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BUSINESS ENVIRONMENT

SYLLABUS

UNIT I
The concept of Business Environment
o significance and nature
Environment Scanning:
o meaning, nature and scope,
o the process of environmental scanning,
Interaction between internal and external environments,
Basic philosophies of Capitalism and Socialism with their variants.
Concepts of Mixed Economy.

REFERENCES : Mohinder Kumar Shartna - Business Environment in India Adhikary M,
Economic environment of business Amarchand, D. Government and Business
Francis Cheunilam : Business and Government Maheswari & Gupta :
Government, Business and Society Kuchal, S.C : Industrial economy of India
Fredrick Davis : Business and society.

Business
Though the term business has been defined by different authors in their own ways, there is no much
difference in the essence of their definitions.
For example, according to Urwick and Hunt, Business is any enterprise which makes, distributes, or
provides any article or service which other members of the community need and willing to pay for.
Almost same views have been expressed by Davis when he defines business as The organized effort by
individuals to produce goods and services, to sell these goods and services in market place and to
reap some rewards for this effort.
Davis and Blomstrom are very right when they say, Business comprises all profit seeking activities
and enterprises that provide goods and services necessary to an economic system.
Business is the economic pulse of a nation, striving to improve the societys standard of living. Thus
business means the total enterprise of a country in manufacturing, industry, finance and commerce. It
may be public enterprise or private enterprise or a joint enterprise, or the like.
Characteristics of business
1. Profit seeking activity
2. Providing goods and services to the society
3. Participant in society
4. Flow of income
Components of business
Industry
Trade and commerce
Changing concept of Business
1. Profit concept of Business(Old concept of Business)
Profit Maximization
2. Profit- cum- Service concept of Business
Making better product at a competitive price
3. Profit- through- Service concept/ Modern concept/ Business as Social System Concept
Today business is regarded as an integral part of the Social System; the main characteristics of
business as a social system are as follows:
Business is a system having its own sub-systems
Business interacts with its external environments
Business is a dynamic social system having stabilizing tendencies
Social values
Viability
Public viability
Business is related to people

Objectives of business
Objectives give purpose and directions to the work of all employees, they indicate the broad limits within
which action is to be taken. They serve as media by which multiple interests are channeled into joint
effort. Therefore, profitability is the basic economic objective for the survival and growth of an enterprise.
Earning profit as one of the objectives of business can be justified because profit is necessary
I. To pay fair return to shareholders for their investments
II. To retain some earnings for re- investment which is necessary for its growth, and
III. For profit is the index of efficiency of an enterprise.
A. Primary Objectives
1. Survival and Growth of Business and Profit to Shareholders
2. Service to customer
B. Social Objectives
1. Employees Satisfaction
2. Service to Community and to Society in General
3. Observance of Governmental Regulations
4. Ethical Behaviour
BUSINESS ENVIRONMENT
Business involves activities, which links an organization with outside world. Within an organization, a
business is governed by the behaviour of its employees, management or decision makers. But externally a
business is influenced by a score of factors, which range from customers to competitors and government.
Therefore, a business cannot be independent of (he influence of these external factors. It should also be
noted that a business has absolute control over all the internal factors, it has no control over the external
factors. So often it becomes necessary for business houses to modify their internal decisions and policies,
on the basis of the pressure from external factors This highlights the need to be ever- cognizant of
changes and influences of external factors so as to conduct business on healthy lines. It is in this context
that business environment assumes all significance. Business environment therefore refers to the
influences and pressures exerted by external factors on the business. The following Figure would help to
understand the various factors which constitute the business environment.







1. Demographic environment: This refers to the size and behaviour of population in a country.
Suppose a country has a huge size of population, then, the country would provide extensive
business or marketing opportunities for all types of business organizations. On the other hand, a
country with low size of population would force the business organizations to seek external
market for their products or services. Similarly, if the population in a country is well - tuned to
'use and throw concept [like most of the Western countries] then there would be limited scope
for repair shops and employment scope in that segment would be almost nil. But alternatively
this would give wide marketing opportunities for manufacturing organizations. On the other
hand, if the population is averse to 'use and throw' concept, then the business opportunities
would be limited for manufacturing organizations but the repair shops, self-employed technical
persons and spares manufacturers, would have roaring business. Hence, the size and quality of
population emerges as a vital factor influencing business environment.
2. Economic environment: Economic environment refers to the overall economic factors like
economic philosophy of the country, economic structure, planning, economic policies, controls
and regulations, etc. All these have a serious impact on the functioning of business organizations
in a country. For example, in a Capitalistic economic system, business organizations would be
subjected to limited government regulations and controls. They would be more governed by
market forces [demand and supply] rather than by other factors. On the other hand, in a Socialist
system, the government would determine everything on behalf of the country. In a Communist
set up, the government has absolute control over every aspect over production that private
enterprises may not exist at all. In a Mixed economic system, government would be selective in
allowing die presence of private enterprises in certain activities, reserving some spheres
completely for governmental operations. Hence, the economic philosophy of the country directly
determines the scope and functions of business organizations in that country.
3. Geographical and ecological environment: Geographical environment refers to climatic
conditions and natural resources, which determines flu manufacturing scope and the nature of
the products that could be marketed. For example, a country like Kenya has to manufacture more
of products based on forest resources, while the Gulf countries can produce only crude, Japan
can have business in fish, fruits, etc., Countries in the tropical region would have organizations
specializing in products from geographical resources available in abundant in that region,
while organizations in Mediterranean countries have a Different business scope, Scandinavian
countries have scope for dairy product manufacturing, etc. Similarly ecological imbalance is
taking place at an alarming rate in the world today, that deforestation and hunting of rare species
of animals for food are all prohibited now. Hence, while identifying the business opportunities,
business organizations have to be conscious of the limitations posed by the geographical and
ecological considerations.
4. Legal environment: It is well known that every country has a number of legal regulations to
ensure that the interests of business organizations do not run counter to national interests.
Right from the stage of incorporation of organizations, their listing in stock exchange, reprisal of
customer complaints, payment of tax to government, manufacturing practices, human resources
development to pricing of products and services, a number of legal regulations have to be
fulfilled. For example, in USA and several western countries, consumer protection is very active,
that even a medical practitioner is subjected to huge liabilities in limes of deficiency in services.
In India and other countries, very rigorous legal provisions arc in place to prevent hunting of rare
species, that any organization, which manufactures products based on such species, have lo get
legal sanctions. In case of failure to honor cheques issued, organizations are now a days
made to pay hefty compensations. Hence, the deterrence in terms of legal provisions has become
the order of the day. All organizations have to first of all address these provisions become coming
in to steam.
5. Technological environment: This is a very significant external factor determining the
destiny of business organizations. Supported by computerize operations, modem business
organizations have succeeded in analyzing customers, minimizing the defects in products,
ensuring service at the right time and place, etc. While communications use to take unduly long
time in those days, business communications are instantaneous these days, thanks to modem
satellite technology. Modern organizations have recognized that research and development
alone can ensure organizational growth and stability. They have become more and more pro-
active and remain as change agents of the economy. Governments have also become more
technology conscious that right from police controls to registration of title deeds,
computerizations has been adopted. Customer servicing through call centers is the latest
necessity of organizations. Manufacturing activities have become more and more technically
sophisticated. Therefore business environment has become highly dynamic.
6. Social environment: Social environment today has brought compulsions on business
organizations to adhere to certain business ethics and morals. Social responsibility of business is
an important force that modern business organizations cannot wriggle out of their duties and
responsibilities towards the society. For example, every leather manufacturing or process unit is
made to install pollution prevention system. Similarly, the expectations of various interests in the
society have undergone a sea of change. The shareholders, promoters and owners expect a
reasonable return on their investments. The workers expect security of service, terminal
benefits, accident relief and various other compensations from the organizations. Government
expects the business units to pay tax regularly and participate in social improvement. The
distributors and agents expect the organizations to ensure smooth delivery process and demand
more commission and compensation. Suppliers expect the organizations to give them continuous
business and prompt payment of bills. Therefore each social group has a specific interest, the
combination of all these, exerts enormous pressure on the business unit. A business unit which
succeeds in meeting the interests of all these groups remains successful and grows.
7. Educational and cultural environment: Educational environment in a country determines the
quality of population. A country with very high illiterate population would always experience
political and economic instability. Similarly, lack of education may also give scope for the
existence of superstitious beliefs, fatalistic attitude, etc. People's choice of goods and services
would be more governed, by their religious faiths and beliefs. For instance, in the colonial days,
the Indian population was a victim of the Britisher's divide and rule tactics. The economic
development of a country completely depends on the literacy level which alone can pave the way
for improvement in science and technology, modernization, industrialization, etc. In such a
country, the business opportunities are plenty.
8. Cultural environment: Cultural environment refers to the values, norms, customs, ethics, goals
and other accepted behaviour pattern of people in a country. In olden days, religion was the basis
of all activities in a society. The religious leaders and institutions determined what business
should do and what people must consume. In India, the existence of caste system has done more
damage than any good. Caste based politics has become the order of the day. Under the pretext
of working for backward and downtrodden people, several persons have amassed fortune. This is
worsened by political support and policies. A modern organization does not have the liberty to
recruit people on merit but it has to follow strictly die reservation policy of the government.
Another serious aspect of the cultural environment is the attitude and behaviour of the people in
urban and rural areas. The urban - rural divide has created enormous problems for administrators
and specifically business organizations prefer urban educated person to persons from rural areas.
9. Political environment: Political stability is one important factor winch determines the business
growth or downfall. A country with relative political stability would witness inflow of foreign
capital and collaboration. By political stability we mean that the policies of government
remaining consistent. As the business decisions arc based on government policies, frequent
changes in these policies would force business organizations to change their policies too which,
makes functioning very difficult. Sometimes, when the policies determined by a party in power
are reversed by the succeeding party forming the government, there would be far reaching
changes in business environment For example, India was following a policy of protectionism till
late" 1908's. Hence, the industrial development and economic development could not take place
at a rapid rate. In the absence of competition, the business organizations, made people to accept
inferior quality goods and services. Once, the liberalization policy is adopted, the scene has
completely changed. Today, no business can survive unless it provides quality goods or services
on par with the multinational corporations. Another aspect of political environment is the
political ideology with which a party is wedded to, would make the government tow the lines of
countries with similar ideologies. Until the disintegration of USSR, India was simply following
USSR's lines, but after the disintegration, India has to literally fend for itself. With the pressures
mounted by the Western countries, India had to accept various trade and monetary policies. This
has brought about a complete change in business environment.
Inter- Action Matrix
Present era is the era of competition. A business is successful only if in the present market place it
anticipates and interprets the development of external environment that is not under the control of the
company. Any change in these forces affects the enterprisers long- term goals. The key to success for any
onganisation is better understanding to the environment.
All economic factors whether economic or non- economic such as (P.E.S.T.), have interaction with each
other, due to this inter action the environment has become extremely dynamic and complex, the
economic and non- economic factors are so closely related and all of these are very confusing that
sometimes it appears very difficult to separate them and any attempt to make any distinction between
them proves to be futile.
The inter- action matrix between various economic factors is as shown below:
On the basis of factors
a. INTERACTION MATRIX
Economic
Environment
Non- Economic Environment
Sociological Educational
Political
and Legal
Historical
Physical and
geographical
Economic system + + + + +
Economic
structure
+ + + + +
Functioning of
economy
+ + + + +
Economic
planning
+ + + + +
Economic
programmes
+ + + + +
Economic policies + + + + +
Economic control
and regulations
+ + + + +
Economic growth
and development
+ + + + +

On the basis of Space
b. INTERACTION MATRIX
No- National Environment National Environment
National Economic
Environment
National Non-Economic
Environment
Local Economic Non
Economic
++ ++
Regional Economic Non
Economic
++ ++
International Economic Non
Economic
++ ++
On the basis of time
c. INTERACTION MATRIX
Non Present Environment Present Environment
Present Economic
Environment
Present Non-Economic
Environment
Past Economic Non Economic ++ ++
Future Economic Non
Economic
++ ++

Environmental Scanning
The term environmental scanning in business means to Carefully analyze the various factors influencing
the business. Environmental scanning is not once and for all; rather it is a continuous process.
According to Jauch and Glueck, Environmental analysis is the process by which strategists monitor
the environmental factors to determine opportunities for and threats to their firms. Environmental
analysis also consists of managerial decisions made by assessing the significance of the data of the
environmental analysis.

Environmental scanning is needed because of the following reasons:-
1. Effective Utilization of Resources- the key to business success is the most effective utilization of
the company resources, existing resources as well as the additional resources it can mobilize. All
this involves the evaluation of the companys strengths and weaknesses in the light of the
environmental threats and opportunities and taking appropriate measures to harness the
opportunities or to combat the threats and formulation of strategies accordingly.

2. Constant Monitoring of the Environment- environmental scanning provides a clear cut idea
about the existing environment. Without environmental scanning it would not be possible to
know the changes in customers taste and preferences, competitors moves, latest innovations,
latest policy developments etc.

3. Strategy Formulation- environmental analysis will indicate the areas for diversification and
growth as well as measures to face the problems. Knowledge and understanding of its
environment by a firm leads to more effective strategic decision making by permitting proactive
strategy based upon forecast proactive for the business.

4. Identification of Threats and Opportunities- environmental analysis can help the firm in
identifying its threats and opportunities. After the proper identification, strategies can be
adopted to exploit the environmental opportunities and to overcome the threats.

5. Useful for the Managers- Managers have found much value in environmental analysis in many
ways. If we compare the overall economic performance of the companies that made
environmental assessments with those who did not, we will find out that those that did make
such assessment out performed those who did not.

6. Prediction of Future- predicting future has become one of the most important functions and
skills of the management. Future managers have to be more anticipative than reactive and
problem solvers.

FACTORS TO BE CONSIDERED FOR ENVIRONMENTAL SCANNING
1. Events- Events are important and specific occurrences taking place in different environmental
sectors e.g. The gas leakage accident at the Union Carbide factory at Bhopal and the resulting
holocaust was an event.
2. Trends- Trends are the general tendencies or the courses of action along which events take place.
3. Issues- Issues are the current concerns that arise in response to events and trends.
4. Expectations of People- The expectations of the general public from the Government is of
legislating changes in rules and regulating pertaining to safety measures and strict enforcement
through various mechanisms.

APPROACHES TO ENVIRONMENTAL SCANNING
KUBR has suggested 3 approaches:
1. Systematic Approach- The important features of this approach are as follows:-
In this approach, information for environmental scanning is collected systematically.
Information which is pertaining to business and industry could be collected
continuously to monitor changes and take the relevant factors into account.
Continuous updating such information is necessary not only for strategic
management but also for operational activities.
2. Ad-hoc Approach- The important steps involved in this approach are:-
Under this approach organization may conduct special surveys and studies to deal
with specific environmental issues from time to time.
Such studies may be conducted when an organization has to undertake special
projects, evaluate existing strategies or to devise new strategies.
Changes and unforeseen developments may also be investigated with regard to their
impact on an organization.
3. Processed Form Approach-
The organizations generally use information in processed form i.e. supplied by
government agencies or private institutions.
The organizations also use secondary sources of data, available from different
sources both inside and outside the organizations.

SOURCES OF INFORMATION FOR ENVIRONMENTAL SCANNING
A. Daily Newspapers
i. Economic Times
ii. Business Standard
iii. Financial Express
iv. The Times of India
v. The Hindu
vi. International Herald Tribune
B. Journals
I. Business India
II. Business World
III. Update
IV. Fortune India
V. The Sunday Observer
VI. The Economic and Political weekly
VII. Environmental Trends and Scenarios
VIII. Main Stream
IX. India Today
X. Commerce
XI. Seminar
XII. Harvard Business Review
XIII. Sloan Management Journal
XIV. Long Range Planning Journal
XV. Fortune International
XVI. C.M.I.E Publications
XVII. Economist
XVIII. I.M.F World Economic Outlook
C. Govt. Publications
i. Govt. information sources like census of India reports, five year plan reports,
statistical abstracts of India etc.
ii. Periodical reports like economic surveys, annual survey of industries, annual
report of ministries etc.
iii. Occasional reports brought out by various statutory agencies such as guidelines
to industries, policies related to specific industries, export, import, policies.
iv. RBIs department of statistic also publishes valuable occasional papers related to
different aspects of the economy and industry.
v. References such as India-a-Reference(annual) published by the Ministry of
information contains comprehensive information on the geographic and
demographic features of India, its political and social institutions, economy and
culture, plans, programmes etc.
D. Institutional Publications
i. Bombay Stock exchange Directory
ii. The Centre for Monitoring Indian Economy (CMIE)
iii. Kolhares Industrial Directory of India. Published by Kothari Enterprises,
Madras.
iv. Publications of market research agencies, such as Operation Research Group
(OPR). The National Council for Applied Economic Research (NCAER).
v. Publications of Trade and Industry federation such as FICCI, ASSOCHAM and
industry associations like ATMA.
vi. Annual company reports.
E. Industrial Espionage Agencies
Private agencies provide information and reports on competitors plans and
activities which are essential for strategic planning.
ECONOMIC ENVIRONMENT
Economic environment influences the business to a great extent. It refers to all those economic factors
which affect the functioning of a business unit. The following factors constitute economic environment
of business:-
a. Economic system
b. Economic planning
c. Industry
d. Agriculture
e. Infrastructure
f. Financial and fiscal sectors
g. Removal of regional imbalances
h. Price and distribution controls
i. Economic reforms
j. Human resource
k. Per capita income and national income
The economic system in a country decides the development prospects to a great extent. There are 3 types
of economic systems viz:-
1. Capitalism
2. Socialism
3. Mixed economy

A. CAPITALISM According to LOUCKS, Capitalism is a system of economic organization
featured by the private ownership and use for the private profit man-made and natural made
capital. There are basically two kinds of capitalist system:-
a. Laissez Faire in this type of capitalist system, the government intervention in the economy is
absent.
b. Regulated or Mixed Capitalism- in this type of capitalist system, there is substantial amount of
government intervention in the economic and industrial development.

Characteristics of Capitalism:-
1. Freedom of Enterprise - Individuals and firms have the right to own and use property, and to
earn and spend incomes. Here private firms are allowed to obtain resources, to organize
production and to sell the product in any manner to anyone.
2. Private Ownership In this type of system the factors of production i.e. land, labour and capital
are privately owned i.e. one in which there is freedom of private ownership of property. Here
private property is protected, controlled and enforced by law.
3. Profit Motive Under capitalism profit motive acts as a barometer. Persons invest capital into
business to earn profit. In a capitalist economy, the person is free to select any occupation he is
qualified for. This freedom of choice enables the individuals to earn profit from his own started
business.
4. The Market System or Mechanism Of all characteristics of capitalism market, mechanism is
said to be the most important. Profits in a business are related with price mechanism which
guides the allocation of resources under capitalist system.
5. Competition There is a competition among sellers and buyers in an ideal capitalist system. The
tough competition among producers compels them to make best use of factors of production and
produce at minimum cost in order to earn maximum profits.
6. Freedom of Contracts People are free to make contracts and settle transactions. So every
person is free to sell his goods or services to anyone he feels like.
7. Limited Role of Government In Laissez Faire form of capitalist system, the government does
not interfere in the working of the economy. Producers and consumers are free to take their own
decisions.
8. Absence of a Central Plan Freedom of enterprise, occupation and property rights rule out the
possibility of a central plan. The activities of various economic units in a capitalist system are not
guided or controlled by a central plan.

Merits of Capitalism:-
1. Efficient Utilization 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.
2. Democratic Producers, consumers, the workers, all enjoy economic freedom and are free to
work as they like. Goods are produced according to liking and demands of the consumers.
3. 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.
4. Efficiency properly rewarded both producers and labourers work hard and with more
efficiency as producers can make more profits and labourers can get better wages.
5. 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 involve great risks.
6. 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 of competition also where
producer tries to produce at minimum cost and ultimately consumer is benefited.
7. Encourages Capital Formation the existence of capitalism is dependent upon the right to
inherit the property and profit motive, because of which people have incentive to save a part of
their income which they can further invest to make more profits.

Demerits of Capitalism:-
1. Wastage and misallocation of Resources under capitalism most of resources are wasted on
advertisement and salesmanship and products are produced to satisfy profit motive only and
essential commodities are neglected for production.
2. Economic Stability Business cycles affect consumers the most. They suffer both in periods of
inflation and deflation.
3. Inequality of Wealth an unplanned capitalist economy can be compared with a vehicle without
steering wheel. Artificial scarcity of goods is created by greedy entrepreneurs who earn profits to
great extent while consumers ultimately suffer.
4. No freedom in modern capitalist market one can find presence of group rivalries and price
wars, price arguments etc.
5. Class Struggle rich are becoming richer and the poor poorer. The society gets divided into two
classes have and have-nots. There is a clash of interests.
6. Unemployment and corruption corruption and unemployment has become a chronic disease in
the capitalist system.
7. 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
primarily for military purposes by the state.

B. SOCIALISM Socialism in 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. In socialism, there
is in fact a variety of systems. On one hand there are communist countries characterized by state
capitalism and on the other hand, there are the democratic socialist nations with a dominant
private sector.

Features of Socialism
1. 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 perfect equality in income distribution. There may be wage
differentials, depending on the nature and requirements of the nature of the job.
2. Government Ownership here, the main means of production are either owned by the
government or its use is governed by the Government. It becomes easy to achieve the desired
patterns of resource allocation if the state owns almost the whole of the means of production.
3. Economic laws in socialist system, all working people have an interest in the fullest
understanding and application of the economic, laws 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.
4. 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.

Merits of Socialism
1. Better Allocation and utilization of Resources In socialist economy resources are owned and
controlled by the state, so no wastage and duplication takes place. There is no self interest of
private individuals and so no profit motives.
2. 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.
3. 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.
4. No Class Struggle there is a collective ownership of different factors of production which
ensures the best utilization of available resources of economy and equal distribution. So there is
no gap between haves and have-nots.
5. Reduction in Inequality of Income since there is no gap between haves and have-nots there is
equality of income. Equal chances are given to all in all the fields like occupation, education etc.

Demerits of Socialism
1. Bureaucratization 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.
2. Lack of Incentives major disadvantage of socialism is that people do not have incentives for
greater work, efficiency and enterprise. People get fixed wages and salaries from government so
they lack initiatives and incentives.
3. Red Tapism in socialist system the decisions are delayed as files go on moving from one place to
another which results in wastage of time and money also.
4. 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.
5. Promotes Corruption the government being ultimate authority the govt. servants often become
dishonest and corrupt while doing work of the people.
6. Misallocation of Resources allocation of resources is made according to the desires and
demands of the consumers since there is no place for price mechanism.

Mixed Economy
There was no reference to the mixed economic system in Economic literature in the past. Economists
were mainly familiar and advocated the Laissez faire or free enterprise system, as several countries could
develop fast following the free enterprise system, in which there was no or little government
intervention. The entire economic system operated with the price mechanism at its center point. The
producers produced what the consumers wanted and this provided very little scope for the government
to intervene in the system. The Classical economists and their ardent supporters believed that the
invisible hand will direct the economy and with private initiative and enterprise, every country should be
able to record a faster growth as proved in the case of UK, USA, Europe, Australia, and other countries.
But over a period under the leadership of Karl Marx, a new economic system was developed called
socialism, in which there is no scope for any private enterprise as everything owned and controlled by the
government. The government decided the type of developmental activities and me requirements of the
society and used the available resources in the provision of these requirements. Several countries like
USSR, Communist China, Vietnam, Cuba and others preferred this socialist system in which government
is made the custodian of the society. The main reason for Die emergence of this new economic system
was the failure of capitalism during the 1929 depression to revive every economy from depression. Keynes
himself thought that capitalism without some of its evils could certainly help economic recovery. Hence,
a time came when economists felt that cent per cent free enterprise or cent per cent government
governed economic development cannot work satisfactorily. A compromise between these extremes was
thought of as an ideal economic system. The new system called 'mixed economic system' contained the
merits of both the capitalism and socialism and appeared to be full of promise. This mixed economic
system is adopted by India as indicated by the First Industrial Policy Resolution 1948.
Characteristics of mixed economy:
1. Co-existence of public and private sectors:
In a mixed economy, one will find the existence of both the private and public sectors. In such a system,
the government will undertake the responsibility to build and develop certain sector activities and leave
the other activities for the private initiative. In India, the government announced the adoption of the
mixed economy system through its 1948 Industrial Policy Resolution. The government clearly earmarked
the industries to be completely under the state control, the industries which are to owned and controlled
by the state as well as the private sector and industries which are completely left for the private sector. In
this way the Resolution provided for the simultaneous existence of both private and public sectors.
2. State participation in economic development:
This is the second feature of mixed economy, according, to which the state reserves its right to design
and decide the type of development to be achieved. In such a set up, the government strives to promote
the welfare of the country by ensuring social order, social justice and establishing all the necessary
institutions which are required to achieve the desired pattern of growth and development.
3. Distribution of ownership and control of resources:
This is the next feature of mixed economy. In this system, the government itself enters the field of
production so that the available resources are fully utilized. This will also help to avoid concentration of
wealth in the hands of a few and enable distribution of ownership and control of productive activities. As
a result there is no scope for exploitation of any group, say labor, by any other group. In this way the
weaker section of the community is well protected and taken care of. Only the mixed economy will
enable the government to attain the objectives of the Directive Principles of the Indian Constitution.
4. Directing the investment in socially desirable projects and channels:
Mixed economy facilitates the flow of investment into channels which confers the society with several
benefits. For example, the Indian government has invested huge amount in several projects to develop the
infrastructural facilities. This forms the basis for the development of other sectors. The investment in
these infrastructural areas will not come forth from the private sector as the return is nil. Hence, the
government in a mixed economic set up provides the thrust by developing the necessary background and
strength which will encourage the private sector to invest in profitable opportunities. In this way the
government plays a key role in a mixed economic system.
5. Scope for achieving balanced economic development:
I Left to itself, the private sector would establish its enterprises only in urban or sub-urban areas and that
too in already well developed states. This will mean other areas will have no scope for development. But
in a mixed economy, the government will itself undertake the initiative to set up industries in backward
areas and encourage the private initiative to set up industries in such areas by offering several
concessions and exemptions. In the absence of nixed economy, several states in India would have
remained industrially backward.
6. Ultimate control and regulation in the hands of government:
This feature of mixed economy clearly spells out that in every activity affecting the economy, the
government will be the ultimate authority. Though the private sector is assigned its role to perform, the
government will still monitor and control the way in which the private initiative is performing its role.
Infact, according to the 1948 Industrial Policy Resolution, the government made it clear that the
industries already established by the private sector belonging to that category in which new industries
will be established by the government alone, the government would undertake the review of the working
of these industries in private sector after a period of ten years and if found not satisfactory, they would be
taken over by the government. Though this was criticized as a threat of nationalization, yet through such
a provision the government underlines its authority. Similarly in the banking and insurance sectors, the
government nationalized banks emphasizing its powers to control and regulate any sector.
7. Co-operation in the field of economic development:
According to this feature of mixed economy, the government formulates the design for development and
invites the private sector to participate in the development. It clearly spells out the guidelines which
would govern such cooperative efforts and the limits of freedom granted to the private sector. In Indian
case, the government prepares the plans for development and spells out the areas left for the private
initiative and the areas that will be under state control. Hence, there is scope for the development of
private sector, though only according to the design developed by the government.
8. Planning process under mixed economy:
As has been already stated, in a mixed economy there is a need to achieve a compromise between self-
interest and social interest This is a very difficult task as the government has to carefully foresee the type
of development it wants to achieve and closely monitor the activities of the private sector to ensure that
the social interest is never at stake. Obviously, planning is a very difficult exercise in a mixed economy set
up. The success of planning will depend upon; i) the extent to which the public sector is able to rise to
achieve the social gains aimed for, ii) the success of the state in guiding and regulating the private sector
activities towards social goals and iii) the extent lo which (lie state is able (o check the distortions taking
place in investment by private sector affecting (he interest of the public sector. Hence in the planning
process the state has taken up the following steps to ensure the accomplishment of the objectives of the
mixed economy,
a. By holding complete ownership of defense and heavy industries, the government has provided
an industrial base with which the private sector is expected to plan its investment activities.
b. The state also has made huge investments in economic infrastructures so as to help the
extension of market for goods, raising the productivity in agricultural and industrial sectors,
encouragement of further productive investment
c. The government has complete control of the financial institutions including banks so that it
can ensure that the banks and other institutions play a key role in the development activities of
the state. The government could also realize the expected gains by encouraging the priority
activities in every sector. The economic institutions are made to support the weaker sections of
the community.
d. Through powerful legislations like MRTP Act, FERA, etc., the government could ensure that
there is no scope for exploitation of the common people by the private enterprise. Such a legal
framework lays down the rules of the game and ensures fair play in a mixed economic set up.
e. As a method of protecting the weaker and downtrodden people, the government has policies
like rationing, price controls, etc. Such regulations are built in the planning mechanism itself,
so that the private sector cannot exploit the community.
f. Towards the improvement of welfare in the economy, the state has undertaken several specific
programs aimed at specific target groups. For example schemes aimed at the backward and
schedule tribe providing them reservation in educational, employment and other opportunities,
rural oriented schemes for the rural folks, health for all schemes, provision of free educational
and medical facilities up to a certain level, etc. All these schemes aim at improving the social
welfare. In all these activities the private sector is also welcome to play its role.
g. The government makes effective use of the tools of fiscal policy viz. taxation and public
expenditure, so as to achieve the objectives of economic planning.
Marxism
Marxism is essentially socialism in different garb. The pure socialism is proved to be impractical and it
made role of government the center point. Most of the government could not fit in this role effectively.
Further capitalism with its explicit goals threatened the success of socialism. It was at this juncture that
Karl Marx came up with his ideology, which led to the evolution of Marxian socialism. Marx succeeded
through his logical reasoning that economics dominates every activity of a society. This leads to class
struggle. When one struggle is tackled another one crop up. The continued onslaught of the capitalist on
the society would result in the creation of haves and have-nots. This division of the society would widen
with the continuance of capitalism, which ultimately will result in class struggle. Marx explained
through his theory of value that every product should be valued in accordance with the value of labor
contained in it. But the laborers are rewarded at a very much lesser rate than what they create. That is,,
every laborer contribute more by way of his work to produce the product but he is paid a very low wages.
The difference is the gain realized by the capitalists. The capitalists would accumulate profits this way at
the cost of worsening labor condition. Over a period the divide between the proprietary class and the
labor class would widen that much, that there would be social upheaval. Karl Marx predicted class war
and argued that unless the capitalist class realizes this, there would be severe impact on production and
economic condition of a country. His argument came true in the case of France that the French
revolution broke out in 1789. There were similar problems in different parts of the globe, like in
erstwhile USSR [Scissor's crisis], and China. China, especially remained a closed economy till early
I990's. But in China, the Marxism led to the emergence of communism. This is discussed in detail below.
Though Marxism held sway over a number of countries for some time, yet it has inherent defects. Firstly,
Marx's view that all activities in all countries are basically economic in nature is not true. Secondly, his
argument that class struggle continuously takes place in every country did not hold water. A number of
other reasons of economic, social and cultural nature led to the struggle and not the way Marx predicted.
Thirdly, the theory of surplus value could not be applied in practice in service industry. Fourthly, Marx
never took into the interference that a government could make in case of exploitation of society by the
capitalists.
Communism
Communism is Marx's prediction at the fall of capitalism. Marx argued that the widening inequalities in
a society coupled with class struggle should ultimately sound the death knell of capitalism. He is of the
view that when capitalism falls, the communism will emerge in which, the laborers will lead the country.
The government will own all the resources and determine the needs of the society. It will also decide
various other issues of macro and micro importance. Government will turn out to be the custodian of the
society and in a pure communistic society; people will lead a life where basic necessities are provided by
the government. Unemployment will be very low as every one is occupied in some avocation or other.
But the way in which communism was practiced in China created an impression that the government
would be oppressive in its approach that the people will lead a life of slavery. One has to work to earn his
bread. Military type of regimentation was enforced that common people were subjected to absolute
control and regulation by government. The economy remained closed without any international
relations, both economic and social. There were no two party systems that the nominated representatives
of the Communist party attended to all the governmental responsibilities. Market mechanism is
completely absent in such a system, as government determined everything on behalf of the country.
As has been already pointed out depending upon the economic system, the business environment will
change. In a capitalist system, the environment provides opportunities for every one who wants to
maximize gains. In a socialist system, the government undertakes the responsibility of providing
everything to the citizens. In a Marxist economy, it is ultimately the laborers who will hold the reins. In a
Communist economy, it is the group of administrators who run the economy in the interest of the
economy.
Strategies to deal with the environment
Uncertainty and interdependence.
Uncertainty: Uncertainty arises because managers can neither fully predict nor control what will happen
out of the interface. The managers do not get adequate information of right quality to take decisions to
deal with environmental forces, thus, they have to devise their actions under partial ignorance.
Interdependence: while doing business managers develop a variety of exchange relationships with people
such as suppliers, customers etc. these relationships neither are nor uniform also. Therefore, the
organization has to evolve different strategies to deal with different segments of environment.
If the managers of an organization are successful in reducing environmental uncertainty and reducing
their dependence on external forces, they will gain control over their environment. A number of
strategies have been devised to help managers minimize the power of task environment over the
organization. These strategies may be classified in to three categories.
1. Strategies for insulating the organization from the environmental forces
2. Strategies for gaining control over certain aspects of external environment
3. Strategies for organizational adaptation
Strategies for insulation of the organization
According to James Thompson An open system can avoid the influence of external forces through
the process of Boundary Spanning in Boundary Spanning the org devises the mechanism to anticipate
the environmental events to minimize the impact of environmental uncertainties. The spanners filter the
information from the environment and only the relevant information is allowed to reach the core of the
org. the org can also adopt the following strategies based on the environmental anticipation that insulate
the org from erratic and potentially damaging environmental demands
1. Buffering
Buffering absorbs the environmental fluctuations of the org.(Stocking the raw materials
and finished goods) this enables the management to maintain the operations when there
are shortages of raw materials and when there are peaks and valleys in demand for these
products
2. Leveling:
Leveling aims at maintaining the sales at uniform level throughout the year, during
periods of high demand, a premium rate may be charged for the product and during
periods of low demands, incentives may be given to the customers in the form of free
gifts, discounts, lucky coupons etc.
3. Rationing:
Rationing is a devise used to establish a set of priorities for using the organizations
scarce resources, it is a method of curtailing demand for input/ output according to the
environmental situations
Strategies for gaining control over certain aspects of external environment
These strategies focus on reducing the organizational dependence on the environment by increasing its
power or control over some aspects of the environment. These strategies are as follows:
1. Creation of prestige
Through advertisement, public relation with press etc.
2. Agreements
With suppliers of materials, banks and financial institutions, labour unions, customers,
competitors etc.
3. Co- potation
According to James Thompson, Co- Optation is the process of absorbing new
elements in to the policy making structure of an organization as a means of averting
threats or maintaining its stability in the changed circumstances.
4. Procurement of key personnel
5. Lobbying
Lobbying is the process of convincing the various powerful elements of the environment
to act in favour of the organization. For instance, the top management of the
organization may resort to lobbying with some members of the ruling party to gain
control over the external environment of the business. They may play an active role to
convince the government to enact laws and modify its monetary, licensing and foreign
trade policies. Political lobbying is also done by the organizations, generally by giving
hefty donations, to increase the domain of their influence in the environment, moreover
there are apex associations of industries like CII, who takes the actions to safeguard the
interest of their member organizations. Most of the industries nowadays have their own
associations.
6. Coalescing
Two or more organizations nay merge their organizations to have better control over the
environment as various resources are pooled together. The merged organizations are
generally those which have some sort of interdependency like procurement of raw
materials
Strategies for organizational adaptation
Managers can anticipate changes in environmental conditions and adapt accordingly. With information
gathered from forecasting, market research etc. managers can help their organizations adapt internally to
anticipate environmental demands. This is one of the most adapted strategies. This strategy involves two
types of adaptations:
1. Adaptation of Organizational Structure
Organizations may adopt suitable corporate strategy to match opportunities and
strengths like Growth, Stability, Profit and combination strategies.
2. Adaptation of systems and processes
Organizations design their systems and processes according to the needs of the environmental so that
they are in a better position to cope with the environmental needs and challenges.
REVIEW QUESTIONS:
1. Discuss the features of modern business
2. What is business environment? What are the constituents of business environment?
3. Write a short note on : a] political environment b] social and cultural environment c] economic
environment d] religious environment
4. Why should the environment be scanned? What purposes would it serve?
5. Explain in detail (he features and elements of economic environment.
6. What is an economic system? Discuss various economic systems with their merits and
limitations.
7. What are the features of mixed economic system? Explain in detail the working of mixe-1
economy in India.
8. What type of distortions could take place in planning in a mixed economic system?
9. Analyse the strengths and weaknesses of capitalism and socialism.
10. Distinguish between Marxism and communism. Trace their evolution.


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