INTRODUCTION

MEANING OF 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 organisation; government policies and regulations; nature of the economy and economic conditions; socio-cultural factors; demographic trends; natural factors; and, global trends and cross-border developments

NATURE OF BUSINESS ENVIRONMENT

Business Environment can be considered at 3 levels Internal Environment Micro Environment Macro environment

1. 2. 3.

INTERNAL ENVIRONMENT
Value System Mission and objectives Management Structure and Nature Internal power Relationship Human resource Company Image and Brand Equity Miscellaneous factors

MICRO ENVIRONMENT
Suppliers Customers Competitors Marketing Intermediaries Financiers Publics

MACRO ENVIRONMENT
Economic Factors Social Factors Demographic Political National Technological Global

IMPORTANCE OF BUSINESS ENVIRONMENT

IMPORTANCE OF BUSINESS ENVIRONMENT

It helps an organization to develop its broad strategies and long term policies Enables an organization to analyze its competitors strategies and there by formulate the effective strategies Knowledge about the changing environment will keep the organization dynamic in approach Enables to foresee the impact of socio-economic changes at the national and international level on its stability

BUSINESS ENVIRONMENT

ECONOMIC ENVIRONMENT

MEANING

The economic environment is an amalgamation of various economic factors, such as total employment, productivity, income, wealth, inflation and interest rates. These factors influence the spending patterns of individuals and firms.

COMPONENTS OF ECONOMIC ENVIRONMENT

Income and wealth: Income in an economy is measured by GDP, GNP and per capita income. High values of these factors show a progressive economic environment. Employment levels: High employment represents a positive picture of the economy. However, there are many forms of unemployment, including partial employment and disguised unemployment. Productivity: This is the output generated from a given amount of inputs. High levels of productivity support the economic environment.

FACTORS AFFECTING THE ECONOMIC ENVIRONMENT

Inflation and deflation: Inflationary and deflationary pressures alter the purchasing power of money. This has a direct impact on consumer spending, business investment, employment rates, government programs and tax policies. Interest rates: Interest rates determine the cost of borrowing and the flow of money towards businesses. Exchange rates This impacts the price of imports, the profits made by exporters and investors and employment levels (also through the impact on the tourism industry). Monetary and fiscal policy: This helps in attaining full employment, price stability and economic growth

ECONOMIC SYSTEM
An economic system is the system of production, distribution and consumption of goods and services of an economy. Set of principles and techniques by which problems of economics are addressed, such as the economic problem of scarcity through allocation of finite productive resources. Composed of people and institutions, including their relationships to productive resources

CLASSIFICATION OF ECONOMIC SYSTEM

Economic system can be broadly divided into Laissez- Faire Capitalism Socialism Mixed Economy

1. 2. 3. 4.

LAISSEZ- FAIRE

Laissez faire means, 'allow to do'. Government abstention from interference in the actions of individuals, especially. in commerce; general noninterference or indifference. Laissez faire was a synonym for strict free market economics during the early and mid-19th century. From the French diction, laisser-faire, laissez faire, laissez aller and laissez passer, means "let do, let go or let pass. laissez faire is an injunction against government interference. Laissez faire is an economic doctrine that government should not interfere in the economic or social regulation of society unless absolutely necessary.

Laissez faire assumes that the competitive system of free markets is the best means of allocation of scarce resources between alternative uses. Government intervention in the market place to regulate economic activity is seen as illegitimate and inefficient. The Laissez faire doctrine lost popularity in the middle of the twentieth century, with the rise of the welfare state and extensive public ownership of parts of the economy, but has regained favor in the 1980's and 1990's.

CAPITALISM
It is an economic system in which the means of production, are privately owned and utilization of productive resources ,Individual freedom to make production and consumption decisions and minimal state. It is also known as Free Enterprise economy and Market Economy. It is categorized into two i.e. is 1. Laissez-Faire capitalism where government intervention in the economy is absent or negligible 2. Modern ,Regulated or Mixed Economy where there is a large amount of intervention.

FEATURES
Private Ownership Free Enterprise Consumers sovereignty Freedom of choice of occupation Freedom to save and invest The market system Competition Absence of central plan Limited role of government

MODERN CAPITALISM
Modern capitalist economies are mixed or regulated systems. Such regulated market economies include the U.S., Canada, Australia, U.K, Italy, France, Germany and many more. According to R.S.Musgrave and P.B.Musgrave a substantial share of the nations product goes to satisfy public wants, a substantial part of the private income originates in the public budget, and public tax and transfer payments significantly influence the state of private income distribution.

MERITS

Freedom of enterprise Encourages initiative and entrepreneurship Encourages R&D and innovation Encourages fast economic development

DEMERITS

Severe competition brought about by capitalism as its major drawback. Capitalist economy can give rise to unfair competition. Capitalism may lead to a depletion of the resources on Earth, as it requires continuous economic growth. Capitalism makes an economy money-oriented. Business corporations look at the economy with a materialistic point of view. Profitability remains their only primary business goal. Business giants take over smaller companies. Employment rights are compensated with the sole aim of higher productivity

SOCIALISM
A theory or system of social organization that advo cates the vesting of the ownership and controlof th e means of production and distribution, of land, capi tal etc., in the community as a whole. Features: 1. Government Control 2. Central Authority 3. Restriction on consumption 4. Fixation of wages and prices 5. Distribution of Income

MERITS
Democratic socialism strives to achieve the tradeoff between free enterprise system and state capitalism. It seeks to prevent concentration of economic power and achieve fair distribution of wealth and income. Use of national resources for the benefit of the society as a whole. National Planning and resource allocation with a view to clearly defined objectives and priorities. Government direction and control to serve the interest of the society.

DEMERITS

Socialism is unrealistic. Virtually impossible to achieve equality within modern societies. Socialism might redistribute some of the wealth of the richest members of society yet it does not eliminate poverty. Instead of improving the living standards for all socialism actually lowers the income of the richest to be nearer the income levels of the poorest. Socialism is actually economically inefficient as it puts of f entrepreneurs from generating wealth because they u sually have to pay higher taxes. As socialism provides the poorest with higher levels of income via social security payments it deters them from working hard, if at all.

SOCIALIST COMMAND ECONOMY

The primary feature of command economy is the centralization of decision making. There is no horizontal communication between producing and consuming unite. All the communication is vertical i.e between individual economic unit and planning agency

DEMERITS
No consumer sovereignty No innovation and talents utilized as private enterprises are not allowed. Central planning done so limited scope for accommodating different views and and making critical evaluation. People may lack incentive to work hard in the absence of private property The absence of freedom of choice of occupation is unfair

MIXED ECONOMY

Mixed economy is an economic system that includes a variety of private and government control, or a mixture of capitalism and socialism.

Features: Coexistence of Public, private, joint & cooperative sector Effective government control of the economy through policies, guidelines and laws. Substantial presence of public sector in important industries/sectors. competition

MERITS
Achieve faster growth Countervailing force Prevent concentration economic power Fostering economic development Public sector plays special role in the development of priority sectors and backward areas Public sector plays an important role in infrastructure developement

MONETARY POLICY
Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. These cycles also coincide with the halves of the financial year. The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks It brings about a change in the economy by changing money supply and interest rate

MEASURES OF MONEY STOCK

A knowledge of the measures of money stock in an economy would help us to understand monetary policy better. The Reserve Bank of India employs four measures of money stock, namely, M1, M2, M3 and M4.

M1: The measure of money stock designated by M1 is usually described as the money supply. M2: M2 is M1 + Post Office Savings Bank Deposits. M3: M3 is M1 + Time Deposits with the banks. In other words, M3 is money supply plus fixed deposits with the banks. M3 is usually referred to as aggregate monetary resources. M4: M4 is M3 plus the total Post Office Deposits.

INSTRUMENTS OF MONETARY POLICY

The instruments of monetary policy (methods of credit control) may be broadly divided into: General (Quantitative) methods : It affects the total quantity of credit and affect the economy generally Selective (Qualitative) methods: a. It affects to the certain sectors only. Also certain qualitative distinctions are made between different sectors and segments of the economy . b. It is applied in regulating the flow of credits.

GENERAL CREDIT CONTROLS

1.

2.
3.

There are three general or quantitative instruments of credit control, namely, The Bank Rate Open Market Operations Variable Reserve Requirements.

THE BANK RATE

It is also known as the discount rate and is the oldest instruments of monetary policy. The term Bank Rate refers to the minimum rate at which the central bank provides financial accommodation to commercial banks in the discharge of its function as the lender of the last resort. It affects both the cost and availability of credits. The importance of Bank rate lies in the fact that it act as a pace setter to all the other rates of interests.

VARIABLE RESERVE RATIOS

The central bank has the power to vary this reserve requirement; and the variation in the reserve requirements affect the credit creating capacity of commercial banks.