PBMMPGC, MYSORE

BUSINESS POLICIES AND ENVIRONMENT

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WHAT IS BUSINESS?

Meaning:

• A business (also known as a company, enterprise, and firm) is a legally

recognized organization designed to provide goods or services, or both, to
consumers, businesses and governmental entities.
• Businesses are predominant in capitalist economies. Most businesses are
privately owned
• A business is typically formed to earn profit that will increase the wealth of its
owners and grow the business itself.
• The owners and operators of a business have as one of their main objectives the
receipt or generations of a financial return in exchange for work and
acceptance of risk.

FORMS OF BUSINESS OWNERSHIP

• While establishing a business the most important task is to select a proper form
of organization.
• This is because the conduct of business, its control, acquisition of capital,
extent of risk, distribution of profit, legal formalities, etc. all depends on the
form of organization.

1. Proprietorship
A sole proprietorship is the oldest and the most common form of business. It is
a one-man organisation where a single individual owns, manages and controls
the business.

ADVANTAGES:

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• Ease of formation
• Maximum incentive for work
• Secrecy of business
• Quick decisions and flexibility of operations

Disadvantages:

• Limited capital
• Limited managerial ability
• Limited life
• Unlimited liability

Hence, this form of organization is suitable for the businesses which involve
moderate risk, small financial resources, capital requirement is small and risk
involvement is not heavy.
Example: automobile repair shops, small bakery shops, tailoring, etc.

2. Partnership Firm
Partnership is defined as a relation between two or more persons who have
agreed to share the profits of a business carried on by all of them or any of them
acting for all. The owners of a partnership business are individually known as
the "partners" and collectively as a "firm".

ADVANTAGES:
• Ease of formation
• Greater capital and credit resources
• Better judgment and more managerial abilities

DISADVANTAGES:

• Absence of ultimate authority

• Liability for the actions of other partners
• Limited life
• Unlimited liability

Partnership is an appropriate form of ownership for medium sized business

involving limited capital. This may include small scale industries, wholesale and
retail trade; small service concerns.

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Example: transport agencies, real estate brokers; professional firms like charted
accountants, doctor’s clinic, law firms etc.

3. Private Limited Company

A private limited company is a voluntary association of not less than two and
not more than fifty members, whose liability is limited, the transfer of whose
shares is limited to its members and Who is not allowed to invite the general
public to subscribe to its shares or debentures
A private company is preferred by those who wish to take the advantage of
limited liability but at the same time desire to keep control over the business
within a limited circle and maintain the privacy of their business.

ADVANTAGES:

• Continuity of existence
• Limited liability
• Less legal restriction

DISADVANTAGES :

• Shares are not freely transferable

• Not allowed to invite public to subscribe to its shares
• Undemocratic control

4. Public Limited Company

A public limited company is a voluntary association of members which is

incorporated and, therefore has a separate legal existence and the liability of
whose members is limited.

ADVANTAGES

• Continuity of existence
• Larger amount of capital
• Unity of direction
• Efficient management
• Limited liability
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DISADVANTAGES:

• Undemocratic control
• Scope for directors for personal profit
• Subjected to strict regulations

GOALS OF BUSINESS

• The term business goal is used in two senses. Broadly, it refers to the long
term, ultimate purpose of the organization. It is also often used to refer to the
short term specific targets.
• Mission leads to objectives (which are designed to achieve the mission)
• Objectives lead to goals(which are designed to achieve the objectives)
• And goals lead to targets (which are set to achieve goals)

VISION/MISSION

• Mission, also known as vision, value statement, principles, is the pivot around
which corporate strategy revolves.

• A mission statement reveals the long-term vision of an organization in terms of

what it wants to be and whom it wants to serve. It describes an
organizations purpose, customers, products or services, markets,
philosophy and basic technology.

• Peter Drucker suggests three fundamental questions would help to clearly

define/redefine the business and formulate/reformulate the mission. These
questions are:

 What is our business?

 What will our business be?

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 What should our business be?

 What is our business?

• The most important time to ask this seriously is when a company has been
successful and not to have done so is the reason for the crisis of many
organisations.

 What will our business be?

• As the business environment is very dynamic, sooner or later even the most
successful answer to the question what is our business? Becomes obsolete

• ‘What changes in the environment are already discernible that are likely to
have high impact on the characteristics, mission, and purpose of our business?
And

• How do we now build these anticipations into our theory of business, into its
objectives, strategies and work assignments?

 What should our business be?

• The future may have new or better opportunities outside the current business
of the company. Or it may not be wise to continue in all or some of the
current businesses. There is, therefore, a need to ask, what should our
business be?

OBJECTIVES, GOALS AND TARGETS

Objectives:

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• “Objectives help define the organization in its environment. Most

organizations need to justify their existence, to legitimize themselves in the
eyes of the govt, customers, and society at large. And by stating objectives,
they also attract people who identify with the objectives to work for the
organization.

• Objectives covers long range co aims, more specific dept goals, and even
individual assignments.

Goal:

• An intermediate result to be achieved by a certain time as part of the grand

plan.

• Goals are short term milestones or bench marks that organizations must
achieve in order for longer term objectives to be reached.

• Goals should be measurable, quantitative, challenging, realistic,

consistent and prioritized.

• Goals are specifically important in strategy implementation, whereas

objectives are particularly important in strategy formulation.

IMPORTANCE OF OBJECTIVES

1. Justify the organization

2. Provide direction

3. Basis for management by objectives

4. Help strategic planning/management

5. Help coordination

6. Provide standards for assessment and control

7. Help decentralization

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GUIDELINES FOR IDEAL OBJECTIVES:

Objectives to be successful should posses certain qualities and there are therefore
some important factors to be considered while formulating the objectives.

1. Participation

2. Clarity

3. objectives should not be vague and ambiguous

4. Realism

5. Flexibility

6. Consistency

7. Ranking

8. Verifiability.

9. Balance

FACTORS AFFECTING OBJECTIVES

Objectives are not formulated in a vacuum. Objectives are formulated by the top
managers in a firm, the choice of objectives are affected by three factors, namely,

1. Forces in the environment

2. Internal forces

3. The value systems of the top executives

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HIERARCHY OF OBJECTIVES

Organization with a hierarchical structure (i.e. with different levels of management

like top level, middle level and lower level) normally have a hierarchy of
objectives to be pursued different levels.

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MIS
SIO
N

CORPORATE
OBJECTIVES

SBU OBJECTIVES

DEPARTMENTAL OBJECTIVES

DIVISIONAL OBJECTIVES

INDIVIDUAL OBJECTIVES

CLASSIFICATION OF OBJECTIVES:

BROADLY THERE ARE TWO CLASSES OF OBJECTIVES:

1. Economic objectives

2. Social objectives.

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ECONOMIC OBJECTIVES:

1. Survival

2. Return on investment

3. Growth

4. Innovation

5. Market share

SOCIAL OBJECTIVES:

Social objectives of business may be grouped into three broad categories:

1. Objectives which protect consumers interests

2. Objectives which protect the interests of workers

3. Objectives which protect the interests of the society

PRIMARY AND SECONDARY OBJECTIVES:

PRIMARY OBJECTIVES

1. The extension, development and improvement of the company’s business

and the building up of its financial independence.
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2. The payment of fair and regular dividends to the shareholders.

3. The payment of fair wages under the best possible conditions to the workers

4. The reduction of prices to consumers

SECONDARY OBJECTIVES

1. To provide a bonus for the workers

2. To assist in promoting the amenities of the locality

3. To assist in developing the industry of which the firm is a member

4. To promote education research and development in the techniques of the

industry or any other purpose approved by the directors and members in
general meeting.

SHORT-RUN AND LONG-RUN OBJECTIVES

• A company may have short-run and long-run objectives

• A company will normally pursue the secondary objectives listed therein as

long term objectives. This shall not be interpreted to mean that long run
objectives are secondary objectives. Some of the long run objectives like
profit are essentially primary objectives of several companies.

• Some of the long run objectives of several companies like development of

the local community assisting the development of the industry of which it is
a part serving the society etc. are secondary objectives.

TOP-DOWN AND BOTTOM-UP APPROACH:

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• For the determination of the objectives of the different levels in the

hierarchy, there are two approaches.

• In the top down approach the upper level managers determine the objective
for their subordinates

• in the bottom up approach the subordinates initiate the setting up of

objectives for their positions and present them to the superior for
consideration

• Either approach is insufficient. Both are essential but the emphasis should
depend on the situation including such factors as the size of the organization
the organizational culture, the preferred leadership style of the executive and
the urgency of the plan.

BUSINESS ENVIRONMENT

• Business environment consists of all those factors that have a bearing on the
business, such as the strengths, weaknesses, internal power relationships and
orientations of the organization govt policies and regulations nature of the
economy and economic conditions socio cultural factors demographic trends
natural factors and global trends and cross border developments.

Types of environment:

1. Internal environment: factors internal to the firm and

2. External environment: factors external to firm which have relevance to it.

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INTERNAL ENVIRONMENT:

The important internal factors which have a bearing on the strategy and other
decisions are outlined below.

1. Value system

2. Vision, mission and objectives

3. Management structure and nature

4. Internal power relationship

5. Human resources

6. Company image and brand equity

7. Miscellaneous factors:

There are a number of other internal factors which contribute to the business
success/failures or influence the decision-making. They include the
following.

• Physical assets and facilities

• R & D and technological capabilities

• Marketing resources

• Financial factors

EXTERNAL ENVIRONMENT:

External environment consists of a micro environment and a macro environment.

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I. Micro environment

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

environment that affects the performance of the company. These include:

a) Suppliers:

b) Customers:

c) Competitors:

COMPETITIVE STRUCTURE OF INDUSTRIES

The competitive structure of industries is a very important business environment.

Identification of forces affecting the competitive dynamics of an industry will be
very useful in formulating strategies.

According to Michael Porter’s well known model of structural analysis of

industries, the state of competition in an industry depends on five basic
competitive forces, viz,

a) Rivalry among existing firms

b) Threat of new entrants

c) Threat of substitutes

d) Bargaining power of suppliers

e) Bargaining power of buyers

a) THREAT OF ENTRY:

A growing industry often faces threat of new entrants that can alter the
competitive environment. There may however be a number of barriers to
entry. Potential competition tends to be high if the industry is profitable.

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The following are some of the important common entry barriers

1. Govt policy

2. Economies of Scale

3. Cost disadvantages independent of scale

4. Product differentiation

5. Monopoly elements

6. Capital requirements

b) RIVALRY AMONG EXISTING COMPETITORS:

Rivalry among existing competitors is often the most conspicuous of the

competitions. Firms in an industry are ‘mutually dependent’ – competitive
moves of a firm usually affects others and may be retaliated (price wars).
Common competitive actions include price changes, promotional measure,
customer service, warranties, product improvements, new product
introductions, channel promotion etc.

There a number of factors, which influence the intensity of rivalry. These

include:

1. Number of firms and their relative market share, strengths etc

2. State of growth of industry

3. Fixed or storage costs

4. Indivisibility of capacity augmentation

5. Product standardization and switching costs

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6. Strategic stake

7. Exit barrier

8. Diverse competitors

9. Switching costs

10.Expected retaliation

c) THREAT OF SUBSTITUTES:

An important force of competition is the power of substitutes.

Firms in many industries face competition from those marketing close or

distant substitutes. Porter points out that substitute products that deserve the
most attention are those that

1. Are subject to trends improving their price-performance trade off with the
industry’s product, or

2. Are produced by industries earning high profits.

d) BARGAINING POWER OF BUYERS

For several industries, buyers are potential competitors- they may integrate
backward. Besides, they have different degrees of bargaining power.
“Buyers compete with the industry by forcing down prices, bargaining for
higher quality or more services, and playing competitors against each other-
all at the expense of industry profitability”

e) BARGAINING POWER OF SUPPLIERS:

The important determinants of supplier power are the following;

1. Extent of concentration and domination in the supplier industry

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2. Importance of the product to the buyer

3. Importance of the buyer to the supplier

4. Extent of substitutability of the product

5. Switching costs

6. Extent of differentiation or standardization of the product

7. Potential of forward integration by suppliers

Porter’s analysis thus shows that:

• Knowledge of these underlying sources of competitive pressure highlights

the critical strengths and weaknesses of the company, animates its
positioning in its industry, clarifies the areas where strategic changes may
yield the greatest payoff, and highlights the areas where industry trends
promise to hold the greatest significance as either opportunities or threats.

• Understanding these sources will also prove to be useful in considering

areas for diversification, though the primary focus here is on strategy in
individual industries

[CONTINUATION OF MICRO ENVIRONMENT]

d) Marketing Intermediaries

e) Financiers

f) Publics

II. MACRO ENVIRONMENT

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Macro environment consists larger societal forces that affect all the factors
in the company’s micro environment- namely, the demographic, economic,
natural, technical, political and cultural forces”

A co and the forces in its micro environment operate in a larger macro

environment of forces that shape opportunities and pose threats to the
company.

The macro forces are, generally more uncontrollable than the micro forces.
When the macro environment is uncontrollable, the success of a co depends
on its adaptability to the environment.

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