Business Legal Environment Unit 1

Business and Legal Environment

Course Content

• Unit – I 08 hours– Meaning of Business Environment, – Economic and Non-economic factors influencing

business and their interaction, – Economic systems, – Historical Perspective on public control of business, – Constitutional framework of state control of business.

• Unit – II 12 hours– Planning and Economic Policies

• Unit – III 24 hours– Business Legislation

• Unit – IV 12 hours– Overview of Economic Legislation

Books Recommended

• Kuchhal, M.C., Prakash, Deepa(2009), Business Legislation for Management, Vikas Publishing House

• Saleem, Shaikh (2010). Business Environment, 2nd edition, Pearson Education.

• Tulsian, P C(2009) , “Business Laws,” Tata Mc Graw Hill, New Delhi

UNIT - I

Meaning of Business Environment

• A set of surrounding factors/ conditions that affects (helps/ hinder) the functioning/ development of the business/ organization.

Why Study Business Environment

• Development of broad strategies to ensure sustainability

• To foresee the impact of socio-economic changes at the national and international levels on firm’s ability

• Analysis of competitor’s strategies and formulation of effective counter measures

• To keep oneself dynamic

What do you mean by Business Environment???

The environment of any organization is “ the aggregate of all conditions, events and influences that surround and affect it.”

Characteristics of Business Environment:• Complex• Dynamic• Multi-faceted• Far- reaching impact

Nature of Business Environment

• Aggregative: totality of all the external forces which influence the working and decision making of an enterprise.

• Inter-related: various elements are closely interdependent and any change in one element affects the other elements.

• Relative: it differs from country to country and even region to region.

Contd.

• Inter-temporal: it changes over time, specially in long run, it changes certainly.

• Uncertain: business environment is volatile so it becomes very difficult to forecast.

• Contextual: business environment provides the macro framework within which the business firm (a micro unit) operates.

Significance of Business Environment

• First mover advantage• Early warning signal• Customer focus• Strategy formulation • Change agent• Public image

• Continuous learning

Types of Environment

• Internal Environment

• External Environment– Micro environment– Macro environment

Economic Non Economic

Internal Environment

Refers to all the factors that are within an organization

which impart strengths or cause weaknesses of

strategic nature.

Controllable factors. These include:

Value system

Mission and Objectives

Management Structure and Nature

Components of Internal Environment

Human Resources

Company Image and Brand Equity

Other Factors

Physical Assets and Facilities

R & D and Technological Capabilities

Marketing Resources

Financial Resources

Factors of Internal Environment

Factors

culture

Mission & objectives

Top management structure

Power structure

Company image & brand equity

Human & other resources

External Environment

• Includes all factors outside the organization which provide opportunities or pose threats to the organization

• Uncontrollable factors

• Consists of Micro and Macro environment

Micro Environment

“It consists of the factors in the company’s immediate environment that affect the performance of the company”.

Micro Environment Factors

Suppliers

Customers

Marketing Intermediaries

Competitors

Publics

Financial Community

Elements of Micro Environment

Micro Environment

customers

Competitors

suppliers

Marketing intermediaries

financiers

publics

Micro Environment of a typical car manufacturer

ComponentsSupplier

Customers

Car DealersCompetitors

Stakeholders

CarManufacturer

PotentialSupplier 

PotentialCustomers

Customers

PressureGroups

ForSupplies

ForCustomers

PotentialDealers

Government

LocalCommunities

Macro Environment

It comprises general trends and forces that may not immediately affect the organization but sooner or later will alter the way organization operates.

Macro Environment :- Economic Non Economic

Economic and Non-economic factors influencing business and their interaction

Economic & Financial Environment

• Nature of economic system

• Economic structure• Economic policies• Economic

infrastructure

Economic Environment

– Economic stages that exists at a given time in a country – Economic system that is adopted by a country for example.

Capitalistic, Socialistic or Mixed Economy– Economic planning, such as five year plans, budgets, etc.– Economic policies for example, monetary, industrial and

fiscal policies– Economic Indices such as National Income, Per Capital

Income, Disposable Income, Rate of growth of GNP, Distribution of Income, Rate of savings, Balance of Payments etc.

– Economic Problems– Functioning of economy

Non Economic Environment

– Regulatory Environment

– Socio- Cultural Environment

– Demographic Environment

– Technological Environment

– Political Environment

Chapter 1 Slide 25

Non- Economic Environment

Legal and Regulatory Environment• People are willing to start new businesses if they

believe that the risk of losing their money isn’t too great.

• Part of that decision is affected by how governments work with businesses.

• Governments can do a lot to lessen the risk of starting and running a business through laws

Freedom of ownership Contract laws Elimination of corruption

Macro Environment

• Regulatory Environment

– Constitutional framework

– Policies relating to pricing and foreign investment

– Policies related to the public sector, SSIs, development of backward areas and control of environmental pollution

Non- Economic Environment

• Cultural Environment

– Social Customs & Rituals and practices

– Lifestyle patterns

– Family structure

– Role & position of men, women, children and aged in family & society

Non- Economic Environment

Demographic Environment

Growth of population

Age Composition

Life Expectancy

Sex Ratio

Fertility and Mortality rates

Inter-state migration

Non- Economic Environment

Technological Environment

Technology refers to inventions or innovations from applied science or engineering research.

The use and application of technology affects productivity. Productivity is the amount of output you generate given the amount of input.

The more you can produce in any given period of time, the more money you are worth to companies.

Sources of technology Technological development Impact of technology

Political Environment

Political parties in power Political Philosophy

International Environment

Important factors that operate at global level which have an impact on organization are:

Growth of world economy

Distribution of world GDP

International institutions IMF,WTO ILO

Economic relations between nations

Global human resource-nature and quality of skills, mobility of labor

Global technology and quality standards

Global demographic patterns

WTO and its relevance for Indian companies

The main guidelines of WTO are: • Trade without discrimination• Growing market access• Promotion of fair competition

The response of Indian government to WTO constitutes the following actions

• Reduction of tariffs• Opening Indian markets for Global Players• Rationalizing industrial licensing and removal of

controls on the size of operations

WTO and its relevance for Indian companies

The impact of WTO on Indian companies is likely to include the following : • Increasing competition• Consolidation of activities in core competence areas• Improvements in infrastructure to negate structural disadvantages.• Shake out of minor players and M&As to gain global scale.

Overview of Business Environment

MACRO ENVIRONMENT

ECONOMIC Environment

MICRO ENVIRONMENT

BUSINESS

Internal Environment

Values, Mission & Objectives.

Human Resources,Co. Image & Brand Equity

TECHNOLOGICAL FACTORS

MARKETING INTERMEDIARIES

DEMOGRAPHIC FACTORS

SOCIAL CULTURAL FACTORS

Non - Economic Environment

Economic Systems

Meaning

• It is a system designed by a nation to utilize its resources for the purpose of satisfying the needs and wants of its people.

Basic units of an Economic System

• Household

• Firm

• Industry

• Government

Characteristics

• National entity: economic system always covers the entire country.

• Institutional: it comprises various institutions which a nation has devised and adopted for satisfying the needs of its people. Such as firm, industry, govt., economic planning.

Functions of An Economic System

• What to produce?

• How to produce?

• For whom to produce?

• Choice between current needs & future needs

• Economic growth

Problems All Economies Face

Scarcity forces all countries to answer these 3 questions

Scarcity leads to conflict

Do All Countries Answer These Questions The Same Way?

• No• Conflicts arise in all economies

Different Countries Use Different Systems To Answer These

Questions

Major Economic Systems Include:Market /CapitalisticCommand/ Socialistic Mixed Economic System

Types of Economic Systems

• Capitalist:

• Socialism:

• Mixed Economy:

Contd.

• Interdependence: different institutions are interdependent and interacting.

• Scarcity of resources: limited resources in comparison to the demand for these resources.

• Need satisfaction:

• Dynamic: some economic systems change slowly while others change fast.

Market Economic System

• Also known as Capitalism, Free Market, or Free Enterprise

• Defined: ownership of resources and means of production by individuals, basically free of government control in deciding goods and services produced

• Ownership of Resources: Productive resources privately owned and operated

Market Economic System

• Allocation of Resources: Resources are obtained through the lure of profits in the market

• Role of Government: Government only tries to make sure there is some competition and provides some public goods

Market Economic System• Goals: Profit for individuals, people are

motivated by economic rewards• Methods: Competition, supply and demand• Characteristics: Private property,

specialization, minimal government regulation • Political System: Democracy/Parties• Current World Examples:

Switzerland Canada Australia Chile Argentina South Africa

Command Economic System

• Defined: An economy in which all of the major economic questions are answered by a central authority. The two main forms of Socialism are: -– Democratic Socialism:- All the economic

activities are controlled and regulated by the government but the people have the freedom of choice of occupation and consumption.

– Totalitarian Socialism:- This form is also known as Communism. Under this, people are obliged to work under the directions of Government.

• Ownership of Resources: All Productive resources are owned and operated by the government

Command Economic System

• Allocation of Resources: Central planning group directs all resources

• Role of Government: Government makes all decisions

Command Economic System

• Goals: Equal distribution of income• Methods: Revolution to gain control, no

opposition forces allowed • Characteristics: no private property, one

political party• Political System: Totalitarian• Current and Former World Examples:

Cuba North Korea China Former Soviet Union

No Pure System Is Perfect: Market

Strengths:• Able to change

gradually• Individual freedom for

all• Lack of government

Interference• Variety of goods and

services• High consumer

satisfaction• Promotes economic

freedom and growth

Weaknesses:• Does not protect the

young, sick, old who cannot work

• Market failures happen leading to lots of ups and downs

• Doesn’t promote economic security, equity, or efficiency as well as other systems

No Pure System Is Perfect: Command

Strengths:• Things can be

changed dramatically in a short time

• Promotes economic security, efficiency, and equity

Weaknesses:• Does not meet the needs

and wants of consumers• Lacks effective incentives

to get people to work• Needs a large

bureaucracy which consumes resources

• Inflexible for day-to-day changes

• New and different ideas discouraged, people can’t be individuals

• Doesn’t promote: economic growth or freedom

If No Pure System Is Perfect Then What?

• Most countries in the world are a blend of different elements

• They are called mixed or combination systems

• Market Command

Economies

Mixed Economic System

• Defined: A system in which economic questions are answered by a combination of command and market methods

• Ownership of Resources: Basic utilities, other important resources government owned and operated; the rest privately owned and operated

Mixed Economic System

• Allocation of Resources: Government plans where resources go for key industries

• Role of Government: Government directs its plans for the biggest, key industries only

Mixed Economic System• Goals: Equal distribution of income• Methods: High Taxes• Characteristics: Limited competition, lots of

government planning, many services paid for by government: health, education, welfare

• Current World Examples:

England Germany Sweden Egypt

France Italy Hungary Mexico

• Political System: Socialist democracy, political parties voted in

Mixed Economic System

• Strengths and Weakness vary by country

• Generally these countries experience the same ups and downs that market economies like the United States experience

Historical Perspective on public control of business

• Civilization• Monarchy• Tax Collection• Monarchy to Parliamentary Set-up• Societal control• Parliamentary dynamics resulting in

inclination towards rich candidate • Resultant entrepreneurship promotion• Low labour internsive units

CONSTITUTIONAL FRAMEWORK OF STATE CONTROL OF BUSINESS.

Characteristics of Indian Constitution

1) Sovereignty: India is an independent republic and not subordinate to any other nation.

2) Democracy: govt. is run by representatives who are elected by the people of the nation.

3) Secularism: complete freedom to its citizen to preach & practice their religion.

Contd.

4) The parliamentary system: ministers and the prime minister are answerable to the parliament.

5) Separation of powers:

Federal System of the Govt.

• Meaning: where the powers of the central govt. and State govt. are well-defined.

• Division of powers between the Central & State govt. has been done through three lists : – The Union List– The State List – The Concurrent List

Functions of the State

Functions of State

The basic functionsActivities that are Undertaken only by the State

Intermediate FunctionsGovt. can work in collaboration with civil Society & markets

Activist functionsActive participation of Govt. for promoting markets

The Basic Functions

i. Providing pure public goods

ii. Defense

iii. Law & order

iv. Property rights

v. Public health

vi. Protecting the poor

vii. Macroeconomic stability

viii. Antipoverty programmes

ix. Disaster relief

Intermediate Functions

i. Addressing externalities:- basic education, environmental protection

ii. Regulating monopolies:- consumer protection, financial regulations.

iii. Providing Social Insurance:- pensions, family allowances, unemployment insurance.

Activist Functions

i. Coordinating private activity

ii. Fostering markets

iii. Asset redistribution

Economic Roles of the Govt.

Economic roles of Govt.

Regulatory roles

Promotional roles

Entrepreneurial roles

Planning roles

Regulatory Roles

i. Grant of license, restriction on location of industry

ii. Regulating the conduct of business ventures

iii. Controlling the accrual & disposal of business income

iv. Regulating the relationship with its stakeholders

Promotional Roles

i. Development of infrastructure

ii. Assistance by way of subsidies

iii. Allocation of scarce resources

iv. Fiscal, monetary and other incentives

Entrepreneurial Roles

• Govt.’s participation in business through public ownership and management of industrial and commercial undertakings.

• Balanced regional development

• Promotion of capital intensive industries

Planning Roles

• Socio-economic development

• Social justice

• Balanced regional development

• Rapid industrialization

• Employment generation

• Development of agriculture & small scale industries

Rationale of State Intervention

1) Legal framework

2) Imperfect competition

3) Externalities

4) Social objectives

5) Industrial base

6) Balanced regional development

7) Self reliance

Thank You