirations.
Some of the National objectives are:

 Creation of employment opportunities

 Promotion of social justice
 Produce and supply goods in accordance with the national interest
and priorities
 Payment of taxes and other dues honestly and regularly to the state
and nation
 Helping the state in maintaining law and order by promoting good
industrial relations
 Implementing government‘s economic and financial policies.
Global Objectives

These are the objectives to face the challenges of global market. Some of
the global objectives are:

 Making available globally competitive goods and services; and

 Reducing disparities among rich and poor nations by expanding its
operations.
4.6.4 SIGNIFICANCE OF BUSINESS OR IMPORTANCE OF BUSINESS

Business is an integral part of modern society. It is an organized and

systematized activity for achieving profit. It is concerned with activities of
people working towards a common goal. The modern society cannot exist
without business. The need and importance of business in society can be
described as follows:

i) Improvement in standard of living: Business helps people in general

to improve their standard of living.
ii) Proper utilisation of resources: It leads to effective utilisation of the
scarce resources of society. It provides facility of mass production which
ultimately brings economies of scale.
iii) Better quality and large variety of goods and services: It involves
production, purchase and sale of goods and services at reasonable price.
Customer‘ satisfaction is the backbone of modern business. Services
such as supply of water, electricity etc. may be considered highly
significant for the welfare of the community
iv) Creates utilities: Business makes goods more useful to satisfy human
wants. It adds to products the utilities of person, time, place, form,

47
knowledge etc. Thus, people are able to satisfy their wants effectively and
economically.
vi) Employment opportunities: It provides employment opportunities to
large number of people in society.
vii) Workers’ welfare: Business organisations these days take care of
various welfare activities for workers. They provide safer and healthier
work environment for employees.
4.6.5 SCOPE OF BUSINESS
The term business includes the industry and commerce and trade.
1. Industry

The word ―Industry‖ refers to the business activities which are connected
with the extraction and production or manufacturing of products. The
product produced by an industry is either used by the large consumers or
again by the industry. If the product is used by the consumer, it is called
consumers‘ goods such as clothes.

If the product is used again by the industry, it is called the producer‘s

goods or capital goods. In a case when a product produced by the industry
is further processed into finished products for other purposes, they are
called intermediate goods. e.g., plastic.

The industry is further divided into types on the basis of business activity:
i) Extractive Industries: The industries which extract, and manufacture
raw materials from above or under the Earth‘s surface are known as
Extractive Industries and they include mining, fisheries, forestry and
agriculture, etc.
ii) Genetic Industries: The industries which are involved in reproducing
and multiplying certain species of animals and plants and sell them in the
market to earn a profit are named as Genetic Industries. These industries
include cattle breeding farms, poultry farms and plant market, etc.

iii) Constructive Industries: The industries which are involved in the

construction of building, canals, bridges, dams and roads, etc. are called
Constructive Industries.
iv) Service Industries: The industries which are involved in
manufacturing the intangible goods which cannot be seen but felt such as
services of professionals like doctors, lawyers are examples of Service
Industries.

48
2. Commerce

The second component of the scope of business is Commerce. It involves

the buying and selling of goods and all the activities which are associated
with the transfer of goods from the production source to the ultimate
consumers or destination. The ranges of activities related to Commerce
take place through:

3. Trade

The process of buying and selling goods is called Trade. It is the process
of exchanging goods and services amongst the buyers and sellers and
both of them earn profits. Trade can be classified into two types; internal
and external.
i) Internal Trade: The process of buying and selling goods within a
country is called internal trade. The internal trade can be either wholesale
trade or retail trade.
ii) Wholesale Trade: In wholesale trade, the goods are purchased in bulk
from the producers and sell them to the retailers. These retailers then sell
these goods to the final consumers.
iii) Retail Trade: In the retail trade, the retailer sells goods and services
to the final consumers.
iv) External Trade: The process of buying and selling goods between the
two countries is called external trade. The external trade has two types;
import trade and export trade.
The elements which help in the purchasing of goods and services are
called aid to trade. There are certain constituents that are essential for the
progress of the trade and are as follows:
i) Transport: By using different ways of transport, the goods are
transported from industry to the consumers. It includes railways, ships,
airlines, etc.
ii) Insurance: Insurance is very important to aid to trade. Insurance
reduces the risk of damage to goods due to fire, flood or earthquake, etc.
by paying a good amount in this regard.
iii) Warehousing: Warehouses are used to keep the goods and are
released and are delivered to the market when demanded. Thus,
warehousing plays an important part to overcome the barrier of time and
helps the goods reach the consumers in a short span of time.
iv) Banking: Commercial banks play an important role in financing trade
activities. They provide funds to the traders for stock holding and

49
transporting the goods. They also support the producers in purchasing
and receiving at both national and international levels. The banks also
offer credit facility in the form of cash credit, overdrafts and loans to the
traders.

v) Advertisements: Advertisements play an important part in selling the

good to the consumers. The advertisement is either shown on television
or printed in newspaper or magazines etc. and help the consumers to
choose their desired product. Thus, advertisements are very important for
the seller as well.
LET US SUM UP

We can understand that the world‘s increasing globalisation and

increasing population bring more interaction among people from diverse
backgrounds. Most workplaces are made up of diverse cultures, age,
education etc., so organisations need to learn how to manage this
diversity in management. We understand different organisations adopt
different technique like career development programs, avoiding
discrimination, and committee of diverse management etc., to handle the
diverse situations effectively. It requires the organisations to review their
management practices and develop new and creative approaches to
managing people. Positive changes will increase work performance and
customer service.

This unit gives the clear understating of the objectives of business and
scope of business in detailed way along with diversity exists in the
organisation. The significance of diverse management explains the
necessity to adopt diverse management technique to educate everyone
about diversity and its issues, including laws and regulations.
CHECK YOUR PROGRESS

Choose the Correct Answer:

1. Which is Not considered a core Dimension of Managing Diversity?

a) Age b) Gender
c) Weight d) Ethnicity
2. Workforce Diversity Management is significant for .
a) Decision Making
b) Better Human Relation
c) Reduction of Labour Turnover and Building of Goodwill
d) All the above

50
3. Which of the following does not characterize business activity?

a) Production of Goods and Services

b) Presence of Risk

c) Sale or Exchange of Goods and Services

d) Salary or Wages
4. Which of the following cannot be classified as an objective of business?
a) Investment b) Productivity
c) Innovation d) Profit Earning
5. Business is .

a) Art b) Science
c) Both Art and Science d) None of these
GLOSSARY

Diversity : It means acknowledging people's differences

and recognizing these differences as valuable;
Management

Human Relations : It is defined as relations with or between

people, particularly in a workplace setting.

Labour Turnover : Labour turnover, also known as employee or

staffing turnover, is the frequency with which
the employees of an organisation leave their
jobs.

Discrimination : Discrimination is the act of making

unjustified, prejudiced distinctions between
people based on the groups, classes, or other
categories to which they belong or are
perceived to belong.
A rapid increase in the number or amount of
Proliferation :
something.
Rural Market : Rural market includes all business activities
which involved in flow of goods and services
from producers to rural consumers.

SUGGESTED READINGS
1. K. Aswathappa, (2011), Business Environment for Strategic
Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,

51
 26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES
1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A |
INTRODUCTION TO BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.c) 2. d) 3. d) 4. a) 5. c)

52
UNIT 5

POLITICAL ENVIRONMENT
STRUCTURE
Overview
Learning Objectives
5.1 Introduction
5.2 Basic Principles of Our Constitution
5.3 Federal System of the Government
5.4 The Directive Principles of The State
5.5 The Fundamentals Rights and Duties
5.6 Difference Between Fundamental Rights and Directive
Principles
5.7 Criticism of the Directive Principles
Let Us Sum Up
Check Your Progress
Glossary
Suggested Readings
Web Resource
Answer To Check Your Progress
OVERVIEW

In an economy, all the sectors of business will be functioning within the

framework of the rules and regulations of the country. All types of business
own their existence through the privileges guaranteed under the
constitution of the country. The Indian Constitution incorporates a number
of matters that are economically very significant and have far – reaching
implications. The socio economic and political objectives of the Indian
Republic and the basic guiding principles of State functioning have been
clearly laid down in the preamble to the constitution, in the Fundamentals
Rights and in the Directive Principles of state policy. The Constitution also
outlines the economic powers and responsibilities of the various
Governments and the State Government
LEARNING OBJECTIVES

After studying this unit, you will be able to;;

 describe the basic principles of our constitution

53
  discuss the concept of federal system of government
 explain the importance of directive principles of state policy
 analyse the fundamental rights and duties of the citizen
 examine the differences between fundamental rights and directive
principles.
5.1 INTRODUCTION

Before knowing the feature of the Indian Constitution, it is essential to

know about its preamble. The Constitution of every country in the world
has its own preamble. The preamble reflects the views and the objectives
of the constitution-makers and also the basic values of the country and
the constitution. The makers of the constitution had a dream of an ideal
society which was stated in the following

―We, the people of India, having solemnly resolved to constitute India into
a Sovereign, Socialistic, Secular, Democratic, Republic and to secure for
all its citizens, justice – Social, Economic and political; Liberty of thought,
expression, belief, faith and worship; Equality of status and opportunity,
and to promote among them all fraternity, assuring the dignity of the
individual and the unity and integrity of the Nation‖. The preamble as given
above clearly states that our country is now sovereign in all matters. The
ultimate source of all power is ‗the people.‘

5.2 BASIC PRINCIPLES OF OUR CONSTITUTION

i) Sovereignty: This is the main feature of the Indian Constitution. India
is completely an independent state now. We are not subordinate or slave
to any country in external or internal matters. We, the Indians run our own
government. Our government is now capable of making its own decision
in internal and foreign affairs.
ii) Democracy: Democracy means a government which is run by
representative who are elected on the basis of adult franchise. This means
that each adult, man and women, elects a representative of his or her own
choice. The representatives are elected after every five years. These
representatives, together, form the government.
iii) Secularism: The State gives equal treatment to all religion. It does
not favour any particular religion. The Constitution gives complete
freedom to its citizens to practice and preach their own religion.
iv) Socialism: The achievement of socialism, based on economic and
social equality, is the chief goal of our constitution. It provides equal
opportunities in education, employment, justice etc., to all. Special
facilities have been given to the backward and the downtrodden people.

54
The Directive principles have been incorporated for the establishment of
a Welfare state. Economic disparities, especially, create unrest in the
country; under such conditions the country cannot make any progress.
Therefore, efforts have been made to create a society based on social
and economic equality. Socialism is one of our national goals.
5.3 FEDERAL SYSTEM OF THE GOVERNMENT

The Federal system of the government is that system where powers of

the Central Government and the State Government are well defined in the
Constitution. Our Constitution sets up a federal system of the
government. In our country, there are 27 state and 5 union territories.
There is separate government at the Centre and in the states. The
division of powers between the Central and the state Governments has
been made according to the three lists in the Constitution.
i) The Union list: Railways, Posts and telegraph, armed forces, external
affairs, etc., are some of the subjects included in this list.
ii) The State List:: The subjects of local important like the police, jails,
education, agriculture, health, etc., are enumerated in this list.
iii) The Concurrent List: Both the parliament and the state legislatures
can make laws on the subjects given in this list.
iv) Single Citizenship: Our constitution provides for a single citizenship
of this country. The Citizen of each state is a citizen of India. We do not
have the system of double citizenship in Indian. A person may be living in
Madhya Pradesh or Maharashtra but he is called as the citizen of India.
v) The Parliamentary System: Like Britain, there is the parliamentary
system of Government in India. Real Power is vested in the parliament.
The Ministers in the Central Cabinet are members of the Parliament. The
Prime Minister and other Ministers are answerable to the parliament for
their actions.
5.4 THE DIRECTIVE PRINCIPLES OF THE STATE POLICY
To bring about economic and social welfare in the country, the Directive
principles of the State policy have been stated in our Constitution. The
purpose is to bring social equality in the country; special directions have
been given for the uplift of the backward communication and weaker
section of our society. There is a provision to make special laws for
women. The Directive principle direct the Government to work for the
social well-being, Society, economic and social prosperity of the nation.
There is a Directive principle which aims at achieving free and compulsory

55
education for all children up to the age of 14 years. The Directive
principles also provide equal pay for equal work for both men and women.
5.5 THE FUNDAMENTAL RIGHTS AND DUTIES

The Fundamental Rights are defined in Part III of the Indian Constitution from
article 12 to 35 and applied irrespective of race, place of birth, religion, caste,
creed, gender, and equality of opportunity in matters of employment

The fundamental right is the necessary condition for the development of

the personality of an individual. These help in promoting democratic
values. There are six fundamental rights guaranteed in the constitution
necessary for the development of the personality of the citizens.
Rights and duties are interrelated. One man‘s duty is another man‘s
rights. Neglect of duties is curse for humanity and it hampers the growth
of the society. When citizens forget their duties there is lawlessness in
the society. Therefore, the proper balance should be maintained between
rights and duties.

The Indian Constitution has guaranteed some important rights. Even the
Parliament or the Legislative Assemblies cannot make any law which
encroaches upon these rights. Any law which interferes with fundamental
rights can be set aside by the Supreme Court. It is only during emergency
that the fundamental rights can be suspended
Our constitution has guaranteed six types of right to the citizens:
i) Right to Equality: Our constitution gives equal treatment to all citizens.
The State cannot discriminate on the basis of religion, caste, creed, sex,
language, place of birth, etc. The state gives equal opportunities to all
individuals, on the basis of abilities, in the fields of education, employment,
profession and earning a livelihood. Untouchability has been abolished.
Scheduled castes, scheduled tribes and other backward classes have
been given special facilities. Due to their backwardness, some seats have
been reserved for them in school, colleges and government service, so
that they may come at par with other sections of society. All the titles
awarded before Independent have been abolished. In free India such
distinctions as ‗Bharat Ratna‘ and ‗Padmashri‘ are conferred for
outstanding service to the country.

ii) Right to Freedom: Every citizen has the rights to read and write,
speak, hold public meeting peacefully and form any association or union.
A citizen is free to go to any part of the country and settle there. He can
take up any job or trade anywhere in India. He is also free to acquire any
property anywhere in the country.

56
iii) Right against Exploitation: The purpose of this right is to prevent
any exploitation in the society. It is offense to buy or sell men, women
and children. The constitution prohibits forced labour or ‗beggar‘. Nobody
can be asked to work against his wishes. No child under the age of 14
years can be employed to work un any factor or mine.
iv) Right to Freedom of Religion: Every citizen in India has the freedom
to practice his own religion. People of different religion have also the
freedom to preach their religion in peaceful manner. They can also form
religious association for religious purposes.
v) Cultural and Educational Rights: Every Indian citizen has the right to
preserve his own language, script and culture. People in different parts
of the country speak different languages. They take pride in their language
and culture. They have the right to establish their own education
institutions.
vi) Right to Constitutional Remedies: Each citizen has the right to
approach to court in order to protect his fundamental rights. If fundamental
rights are curtailed or taken away by any law enacted by the government,
the citizen can approach the Supreme Court and Challenge the action of
the Government. This is why the court have been described as the
protectors of citizens‘ rights.
Fundamental Duties of our constitution

Our constitution was enforced on January 26, 1950. But nothing was said
about the duties of the citizens in the Constitution. In order to make
people conscious of their duties, the Constitution was amended in 1986
and the fundamental duties of the citizens were incorporate in it. These
are as under:

i) To show respect to the Indian Constitution, the National Flag and the
National Anthem.
ii) To have faith in the ideals of the national freedom movement.
iii) To protect the integrity and unity of the country.
iv) To defend and serve the country.
v) To develop a spirit and of goodwill and brotherhood.
vi) To inculcate a scientific attitude among people.
vii) To preserve ancient culture.
viii) To protect the property of the nation.
ix) To protect forest, lakes and wild-life.
x) To strive individually and collectively for the achievement of national
goods.

57
There is a close relationship between fundamental rights and duties as
enshrined in the constitution. The rights and duties are complementary to
each other. We cannot think of the one without the other. The rights and
duties are interrelated.

Directive Principles

An analysis of the Directive principles shows that elements of socialism,

Gandhian principles and liberalism have been combined to get the best
results out of these.
i) Socialist principles in the Directives: Directives relating to adequate
means of livelihood, prevention of concentration of wealth, equal pay for
equal work for both men and women, care of the health of children, right
to education, work and employment, old age sickness and disablement
benefit, a living wage, a decent standard of living, advancement of social
and cultural opportunities, etc., go to show that in the long run, the state
should strive to have socialistic principles implemented in our systems.
Most of these Directives had been included in the list of fundamental Right
in the former U.S.S.R.
ii) Gandhian Principles in the Directives: Directives relating to the steps
to organize panchayats for self-government, promotion of cottage
industries, prevention of slaughter of cows and calves and other mulch
and draught animals, special care to promote the interest of weaker
sections of the society, prohibition of the consumption of liquor and other
intoxicating drinking as well as drugs which are injurious to health, etc.,
go to show the need for implementing Gandhian ideologies in our system.
iii) Examples of liberalism: Directive to secure for the citizens a uniform
civil code, free and compulsory education for all, raising the level of
nutrition, improvement of public health development of agriculture and
animal husbandry on modern scientific lines, separation of judiciary from
the executive, promotion of international peace and settlement of dispute
by arbitration, provision of legal aid to the poor and protection of
environment and also wildlife and forest, etc., speak a lot about the duties
of the government.

5.6 DIFFERENCES BETWEEN FUNDAMENTAL RIGHTS AND

DIRECTIVE PRINCIPLES

The Fundamental right are stated in part III of the Constitution and the
directive Principles of State policy are indicated in part IV of the
Constitution. The differences between the two are as follows:

58
 While Fundamental Rights constitute limitations upon the State
actions, the Directive Principles are in nature of instruments of
institution to the government of the day to certain things and to achieve
certain ends by their actions.
 The Directives, however, require, to be implemented by legislation. In
the absence of legislation implementing the policy laid down in a
Directive, neither the State nor an individual can violate any existing
law or legal right
 From the standpoint of the individual, the difference between the
Fundamental Right and the Directive is that the former is a justifiable
one, while the latter non-justifiable. In other words, the Courts are not
competent to compel the government to carry out any Directive, while
the fundamental rights can be enforced in the courts by the individuals.

For example, an unemployed person cannot sue the government in the

court of law for getting employment under the Directive ‗Right to Work‘
(Art. 41). On the other hand, if a person is discriminated on the basis of
religion or caste or sex in giving employment, the aggrieved person can
sue the government in a court of law under the Fundamental right which
prohibit discrimination on religion and caste etc., A law which contravenes
a Fundamental Right can be declared by the appropriate court to be void,
but a law which is contrary to a Directive cannot be so held to be void. If
there is any conflict between part III and part IV of the constitution, i.e.,
conflict between ‗Fundamental Rights‘ and ‗Directive Principle‘, the former
will prevail in the courts. The Directive Principle of State policy has to
conform to and run subsidiary to the chapter of Fundamental Rights.
5.7 CRITICISM OF THE DIRECTIVE PRINCIPLES
The Directive Principle of State Policy contained in part IV of the
Constitution of India have been criticized on several ground. As the
Directive Principle is not enforceable by the Courts, critics regard them as
useless. They are supposed to be mere pious wishes with high sounding
words which serve no purpose. This expression may serve to mislead the
ignorant public and be used as a vote-catching device. They are described
as superfluous because, every State strives to bring about the welfare of
its people. Some regard them as meaningless, as there is no sense in
Sovereign State giving directions to itself. Some of the principles are of
doubtful validity. The directives of ‗Prohibit of liquor and intoxicating has
not yet been fully realised, as it deprives the State Revenues. When there
is huge unemployment in the State, the Article 41 of the Directive ‗Right
to Work‘ becomes rather ridiculous. These Directives have no ‗legal

59
sanction‘ and these can be utilized by the whims and fancies of the
politicians.
LET US SUM UP

The characteristics of the Indian constitution are highlighted in this unit. It

explains the Federal System of Government, the Basic Rights and
Responsibilities of Citizens, and the Directive Principles of the State
Policy. The distinctions between fundamental rights and guiding principles
are evident to us. Being an Indian citizen, not knowing the law is not an
excuse. It gives an understanding of constitutional provisions fundamental
rights and directive principles of state policy.
CHECK YOUR PROGRESS
Choose the Correct Answer:

1. The main feature of the Indian Constitution is .

a) Sovereignty b) Socialism
c) Secularism d) Democracy
2. is the form of the government in which power is
concentrated in one level of the government.
a) Federalism b) unitary form of government

c) a and b d) None of the above

3. The Directive Principle direct the Government to work
for .
a) social well-being b) Society

c) Economic and social prosperity d) All the above

4. The Indian Constitution has guaranteed types of right to
the citizens
a) Four b) Five c) Six d) Seven

5. Usually, federalism has two levels of government state and

government.

a) Local Government b) District Government

c) Central Government d) All the above

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GLOSSARY

Constitution : The Constitution of India is the supreme law

of India. The document lays down the
framework that demarcates fundamental
political code, structure, procedures, powers,
and duties of government institutions and
sets out fundamental rights, directive
principles, and the duties of citizens

Federal System : The Federal system of the government is

that system where powers of the Central
Government and the State Government are
well defined in the Constitution

Democracy : Democracy means a government which is

run by representative who are elected on the
basis of adult franchise. This means that
each adult, man and women, elects a
representative of his or her own choice.

Secularism : The State gives equal treatment to all

religion. It does not favour any particular
religion. The Constitution gives complete
freedom to its citizens to practice and preach
their own religion

Socialism : It provides equal opportunities in education,

employment, justice etc., to all. Special
facilities have been given to the backward
and the downtrodden people

Directive Principles : To bring about economic and social welfare

in the country, the Directive principles of the
State policy have been stated in our
Constitution

Fundamental : The fundamental right is the necessary

Rights condition for the development of the
personality of an individual. These help in
promoting democratic values. There are six
fundamental rights guaranteed in the
constitution necessary for the development
of the personality of the citizens.

61
SUGGESTED READINGS

1. K. Aswathappa, (2011), Business Environment for Strategic

Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES

1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.a) 2.a) 3.d) 4. c) 5. c)

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UNIT 6

BUSINESS AND GOVERNMENT

STRUCTURE

Overview

Learning Objectives
6.1 Introduction

6.2 Reason for Intervention by State Government

6.3 Responsibility of Business towards Government
6.4 Economic Roles of Government on Business
Let Us Sum Up

Check Your Progress

Glossary
Suggested Readings

Web Resources
Answer To Check Your Progress
OVERVIEW

Business is an important in society. It may be for the supply of goods and

services, creation of employment opportunities; offer of better quality of
life; or contribution to the economic growth of a country; the role of
business is crucial. There is no country in the world where government of
the land does not interfere, in one form or the other, in its economic
activities. Which the state control of economy is a universal phenomenon,
the extent & nature of the control vary widely between nations depending
upon the nature & storage of development of the economy, the behaviors
of the private sector, the political philosophy etc. The two most powerful
institutions in the society today are business and government where they
meet on common ground – amicably or otherwise –together they
determine public policy, both foreign &domestic, for a nation. Government
regulation of the business may cover a broad spectrum extending from
entry into business to final results of a business.

LEARNING OBJECTIVES

After studying this unit, you will be able to;

 explain the reasons for intervention of state government in business

63
  describe responsibilities of business towards government
 delineate economic roles of government in business.
6.1 INTRODUCTION

Function of the state varies 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, 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 (including legal) 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 (Pollution, for example), regulation of
monopolies, and the provision of social insurance (pensions,
unemployment benefits). Here, too, the government cannot choose
whether, but only how best to intervene, and government can work in
partnership with market 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 Asia‘s experience has renewed interest in the state‘s
role in promoting markets through active industrial and financial policy.
6.2 REASONS FOR INTERVENTION BY STATE GOVERNMENT

i) The faster a country moves towards economic development, the

greater has to be the role of the state.
ii) To ensure speedy & balanced development of the economy with the
least wastage of resources
iii) Ours being a socialist society, the government is compelled to enter
directly into industrial & commercial activities.
iv) The function of government which was originally limited to the
maintenance of law and order has considerably expanded.
v) State participation is necessary to lay a strong base for future
development of Industry and Commerce.
vi) Failure of market invites government intervention in an economy
6.3 RESPONSIBILITIES OF BUSINESS TOWARDS GOVERNMENT

The Government has certain definite expectation from business. The

business houses are expected to fulfill the following responsibilities: -
i) Regular Payment of Taxes: Taxes are a major source of revenue for
the Government. It is the responsibility of every businessman to pay

64
regular taxes on sales, inputs and income. Moreover, it is the duty of
businessman, as an employer, to deduct the income tax from the salaries
of the employees and remit the same to the government treasury.
ii) Voluntary Programmes: Another expectation of the Government from
the business is that the business firms should cooperate with Government
agencies on voluntary basis in connection with various programmes like:

 Sponsoring social welfare progarmme

 Cultural growth
 Environmental preservation
 Promoting education
 Population control measurers
 Assistance in connection with drought relief etc.
iii) Providing Information: It is another responsibility of the business
houses to give feedback information to the Government on the decisions
taken by the political leaders. Business has necessary knowledge and
experience. They can, therefore, place before the decision makers the
facts and problems and argue for the modification or changes. This can
be done by them individually or collectively.

iv) Government Contracts: Due to privatisation of the economy a

number of Government contract are executed by private business
houses. Many business houses projects according to required
specification and standards.

v) Providing Services to the Government: Sometimes, some

influential and competent businessmen are included in the Advisory
boards constituted by the abroad for exploring trade and industry
prospectus.
vi) Corporate Contributions to Political Activities: The business is
involved in the political activities in the following ways:
 Making monetary contributions to political parties particularly at
the time of elections.
 To contest elections as independents or on party tickets.
 Through lobbying this refers to the behavior after the election and
is concerned with securing legislation in favor of business.
 It is the responsibility of the business houses to make sure that
their political involvement provides an additional safeguard
against the authoritarian potential of a mass society.

65
6.4 ECONOMIC ROLES OF GOVERNMENT IN BUSINESS

Government normally plays four important roles in an economy, for

shaping the business environment. They are as follows:
1. Regulator Role
2. Promoter Role
3. Entrepreneurial Role
4. Planner Role

The nature and extent of the above cited roles of the government will vary
depending upon a given situation. We shall discuss about those at length.
1. REGULATOR ROLE

Government Regulation of the business may cover a broad spectrum

extending from entry into business to final results of a business.
Types of government regulation of the economy may be broadly divided
into:
i) Formal & informal controls
ii) Inducive and Coercive controls
iii) Direct & indirect controls
i) Formal and Informal Controls: Formal control are usually those
emanating from legislation, as for, example, the Industries Act, 1957, the
companies Act 1956 and MRTP Act 1969.

Informal control refers to the controls which various groups impose upon
themselves out of need & custom.
ii) Coercive and Inducive Controls: Coercive regulations require
performance of certain actions or reframing from others in order to avoid
penalties. For instance, taxes must be paid or fine or imprisonment may
result.
Inducive controls hold out a promise of reward for compliance with the
desired lines of action. For example, subsides may be granted to stimulate
certain activities.
iii) Direct & Indirect Controls: Businessmen prefer indirect controls to
direct regulation. When government fixes prices of certain products or
services, it is an example of direct control.

The variation of corporation of corporate income tax to influence economic

activity is an indirect control measure.
2. PROMOTER ROLE

The promotional role of the government is very important in developing

countries and also in developed countries. In developing countries, there

66
will be deplorable dearth of entrepreneurial skill and other infrastructural
facilities. Hence, the promotional role of the government by providing
finance to industry, creating the required minimum infrastructural facilities
for industrial growth and development and also for further investment
assumes important. For example, our government has identified certain
backward areas as ‗No Industry Districts‘. To promote development of
such areas, Government provides subsidies and tax holiday to attract
investment in backward areas. The Government is assisting the
development of small – scale industries through District Industrial
Centers.
In development countries, the government has to develop infrastructures,
Such as power, transport, finance, marketing, institutions for training and
guidance and other promotional activities. This includes promotional role
by the government in the risk- prone sectors. Even in USA, the
government undertake promotional role and this promotional role is not a
small one.
3. ENTREPRENEURIAL ROLE

In many countries the State, by establishing its own industries has

undertaken the task of entrepreneurial role. India is a standing example
about this. Number of factors is responsible for the government to take up
this role and operate business enterprises. Dearth of private
entrepreneurship unprofitable sectors or neglect of some sectors by the
private business, absence of adequate competition and the resultant
exploitation of consumers and socio-political ideologies of the State are
all the contributing causes for the State to start the business and bear the
risks. Generally, private investors are solely guided by profit motive they
will avert any enterprise involving high risks. Hence, they will not enter in
areas of low returns and also public utility services where the investments
are very heavy and the returns very meager. But as ‗Social entrepreneur‘
the government does not hesitate to take them up.
4. PLANNER ROLE
More of the modern State are welfare-State, undertaking plethora of
responsibilities. Besides protecting the people, the State has to fulfill all
economic requirement of the people and their aspirations. The
Government is expected to bring about all-round prosperity. In any
economy the resources would be very much limited and the requirement
of the people would be too many, the scarcity of resources and the
multiplicity of wants would lead to the question of choice and priorities.
Hence, planning has become an integral part of the government in

67
conserving the resources and utilizing them so as to achieve maximum
satisfaction for the people.
In its role as a planner, the government indicates the various priorities and
makes sectoral allocations. Mixed economies are democratically
planned and they have to manage the economic and business activities
through the exercise of planning.

The idea of economic planning can be traced to three different sources.

They are;

i) Rationalisation of Resources
ii) Socialisation of Resources
iii) Nationalisation of Resources.
i) Rationalisation of Resources: Since the resources of the economy
are much limited, they have to be utilised in a ratioanlised way or in an
optimal manner so as to achieve optimum satisfaction for the society. In
other words, the planned economy is a rational economy which attempts
to secure the maximum return with minimum wastage of productive
resources.
ii) Socialisation of Resources: Nationalisation concept connotes that a
planned economy is a powerful economy. The nationalists want to use
planning as a weapon to strengthen the country, not only economically,
but also politically. This concept has a tinge of totalitarian principle.
Fascism, Nazism and communism resorted to planning more to achieve
political power.
iii) Nationalisation of Resources: Implementation of the plan is the
roughest part of the planning process. If the execution has not been done
properly and efficiently, the whole plan will fail. Even a well formulated
plan may miserably fail due to poor and inefficient execution. Perhaps
this is the case with Indian planning, through Five-Year plans, and Lewis
remarked: ―Indian is better planners than doers‖. This is worth
remembering. Formulation of plan is only a promise, whereas the
execution is the actual performance of the plan.
LET US SUM UP

This unit gives clear understanding of the government four key

responsibilities towards the business and society. These positions include
regulator role, promoter role, entrepreneur role r, and planner role, which
help to shape the business environment. It is also understood that the
government has a significant influence on all aspects of business. It is
clear that businesses have obligations to the government, including

68
paying taxes, providing the authorities with the necessary information, and
making a positive impact on society.
CHECK YOUR PROGRESS
Choose the Correct Answer:
1. Macro Environments of business includes .
a) Political and Government factors b) Economic factors
c) Demographic factors d) All the above
2. Types of Government regulations of the economy include .
a) Formal and Informal controls b) Inductive and Coercive controls
c) Direct and Indirect controls d) All the above
3. The wages of Industrial workers are regulated by .
a) Government b) Public
c) Employees d) Consumers
4. The Government normally play important roles in an
economy.
a) Two b) Three c) Four d) Five
5. The idea of economic planning can be traced to sources
are .
a) Rationalisation of Resources b) Socialisation of Resources
c) Nationalisation of Resources d) All the above
GLOSSARY

Coercive : Coercive regulations or control require

Regulations performance of certain actions or reframing
from others in order to avoid penalties. For
instance, taxes must be paid or fine or
imprisonment may result.
Inductive Control : Inductive controls hold out a promise of
reward for compliance with the desired lines of
action. For example, subsides may be granted
to stimulate certain activities.
Rationalisation of : The resources of the economy are much
Resources limited, they have to be utilised in a
ratioanlised way or in an optimal manner so as
to achieve optimum satisfaction.
Fascism : Fascism is generally defined as a political
movement that embraces far-right nationalism
and the forceful suppression of any
opposition, all overseen by an authoritarian
government.

69
 Nazism : Nazi ideology was synonymous with Hitler's
worldview. According to this there was no
equality between people, but only a racial
hierarchy. In this view blond, blue-eyed,
Nordic German Aryans were at the top, while
Jews were located at the lowest rung.
Totalitarianism : Totalitarianism is a form of government that
attempts to assert total control over the lives
of its citizens. It is characterized by strong
central rule that attempts to control and direct
all aspects of individual life through coercion
and repression.

SUGGESTED READINGS
1. K. Aswathappa, (2011), Business Environment for Strategic
Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES
1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS
1.d) 2. d) 3. a) 4.c) 5.d)

70
UNIT 7

LEGAL ENVIRONMENT
STRUCTURE
Overview
Learning Objectives
7.1 Introduction
7.2 Concept of Political System
7.3 Main Institutions in Political System
7.4 Various Laws that Governs the Business Environment in India
7.5 Meaning of Legal Environment
7.6 Scope and Objectives of Legal Environment
7.7 Impact of Business on Legal Environment
Let Us Sum Up
Check Your Progress
Glossary
Suggested Readings
Web Resources
Answer To Check Your Progress
OVERVIEW

The Political, Legal, and Regulatory Environment can be very influential

insofar as the way you carry out business activities. Organisations need
to comply with each country‘s laws and regulations in which they do
business. Rules and regulations can change frequently and are
sometimes ambiguous; they also depend on the political culture in a
country. Many industries are heavily regulated around the world, such as
banking and finance, utility, transportation, oil and gas, and mining. The
regulations will have a major influence on business model. Moreover, the
legal system can differ from one country to the other (e.g., civil law,
common law, religious law) and often requires very specialized expertise.
In India legal environment of business affected according to the ideology
of the government
LEARNING OBJECTIVES

After studying this unit, you will be able to;

 explain legal systems in business
 various laws related to business in India.

71
7.1 INTODUCTION

Legal environment acts as an important factor for setting up or running

any business activities by an individual or any organisation in a particular
country. The legal environment in one country is different from another
country. Legal environment decides the ways of how business activities
of any particular country are able to flourish or may get constrained by the
laws of the nation. It also influences in estimating the useful economic life
of an intangible asset. Legal environment of a business includes various
legislations enacted, amended or repealed by the Government,
Administrative Orders proclaimed by Government Authorities, etc The
legal environment in India includes various laws regulating business
activities like Companies Act 2013, Consumer Protection Act, 2019 GST
act, 2007and many other such legislations, policies relating to licensing
and approvals, foreign trade etc.
7.2 CONCEPT OF POLITICAL SYSTEM
The political system prevailing in a country directs and controls the
business activities of that country. A political system which is stable,
dynamic and assures personal security to the citizens is primary factor for
growth of any business. Two basic political philosophies are in existence
all over the world, viz., democracy and totalitarianism. In its pure sense,
democracy refers to a political arrangement in which supreme power is
vested in the people. Democracy may manifest itself n any of two
fundamental manners. If each individual is given the right to rule and vote
on every matter, the result is pure democracy which is not, however,
workable in a complex society with a large constituency. Hence, the
republican forms of organisation follow whereby the public, in a
democratic manner, elect their representatives who do ruling. In
totalitarianism, also called authoritarianism, individual freedom is
completely subordinated to the power of authority of the state and
concentrated in the hands of one person or in a small group which is not
constitutionally accountable to the people. Societies ruled by a pressure
clique - political, economy or military - or by a dictator plus most
oligarchies and monarchies belong to this category. The doctrine of
fascism and erstwhile Russian Communism Russian Communism are
example of totalitarianism. India is a democratic country.

7.3 POLITICAL SYSTEM COMPRISES THREE VITAL INSTITUTIONS

i) Legislature
ii) Executive or Government
iii) Judiciary

72
i) Legislature: Out of three, legislature is most powerful political institution
vested with such powers as policy making, law-makings, budget
approving, executive control and acting as mirror of public opinion. The
influence of legislature on business is considerable. It decides such vital
aspects as the type of business activities, the country should have, who
should own them, what should be their size of operation, what should
happen to their earnings and other related factors.

ii) Government as Executive: Also called the ‗state‘ the term government
refers to ―the centre of political authority having the power to govern those
it serves‖. For business consideration, we should know what
government‘s responsibilities to business are. Specifically, government‘s
responsibilities towards business are as follows:

 Establishment and enforcement of law

 Maintenance of order
 Money and credit
 Orderly growth
 Infrastructure
 Information
 Assistance to small industries
 Transfer of technology
 Tariffs and Quotas
iii) Judiciary: The third political institution is judiciary. Judiciary
determines the manner in which the work of executives has been fulfilled.
It settles the relationship between private citizens, on one hand, and
between citizens and the government upon the other.

The power of the judiciary is of dual type:

 The authority of the courts to settle legal disputes.
 Judicial review - the authority of the courts to rule on the
constitutionality of legislation.
7.4 MEANING OF LEGAL ENVIRONMENT

The legal environment of business is defined as: the attitude of the

government toward business, the historical development of this attitude;
current trends of public control in taxation, regulation of commerce and
competition; freedom of contract, antitrust legislation and its relationship
to marketing, mergers and Governments want to encourage business
activity, but they also need to pass laws and put in place rules and
regulations to control business activity and avoid undesirable outcomes
or negative externalities. They may pass regulations concerning the

73
employment of people, environmental impact or perhaps constraints to
ensure that all advertising is legal, decent and truthful.
7.5 SCOPE AND OBJECTIVES OF LEGAL ENVIRONMENT

i) Internal Security: The state governments have to maintain the internal

security, law and order in the state as per our constitutional amendment.
Internal security is managed through state police.
ii) Public Order: States have jurisdiction over police and public order in
order to maintain peace among the public.
iii) Education: Providing a public education system, maintaining school
buildings and colleges, employment of teachers, providing help to under
privileged students all come under the education department of the state.
iv) Agriculture: The state governments have to provide support for
farmers, funds for best farming practices, disease prevention and aid
during disasters such as floods or droughts.
v) Finances: Every business need finance to run the business
successfully. Business government covers the various financial aspects
of the state legislature financial powers of the state, which include
authorisation of all expenditure, taxation and borrowing by the state
government. State legislature provides the power to originate money bills
and it has control over taxes on entertainment and wealth, and sales tax.
vi) Reservation of Bills: The legal environment covers the legislative
powers of the state governor and the situations wherein he may reserve
any bill for the consideration of the President.
vii) Transport: State government runs the rains, trams, bus and ferry
services and other public transportation in the cities and towns of the
States.
viii) Water Supply: It details about the rules and regulations of water
supply to cities and towns for drinking, including irrigation for farmers, and
states the responsibility of the State governments.
ix) Budget: The Legislative procedures of the State Government are to
make budget for state.
x) Allocation of Funds: Procedural legislative powers to give funds to
all its organisations like Zila Parishad, corporation, and other
departments.
7.6 IMPACT OF LEGAL ENVIRONMENT ON BUSINESS

The legal environment therefore impacts on all business behaviour and

can be split into a number of different areas:

74
i) Employment legislation - rules, regulations and laws concerning the
employment of people.
ii) Environmental legislation - laws, rules and regulations concerning
the environmental impact that then operations of firms create.
iii) Consumer law - businesses sell to consumers and it is important that
consumers have protection to ensure they are not misled or treated
unfairly by firms.
iv) Competition law - competition is a healthy way to ensure that prices
are kept down and that businesses innovate. Without competition firms
may be in a position to exploit consumers and so governments often
legislate to try to ensure competition is fair and to prevent the development
of monopolies.

v) Information or Reporting law - Governments often legislate to ensure

that the information that firms provide is accurate and reflects the true
state ('a true and fair view') of the business. These types of rules and
regulations may include accounting regulations/standards to ensure firms
represent their financial position accurately and ensure that firms do not
keep information on consumers that they are not entitled to retain.
vi) Social welfare laws - here government attempts to promote the
consumption of merit goods, which enhance human welfare such as
education and health services, and discourages or prevents the
consumption of demerit goods such as tobacco, and petrol. Demerit
goods result in higher social costs.

Legal environment affecting the business environment in India: The legal

environment of business is defined as the framework of rules and
regulations, bylaws and various legislations that govern the day to day
working of the business. The legal environment dominates the business
environment of a country. The legislature of the country, being the law-
making authority frames the laws and the executives ensures that those
rules are followed and if these rules are not properly implemented, the
judiciary of the country comes into the picture in order to take necessary
actions by imposing fines and penalties.
7.7 VARIOUS LAWS THAT GOVERNS THE BUSINESS
ENVIRONMENT IN INDIA

i) Business laws
ii) Corporate laws
iii) Indian contract act 1872
iv) Negotiable Instrument Act 1881

75
 v) Sale of goods act 1930
vi) Indian Partnership Act 1932
vii) Monopolies and Restrictive Trade Practices Act 1969
viii) Air (prevention and control of pollution) Act 1981)
ix) Environment Protection Act 1986
x) Consumer Protection Act 1986
xi) Competition Act 2002
xii) The national Green Tribunal Act 2010
i) Business law: Business laws of the company are also known as
mercantile law. It helps in regulating the day-to-day business transactions.
ii) Corporate Laws: Corporate laws are the rules and regulations that
govern, the formation, registration, share capital, board meetings,
minutes, dissolution, winding up etc.,
Features of Corporate Laws

 It brought in the mandatory appointment of women directors on

board.
 It brought in the clause of Corporate Social responsibility from a
certain class of companies.
 More powers have been given to the shareholders of the company
 The act introduced national company law board tribunal and
national company appellate tribunal
 Rules were amended to enable the fast-track mergers of the
companies.
iii) Indian Contract Act 1872: It contains all the rules and regulations
which help the business (as well as non-business) is entering into various
agreements and contracts.
Features of Contract

 There must be two parties and all essential elements must present
in the contract.
 A valid contract is enforceable by law.
 There must be an intention of the parties to enter into the contract
and the intention should not violate rules of the country
 The parties must be competent to perform the contract
 The contract must be certain in nature and it must be possible to
perform. There must be lawful consideration for fulfilling the
contract.
iv) Negotiable Instrument Act 1881: Negotiable Instruments Act, 1881
is a law relating to all negotiable instruments such as promissory notes,

76
bills of exchange and cheques. The word "negotiable instrument" means
a document which is transferable from one person to another. If the
instrument is payable to order, the property in the instrument passes by
endorsement and if the instrument is payable to the bearer, the property
in the instrument is passes by delivery. Individual or any person, taking an
instrument bonafide and for value is known as a holder in due course, The
holder in the due course has a right to sue or claim upon a negotiable
instrument in his or her own name for the recovery of the amount. Also,
he need not give notice to transfer to the party liable on the instrument to
pay. There are certain presumptions which apply to all negotiable
instruments until and unless contrary is proved. These presumptions re
consideration, date, time of acceptance, time of transfer, the order of
endorsements, stamp, and holder presumed to be holder in the due
course, proof of protest.

v) Sale of Goods Act 1930: Sale of goods act constitutes one of the most
important types of contracts under the law in India. All the contracts or
agreements related to the sale of goods are governed under this act.

 There must be two different parties to a contract of sale i.e there

must be a buyer and seller
 There must be transfer of property in order to complete the
process of sale. Here transfer of property means transfer of
ownership right of the property,
The main subject of the contract must be goods as per section 2 (7)
―Goods means every kind of movable property other than actionable
claims and money; and includes stock and shares, growing crops, grass,
and things attached to or forming part of the land which is agreed to be
severed before sale or under the contract of sale. There must be
consideration for the sale of or transfer of property. The consideration
must be in monetary terms.
vi) Indian Partnership Act 1932: The Indian Partnership Act 1932
defines a partnership as a relation between two or more persons who
agree to share the profits of a business run by them all or by one or more
persons acting for them all.
The essential characteristics of the act are:

 There must be at least two persons who are competent to form

partnership.
 The partnership relation is contractual in nature. It arises from the
contract and not from the status of the partners,

77
  The agreement must be express i.e., it must be written or oral or
implied.
 The agreement may be for a fixed period of time or for the
execution of the particular venture.
 The partnership agreement must have all essential elements of a
valid contract.
 The object of partnership must be to make profits.
 Profits must be distributed among the partners in an agreed ratio.
vii) Monopolies and Restrictive Trade Practices Act 1969: The MRTP
Act aims to prevent the concentration of economic power in the hands of
few groups of people. This provides for control of monopolies, prevention
of unfair trade practices.

Main aim of the act is as follows:

• Control the monopolies

• Prohibit unfair trade practices
• Prohibit restrictive trade practices
• Prohibit monopolistic trade practices
Water Prevention and Control of Pollution Act 1974

This act was enacted to provide for prevention and control water pollution.
It also provides the establishment boards for prevention and control of
water pollution. The act prohibits the industries and manufacturing units
from discharging of pollutants into water bodies beyond given standard,
and also lays downs penalties for non- compliance. It set up CPCBs,
which further lays down the standards for the control and prevention of
water pollution.

viii) Air Prevention and Control of Air Pollution Act 1981: It was
enacted to counter the problem associated with air pollution, it set
standards to combat air pollution and prohibiting the use of substances
and fossil fuels that give rise to air pollution • It provides for the enactment
and establishment of the boards at centre as well at state levels. ―The act
empowers the state governments in consultation with the SPCB‘s and can
declare any region within the state as air pollution control region. Under
this the establishment or operation of any industrial plant in the pollution
control area require permission form SPCB‘s. SPCB‘s are also required
to test the quality of air in air pollution control areas, also inspect air
pollution control equipment and manufacturing processes.

ix) The Environment Protection Act 1986: The main aim of the act is to
protect the environment and bring sustainable environment. It provides
the framework for planning and implementing the long-term requirements

78
of environment safety and lays effective guidelines that threaten the
environment.
Under this act the central government has the power to take necessary to
develop and protect the quality of the environment. It set standards for
emissions and discharges the pollution in the atmosphere and it give
regulations for the location of the industries, manages the hazardous
waste and protects the public health. It issues the notification from time to
time for the protection of the ecological sensitive areas and other reserve
areas.
x) Consumer Protection Act 1986: This act was enacted for the
protection of the consumers in India. It has the mechanism for the
redressal of the grievances of the consumers.
The Features of Consumer protection Act are as follows

• It applies to all goods and services until and unless the union
government exempts it.
• It covers all public, private and co-operative sectors
• Provisions are compensatory in nature.
• It educates consumer against exploitation • It provides justice to
aggrieved customers.
xi) Competition Act 2002: This act was enacted for the economic
development of the country, for the establishment of the Commission to
prevent practices that have an adverse effect of the competition in order
to promote sustainable competition in markets, to protect the interest of
the consumers and to ensure freedom of trade in India.

Objectives of the Act

• To ensure freedom of trade in the market

• To prevent the domination of the big players in the market.
• To promote healthy competition in the market.
• To protect the interest of the consumer by providing them with
good products and services at reasonable prices.
• To prevent the practices that may bring an adverse impact on
competition in the Indian market. Environmental laws
Environmental Laws are those laws that enable the parliament
with the need for protection and motive of conservation of the
environment.
xii) The National Green Tribunal Act 2010: This act provides for setting
up of national Green Tribunal which will expeditiously disposes of cases

79
relating to environmental protection and conservation of forest resources
and other natural resources.
LET US SUM UP

This unit provides a thorough explanation of the many laws that the
government has periodically passed to control commerce. Business laws,
corporate laws, environmental laws, the Indian Contract Act of 1872, the
Negotiable Instruments Act of 1881, the Sale of Goods Act of 1930, the
Indian Partnership Act of 1932, the Monopolies and Restrictive Trade
Practices Act of 1969, and the Air (prevention and control of pollution) Act
of 1981, Companies Act of 2013 are among the various laws.
CHECK YOUR PROGRESS
Choose the Correct Answer:

1. Under which of the following business environment does the industry

is operating .

a) Social Environment b) Political Environment

c) Technological Environment d) Legal Environment

2. Which one of the following is the agreement that is enforceable by
law?
a) Contract b) An Agreement
c) Consideration d) Acceptance
3. How many parties are there to a Promissory Note?
a) Two Parties b) One Party

c) Four Parties d) Three Parties

4. Consumer Protection Act is applicable to .

a) Immovable goods b) Movable goods

c) Specific goods and Services d) All Goods and Services

5. The Environment Protection Act was passed in .

a) 1984 b) 1986 c) 1981 d) 1980

GLOSSARY

Legislature : Legislature is most powerful political institution

vested with such powers as policy making, law-
makings, budget approving, executive control
and acting as mirror of public opinion. The

80
 influence of legislature on business is
considerable.

Business laws : Business laws of the company are also known as

mercantile law. It helps in regulating the day-to-
day business transactions

Corporate laws : Corporate laws are the rules and regulations that
govern, the formation, registration, share capital,
board meetings, minutes, dissolution, winding up
etc.

Negotiable : It is a law concerning all the negotiable

Instrument Act instruments i.e., Promissory notes, Bills of
Exchange and Cheques.

MRTP Act : The MRTP Act aims to prevent the concentration

of economic power in the hands of few groups of
people. This provides for control of monopolies,
prevention of unfair trade practices

Consumer : This act was enacted for the protection of the

protection Act consumers in India. It has the mechanism for the
redressal of the grievances of the consumers.

Environment : The main aim of the act is to protect the

Protection Act environment and bring sustainable environment.
It provides the framework for planning and
implementing the long-term requirements of
environment safety and lays effective guidelines
that threaten the environment

Competition : This act was enacted for the economic

Act development of the country, for the establishment
of the Commission to prevent practices that have
an adverse effect of the competition in order to
promote sustainable competition in markets, to
protect the interest of the consumers and to
ensure freedom of trade in India.

SUGGESTED READINGS
1. K. Aswathappa, (2011), Business Environment for Strategic
Management, Himalaya Publishing House, New Delhi.

81
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment,Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES

1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.d) 2.a) 3.c) 4. d) 5.b)

82
 BLOCK -3

Unit 8 : Demographic Environment

Unit 9 : Culture and Business

Unit 10: Social Responsibility of Business

83
UNIT 8

DEMOGRAPHIC ENVIRONMENT
STRUCTURE

Overview

Learning Objectives
8.1 Introduction of Demographic Environment

8.2 Importance of Demographic Environment

8.3 Falling Birth Rate and Changing Age Structure
8.4 Migration and Ethnic Aspects
Let Us Sum Up

Check Your Progress

Glossary
Suggested Readings

Web Resources
Answer to Check Your Progress
Overview

The demographic environment refers to the study of the characteristics of

human populations, such as their age, gender, race, education level,
income, occupation, and geographic location. This information is used to
understand trends and patterns in population growth, migration, and
distribution, as well as to identify changes in social and economic
structures.

The study of the demographic environment is important because it can

help businesses, governments, and other organisations make informed
decisions about their operations and policies. One of the most significant
demographic trends in recent years has been population aging. As people
live longer and birth rates decline, the proportion of older adults in the
population is increasing. This has significant implications for health care,
retirement planning, and social welfare programs.
Overall, the demographic environment is a complex and constantly
changing field of study, with important implications for many areas of
society. By understanding the characteristics of human populations, we
can make more informed decisions about how to build a more equitable
and sustainable future.

84
LEARNING OBJECTIVES

After studying this unit, you will be able to;

 define the meaning of demographic environment
 explain the important of demographic environment
 define the concept of a falling birth rate and describe the factors
that contribute to it
 describe the migration and ethnic aspects.
8.1 INTRODUCTION

The demographic environment refers to the study and analysis of the

characteristics of human populations, such as age, gender, race,
education level, income, occupation, and geographic location. It is an
important aspect of environmental analysis that helps businesses,
governments, and other organisations understand population trends and
patterns, which in turn can inform decision-making related to marketing
strategies, resource allocation, and policy development. The demographic
environment is constantly changing and has significant implications for
various areas of society, including social welfare, healthcare, and
education.
8.2 IMPORTANCE OF DEMOGRAPHIC ENVIRONMENT

It is conventionally said that Management is Men, Material, Machinery and

Money. Even if all the other Ms are excellent, it would not be of use unless
the Men is the right one (in terms of quality, potential, motivation and
commitment etc.)
Market is people in the sense that the demand depends on the people
and their characteristics – the number, income levels, tastes and
preferences, beliefs, attitudes and sentiments and a host of other
demographic factors. No wonder, demography is an important basis of
market segmentation.
Important demographic bases of market segmentation include the
following:

 Age structure
 Gender
 Income distribution
 Family size
 Family life cycle (For example: young, single: young, married, no
children; young married with children …….)
 Occupation
 Education

85
  Social class
 Religion
 Race
 Nationality

The demographic environment differs from country to country and from

place to place within the same country or region. Further, it may change
significantly over time. Peter Drucker, who emphasizes the tremendous
economic and business implications of demographic changes, suggests
that any strategy, that is any commitment of present resources to the
future expectations, has to start out with demographics.
Demographic factors such as size of the population, population growth
rates, age composition, ethnic composition, density of population, rural-
urban distribution, family size, nature of the family, income levels etc. have
very significant implications for business.

Population Size
The size of the population is an important determinant of demand for many
products. There are countries with less than a lakh of people on the one
hand and those with over a thousand million on the other hand.

One of the important objectives of the formation of the European Union

(EU) was to bring about a single market that compares, in terms of the
number of consumers, to that of USA and Japan.
Poor countries with small population are generally not attractive for
business. However, even such countries may hold out opportunities for
some companies. As these markets may not be of interest for large
companies, small firms may find promising niches in these markets.

Advanced countries, particularly with large population, are generally

attractive markets. The major part of the international trade and foreign
investments naturally take place between these nations. Because of the
large potential of these markets, competition is generally strong in them.
8.3 FALLING BIRTH RATE AND CHANGING AGE STRUCTURE

True, there has been an explosive growth of the global population,

particularly in the developing countries. The universal trend now,
however, is fall in birth rates, although the total population is still growing
at over one per cent annually. Developing countries are also experiencing
significant decline in the population growth rates. In developed countries,
the fall in the birth rate is so steep that the population size would shrink
drastically.

86
Because of the declining birth rate, population is already peaking in a
number of countries. The collapse of population size has serious
implications for business.

The declining birth rate poses a problem for many businesses. Because
of the decline in the birth rates and the consequent fall in the size of the
baby population, the market for baby products has shrunk. This has
prompted some companies, such as Johnson and Johnson, to reposition
their products (originally introduced as baby products) and to pay more
importance to international business.
The declining birth rate has, however, been a boon to certain industries.
For example, industries such as hotels, airlines and restaurants have
benefited from the fact that young childless couples have more time and
income for travel and dining out. Small families have also similar
advantages when compared with large families.
It is obvious that business should necessarily ponder over whether the
falling birth rate and the shrinkage in the number of young people—and
especially of people under eighteen, that is, babies, children and
teenagers—is a threat or an opportunity.
According to Drucker, the most important single new certainty about future
is the collapsing birth rate in the developed world, which he describes as
―national suicide‖ He points out that in Western and Central Europe and
in Japan, the birth rate has already fallen well below the rate needed to
reproduce the population.

That is, below 2.1 live births for women of reproductive age. In some of
Italy‘s richest regions, for example, in Bologna, the birth rate by the year
1999 had fallen to 0.8; in Japan to 1.3. In fact, Japan and all of Southern
Europe- Portugal, Spain, Southern France, Italy, Greece is drifting toward
collective national suicide by the end of the 21st century. By then Italy‘s
population, for instance, now 60 million-might be down to 20 or 22 million;
Japan‘s population—now 125 million-might be down to 50 or 55 million.
But even in Western and Northern Europe the birth rates are down to 1.5
and falling. But in the United States, too, the birth rate is now below 2 and
going down steadily. And it is as high as it is only because of the large
number of recent immigrants who still, for the first generation, tend to
retain the high birth rates of their country of origin for example, Mexico.2
As Drucker points out, for a business that makes its living making goods
for small children, the collapsing birth rate may be an opportunity. It is
conceivable that having fewer children means that the child becomes
more and more precious and that a larger share of the disposable income

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is spent on it. This apparently has already happened in China where a
majority of families have only one child. Many families, there, despite their
poverty, apparently spend more on the single child than they used to
spend on three or four children. There are signs in other countries like
Germany, Italy and even in the United States of similar developments.3

Although birth rates have fallen in developing countries, the population

growth rates are still very high. This coupled with a steady increase in
income drives fast the growth of the markets of a number of developing
economies
When the population is very large, even if the country is generally poor,
there could be a sizeable market even for those goods and services which
are regarded luxuries in these countries. For example, if just five per cent
of the Indian population is well to do, the absolute number (more than 50
million) is larger than the total population of many of the high-income
economies.
High population growth rate also implies an enormous increase in the
labour supply. When the Western countries experienced industrial
revolution, the population growth was comparatively slow. Labour
shortage and rising wages encouraged the growth of labour- intensive
methods of production. Capital-intensive technologies, automation, and
even rationalisation, are opposed by labour, and many sociologists,
politicians and economists in developing countries. Cheap labour and a
growing market have encouraged many multinationals to invest in
developing countries. Many companies in the developed countries have
relocated their production facilities, wholly or partially, in the developing
countries to reduce the labour costs.

The problems of developing countries due to the population explosion

also indicate the enormous scope for several industries. A very significant
share of the Indian population is below the poverty line. Although these
people, who do not have sufficient income even to meet the bare minimum
basic necessities of life, do not come within the market for a large variety
of goods and services, the existence of such a large size of poor
population has a lot of other implications. To solve the basic problems, the
additional number of children to be educated, the additional number of
people to be provided with medical care, water supply etc. during one Five
Year Plan in India are more than what most nations have done over
centuries. While it is a formidable national challenge, it also indicates
enormous business opportunities.

88
The occupational and spatial mobilities of population too have implications
for business. If labour is very mobile between regions and occupations,
labour problems are likely to be less than would otherwise be the case.
MOST POPULOUS NATIONS AND INDIA

Share (%) of Ten Most Growth of Population of

Populous India
Countries in World Population

China 19.4 Census year Population

(Million)
India 17.5
1901 238.40
USA 4.5 1911 252.09
Indonesia 3.4 1921 251.32
1931 278.98
Brazil 2.8
1941 318.66
Pakistan 2.7
1951 361.09
Bangladesh 2.4 1961 439.23
Nigeria 2.3 1971 548.16
Russia Federal 2.0
1981 683.33
1991 846.42
Japan 1.9
2001 1028.74
Others 41.2 2011 1210.19
2021(projection) 1400.00

Source: Marketriser.com

If the labour is highly heterogeneous in respect of language, religion and

caste, ethnicity etc., personnel management is likely to become a more
complex task. A highly heterogeneous population with its varied tastes,
preferences, beliefs temperaments etc. give rise to differing demand
patterns and calls for differing marketing strategies.

The falling birth rate and rising longevity will significantly alter the age
distribution within the population. The proportion of aged in the total
population will go up. For example, of those 20-odd million Italians by the
year 2080, a very small number will be under fifteen, and a very large
number—at least one-third of the population—well above sixty. In Japan,
the disproportion between younger people and people above any
traditional retirement age will be equally great if not greater. In the United
States, the young population is already growing much more slowly than
the older population, past traditional retirement. Still, up to the year 2015
or so, the number of young people will still be growing in absolute numbers
in the United States. But then it is likely to go down and quite rapidly. The
share of old in the total population will increase in the future in almost
every nation.

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The changes in the age distribution have a lot of implications for business.
Several pharmaceutical companies, for instance, are paying a lot attention
to the potential requirements of the aged population.

The increasing proportion of the aged would have implications for the
Government. It may increase the welfare burden of the governments.

According to Drucker, the collapsing birth rates will have the following
implications.
1. For the next twenty or thirty years, demographics will dominate the
politics of all developed countries. And they will inevitably be politics
of great turbulence. Important issues include the retirement age and
immigration.
2. For the next twenty or thirty years, no developed country is likely,
therefore, to have stable politics or a strong government. Government
instability is going to be the norm.
3. ―Retirement‖ may come to mean two different things. It is quite likely
that the trend toward ―early retirement‖ will continue. But it will no
longer mean that a person stops working. It will come to mean that a
person stops working full-time or as an employee for an organisation
for the entire year rather than a few months at a time. Employment
relations—traditionally among the most rigid and most uniform
relationships—are likely to become increasingly heterogeneous and
increasingly flexible, at least for older people. This will increasingly be
the case as the centre of gravity in the older population shifts from
manual workers to people who have never worked with their hands,
and especially to knowledge workers—a shift that will begin in the
United States around the year 2010 when the babies of the ―baby
boom‖ which began in 1948 reach traditional retirement age.
4. The final implication is that in all developed countries the productivity
of all workers— whether full-time or part-time—and especially of all
knowledge workers, will have to increase very rapidly. Otherwise, the
country—and every organisation in it—will lose position and become
steadily poorer.
8.4 MIGRATION AND ETHNIC ASPECTS:

While the population will be declining in many developed countries, which

may also lead to labour shortage, population pressure will be mounting in
developing nations many of which are neighbours of the rich nations. As
a consequence, to prevent migration pressure, as Drucker observes, is
like preventing the law of gravity.6 The response to immigration will be
different between countries. On the one hand is the United States which
has been a great nation of immigrants and on the other is Japan, which

90
has never allowed any immigration whatsoever. The immigration will likely
be a hot political issue in a number of countries.
Already, immigration has brought about very remarkable ethnic changes
in USA.7 A number of localities are concentrated by immigrant
communities. Detroit claims to be the Arab capital of America. Miami used
to be thought of as a Cuban enclave, but is becoming more Haitian, more
Jamaican, more all sorts of things. According to the mayor of Miami, his
region is home to 156 nationalities. Silicon Valley is merely the latest
American showpiece to be built in large part by immigrants.
In the 1950 census, America was 89 per cent white and 10 per cent black.
Other races hardly got a look-in. Now, Latinos account for around 12 per
cent of the population. Within the next five years, they will overtake blacks
to become the largest minority group. If current trends continue, they will
be the majority in Los Angeles County in ten years. In 20 years, they will
dominate Texas and California. By 2050, one in four of the 400 million
people who will then be living in the United States will be Latino—and if
you add in Asians, their joint share will be one in three.

It is estimated that every year roughly a million new people arrive (700,000
legally, 300,000 illegally) in USA. Once settled, the immigrants generally
have more children than their neighbours (An average of around three per
woman, compared with 1.8 for non-Hispanic white women). Half of the 50
million new inhabitants expected in America in the next 25 years will be
immigrants or the children of immigrants.
The good old dictum be a Roman when in Rome hardly happens.
Although the US was originally called a melting pot, immigrants have been
found to retain their identity rather than melting. As Kotler observes,8 now
the US is called a salad bowl society with ethnic groups maintaining their
ethnic differences, neighbourhoods and cultures. Each specific group has
certain specific wants and buying habits. Several food, clothing and
furniture companies in the US have directed their products to one or more
of these groups. For instance, Sears is taking note of the preferences of
different ethnic groups. Colgate Palmolive has successfully promoted its
toothpaste within the Hispanic community through ads that place less
emphasis on health and more emphasis on appearance. Marketers must,
however, be careful not to overgeneralize about ethnic groups because
within each ethnic group there are consumers who are different from each
other.

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LET US SUM UP

Demographic factors such as size of the population, population growth

rates, age composition, ethnic composition, spatial distribution of
population, family size, family life cycle, income levels, ethnic
composition, religion etc. have very significant implications for business.

The demographic environment differs from country to country and from

place to place within the same country or region. Further, it may change
significantly over time.
Because of the diversity of the demographic environment, companies are
sometimes compelled to adopt different strategies within the ‗same
market‘. Population growth rates vary widely between nations.
The world population is projected to jump from about 6 billion in 1999 to
over 7 billion by 2014. More than half of the next billion will come from
South Asia and Sub-Saharan Africa, Europe and Central Asia will add just
1 per cent and the world‘s high-income countries will add about 3 per cent.

While there has been an explosive growth of the global population,

particularly in the developing countries, the universal trend now, however,
is fall in birth rates, although the total population is still growing at over
one per cent annually. Developing countries are also experiencing
significant decline in the population growth rates. In developed countries,
the fall in the birth rate is so steep that the population size would shrink
drastically.
Because of the declining birth rate, population is already peaking in a
number of countries. The declining birth rate and the collapse of
population size have serious implications for business.
The increase in population and increase in income make the developing
countries very attractive markets of the future. In fact, there are only three
countries, excluding India (China, USA and Indonesia), in the world with
a total population larger than the population that India added to itself
during 1991-2001. The total population of a large number of countries is
smaller than the annual addition to the Indian population.
CHECK YOUR PROGRESS
Choose the Correct Answer:
1. has a significant impact on the demand for many
products.
a) Income distribution b) Family size
c) Education d) Age composition

92
2. Which of the following is not a demographic basis of market
segmentation?
a) Age structure b) Gender
c) Occupation d) Technological advancements
3. What is the expected proportion of Latinos and Asians in the US
population by 2050?
a) One in four b) One in three
c) One in two d) Two in three
4. is the reason for some food, clothing and furniture
companies in the US to direct their products to specific ethnic groups?
a) To promote diversity
b) To encourage assimilation
c) To maintain ethnic differences
d) To cater to specific wants and buying habits
5. What is the implication of declining birth rates in developed countries
for businesses?
a) The population size would shrink drastically.
b) There will be an explosive growth of the global population.
c) Developing countries will experience significant growth in population.
d) There will be no effect on businesses.
GLOSSARY

Demographic : Refers to the characteristics of human

factors populations, such as size, growth rate, age,
ethnic composition, spatial distribution, family
size, family life cycle, income levels, and
religion.

Population : Refers to the increase in the number of

growth rates individuals in a population over a specific
period of time, usually one year.

Birth rate : Refers to the number of births per 1,000

individuals in a population over a specific
period of time, usually one year.

Developing : Refers to countries that have low levels of

countries: economic development and a high proportion
of their population living in poverty.

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 High-income : Refers to countries that have a high level of
countries economic development and a low proportion
of their population living in poverty.

Market : Refers to a group of potential customers who

share a common need or want and are willing
and able to purchase a product or service to
satisfy that need or want.

Population size : Refers to the total number of individuals in a

population.

Business : Refers to the potential effects that

implications demographic factors can have on a company's
operations, marketing strategies, and
profitability.

SUGGESTED READINGS
1. K. Aswathappa, (2011), Business Environment for Strategic
Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES
1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.d) 2.d) 3. a) 4.d) 5. a)

94
UNIT 9

CULTURE AND BUSINESS

STRUCTURE

Overview

Learning Objectives
9.1 Introduction

9.2 Definition of Culture

9.3 Dimensions of Culture
9.4 Elements of Culture

9.5 Indian Languages and Their Classification

9.6 Meaning of Business
9.7 Definition of Business
9.8 Characteristics of Business

Let Us Sum Up
Check Your Progress
Glossary
Suggested Readings

Web Resources
Answer To Check Your Progress
OVERVIEW
Business culture refers to the set of behavioral and procedural norms that
can be observed within a company, such as its policies, procedures,
ethics, values, employee behaviors and attitudes, goals and code of
conduct. It includes the behavior pattern and norms of that group the rules,
the assumptions, the perceptions, and the logic and reasoning that are
specific to a group. Successful businesses have learned the importance
of culture in a company and how it can increase employee morale,
encourage equitable Culture is what is core to the organisation. Culture is
the values & beliefs that an organisation upholds and it is demonstrated
through the behaviors of individuals & teams. Hence every organisation
must understand the culture and behaviours of individual which define the
organisational character. It is a continuous process keep changing from
time to time.

95
LEARNING OBJECTIVES

After studying this unit, you will be able to;

 define the meaning of business and culture
 explain the different dimensions of business and culture
 explain the elements of culture
 describe the characteristics of business.
9.1 INTRODUCTION

Business is an integral part of social system. The social system is

influenced by the way the business functions. Social and cultural
environment refers to the influence exercised by a number of social
factors. Such factors include attitude to wealth, family, marriage,
education, caste and religion etc. These, is turn are influenced by the
culture, social attitudes, changing patterns of culture, demographic
features of the people and human nature and needs.

Cultures change slowly and pick up new ideas gradually. However, there
are certain deep-rooted values that are not self-contained and persistent
that if there is any sudden change, people are torn apart and completely
uprooted psychologically. Business and culture are closely connected.
Social and cultural environment refers to the influence exercised by
certain social and cultural factors like family, marriage, religion, education,
attitude of people to work, ethics, attitude to wealth and social
responsibility of business.
9.2 DEFINITION OF CULTURE
E.B. Taylor says, ―Culture is understood as that complex whole which
includes knowledge, belief, art, law, morals, customs and other
capabilities acquired by an individual as member of a society‖.
Cultural is not confined to one particular period of time. It has two
phenomena shared values and passage of time. Culture of society is
shared by its members secondly; cultural ethos is passed on from
generation to generation.

Francis Merill has formulated the concept of cultural as follows. He says

culture:
 Is characteristically human product of social interaction.
 Provides socially acceptable patterns for meeting biological and social
needs.
 Is cumulative as it is passed on from generation of generation in a given
society.

96
 Is learned by each individual in the course of his development in a
particular society.
 Is therefore, a basic determinate of personality and
 Depends for its existence upon the continued functioning of society but
it is independent of any individual or group.

According to Elbert W. Sterward and James A. Glyne say ―Culture

consists of the thought and behaviour patterns that members of society
learn through language and other forms of symbolic interaction their
customs, habit, beliefs, and values, the common views points which bind
them together as a social entity‖.
Culture, according to anthropologists, comprise of everything from
traditional manner in which people produce, cook, or eat their food, the
socials moral, religious, values which are generally accepted by people.
Edward T. Hall says cultural is not an exotic notion studied by a select
group of anthropologists. It is a mold in which we are all cast, and it
controls our daily lives in many unsuspected ways.
According to Schiftman and Lazar Kanuk, ―Cultural is the sum total of
earned beliefs, values and customs that serve to direct the consumer
behavior of members of that society‖.
9.3 DIMENSIONS OF CULTURE

Business and culture are highly interlinked and their interface may be
highlighted in the following dimensions.
i) Culture creates Tastes and Preferences: A sub society may have a
sub cultural impact and this determines the products they buy and the
pattern of consumption.
ii) Culture determines Products and Services: The beverages people
drink, the type of food they eat., the clothes they wear, the goods or
service they consume are changing from time to time within the same
culture. The business should realise difference in culture and produce the
products suitably.

iii) Culture determines the extent of Globalisations: Work motivation,

profit, motivation, business goals, negotiating styles, attitudes towards
development of business of relationship, gift giving customs, greetings,
significance of body gestures, meaning of colors and number vary from
country to country. A company that wants to globalize should consider all
the above factors.

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iv) Culture determines Attitude: The attitude of people towards self is
most important. An American finds himself more assertive and
independent when compared to an Indian or a Japanese.

Similarly attitude to business is based on belief, customs and the social

philosophies. The attitude of a worker to worker towards work largely
depends up on his culture. A person from Japan might like to have team,
job pride in group tasks, motivate toward efficiency and perfection. In India
the worker is more different towards his work.

The degree of ―Collectivism‖ and individualism decided by cultural factors.

The Japanese enjoy pride in ―Collectivism‖ while the US based executive
enjoys individualism‖.
9.4 ELEMENTS OF CULTURE

The following are some important elements of culture.

i) Knowledge and Belief: Here knowledge includes scientific realistic
concepts, where beliefs include myths, metaphysical beliefs.
ii) Ideals: It refers to the social norms which define what is expected,
customary, right or proper in a given situation. Always these norms are
enforced by sanctions.
iii) Preferences: It includes both attractive and un attractive choice of the
people. They are the objects of desire.
iv) Taste, Fashion and Habits: The culture of the any society includes
the general taste of its members, the fashions and habits chosen by the
members.
v) Art and Literature: Art and literature are the important cultural
elements which help the culture to develop itself and In the existence of
culture for a long period.
vi) Moral and Legislation: The culture also includes moral rules and legal
requirement of the society.
9.5 INDIAN LANGUAGES AND THEIR CLASSIFICATION

The Indian people, composed of diverse elements, now speak language

belonging to four district speech families the Aryan, the Dravidian, the
Sino- Tibetans (or monologed) and the Austric. Indian civilisation has
found its expression primarily through the Ariyan speech as it developed
over the centuries. The rhymes and poem collected in the four Vedas,
sometime during the tenth century B.C represent the earliest stage of the
Aryan speech in India. The non –Aryan Dravidian and Austic Dravidian
and Austic Dialects along with Aryan language gave birth to middle Indo-

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Aryan or Prakrit. The whole country in North, East and central Indian
become Aryanized through the spread of Prakrit.
A younger form of the Vedic speech established by the Brahmans in
northern Punjab later came to known as ‗Sanskrit‘. Sanskrit became one
of the greatest languages in Indian civilisation and the greatest vehicle of
Indian culture for the last 2,500 years. A great many works in Sanskrit-the
Mahabharata, the Ramayana, the puranas the Dharma – Sastra acquired
vast sanctity. Sanskrit absorbed and assimilated many words and the
terms of expression form the regional dialects. Dravidian is the other
important language family which forms a solid block in south India,
embracing the four great literary languages, Kannada, Malayalam, Tamil
and Telugu. Of the four great Dravidian languages, Tamil has preserved
its Dravidian character best.
People of Mongoloid origin speaking language of the Sino-Tibetan family
were present during century B.C. The Sino-Tibetan language does not
have much importance or cultural significance in India. Austic language of
India link up India with Burma, with Indo-China, Malaya and Indonesia.

Persian was the court language of the Muslim rulers, and Urdu came in to
existence in the 13th – 14th centuries as the medium of communication
between the people and the Persian –using court and army officials.
Hindi is a great language and it has one of the richest medieval literatures
of India. It is the link of North Indian. Since the days of Ramadhan Roy
(1772-1833), Bengali prose became a powerful medium with the help of
Sanskrit. A song in Bengali composed by Rabindranath Tagore has been
adopted as the National Anthem of the Indian Republic. English, the
official language of the British rules became the medium used by the elite
all over the country and now it has become the only available medium for
inter-state-university and inter –national communication.

9.6 MEANING OF BUSINESS

The term ‗businesses typically refer to the development and processing

of economic values in society. Normally, the term is applied to that of
economy whose primary purpose is to provide goods and services for
society in an effective manner. The following are some of the popular
definitions.
9.7 DEFINITION OF BUSINESS

―Business comprises all profit – seeking activities and enterprises that

provide goods and services necessary to an economic pulse of a nation,
striving to increase society ‗s standard of living. Profits are a primary

99
mechanism for motivating these activities.‖ - Boone, Louis. E and David.
L.Kurtz.

―Business is any enterprise which makes, distributes, or provides any

article or service which other members of the community need and are
and willing to pay for‖. – Urwick and Hunt.
Business may be defined as ―the organised efforts by individuals to
produce goods and services, to sell these goods and services in a market
place, and to reap some reward for this effort!‖

Functionally, we may define business as ―those human activities which

involves production or purchase of goods with the object of selling them
at a profit‖. In essence, business represents an organized effort by an
individual or individuals engaged in making a living. Each firm furnishes
goods and services to others, and each operates with the aim of furnishing
some return to its members.
9.8 CHARACTERISTICS OF BUSINESS

The following are characteristics of business

I) Sale, Transfer or Exchange
ii) Dealing in Goods and Services
iii) Continuity in Dealings
iv) Profit Motive
v) Risk or Uncertainly
i) Sale, Transfer or Exchange: The foremost characteristic of business
is the exchange or transfer of goods and service for price or value.
Production or purchase of goods and services for personal use or for
presenting as gifts to others not constitute business as no sale or transfer
for value is involved. For example, a farmer who keeps cows to obtain
milk for his family is not running a business. But if he keeps a number of
cows to sell the milk obtained from them it becomes business provided
the other conditions are also satisfied.

ii) Dealing in Goods and Services: Dealing in goods and services is

another distinguishing feature of business. Every business enterprise
comes into existence to provide goods or services to society. The goods
or services may be procured by an enterprise through production and / or
purchase. The goods may be consumer goods such as bread, rice, cloth,
shoes, etc. or producer‘s goods like tools, components, machinery, raw
materials, etc. The consumer goods are meant for direct consumption in
the original or processed form. Producers‘ goods or capital goods are

100
used for producing other goods. Services are intangible and invisible
goods, e.g., electricity, gas, insurance, transportation, banking, etc.
iii) Continuity in Dealings: Dealing in goods and services constitute
business only when they are carried on regularly. A single transaction like
sale of old newspapers by a housewife or the sale of one‘s old scooter is
not business though the seller gets money in exchange. But the Hindustan
Times Ltd. and Bajaj Auto Ltd. are business concerns because they are
regularly dealing in the same article. Recurring sale rather than an
isolated deal is the hallmark of business.
iv) Profit Motive: Every business is carried on with the purpose earning
money and acquiring wealth. It is the hope of making money that induces
people to go into business. No business can survive for long without
earning profits. Even government enterprises are expected to earn profit
or surplus. However, profits must be earned through legal and fair means
or by serving the society and not by exploiting smuggling and black –
marketing cannot be called business.
v) Risk or Uncertainly: Risk implies the uncertainty of reward or the
possibility of loss. The element of risk is present in almost all economic
activities but it is more significant in business. Though business aims at
profits, losses are quite possible and common. Before an activity can be
called business there must, therefore, exist not only the goal of profit but
the risk of loss. Risk or uncertainty arises because the future is unknown
and businessmen have practically no control over several factors affecting
profits. These factors include:

 Charge in consumers tastes, fashions and demand;

 Changes in technology resulting into obsolescence of plant,
machinery and techniques of production.
 Increase in the degree of Competition in the market;
 Shortage of raw materials, power, fuel, etc.
 Labour trouble in the form of strikes, lockouts, gheraos, etc...
 Faulty managerial decisions concerning the use of capital and other
resources; and
 Fire, theft, and other natural calamities which can be insured against
Social Environment
LET US SUM UP
The reader can fully comprehend the culture and its traits after reading
This unit. Additionally, it provides a thorough understanding of how culture
affects business. It explains how the individual's tastes, preferences,
routines, linguistics, traditions, etc. affect business.

101
CHECK YOUR PROGRESS
Choose the Correct Answer:
1. include knowledge, belief, moral and customs acquired by
an individual as a member of society.
a) Culture b) Structure
c) Change d) Environment
2. Culture dimensions includes .
a) Tastes, Preference and Attitude b) Products and Services
c) Globalisations d) All the above
3. Elements of Business culture includes .
a) Vision and Values b) Practices and People
c) Narrative and Place d) All the above
4. Business culture needs to be kept alive by .
a) Workers b) Salesman
c) Top Managers d) Human Resource Managers
5. Business Culture Building characteristics are .
a) Commitment b) Competence
c) Consistency d) All the above
GLOSSARY

Culture : It means all the ways of life including arts, beliefs

and institutions of a population that are passed
down from generation to generation. Culture has
been called "the way of life for an entire society

Attitude : A feeling or opinion about something or

someone, or a way of behaving that is caused by
this:

Collectivism : Collectivism is a political theory associated with

communism. More broadly, it is the idea that
people should prioritize the good of society over
the welfare of the individual.

Individualism : The idea that freedom of thought and action for

each person is the most important quality of a

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 society, rather than shared effort and
responsibility.

Cultural : Cultural exchange is sharing different ideas,

Exchange traditions, and knowledge with someone who
may be coming from a completely different
background than your own.

Cultural : ―Cultural transfer‖ refers to the cultural mobility of

Transfer objects like the global flow of commodities,
concepts, words, images, persons, animals,
money, weapons, drugs etc.

SUGGESTED READINGS

1. K. Aswathappa, (2011), Business Environment for Strategic

Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES
1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A |
INTRODUCTION TO BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.a) 2.d) 3. d) 4.c) 5. d)

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UNIT 10

SOCIAL RESPONSIBILITY OF BUSINESS

STRUCTURE

Overview

Learning Objectives
10.1 Introduction

10.2 Definition
10.3 Social Responsibility of Business towards different Groups
10.4 Arguments against Social Responsibility of Business

10.5 Arguments for Social Responsibility of Business

10.6 Social Responsibility – The Indian Situation
Let Us Sum Up
Check Your Progress

Glossary
Suggested Readings
Web Resources

Answer To Check Your Progress

OVERVIEW
In the age of globalisation, corporations and business enterprises have
crossed the national boundaries to become international. Business
enterprises have been using natural resources in a big way of
maximisation of their profits. Business enterprises intervene in so many
areas of social life, hence their responsibility towards society and
environment has emerged. In India and elsewhere, there is a growing
realisation that business enterprises are, after all, created by society and
must therefore serve it and not merely profit from it. Thus the role of
business in society has been put under ―corporate social responsibility‖.
India is a democratic welfare state. It wants to achieve welfare through
democratic means. Business organisations which fit in with such a
specification would have a better scope to survive and grow here. In order
to make themselves suitable for such a business environment, they
should foster a corporate objective of maximizing social benefit. This must
be considered as the social responsibility of business. It means that every

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business enterprise has a responsibility to take care of the society‘s
interest.
LEARNING OBJECTIVES

After studying this unit, you will be able to;

 define the meaning of social responsibilities
 explain the social responsibilities of business towards various
groups
 describe arguments against social responsibilities in business
 elucidate the social responsibilities in Indian context.
10.1 INTRODUCTION

The real meaning of social responsibility with reference to business

enterprises has to be understood first to see the correlation of business
with social responsibility. Business is an economic activity to earn profit
for the owner and social responsibility means serving community without
any expectation. Now the question arises is why is there a need for a
business to serve the community? Business is expected to create wealth,
create markets, generate employment, innovate, and produce sufficient
surplus to sustain its activities and improve its competitiveness. Society is
expected to provide an environment in which business can develop and
prosper, allowing investors to earn returns. Business depends for its
survival and long – term prosperity on society to provide the resources –
people, raw materials, services, and infrastructure. These inputs from
society help to convert raw materials into profitable goods and services.
While society provides the means of exchange, trained manpower, legal
and banking system, infrastructure like roads, schools, hospitals, and so
on. Business provides producers and services, direct and indirect
employment, income generation in terms of wages, dividend, taxes,
interest, and the like. The long – term sustainability of any business
requires business – society connects. In addition to the above, with the
advent of the joint stock company, society grants to business two special
rights to assist it in performing its role. The first is ―potential immorality‖
and the second is ―limited liability‖.
10.2 DEFINITION

Koonz and O‘ Donnell have defined social responsibility as ―The personal

obligations of the people as they act in their own interests to assure that
the rights and legitimate interest of others are not ignored‖. The
international Seminar on the social Responsibilities of Business held in
New Delhi in 1965 defined ―social responsibilities of business as
responsibility to customers, workers, shareholders and the community‖.

105
Adolph Berla defined social responsibility as the Manager‘s
responsiveness to public consensus. This means that there cannot be the
same set of social responsibilities applicable to all countries at all times.
These would be determined in case by the customs religions, traditions,
level of industrialisation and a host of other norms and standards about
which there is a public consensus at any given time in a given society.

According to Keith Davis, the term social responsibility refers to two type
of business obligations (a) the socio-economic obligation and (b) the socio
human obligation.

From the above definitions, it is very clear that the concept of social
responsibility assumes that business has not only economic and legal
obligations, but also certain other social responsibilities. The Socio –
economic obligation of every business is to see that the economic
consequences of its actions do not adversely affect public welfare. This
includes obligations to promote employment opportunities, to maintain
competition, to curb inflation, and the like. The socio – human obligation
of every business is to nurture and develop human values (such as
morale, cooperation, motivation and self – realisation in work).

10.3 SOCIAL RESPONSIBILITIES OF BUSINESS TOWARDS

DIFFERENT GROUPS

The social responsibilities of business enterprises should be considered

with reference to their responsibilities towards owners (shareholders),
employees, consumers, the Government and the community at Large.
i) Responsibility Towards Owners or Shareholders
It is primary responsibility of the management. The expectations of the
shareholders are:

 A fair and responsible rate of return on capital and fair dividend for
their investment.
 A vshare in the profit, in the shape of profit – sharing or bonus
payment schemes
 Capital appreciation
 Security for investment
 Corporate image and
 Knowledge about the working of the enterprise and its periodical
report.
ii) Responsibility Towards Employees

The responsibility of business towards society demands a new orientation

of the employer – employee relationship in place of the traditional master

106
– servant relationship. The management should promote a spirit of co –
operative endeavor between employers and employees. Responsibility of
the Organisation towards Employees include

 Payment of fair and reasonable wages to labour and fair salaries to

the staff members based on the principles of adequacy, equity and
human dignity.
 Provision of reasonable and just working conditions
 Establishment of fair work standards and norms
 Provision of labour welfare facilities such as medical facilities
accommodation, canteen facilities etc.
 Adoption of progressive labour policy based on recognition of
genuine trade union rights
 Development of leadership qualities
 Providing facilities for joint consultation and collective bargaining
 Offering job security and promotion opportunities
 Arrangements for proper training and education of the workers
 Proper recognition, appreciation and encouragement of special
skills of the employees and workers and
 Provision of religious, social political freedom to workers.

iii) Responsibility Towards Consumers

The modern marketing approach is consumer – oriented. It aims at
satisfying the real needs and wants of the consumers. The success of an
organisation depends upon its ability to satisfy the consumers‘ needs and
wants. The following are the important responsibilities of the business
consumers:
 The goods supplied must meet the needs of the consumers of
different classes, tastes towards and purchasing power.
 The goods must be of appropriate standard and quality, and be
available in adequate quantities at reasonable prices.
 Customer services should be available by way of advice, guidance
and maintenance.
 There should be a fair and widespread distribution goods and
services among all the sections of consumers.
 There should be prevention of concentration of goods in the hands
of a limited number of products or purchasers or groups.
 The products supplied should not have any adverse effect on the
consumers.
 Taking appropriate steps to prevent profiteering, hoarding, black
marketing etc.
 Avoiding misleading, false and exaggerated advertisements.

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  Providing an opportunity for being heard and redressing the genuine
grievances of the customers.
iv) Responsibility towards the Government

The responsibility of business towards the Government includes the

following: -
 The enterprise should conduct its affairs in a law-abiding manner.
 It should pay its dues and taxes to the Government fully and
honestly.
 It should desist from corrupting public servants or the democratic
process for selfish ends.
 It should not make any attempt to buy political support by money or
patronage.
 It should follow honest trade practices and avoid activities leading
to restraint of trade.
 It should maintain impartially towards political affairs, i.e., it should
abstain from direct political involvement and should not support any
political party.
v) Responsibility to the Community
A business has many responsibilities towards society at large. These
responsibilities include:
 Providing employment opportunities to the socially handicapped
and weaker sections of the community
 Taking all efforts to prevent environmental pollution and preserve
the ecological balance.
 Setting up new industries in backward and less developed regions.
 Promotion of cottage, village and small – scale industries
 Protecting and improving the natural environment including forests,
lakes, rivers and wild life.
 Prevention of slum development, elimination of crimes in industrial
areas and meeting the heavy costs of pollution and waste disposal.
 Providing relief to victims of natural calamities.
 Providing liberal contribution to furthering social causes such as
promotion of education, population control, AIDS control
programme, etc.
 Contributing to the overall development of the locality in which the
business is situated.

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10.4 ARGUMENTS AGAINST SOCIAL RESPONSIBILITY OF
BUSINESS

i) Milton Friedman argues ―that there is one and only one social
responsibility of business that is to use its resources and engage in
activities designed to increase its Profits‖. He is of the opinion that
social matters are not the immediate concern of business people.
Further, he argues that in a free enterprise, private property system, a
corporate executive is an employee of the owners of the business.
Therefore, he should conduct the business in accordance with their
desires, which generally will be to make as much money as possible,
while conforming to the basic rules of society.
ii) Hayek argues that entrusting the management with power to use the
resources for social good rather than upholding the owner‘s interest
would amount to conferring the management with arbitrary and
politically dangerous powers.
iii) Another major objection to social responsibility is that business is not
equipped to handle social activities. According to this view, managers
do not have the required social skills and expertise to make social
decisions. It may be said that if managers pay special attention to social
responsibility, it would dilute the primary purpose of business.
iv) Another argument against social responsibility of business is that
business already has enormous economic, environmental and
technological power. As such, business concerns should not be
entrusted with additional powers.
v) If business firms undertake social responsibilities, the cost of
production of their goods and services may tend to increase. This
would make the firms products less competitive in the international
market.
10.5 ARGUMENTS FOR SOCIAL RESPONSIBILITY OF BUSINESS

i) The case for social responsibility of business arises primarily on the

ground that business concerns are creatures of society. They make
use of the resources of the society and depend upon the society for
their existence. As such, they should discharge their duties and
responsibilities in enhancing the welfare of the society.
ii) In recent years, the growth of large corporate enterprises has
resulted in many serious human and social problems. Hence,
managers should conduct the affairs of corporate enterprises in
such way as to solve or at least ameliorate these problems.
iii) Another reason for business assuming social responsibilities is to
avoid future Government intervention and regulation in the social

109
 field. If business fails to assume social responsibilities. Prominent
examples include the Consumer Protection Act, 1986 and the
MRTP Act, 1969.
iv) Social responsibility also emanates from the social power which
business possesses, say as a result of being a potential employer.
v) Business is an integral part of society. It makes use of the resources
of society to accomplish its objectives. Hence, business has not only
to protect the interest of those whom it serves but also of society at
large, as a custodian of the society‘s resources.
vi) The doctrine of trusteeship, as propounded by Mahatma Gandhi
and Andrew Carniger, emphasizes the fact that ―A business must
be held in trust legally and normally for the benefit of the people
whom the business wants to serve‖ Business must earn a profit to
survive and grow. However, it must act in concert with the broad
public interest and serve the objectives of mankind and society.
vii) Davis Keith argues that ―Business has the resources and let
business try‖. ―He is of the opinion that business has a reservoir of
management talent, functional expertise and capital. Therefore,
business can try to solve social problems.
viii) Changing social values have also let to the adoption of this
concept. The boundaries of business are determined by the
prevailing values of the society. For instance, do we allow
environmental pollution and if so, of what kind and how much? Such
questions are determined by the prevailing values in the society.
ix) Win a view to enhancing corporate image and goodwill, an
enterprise has to behave in a socially responsible manner. The
purpose of enhancing corporate image is to attract a large number
of customers.
x) Another major reason for the involvement of business in the social
area is to maintain industrial peace. Today, trade unions demand
better working conditions, reasonable wages, welfare facilities, etc.
Therefore, to maintain industrial peace, business has to be involved
in social activities.
xi) Yet another reason is the enlightened self-interest of business.
This doctrine assumes that by helping society as a whole, business
is actually serving its own long – term interest. It is to be noted that
long – term interest of business as best served when management
assumes social responsibilities.
10.6 SOCIAL RESPONSIBILITY - THE INDIAN SITUATION

The concept of social responsibility is very old in India. Businessmen were

treated with great respect also because of prevalence of the concept of

110
parting with one‘s wealth for the benefit of society. Merchants have always
been charitable and provided relief in difficult times of draughts, famine or
epidemics. Over the years this practice remained same except the shift
from merchant charity to corporate citizenship. The merchants were
leaders not only in the economic but also the social field and took active
interest in social reforms and in public life as well.

J.R.D Tata was first to conduct social audit in India. Number of leading
companies have realised the social responsibility and recognised the
concept of social responsibility of corporate sector. Numbers of schools,
colleges, hospitals, research institutes, technological institute,
management‘s institutes, libraries, museum, places of religions, worship,
institutes for old and orphans, have set up with the help of business
community. There have been huge contributions from many businessmen
for the poor and needy in times or droughts earthquakes, floods and other
natural calamities. The problem of damage to ecology is a serious
problem now – a – days which has been handled by many businessmen
in very effective way. The number of measures taken to control ―Pollution
in environment‖ shows the efforts put in by them with the help of
government. Public sector is guilty as private sector as far as the problem
of pollution of environment is concerned. There are many public sector
enterprises in India which have failed to discharge their primary
responsibilities as well. There has been change in attitude of society and
the business community itself about its obligations to society and the way
of expressing it. now there is more of direct engagement in the
mainstream development concerns and in helping disadvantaged groups
in the society.

An international seminar was held in New Delhi in March 1995 to define

social responsibility of business followed by another seminar in March
1966 in Calcutta. A National Committee on Social Responsibilities of
Business was also constituted. In 1980 big business houses adopted 100
villages for developing them as model villages. The problem of industrial
labour unrest has also been taken care of by ensuring participation of
labour in management.

Through the business units in India have starting realising their

responsibility towards society, but member of such units is very limited.
Government should take legislative measures to force all business units
to contribute something for social uplift. Besides legislative measures,
awareness about social responsibility should be created. Business should
prepare a code of ethics for social upliftment. The company law can also
make a provision to make it obligatory for units having investment beyond

111
a certain limit to spend a part of their profits on social welfare activities.
The companies should also show in their balance sheets the amount they
have spent on social obligations.
LET US SUM SUP

After reading this unit, the reader will have a comprehensive

understanding of what social responsibility is and how businesses must
be responsible to society. This unit provides an overview of the socially
acceptable practices, such as the provision of high-quality goods and
services, the charging of reasonable prices for such items, and the
improvement of working conditions. Also, it presents a clear picture of
the social obligations that businesses in India have.
CHECK YOUR PROGRESS

Choose the Correct Answer:

1. Responsibility of business to employees includes .
a) Payment of Fair Wages

b) Providing Training and Education

c) Recognizing them
d) All the above

2. Responsibility of business to the Community includes .

a) Making Eco - Friendly Products
b) Developing Backward / Rural areas
c) Developing a Better Society

d) All the above

3. For a business which is a broader term social responsibility or legal
responsibility .

a) Both are equally important b) Social Responsibility

c) Legal Responsibility d) None of the above
4. A firm has the social responsibility of providing fair returns to
its .
a) Investors b) Customers
c) Suppliers d) All the above
5. ―To adopt fair trade policies and Practices‖. It is an example of
responsibility of business towards .

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a) Shareholders b) Employees

c) Government d) Consumers
GLOSSARY

Social : Social Responsibility is an ethical theory in

Responsibility which individuals are accountable for
fulfilling their civic duty, and the actions of an
individual must benefit the whole of society.

Shareholders : A shareholder is a person or institution that

has invested money in a corporation in
exchange for a ―share‖ of the ownership.

Consumers : A person who buys goods or services for

their own use:

Capital : Capital appreciation is a rise in an

Appreciation investment's market price. Capital
appreciation is the difference between the
purchase price and the selling price of an
investment. I

Corporate Image : A corporate identity or corporate image is the

manner in which a corporation, firm or
business enterprise presents itself to the
public. The corporate identity is typically
visualized by branding and with the use of
trademarks, but it can also include things like
product design, advertising, public relations
etc.

SUGGESTED READINGS
1. K. Aswathappa, (2011), Business Environment for Strategic
Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.

113
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment,Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES

1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.d) 2.d) 3.b) 4.a) 5. c)

114
115
 BLOCK - 4

Unit 11: Business Ethics and Values

Unit 12: Corporate Governance
Unit 13 : Economic Systems
Unit 14 : Economic Planning

116
UNIT 11

BUSINESS ETHICS AND VALUES

STRUCTURE

Overview

Learning Objectives
11.1 Introduction

11.2 Meaning and Definition

11.3 Needs for Business Ethics
11.4 Nature of Business Ethics

11.5 Sources of Business Ethics

11.6 Scope of Business Ethics
11.7 Elements of Business Ethics
11.8 Principles of Business Ethics
11.9 Unethical Practices

Let Us Sum Up
Check Your Progress

Glossary

Suggested Readings

Web Resources
Answer to Check Your Progress
OVERVIEW

Business ethics carries significant influence in the corporate world. Not

only does it change how businesses operate on a day-to-day- basis, but
it also influences legislation around corporate regulation.
Business ethics is the study of how a business should act in the face of
ethical dilemmas and controversial situations. This can include a number
of different situations, including how a business is governed, how stocks
are traded, a business' role in social issues, and more. Many businesses
leverage business ethics not only to remain clean from a legal
perspective, but also to boost their public image. It instills and ensures
trust between consumers and the businesses that serve them.

117
The modern idea of business ethics as a field is relatively new, but how to
ethically conduct business has been widely debated since bartering and
trading first arose. Aristotle even proposed a few of his own ideas about
business ethics.

LEARNING OBJECTIVES

After studying this unit, you will be able to;

 define the meaning of business ethics

 explain needs for business ethics
 enumerate principles of business ethics
 describe sources of business ethics
 explain the elements of business ethics
 highlight the characteristics of business ethics
 describe the scope and nature of business ethics
 delineate the benefits of business ethics.
11.1 INTRODUCTION

The term "ethics" is derived from the Greek word "ethos" which refers to
character or customs or accepted behaviors. The Oxford Dictionary states
ethics as "the moral principle that governs a person's behavior or how an
activity is conducted". The synonyms of ethics as per Collins Thesaurus
are - moral code, morality, moral philosophy, moral values, principles,
rules of conduct, standards. Ethics is a set of principles or standards of
human conduct that govern the behavior of individuals or organisations.
Using these ethical standards, a person or a group of persons or an
organisation regulate their behavior to distinguish between what is right
and what is wrong as perceived by others.
Ethics is a subject of social science that is related with moral principles
and social values. 'Business Ethics' can be termed as a study of proper
business policies and practices regarding potentially controversial issues,
such as corporate governance, insider trading, bribery, discrimination,
corporate social responsibility, and fiduciary responsibilities. Businesses
must abide by some basic principles. It should provide quality goods and
services at reasonable prices to their consumers. It must also avoid
adulteration, misleading advertisements, and other unfair malpractices.

11.2 MEANING AND DEFINITION

Business ethics is a form of applied ethics or professional ethics that

examines ethical principles and moral or ethical problems that can arise
in a business environment. It is also known as corporate ethics. It applies

118
to all aspects of business conduct and is relevant to the conduct of
individuals and entire organisations.
There are many definitions of business ethics, but the ones given
by Andrew Crane and Raymond C. Baumhart are considered the most
appropriate ones.
Definition

According to Crane, "Business ethics is the study of business situations,

activities, and decisions where issues of right and wrong are addressed."
Baumhart defines, "The ethics of business is the ethics of responsibility.
The business man must promise that he will not harm knowingly."
11.3 NEEDS FOR BUSINESS ETHICS

The need for business ethics, i.e., for a set of generally accepted standard
of personal conduct, is evident throughout the world. These have been
and are being developed by the trade associations concerned with these
broad objectives:

i) Publication of a Code of Ethics is likely to improve the confidence of

customers, clients, employees, etc., in the quality of service they may
expect;
ii) Business code governs the inter-relationship of the members.
Business cannot be carried on, in its present complexity, without trust
in the ethical standards of vendors and suppliers, of financiers and of
government agencies.
iii) The interest of all those who deal with business –the stock-holders,
employees, customers, competitors, dealers and suppliers, and the
local community –need be protected from the unethical and dubious
ways of dealing and exploitation.
iv) The consumer‘s right can be saved and served well only when there
is some type of moral binding on the business community: (a) the
consumer has the right to be informed; (b) he has the right to safety;
(c) he has the right to choose; (d) he has the right to be heard.
v) Business today is confronted with major group of social issues (a)
people –oriented management; (b) ecology and environment
protection; (c) consumerism; and (d) the energy crisis and resource
utilisation and development. These issues being inter-related, need
that business should feel some obligation for meeting these issues.
11.4 NATURE OF BUSINESS ETHICS

i) Ensure legality of business activities: Business activities must be

legal and a business man should not do any kind of illegal activity.

119
ii) Customer Orientation: All of his operations must be customer
oriented. He must bear in his mind that the ―customer is the kinds‖ So, he
should produce and distribute that types of goods and services which can
satisfy the customers.

iii) Supplying Good Quality Product: A businessman must have to

ensure the supply of good quality products and services. He has to
maintain minimum standard of his product and service.
iv) Price: Businessman has to claim a reasonable price for has products
or services that is under buying capacity of the customers.
v) Following Rules and Regulations: A businessman must have to
follow all business-related rules and regulations that is formulated by the
government.
vi) Employer-employee relationship: This is an important issue to build
up a friendly relationship between employer and employees in an
organisation because a success of the organisation largely depends on it.
vii) Avoiding fraud and cheating: A businessman has to avoid unfair
means. He should not try to cheat or fraud the customers or general
public. He should always practice honesty and sincerity in his activities.
viii) Environmental issues: In the present world, environmental issues
are considered a vital matter. A businessman ensures healthy
environment for the insiders as well as the outsiders for running the
organisation smoothly.
ix) Avoiding artificial shortage: Some dishonest businessmen create
artificial shortage of products and thereby they want to gain more profit.
This is not acceptable.
x) Avoiding harmful competition: In order to survive in the market
successfully, each and every business organisation should co-operate
with each other. They should avoid harmful competition.
11.5 SOURCES OF BUSINESS ETHICS

The various sources from where ethical values have been evolved. The
main sources are;

i) Religion
ii) Society
iii) Legal System
iv) Genetic inheritance
v) Marketplace
vi) Nature

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 vii) Culture
11.6 SCOPE OF BUSINESS ETHICS

Ethical problems and phenomena arise across all the functional areas of
companies and at all levels within the company.
i) Ethics in Compliance: Compliance is about obeying and adhering to
rules and authority. The motivation for being compliant could be to do the
right thing out of the fear of being caught rather than a desire to be abiding
by the law. An ethical climate in an organisation ensures that compliance
with law is fuelled by a desire to abide by the laws. Organisations that
value high ethics comply with the laws not only in letter but go beyond
what is stipulated or expected of them.
ii) Ethics in Finance: The ethical issues in finance that companies and
employees are confronted with include: • In accounting – window
dressing, misleading financial analysis.
 Related party transactions not at arm‘s length
 Insider trading, securities fraud leading to manipulation of the
financial markets.
 Executive compensation.
 Bribery, kickbacks, over billing of expenses, facilitation payments.
 Fake reimbursements
iii) Ethics in Human Resources: Human Resource Management (HRM)
plays a decisive role in introducing and implementing ethics. Ethics should
be a pivotal issue for HR specialists. The ethics of human resource
management (HRM) covers those ethical issues arising around the
employer-employee relationship, such as the rights and duties owed
between employer and employee. The issues of ethics faced by HRM
include:
 Discrimination issues i.e., discrimination on the bases of age,
gender, race, religion, disabilities, weight etc.
 Sexual harassment.
 Affirmative Action.
 Issues surrounding the representation of employees and the
democratisation of the workplace, trade etc.,
 Issues affecting the privacy of the employee: workplace
surveillance, drug testing.
 Issues affecting the privacy of the employer: whistle-blowing.
 Issues relating to the fairness of the employment contract and the
balance of power between employer and employee

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  Occupational safety and health. Companies tend to shift economic
risks onto the shoulders of their employees. The boom of
performance-related pay systems and flexible employment
contracts are indicators of these newly established forms of
shifting risk.
iv) Ethics in Marketing: Marketing ethics is the area of applied ethics
which deals with the moral principles behind the operation and regulation
of marketing. The ethical issues confronted in this area include:

 Pricing: price fixing, price discrimination, price skimming.

 Anti-competitive practices like manipulation of supply, exclusive
dealing arrangements, tying arrangements etc.
 Misleading advertisements
 Content of advertisements. • Children and marketing.
 Black markets, grey markets.
v) Ethics of Production: This area of business ethics deals with the
duties of a company to ensure that products and production processes do
not cause harm. Some of the more acute dilemmas in this area arise out
of the fact that there is usually a degree of danger in any product or
production process and it is difficult to define a degree of permissibility, or
the degree of permissibility may depend on the changing state of
preventative technologies or changing social perceptions of acceptable
risk.
 Defective, addictive and inherently dangerous products and
 Ethical relations between the company and the environment
include pollution, environmental ethics, and carbon emissions
trading.
 Ethical problems arising out of new technologies for e.g.
Genetically modified food
 Product testing ethics. The most systematic approach to fostering
ethical behaviour is to build corporate cultures that link ethical
standards and business practices.
11.7 ELEMENTS OF BUSINESS ETHICS
i) A Formal Code of Conduct: Code of conduct is statements of
organisational values. The Sarbanes-Oxley Act, 2002 made it important
for businesses to have an ethics code, something in writing which will help
the employees know – with both ease and clarity – what is expected of
them on the job. The code should reflect the managements desire to
incorporate the values and policies of the organisation.

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ii) Code of Ethics: For every new business incorporated, it is important
for the management to have a code of ethics for his business. It is usually
unwritten for small businesses. It is basically a buzzword for the
employees to observe ethical norms and form the basic rules of conduct.
It usually specifies methods for reporting violations, disciplinary action for
violation and a structure of the due process to be followed. A code of
ethics must summarize the beliefs and values of the organisation. For a
large business empire, it is important to hire talent to assist existing
personnel with regards to integrity, understanding, responsibility, and
cultural norms of the country.
iii) Ethics Committee: Ethics committees can rise concerns of ethical
nature; prepare or update code of conduct, and resolve ethical dilemma
in organisation. They formulate ethical policies and develop ethical
standards. They evaluate the compliances of the organisation with these
ethical standards. The committee members should be conscious about
the corporate culture and ethical concise of the organisation. The
following committees are to be formed:
 Ethics committee at the board level- The committee would be
charged to oversee development and operation of the ethics
management programme.
 Ethics management committee – It will be charged with
implementing and administrating an ethics management programme,
including administrating and training about policies and procedures,
and resolving ethical dilemmas.

iv) Ethical Communication System: Ethical communication system

helps the employees in making enquiries, getting advice if needed and
reporting all the wrong done in the organisation. Objectives of ethical
communication system are:
 To communicate the organisations values and standards of ethical
conduct or business to employees.
 To provide information to employees on the company‘s policies
and procedures regarding ethical code of conduct.
 To help employees get guidance and resolve queries. To set up
means of enquiries such as hotlines, suggestion boxes and e-mail
facilities. Top management can communicate the ethical
standards to the lower management which can be further
transferred to the operational level.
v) An Ethics Office with Ethical Officers: The job of an ethics officer is
to communicate and implement ethical policies amongst employees of the

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organisation. Ethics officer should develop a reputation for credibility,
integrity, honesty and responsibility. Functions of ethics officer are:

 Assessing the needs and risks that an ethical programme must

address. b. Develop and distribute code of conduct.
 Conduct ethical training programme.
 Maintain confidential service to answer employee‘s questions
about ethical issues.
 To ensure that organisation in compliance with governmental
regulations.
 To monitor and audit ethical conduct.
 To take action on possible violation of company‘s code.
 To review and update code in time.
vi) Ethics Training Programme: Any written ethical code will not work
unless supported and followed by a proper training programme. Some
companies have an in-house training department while others may opt for
an out-source expert. To ensure ethical behaviour, a corporate training
programme is established which deals in assisting employees to
understand the ethical issues that are likely to arise in their workplace.
When new employees are to be recruited, the induction training should be
arranged for them. Training will help them to familiarize with company‘s
ethical code of behaviour.

vii) Disciplinary System: A disciplinary system should be established in

the organisation to deal with ethical violations promptly and severely. If
unethical behavior is not properly dealt with, it will result in threatening the
entire social system. A company should adopt fair attitude towards
everyone without any discrimination.
viii) Establishing an Ombudsperson: An ombudsperson is responsible
to help coordinate development of policies and procedures to
institutionalize moral values in the workplace.
ix) Monitoring: To make an ethical programme, a successful monitoring
programme needs to be developed. A monitoring committee is formed.
Monitoring can be done by keen observation by ethics officer, surveys and
supporting systems.
11.8 PRINCIPLES OF BUSINESS ETHICS

The principles of business ethics are related to social groups that

comprise of consumers, employees, investors, and the local community.
The important rules or principles of business ethics are as follows;

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1) Avoid Exploitation of Consumers − Do not cheat and exploit
consumer with measures such as artificial price rise and adulteration.
2) Avoid Profiteering − Unscrupulous business activities such as
hoarding, black-marketing, selling banned or harmful goods to earn
exorbitant profits must be avoided.
3) Encourage Healthy Competition − A healthy competitive atmosphere
that offers certain benefits to the consumers must be encouraged.
4) Ensure Accuracy − Accuracy in weighing, packaging and quality of
supplying goods to the consumers has to be followed.
5) Pay Taxes Regularly − Taxes and other duties to the government
must be honestly and regularly paid.
6) Get the Accounts Audited − Proper business records, accounts must be
managed. All authorized persons and authorities should have access to
these details.
7) Fair Treatment to Employees − Fair wages or salaries, facilities and
incentives must be provided to the employees.
8) Keep the Investors Informed − The shareholders and investors must
know about the financial and other important decisions of the company.
9) Avoid Injustice and Discrimination − Avoid all types of injustice and
partiality to employees. Discrimination based on gender, race, religion,
language, nationality, etc. should be avoided.
10) No Bribe and Corruption − Do not give expensive gifts, commissions
and payoffs to people having influence.
11) Discourage Secret Agreement − Making secret agreements with
other business people to influence production, distribution, pricing etc. are
unethical.
12)Service before Profit − Accept the principle of "service first and profit
next."
13) Practice Fair Business − Businesses should be fair, humane,
efficient and dynamic to offer certain benefits to consumers.
14) Avoid Monopoly − No private monopolies and concentration of
economic power should be practiced.
15) Fulfil Customers’ Expectations − Adjust your business activities as
per the demands, needs and expectations of the customers.
16) Respect Consumers Rights − Honor the basic rights of the
consumers.

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17) Accept Social Responsibilities − Honor responsibilities towards the
society.
18) Satisfy Consumers’ Wants − Satisfy the wants of the consumers as
the main objective of the business is to satisfy the consumer‘s wants. All
business operations must have this aim.
19) Service Motive − Service and consumer's satisfaction should get
more attention than profit-maximisation.
20) Optimum Utilisation of Resources − Ensure optimum utilisation of
resources to remove poverty and to increase the standard of living of
people.
21) Intentions of Business − Use permitted legal and sacred means to
do business. Avoid Illegal, unscrupulous and evil means.
11.9 UNETHICAL PRACTICES
Unethical Practices against Consumers

i) Adulteration: There have been report of adulteration to the extent had

may cause health problems. Black-paper is mixed with papaya seed,
sawdust, is coloured and sold as red chili powder, small pebbles are
mixed with rice and pulses, wood pieces are coloured. The recent case
of mixing animal fat with vanaspati raised all India concern.
ii) Spurious products: Some businesses have gone to the extent of
selling spurious products. Even life-saving medicines have not been
spared. Sometimes plain water is found in life-saving injections. Glucose
bottle either contain very glucose or it is contaminated. Drugs rendered
time-barred are sold by changing their labels.
iii) Duplicates: Not only are duplicates found to be sold as imported items
but popular brands of Indians products are duplicated. Detergents, Soft-
drinks, Ketches, jams, squashes, oils and a host of other items are
duplicated and sold under popular brand names.

Unethical Practices against Employees

i) Low Salaries: Excepting certain organisation, particularly in the
corporate sector, salaries being paid to the employees tends be very low.
They are barely sufficient to make, one‘s both ends meet.
ii) Poor Working Conditions: There is hardly any attention paid to the
work environment. Again, certain exceptions, particularly, in the corporate
sector, do exist. Working conditions tend to be unhygienic inadequate
ventilation, poor lighting, and no welfare facilities. Besides, safety of the
workers is also not carried for.

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iii) Exploitation: Bonded labour is still not uncommon; workers being not
allowed to move from their work place. Moreover, they are hardly given
two square meals and made to work to the whole day. In spite of
government‘s resolve to eradicate this evil it still exists. Cases have been
reported not only from far-flung areas but also from capital‘s neighboring
districts in U.P., Haryana and Rajasthan. Besides, employees even
educated ones are made to sign receipts for sales more than what are
actually paid to them.

Unethical Practices against Government and Community

i) Tax Evasion: one of the basic reasons of tax evasion is said to be the
rate of taxation. Income tax, for instance, is highest in India. However, it
is doubtful, if lower rates of taxation will make the business community
more sincere on paying their taxes, though initial response may be
encouraging. Black money has in fact general tend a parallel economy.
Government has been endeavoring to channalise this black money into
productive uses. Ones such step has been the issue of bearer bounds for
which investment are not to be accounted for.

ii) Pollution: Pollution continues to be one of the major practices being

followed by Indian business. In spite of a separate Ministry of
Environment, air, water noise pollution continues unabated; however,
some check has been reported on high industrial units. New projects have
to seek clearance from the ministry of Environment before they can be
launched. However, better controls may be expected in future
iii) Bribes, etc.: Corrupt practices, including bribe, have become the style
of today‘s business operations. Even political support is exploited to get
anything cleared that may otherwise to objectionable. Poor quality
construction is cleared by the officials for a quid – proquo. In fact, in certain
cases there is a set percentage to be paid to the officials.
LET US SUM UP

Reading this unit provides a thorough understanding of the meaning and

importance of corporate ethics. It also sheds more light on the ethical
standards that Indian businesses adhere to. It aids the reader in
comprehending the dos and don'ts for enterprises. Along with outlining
the numerous regulations followed to instill ethical principles in enterprises
in India, it also explains the unethical actions that businesspeople engage
in against consumers and governments.

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CHECK YOUR PROGRESS

Choose the Correct Answer:

1. Business Ethics is .

a) Social Science b) Normative Science

c) Science of Conduct d) All the above
2. Which one of the following is not principal business ethics?

a) Principle of Universality b) Principle of Dissatisfaction

c) Principle of autonomy d) Principle of humanity
3. What is the major component of business ethics?

a) Ethics b) Ethical principles

c) Rules of behavior d) All of the above
4. Which one of the following is not an unethical practice against
Consumer?
a) Adulteration b) Principle of Humanity
c) Spurious Product d) Duplicate

5. Tax Evasion against .

a) Consumer b) Employees
c) Government and Community d) None of the above

GLOSSARY

Business Ethics : Business ethics refers to implementing

appropriate business policies and practices
with regard to arguably controversial subjects.

Ethical : Ethical communication refers

Communication to communicating in a manner that is clear,
concise, truthful, and responsible

Ethics Training : Ethics training is a program where the

employees of a business are taught certain
Program
business ethics that would improve the
workplace

Code Of Ethics : A code of ethics sets forth values, ethical

principles, and ethical standards to which

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 professionals aspire and by which their
actions can be judged.

Adulteration : Adulteration is the act of making food or drugs

of poor quality by adding some other
substances to them.

Tax Evasion : Tax evasion is an illegal activity in which a

person or entity deliberately avoids paying a
true tax liability

SUGGESTED READINGS

1. K. Aswathappa, (2011), Business Environment for Strategic

Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES

1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.d) 2.b) 3.a) 4. b) 5. c)

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UNIT 12

CORPORATE GOVERNANCE
STRUCTURE

Overview

Learning Objectives
12.1 Introduction

12.2 Definition
12.3 Main Objectives of Corporate Governance
12.4 Types of Corporate Social Responsibility

12.5 Principles of Corporate Governance

12.6 Need for Corporate Governance
12.7 Benefits of Corporate Governance
12.8 Perspective and Important Issues in Corporate

Governance
12.9 Types of CSR Activities Under Schedule VII of The
Companies Act,2013
12.10 Corporate Government in India
12.11 SEBI Code of Corporate Governance
12.12 The Institute of Company Secretaries of India (ICSI)

12.13 The Institute of Chartered Accountants of India (ICAI)

Let Us Sum Up

Check Your Progress

Glossary
Suggested Readings
Web Resources

Answer to Check Your Progress

OVERVIEW

In today‘s market-oriented economy, the need for corporate governance

arises. Also, efficiency as well as globalisation are significant factors
urging corporate governance. Corporate Governance is essential to

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develop added value to the stakeholders Corporate Governance is the
interaction between various stakeholders such as shareholders, board of
directors, and company‘s management etc., in shaping corporation‘s
performance effectively and efficiently in order to satisfy the different
stakeholders. The relationship between the owners and the managers in
an organisation must be healthy and gives a finance guarantee of fair
return on their investment. The owners must see that individual‘s actual
performance is according to the standard performance. These dimensions
of corporate governance should not be overlooked. Hence the Corporate
Governance deals with determining ways to take effective strategic
decisions. It gives ultimate authority and complete responsibility to the
Board of Directors.

Learning Objectives

After studying this unit, you will be able to;

 define Corporate Governance
 explain the objectives of Corporate Governance
 explain types of Corporate Social Responsibility
 enumerate principles of Corporate Governance
 discuss the need for Corporate Governance
 delineate Benefits of Corporate Governance
 explain Important Issues in Corporate Governance
 elucidate Corporate Governance in India.
12.1 INTRODUCTION

Corporate Governance refers to the way a corporation is governed. It is

the technique by which companies are directed and managed. It means
carrying the business as per the stakeholders' desires. It is actually
conducted by the board of Directors and the concerned committees for
the company's stakeholder's benefit. It is all about balancing individual
and societal goals, as well as, economic and social goals.
Corporate Governance is the interaction between various participants
(shareholders, board of directors, and company's management) in
shaping corporation's performance and the way it is proceeding towards
the relationship between the owners and the managers in an organisation
must be healthy and there should be no conflict between the two. The
owners must see that individual's actual performance is according to the
standard performance. These dimensions of corporate governance
should not be overlooked.
Corporate Governance deals with the manner the providers of finance
guarantee themselves of getting a fair return on their investment.

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Corporate Governance clearly distinguishes between the owners and the
managers. The managers are the deciding authority. In modern
corporations, the functions/ tasks of owners and managers should be
clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective

strategic decisions. It gives ultimate authority and complete responsibility
to the Board of Directors. In today's market- oriented economy, the need
for corporate governance arises. Also, efficiency as well as globalisation
are significant factors urging corporate governance. Corporate
Governance is essential to develop added value to the stakeholders.
Corporate Governance ensures transparency which ensures strong and
balanced economic development. This also ensures that the interests of
all shareholders (majority as well as minority shareholders) are
safeguarded. It ensures that all shareholders fully exercise their rights and
that the organisation fully recognizes their rights.
12.2 DEFINITION
The definition of corporate governance most widely used is ―the system
by which companies are directed and controlled‖ (Cadbury Committee,
1992). More specifically it is the framework by which the various
stakeholder interests are balanced, or, as the IFC states, ―the
relationships among the management, Board of Directors, controlling
shareholders, minority shareholders and other stakeholders‖. Cadbury
Committee [1] (U.K.), 1992 has defined corporate governance as such

―Corporate governance is the system by which companies are directed

and controlled. It encompasses the entire mechanics of the functioning of
a company and attempts to put in place a system of checks and balances
between the shareholders, directors, employees, auditor and the
management.‖
―Corporate governance is the system by which business corporations are
directed and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the
corporation, such as, the board, managers, shareholders and spells out
the rules and procedures for making decisions on corporate affairs. By
doing this, it also provides this; it also provides the structure through which
the company objectives are set, and the means of attaining those
objectives and monitoring performance.‖

Definition of corporate governance by the Institute of Company

Secretaries of India is as under: ―Corporate Governance is the
application of best Management practices, Compliance of law in true letter

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and spirit and adherence to ethical standards for Effective Management
and distribution of wealth and discharge of social Responsibility for
sustainable development of all stakeholders‖

Corporate governance is, ―the framework of rules, relationships, systems

and processes within and by which authority is exercised and controlled
in corporations.‖ It encompasses the mechanisms by which companies,
and those in control, are held to account.‘ – Owen, J.; HIH Royal
Commission.

―Corporate governance is a dynamic force that keeps evolving.‖ – Eric

Mayne, Chair, ASX Corporate Governance Council.
―Corporate governance describes the structure of rights and
responsibilities among the parties that have a stake in a firm.‖ – Aguilera,
R.V. & Jackson, G

12.3 MAIN OBJECTIVES OF CORPORATE GOVERNANCE

i) To catalyze capacity building in new emerging areas of Corporate
Governance.
ii) To further research, scholarship, and education in corporate
governance in India.
iii) To foster a culture of good governance, voluntary compliance and
facilitate effective participation of different stakeholders.
iv) To create a framework of best practices, structure, processes and
ethics.
12.4 TYPES OF CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility is traditionally broken into four categories:

environmental, philanthropic, ethical, and economic responsibility.

i) Environmental Responsibility
ii) Ethical Responsibility
iii) Philanthropic Responsibility
iv) Economic Responsibility
i) Environmental Responsibility: Environmental responsibility refers to
the belief that organisations should behave in as environmentally friendly
a way as possible. It‘s one of the most common forms of corporate social
responsibility. Some companies use the term ―environmental
stewardship‖ to refer to such initiatives. Companies that seek to embrace
environmental responsibility can do so in several ways:
 Reducing pollution, greenhouse gas emissions, the use of single-use
plastics, water consumption, and general waste

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 Increasing reliance on renewable energy, sustainable resources, and
recycled or partially recycled materials
 Offsetting negative environmental impact; for example, by planting
trees, funding research, and donating to related causes
ii) Ethical Responsibility: Ethical responsibility is concerned with
ensuring an organisation is operating in a fair and ethical manner.
Organisations should embrace ethical responsibility aim to achieve fair
treatment of all stakeholders, including leadership, investors, employees,
suppliers, and customers.
Firms can embrace ethical responsibility in different ways. For example,
a business might set its own, higher minimum wage if the one mandated
by the state or federal government doesn‘t constitute a ―livable wage.‖
Likewise, a business might require that products, ingredients, materials,
or components be sourced according to free trade standards. In this
regard, many firms have processes to ensure they‘re not purchasing
products resulting from slavery or child labor.
iii) Philanthropic Responsibility: Philanthropic responsibility refers to a
business‘s aim to actively make the world and society a better place. In
addition to acting as ethically and environmentally friendly as possible,
organisations driven by philanthropic responsibility often dedicate a
portion of their earnings. While many firms donate to charities and
nonprofits that align with their guiding missions, others donate to worthy
causes that don‘t directly relate to their business. Others go so far as to
create their own charitable trust or organisation to give back.

iv) Economic Responsibility: Economic responsibility is the practice of

a firm backing all of its financial decisions in its commitment to do good in
the areas listed above. The end goal is not to simply maximize profits, but
positively impact the environment, people, and society.
12.5 PRINCIPLES OF CORPORATE GOVERNANCE

The Principles of Corporate Governance are:

i) Accountability: Accountability is a responsibility to explain the results
of one‘s decisions taken in the interest of others. In the context of
corporate governance, accountability implies the responsibility of the
Chairman, the Board of Directors and the chief executive for the effective
use of company‘s resources in the best interest of company and its
stakeholders.

Accountability means to be answerable and be obligated to take

responsibility for one‘s actions. By doing so, two things can be ensured-

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That the management is accountable to the Board of Directors.

That the Board of Directors is accountable to the shareholders of the

company.

This principle gives confidence to shareholders in the business of the

company that in case of any unfavourable situation, the persons
responsible will be held in charge.
ii) Fairness: Fairness gives shareholders an opportunity to voice their
grievances and address any issues relating to the violation of
shareholder‘s rights. This principle deals with the protection of
shareholders‘ rights, treating all shareholders equally without any
personal favoritism, and granting redressal for any violations of rights.
iii) Transparency: Transparency means the quality of something which
enables one to understand the truth easily. In the context of corporate
governance, it implies an accurate, adequate and timely disclosure of
relevant information about the operating results etc. of the corporate
enterprise to the stakeholders. In fact, transparency is the foundation of
corporate governance; which helps to develop a high level of public
confidence in the corporate sector. For ensuring transparency in
corporate administration, a company should publish relevant information
about corporate affairs in leading newspapers, e.g., on a quarterly or half
yearly or annual basis.
Providing clear information about a company‘s policies and practices and
the decisions that affect the rights of the shareholders represents
transparency. This helps to build trust and a sense of togetherness
between the top management and the stakeholders. It ensures accurate
and full disclosure timely on material matters like financial condition,
performance, ownership.
iv) Independence: Independence means the ability to make decisions
freely without being unduly influenced. Decisions should be made freely
without having any personal interest in the company. It ensures the
reduction in conflict of interest. Corporate governance suggests the
appointment of independent directors and advisors so that decisions are
taken responsibly without influence.

Good corporate governance requires independence on the part of the top

management of the corporation i.e., the Board of Directors must be strong
non-partisan body; so that it can take all corporate decisions based on
business prudence. Without the top management of the company being
independent; good corporate governance is only a mere dream

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v) Social Responsibility: Apart from the 4 main principles, there is an
additional principle of corporate governance. Company social
responsibility obligates the company to be aware of social issues and take
action to address them. In this way, the company creates a positive image
in the industry. The first step towards Corporate Social Responsibility is
to practice good Corporate Governance.

12.6 NEED FOR CORPORATE GOVERNANCE

The need for corporate governance is highlighted by the following factors:

i) Wide Spread of Shareholders: Today a company has a very large
number of shareholders spread all over the nation and even the world;
and a majority of shareholders being unorganized and having an
indifferent attitude towards corporate affairs. The idea of shareholders‘
democracy remains confined only to the law and the Articles of
Association; which requires a practical implementation through a code of
conduct of corporate governance.
ii) Changing Ownership Structure: The pattern of corporate ownership
has changed considerably, in the present-day-times; with institutional
investors (foreign as well Indian) and mutual funds becoming largest
shareholders in large corporate private sector. These investors have
become the greatest challenge to corporate managements, forcing the
latter to abide by some established code of corporate governance to build
up its image in society.
iii) Corporate Scams or Scandals: The event of Harshad Mehta
scandal, which is perhaps, one biggest scandal, is in the heart and mind
of all, connected with corporate shareholding or otherwise being educated
and socially conscious. The need for corporate governance is, then,
imperative for reviving investors‘ confidence in the corporate sector
towards the economic development of society.
12.7 BENEFITS OF CORPORATE GOVERNANCE

i) Good Corporate Governance ensures corporate success and

economic growth.
ii) Strong corporate governance maintains investors‘ confidence, as a
result of which, company can raise capital efficiently and effectively.
iii) It lowers the capital cost.
iv) There is a positive impact on the share price.
v) It provides proper inducement to the owners as well as managers to
achieve objectives that are in interests of the shareholders and the
organisation.

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vi) Good corporate governance also minimizes wastages, corruption,
risks and mismanagement.
vii) It helps in brand formation and development.
viii) It ensures organisation in managed in a manner that fits the best
interests of all.
12.8 IMPORTANT ISSUES IN CORPORATE GOVERNANCE

There are several important issues in corporate governance and they play
a great role, all the issues are interred related, interdependent to deal with
each other. Each issue connected with corporate governance have
different priorities in each of the corporate bodies. The issues are listed
as below:
i) Value Based Corporate Culture: For any organisation to run in
effective way, it needs to have certain ethics, values. Long run business
needs to have based corporate culture. Value based corporate culture is
good practice for corporate governance. It is a set of beliefs, ethics,
principles which are inviolable. It can be a motto i.e. A short phrase which
is unique and helps in running organisation, there can be vision i.e., dream
to be fulfilled, mission and purpose, objective, goal, target.
ii) Holistic View: This holistic view is more or less godly, religious attitude
which helps in running organisation. It is not easier to adopt it, it needs
special efforts and once adopted it leads to developing qualities of nobility,
tolerance and empathy.

iii) Compliance with Transparency and Accountability: Disclosure,

transparency and accountability are important aspect for good
governance. Timely and accurate information should be disclosed on the
matters like the financial position, performance etc. Transparency is
needed in order that government has faith in corporate bodies and
consequently it has reduced corporate tax rates from 30% today as
against 97% during the late 1970s. Transparency is needed towards
corporate bodies so that due to tremendous competition in the market
place the customers having choices don‘t shift to other corporate bodies.
iv) Corporate Governance and Human Resource Management: For
any corporate body, the employees and staff are just like family. For a
company to be perfect the role of Human Resource Management
becomes very vital, they both are directly linked. Every individual should
be treated with individual respect, his achievements should be
recognized. Each individual staff and employee should be given best
opportunities to prove their worth and these can be done by Human
Resource Department. Thus, in Corporate Governance, Human Resource

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has a great role. 6. Innovation: Every Corporate body needs to take risk
of innovation i.e., innovation in products, in services and it plays a pivotal
role in corporate governance.
v) Necessity of Judicial Reform: There is necessity of judicial reform for
a good economy and also in today‘s changing time of globalisation and
liberalisation. Our judicial system though having performed salutary role
all these years, certainly are becoming obsolete and outdated over the
years. The delay in judiciary is due to several interests involved in it. But
then with changing scenario and fast-growing competition, the judiciary
needs to bring reforms accordingly. It needs to speedily resolve disputes
in cost effective manner.

vi) Globalisation helping Indian Companies to become Global Giants

based on Good Governance: In today‘s age of competition and due to
globalisation, our several Indian Corporate bodies are becoming global
giants which are possible only due to good corporate governance.
vii) Lessons from Corporate Failure: Every story has a moral to learn
from, every failure has success to learn from, in the same way, corporate
body have certain policies which if goes as a failure they need to learn
from it. Failure can be both internal as well as external whatever it may
be, in good governance, corporate bodies need to learn from their failures
and need to move to the path of success
The Companies Act, April 2013

The Companies Act 2013 has formulated Section 135 and is landmark
legislation that makes Indian companies answerable to the government
about their CSR expenditure. India is the first country to make the
incorporation of Corporate Social Responsibility activities mandatory for
qualifying companies. It is, for sure, a remarkable step towards growth,
overall development and humanity.
Be it a private sector company or a public sector company, Corporate
Social Responsibility CSR has to be adhered to by all listed companies. If
a company falls in either of the following criteria for compulsion, they need
to form a CSR committee. Companies:

 That has a net worth of Rs. 500 crores or more, or

 That have an annual turnover of Rs. 1000 crores or more, or
 That generates a profit of Rs. 5 crores or more.
During any financial year, if any of the above financial strength criteria are
met then the rules of Section 135 apply. Prior to the compulsion of the
Corporate Social Responsibility clause, CSR activities in India were

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voluntary for the listed companies. However, it was mandatory for them to
disclose their CSR spending to their shareholders. Under the Companies
Act, the preference has to be given to local areas in which the company
operates.

12.9 TYPES OF CSR ACTIVITIES UNDER SCHEDULE VII OF

THE COMPANIES ACT 2013

The following are the types of CSR activities in India that the
qualifying listed companies under the Companies Act 2013 can
contribute to:
i) Eradicating Hunger, Poverty and Malnutrition: This can be done by
promoting health care and sanitation in rural areas. This can also be a
contribution to the Swach Bharat Kosh which has been set-up by the
Central Government. Blood donation camps can also be done as a part
of a company‘s CSR initiative.
ii) Promoting Education: This can be inclusive of providing education to
children and essential vocational skill training that enhance employment
or special education among women, elderly and the differently-abled.
iii) Promoting Gender Equality: Women empowerment programmes
can be launched by setting up affordable hostels for women. Establishing
old age homes, daycare centers and other facilities for senior citizens is
another option. Orphanages can also be set up and managed by the CSR
committee.
iv) CSR Initiatives Related to the Environment: Contributions can be
made towards environmental sustainability. Activities that help in
maintaining the ecological balance, protection of flora and fauna, promote
animal welfare, conservation of natural resources and maintaining quality
of soil, air and water including contribution to the Clean Ganga Fund set-
up by the Central Government.
v) Protection of National Heritage, Art and Culture: This can include
the restoration of heritage sites, buildings of historical importance and
works of art. public libraries can be set up as well.
vi) Contributions to various funds: Contributions would be made to the
Prime Minister‘s National Relief Fund or any other fund set up by the
Central Government, for welfare, development and relief of the schedule
caste, tribes, other backward classes, women and minorities.
Contributions provided to the development of technology located within
the central government approved academic institutions.

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Contributions It can be made towards rural development projects and
slum area development.
12.10 CORPORATE GOVERNANCE IN INDIA

i) The Ministry of Corporate Affairs (MCA) and Securities and Exchange

Board of India (SEBI) is responsible for corporate governance
initiatives in India. The corporate sector of India faced major changes
in the 1990s after liberalisation.
ii) In the 1900s, SEBI regulated corporate governance in India through
various laws like the Security Contracts (Regulation) Act, 1956;
Securities and Exchange Board of India Act, 1992; and the
Depositories Act of 1996.
iii) In February 2000, SEBI established the first formal regulatory
framework for corporate governance in India owing to the
recommendations of the Kumar Mangalam Birla Committee. It was
undertaken to improve the standards of corporate governance in India.
This came to be known as clause 49 of the Listing Agreement.
iv) A major corporate governance initiative was undertaken in 2002 when
the Naresh Chandra Committee on Corporate Audit and Governance
furthered their recommendations addressing multiple governance
issues.
v) MCA and the Government of India have set up multiple organisations
and charters like the Confederation of Indian Industry (CII), National
Foundation for Corporate Governance (NFCG), Institute of Chartered
Accountants of India (ICAI).
12.11 SEBI CODE OF CORPORATE GOVERNANCE
To promote good corporate governance, SEBI (Securities and Exchange
Board of India) constituted a committee on corporate governance under
the chairmanship of Kumar Mangalam Birla. On the basis of the
recommendations of this committee, SEBI issued certain guidelines on
corporate governance; which are required to be incorporated in the listing
agreement between the company and the stock exchange.
An overview of SEBI guidelines on corporate governance is given
below, under appropriate heads:

(A) BOARD OF DIRECTORS

The following give details regarding Board of Directors code to be

executed in corporate governance.
(i) The Board of Directors of the company shall have an optimum
combination of executive and nonexecutive directors.

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(ii) The number of independent directors would depend on whether the
chairman is executive or non-executive. In case of non-executive
chairman, at least, one third of the Board should comprise of independent
directors; and in case of executive chairman, at least, half of the Board
should comprise of independent directors. The expression ‗independent
directors‘ means directors, who apart from receiving director‘s
remuneration, do not have any other material pecuniary relationship with
the company.

(B) AUDIT COMMITTEE

(1) The company shall form an independent audit committee whose
constitution would be as follows:
(i) It shall have minimum three members, all being non-executive
directors, with the majority of them being independent, and at least one
director having financial and accounting knowledge.
(ii) The Chairman of the committee will be an independent director.
(iii) The Chairman shall be present at the Annual General Meeting to
answer shareholders‘ queries.

(2) The audit committee shall have powers which should include the
following:

(i) To investigate any activity within its terms of reference

(ii) To seek information from any employee

(iii) To obtain outside legal or other professional advice

(iv) To secure attendance of outsiders with relevant expertise, if
considered necessary.
(3) The role of audit committee should include the following:

(i) Overseeing of the company‘s financial reporting process and the

disclosure of its financial information to ensure that the financial statement
is correct, sufficient and credible.
(ii) Recommending the appointment and removal of external auditor.

(iii) Reviewing the adequacy of internal audit function

(iv) Discussing with external auditors, before the audit commences, the
nature and scope of audit; as well as to have post-audit discussion to
ascertain any area of concern.

(v) Reviewing the company‘s financial and risk management policies.

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(C) REMUNERATION OF DIRECTORS

The following disclosures on the remuneration of directors shall be made

in the section on the corporate governance of the Annual Report:

(i) All elements of remuneration package of all the directors i.e., salary,
benefits, bonus, stock options, pension etc.
(ii) Details of fixed component and performance linked incentives, along
with performance criteria.
Board Procedure Some Points in this Regards are

(i) Board meetings shall be held at least, four times a year, with a
maximum gap of 4 months between any two meetings.
(ii) A director shall not be a member of more than 10 committees or act as
chairman of more than five committees, across all companies, in which he
is a director.
(D) MANAGEMENT

A Management Discussion and Analysis Report should form part of the

annual report to the shareholders; containing discussion on the following
matters (within the limits set by the company‘s competitive position).
(i) Opportunities and threats
(ii) Segment-wise or product-wise performance

(iii) Risks and concerns

(iv) Discussion on financial performance with respect to operational

performance
(v) Material development in human resource/industrial relations front.
(E) SHAREHOLDERS

i) In case of appointment of a new director or reappointment of a director,

shareholders must be provided with the following information:
1. A brief resume (summary) of the director
2. Nature of his expertise

3. Number of companies in which he holds the directorship and

membership of committees of the Board.

(ii) A Board Committee under the chairmanship of non-executive director

shall be formed to specifically look into the redressing of shareholders and
investors‘ complaints like transfer of shares, non-receipt of Balance Sheet

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or declared dividends etc. This committee shall be designated as
‗Shareholders / Investors Grievance Committee‘.
(F) REPORT ON CORPORATE GOVERNANCE

There shall be a separate section on corporate governance in the Annual

Report of the company, with a detailed report on corporate governance.
(G) COMPLIANCE

The company shall obtain a certificate from the auditors of the company
regarding the compliance of conditions of corporate governance. This
certificate shall be annexed with the Directors‘ Report sent to
shareholders and also sent to the stock exchange
Various Forums of corporate Governance

The National Foundation for Corporate Governance (NFCG) has been set
up by the Ministry of Company Affairs, Government of India, in partnership
with Confederation of Indian Industry (CII), Institute of Company
Secretaries of India (ICSI) and Institute of Chartered Accountants of India
(ICAI) with the goal of promoting good corporate governance practices in
India. NFCG will act as a nodal agency and will initially evolve corporate
governance principles in three areas — institutional investors,
independent directors and auditing. The government is now also working
on setting up national centers for corporate governance at various Indian
Institutes of Management.
The NFCG (National Foundation for corporate governance) has
constituted for achieving the following objectives:
 Creating awareness for implementing good corporate governance
practices is needed both at the level of individual corporations and for
the economy as a whole. The foundation would provide a platform for
quality discussions and debates amongst academicians, policy
makers, professionals and corporate leaders through workshops,
conferences, meetings and seminars.
 Encouraging research capability in the area of corporate governance
is required in the country and providing key inputs for developing laws
and regulations which meet the twin objectives of maximizing wealth
creation and fair distribution of this wealth.
 Working with the regulatory authorities at multiple levels to improve
implementation and enforcement of various laws related to corporate
governance.

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 In close coordination with the private sector, to instill a work
commitment to corporate governance reforms and facilitates the
development of a corporate governance culture.
 Cultivating international linkages and maintaining the evolution
towards convergence with international standards and practices for
accounting, audit and non-financial disclosure. — Setting up of
―National Centers for Corporate Governance‘ across the country,
which would provide quality training to Directors and aim to have
global recognition and acceptance.
 NFCG is committed to creating awareness about the importance of
implementing good corporate governance practices both at the level
of individual corporations and for the economy as a whole. It organizes
workshops, conferences, meeting and seminars to discuss and
disseminate information about the best practices in the area of
corporate governance. The foundation would provide a platform for
quality discussions and debates amongst academicians, policy
makers, professionals and corporate leaders, both from India as well
as abroad. The Foundation organizes these programmes on its own
as well as in collaboration with its partners.
12.12 THE INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI)

The vision of ICSI is to be a global leader in development of professionals

specializing in Corporate Governance. For promoting good corporate
governance, the mission of ICSI is to continuously develop high caliber
professional ensuring good corporate governance and effective
management and to carry out proactive research and development
activities for protection of interest of all stakeholders thus contributing to
public good.
ICSI defines Corporate Governance as, ―the application of best
management practices, compliance of law in true letter and spirit and
adherence to ethical standards for effective management and distribution
of wealth and discharge of social responsibility, for sustainable
development of all stakeholders‖.

The ICSI conducts various programs throughout India covering several

topics like corporate governance, company law, secretarial audit and
compliances, securities laws and capital markets, financial markets etc,
for development of corporate governance practices in Indian Corporate
Sector. To achieve excellence in various secretarial practices for good
corporate governance ICSI has issued following Secretarial standards:
1. Secretarial Standard on Meetings of the Board of Directors

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2. Secretarial Standards on General Meetings

3. Secretarial Standard on Dividends Further, to guide its members and

others to comply with the Secretarial Standards and other regulations,

ICSI has issued Guidance Notes on the following topics: — Meetings of

the Board of Directors — General Meetings — Passing of resolution by
Postal ballot— Dividend — Buy Back of securities — Board‘s Report the
Institute regularly brings out Publications covering various aspects of
Company Law and role of Company Secretary.

The institute has also taken initiatives to awaken Indian Corporate Sector
in Corporate Governance. For this purpose, the Institute since 2001, is
conferring ‗ICSI National Award for Excellence in Corporate Governance‘
annually to the participating companies in order to promote corporate
governance culture in Indian corporate sector.
12.13 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(ICAI)

In the developed nations, high quality accounting standards reduce

uncertainty and increase overall efficiency and investor confidence. The
Accounting Standards issued by The Institute of Chartered Accountants
of India (ICAI) serve this objective. The ICAI has issued 29 Accounting
Standards covering, interalia, disclosure of accounting policies, valuation
of inventories, amalgamation, interim financial reporting, financial
reporting of interest in joint venture, related party disclosures etc. Such
accounting standards are based on the generally
Organisation for Economic Co-operation and Development (OECD)

The Organisation for Economic Co-operation and Development (OECD) is a

unique forum where the governments of 37 democracies with market-based
economies collaborate to develop policy standards to promote sustainable
economic growth. The OECD provides a setting where governments can
compare experiences, seek answers to common challenges, identify good
practices, and develop high standards for economic policy. Accepted
accounting assumptions of going concern, consistency and accrual basis

The six OECD Principles are:

i) Ensuring the basis of an effective corporate governance

framework
ii) The rights and equitable treatment of shareholders and key
ownership functions

iii) Institutional investors, stock markets, and other intermediaries

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 iv) The role of stakeholders in corporate governance

v) Disclosure and transparency

vi) The responsibilities of the board

1. Ensure the basis of an effective corporate governance framework:

The corporate governance framework should promote transparent and
efficient markets, be consistent with the rule of law and clearly articulate
the division of responsibilities among different supervisory, regulatory and
enforcement authorities.
2. The rights and equitable treatment of shareholders and key
ownership function: The corporate governance framework should
protect and facilitate the exercise of shareholders‘ rights and ensure the
equitable treatment of all shareholders, including minority and foreign
shareholders. All shareholders should have the opportunity to obtain
effective redress for violation of their rights.‘
Basic shareholder rights should include the right to:
i) Secure methods of ownership registration;
ii) Convey or transfer shares;
iii) Obtain relevant and material information on the corporation on a
timely and regular basis;
iv) Participate and vote in general shareholder meetings;
v) Elect and remove members of the board; and
vi) Share in the profits of the corporation.
3. The Institutional investors, stock markets, and other
intermediaries: ‗The corporate governance framework should provide
sound incentives throughout the investment chain and provide for stock
markets to function in a way that contributes to good corporate
governance.‘

 All shareholders of the same series of a class should be treated

equally
 Insider trading and abusive self-dealing should be prohibited
 Members of the board and key executives should be required to
disclose to the board whether they, directly, indirectly or on behalf
of third parties, have a material interest in any transaction or matter
directly affecting the corporation.
4. The role of stakeholders in corporate governance: The corporate
governance framework should recognize the rights of stakeholders
established by law or through mutual agreements and encourage active

146
co-operation between corporations and stakeholders in creating wealth,
jobs, and the sustainability of financially sound enterprises.
5. Disclosure and transparency: The corporate governance framework
should ensure that timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial situation,
performance, ownership, and governance of the company.

To get a better understanding of the role disclosure and transparency

plays in corporate governance.
6. The responsibilities of the board: The corporate governance
framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board, and the board‘s
accountability to the company and the shareholders.

LET US SUM UP
This unit gives clear understanding of the concept of corporate
governance and the principle of corporate governance clearly. Studying
the concept of Corporate Governance highlights the necessity of
transparency in company‘s operations. It also highlights the board of
directors‘ role and shareholders right clearly. This also ensures that the
interests of all shareholders like majority as well as minority shareholders
are safeguarded. Also, it explains the important issues met in India which
enrich reader‘s understanding of corporate governance more clearly. It
gives wider explanation of corporate governance in India entail the reader
to understand what is the perspective of corporate governance in India.
CHECK YOUR PROGRESS

Choose the Correct Answer:

1. Corporations are controlled and directed by which one of the following?

a) Corporate Ethics b) Corporate Governance

c) Corporate Codes d) Corporate Mechanism

2. Corporate governance involves the exercise of control over a
company‘s _ _ _ .
a) Finance and Accounting
b) Manufacturing facilities
c) Entire Corporate Direction
d) Marketing and Human Resources
3. Component of Corporate Culture includes _ __ _ _.
a) Vision and Values b) Practice and Place

147
 c) Narrative and Place d) All the above
4. Good Corporate Governance ensure ________ _ .

a) Corporate Success b) Economic Growth

c) Minimize the risk d) All the above
5. Criteria to form a CSR committee for Private and Public limited
Companies _ ______ _.

a) Net Worth of Rs. 500 corers or more

b) Annual Turnover of Rs. 1000 crores or more

c) Annual Profit of Rs. 5 crores or more
d) Any one of the above
GLOSSARY

Corporate : Corporate governance is the system by

Governance which companies are directed and
controlled. Boards of directors are
responsible for the governance of their
companies.

Corporate Social : Corporate Social Responsibility is a

Responsibility management concept whereby companies
integrate social and environmental concerns
in their business operations and interactions
with their stakeholders.

Transparency : Transparency implies openness,

communication, and accountability.
Transparency is practiced in companies,
organisations, administrations, and
communities.

Accountability : Accountability is an assurance that an

individual or organisation is evaluated on its
performance or behavior related to
something for which it is responsible.

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 Corporate Culture : Corporate culture, also known as company
culture, refers to a set of beliefs and
behaviors that guide how a company's
management and employees interact and
handle external business transactions.

Stakeholders : A stakeholder is a party that has an interest

in a company and can either affect or be
affected by the business. The primary
stakeholders in a typical corporation are
its investors, employees, customers, and
suppliers.

SUGGESTED READINGS
1. K. Aswathappa, (2011), Business Environment for Strategic
Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES
1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.b) 2.c) 3.d) 4. d) 5. d)

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UNIT 13

ECONOMIC SYSTEMS
STRUCTURE

Overview

Learning objectives
13.1 Introduction

13.2 Capitalism
13.2.1 Characteristics of Capitalism
13.2.2 Merits of Capitalism

13.2.3 Demerits of Capitalism

13.3 Socialism
13.3.1 Merits of Socialism
13.3.2 Demerits of Socialism

13.3.3 Impact of Capitalism on Business

13.4 Mixed Economy
13.4.1 Merits of Mixed Economy
13.4.2 Demerits of Mixed Economy

Let Us Sum Up
Check Your Progress
Suggested Readings
Web Resources
Answer to Check Your Progress
OVERVIEW
The present-day economic environment of business is a complex one.
The business sector has economic relation to the government, capital
market, household sector and abroad sector. These different sectors
together influence the trends and structure of the economy. The form and
functioning of the economy vary widely. The design and structure of any
economic system is conditioned by the socio – political arrangements.
Such arrangements have relevance from the standpoint of
macroeconomic decision making.

150
For example, under a democratic set- up, the public exercise an influence,
direct or indirect, through a system of voting, on the nature of decision
taken by the government. Under dictatorship, one ruler takes the crucial
decision for the entire country. Under a parliamentary system, most
decisions are processed by the Cabinet Ministers, whereas under
presidential form of government, the president acts as the real manager
of the state: it is he who takes or makes decisions similarly the macro
decision making is more decentralized under a federal from of government
than under a unitary from.

LEARNING OBJECTIVES

After studying this unit, you will be able to;

 list out the basic indicators of economic system

 describe the various types of economic system
 discuss the merits and demerits of capitalism, socialism and mixed
economy.
13.1 INTRODUCTION
The economic system in a country decides the development prospects to
a great extent. Government regulation of economic activities depend to a
very large extent on the nature of the economic system. We face no
difficulty in making economic progress if a country could have a laissez
faire economy. The economic environment of business is determined
according to the economic system obtained within country. The economic
activities are mainly framed with a purpose of earning, spending and
savings. An economy can be explained in terms of the system of
production, consumption, selling and exchange transactions. Production
of goods is very important to the description of an economy. Without
production in a country, system cannot be worked out and other activities
are also crucial i.e., consumption, selling and exchange transactions. In
economic system market economy, economic growth is a must. Economic
growth is everybody‘s concern and it may be defined as a rate of
expansion in a country.
The changing approaches to the study of economic growth indicate that
conceptual base of development has been evolving the onset of the
Industrial Revolution. This conceptual evolution born out of environmental
changes has been co-extensive with the tempo of economic development
in society. Unless people save and invest, productive activity cannot be
started. It is here that the economic growth in a country play a very
important role. In the initial stages of economic development, the task of
identifying people to save and of collecting these savings, especially in

151
villages and semi – urban sectors of the economy. There are three
important types of economic system viz. Capitalism, socialism and mixed
economy.
13.2 CAPITALISM

Capitalism is a system of economic organisation characterized by private

ownership of the means of production and distribution. (Land, Factories,
Roads etc.) and their operation for profit under predominantly competitive
condition. Free enterprise, competition and private ownership of property
play an important role in capitalist system.

The capitalist system is also known as ‗Free enterprise economy‘. In other

words, ―Laissez Faire‖ economic policy is followed in capitalist economy.
Laissez faire implies a policy of non - interference by the government in
the economic life of the country. Here, the state confines its activities to
the maintenance of law and order with in the country, defending the
country from foreign war and provides fair justice to the people, leaving
trade and industry to take their own course. There is a private ownership
of the means of production, individual decision making and use of the
market mechanism in the capitalist system. Household and firms are the
basic production units. There are two kinds of capitalist system.
i) Laissez Faire: In this type of capitalist system, the government
intervention in the economy is absent and
ii) Regulated or mixed capitalism: In this type of capitalist system,
there is a substantial amount of government intervention in the economic
and industrial development.
Definition

In the words of Prof. R. T. Bye capitalism is ―that system of economic

organisation in which free enterprise, competition and private ownership
of property generally prevail‖
According to G.D.H Cole ―capitalism is a system of production for profit
under which instruments and materials of production are privately owned,
the work is done mainly by hired labour, the product belonging to the
capitalist owner or owners‖. According to Loucks, ―Capitalism is a system
of economic organisation featured by the private ownership and use for
the private profit of man- made and nature made capital.‖
13.2.1 Characteristics of Capitalism
i) Private Property: Private ownership and control of property is
considered as a natural right under capitalism. Private property provides

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incentives to individual to make the best use of their assets. Individuals
can amass wealth and pass them to others at the time of death.
ii) Freedom of Enterprise: The advocates of capitalism believe that
absence of government intervention leads to economic individualism and
economic freedom. As a consumer he is free to spend his income as he
chooses and as a producer, he is free to purchase the inputs and to
organize them as he wishes for the purpose of producing in things that
society wants.
iii) Competition: That is competition among sellers, among buyer and
among workers. Under conditions of perfect competition, there will be
several numbers of buyers and sellers who have a thorough knowledge
of market conditions. There will be only one price offer a commonly at a
time all over the market.
iv) Price System: The price system regulates all the economic activities
of a capitalist economy. The price system is essentially a system of profits
for firms and individual who are able to survive, and losses for those who
are not.
v) Economic motivation and profit motive: Economic motivation
means that individuals under capitalism are usually motivate by the desire
for economic gain in their activities. Economic motivation takes the form
of differences in wages, special prices for unusual accomplishments and
special rewards.
vi) Government: Adam Smith advocated a minimum role for State in eco-
nomic affairs. According to him, the government could perform the
functions as to protect society from foreign attack, to establish the
administration of justice within the country and to erect and maintain the
public works and institution that private entrepreneurs cannot undertake
privately.
vii) Inheritance: The right to give or acquire property in inheritance is al-
lowed in capitalism.
viii) No Central Plan: Under the capitalist economy there is no central
plan to guide and control the activities of various business concern. It is
the market forces which influence the resource allocation investment
decisions etc. and not the Government under the capitalist economy.
13.2.2 Merits of Capitalism

The major merits of capitalist economic system are:

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i) Efficient Utilisation of Resources: Every producer tries to use the
different factors of production to the best possible use to minimize cost of
production to stand the competition.
ii) Democratic: Producers, consumers, the workers all enjoy economic
freedom and are free to work as they like. Goods are produced according
to liking and demand of consumers.
iii) Automatic balance in the system: The capitalism works
automatically through price mechanism. The demand and supply i.e.,
price mechanism balances the imbalances in economy. With increase in
demand of product the price rises which in turn attracts new producers to
enter the market and hence supply increases resulting in decrease in price
again.
iv) Efficiency properly rewarded: Both producers and laborer‘s work
hard and with more efficiency as producers can more profits and laborer‘s
get better wages.
v) Incentives for risks and uncertainties: Entrepreneurs are induced to
invest more money even in the projects involving high risk by providing
them incentives. This results in technological progress and new
innovations, which involves great risks.
vi) Economic Growth: The capitalist countries have become rich and
affluent and people of that country enjoy higher standard of living. This is
because of presence competition also where producer tries to pro- duce
at minimum cost and ultimately consumer is benefited.
vii) Encourages Capital Formation: The existence of capitalism is de-
pendent upon the right to inherit the property and profit motive, because
of which people have incentive to save a part their income which they can
further invest to make more profits. Thus, this circle investment and saving
leads to higher rate of capital formation.
13.2.3 Demerits of Capitalism
i) Wastage and misallocation of Resources: Under capitalism most of
resources are wasted on advertisement and salesmanship and profits are
produced to satisfy profit motive only and essential commodities are
neglected production.

ii) Economic Instability: Business cycles affect consumer the most.

They suffer both in periods in inflation (rising prices) and deflation (failing
prices). The greatest depression of 1930 shook the very basis of many
capitalist countries.

154
iii) Consumer’s sovereignty is a myth: At times producers enjoy
monopoly in the market and produces substandard product. So, it is the
producer who influences the market and not consumer. Capitalism is
basically a sellers‘ market where consumer has no freedom.

iv) Inequality to Wealth: An unplanned capitalist economy can be com-

pared with a vehicle without a steering wheel. Artificial scarcity of goods
is created by greedy entrepreneurs who earn profits to great extent while
consumers ultimately suffer.

v) No freedom: In modern capitalist market one can find presence of

group rivalries and price wars, price agreements etc. speculative practices
become a part of system.
vi) Class Struggle: Rich are becoming richer and the poor poorer. The
society gets divided in two classes – haves and have – nots. There is
clash of interests. Laboure‘s demand high wages while the capitalists
want to pay lower wages.
vii) Unemployment and Corruption: Corruption and unemployment has
become a chronic disease in the capitalist system. In U.S.A over three
million young people between 16-24 years cannot find jobs.
viii) Inflation: Inflation spreads throughout the world because of mutual
international relations and trade. Also, inflation is because of nature of
modern capitalism in non – productive expenditure primary for military
purposes by the state.
13.3 SOCIALISM

Socialism is an economic system where the means of production are

either owned or managed by the state and where the investment structure,
consumption, allocation of resources, distribution of income etc. are
regulated and directed by the state. The political economy of socialism is
a living, rapidly developing science. Its foundations were laid by Karl Marx
and Federic Engels, who revealed the tendencies in the development of
capitalism that were leading inevitably to its downfall and triumph of the
communist mode of production‖.
In a socialized economy, labour becomes directly social and the
ownership of the means of production becomes the equality of every
person of society in relation to the means of production and everyone gets
their share of common wealth in proportion to their labour input. ―An
essential feature of the law of socialist accumulation is that its operation
is accompanied by the development and consolidation of social property
and a steady rise in the wellbeing of the people‖

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Under socialism system the workers of industry, agriculture, transport and
other sectors of the economy themselves become the joint owners of the
means and results of production. Under socialism, the labour of the both
the individual workers and the working collective is integrated in the
process of production itself into the aggregate social labour as an
indispensable component.

The main features of a socialist system are as under;

i) Equitable Distribution of Income: Socialism is better for peace and
happiness. In socialist countries, an equitable distribution of income is an
important feature. Equitable distribution of income does not mean that
there is a perfect equality in income distribution. There may be wage
differentials, depending on the nature and requirements of the nature of
the job. by fixing the appropriate wage rate and other economic benefits,
the objective of equitable income distribution may be achieved.

ii) Government Ownership: Another feature of socialist system is

government ownership. Here, the mean of production is either owned by
the Government or its use is governed by the Government. It becomes
easy to achieve the desired pattern of resource allocation if the state owns
almost the whole of the means of production. Socialist believe in working
a political party, by educating public opinion, to win enough votes to put
their programme peacefully into effect.
iii) Economic Laws: In socialist system, all working people have an
interested in the understanding and application of the economic, law of
socialism. The main change in economic conditions in a country that has
taken the road of building socialism leads to the economic laws of
socialism coming into being and beginning to operate. These laws have
some special features / conditions by the specific socioeconomic structure
of society.
iv) Plan of Action or Central Authority: The liberal socialist economy
preserves to a considerable extent free choice of consumption. The
socialist economies generally have a uniform plan of action or central
authority like the central planning agency to formulate the national plan
for development. Socialism stipulates an authority which can set and ac-
accomplish socio – economic goods of authority, which must have power
to direct the means of production according to some plan of action. In
socialist system, the central planning authority commands the pattern
resource utilisation and development.

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13.3.1 Merits of Socialism

i) Better Allocation and Utilisation of Resources: In socialist economy

resources are owned and controlled by the state, so no wastage and
duplication take place. There is no self-interest of private individuals and
so no profit motive. ‗What to produce and how much to produce‘ is done
according to what is really useful to the people.
ii) Elimination of Unemployment: Central planning authority on behalf
of state gives boost to employment. It also ensures that all resources are
put to their best use.
iii) No Cyclic Fluctuations: As socialist economy is a planned economy,
there is no surplus and deficiency which results in smooth working of the
economy. There are no business fluctuations.
iv) No Class Struggle: There is collective ownership of different factors
of production which ensures the best utilisation of available resources of
economy and equal distribution. So, there is no gap between haves and
have- nots.
v) Reduction in Inequality of income: Since there is no gap between
haves and have – nots there is equality of incomes. Equal chances are
given to all in all the field like occupation, education etc.
13.3.2 Demerits of Socialism

The following are shortcomings of socialism;

i) Bureaucratisation: The owners in private enterprises take interest in
their work in capitalism. But in socialism government gets all the work
done through their people who do not take so much interest and lack
enthusiasm as people of private enterprise.
ii) Lack of Incentives: Major disadvantages of socialism is that people
do not have incentive for greater work, efficiency and enterprise. People
get fixed wage and salaries from government so they lack initiative and
incentive.
iii) Red Tapism: In socialist system the decisions are delayed as files go
on moving from one place to another which result in wastage to time and
money also.
iv) Concentration of Economic Power in the hands of State: The
power gets concentrated in the hands of government or state, and thus
government may not do work according to desires and preferences of the
consumers. Economic freedom and Democratic rights of people are
endangered because of danger of authorities.

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v) Promotes Corruption: The government being ultimate authority the
govt. servants often become dishonest and corrupt while doing work of
people.
vi) Misallocation of Resources: Allocation of resources is not made
according to desires demands of the consumers since there is no place
for price mechanism.
vii) No Consumer Sovereignty: Wants of consumer are generally not
taken into consideration for production of various goods. There is rationing
system in distribution of goods as well which is against consumer
freedom.
13.3.3 Impact of Capitalism on Business
The considerable freedom of enterprise extended under capitalism to the
businessman may lead the entrepreneurs to taken on any business as
they wish, as there is a minimum of government intervention. Since there
is enough scope for amassing wealth strategic industries needing a huge
amount of capital can be started. The entrepreneurs with the profit motive
may exercise strenuous effort to increase productivity, thereby increasing
the economic wealth of nation.
The ultimate suffers in the capitalist economy are the consumers, as the
entrepreneurs with the sole aim of making profits may spend their wealth
in non-productive industries. Concentration of economic power may affect
largely the initiative of small entrepreneurs. The essential services
organisation like post and Telegraphs, Railways etc., If handed over to
private sector, may be found effective, but in the capitalist economy,
people will run after money and the social welfare will be thrown in the air.

However, the business in order to excel those in the other nations, will
introduce the advanced techniques, absorb the latest available
technology and improve the economic position of the nation. Just to push
up sales, there will be a lot of expenditure spent on advertising which in
the way helps the ultimate consumers derive benefits out of the products,
but bear the additional cost.
13.4 MIXED ECONOMY

Mixed economy is the combination of capitalism and socialism. Under the

mixed economy, the advantage of both capitalism and socialism are
incorporated and at the same time their evils are avoided. Under mixed
economy, both the private and the public sector‘s function side by side.
The Government directs economic activity towards certain socially
important areas of the economy and the balance is subject to the

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operation of the price mechanism. The public and private sectors work in
a co-operative manner to attain the social objectives under a common
economic plan. The private sector constitutes an important part of the
economy and considered as an important instrument of economic growth.
India is regarded as the best example of mixed economy in the world.

The following are the main characteristic of mixed economy;

i) Co-existence of the Private and Public Sectors: Co – existence of
the Private and public sectors is the outstanding feature of mixed
economy. In mixed economy, both public sector as well as private sec- tor
industries will be functioning. Certain industries will be in the public sector
and certain industries in the private sector. Private individuals and firms
own private sector industries. Profit will be the primary motive of private
sector industries. In public sector, industries are owned and managed by
the Government. Public industries will also have profit motive but that too
for the promotion of social welfare.

ii) Existence of Joint Sector: Joint Sector is one where both Government
and Private individuals establish an organisation jointly by contributing the
necessary capital.
iii) Regulation of Private Sector: Under mixed economy, Government
exercises strict control and regulation over private sector industries.
iv) Planned Economy: The entire economic structure is subject to the
planning of the Government. Mixed economy is a planned economy. The
planning commission decides the objectives, targets and allocation of
resources etc.
v) Private Property: Under mixed economy private firms and individuals
have right to own and use property.
vi) Provision of Social Security: Under mixed economy, Government
takes steps to provide society security.
vii) Motive of Business Concerns: The motive of the business concern
is profit but coupled with the objective of social welfare.
viii) Reduction of Inequalities of Income and Wealth: The Government
takes steps to reduce inequalities of income and wealth
ix) Complete Economic Freedom: There is complete economic freedom
in mixed economy. Hence, the consumer is free to buy any commodity
they like.

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13.4.1 Merits of Mixed Economy

i) There will be competition between public and private industries, which

will result in greater efficiency and production.
ii) The profit of public sector industries goes to the Government and as
a result inequalities of income will be reduced.
iii) In a mixed economy, economic activities are carried out as per plan.
The entire economic system is subject to planning of the Government.
iv) The economic activities take place in a planned manner. So, there will
be economic stability.
v) Goods are produced as per the wishes of the consumers, which
results in consumer‘s sovereignty.
vi) In mixed economy, freedom of enterprise and profit motive are the
important features. Further there is competition between public and
private sectors. These factors increase efficiency, initiative, innovation
and productivity.
vii) Mixed economic system gives importance to the promotion of social
welfare. Under this system, both private and public sectors work for
the welfare of people.
viii) Under mixed economy, individual rights are protected. People have
freedom to buy any commodity.
13.4.2 Demerits of Mixed Economy

i) There is unhealthy competition between private and public sectors.

ii) There is no freedom to private sector. This is because Government
regulates private industries through its various regulations and
licensing.
iii) Inefficiency of public sector is another demerit of mixed economy.
They may suffer heavy losses. People will have to bear these losses.
iv) The objects and targets to economic planning also may not be
achieved.
v) On account of capital scarcity, Government regulation and control, the
growth of private sector may be less than what is fixed in plan. It may
vi) lead to unemployment and uncertainties.
vii) There is always a threat of nationalisation in the mixed economic
system because of which the private sector does not work actively.
viii) In spite of the defects in the mixed economy, it has become popular
in some countries. India is one of the important countries, which
adopted mixed economy.
LET US SUM UP

The economic System in a country decides the development prospects to

a great extent. Economic system is a system adopted to utilize the

160
country‘s resources for the satisfaction of public needs and wants. The
important economic factors are national, institutional, inter- dependent,
scarce resources, need satisfaction etc. There are three important types
of economic system namely capitalism, socialism and mixed economy.
The mechanism of capitalism is right to private property, freedom of
enterprise, profit motive, competition and price mechanism. Socialism is
an economic system where the means of production are either owned or
managed by the state and where the investment structure, consumption,
allocation of resources, distribution of income etc are regulated and
directed by the State. Mixed economy is the combination of capitalism and
socialism, co – existence of public and private sectors.

CHECK YOUR PROGRESS

Choose the Correct Answer:

1. Characteristics of Capitalism include .

a) Private Property b) Freedom of enterprise
c) Competition d) all the above
2. Draw backs of capitalism does not include .

a) Freedom of Choice
b) Problem of monopoly by consumers
c) Lot of unused facilities

d) all the above

3. Merits of Socialism does not include .
a) Classless society b) No competition

c) Bossism d) all the above

4. Maruti udyog Ltd is owned by .

a) Govt. of India

b) Suzuki Motor Corporation, Japan

c) Govt. of India and Suzuki Motor Corporation, Japan
d) all the above
GLOSSARY

Economic System : A system adopted to utilize the country‘s

resources for the satisfaction of public
needs and wants.

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 National Factors : Economic factors related to the country's
overall economic development, such as
GDP, inflation, and employment rates.

Institutional Factors : Economic factors related to the structures

and organisations that govern the
economy, such as government policies,
regulations, and laws.

Inter-dependent : Economic factors that depend on the

Factors interconnectivity and interdependence of
various sectors of the economy.

Scarce Resources : Resources that are limited in supply, such

as natural resources and human capital.

Capitalism : An economic system where the

mechanism is based on right to private
property, freedom of enterprise, profit
motive, competition and price mechanism.

Socialism : An economic system where the means of

production are either owned or managed
by the state and where the investment
structure, consumption, allocation of
resources, distribution of income, etc. are
regulated and directed by the State.

SUGGESTED READINGS

1. K. Aswathappa, (2011), Business Environment for Strategic

Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M., (2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.

162
7. Dr.S. Sankaran, (2013), Business Environment, Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES

1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
Answers to Activity

1. (d) 2. (a) 3 . (c) 4. (c)

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UNIT 14

ECONOMIC PLANNING
STRUCTURE
Overview
Learning Objectives
14.1 Introduction
14.2 The Planning Commission
14.3 Five Year Plans
14.4 Salient Features of Five-Year Plan
14.5 Failures of Planning in India
Let Us Sum Up
Check Your Progress
Glossary
Suggested Readings
Web Resources
Answer to check Your Progress
OVERVIEW
The need for planned, co-ordinate economic development under
Government guidance was recognized all along the freedom movement.
The Planning Commission was set up in March 1950. Its task was to make
an assessment of the material, the capital and the most effective utilisation
of these resources on a priority basis. India started planning seriously for
the future. India‘s economic history may be broadly divided into the
following phases –the period from 1947 to the mid-1950s, which was the
preparatory phase in planning for development; the period from mid-
1950s to the 1960s characterized by rapid industrialisation, the period of
late 1960s and 1970 when the plans tried to focus on agriculture and
finally the phase of liberalisation starting tentatively in the 1980s and
gearing up from 1991 to the present.
It is important to note that much of the powers that the Central
Government in India exercises in the economic field is not derived from
the constitution of India, but from the system of planning that has been in
operation since 1951. The Planning Commission that was created in 1950
as an executive organ of the Central Government is charged with the
responsibility of determining the size of the Five-Year Plans and the
Annual Plans of the State including the pattern of financing and allocating
Central Plan assistance to the states. The planning Commission also

164
determines the plan size of the Central Ministries and approves all major
plans and projects of these Ministries. Planning assumes a commanding
position in India‘s economic system.
LEARNING OBJECTIVES
After studying this unit, you will be able to;
 discuss the concept of Economic Planning
 explain the planning commission.
 elucidate the features of five-year plans implemented from time to
time
 explain the failures of economic planning in India.
14.1 INTRODUCTION
Economic development has been closely linked with planning. Planning
has become a craze in modern times, especially in under-developed and
developing countries. The idea of planning acquired a tremendous
support after the end of World War II since disrupted economies had to
be rehabilitated and the underdeveloped economies were fired with the
ambition of rapid economic development. There is a distinction between
planned and the unplanned economy, yet planning has been universally
accepted and the planned sector is expanding almost everywhere. For the
under developed countries, desirous of accelerating development,
planning is very significant element of progress. As Robbins says,
―Planning is the grand panacea of our age‖ It is no longer a forbidden fruit.

Definition of Economic planning

According to Professor Dickinson, economic planning is the making of

major economic decisions by a determinate authority on the basis of a
comprehensive survey of the economy as a whole. Such decisions
include what and how much to produce; how, when and where it is to be
produced; and to whom it is to be allocated.

With reference to under developed countries, Subrata Ghatak defines

economic planning as a conscious effort on the part of any government to
follow a definite pattern of economic development in order to promote
rapid and fundamental change in the economy and society.

Indian Economic planning

Indian planning like its economy is of a mixed nature. There is no scope
for making a detailed physical plan for all sectors as a predominant part
of the Indian economy continues to be in the private sector, the production
of which is beyond the direct control of the planners. By setting physical
targets for a host of industries, the plan documents provide a framework
for exercising physical control in respect of these industries.

165
 i) India is lacking in such preconditions of a planned economy as the
state ownership of a decisive part of the means of production, etc.
The directive or compulsory nature of plant exists only in the public
sector of the Indian economy while the private sector, which
constitutes a major part of the economy, has indicative characters.
ii) The plan of India, however, extends over the economy as a whole
and encompasses then entire country and is therefore, complete
and general.
iii) Indian planning is both physical planning and financial planning.
iv) As regards agricultural, the plan targets necessarily contain merely
comprehensive indications as agriculture operates exclusively
within the spheres of the private sector.
v) The preponderance of the private sector in the economy of the
country also reacts upon the adjustment of the public sector.
In short economic planning is comprehensive in nature as in socialist
economies but democratic in character unlike the socialist planning which
is totalitarian.
14.2 THE PLANING COMMISSION
The Planning Commission of India was set in March 1950 with Jawaharlal
Nehru as its chairman. The Commission comprises eight members:
 Prime Minister (Chairman)
 Four full –time members (including Deputy Chairman)
 Minister of Planning
 Minister of Finance
 Minister of Defence
With a change in the government at the center, a new Planning
Commission is always formed. The main functions of the Planning
Commission include:
i) Making real assessment of various resources and investigating the
possibilities of augmenting resources;
ii) Formulating plans;
iii) Defining stages of plan implementation and determining plan
priorities;
iv) Identifying the factors regarding economic growth and determining
condition for its successful implementation.
v) Determining plan machinery at each stage of the planning process;
vi) Making period policy measures to achieve objectives and targets of
plan; and
vii) Making additional recommendations as and when necessary.
The National Development Council

The National Development Council (NDC) has been working as the

highest national forum for economic planning in India since August 6,

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1952. Representatives of both, the Central and the State Government,
come together in the NDC to finally approve all important decisions
relating to planning.

The NDC is composed of the following members

 The Prime Minister of India
 All state Chief Ministers
 Member of Planning Commission
The NDC works as an advisory body where the State Government
occupies an important position.
Functions

The following are the main functions of the National Development council:
i) To review the National Plan Periodically.
ii) To consider important questions related to social and economic policy
affecting national development.
iii) To recommend various means of achieving aims and targets set out
in the National Plan. The Council also recommends various measures
for achieving active participation and co-operation of the people, for
improving efficiency in administrative service, for ensuring fullest
development in the backward regions and to the backward sections of
the community, and also for building up resources for national
development.
iv) The NDC also takes the final decision regarding allocation of central
assistance for planning among different states. The ―Gadgil formula‖
and all the systems followed in transferring central assistance for plan
to states are finalized by the NDC.
v) The NDC approves the draft plan prepared by the planning
commission.
Objectives of Planning in India

In a developing country like India, economic planning plays a very

important role in economic development. The fundamental objective of
the economic planning of our country is to accelerate the pace of
economic growth and to provide social justice to the general masses.
Thus, ―growth with social justice ―is the main objective of economic
planning in India. The major objectives of economic planning in India can
be summarized as follows:
 Attainment of higher rate of economic growth
 Reduction of economic inequalities
 Achieving full employment

167
  Attaining economic self-reliance
 Modernisation of various sectors
 Redressing imbalances in the economy.
14.3 FIVE YEAR PLANS

Let us now discuss the objective of each five-year plan.

a) First Five Year Plan (1951-52 to 1952-56)

The First Five Year Plan of India had mainly two objectives:
i) To correct the disequilibrium in the economy caused by World War
II and the partition
ii) To initiate the process of all-round balanced development for
ensuring a rising national income and improvement in the standard
of living
Thus, the First Plan aimed at infrastructure such as, roads, railways,
irrigation and power projects, and finally rehabilitate refugees. The plan
also tried to lay a foundation for the future development of the economy
and to attain social justice and to contain inflationary pressures. The plan
fixed the targets for raising the rate of investment by 7 per cent and
national income by 11 cents.

b) Second Five-Year Plan (1956-57 to 1960-61)

India‘s Second Five Year Plan was a bit more ambitious and bolder in
comparison to the First Plan. The Second plan tried to lay the foundations
of industrial progress, made a strong case for rural development, and also
tried to achieve a socialistic pattern of society.
The Second Five Year plan had the following four main objectives

i) A sizeable increase in the income to raise the level of living in the

country
ii) Rapid industrialisation with particular emphasis on the
development of basic and heavy industries
iii) A large expansion of employment opportunities.
iv) Reduction of inequalities in income and wealth and a more even
distribution of economic power.
c) Third Five Year Plan (1961-62 to 1965-66)

The Third plan accorded greatest importance to the achievement of

balance regional development. It realized the need for a balanced
approach and thus gave importance to the development of agriculture and
rapid industrialisation through the promotion and development of heavy
industries.

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The main objective of the third Plan was to attain self-sustaining growth in
the economy.
The following were the objectives of the Third Five Year plan:
i) To secure an increase in the national income of over 5 per cent
annum, the pattern of investment being designed also to sustain
the rate of growth during the subsequent plan period
ii) To achieve self-sufficiency in food grains and increase agricultural
production to meet the requirement of industry and exports
iii) To expand basic industries like steel, chemicals, fuel, and power
and establish machine-building capacity, so that the requirement
of further industrialisation could be met indigenously within a
period of ten years or so
iv) To utilise the manpower resources of the country to the fullest
possible extent and to ensure a substantial expansion in
employment opportunities
v) To establish progressively greater equality of opportunities and to
bring about reduction in disparities in income and wealth and a
more even distribution of economic power.
d) Fourth Five –Year Plan (1969-70 to 1973-74)
The Fourth Plan aimed at two main Objectives:
i) Growth with stability and
ii) Progressive achievement of self-reliance
Besides these two, the other objectives were as follows
i) Attaining social justice and equality along with care of the weak
and under- privileged, and the common man
ii) generating more employment opportunities both in the rural urban
areas
iii) assigning an increasing role to the public sector in the growth
process
iv) correcting regional imbalances among different states.
v) The Fourth plan target for increasing the national income by 5.5
per cent per annum and for increasing the per capita income from
Rs. 522 in 1968-69 to Rs. 643 in 1973-74.
e) Fifth Five Year Plan (1974-75 to 1978-79)

The draft of the Fifth Plan was presented before Parliament in December
1973 and became operative form April 1, 1974. The Period of the Fifth
Plan was originally scheduled to be 1974-75 to 1978-79. But with the
formation of the Janata government at the centre in March 1977, the Fifth
Plan was terminated at the end of March 1978-a year before full term.
f) The Fifth plan had two main objectives
i) Removal of poverty
ii) Achievement of economic self-reliance

169
The Fifth plan designed certain special measures to increase the level of
income and consumption of the lowest 30 per cent of the population who
were living below the poverty line. The plan paid more attention to
improving the loss of the rural poor. Moreover, for promoting social
justice, the Fifth plan launched the Minimum Need programs for the first
time. It was designed to provide a minimum level of social consumption to
all sections of people throughout the country. The plan aimed to increase
the per capita consumption expenditure of the lowest 30 per cent of the
population from Rs25 per month to Rs 29 per month.

For achieving economic self-reliance, the plan aimed that elimination of

special forms of external assistance, particularly food and fertilizer
imports.
g) Sixth Five-Year Plan (1980-81 to 1984-85)

After the termination of the Fifth plan in 1977-78, the Janata government
prepared its own draft of the sixth plan (1978-83). However, after the fall
of Janata-Lok Dal government, the Congress (I) Government drew up a
new Sixth Plan (1980-85). This draft was approved by the National
Development Council on February 14, 1981.
The Sixth Plan laid down the following objectives
i) A signification step-up in the rate of growth of the economy by
promoting efficiency in the use of resources and improved
productivity.
ii) Strengthening the impulses of modernisation for the achievement of
economic and technological self-reliance
iii) Progressive reduction in the incidence of poverty and unemployment
iv) Speedy development of indigenous sources of energy with proper
emphasis on conservation and efficiency in energy use
v) improving the quality of life of the people in general with special
reference to the economically and socially challenged sections
though a minimum needs programme
vi) strengthening the re-distributive bias of public and service in favor of
the poor and thus contributing to reduction in inequalities of income
and wealth
vii) Promoting policies for controlling the growth of population through
voluntary acceptance of the small family norms.
viii) Progressive reduction in regional inequalities of the development
and in the diffusion of technological benefit.
ix) Bringing about harmony between the long-term and the short-term
polices
x) promoting the active involvement of all sections of the people in the
process of development through appropriate education,
communication, and institutional strategies.

170
h) Seventh Five –Year Plan (1985-86 to 1989-90)

The National Development Council approved the draft Seventh Five-Year

Plan on November 9, 1985. The plan laid emphasis on development,
equity and social justice through the achievement of self-reliance,
efficiency, and increased production. The Seventh Plan emphasized the
policy for accelerating growth in food grains production, increasing
employment opportunities, and raising productivity. Thus, the seventh
plan was mainly devoted to ―food, work and productivity‖.

The National development Council approved the following

objectives for the Seventh Five Year Plan:
i) Achievement of self- sufficiency in the production of food grains as
well as increase in production of agro-raw materials like oil seeds
cotton and sugarcane by raising the rate of growth of production in the
agricultural sector
ii) Generation of productive employment for maximum utilisation of
human resources and solving the problem of unemployment through
the development for a large number of people.
iii) To promote efficiency and productivity through elimination of
infrastructural bottlenecks and shortages by improving capacity
utilisation and by promo;ting modernisation of plan and equipment and
more extensive application and integration of science and technology.
iv) To promote equity and social justice through alleviation of poverty and
reduction in inter-class disparities in respect of income and wealth.
v) To improve the quality of life and standard of living of the people in
general with special reference to economically and socially weaker
sections through a minimum needs programme.
vi) To promote speedy development of power generation and irrigation
potential along with utilisation of existing capacities and also to
conserve energy along with promotion of non-conventional energy
sources
vii) To achieve self-reliance through attaining self-sufficiency in food
grains and by reducing dependence on external finance through
export promotion and import substitution
viii) To decentralize planning and to achieve full participation in
development works along with promoting active involvement of all
sections of population in the process of development through
appropriate education, communication and institutional strategies.
ix) To ensure growth with stability by restraining inflationary pressures
through non-inflationary financing
Annual Plans (1990-91 and 1991-92)

After the completion of the seventh plan by March 1990, the Planning
commission initially decided to launch the Eighth plan as per its schedule-
from April 1, 1990. Accordingly, the Planning Commission approved the

171
approach to the Eighth Five –Year Plan (1990-95) on September 1, 1989
under the chairmanship of Rajiv Gandhi. The highlights of this approach
were attainment of 6 per cent growth in GDP, a sharp regional focus,
international competitiveness, self-reliance, poverty alleviation, and
people participation.

But after the 1989 General Election, the National Front Government
headed by V.P.Singh came to power at the centre. The National
Development Council then approved a new approach to the Eight plan on
September 18,1990, and finalized the total outlay of the eight plans at
Rs.6,10,000 crore, including a public sector outlay of Rs.3,35,000 crore.
The total outlay of the annual plan 1990-91 was fixed at Rs.64,717 crore
including a public sector outlay of the Rs. 39,329 crores, the plan also
envisaged a growth rate of 5.5 per cent in GDP, a domestic saving rate of
22 per cent, and employment growth of 3 per cent per annum.
Following the collapse of the National Front government, the new
government, headed by Chandra Shekhar, expected to take a fresh look
at the proposed size and other parameters of the Eight plan in view of the
adverse impact of the Gulf crisis on the country‘s economy. The spurt in
oil price aggravated the country‘s balance of payment position
considerably. But before it could take a final decision about the Eight Plan,
the Chandra Shekhar government collapsed, making way for another
General Election in the month of May –June 1991.
After the formation of a new Congress (I) government at the centre,
headed by P.V.Narasimha Rao, on June 21, 1991, fresh discussions were
held about the fate of eight plans in the face of one of the worst financial
crises faced by the country. On July 29, Prime Minister Narashimha Rao
announced in Parliament that the Eight Plan would start from April1, 1992,
taking the earlier two year (1990-91) and (1991-91) as Annual Plans.
h) Eight Five Year Plan (1992-93 to 1996-97)
The approach paper of the Eighth Plan approved by three different
governments is 1989, 1990 and 1991. But due to political changes, the
Eighth Five Plan could not commence from 1990-91. Following the
installation of the Congress (I) Government in June 1991, the Planning
Commission was reconstituted with pranab Mukherjee as its Deputy
Chairman. The revised time frame of the eight plans was from 1992-93
to 1996-97.
In order to meet the challenges faced by the economy, the Eighth Plan
finalized the following objectives:

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i) Generation of adequate employee opportunities to achieve near-full
employment by the turn of the century
ii) Containing population growth through people‘s active co-operation
and an effective scheme of incentives and disincentives
iii) Universalisation of elementary education and eradication of illiteracy
among people in the age group of 15 to 33 years.
iv) Provision of safe drinking water and primary health care including
immunisation to all villages and the entire population and complete
elimination of scavenging
v) Growth and diversification of agriculture to achieve self-sufficiency in
food and generate surplus for exports.
vi) strengthening of infrastructure (energy, transport, communication,
irrigation) in order to support the growth process on a sustainable
basis.
i) Ninth Five-Year Plan (1997-98 to 2001-2002)

The National Development Council, in its meeting held on January 16,

1997, unanimously approved the draft approach paper Ninth Five Year
Plan (1997-2002) with a call for collective effort to raise Rs.8,75,000 crore
for implementing the plan.

The Planning Commission finalized the objective of the Ninth Plan in

conformity with the common Minimum Programme (CMP) of the United
Front government and also in consultation with the Chief Ministers of
different states on maintenance of basic minimum services. The draft
approach paper of Ninth plan outlines the following important objectives
for the plan:

i) accelerating the rate of economic growth with stable prices

ii) Giving priority to agriculture and rural development with a view to
generating adequate productive employment and eradicating poverty
iii) Attaining food and nutritional security for all, particularly the vulnerable
sections of the society
iv) providing basic minimum needs of safe drinking water, primary health
care facilities, universal primary education, shelter, and connectivity to
all in a time bound manner
v) Containing the population growth of the country.
vi) Ensuring environmental sustainability of the development process
through social mobilisation and participation of people at all levels
vii) Empowerment of people and all socially disadvantage group such as
scheduled castes, scheduled tribes, and other backward classes and
minorities as agents of socio-economic change and development.
viii) Promoting and developing people‘s participatory institutions like
panchayati raj, co-operatives and self-help group.
ix) Strengthening efforts to build self-reliance

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j) The Tenth Five-Year Plan (2002-07)

The Tenth Five-Year Plan was introduced on April 1, 2002. The Plan was
launched in the background which has both positive and negative
features. On the positive side, GDP growth rate in post-reforms period
has improved making India one of the fast-growing developing countries.
Population growth has declined to less than 2 per cent for the first time in
five decades. The percentage of population below the poverty line has
continued to decline. Literacy rate has increased from 52 per cent in 1991
to 65 per cent in 2001. Software and IT enabled in services sectors have
emerged as new sources of strength creating confidence about India‘s
potential to be competitive in the world economy.
On the negative side, growth has generated less than expected
employment. The infant mortality rate has stagnated at 72 per 1,000 for
several years. As many as 60 per cent of rural households and 20 per
cent of urban households do not have a power connection. There is actual
shortage of drinking water in urban areas. Land and forest degradation
and over exploitation of ground are posing a serious threat to sustainability
of food production. Population in the cities is rising rapidly.
Objectives and Targets

i) An average annual Growth rate of 8per cent

ii) Increase in per capita income at 6.4 per cent annum
iii) Enhancement of human well-being through (a) an adequate level of
consumption of fixed and other types of consumer goods, (b) access
to basic social service especially education, health, drinking, water
and sanitation.
iv) Expansion of economic and social opportunities for individuals and
group and greater participation for individual and groups in decision-
making.
k) The Eleventh Five-Year Plan (2007-2012)
Eleventh Five Year Plan is the economic and development plan of India
for the period 2007–2012.
The Main objectives of the Eleventh Five Year Plan
i) To create employment opportunities for an additional 70 million people
by 2012: The Eleventh Plan proposes to create nearly 58 million jobs
that aim to reduce unemployment by 5 per cent by the time the
eleventh fie year plans come to an end.
ii) To improve the quality of life of all citizens, with a special focus on
women and children. The Plan proposes to raise the rate of economic
growth to an average of about eight per cent per year during the
Eleventh Plan period.

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iii) To reduce the incidence of poverty by at least ten percentage points.
The Plan sets the poverty alleviation target of reducing the headcount
ratio of people living below the poverty line.
iv) To reduce regional imbalances in income and development. The Plan
seeks to correct the regional imbalances by providing for the
accelerated and more equitable development of backward States and
regions.
v) To make India a global knowledge economy. The Eleventh Plan
proposes to raise the level of investment in education and research
and development (R&D) to at least six per cent of GDP.
vi) To provide the infrastructure that is at par with international standards.
The Plan proposes an investment of over Rs 24 lakh crore, which is
near twice the investment made during the Tenth Plan.
vii) To build a clean and energyefficient economy. The Plan proposes to
increase the share of renewable energy in the total energy mix.
viii) To ensure environmental sustainability. The Plan proposes to
increase forest and tree cover, and also to take steps to improve the
quality of air and water.
ix) To ensure inclusive growth. The Plan proposes to focus on the
development of Scheduled Tribes, Scheduled Castes, Other
Backward Classes, minority communities and women.
x) To make India a global economic power.
xi) To develop worldclass infrastructure. The Eleventh Five Year Plan is
also committed to achieving the Millennium Development Goals.
The main aim of the 11th fiveyear plan is to achieve rapid economic
growth. The plan targets an annual growth rate of between and per cent
over the five years. The other objectives of the 11th Five Year Plan are to
create employment opportunities, reduce poverty and regional
imbalances, improve the quality of life and make India a global knowledge
economy.
l) Twelfth Five Year Plan (2012-2017)
12th Five Year Plan 2012-17 as per the draft document released by the
Planning Commission aims at a growth rate of 8%. The Twelfth Plan's
slogan is "Faster, Sustainable, and More Inclusive Growth." It means that
the Twelfth Plan aims for faster growth that can be sustained over time,
with the benefits of growth reaching the masses.
Twelfth five-year plan – Objectives
Economic growth
i) The real GDP is growing at an annual rate of 8%.
ii) Agriculture is growing at a rate of 4%.
iii) Manufacturing is growing at a 10% rate.
iv) Every state must achieve a faster rate of growth than that of the 11th
plan.

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Poverty and Employment
i) The poverty rate will be lowered by 10% compared to the end of the
11th plan.
ii) In the non-farm sector, there are 5 million new job openings and skill
certifications
Education
i) The average number of years spent in school will rise to seven.
ii) In higher education, there are 20 lakh seats available for each age
group.
iii) End the gender and social disparities in school enrollment.
Health
i) Increase the Child Sex Ratio to 950 by lowering the IMR to 25 and the
MMR to 1.
ii) Total Fertility Rate (TFR) should be reduced to 2.1.
iii) Reduce child malnutrition in the 0-3 age range to half of the NFHS-3
level.
Infrastructure
i) Infrastructure investment accounts for 9% of GDP (gross irrigated
area). 103 million hectares of land (from 90 million hectare)
ii) All communities will have electricity, and AT&C losses will be reduced
by 20%.
iii) All-Weather Roads Connect Villages
iv) National and state highways must have a minimum of two lanes.
v) Dedicated Freight Corridors on both the east and west coasts.
vi) Teledensity in rural areas has reached 70%.
vii) 50 percent of the rural population will have access to 40 litres of
drinking water per day, and 50 percent of all Gram Panchayats will
have Nirmal Gram status.
Environment and Sustainability
i) Every year, increase green cover by 1 million hectares.
ii) Over a five-year period, 30,000 MW of renewable energy will be
generated.
iii) By 2020, the GDP emission intensity will be decreased to 20-25
percent of 2005 levels.
Service Delivery
i) 90 percent of Indian households have access to banking services.
ii) Subsidies and welfare payments will be made through the Aadhar-
based Direct Cash Transfer Scheme.
m) Thirteen Five Year Plan (2017-2022)
The ten objectives for the 13th five-year plan includes "maintaining
economic growth, transforming patterns of economic development,
optimizing the industrial structure, promoting innovation-driven
development, accelerating agricultural modernization, reforming

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institutional mechanisms, promoting coordinated development,
strengthening ecological construction, safeguarding and improving
people‘s livelihoods and promoting pro-poor development."
14.4 SALIENT FEATURES OF INDIA’S FIVE YEARS PLAN

In India, the Five Year is a deep-rooted system. Although systematic effort

of planning was initiated in 1951 but in the meantime, the Eighth Five-year
plan has already been completed. It would now be better to study the
salient features of Indian‘s Five-Year plan thoroughly. The following are
some of these salient features.
i) Democratic: The first important feature of Indian planning is that it is
total democratic. India being the largest democratic country in the world
has been maintaining such a planning set up where every basic issues
related to its Five-Year plan is determined by a democratic elected
Government.
ii) Decentralized planning: Although since the inception of First Plan, the
important of decentralized was emphasized so as to achieve active
people‘s participation in the planning process, but the real introduction of
decentralized planning was made in India for the first time during the
seventh plan. Till the sixth plan Indian had adopted the system of
centralized planning with little variation. Decentralized planning is a kind
of percolation of planning activities or process from the centre to the sub-
state levels, i.e. District, sub-division block and village level. Thus,
decentralized planning is a kind of planning at the grass root level or
planning from below. Under decentralized planning in India emphasis has
been given on the introduction of district planning, sub divisional planning
and block-level planning so as to reach finally the village level planning
successfully.
iii) Regulatory Mechanism: Another important feature of Indian
planning is that it is being directed by a central planning authority, i.e., the
Planning Commission of India which plays the role of regulatory
mechanism, so as to provide necessary direction and regulation over the
planning systems. Moreover, in order to have proper co-ordination
between centre and state, a co-ordinating agency, the National
Development council (NDC) was set up by government of India of 6th
August under the present regulatory mechanism, every planning decision
in India originates from the planning commission and gets finally approved
by the is National Development council. Moreover, the planning
commission of India a also having adequate regulatory mechanism over
the successful implementation of planning.

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iv) Existence of Central plan and State plan: Another important feature
of Indian planning is that is the co-existence of both the central plan and
state plans. In every Five-year plan of the country, separate outlay is
earmarked both for the central plan and also for the state plan. Central
plan is under the exclusive control of the planning commission and the
Central Government, where the state plan is under the exclusive control
of state planning broad and state Government which also requires usual
approval from the planning commission.

v) public sector and private sector plan: Another notable feature of

India‘s Five-Year Plan is that in each plan, separate outlay is earmarked
both for public sector and the private sector. India being a mixed economy
it is quite natural that a separate investment outlay for public as well as
the private sector is being maintained in each plan.
vi) Period Plan: One of the important features of Indian planning is that
it has adopted a periodic plan of 5 years period having five separate
Annual plan components.
vii) Basic Objectives: The major objective of economic planning in India
mostly consists attainment of higher rate of economic growth, reduction
of economic inequalities, achieving full employment, attaining economic
self-reliance, modernisation of various sectors and redressing the
imbalance in the economy. In general, Growth with social justice is the
main objective of economic planning in India.
viii) Unchanging priorities: Five year Plans in India are determining its
priorities considering the needs of the country. It is being observed that
India Five Year Plans have been giving too many priorities on the
development Industry. Power and Agriculture with minor modifications.
Thus, there is no remarkable changes in the priority pattern of Indian
planning, although in recent years increasing priorities are also being laid
on poverty eradication programs and on employment generating
schemes.

ix) Balanced Regional Development: Another salient feature of India‘s

five years plan is that it constantly attaches much importance on balanced
regional development. Development of backward regions is one of the
important objectives of Indian planning.
x) Perspective Planning on Basic Issues of Problems: Another import
feature of Indian planning is that it has adopted the systems of perspective
planning on some basis issues or problems of the country, for a period of
15 to 20 years on the basis of necessary projections.

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xi) Shortfalls in Target Realisation: Another notable feature of India‘s
systems Five Year plan is its shortfalls in target realisation. Although
targets are fixed for every plan in respect of rate of growth national
income, employment population, production, to the fullest extent,
excluding certain specific cases. Such shortfalls in target realisation leads
to the problems of spill over the projects into next year plans and cost over
runs.

14.5 FAILURES OF PLANNING IN INDIA

Although the economic planning has achieved programs on various socio-

economic fronts but it has failed in certain respects. The following are
some of the areas where planning in Indian has failed.
i) Standard of living: The five-year plan has failed to attain an adequate
rise in standard of living of people in general. It failed to provide even basic
necessities of life. The poverty elevation programs have also failed to
achieve the required level of success in improving the standard of living
of people and also to reduce the percentage of population living below
poverty line.
ii) Growing Unemployment: Fifty years planning has also failed to
generate adequate employment opportunities to the growing number of
unemployed. As per recent government estimates, the labour force of the
country has increased by about 35 million during 1992 -97 and by another
36 million during 1997-2002.
iii) Inadequate growth in Productive Sectors: As it is evident from the
figures given in achievement, both agricultural and industrial sector have
failed to attain required growth rates. The rate of growth of agricultural
output remained all along poor.
iv) Rise in Price Level: Except first plan all other plans have experienced
rise in price level. No government action either monetary or fiscal could
control Inflationary trends.
v) Inadequate distribution of Income and Wealth: The gap between
rich and poor has widened during planning period of fifty years. The
objective of attaining a socialistic pattern has remained a mere slogan.
About 58.1 percent of total number of agricultural holdings is of marginal
category which is considered as uneconomic.
vi) Poor Level of Implementation: The level of implementation of plan
project particularly in respect of rural development agricultural and social
welfare sector remained all along poor.

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vii) Shortfall in attaining Targets: Five years plans have not only failed
to attain the objective of sectoral plans but also failed in attaining targets
in overall economic growth out of growing dishonesty and corruption at
the administration level.

viii) Lack of strong base of Planning: Most of India‘s population is

depend on agriculture which is fundamental to our economy and plans.
And agriculture continues to be a gamble monsoon because of poor
development of irrigation and flood control measure.

ix) Paradox of Savings and Investments: In spite a high rate of saving

and investment, Indian economy has been facing a paradoxical situation
of attaining poor rate of economic growth. Such a situation is result of
higher capital output ratio low rate of return on capital employment
employed and hung unproductive investment in the traditional sector.
x) Growing Deficit in BOP and Foreign Exchange Crisis: Fifty years of
economic planning has also failed to contain the trend of growth deficit in
the balance of payment of country leading to a serious foreign exchange
crisis as experienced during 1991.
LET US SUM UP
The reader can understand the concept of economic planning and various
planning strategies adopted over the years. The reader can understand
the objective of planning commission and national development cell. It
gives greater understanding of five years plans objectives and its
achievement vary widely. It also explains the reasons for the failures of
five-year plans implementation.
CHECK YOUR PROGRESS
Choose the Correct Answer:

1. What was the motto of the first five-year plan?

a) Development of finance b) Development of technology

c) Development of secondary sector d) Development of agriculture
2. Which research institute was established during the second 5-year
plan?
a) Institute of Economic Growth

b) Tata Institute of Fundamental Research

c) Centre for Economic and Social Studies

d) Council of Scientific and Industrial Research- Indian of Integrative
Medicine

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3. What was the focus of the first five-year plan?

a) Development of the service sector

b) Development of the primary sector

c) Development of the agricultural sector

d) None of the above
4. Which agricultural initiative was implemented during the fourth plan?

a) E-National Agriculture Market

b) National Mission for Sustainable Agriculture
c) green revolution

d) Pradhan Mantri Fasal Bima Yojana

5. What were the objectives of the ninth five-year plan?
a) Population control b) Social justice
c) Reduction of poverty d) Both (a) and (c)

GLOSSARY

Planning Commission : The Planning Commission was assigned

the responsibility of assessing all the
resources of the country, enhancing
scarce resources, drafting plans for the
most productive and balanced usage of
resources and ascertaining priorities

National Development : The National Development Council (NDC)

Cell or Rashtriya Vikas Parishad is the apex
body for decision creating and
deliberations on development matters in
India, presided over by the Prime Minister

Regulatory : Regulatory mechanism means an

Mechanism ordinance, permit, standard, contract
language, or any other procedure, that will
be enforced by the permittee.

Standard of Living : Standard of living is the level of income,

comforts and services available, generally
applied to a society or location, rather than
to an individual Standard of living are
relevant because it is considered to
contribute to an individual's quality of life.

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 Foreign Exchange : Foreign exchange refers to exchanging
the currency of one country for another at
prevailing exchange rates.

SUGGESTED READINGS
1. K. Aswathappa, (2011), Business Environment For Strategic
Management, Himalaya Publishing House, New Delhi.
2. Dhanabhakiyam. M & Kavitha. M.,(2014), Business Environment,
Vijay Nicole Imprints Private Ltd., Chennai.,
3. Francis Cherunilam, (2018), Business Environment, Text and Cases,
26th Edition, Himalaya Publishing House, New Delhi.
4. Gaurav Datt, Ashwani Mahajan (2016), Indian Economy, 72nd Edition,
S Chand Publishing, New Delhi.
5. Gupta C.B., (2018), Essentials of Business Environment, First Edition,
Sultan & Chand Publications, New Delhi.
6. V P Michael, (2000), Business Policy and Environment, 2nd Edition,
S. Chand Publishing, New Delhi.
7. Dr.S. Sankaran, (2013), Business Environment,Margham
Publications. Chennai
8. B. C. Tandon, (1975), Environment and Entrepreneur, Chugh
Publications, Allahabad.
WEB RESOURCES
1. https://www.nimas.edu.np/wp-content/uploads/2017/11/Unit-1-
Introduction-to-Business-Environment.pdf
2. https://www.vedantu.com/commerce/business-environment
3. DAY 01 | BUSINESS ENVIRONMENT | I SEM | B.B.A | INTRODUCTION TO
BUSINESS ENVIRONMENT | L1 - YouTube
4. https://www.youtube.com/watch?v=FCacrNZacm8
ANSWER TO CHECK YOUR PROGRESS

1.d) 2. b) 3.b) 4.c) 5. d)

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