September 22, 2012 Chapter- 1

BUSINESS ENVIRONMENT, ASHISH SRIVASTAVA

Indian Business Environment: Concept, Components and Importance Business means state of being busy. In Functional sense business is the function or activity of an organization or individual. In Traditional sense, it is a commercial activity aimed at making a profit. Features of Business: Sale, Transfer or exchange for satisfaction of Human needs. Dealings in goods and services. Regularity or Continuity of Dealings. Profit Motive Risks and Uncertainties.

Changing Concept of Business: Profit cum Service Profit through Service.

Concept of Environment: Environment means surroundings, external agents, influence or circumstances under which someone or something exists. Features: Environment is complex. It is dynamic. It is multifaceted.

Business Environment: It is aggregate of all those factors conditions, situations which directly affect the working of a business enterprise. Keith Devis said this in his book Challenge of Business. Characteristics of Business Environment: Surrounding Situation

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BUSINESS ENVIRONMENT, ASHISH SRIVASTAVA

It is complex. It is dynamic It is multifaceted: When the development is welcomed as an opportunity by one company while another company perceives as a threat. Differs from country to country.

Components/ Factors affecting Business Environment

Internal Environment 1. Strategy 2. Structure 3. Personnel Capability 4. Financial Capability 5. Marketing Capability 6. Operations Capability 7. Technical Capability Micro Environment 1. Suppliers 2. Customers 3. Competitors 4. Market Intermediaries 5. Public

External Environment

Macro Environment 1. Economic Environment 2. Political Legal Environment 3. Social & Cultural Env. 4. Technological Env. 5. Demographic Env 6. Ecological/ Natural Env 7. International env.

INTERNAL ENVIRONMENT It includes 5 Ms. Man, Material, Money, Machinery and management. Strategy: Blue print of course of action to achieve the desired objectives. Structure: Relationship between different levels of management, mgt and shareholders, shareholders and board of directors, employees to employees, mgt and labour union etc. the better relationship between all these parties affect the decision making and their implementation. Personnel Capability: Includes Recruitment, Training and Development of personnel.

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BUSINESS ENVIRONMENT, ASHISH SRIVASTAVA

Financial Capability: Finance is the life blood of organization. It affects business performance, strategies and decisions. It includes factors related to : a. Source of funds like capital structure, procurement of capital b. Uses of funds like capital investment, fixed assets acquisition, current assets. c. Mgt of funds like financial accounting and budgeting mgt control system. Marketing Capability: Marketing efficiency depends upon its marketing resources. It includes quality of marketing ma, Brand equity and distribution network. Example: ICICI started a door to door campaign to promote its various deposite schemes. For this young bank officers have been trained. EXTERNAL ENVIRONMENT 1. MICRO ENVIRONMENT: Firms immediate environment. . A. Suppliers: Who supplies the inputs like raw material and components to the company. Reliability: Reliable source of supply. Multiple Suppliers: In case of strike, lockout and other problems.

Philip kotler said supply mgt plays an important role in scarcity mgt. B. Customers: Business exist only bcoz of its customers. A company may have different customers: i. Individual and household ii. government bodies iii. Foreign customers iv. Retailers v. Wholesalers. C. Competitors: Desire Competition: The Competition for a company of TV may come not only from TV manufacture but also from refrigerator, Banks, UTI.

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BUSINESS ENVIRONMENT, ASHISH SRIVASTAVA

Product Form Competition: If the Consumer decide to go for a TV, he has to choose a particular form of TV, Black & White or Colour with remote or without remote. Brand COMPETITION: Between brands and substitute or complimentary goods. Generic Competition: Competition among alternatives which satisfy particular category of desire. Example: If a person wants to invest his money he should buy shares, debentures or in mutual funds etc. is generic competition.

Market intermediaries/ channels: Middleman: Agents , Merchants who helps the company to findthe customers and finalise the sales with them. Physical Distribution Firm: Warehouse and transport firms which assets the company in stocking and moving the goods from the place of origin to their distribution. Financial Intermediaries: Marketing Services Agencies: Advertising Agency, Market Research firms, Media and Counselling Firms. Public Media Public: organization that carry news, editorial, opinion. Ex. Newspapers, magazines and TV Channels. Financial Public: They influence the ability of the business enterprise to obtain funds, banks, investment companies. Citizen Action Group: Consumer Association. Local Public.

MACRO ENVIRONMENT: 1. Economic Environment Economic System: o o o Capitalism: All means of production are privately owned. Socialism: All means of production are socially owned. Mixed

Economic Conditions: Recession, business cycle. Economic policies: o Monetary Policy

September 22, 2012 o o

BUSINESS ENVIRONMENT, ASHISH SRIVASTAVA Fiscal Policy Industrial Policy

2. Social and Cultural Environment: Customs, Beliefs. 3. Technological Environment: Sum total of knowledge. 4. Demographic Environment: Size Growth rate, Sex of population Family size Education Level Caste, Religion Economic Satisfaction of population.

5. Ecological/ Natural Environment 6. International Environment 7. Political Legal Environment

CHAPTER-2, ENVIRONMENTAL ANALYSIS OR SCANNING Environmental Analysis or scanning is the process of monitoring economic, competitive, technological, social cultural, demographical and political settings to determine opportunities for threats to the firm. Characteristics: Continuous Process Exploratory Process Holistic Exercise

Objectives of Environmental Analysis: Understanding the Environment Input Output Relationship Appropriate Strategy Formulation To Predict Future Developments

Process of Environmental Analysis:

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BUSINESS ENVIRONMENT, ASHISH SRIVASTAVA

Monitoring: It means to understand the various environmental factors which affect the business. Thus as monitoring progresses the data turn frequently from imprecise to precise. Search Scanning and Spying: Forecasting Assessment. Limitation of Environmental analysis: Unexpected Events: Environmental Analysis cannot eliminate uncertainty. Not a Sufficient Guarantor Inaccurate data Too much Information Overcautious approach: Success lies in adventure and strategic risk taking. It includes those who hesitates to step forward. ETOP or SWOT : A Technique of Diagnosis Some authors use the profile ETOP while some use SWOT. S- Strength W- Weakness O- Opportunity T- Threats E- Environmental T- Threat O- Opportunity P- Profile

Strength and weakness are internal factors and can be controlled. While Opportunity and threats are external and cant be controlled.

Monetary Policy of India or of Reserve Bank of India The Monetary policy & Credit Policy Is the policy statement, traditionally announced twice a year, through which the RBI seeks to ensure price stability for the economy. The most important wok of RBI is Monetary control and management. Monetary control means to regulate the supply of money and credit in such a way so that demand of credit and currency for trade, Commerce and Economic activities can be successfully met.

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BUSINESS ENVIRONMENT, ASHISH SRIVASTAVA

Monetary Policy is the policy by which central bank of a country for the achievement of various goals: i)Supply of Money ii) Control cost of Money or Rate of Interest When is the Monetary Policy Announced: Historically the Monetary Policy is announced twice a year a slack season policy (April September) and a busy season Policy (Oct- March)in accordance with agriculture cycle. The Monetary Policy has become dynamic in nature as RBI reserves its right to alter it from time to time, depending on the state of the economy. Elements of Monetary Policy: Price Stability Regulate banking Control interest rate Investment ko protsahan

Objectives of Monetary policy in India: Economic Growth: to raise the national income. Expansion of Money: to fulfill the needs of production and trade & at the same time moderating the growth of money supply to contain the inflationary pressure. Encourage exports: in order to solve Balance of payment deficit. Social Justice: Reduce Deficit: Equilibrium in demand and supply of money

Methods of Credit Control or Instruments of Monetary Policy Quantitative Credit Control Qualitative Credit Control

Quantitative Credit Control 1. Bank Rate: It is the interest rate at which the Reserve bank gives short term loans to other banks on the backing of approved securities. It is also known as Discount Rate. It is also the rate at which the member banks get rediscounting facility from the Reserve Bank.

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BUSINESS ENVIRONMENT, ASHISH SRIVASTAVA

When RBI seems, credit is incresng in the market then it increases its interest rate. So that less people will get loan and less money in the market. And vice versa when credit is less in market it decreases interest rate. RBI If RBI wants to reduce supply of money Increases bank rates Less credit is made by banks People have less money Quantity of money is less RBI If RBI wants to increase supply of money Decreases bank rate More credit is made People have more money More

When RBI reduce rates for increase in credit is known as Cheap Money Policy bcoz when interest rate decrease credit creation increases. When RBI increases interest rates and credit decreases is DEAR MONEY POLICY. Bank rate is not used as policy rate these days. Since last few years Repo Rate and reverse repo rate are the bases for monetary policy. On 3 may, 2011 it is decided in monetary policy of RBI that since now there is only a policy rate i.e. Repo Rate. Reverse repo rate is 1 % less as compare to repo rate. 2 Open Market Operations: Open Market Operations means the purchase and sale of government securities, first class bills of exchange and promissory notes by the RBI to control the volume of credit in the country. When securities are purchased by central bank, then money supply with commercial banks and public increases. This will further expand credit in the economy. When securities are sold by central bank, then supply of money in the economy deceases. It leads to CREDIT CONTRACTION. switch Operations: Purchase of one loan against sale of another. Central Bank If CB wants to reduce supply of money Sales of securities Insufficiency ( kami) of Cash reserves at bank Less money with people Decrement in quantity of money Central Bank Increase supply of money Purchase of securities Increase in cash reserves More money with people Quantity of money increases.

3. Repurchase Options: (Repo- its use started from 4 Nov, 1996.) Repo Rate: Rate at which Commercial banks get loan from RBI to fulfill its short term needs (also overnight needs) is repo rate. Reverse Repo: At which RBI takes loan from Commercial bank for short term. LAF: Liquidity Adjustment Facility.

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BUSINESS ENVIRONMENT, ASHISH SRIVASTAVA

4. Variable Cash Reserve Requirements/ ratio : CRR- Commercial bank in every country maintain a certain percentage of their deposit in form of balances with the central bank is known as CRR. If RBI increases CRR then banks will have to maintain more Cash holdings. And it will reduce loan giving capacities. So higher CRR will contract credit. If RBI decreases CRR then banks will have to maintain less cash holdings and banks will have more of surplus cash for granting loans.As per section 42 (1) of RBI Act 1934 for every commercial bank 5% of Demand Deposit and 2% of Time Deposit RBI ke paas rakhna compulsory hai. But in 1962 two amendments were there: 1. Demand and Time deposit ko milaa diya jaye. 2. RBI has the right to decide CRR in between 3% - 15%.

5. Statutory Liquidity Requirements/ Reserve (SLR) : All commercial banks will have to maintain liquid assets in the form of cash, gold and unencumbered approved securities equal to not less than 25% of their total demand deposit and tie deposit liabilities. SLR is decided by RBI between 25% - 40%. Effective from 22 sept, 1990 SLR made at 38.5% and remained at the same level upto 31 march 1992. In view of NARSIMHA Committee The govt has decided to reduce SLR in stags from 38.5% to 25%. 6. Prime Lending Rate (PLR): the rate below which, a bank cannot give loan to any sector. It is known as BENCHMARK in America and Europe. Qualitative Selective Credit Control: It refers to regulating and controlling the credit to a specific sector/ commodity/ area. It is discriminatory in nature as it is not applicable to the whole economy. The main selective measures are as follows: Change in Marginal Requirements: means margin money to be kept by commercial banks while lending the loans. Under this central bank of a country makes change in marginal requirements to control and release funds. When the central bank feels that the prices are rising, then the central bank controls credit by changing the marginal requirements of loan against those commodities. A higher margin is used in inflationary conditions. Rationing of Credit: under this the RESERVE BANK fixes the quota for member banks as well as their limits for the payment of bills. The quota system first used in 1960. If the banks seek more loans than the quota which is fixed for them, they will have to pay higher rate of interest to the reserve bank than the prevailing bank rate. Regulation of Consumer Credit: Credit Control restrictions are imposed on the purchase of consumer goods or the time for the payment is fixed and the installments are reduced. Credit Authorisation Scheme (CAS) : It was introduced in 1965. The RBI regulated not only the quantum but also the term on which credit flowed to the different large borrowers. The credit authorization scheme was finally withdrawn as part of financial sector reforms. Credit Monitoring Arrangement (CMA): The basic financial discipline continued to be observed by banks, RBI would monitor all sanctional of bank loan exceeding: o Rs. 5 crores to any single party for working capital requirements o Rs. 2 crores in case of term loans. Moral Persuasion: The reserve bank persuades member banks to fall in line with the policy guidelines chalked out from time to time. To achieve this purpose from time to time the governor of the Reserve bank

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BUSINESS ENVIRONMENT, ASHISH SRIVASTAVA

convenes meetings of the representatives of scheduled banks and exhorts the need to follow the prescribed policies. Direct Dealing or Direct Action: Under extraordinary circumstances, the reserve bank has power to make direct dealings. Direct dealings means that the reserve bank can purchase directly from the public got securities, bills and foreign exchange documents and also sell them to the line of the reserve bank

Limitations of Monetary Policy: Excessive Cash Reserve with the banks Misuse of Financial Resources Limited Area of Operation Predominance of Currency Lack of Co-ordination with Fiscal Policy Mot Proper Implementation of the Monetary Policy Defects in Monitoring Systems Govt Policies Lack of control over non-banking Financial Institutions Absence of organized Money Market Existence of Black Money