Business Environment and Strategy

UNIT
01 Introduction to Business
Environment
Names of Sub-Units
Introduction to Business Environment: Business, Scope of a Business/Business Scope, Goals and

Objectives of a Business, Business Environment, Nature of Business Environment, Scope of Business
Environment, Importance of Business Environment, Components of Business Environment, Relation
Between Business Environment and Strategic Management
Overview
The unit begins by explaining the meaning of the business environment. Further, it discusses the
meaning, scope, goals and objectives of a business. The unit explains the nature of the business
environment. It also discusses the scope of the business environment, the importance of Business
Environment as well as its components. Towards the end, you will be acquainted with the study of
Relation Between Business Environment and Strategic Management.
Learning Objectives
In this unit, you will learn to:

 Explain the meaning and scope of business
 Comprehend the meaning and scope of Business Environment
 Elucidate the Relation Between Business Environment and Strategic Management
 Describe the nature of business environment
 Discuss the goals and objectives of a business
 State the importance of business environment
 Explain the components of the business environment
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Business Environment and Strategy
Learning Outcomes
At the end of this unit, you would:

 Assess the classification of business objectives
 Evaluate the internal and external factors of a business strategy
 Analyse the important factors of business environment
 Examine the macro factors of business environment
Pre-Unit Preparatory Material
 https://nios.ac.in/media/documents/SrSec319NEW/319_Bus_Studies_Eng/319_Bus_Studies_Eng_
Lesson1.pdf
1.1 INTRODUCTION
Businesses, like humans, do not operate in isolation. They operate within a particular environment and
negotiate their way through it. The extent to which a business flourish is determined by how it interacts
with its surroundings. Businesses that stay oblivious to crucial changes in the environment ultimately
vanish from the market.
To be successful, businesses must not only be aware of the various elements of the environment, but
also appreciate, adapt to, manage and influence them. If a business wants to survive and thrive, it must
constantly monitor and adapt to the environment. Disturbances in the environment might either pose
a serious threat to the business or provide it with new chances. A successful business must be able to
recognise, assess and respond to the numerous possibilities and risks that exist in its surroundings.
For example, a firm must make the appropriate adjustments to adapt to the new policies.
Similarly, a shift in technology may make the current product obsolete or irrelevant, as we have seen
with the introduction of computers, which replaced typewriters, and with the arrival of colour television,
which made black and white television obsolete. A change in fashion or customer preferences can also
modify demand in the market for a certain product; for example, the demand for jeans reduced the sale
of other conventional clothing. All of these elements are external to the business and beyond its control.
As a result, in order to survive and prosper in business, business units must adapt to these changes.
1.2 BUSINESS
A business is an economic activity performed by an enterprising entity or an organisation often with
the objective of maximising profits. Economic activities performed by a business organisation include
production (conversion of inputs into output), distribution (supply of output in the market) and sales
(exchange of products with buyers for money). The essential idea underpinning a firm is the concept
of the business based on which the business model, plan, vision and mission are created. For example,
Uber was founded on the idea of combining taxi drivers and providing on-demand services under one
brand. This principle served as the foundation for all other corporate strategies.
All business entities have to deal with limited resources; therefore, it becomes challenging for business
entities to allocate resources in such a way that profits can be maximised and at the same time costs
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UNIT 01: Introduction to Business Environment JGI JAIN
are kept to a minimum. In the process of allocating resources and maximising profits, business entities
need to answer the following questions:
 What to produce?  Where to produce?
 How much to produce?  How to produce?
Let us understand with the help of an example. An automobile manufacturer may face a dilemma
whether to produce cars or buses. Once it decides to produce both, the manufacturer needs to decide
whether to produce both cars and buses in equal quantities, or cars should be produced more. After
this, the automobile manufacturer has to decide the location of its manufacturing plant. Finally, the
manufacturer has to take a call on which methods of production or technology should be used. Generally,
the methods chosen are cost effective so that profits can be maximised.
1.2.1 Scope of a Business/Business Scope

Business is an organised and systematic activity for earning profit. It is an integral part of society as it
creates employment opportunities. The following points explain the scope of business:
 Enhances living standards of the people by providing a variety of goods and services at the right
time and at the right place.
 Generates employment opportunities, which in turn reduces poverty
 Makes optimal utilisation of scarce resources of the nation
 Improves nation’s image by producing and exporting quality goods and services to foreign countries
 Provides a better return to the investors on their capital investment
 Promotes social interest by providing tourist services, sponsoring trade shows, etc. in the country
 Facilitates exchange of culture among the people of different nations, thereby maintaining
international harmony and peace
 Performs research and development to promote innovation
1.2.2 Goals and Objectives of a Business

Business objectives refer to results that a business organisation aspires to achieve or accomplish over a
specified period of time. It is a common belief that all business organisation has a single objective i.e., to
make a profit. However, no business organisation can overlook the interests of its different stakeholders,
i.e. employees, customers and society and the nation as a whole. Thus, business objectives of the business
organisations are classified into four types, which are listed in Figure 1:
Economic Objectives
Social Objectives
Human Objectives
National Objectives
Figure 1: Business Objectives
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Let us explain these business objectives in detail.

 Economic objectives: These objectives include earning maximum profits, exploring new market
opportunities, acquiring new customers, expanding business operations, making innovation,
improving existing goods and services, making the optimal utilisation of available resources.
 Social objectives: These objectives are sought by organisations for the benefit of society. Some of
these social objectives are producing and supplying goods and services to society at reasonable
prices; preventing malpractices such as hoarding, black marketing overcharging, puffery, etc.;
promoting consumer education; ensuring fair returns for investors, protecting the environment;
and so on.
 Human objectives: These objectives are meant for protecting the interests of employees and
ensuring their welfare. Some of these objectives are providing fair remuneration and incentives to
employees, arranging better working conditions, providing job satisfaction, arranging training and
development programmes for the growth of employees and providing equal job opportunities for
all classes of the society.
 National objectives: These objectives of business organisations include generating employment
opportunities, promoting social justice, paying taxes and duties, implementing the government’s
economic and financial policies and so on.
1.3 BUSINESS ENVIRONMENT

The Business environment comprises surroundings, external objects, influences and circumstances
under which a business exists. These factors can be internal or external and have a direct impact on
the business decisions of an organisation. Business and its surroundings are inextricably linked and
mutually dependent as a business acquires resources from its environment. The following are the
definitions of business environment:
According to Keith Davis, “Business environment is the aggregate of all conditions, events and influences
that surround and affect it.”
As per A.M. Weimer, “Business environment encompasses the climate or set of conditions—economic,
social, political or institutional in which business operations are conducted.”
Customers, rivals, suppliers, as well as the social, political, legal and technological framework of
country comprise the external environment. On the other hand, organisational resources as well as
technological, financial, marketing and operations capabilities of a business organisation fall under the
internal environment. It should be noted that internal factors are controllable, while external factors
are uncontrollable.
1.3.1 Nature of Business Environment

A business environment comprises various characteristics. The following are some important
characteristics of a business:
 Complex: A business environment comprises a range of elements, events, situations and influences
originating from various sources that have a significant impact on business, making it more
complex.
 Interdependence: Social, economic, legal, cultural, technological and political issues all play a key role
in the business environment. These environmental elements are interdependent. For example, the
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evolution of the latest technology is influenced by a country’s economic standing. A wealthy country
can afford to spend enough on research and development. Similarly, changes in the environment
policies can have a substantial impact on the business of manufacturing organisations.
 Dynamic: The Business environment is always evolving. The business environment is dynamic
because it is always changing due to technical advancements, shifts in consumer tastes, and the
introduction of new competitors. The numerous factors in the environment are always changing,
making business dynamic rather than static.
 Uncertainty: The business environment is primarily unpredictable since it is difficult to forecast
future events, particularly when the environment is subject to frequent changes, for example, the
business environment of information technology and fashion industries.
 Relativity: As the business environment varies from country to country and area to region, it is a
relative concept. For example, the business environment existing in India will not be the same as
that of the United States due to different market conditions and factors.
1.3.2 Scope of Business Environment

Like human beings, business organisations do not exist in a vacuum. Each business organisation survives
and grows within the context of different environmental forces. While these forces are uncontrollable,
business organisations have no alternative but to respond to them timely. A good understanding of the
environment by business managers enables them not only to identify and evaluate, but also to react
to the forces external to their firms. Let us understand how a thorough understanding of the business
environment helps business organisations in the following points:
 Identifies business opportunities and threats: A business environment aids in the identification
of numerous opportunities (new markets, lifting of government restrictions, etc.) and dangers (a
rise in the number of new entrants, etc.) to the business organisation. All threats may be easily
identified with good interaction between the business and its surroundings. It will allow businesses
to take corrective action in a timely manner. For example, Samsung saw the popularity and scope
of smartphones and rode on the most popular and advanced Android OS, whereas Nokia failed to
recognise this scope and continued to utilise its Symbian OS, resulting in Nokia’s market share falling
from 55 percent to 27.7% in 2014. Similarly, Volvo has made good use of its first-mover advantage in
India’s luxury bus market. It currently controls roughly 74% of the market.
 Helps in planning and policy formulation: A thorough understanding of the business environment
aids in the formulation of more effective policies and plans. It provides businesses with up-to-date
information about market circumstances. Business organisations that are well-versed with their
environment make sound judgments.
 Provides useful resources: The business environment provides a variety of inputs such as raw
materials, capital and labour to a business organisation so that it can carry out business activities.
These inputs are transformed into goods and services in order to meet market demands. An
organisation cannot continue to operate unless it has a sufficient supply of inputs. For receiving
inputs and delivering the essential goods or services, it is completely reliant on the environment.
 Improves performance: The business environment plays an important role in boosting corporate
organisations’ overall performance. Managers keep their knowledge and abilities up to date by
maintaining constant awareness of the environment. Environmental research is used as a tool to
educate managers. Environmental monitoring gives qualitative data that aids in the development
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of strategic thinking. It enables managers to regulate and improve corporate performance by

implementing appropriate management techniques.
 Helps in coping with rapid changes: The factors that make up the corporate environment are
always changing. They fluctuate in their appearance from time to time. Changes in customer
preferences, fashion, technology, economic situations and so on are all examples of these changes.
The ability to recognise these occurring changes is aided by a thorough awareness of the business
environment. It enables them to effectively deal with these changes by taking the relevant steps in
the appropriate time. Managers are sensitive to such changes and respond efficiently as a result of
continual monitoring of the environment.
 Enhances business image: Businesses can improve their public image by having a thorough grasp
of their surroundings. They are more responsive and sensitive to environmental concerns as a result
of their thorough understanding of the corporate environment. Environmental research gives them
the information they need to make realistic strategies and put them into action. Businesses are better
able to provide better service and serve the common good. People are pleased with the company and
have developed trust in it. This aids in the development of a better market image.
 Assists in facing competition: All facts regarding market competitors are sent to businesses
through the business environment. Every business organisation must be aware of its competitors’
actions and tactics in order to effectively meet competition. It aids businesses in developing plans
and procedures in response to competition activity. Businesses can address market problems and
competitiveness by planning ahead of time in a methodical and efficient manner.
1.3.3 Importance of Business Environment

There is a close and continual contact between a business and its surroundings, regardless of its nature
or size. This engagement also aids the firm’s strength and efficient utilisation of its resources. As a
result, comprehending the significance of the business environment will aid in the pursuit of further
business prospects. Let’s take a look at it one by one.
 Identifying Business Threats and Opportunities: One of the most important advantages of a
business environment is that the interaction between a company and its surroundings usually
exposes the company’s potential and risks.
 Providing Growth Direction: When a company interacts with its surroundings, it becomes easier to
identify areas for expansion and growth. Is there a shift in consumer preferences for certain goods
or services? Are there any features that your competitors offer that you should incorporate in your
products as well? By connecting into its business environment, a company can acquire answers to
comparable inquiries.
 Learning that is ongoing: Because nature is essentially dynamic, the environment is always
changing. This keeps managers motivated to maintain their knowledge and abilities up to date. This
aids them in preparing for both anticipated and unanticipated changes in the commercial world.
How has your customers’ purchasing behaviour altered since the introduction of GST, for example?
 Image Construction: When a company shows environmental sensitivity, its image might increase
significantly. In order to accomplish so, the company needs also have a thorough understanding
of its surroundings. Many factories, for example, consider power shortages to be a problem in
their operations. As a result, several businesses have installed captive power plants (CPPs) in their
factories to meet their power needs.
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 Taking on the Competition: It is critical to be informed of your competitors’ actions and strategy in
any business. Firms can study their competitors’ tactics and behaviours in a business setting. They
might also devise their own techniques in this regard. Almost all telecom carriers offer identical
services at similar pricing, if you take a fast look at the industry.
The reason for this is that most telecom companies make it a point to keep up with their competitors’
tactics and actions. Markets are very competitive, and businesses must fight to stay afloat and thrive.
Understanding the relevance of the business environment and allocating resources to thoroughly
examine it can be a major stepping stone toward a company’s success.
Consider that for a moment. Maruti Udyog looked at its business environment a few decades ago
and spotted an opportunity in the demand for tiny automobiles. It began by producing low-cost little
automobiles and quickly rose to the top of the small car industry. Any company that isn’t aware of its
surroundings is blind to the hazards and/or possibilities hiding around every corner.
1.4 COMPONENTS OF BUSINESS ENVIRONMENT

The environment of a business is divided into two parts, namely the internal environment and external
environment. The internal environment comprises the strengths and weaknesses of a business
organisation, while the external environment includes opportunities and threats for the organisation.
Figure 2 lists the components of the business environment:
Components of Business
Environment
Internal Environment External Environment
Micro Environment Macro Environment
• Strategy • Suppliers • Political factors

• Structure • Intermediaries • Economic fact
• Skills of people Competitors • Sociocultural factors
• Financial capability • The public • Technological factors
• Marketing capability • Legal factors
• Operating and • Environmental factors
technical capabilities
Figure 2: Factors Affecting Business Environment

Let us discuss these factors in detail.
 Internal environment: It is the environment within an organisation; thus can be controlled internally.
The internal environment involves strengths and weaknesses of the organisation in different
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functional areas, namely marketing, operations, finance, information technology, personnel, etc.
These factors can be modified or controlled by the organisation from time to time. Some of the
internal factors that are important to be identified and analysed for an organisation are explained
as follows:
 Strategy: It represents the courses of actions taken by an organisation to fulfil its business
objective. To put in simple words, the business strategy of the organisation determines the
environment within which the business organisation operates.
 Structure: An organisational structure represents the relationship between different levels of
management and the board, employees to employees, managers to employees, management to
labour unions, etc. Harmonious relationships between these parties have significant effect on
the business decisions of an organisation.
 Skills of people: The success of a business organisation depends a great deal on the skills and
competencies of its employees. Many organisations need to incur a high cost due to unskilled
employees or wrong hiring of employees. Thus, it is important for the business organisation to
ensure that right people are hired with the right skills. Also, the business organisation should
conduct training and development programmes from time to time to keep building the skills of
its existing employees.
 Financial capability: It is the finance that keeps a business organisation moving and affects its
business performance, strategies and decisions to a large extent. The financial capability of a
business organisation encompasses sources of funds, capital investment, acquisition of assets,
management of funds, and so on.
 Marketing capability: Marketing involves the sending the message to the customers regarding
availability of products or services. The marketing capability involves the modes of promotion,
marketing channels, brand equity, distribution networks, etc.
 Operating and technical capabilities: The operating capability involves the production of goods
and services and use of material resources. On the other hand, the technical capability involves
the adoption of techniques used for production and various other business functions. Right
operating and technical capabilities at place lead to improvement in productivity and quality.
 External environment: It comprises the factors on which a business organisation has no control;
however, timely response by the organisation makes it play safely. The success and survival of a
business organisation depends on its ability to respond to external factors. External environment is
further divided into two types, which are:
 Micro environment: It comprises factors existing in the immediate environment of a business
organisation. These include suppliers, intermediaries, competitors and the public. These micro
factors affect different organisations in the same industry differently. On the other hand, some
micro factors are particular to one business organisation only. Although the micro factors are
the same for business organisations operating in the same industry, the relative success of a
business organisation depends on how effectively it deals with these micro factors.
 Macro environment: Micro factors of a business organisation exist in a large environment known
as macro environment. The micro environment poses a number of threats and opportunities for
a business organisation. The following are the macro factors of business environment:
 Political factors: These include government policies, political stability, systemic corruption,
tax policies, labour regulations, trade barriers, etc.
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 Economic factors: These include economic growth, exchange rates, interest and inflation
rates, and so on.
 Sociocultural factors: These include country’s demographics, population growth rate, age
distribution, career attitudes, health consciousness, and so forth.
 Technological factors: These include automation, research and development, technology
awareness, and so on.
 Legal factors: These factors are related to the constitutional framework of a country,
directive principles, fundamental rights, policies related to export and import.
 Environmental factors: These factors include the availability of natural resources, climatic
conditions, location aspects, pollution control measures, etc.
1.5 RELATION BETWEEN BUSINESS ENVIRONMENT AND STRATEGIC MANAGEMENT

As explained above, business environment consists of all the factors that affect an organisation’s
operations, actions and outcomes. It is divided into internal and external environment. An organisation
is able to better respond to the external environment if it is well-versed with its internal environment.
Strategy is the part of an organisation’s internal environment. A strategy is a plan of action designed
to achieve a particular goal. The external and internal environment influence strategy planning; but,
because the environment is difficult to forecast, it may be ineffective. As a result, marketers should
constantly gather new information about the business environment and develop strategic plans that
can adapt to changing situations.
An organisation needs to formulate a business strategy after considering all internal and external
factors. For example, if an organisation desires to enter the international market, it needs to thoroughly
analyse the economic, political, technological, legal, sociocultural factors of the country and match with
its internal capabilities. Similarly, to expand its business in the domestic market, an organisation needs
to analyse various factors such as number of competitors, government laws, demand for products and
services, and so on. Without analysing the environment, the entire business strategy of an organisation
may lead to failure.
Conclusion 1.6 CONCLUSION
 A business is an economic activity performed by an enterprising entity or an organisation often

with the objective of maximising profits.
 Business objectives refer to results that a business organisation aspires to achieve or accomplish
over a specified period of time.
 Business environment comprises surroundings, external objects, influences and circumstances
under which a business exists. These factors can be internal or external and have direct impact on
the business decisions of an organisation.
 A good understanding of environment by business managers enables them not only to identify and
evaluate, but also to react to the forces external to their firms.
 The environment of a business is divided into two parts, namely internal environment and
external environment. The internal environment comprises strengths and weakness of a business
organisation, while the external environment includes opportunities and threats for the organisation.
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 An organisation needs to formulate a business strategy after considering all internal and external
factors.
 A business environment aids in the identification of numerous opportunities (new markets, lifting of
government restrictions, etc.) and dangers (rise in the number of new entrants, etc.) to the business
organisation.
 The success of a business organisation depends a great deal on the skills and competencies of its
employees.
 If a business wants to survive and thrive, it must constantly monitor and adapt to the environment.
Disturbances in the environment might either pose a serious threat to the business or provide it
with new chances.
1.7 GLOSSARY
 Business: An activity of making money by producing or buying and selling products

 Environmental factors: These factors include the availability of natural resources, climatic
conditions, location aspects, pollution control measures, etc.
 Industry: A group of businesses that produces a closely-related set of raw materials, goods, or
services
 Standard of living: The material well-being of the average person in a given population
1.8 CASE STUDY: TATA NANO–ENVIRONMENTAL ANALYSIS
Case Objective
The case study explains the failure of Tata Nano due to poor environment analysis.
Tata Motors is a leader in manufacturing of commercial, passenger, military and electric vehicles. It is
also the world’s 4th largest truck and 2nd largest bus manufacturer by volume. In January 2008, Tata
Motors introduced Tata Nano, dubbed as the ‘People’s Car’ and also known as the world’s cheapest
car. The car was launched in March 2009 which created a significant impact in the Indian automobile
market. Tata Motors Ltd. is one of the few companies which have its own R&D centres. It has established
an engineering research centre at Pune (with strength of around 3,500 personnel).
The main target group of customers for Tata Nano are the lower- and middle- income families in India,
many of whom resisted purchasing four-wheelers mainly due to the price affordability and maintenance
cost. Launching of Tata Nano gave an opportunity for these groups to purchase a car within their means.
During the initial launch, Tata Nano was priced at about rupees one lakh. In December 2008, the cost of
the car increased significantly due to higher raw material costs.
Further, in 2013, Tata Nano was rated as the most trusted 4-wheeler brand by Brand Trust Report
India Study. Tata Motors was so confident about Nano that they thought this is going to be a massive
success. But it failed and became one of the most disaster products in the history of marketing due to
the following reasons:
 Tata Nano projects itself as the cheapest car. Nobody wants to drive the cheapest car. Buying a car
is related to social status and prestige in society.
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 So many Nano cars catch fire. This created a complete buzz in media. Despite the low price, everyone
hesitated to buy them because of the incidences of fire.
 After the announcement of Nano, the second-hand market of cars faces a drop in price by 15% to
20%. New cars like Alto 800, Maruti 800, Indica, etc., also have to reduce the price. People called it a
Nano effect.
 The vision of Tata was an affordable car that could fit a family of four. But, in reality, it was not
fitting an Indian family of 4 with ease.
Source: https://bking.in/tata-nano-failure-case-study/
Questions
1. What was the vision of Ratan Tata behind the launch of Nano project? How did he analyse the
environment?
(Hint: Low-income group people, safety, substitute for a bike.)
2. In spite of extensive research and development programme, Nano was a huge failure. Why?
(Hint: Poor vision and mission, competition, quality, etc.)
1.9 SELF-ASSESSMENT QUESTIONS
A. Essay Type Questions

1. What do you mean by the term business?
2. What is the scope of business?
3. Explain the factors comprising the internal environment of a business.
4. What is the impact of external environment on the decisions of a business organisation?
1.10 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS
A. Hints for Essay Type Questions

1. A business is an economic activity performed by an enterprising entity or an organisation often
with the objective of maximising profits. Refer to Section Business
2. Business is an organised and systematic activity for earning profit. It is an integral part of society
as it creates employment opportunities. Refer to Section Business
3. The internal environment involves strengths and weaknesses of the organisation in different
functional areas, namely marketing, operations, finance, information technology, personnel, etc.
Refer to Section Components of Business Environment
4. External environment comprises the factors on which a business organisation has no control;
however, timely response by the organisation makes it play safely. The success and survival
of a business organisation depends on its ability to respond to external factors. Refer to Section
Components of Business Environment
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@ 1.11 POST-UNIT READING MATERIAL
 http://www.jiwaji.edu/pdf/ecourse/tourism/Introduction,%20definition,%20concept%20&%20
features%20of%20Business%20environment.pdf
 https://www.mgkvp.ac.in/Uploads/Lectures/47/2724.pdf
1.12 TOPICS FOR DISCUSSION FORUMS
 Find information on how important it is for managers to understand the business of their
organisations.
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UNIT
02 Environmental Scanning and Micro

Business Environment
Names of Sub-Units
Environmental Scanning – Meaning and Concept, Business Environmental Analysis, SWOT Analysis,
Assessing Risk in a Business Environment, Micro Business Environment - Nature and Significance
Overview
The unit begins by explaining the concept and importance of environmental scanning. Further,
it discusses the business environmental analysis. It clarifies the risk assessment in a business
environment. The unit also covers the concept of SWOT analysis. Towards the end, it sheds light upon
the concept and significance of micro business environment.
Learning Objectives

 Explain the meaning and significance of environmental scanning
 Discuss business environmental analysis
 State the concept of SWOT analysis
 Outline risk assessment in a business environment
 Describe the nature and significance of micro business environment.
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Learning Outcomes

 Assess the meaning and significance of environmental scanning
 Appraise the concept of business environmental analysis
 Analyse the tool of SWOT analysis used in business.
 Evaluate the risk assessment in business environmental analysis
 Understand the nature and significance of micro business environment
 https://etheses.whiterose.ac.uk/14714/1/245587_Vol1.pdf
 https://egyankosh.ac.in/bitstream/123456789/12322/1/Unit-1.pdf
2.1 INTRODUCTION
An organisation’s internal and external environments are intertwined. The organisation scan its
environment regularly to monitor its developments and discover variables that can contribute to its
success. The micro environment, which includes all factors in an organisation’s immediate environment,
affects the company’s performance since they have a direct impact on the firm’s daily business activities.
Environmental scanning is a method that companies employ to keep track of their external and internal
environments.
2.2 ENVIRONMENTAL SCANNING – MEANING AND CONCEPT

The goal of the environmental scanning scan is to identify opportunities and dangers that may influence
the firm so that strategic business decisions can be made. The organisation collects information about
its environment and analyses it as part of the environmental scanning process to foresee the impact
of changes in the environment. This ultimately assists the management team in making well-informed
judgments. Environmental scanning is the persistent examination and analysis of the business
environment both inside and outside of an organisation. It is utilised to assess and evaluate expected
opportunities, threats, market trends and lessons that can influence the organisation. Recognising these
variables permits an organisation to react properly by creating strategies to combat likely dangers
before they influence the organisation. Figure 1 represents the process of Environmental Scanning.
Scanning
strategies
Input
Environmental Perceived Strategic
Scanning environment Change
change
Internal
factors
Process
Figure 1: Environmental Scanning Process
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UNIT 02: Environmental Scanning and Micro Business Environment JGI JAIN
Environmental scanning, as shown in the diagram above, should be used to detect opportunities and
dangers in the organisation’s surroundings. Once these have been recognised, the company can devise a
strategy to help maximise opportunities while reducing threats. Let’s take a quick look at the components
of an organisation’s environment before we get into the crucial variables for environmental scanning.
2.2.1 Importance of Environmental Scanning

Environmental scanning is required since the environment is rapidly changing, which has a significant
impact on the business firm’s operations. An examination of the company environment aids in the
identification of strengths, weaknesses, opportunities and dangers. Every firm must conduct a SWOT
analysis to survive and thrive.
The following is the need and importance of environmental scanning:
 Identification of strength: The strength of a commercial firm to acquire an advantage over
its competitors is referred to as its strength. The internal business environment is examined to
determine the firm’s strengths. Following the identification of a firm’s strength, the firm should
endeavor to combine or augment its solidarity by working on existing plans, strategies and assets.
 Identification of weakness: The firm’s weakness entails its constraints. Monitoring the firm’s
internal environment aids in identifying both its strengths and weaknesses. A company may excel
in some areas while falling short in others. The weaknesses should be discovered as soon as feasible
to rectify them for future growth and progress
 Identification of opportunities: Environmental analysis aids in the identification of business
prospects. The company should make every attempt to take advantage of possibilities when they
arise.
 Identification of threat: Competitors and other things might put a business at risk. Environmental
analyses can assist companies in identifying threats from the outside world. Early detection of a
threat is usually advantageous because it aids in the mitigation of the threat.
 Optimum use of resources: Environmental evaluation aids in the most efficient use of scarce human,
natural and capital resources. Systematic studies of the business environment assist the firm in
reducing waste and making the best use of available resources. Resources cannot be used effectively
and optimally unless the internal and external environments are analysed and understood.
2.3 BUSINESS ENVIRONMENTAL ANALYSIS

Business environmental analysis is a comprehensive word for the methodical process of identifying
environmental issues in a business, assessing their impact and developing a strategy to reduce and/or
capitalise on them. Any business manager should be able to assess the business environment in which
they operate.
One of the key goals of environmental analysis is to identify all environmental elements that have an
impact on, or could have an impact on, your company. Brainstorming is the most popular method for
accomplishing this. All environmental aspects are not always evident to everyone, so the more individuals
involved, especially early on in the brainstorming process, the more accurate the environmental profile
generated will be.
New tax regulations, tariff limits, export laws, consumer trends, evolving technology, new replacement
items, emissions laws, or a new competitor are all examples of environmental variables. According
to Forbes, the field of beauty, for example, is moving toward gender equality. There’s a chance that
customers would reject firms that force them to conform to antiquated beauty standards.
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JGI JAIN
There are four basic steps in the broad process of analysing the business environment:
 First, environmental elements are scanned in the environment.
 The relevant elements are then filtered and monitored in the second step.
 Thirdly, the influence of those elements is examined.
 Finally, scenarios are predicted based on the discovered environmental characteristics, and solutions
are designed appropriately.
Furthermore, as strategies are executed, the business environment is monitored to accommodate for
any unanticipated changes.
2.3.1 Steps in Business Environmental Analysis

The following steps must be completed in order throughout the environmental scanning procedure.
 Identification of key environmental variables: The first stage in environmental scanning is to
identify significant environmental factors that affect the business and industry of the organisation.
Both the micro and macro environments of business are included in these environmental variables.
The organisation must determine which variables are relevant as well as which variables are of a
generic nature. Customer-related, competition- or market-related, technology-related, regulatory
framework-related, etc., are examples of major environmental variables.
 Identification of information sources for environmental scanning: Environmental scanning
necessitates data input that can be derived from a variety of sources. The may be both formal and
informal sources. These could be both written and oral sources. The origins of data sources could be
both internal and external.
 Environmental scanning approaches: Depending on the situation, the organisation may use a
systematic approach, an ad-hoc approach, a processed form approach, or a combination of these
ways in varying degrees.
 Environmental scanning procedures: There are a variety of environmental scanning techniques
available. Quantitative and qualitative techniques are both available. The strategist can use both
formal and systematic procedures as well as intuitive methods.
 Elements impacting environmental scanning: Environmental scanning is influenced by a number
of factors. Events, trends, issues and expectations of various groups with an interest in the
organisation or its stakeholders are examples of these influences. Events are significant and unique
occurrences that occur in several environmental sectors. The broad tendencies or trajectories along
which events occur are referred to as trends. The present worries of diverse sections of society that
arise in response to events and trends are referred to as issues. Expectations are demands made by
various interest groups in response to their concerns about situations that have arisen.
2.4 SWOT ANALYSIS

A SWOT analysis is a technique for evaluating the four areas of your business. SWOT stands for Strengths,
Weaknesses, Opportunities and Threats.
SWOT Analysis is a tool that can assist you in analysing what your organisation does best right now and
developing a successful future strategy. SWOT can also reveal aspects of your business that are holding
you back or that your competitors could take advantage of if you do not protect yourself.
4
A SWOT analysis looks at both internal and external issues, or what’s happening inside and outside your
company so you will have some control over some of these elements and others won’t. In either scenario,
the best course of action will become clearer once you have identified, recorded and analysed as many
variables as possible.
For example, you may be well aware of some of your organisation’s strengths, but you may not realise
how unreliable those strengths are unless you record them alongside vulnerabilities and dangers.
Similarly, you may have legitimate concerns about some of your company’s flaws, but by going through
the research step by step, you may uncover an opportunity that could more than compensate. The
components of SWOT analysis are as follows:
 Strengths: Strengths are things that your company performs exceptionally well or in a way that
sets it apart from its competition. Consider the benefits your firm has over competitors. These could
include employee motivation, access to certain resources or a robust set of manufacturing methods.
 Weaknesses: Your organisation’s weaknesses, like its strengths, are intrinsic aspects, so concentrate
on your people, resources, systems and procedures. Consider what you could do better and what
practices you should avoid.
 Opportunities: External elements that may provide a competitive edge to a company are referred to
as opportunities. If a country lowers tariffs, a car manufacturer, for example, can export its vehicles
to a new market, boosting sales and market share.
 Threats: Threats include anything that can have a negative impact on your firm from the outside,
such as supply-chain issues, market shifts or a recruitment shortage. Anticipating risks and taking
action against them is critical before you become a victim and your growth stagnates.
2.5 ASSESSING RISK IN A BUSINESS ENVIRONMENT

You can use an environmental risk assessment to determine the chance of your company harming
the environment. This includes explaining potential hazards and consequences before taking steps to
mitigate them.
It employs approaches that are comparable to the health and safety risk assessments that your company
already conducts.
How to carry out an environmental risk assessment
An environmental risk assessment can be broken down into five steps. You must do the following:
1. Identify any dangers, such as potential sources of injury.
2. Describe the potential harm they could inflict.
3. Assess the likelihood of occurrence and devise preventative measures
4. Keep track of the assessment’s findings and take precautions
5. Re-evaluate the assessment frequently
2.6 MICRO BUSINESS ENVIRONMENT -NATURE AND SIGNIFICANCE

When it comes to the business environment, it is not limited in its scope and also includes the micro
environment as well which stresses upon the internal workings for any business. It contains those
factors that can have serious impact on how the business functions within its operational structures.
The Micro Business Environment impacts the day-to-day functioning of any business organization. It
includes competitors, customers and suppliers.
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JGI JAIN
2.6.1 Meaning of Micro Business Environment

The parts of the organisation’s environment that are under management’s control make up the micro
environment. The term “microenvironment” refers to the environment that exists within a company
organisation and has the ability to influence daily operations. It is connected to a small area where the
company operates. The micro business environment is composed of forces that surround the company.
These forces are unique to the business in question. They can affect the company’s performance and day-
to-day operations, but only in the short term. Microenvironmental forces are those that are distinct and
individual, such as customers, producers, marketing intermediaries, public entities and the enterprise
itself.
2.6.2 Elements of Micro Environment (Customers, Suppliers and Competitors)

1. Competitors: The competitive environment comprises a few key elements that any company must
be aware of. No corporation, no matter how large, has a monopoly. A corporation faces numerous
sorts of rivalry in the traditional business sector. The most typical type of rivalry that a company’s
product presently encounters is from other companies’ differentiated offerings.
Philips TV, for example, competes with firms like Videocon, Onida, BPL and others, in the Color
Television Market. Brand competition is the name for this form of competition. It can be found in all
marketplaces for durable goods.
2. Customers: “There is only one valid definition of business purpose, and that is to produce a customer,”
says Peter F. Drucker. The goal of business enterprises is to make money by meeting client demand.
It now prioritises profitable sales over volume sales for the sake of volume sales. Customers are now
at the center of a company’s marketing strategy.
To be successful nowadays, a business must find buyers for its products. As a result, customers are
the most significant aspect of the company’s micro-environment. Consumer pleasure is the most
important factor in product sales.
This is one of the reasons why customer satisfaction surveys are more important. Every the
commercial firm now has mechanisms in place to monitor client attitudes and satisfaction on a
regular basis, because it is widely acknowledged that customer contentment is the foundation for a
company’s success. Individuals, corporate companies, institutions and the government are the most
common types of consumers.
From the company’s perspective, having customers from various groups and legions is always
preferable because demand for the company’s goods is readily sustained.
3. Suppliers: In terms of suppliers, the company could consider obtaining the essential materials or
labour in accordance with its manufacturing schedule. It can implement a purchasing policy that
gives the company bargaining strength.
“The connection between suppliers and the corporation epitomises a power balance between them,”
according to Michael Porter. This equation is based on the state of the industry and the degree to
which each is reliant on the other.”
Individuals or businesses serve as suppliers. They joined forces to give the company with resources
it requires. Now the organisation must set specifications, look for suitable suppliers, identify and
analyse those suppliers, and then choose those who offer the best combination of quality, delivery
reliability, credit, warranties and, of course, affordable prices.
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2.6.3 Significance of Micro Business Environment

Microbusiness environment is the primary support point to build a business empire. All marketing plans,
methodologies, strategies and targets are carried out through these components. It is, consequently, the
executive arm of business where practical execution of thoughts, considerations and ideas are done and
in view of the reactions of these components, a business either moves forward or may step back. Micro
environment assumes a necessary part in understanding the current potential and deciding the fate of
a business.
 An organisation’s internal and external environments are intertwined.

 It is critical for the organisation to scan its environment regularly to monitor its developments and
discover variables that can contribute to its success.
 Environmental scanning is a method that companies employ to keep track of their external and
internal environments.
 The microenvironment, which includes all actors in an organisation’s immediate environment,
effects the company’s performance since they have a direct impact on the firm’s daily business
activities.
 The goal of the environmental scan is to identify opportunities and dangers that affect the firm so
that strategic business decisions can be made.
 The organisation collects information about its environment and analyses it as part of the
environmental scanning process to foresee the impact of changes in the environment. This ultimately
assists the management team in making well-informed judgments.
 Environmental scanning is required since the environment is rapidly changing, which has a
significant impact on the business firm’s operations.
 An examination of the company environment aids in the identification of strengths, weaknesses,
opportunities and dangers.
 Every firm must conduct a SWOT analysis to survive and thrive.
 The strength of a commercial firm to acquire an advantage over its competitors is referred to as its
strength. The internal business environment is examined to determine the firm’s strengths.
 Environmental business analysis is a catch-all word for the methodical process of identifying
environmental issues in a business, assessing their impact and developing a strategy to reduce and/
or capitalise on them.
 Any business manager should be able to assess the business environment in which they operate.
 A SWOT analysis is a technique for evaluating these four areas of your business. SWOT stands for
Strengths, Weaknesses, Opportunities and Threats.
 SWOT Analysis is a tool that can assist you in analysing what your organisation does best right now
and developing a successful future strategy.
 SWOT can also reveal aspects of your business that are holding you back or that your competitors
could take advantage of if you do not protect yourself.
 The parts of the organisation’s microenvironment that are under management’s control make up
the microenvironment.
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JGI JAIN
 The microenvironment of several firms in an industry might sometimes be nearly identical.

 Micro business environment is the primary support point to build a business empire. All marketing
plans, methodologies, strategies and targets are carried out through these components.
2.8 GLOSSARY
 Environmental Scanning: The continuous observation of trends and events in an organisation’s

internal and external environment that have an impact on its success
 Evaluation: The process of interpreting and assigning meaning to proposed or actual implications
of proposals or results in an organised way.
 Strategy: An action was taken by management to achieve one or more of the organisation’s
objectives.
 Micro Business Environment: The environment that comes into close contact with a corporation
and has an immediate impact on its day-to-day operations.
 Business: A business is characterised as an association or an entity engaged in commercial,
industrial, or professional activities.
2.9 CASE STUDY: DOORDARSHAN’S PROBLEMS
Case Objective
This study aims to show the rising problems of DD due to weak strategy and failure to recognise the
changing business environment.
After years of declining income, Door Darshan (DD) had a 50% revenue increase in 1999-2000. DD made
6.1 million dollars in 1999-2000, compared to 3.99 million dollars in 1998-99. With the debut of DD World
(a channel for NRIs), DD showed signs of life, and several of its regional channels became a hit.
DD’s honeymoon with success, however, appeared to be ended by the end of 2000-01. DD’s revenues were
expected to expand by 6-15 percent in 2000-01, whereas private channels, such as Zee TV, Star and Sony
were expected to grow by 40-50 percent. Analysts believed that DD’s declining revenues were just the
beginning.
DD was beset with a slew of issues, all of which stemmed from poor administration. By the late 1990s,
DD had lost its private producers, marketers and viewership. Even two-wheeler manufacturers kept a
minimal profile, with no car companies advertising on DD. Only during sports telecasts did Pepsi and
Coca-Cola advertisements appear.
Only FMCG firms remained loyal to DD due to its terrestrial network, which allowed them to reach out
to rural and semi-urban audiences. DD outsourced 50 percent of its programming to private producers
while having over 21,000 workers. DD was accused of a variety of large-scale scams and irregularities in
the late 1990s. DD’s performance was hampered by underutilised infrastructure, bad investments and
weak financial management. When the government opened the airwaves to private players in 1992, DD
was forced to compete with commercial satellite channels.
There were very few viewers for DD programmes in Cable & Satellite (C&S) homes. The DD programmes’
dwindling Television Audience Numbers (TVRs) were also a source of concern, as advertisers abandoned
8
them due to low viewer ratings. Analysts estimated that DD would require financial support of $5 billion
in the fiscal year 2000-01 to stay afloat because its revenues would not be enough to cover its expenses.
Analysts questioned the government’s ability to own DD, and many believed that privatisation was the
only option.
Questions
1. Did DD fail to recognise the shifting business landscape?
(Hint: Yes)
2. Is it possible to conduct a SWOT analysis for DD?
(Hint: Great reach was its strength, strategy was its weakness, privatisation was its opportunity ,
commercial satellite channels were its threats.)

1. Define environmental scanning.
2. Explain the importance of environmental scanning.
3. Discuss the SWOT analysis.
4. Describe the micro business environment.

1. The goal of the scan is to identify opportunities and dangers that affect the firm so that strategic
business decisions can be made. The organisation collects information about its environment and
analyses it as part of the environmental scanning process to foresee the impact of changes in the
environment. Refer to Section Environmental Scanning – Meaning and Concept
2. Environmental scanning is required since the environment is rapidly changing, which has a
significant impact on the business firm’s operations. An examination of the company environment
aids in the identification of strengths, weaknesses, opportunities and dangers. Every firm must
conduct a SWOT analysis to survive and thrive. Refer to Section Environmental Scanning – Meaning
and Concept
3. SWOT analysis is a technique for evaluating the four areas of your business. SWOT stands for
Strengths, Weaknesses, Opportunities and Threats.
SWOT Analysis is a tool that can assist you in analysing what your organisation does best right now
and developing a successful future strategy. SWOT can also reveal aspects of your business that are
holding you back or that your competitors could take advantage of if you do not protect yourself.
Refer to Section SWOT Analysis
4. The parts of the organisation’s environment that are under management’s control make up the
micro environment. The term “microenvironment” refers to the environment that exists within a
company organisation and has the ability to influence daily operations. It is connected to a small
area where the company operates. The micro environment is made up of all the forces that surround
the company. Refer to Section Micro Business Environment - Nature and Significance
9
 https://www.managementstudyguide.com/environmental-scanning.htm
 Research online and discuss with your friends the importance of SWOT analysis with some real life
examples.
10
UNIT
03 Macro Business Environment
Names of Sub-Units
Macro Business Environment – Meaning, Constituents of Macro Business Environment, Factors

Affecting Macro Business Environment (Political and Legal, Economic, Socio-Cultural, Technological,
And Natural)
Overview
The unit begins by explaining the meaning and significance of macro business environment. Further, it
discusses the constituents of macro business environment. The unit also explains the factors affecting
macro business environment.
Learning Objectives

 Explain the meaning of micro business environment
 State the significance of macro business environment
 Describe the constituents of macro business environment
 Discuss the factors affecting macro business environment
Learning Outcomes

 Assess the concept and meaning of micro business environment
 Analyse the significance of macro business environment
 Appraise the constituents of macro business environment
 Evaluate the factors affecting macro business environment
JGI JAIN
 https://www.ddegjust.ac.in/studymaterial/mcom/mc-103.pdf
3.1 INTRODUCTION
The macro environment refers to the factors that have an indirect impact on a company’s operations
and working conditions. These variables are uncontrollable, and the corporation has no capacity or
ability to exert any influence over them.
Economic and non-economic macro environments are two types of macro environments. Because
business is essentially an economic activity, the national and international economic environment of
company is critical.
The country’s economic environment encompasses its economic system, macroeconomic factors,
business cycle stages, financial system, and government economic policies.
The political system, government policies, legal framework, social system, cultural values, demographic
variables, technological advancement, and natural environment of the country all fall within the non-
economic environment. In their entirety, all of these variables are extremely important in today’s
industry.
3.2 MACRO BUSINESS ENVIRONMENT – MEANING

The macro business environment is the firm’s remote environment, or the external environment in which
it operates. The macro business environment comprises of set of outside conditions that can influence
a business’ development endeavors either positively or negatively. These components or variables are
considered uncontrollable and they have an impact on the organisation’s overall performance. In most
cases, the corporation cannot manage the macro business environment because it is too large and
unpredictable.
As a result, the company’s success will be determined in great part by its capacity to adapt and react to
changes in the macro environment.
The corporation must first keep a close eye on the many parts of the macro environment. This will assist
them in comprehending the macro environment’s dynamic nature. It also aids them in adapting to the
ever-changing surroundings.
3.2.1 Significance of Macro Business Environment

A macro environment is a set of external variables that have a favourable or negative impact on a
company’s development efforts. These factors are regarded uncontrollable and have an impact on the
overall performance of the firm.
These variables are considered as macro because they have an impact on the entire economy, not
just the company’s immediate market. Economic growth, inflation, social conditions, interest rates,
government policies, technology advancements, and climate change are just a few of these factors.
Each has a different impact on how firms operate, and they all necessitate the development of strategies
to address the dangers and capture the opportunities that this macro environment currently presents.
2
UNIT 03: Macro Business Environment JGI JAIN
The ability of a corporation to adapt swiftly to external changes is a valuable asset, as it allows it to
respond positively and develop its business model around new paradigm shifts.
Because macro contexts are highly dynamic, this ensures the business’ long-term viability. The PESTLE
(Political, Economic, Socio-cultural, Technological, Legal, and Environmental) analysis is one of the most
widely used methods for gaining a better knowledge of a company’s macro environment. A corporation
can not only identify external conditions but also build successful strategies to cope with these aspects
using a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis.
3.3 CONSTITUENTS OF MACRO BUSINESS ENVIRONMENT

The Macro-Environment can be divided into two categories:
 Economic Environment: Economic Environment of a business comprises its macroeconomic
parameters, the economic system, distinct stages of the business cycle, the financial system, and
other factors all have a role in the overall economy. Various macro-environmental elements that
affect the economic system of a country have a direct impact on business success. Any business’s
current economic environment is complicated and difficult to comprehend.
 Non-Economic Environment: Government policies, demographic variables, the legal framework,
the social system, the political system, technological advancement, and other elements all play a
role in the non-economic environment. A non-economic environment, in general, has a significant
impact on the performance of any business.
3.4 FACTORS AFFECTING MACRO BUSINESS ENVIRONMENT (POLITICAL AND LEGAL,

ECONOMIC, SOCIO-CULTURAL, TECHNOLOGICAL, AND NATURAL)
The factors which can impact the macro business environment are discussed below:
 Socio-Cultural Environment: It includes social ideals and culture, both of which are critical to a
company’s success. It indicates that any change in the social environment has the potential to
have a direct or inadvertent impact on the business. Culture encompasses conventions, a variety
of behavioural patterns, values, and even crucial facts. In the long run, cultural influences have an
equal or greater impact on firm’s success. Religion and beliefs, various lifestyles, socio-economic
classes, population growth rates, life expectancy rates, and many other social and cultural elements
all have an impact on company’s productivity.
 Technological Environment: With the passage of time, technology evolves at a rapid pace, causing
an increasing number of businesses to be concerned about keeping their services current. Technology
is not limited to the IT industry. The production process, goods, innovative techniques, and more are
all part of it. Technological advancements can provide a significant competitive advantage to any
business. Automation, engine performance and efficiency, wireless charging, internet connectivity,
and many other macro-environmental aspects related to technology are among the most common.
 Economic Conditions of the Market: The performance of any firm is largely determined by the state
of the economy. All of a company’s activities, as well as its production variables, are dependent on
the economy. A market is never in a stable state and is continually fluctuating. If economic conditions
are favourable, a low rate of interest will benefit all enterprises.
 Ecology and Physical Environment: When it comes to a company’s performance, the ecology and
physical surroundings are critical. For example, global warming, a significant shift in the physical
environment, has begun to disrupt rainfall patterns in several locations. As a result, it may have an
impact on crops, resulting in a lack of raw materials such as cotton. So, whether it’s topographical
3
components, meteorological conditions, climate change, or any other environmental issue, they’re
all important in the macro business environment.
 Political and Legal Factors: The three major branches of government that make up a country’s
political environment are the executive, legislative, and judicial branches. The political atmosphere
is influenced by the party’s political beliefs and ideologies at the state and national levels. The legal
environment includes a variety of rules, regulations, and laws. The legal and political stability of
any government is critical to the success of any business. The essential instance where political
variables play a critical impact is the point at which an organisation attempts to move into another
market - explicitly one in the other country. The organisation should comprehend the regulations
and guidelines that direct both the industry it operates in and any specific rules it may be subjected
to. It might influence whether it’s financially feasible and responsible for the organisation to enter
the new market by any means.
 The macro environment refers to the factors that have an indirect impact on a company’s operations
and working conditions.
 These variables are uncontrollable, and the corporation has no capacity or ability to exert any
influence over them.
 Economic and non-economic macro environments are two types of macro environments.
 The country’s economic environment encompasses its economic system, macroeconomic factors,
 The political system, government policies, legal framework, social system, cultural values,
demographic variables, technological advancement, and natural environment of the country all
fall within the non-economic environment.
 In their entirety, all of these variables are extremely important in today’s industry.
 In most cases, the corporation cannot manage the environment because it is too large and
unpredictable. As a result, the company’s success will be determined in great part by its capacity to
adapt and react to changes in the macro environment.
 The corporation must first keep a close eye on the many parts of the macro environment.
 This will assist them in comprehending the macro environment’s dynamic nature. It also aids them
in adapting to the ever-changing surroundings.
 The factors which can impact the macro business environment are: Political and legal, socio-
cultural, economic, technological and physical.
3.6 GLOSSARY
 Macro Environment: The collection of circumstances that prevail across the economy as a whole,
rather than just in one industry or location
 Macroeconomic: Macroeconomics is the branch of economics concerned with the overall structure,
performance, behavior, and decision-making of the economy
 Demographic: The study of a population based on age, race, and gender
 Ethical: Being compliant with the acknowledged norms of right and evil that govern a profession’s
conduct
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UNIT 03: Macro Business Environment JGI JAIN
 PESTEL: A PESTEL analysis is an abbreviation for a tool used to recognise the macro (outside)
powers confronting an association. The letters represent Political, Economic, Social, Technological,
Environmental and Legal environment of a business
3.7 CASE STUDY: R.I.P ZIMBABWE DOLLAR
Case Objective
This study aims to show the fall of Zimbabwe Dollar.
“Zimbabwe is nearing the end of a textbook hyperinflationary period. As the supply of Zimbabwe dollars
increases and the demand for them decreases, inflation is accelerating. People will eventually refuse to
accept the money, causing it to completely collapse.” Facts on the ground have validated this prognosis
in recent months. The Zimbabwe dollar is no longer in use.
A hyperinflation indicator for Zimbabwe was created last year. The index was first published on January
5, 2007, a month before Zimbabwe entered the hyperinflationary zone. I ceased reporting the index on
November 14, 2008, due to a lack of credible data. Noncash Zimbabwe dollar transactions were used to
create this index. In Zimbabwe, this have accounted for the majority of transactions.
However, by the end of November, almost no non-cash Zimbabwe transactions were taking place, and
the Zimbabwe Stock Exchange had ceased operations. As a result, the non-cash Zimbabwe dollar has
died.
All that is left of the Zimbabwe dollar is ashes - a sliver of paper money. During Zimbabwe’s hyperinflation,
foreign currencies quickly and spontaneously supplanted the Zimbabwe dollar. In late January 2009,
the process of “dollarization” was made legal. Despite the fact that the Zimbabwe paper money still
circulates alongside other currencies, its true worth is insignificant, its use is restricted, and its value
against the US dollar is cut in half every two days.
Zimbabwe was unable to break Hungary’s global record for hyperinflation set in 1946. Nonetheless, in
October 2008, Zimbabwe sped past Yugoslavia. As a result, Zimbabwe today holds the second-highest
level of hyperinflation in the world. Below are the top three hyperinflations:
Country Month with highest Highest monthly Equivalent daily Time required for
inflation rate inflation rate inflation rate prices to double
Hungary July 1946 1.30 × 1016% 195% 15.6 hours
Zimbabwe Mid-November 2008 (latest 79,600,000,000% 98.0% 24.7 hours
measurable)
Yugoslavia January 1994 313,000,000% 64.6% 1.4 days
Questions
1. What do the six macro environments entail?
(Hint: There are six main factors that make up the Macro Environment: Demographic, Economic,
Political, Ecological, Socio-Cultural, and Technological forces.)
2. What is the difference between a micro and a macro business environment?
(Hint: The surrounding environment in which the organisation operates is referred to as the
micro environment. The macro environment refers to the overall environment that can have an
impact on the operations of all businesses elements: Competitors, Organisation, Suppliers, Market,
Intermediaries, and Customers (COSMIC).)
5

1. What do you mean by macro business environment?
2. Explain the significance of macro business environment.
3. Discuss the factors affecting macro business environment.

1. The macro environment is the firm’s remote environment, or the external environment in which it
operates. The macro business environment comprises of set of outside conditions that can influence
a business’ development endeavors either positively or negatively. Refer to Section Macro Business
Environment – Meaning
2. A macro environment is a set of external variables that have a favourable or negative impact on a
company’s development efforts. These factors are regarded uncontrollable and have an impact on
the overall performance of the firm. These variables are considered as macro because they have
an impact on the entire economy, not just the company’s immediate market. Economic growth,
inflation, social conditions, interest rates, government policies, technology advancements, and
climate change are just a few of these factors. Each has a different impact on how firms operate,
and they all necessitate the development of strategies to address the dangers and capture the
opportunities that this macro environment currently presents. Refer to Section Macro Business
Environment – Meaning
3. There are many factors which can impact the macro business environment. Refer to Section Factors
Affecting Macro Business Environment
 https://www.vedantu.com/commerce/macro-environment
 https://www.yourarticlelibrary.com/business/macro-environment-of-business-economic-
environment-and-non-economic-environment/23373
 https://www.monash.edu/business/marketing/marketing-dictionary/m/macro-environment
 Discuss with your friends about the advantages and significance of understanding the macro
business environment.
6
UNIT
04 Economic Environment and Planning
Names of Sub-Units
Meaning of Economic Environment and Economic Planning, Role of Economic Factors on Business,
Industrial Policy of India, Introduction to Companies Act, 2013, Growth Strategy and Planning
Overview
The unit begins by explaining the meaning of economic environment and planning. Further, it discusses
the role of economic factors on business. Now, the Industrial Policy of India and the Companies Act of
2013 are explained in this unit. It also discusses growth strategy and planning.
Learning Objectives

 Explain the meaning of economic environment and planning
 Describe the role of economic factors on business
 Discuss Indian industrial policy and the companies act of 2013
 Explain the growth strategy and planning
Learning Outcomes

 Assess the concept of economic environment and planning
 Appraise the role of economic factors on business
 Evaluate the Industrial Policy of India
 Analyse the Companies Act, 2013
 Examine the growth strategy and planning
JGI JAIN
 https://www.mgkvp.ac.in/Uploads/Lectures/47/1416.pdf
4.1 INTRODUCTION
Planning is an important component of management since it lays forth a strategy for the company or
business to pursue. Planning allows you to prepare for the unknown future. Planning allows things to
happen that would not otherwise happen, and it is a mental activity that necessitates the utilisation of
intellectual resources.
Commitment of India to planned economic development is an impression of our society’s determination
to work on to improve the economic status and conditions of our people and also an affirmation of the
role of the public authority in achieving the growth performance an assortment of social, monetary and
institutional means. The goal of Indian economic planning is to achieve a broad-based increase in the
living standard of the entire population.
4.2 MEANING OF ECONOMIC ENVIRONMENT AND ECONOMIC PLANNING
Economic Environment
Economic and non-economic environments are two important components of business environments.
The economic environment of a business encompasses its economic system, macroeconomic factors,
business cycle stages, financial system and government economic policies. These economic factors are
external to business, uncontrollable in nature and have an indirect impact on a company’s operations
and working conditions. While organisations in most cases can’t control their economic environment,
they can assess economic conditions and circumstances before deciding to enter a specific market or
industry or pursue other strategies.
Economic Planning
Economic planning is an economic program or policy hypothesised for the improvement and development
of the regional economic system. Economic planning is a strategic planning process which includes
preparing a rundown of the issues confronting the economy, rearranging the list based on priority,
recognising the economic issues which are to be addressed, fixing an objective to accomplish the desired
economic goal, estimating how much resources are required for accomplishing the objective, mobilising
and assembling the resources and once the assets are organised, implementation and execution process
starts in an organised manner to accomplish the desired economic goal.
4.3 ROLE OF ECONOMIC FACTORS ON BUSINESS

The dynamic economic climate that exists in the market has an impact on all enterprises, whether local
or foreign. Interest rates, demand and supply, unemployment, inflation, and other economic conditions
all have an impact on company.
Let us have a look at some of these economic variables.
1. Demand and Supply
Demand and supply are two major economic aspects that influence how well company models
perform. Demand refers to a customer’s willingness and ability to buy what a company has to
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UNIT 04: Economic Environment and Planning JGI JAIN
offer, while supply refers to the company’s ability to make what the customer wants accessible. For
example, when a mobile phone with cutting-edge technology is launched to the market, it commands
a higher price owing to high market demand, and prices remain high as long as demand exceeds
supply.
Here is another illustration. The sugar harvest in Brazil, possibly the world’s greatest producer, was
ruined by bad weather in 2000. As a result, there was a reduction in sugar supplies throughout the
world, causing sugar prices to skyrocket. As a result, other providers took advantage of the situation
and increased supply which lowered the cost.
2. Inflation
Inflation typically arises when the amount of money in the economy grows too quickly without being
matched by an equivalent supply of goods and services. There is a lot of information moving around
in this scenario right now. In order to keep firms afloat, products prices must rise in one manner or
another. As a result, the cost of raw materials used in manufacturing has increased. The increase in
the cost of raw materials is clearly reflected in the selling price.
Let us have a look at this in more detail. Consumers’ purchasing power dwindles, their wages remain
steady, while cost of goods and services skyrocket. This will have a significant impact on companies
because demand for items is directly proportional to their availability and price.
3. Interest rates
Interest rates represent the fees charged by a lender from an individual or corporation who wishes
to borrow money. Many small and medium-sized firms rely on bank and other financial institution
loans for capital financing. Increased overall corporate expenditures are caused by high interest
rates.
4. Unemployment
One more essential part of the economy that influences business activities is employment level in
the economy. Employment level in the economy straightforwardly affects the purchasing power of
people. At the point when unemployment is low, consumer spending tends to be high on the grounds
that most people have income to spend which is really great for organisations and helps drive
growth and development.
5. Infrastructure
Infrastructure is a resource management system that is required for a society or company to
function. Infrastructure is divided into two types: hard and soft. Transportation, telecommunications,
energy, and water supply and sanitation are examples of hard infrastructure that are required to
run a country. Education, banking, government, emergency, and healthcare systems are examples
of soft infrastructure that help a country sustain its health, economic and social standards. Hard
infrastructure is of primary importance to businesses since it has a direct impact, however, soft
infrastructure has a secondary influence and is as significant.
6. Exchange rates
Exchange rates must be considered by everybody involved in export or import. Changing exchange
rates may influence how much a firm must pay a foreign supplier to satisfy them, affecting profit
margins and requiring a significant amount of resources to keep track of.
4.4 INDUSTRIAL POLICY OF INDIA

Industrial Policy of India incorporates the set of principles, standards and measures set by the
Government to assess and evaluate the rate of progress of the manufacturing sector which eventually
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enhances financial development, economic development and growth of the country. The government
takes these measures to energise and improve the competitiveness and abilities of different firms.
Following are the objectives of industrial policy:
 To keep up with consistent development and growth in productivity
 To generate and initiate more job opportunities
 To make use of available HR better
 To speed up the advancement of the country through various means
 To match the degree of international industrial standards and competitiveness
Government of India announced various industrial policies since independence as listed below:
 The Industrial Policy Resolution, 1948
 Industrial Policy Resolution, 1956 (IPR, 1956)
 Industrial Policy Statement, 1977
 Industrial Policy Statement, 1980
New Industrial Policy, 1991

The new industrial policy was announced by the government of India on July 24 ,1991. The fundamental
philosophy of the new policy of 1991 has been summarised as: ‘Progression with Change’.
Objectives of new economic policy of 1991 are as follows:
 To unite the qualities and strengths developed during the initial forty years of economic planning
and to expand on the additions already made
 To address the bends or shortcomings that might have sneaked in the industrial structure as it had
created over the initial forty year
 To keep up with sustained growth in the productivity and gainful employment.
 To accomplish worldwide intensity and international competitiveness. The quest for these objectives
will be tempered by (a) the need to save and preserve the environment, and (b) the need to ensure the
efficient use of available resources.
Policy Changes: Important changes in the NIP 1991 can be described as follows:
 As per new industrial policy of 1991, the public authority permitted domestic firms to import better
technology to further develop productivity, efficiency and to approach better innovation. The
Foreign Direct Investment ceiling was expanded from 40% to 51% in selected areas.
 Licensing for setting up industries was nullified or abolished except for 18 industries.
 There was a condition of phased manufacturing program on foreign firms to decrease imported
data inputs and use domestic inputs only, that condition was nullified and abolished in 1991 new
industrial policy.
 To keep a check on monopolies, the MRTP Act was replaced in 1991 and the Competition Act, 2000
was passed on the proposal of SVS Raghavan panel.
 The stakes of Government in Public Sector Enterprises were decreased to strengthen and intensify
their efficiency, productivity and competitiveness under the disinvestment policy.
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4.5 INTRODUCTION TO COMPANIES ACT, 2013

A corporation is a registered association that denotes a legal entity. It is a self-contained legal body with
perpetual succession, a common capital consisting of transferable shares, a common seal for signing
documents, and limited liability.
The Companies Act of 2013 is an Act of the Indian Parliament that governs the formation, formation,
and operation of companies in India. The Indian Companies Act of 1956 has been replaced with the
Companies Act of 2013. The Act establishes broad guidelines for all public and unlisted enterprises in
the nation. The Companies Act of 2013 gives shareholders more control and emphasises the need of
corporate governance.
In comparison to the Companies Act 1956, the Companies Act, 2013, comprises 29 chapters and 470
sections (658). It has seven different schedules.
The financial year now ends on March 31st, financial statements are prepared in accordance with
Schedule 3 of the Financial Statements Act, and the notion of a one-person business has been established,
which was not included in the previous Companies Act.
Provisions of Companies Act, 2013

The Ministry of Corporate Affairs has announced that 98 parts of the Companies Act, 2013 would take
effect on September 12, 2013. The following are some key provisions to guarantee that businesses comply
with the law on time:
1. Special resolution for borrowing in excess paid-up capital and free reserve: Section 180 of the
Companies Act, 2013, states that unless a special resolution is passed, a business cannot borrow more
than its paid up capital and free reserves. A private firm must also approve a separate resolution
approving its planned borrowing if its current debt exceeds its paid-up capital and free reserves.
2. Provisions on free reserves: The free reserve is defined in Section 2 (43) as the amount available for
distribution according to the most recent audited balance sheet. It does not, however, include the
revaluation reserve and any changes in the carrying value of its assets/liabilities that are routed
through profit & loss or otherwise.
3. Limit on maximum partners: In any combination or partnership, the maximum number of people/
partners cannot exceed 100. This limitation does not apply to a corporation founded by professionals
such as accountants, chartered accountants, and attorneys.
4. Net worth: Securities premium account is included in Section 2(57) of the Companies Act, 2013,
although it does not include write-back of depreciation in Net Worth.
5. One person company: The Indian Companies Act of 2013 introduces a new type of private business,
the one-person company. It just has one shareholder and one director. A private corporation must
have at least two shareholders and two directors.
6. Restriction on composition: Every firm shall have at least one director who spent at least 182 days
in India during the preceding calendar year.
7. Rotation of auditors: In the event of publicly listed corporations, the Act provides for auditor
rotation. Auditors are likewise prohibited from conducting non-audit services under the Act.
4.6 GROWTH STRATEGY AND PLANNING

Growth Strategy
In the marketing world, there is a lot of misunderstanding about what a growth marketing plan is and
how it differs from a marketing strategy.
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First and foremost, a growth strategy is not the same as a marketing strategy. It also does not imply
conducting PPC advertisements, SEO traffic or CRO testing on your website. These are marketing
strategies that are part of your marketing strategy.
Your growth strategy is a long-term plan for getting your company from where it is now to where it
wants to be in the future. This indicates that it:
 involves all of the company’s departments (versus marketing only).
 is designed to help the firm expand in a variety of ways (revenue, employees, etc.).
 covers all aspects of your marketing approach (and not the other way around).
In summary, a growth strategy is a high-level plan that lays out everything a company must accomplish
to expand. It’s a scientific and holistic strategy to accelerating growth.
Business Growth Planning

The planning of growth is analogous to the planning of a business. However, it primarily focuses on
income creation or expansion as well as the steps required to attain these goals.
A growth plan is a detailed, methodical record of your company’s goals for the future. It lays out your
company’s objectives and goals as well as precise plans and techniques for achieving them.
A Growth Plan Considers:

 Your company’s present situation, including its strengths, shortcomings, and opportunities
 The direction in which you want your company to go in the future
 A strategy and timetable for achieving your goals
Developing a strategy plan is an important aspect of growth planning. It takes time to develop a
development strategy, but it will help you stay on track and guarantee that your firm increases in a
planned and organised manner.
Roles and Functions of NITI Aayog
Roles of NITI Aayog

NITI Ayog has replaced the planning commission of India which has a legacy of 65 years. It is a
significant association that will undoubtedly assume a fundamental part in the country’s growth and
development. It is commonly known as national institution for transforming India. The NITI Aayog has
a dual mandate: to oversee the country’s adoption and monitoring of the Sustainable Development
Goals, as well as to encourage competitive and cooperative federalism among States and UTs.
NITI Aayog’s job is not merely to gather data on the SDGs on a regular basis, it also has to take aggressive
steps to achieve the goals and targets. The Ministry of Statistics and Programme Implementation
(MoSPI) has already started working with other ministries to develop indicators that reflect the SDG
goals and targets.
As a first phase, NITI Aayog has created a draught mapping of the goals and targets in cooperation with
MoSPI. In addition, the centrally supported schemes such as the ‘core of the core,’ ‘core,’ and ‘optional’
schemes adopted by the States, as well as some of the Central Government’s recent efforts, have been
mapped. Furthermore, Ministries and States are adopting central sector and state initiatives that are
connected with one or more SDGs, respectively. You may find this mapping here.
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Functions of NITI Aayog

 Cooperative and competitive federalism: The primary platform for putting cooperative federalism
into practise by allowing states to participate actively in the formulation of national policy and
attaining time-bound execution of quantitative and qualitative goals.
 Shared national agenda: With the active participation of states, build a shared vision of national
development objectives and strategies. This will serve as the framework for the Prime Minister and
Chief Ministers to implement their “national agenda.”
 State’s best friend at the centre: Aids states in tackling their own problems by using their strengths
and comparative advantages. This will be accomplished through working with Ministries, promoting
their ideas at the national level, offering consulting services, and increasing capacity.
 Decentralised planning: Converts the planning process to a bottom-up approach.
 Vision & scenario planning: Develops medium- and long-term strategy frameworks for all industries.
 Network of expertise: Through a collaborative community of national and international experts,
practitioners, and other partners, mainstream external ideas and knowledge into government
policies and programmes. This would mean serving as the government’s point of contact with the
rest of the globe.
 Knowledge and innovation hub: Through a resource centre that discovers, analyses, communicates,
and enables replication of research and best practises on good governance, be an accumulator as
well as a disseminator.
 Harmonisation: Facilitates action harmonisation across multiple tiers of government by facilitating
communication, coordination, cooperation and convergence among all stakeholders. The focus will
be on bringing everyone together to build a comprehensive and integrated approach to growth.
 Conflictresolution: Providesaforumforthemutualsettlementofcross-sectoral, cross-departmental,
cross-state, and cross-centre concerns.
 Coordinating interface with the world: Serves as a central hub for strategically leveraging global
experience and resources from multilateral forums, countries, and other sources.
 Internal consultancy: Provides federal and state governments with internal consulting services on
policy and programme creation, as well as specialised expertise such as building and implementing
Public Private Partnerships.
 Capacity building: Enables government-wide capacity building and technology upgrades by
benchmarking with current global trends and offering managerial and technical expertise.
 Planning allows things to happen that would not otherwise happen, and it is a mental activity that
necessitates the utilisation of intellectual resources.
 A definitive target of the Indian economic planning is to accomplish broad based improvement in
the living standard of society at large.
 The economic environment of a business encompasses its economic system, macroeconomic factors,
 Economic planning is an economic program or policy hypothesised for the improvement and
development of the regional economic system.
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 Industrial Policy of India incorporates the set of principles, standards and measures set by
the Government to assess and evaluate the rate of progress of the manufacturing sector which
eventually enhances financial development, economic development and growth of the country.
 The new industrial policy was announced by the government of India on July 24 ,1991. The fundamental
philosophy of the new policy of 1991 has been summarised as: ‘Progression with Change’.
 The Companies Act of 2013 is an Act of the Indian Parliament that governs the formation, formation,
Companies Act of 2013. The Act establishes broad guidelines for all public and unlisted enterprises
in the nation. The Companies Act of 2013 gives shareholders more control and emphasises the need
of corporate governance.
 The Ministry of Corporate Affairs has announced that 98 parts of the Companies Act, 2013, would
take effect on September 12, 2013.
 A growth strategy is a high-level plan that lays out everything a company must accomplish to
expand. It is a scientific and holistic strategy to accelerating growth.
 NITI Ayog has replaced the planning commission of India which has a legacy of 65 years. It is a
significant association that will undoubtedly assume a fundamental part in the country’s growth
and development. It is commonly known as National institution for transforming India.
4.8 GLOSSARY
 Inflation: Inflation is defined as the rate at which prices rise over time
 Consumers: A consumer is a person or a group of people who plans to order, orders or consumes
goods, products or services for personal, social, family, or household purposes
 Interest Rates: The interest rate is a proportion of the principal—the amount borrowed—that a
lender charges a borrower
 Financial Institution: A financial institution is a business that specialises in financial transactions
including investments, loans, and deposits
4.9 CASE STUDY: OIL AND NEW ECONOMY
Case Objective
This study aims to show the effects of changing oil prices in the changing economy.
Worrying over the price of oil is the epitome of old economics. When it comes to refuelling your
automobile, the oil price is hard to notice, yet sophisticated economic observers are urged to ignore it at
every opportunity. For example, “underlying” inflation estimates do not include the price of oil since it is
too volatile, according to the reasoning, and hence no longer meaningful. Nonetheless, both the theory
and the empirical data imply that the price of oil continues to be a key driver of the business cycle.
Cheap oil, in all likelihood, has played a significant part in the creation of a “new economy,” and pricey
oil, if the price continues to rise, may cause more harm than many realise.
Andrew Oswald, a professor at Warwick University in the United Kingdom, has been a strong proponent
of the concept that oil still matters. He even went so far as to say that the so-called new paradigm is
almost completely a mirage induced by a lengthy period of extraordinarily cheap oil in a Financial Times
8
essay last year. He believes that now that the price has risen, and assuming that it remains reasonably
high, the effect will be a significant slowdown in the global economy.
Mr. Oswald is thus a doubly odd character: a new-economy sceptic who believes in quick money. Most
new-economy sceptics want the US Federal Reserve to tighten monetary policy more quickly (because
they believe the surge in labour productivity will not last and that inflationary pressures are building).
Mr. Oswald, on the other hand, although being a harsh critic of the new economy, feels that monetary
policy in both the United Kingdom and the United States should be on high alert for a recession.
In 1998, Mr. Oswald co-authored an essay with Alan Carruth of the University of Kent and Mark Hooker
of the Federal Reserve that bolstered the evidence for this viewpoint. The chart is the beginning point,
and it is worth spending time studying. The relationship between changes in oil prices and, after a delay,
increases in unemployment in the United States is astonishingly tight. And the underlying concept
presented by Mr. Oswald and his co-workers is convincing and straightforward.
They are more concerned with the supply side (i.e., labour market) consequences of oil than with the
demand side effects. Oil boosts expenses and reduces profit margins for producers. Employers aim to
reduce labour expenses in order to regain such profits. Higher unemployment is the outcome at the
aggregate level and for any given demand pressure: in fact, employees are only ready to accept lower
pay if there are more individuals on the dole.
Mr. Oswald and his colleagues demonstrated that a forecasting model based on this version of the labour
market’s “efficiency wage” theory matches the data quite well. Oil played a bigger and statistically more
important effect in driving American unemployment than interest rates from the late 1970s to the mid-
1990s.
Mr Oswald’s technique comfortably surpasses its rivals, including consensus projections from
commercial forecasters, in forecasts that extend beyond the sample period utilised in the study, a severe
test of any model.
The report makes no attempt to examine or refute the claim that new technology reshaped the American
economy in the late 1990s. As a result, new economy optimists may be unconcerned with these findings.
That, however, would be a mistake. Mr. Oswald’s thesis is that positing a new economy to account for the
American economy’s behaviour during the mid-1990s is unnecessary.
The boom has all of the characteristics of an oil price shock, except that it occurred in reverse, as opposed
to the more well-known occurrences of 1973-74 and 1979-80, as well as the less well-known case of 1990-
91. As the price of energy decreased, profit margins broadened considerably; inflationary pressure
eased even as demand grew (because to growing stock market wealth and other factors), and the rate
of unemployment consistent with stable inflation (the so-called natural rate) looked to fall to an all-
time low. Summers, America’s Treasury Secretary, recently drew notice when he compared the current
technological boom to a positive supply side shock, the polar opposite of the 1970s oil price shocks.
However, Mr. Oswald contends that the most logical connection to make between then and now is that
there was a “good” oil price shock during the majority of the 1990s. Even if you disagree with Mr. Oswald’s
new economy scepticism, it is apparent that oil was (rightly) blamed for most of what went wrong in
the past, but given little credit for what has gone right more recently. Despite Mr. Oswald’s scepticism,
it is extremely plausible that a spike in technology innovation in America has provided a large positive
supply shock to the economy. However, rather than being just plausible, the current increase in oil prices
represents a significant negative supply shock.
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Which of these forces proves to be more dominant will determine the economy’s future direction. The
new-economy shock can be considered the winner if low inflation and very low unemployment prevail.
However, if oil prices rise over, say, $ 20 a barrel, low inflation can only be maintained at the expense
of increased unemployment, the oil price will have exacted its revenge. It was denied a large portion of
the credit for the current boom, and it may be more harder to overlook in the event of a future collapse.
Questions
1. How does the price of oil affect international trade and the economy?
(Hint: Oil boosts expenses and reduces profit margins for producers.)
2. Do you agree with Mr. Oswald’s point of view? Justify your actions.
(Hint: The most logical connection to make between then and now is that there was a “good” oil price
shock during the majority of the 1990s
3. Examine the link between unemployment and oil prices from a cause-and-effect standpoint.
(Hint: If oil prices rise over, say, $ 20 a barrel, low inflation can only be maintained at the expense of
increased unemployment, the oil price will have exacted its revenge.

1. Write a note on Companies Act, 2013.
2. Explain the roles of NITI Aayog.
3. Explain the concept of economic planning and economic environment.
4. Write a note on new Industrial Policy.

1.. The Companies Act of 2013 is an Act of the Indian Parliament that governs the formation, formation,
Companies Act of 2013. The Act establishes broad guidelines for all public and unlisted enterprises
in the nation. Refer to Section Introduction to Companies Act, 2013.
2. NITI Ayog has replaced the planning commission of India which has a legacy of 65 years. It is a
significant association that will undoubtedly assume a fundamental part in the country’s growth
and development. It is commonly known as National institution for transforming India. Refer to
Section Growth Strategy and Planning.
3. Economic and non-economic environments are two importantcomponents of business environments.
The economic environment of a business encompasses its economic system, macroeconomic factors,
business cycle stages, financial system, and government economic policies. Refer to Section Meaning
of Economic Environment and Economic Planning.
10
4. Industrial Policy of India incorporates the set of principles, standards and measures set by
the Government to assess and evaluate the rate of progress of the manufacturing sector which
eventually enhances financial development, economic development and growth of the country. The
government takes these measures to energise and improve the competitiveness and abilities of
different firms. Refer to Section Industrial Policy of India.
 https://uk.sagepub.com/en-gb/eur/environment-and-planning-a-economy-and-space/
journal202436
 https://www.researchgate.net/journal/Environment-and-Planning-A-1472-3409
 https://academic-accelerator.com/Impact-Factor-IF/Environment-and-Planning-A-Economy-and-
Space
 Discuss the importance of NITI AAYOG with your friends.
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UNIT
05 Public-Private Enterprises
Names of Sub-Units
Public and Private Sector Enterprises, Rationale for Public Sector Enterprise, Privatisation and the
New Economic Policy of 1991, Implications of New Economic Policy for Indian Business, Disinvestment
in India, Public-Private Partnership (PPP)
Overview
The unit begins by explaining the meaning of public and private enterprises. Further, it discusses the
rationale for Public Sector Enterprise. This unit delves into the concept of privatisation as well as the
New Economic Policy,1991. It also discusses the implications of the New Economic Policy for indian
business and disinvestment in India.
Learning Objectives

 Explain the meaning of public and private enterprises
 Describe the rationale for Public Sector Enterprise
 Discuss the concept of privatisation
 Summarise the New Economic Policy, 1991, and its implications for Indian business
 Interpret the concept of disinvestment in India
JGI JAIN
Learning Outcomes

 Assess the meaning of public and private enterprises
 Appraise the rationale for public sector enterprise
 Evaluate the concept of privatisation
 Analyse the New Economic Policy, 1991 and the implications of NEP for indian business
 Examine the concept of disinvestment in India with examples
 https://ncert.nic.in/textbook/pdf/kebs103.pdf
 https://www.mpgmahavidyalaya.org/userfiles/New%20Economic%20Policy.pdf
 https://rlacollege.edu.in/pdf/Eco_Presentations/Economic-Development-and-Policy/New-
Economic-Policy-of-India.pdf
5.1 INTRODUCTION
In your daily life, you must have come across a variety of corporate organisations. There are stores
owned by solo owners or large retail organisations controlled by corporations in your neighbourhood
market. Then there are those that provide you with services such as legal services, medical services,
and partnership firms, which are owned by more than one person. All of these businesses are privately
held. Similarly, the government may own or operate other offices or places of business. Railways, for
example, is a government-owned and managed company. The Post and Telegraph Department of the
Government of India owns the post office in your neighbourhood, while our reliance on their postal
services, particularly in cities and towns, has drastically decreased. This is due to the large number
of private courier services companies that operate in larger cities. Then there are global firms, which
are businesses that operate in multiple countries. As a result, you may have seen that all types of
organisations, whether public, private, or worldwide, are doing business in the country.
5.2 PUBLIC AND PRIVATE SECTOR ENTERPRISES

Private Sector Enterprise
Private sector enterprises incorporate the sorts of business associations that are owned, managed
and controlled by an individual or a group of individuals. In the case of private sector enterprise, the
government cannot meddle in the day-to-day operations and functions as it has no control over it. Sole
proprietorship, partnership, multinational corporations and cooperative company are different types
of businesses under private sector enterprises.
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UNIT 05: Public-Private Enterprises JGI JAIN
Public Sector Enterprises

As discussed earlier in the introduction section of the book, Public Sector Enterprises or Public enterprises
are commercial units owned, managed and controlled by the federal, state or local governments. Any
business or industrial undertaking owned and controlled by the government with the goal of maximising
social welfare and upholding the public interest is referred to as a public sector enterprise. In India,
public sector firms operate under three major organisational structures. These are the ones:
1. Departmental Undertaking
2. Statutory (or Public) Corporation
3. Government Company
Public-Private Partnership (PPP)
A public-private partnership (PPP) is a collaboration between a government agency and the private
sector to supply goods or services to the general public. Public-private partnerships (PPPs) have been
used in a variety of areas of public policy, including social services, public transit and environmental
and waste-disposal services.
A partnership, in its most basic form, is any corporate or institutional arrangement that engages
in joint action. A public-private partnership (PPP) begins when one or more public entities agree to
collaborate with one or more private companies. PPPs encompass public-sector collaborations with
enterprises and civil society groups, such as community organisations, voluntary organisations, and
Non-Governmental Organisations (NGOs).
5.2.1 Rationale for Public Sector Enterprise

In fact, the reasoning for the establishment of public sector enterprises is numerous and varied. Some
of the rationale for the public sector enterprises are as follows:
 To embrace a welfare oriented or socialist model of development.
 To control, oversee and manage natural monopolies.
 To undertake certain activities or tasks which are way beyond the ability of private sector enterprises.
 To trigger and stimulate the advancement and growth of weaker sections of the society and also to
develop backward regions of the economy.
 To assure the country’s balanced regional growth and incline towards structural changes in the
economy.
 To forestall concentration of economic power and furthermore discouraging the wrong use of
economic power.
 To stimulate the development of agriculture sector in the economy.
 To make use of economic resources efficiently and effectively and also to keep a check on exploitation
of unused natural resources.
 To attain self-sufficiency and quicker economic growth.
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5.2.2 Role and Importance of Public Sector Enterprises for Infrastructure

Public sector enterprises play a very important role for infrastructure in Indian economy in the following
manner:
1. If there is not development in countries infrastructure, then it will result in lesser or no economic
development. Power, transportation, communication, basic and heavy industries, irrigation,
education and technical training etc. are public sector investment on infrastructure sector.
2. Public sector investments paved the way for agricultural development and industrial development.
3. They help in the overall development of the economy as a whole.
4. Public sector enterprises also support private sector enterprises as the investments by private
sector enterprises are dependent on the infrastructural facilities developed by the public sector
enterprises.
5.3 PRIVATISATION AND THE NEW ECONOMIC POLICY OF 1991

Let us understand Privatisation and the New Economy Policy of 1991.
 Privatisation: Simply speaking, privatisation implies allowing the private sector enterprises to set
up businesses which were previously saved for the public sector only. Under this approach many
PSUs are sold or transferred to private sector. Privatisation is defined as the process of selling or
transferring the possession, management and control of the public sector operations, firms or
assets to the privately owned business enterprises or investors. In the case of privatisation, there
is transfer of ownership or control of public sector undertaking to the private sector undertaking.
 The New Economic Policy: Under the leadership of P. V. Narasimha Rao, India’s New Economic Policy
was established in 1991. For the first time, this strategy allowed the Indian economy to be exposed
to the rest of the world. P. V. Narasimha Rao’s New Economic Policy cut import levies, opened the
reserved sector to private firms, and depreciated the Indian rupee to boost exports. The LPG Model of
Growth is another name for this. Economic liberalisation or tariff reductions, market deregulation
or opening markets to private and international actors, and tax reductions are all examples of new
economic policies used to spread the country’s economic wings.
Manmohan Singh, India’s former Prime Minister, is widely regarded as the founder of the country’s
New Economic Policy (NEP). Manmohan Singh announced the NEP on July 24, 1991.
The Features of the New Economic Policy
The Indian market and economy were completely transformed by the new economic strategy of 1991.
With this program the administration implemented several reforms and made significant policy
changes. The New Economic Policy of 1991 cast doubt on India’s status as a socialist country.
1. The government gave up monopolistic control over many industrial sector: The iron and steel
industry, heavy machinery industry, air transport sector, shipbuilding sector, telecommunications
and general communications sector and other significant industrial sectors existed prior to 1991.
Following the proposal, private actors would be able to enter these industries with little difficulty.
The Indian Railways, the army equipment sector, and the nuclear energy industry, among other
things, remained under government control.
4
2. The end of License Raj: Previously, in order to start a firm in any industrial area, private players
had to seek government permits. The tradition of seeking a license to start a business was mainly
phased out after 1991. Licensing was still required in the alcohol, hazardous chemicals, tobacco,
pharmaceuticals and medicines, explosives, and other industries.
3. The government transferred its equity in public sector enterprises to private player: As part
of the New Economic Policy, the government was required to relinquish authority over private
firms. As a result, the government sold its stake in public-sector companies to private investors.
The government gained large monetary advantages as a consequence of this privatisation which
assisted it in filling deficits and clearing debts.
4. The financial sector reforms: The central bank - the RBI - planted much of the authority it wielded
in the financial sector, just as it did in the industrial sector. Private banks are now permitted to
conduct business in the country. Certain critical components of the financial industry, on the other
hand, were retained under RBI’s jurisdiction to prevent any unpleasant financial incidents affecting
account holders.
5. FDI: After the NEP, India’s foreign direct investment policy matured as well. Foreign companies may
now readily join the Indian market. It was permitted to purchase a 51 per cent share in a domestic
firm.
6. Reforms in taxation: The NEP changed the current tax policy. On the one hand, it helped citizens by
decreasing the tax rate, while on the other hand, it benefited the government by bringing numerous
hitherto untaxed industries within the tax net.
7. Import-export reforms: Companies were permitted to import a greater range of items from 1991.
The populace was able to experience high-quality international items because to the outward-
looking attitude to commerce. The monopoly of domestic enterprises was ended and commodity
prices had fallen. Import duties have been reduced.
8. Globalisation: The benefits of globalisation were enjoyed by the Indian society when the Indian market
was opened up to international businesses and products. As more Indian companies, students, and
politicians interacted with global powerhouses, the value of the interchange of ideas grew.
9. Privatisation: As a result of the government’s disinvestment in numerous public-sector organisa-
tions, private actors have emerged to take control of these businesses. These previously government-
controlled enterprises were now disciplined thanks to private players. The general public profited
from the high-quality service provided by these private businesses.
India is a socialist country, according to the preamble to its constitution. Nonetheless, socialism failed
to bring India into the light. As a result, the administration of Narasimha Rao had to go against the
preamble and liberalise the economy. As a result, private corporations have become wealthier, while
government enterprises are on the verge of extinction. Many of the country’s poor inhabitants were
unable to profit from the NEP. Nonetheless, without the NEP, India would have been simply another
African country with little authority or say in world affairs.
5.3.1 Implications of New Economic Policy for Indian Business

Indian Economy experienced so may changes after the implementation of LPG Liberalisation,
Privatisation and Globalisation policy of 1991, commonly known as new economic policy. The reforms
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in the form of Liberalisation, Privatisation and Globalisation had some major impact on the working of
enterprises in business and industry. The Indian business sector has faced a number of challenges as a
result of these changes and reforms. These are follows:
 Competition is increased for Indian firms due to liberalised licensing rules which led the entry of
foreign business players. Foreign competitors offer better quality products at reasonable prices.
 Technological environment is swiftly changing in India after the implementation of new policy
reforms. Advancements can be seen in fields of technology which is making it difficult for Indian
firms to cope with new changes as well as survive and grow in market.
 Customers are more demanding now since they are well informed of their rights and responsibilities
and also about certain malpractices adopted by traders.
 Concept of marketing is changed after the implementation of NEP. There is change of market
orientation or philosophy from production oriented to market – oriented or societal which
necessitates building long term relation with customer to sustain them.
 The budgetary support to PSUs has been declined after the implementation of new economic reforms.
 Due to technological advancements, the need for well trained and skilled human resources is
increased after the implementation of NEP. It led to the need for developing human resources.
5.4 DISINVESTMENT IN INDIA

Disinvestment is a technique, method or strategy by which an investor sells or offloads an asset or
a portion of an asset. Disinvesting is a tactic for getting out of a current investment. Governments
frequently use disinvestment programs to efficiently distribute resources.
Following are the objectives of disinvestment is to:

1. Minimise the financial burden on the government
2. Improve public finances
3. Introduce, competition and market discipline
4. Depoliticise non-essential services
5. Encourage a wider share of ownership
6. Fund growth
Figure 1 shows the brief history of disinvestment:
6
Figure 1: Brief History of Disinvestment
The market activity by which the government sells or liquidates government-owned assets is referred to
as disinvestment by the government.
Latest example of Disinvestment in India
 Life Insurance Corporation of India: This year, the government announced the sale of the country’s
largest insurer. LIC has a market share of roughly 69 per cent. Disinvestment in the state-owned
insurer, LIC, is a one-of-a-kind scenario, since it would need changes to the LIC Act. The LIC Act
regulates numerous aspects of the company’s activities, including the transfer of surpluses,
government guarantees on policies, and so on. According to sources familiar with the situation, the
government may be considering selling a 25% interest in the corporation. However, the 25 per cent
discount will be obtained in stages, with the first step delivering only a 5% discount.
The 5 per cent sale is expected to collect more than Rs. 50,000 crores. The government has named Deloitte
and SBI Capital Markets as transaction consultants, the first stage in the disinvestment process.
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5.5 PUBLIC-PRIVATE PARTNERSHIP (PPP)

Public-Private Partnership (PPP) refers to the arrangement between government and private sector
for the provision of public assets and/or public services. PPP allows execution of the huge projects like
construction of dams, roads, bridges, or hospitals with private funding.
Following are the features of PPP:
1. Here, all the investments are done by the private firm, for a specified period of time.
2. This partnership is suitable when high technology and huge budget is needed. Technology is
provided by the private sector with innovation together with public sector incentives to finish work
on time and within a particular budget.
3. This partnership involves the complete retention of responsibility by the government authorities to
extend services, it doesn’t amount to privatisation.
4. Allocation of risk is well defined among the private sector and the public organisations.
5. Private organisation is selected based on open competitive bidding.
6. Private organisation also receives performance linked payments.
7. This partnership is an alternative in developing countries for executing large projects.
Figure 2 shows the significance of PPP:
Leads to innovation
Improvement in quality standards and regulations
Access to capital
Infrastuctural development
Decreased delays and quick completion of large scale projects
Flexibility in the project
Value for money
Skill and knowledge transfer
Better use of technology
HIgh ROI i.e. Return on Investment
Figure 2: Significance of PPP
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 Private sector enterprises incorporate the sorts of business associations that are owned, managed
and controlled by an individual or a group of individuals.
 Any business or industrial undertaking owned and controlled by the government with the goal
of maximising social welfare and upholding the public interest is referred to as a public sector
enterprise.
 A public-private partnership (PPP) is a collaboration between a government agency and the private
sector to supply goods or services to the general public.
 In fact, the reasoning for the establishment of public sector enterprises is numerous and varied.
 The public sector is seen as a powerful engine of economic development as well as a crucial tool for
self-sufficiency.
 Privatisation is defined as the process of selling or transferring the possession, management and
control of the public sector operations, firms or assets to the privately owned business enterprises
or investors.
 Under the leadership of P. V. Narasimha Rao, India’s New Economic Policy was established in 1991.
 For the first time, this strategy allowed the Indian economy to be exposed to the rest of the world.
P. V. Narasimha Rao’s New Economic Policy cut import levies, opened the reserved sector to private
firms, and depreciated the Indian rupee to boost exports.
 The LPG Model of Growth is another name for the new economic policy. Economic liberalisation or
tariff reductions, market deregulation or opening markets to private and international actors and tax
reductions are all examples of new economic policies used to spread the country’s economic wings.
 The reforms in the form of globalisation, liberalisation and privatisation had some major impact on
the working of enterprises in business and industry.
 Disinvesting is a technique in which an investor sells or offloads an asset or a portion of an asset.
 The market activity by which the government sells or liquidates government-owned assets is
referred to as disinvestment by the government.
5.7 GLOSSARY
 Public sector enterprises: In India, a government-owned enterprise, a government-owned

corporation, a statutory corporation and a nationalised firm are all examples of government-owned
enterprises
 Departmental undertaking: The departmental undertaking is the oldest and most conventional
kind of public sector enterprise organisation
 Balanced regional growth: Balanced regional development is a necessary requirement for a
country’s harmonic and orderly growth
 LPG: It stands for Liberalisation, Globalisation and Privatisation
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5.8 CASE STUDY: ACT AS AN AGENT AND KNOCK OUT ETHICS?
Case Objective
This study aims to show how ethics are an important part in all fields of business.
When businesses strive to strike a compromise between what is appropriate professional behaviour and
what is commercially successful, ethics might suffer. Consider the job of a sales representative. It is fine
to pay an agent a fee to promote your product, but if the agent is also a key player in the transaction,
both the company’s and the agent’s ethics are called into question. When the agent is a senator or a
minister, and the arrangement is a profitable one, we will cry “bribe” and haul individuals off to jail.
Mr. W. Jefferson was recently sentenced to 13 years in jail for his role in a corruption case in which bribe
money was discovered stashed in his refrigerator. He was a member of the US Congress at the time he
was apprehended, and he was supposed to give over the money to a Nigerian minister on behalf of a
corporation searching for a contract in the country. What happens if the doctor takes on the role of an
agent? That can be even more profitable than treating patients, which gives them the power to act as
agents. Pharmaceutical corporations often pay doctors large sums of money to talk to their colleagues
about the benefits of a medicine they promote.
One of the measures under discussion in the US health-care reform debate mandates pharmaceutical
and medical device corporations to disclose payments they make to doctors and other companies
that provide continuing education to doctors. This is being fiercely opposed! If openness is a means
of preventing corruption, any opposition to it must make you worry about the motivation behind the
action.
Questions
1. What does it imply when you say “public private enterprise”?
(Hint: A public-private partnership (PPP) is a long-term contract between a private party and a
government agency for the provision of a public asset or service, in which the private party assumes
major risk and management responsibilities.)
2. Describe the contribution of Private enterprise.
(Hint: Innovation, technology, flexibility, more funds)

1. What do you mean by Public Sector Enterprises?
2. Discuss the Implications of NEP for Indian Business.
3. Explain the concept of disinvestment.
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1. Public Sector Enterprises or Public Enterprises are commercial units owned, managed and
controlled by the federal, state or local governments. Any business or industrial undertaking owned
and controlled by the government with the goal of maximising social welfare and upholding the
public interest is referred to as a public sector enterprise. In India, public sector firms operate under
three major organisational structures. Refer to Section Public and Private Sector Enterprises.
2 The reforms in the form of globalisation, liberalisation and privatisation had some major impact
on the working of enterprises in business and industry. These changes and reforms have posed a
few difficulties to the Indian corporate sector. Refer to Section Privatisation and The New Economic
Policy, 1991.
3. Disinvestment is a technique, method or strategy by which an investor sells or offloads an asset or
a portion of an asset. Disinvesting is a tactic for getting out of a current investment. Governments
frequently use disinvestment programs to efficiently distribute resources. Refer to Section
Disinvestment in India.
 https://www.britannica.com/topic/public-private-partnership
 https://www.mckinsey.com/business-functions/risk-and-resilience/our-insights/a-smarter-way-to-
think-about-public-private-partnerships
 Discuss the role of both the private and the public enterprises play in the Indian economy.
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UNIT
06 Micro, Small and Medium Enterprises
Names of Sub-Units
MSME, MSME Development Act, 2006, MSME Development Institute, Need of MSME for Employment
and Business, Sickness in MSME, Reasons and Remedies for Sickness of MSMEs
Overview
The unit begins by explaining the growth, role and importance of micro, small and medium enterprises
(MSME). Further, it discusses the challenges faced by MSME. The unit explains the MSME Development
Act, 2006, and MSME development institute. The unit explains the need and requirement of MSME for
employment and business. It also discusses the sickness in MSME, reasons for sickness and remedial
measures.
Learning Objectives

 Explain the growth, role and importance of micro, small and medium enterprises (MSME)
 Discuss the challenges faced by MSME
 Describe the MSME Development Act, 2006, and MSME development institute
 Summarise the need and requirement of MSME for employment and business
 Interpret the sickness in MSME, reasons for sickness and remedial measures
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Learning Outcomes

 Analyse the growth of MSME in India
 Examine the challenges faced by MSME sector
 Describe the MSME development institute
 Evaluate reasons and remedies for sickness of MSMEs
 https://gargicollege.in/wp-content/uploads/2020/03/What-are-MSME-its-Role.pdf
 https://www.greatlakes.edu.in/herald/pdfs/march-2017/article-5.pdf
6.1 INTRODUCTION
The MSME sector is a significant pillar of Indian economy as it contributes enormously to the growth and
development of Indian economy with a vast network of around 30 million units, creating employment of
about 70 million, manufacturing more than 6000 products, contributing 45% to manufacturing output
and about 40% of exports, directly and indirectly. This sector even assumes more prominent significance
now as the nation moves towards a quicker, inclusive and comprehensive growth agenda. Moreover, it
is the MSME sector which can help realise the target of proposed National Manufacturing Policy of
raising the share of manufacturing sector in GDP from 16% at present to 25% by the end of 2022.
6.2 MSME
MSME is an abbreviation for Micro, Small, and Medium Enterprises. The MSME, is an autonomous firm
with explicit working and monetary limits laid out by the states or groups of states with distinct logics,
cultures, interests and entrepreneurial spirit.
MSMEs, according to Liberto (2020), are businesses with earnings, assets and many employees that
fall below a legal threshold in each nation or group of countries. Each country has its own definition of
MSME. This sort of business is frequently seen as the lifeblood of both emerging and mature economies.
MSMEs employ a large number of people in emerging economies, accounting for around 45 percent of
overall employment and 33 percent of GDP, according to the Organisation for Economic Cooperation
and Development (OCED).
MSMEs, without a question, play a critical role in the economic growth of many countries. (The new SME
definition.) They are a key source of business skills, innovation, and employment. Model declaration and
user guide, 2018.
What is the significance of MSMEs? Opportunities to encourage the growth of a country’s economy may
be found through MSMEs, which account for more than 95 percent of all businesses in most nations. If
MSMEs have the resources they need to stay afloat and flourish, they will make a big contribution to
their economies.
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UNIT 06: Micro, Small and Medium Enterprises JGI JAIN
6.2.1 Growth of MSME in India

Micro, Small and Medium Enterprises (MSMEs) assume a significant part in the Indian economy. MSMEs
contribute essentially to the Indian economy as far as Gross Domestic Product (GDP), exports and
employment generation is concerned. Their contribution to the Indian economy is as per the following:
 MSMEs contribute 30% of India’s GDP.
 The part of MSME-related products and items in total exports from India during 2018-19 is 48 percent.
 The assessed number of laborers in unincorporated non-agribusiness MSMEs in the nation is 11
crores.
95 percent of industrial units and almost half of all exports are in the MSME sector. Furthermore, the
industry employs about 100 million people, making it the second-largest source of employment after
agriculture. As a result, the development of this sector is crucial for inclusive prosperity and India’s
future.
The food and agricultural industries employ the majority of Micro and Small Businesses. Medium-sized
businesses mostly serve the automotive, pharmaceutical, textile and chemical industries. You will look
at the 5000 medium-sized businesses that employ roughly 2 lakh people and how they can expand into
major businesses in the future. There is no precise definition of a huge corporation.
However, for the purposes of this discussion, let us suppose that large-scale businesses are those with
annual revenues of more than $500 million and employ more than 1000 people. According to Capital
IQ, India has over 800 of these companies, which comprise both public and private corporations. These
businesses are not only more productive (approximately 11 times as productive as a typical business),
but they are also the backbone of our economy, accounting for about 40 percent of all exports and
contributing revenues equal to 48 percent of nominal GDP.
The Transition!
MSMEs are India’s economic backbone. However, in order for India to develop rapidly in the coming
decade, these MSMEs must mature into major corporations. Large enterprises employ a higher
percentage of people in advanced economies than in other nations. These businesses are often more
productive and have greater market connections. They may reduce manufacturing costs while also
making high-quality investments and gaining access to the markets they require to flourish. They
have a higher likelihood of innovating, exporting, and adhering to international quality standards. In
comparison to small businesses, they often offer better wages and provide more stable employment.
The transfer of mid-size businesses upward will not be simple, but it is important for the economy’s
overall growth. As manufacturing shifts from small to large businesses, resources are better used,
economies of size and scope are realised, and investments in innovation, standards, and human capital
are made. Productivity, which is a driving factor of expansion, is ultimately linked to scale.
The following actions are required to unlock the MSME sector in India and assist mid-sized businesses
in making the transition to large-scale businesses:
 Support of MSME firms through industrial policies (Ease of Doing Business)
Ease of doing business is especially important for the MSME sector, which has the potential to
drive India’s economic growth, and it may be achieved through state and federal policies such
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as incentives, regulatory approvals and labour regulations. By reducing laws and processes and
offering clear guidance on future regulatory needs, the government might continue to strive toward
making it easier to do business in India. Industrial policies aiming at promoting scale in general or
the development of specific industries and activities often assist MSME enterprises significantly.
These strategies attempt to reorient economic growth toward manufacturing in order to boost
productivity and gain access to global value chains. Economies of scale and scope, which are a key
aspect of large businesses, are especially significant in manufacturing.
 Promotion of Foreign Direct Investment (FDI)
In various areas, India has one of the most liberalised FDI policies in the world, allowing 100 percent
FDI via the automatic method. The MSME sector is also included by the FDI policy. A liberalised FDI
policy should be followed to guarantee that, in addition to attracting investment, new and cutting-
edge technology is introduced into the nation to increase the MSME sector’s overall productivity and
competitiveness.
Multinational firms can be attracted via FDI, which can help to accelerate job creation, tax income,
and aggregate productivity. Almost every economy has policies and investment plans targeted at
attracting huge multinational corporations to set up shop in their country. In a short period of time,
these techniques can result in huge increases in the share of major enterprises.
 Development of MSME clusters
A cluster is a collection of businesses that produce the same or comparable products/services and are
located in a recognisable and, to the extent possible, continuous region. Automobiles, food processing,
textiles and pharmaceuticals should all have strategies to support MSME clusters. Keeping this in
mind, the government has selected the Cluster Development method as a fundamental strategy for
increasing the productivity and competitiveness of MSMEs and their collectives in the country, as
well as boosting their capacity. These clusters can work as a single giant company, using scale and
breadth to boost production and employment in their respective areas.
 Use of technology
Technology is increasingly being viewed as a business enabler and a critical tool for improving
process efficiency and uniformity. A strong focus on applying new-age technology, creating
indigenous technology, and technological collaboration with global partners is anticipated to play
a critical role in MSMEs building a competitive edge to operate in the global market. For MSME to
scale up their operations and become part of global value chains, technology is critical.
 Access to capital
MSMEs’ potential to promote growth and create jobs is restricted by their ability to obtain suitable
financing. The International Funding Corporation (IFC) estimated the overall demand for debt and
equity finance by MSMEs in India at $1.4 trillion in 2018, with $1.1 trillion in loan demand and $283
billion in equity demand.
Government can offer the essential support to mid-size enterprises to compete on a global scale and
expand by implementing suitable policy interventions and providing support to the MSME sector.
Access to institutional money should not be a barrier to a mid-sized company’s expansion into a
huge corporation.
Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE), Credit Linked Capital Subsidy
for Technology Upgrading (CLCSS), Micro & Small Enterprises Cluster Development (MSE-CDP),
Scheme of Fund for Regeneration of Traditional Industries (SFURTI), and Scheme for Promotion of
Innovation, Rural Industries and Entrepreneurship (ASPIRE) are just a few of the MSME-focused
schemes.
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 Growth imperative
To take advantage of frontier manufacturing prospects in the coming decade, India will need to
quadruple the number of large-scale businesses, with over 1,000 medium businesses expanding
up from their existing levels. By 2030, addressing a ‘missing middle’ of midsize enterprises might
allow 1,000 additional major firms to develop. Improving access to financing and removing other
impediments to doing business will aid the best-performing businesses of all sizes in scaling up and
becoming more globally competitive.
The Indian government has also focused on guaranteeing the growth of homegrown businesses.
The government established the ‘Aatma Nirbhar Bharat’ plan, which includes a host of incentives,
subsidies, and budgetary support aimed at boosting indigenous industry.
The overarching objective is to boost local enterprises’ and industries’ production and export
capacity in order to place them at the centre of global supply networks. If India is to become a $5
trillion economy, it must guarantee that the MSME sector receives the most prominence in the
country’s economic storey. The Production Linked Incentive (PLI) plan, which was just announced,
aims to guarantee that India has worldwide champions in each area. Mid-size businesses will also
benefit from the plan, which will help them develop and compete with global competitors. This not
only helps MSMEs expand, but it also helps the country become a global manufacturing powerhouse.
The PLI plan will also result in investments in innovation, research and development and technology
upgrades for MSME-developed and deployed technologies.
India is at a crossroads, with a potential to improve its manufacturing capabilities to meet domestic
demand as well as global markets. Both the national and state governments, as well as enterprises,
have the authority and the resources to propel India towards a manufacturing-based economy with
significant growth potential. To meet the need for sustainable economic development, meaningful
job opportunities, and improved productivity, an ambitious vision backed by a realistic action plan
is required.
6.2.2 Role and Importance for the Economic Growth
Role of MSMEs in Indian economy

Since its inception, the MSME sector has shown to be a very active sector of the Indian economy. MSMEs
create and produce a wide range of items for both domestic and international markets. They have aided
in the establishment and growth of the khadi, village, and coir industries. They have coordinated and
worked with relevant ministries, state governments and stakeholders to help rural regions develop.
MSMEs have been critical in offering job possibilities in rural regions. In comparison to huge companies,
they have aided in the industrialisation of these areas at a cheap capital cost. The MSME sector has
made a significant contribution to the country’s socioeconomic growth by acting as a complement to
major industries.
MSMEs also contribute and play an important part in the country’s growth in a variety of ways, including
minimal investment, operational flexibility, site mobility, low import rates, and a large contribution to
local output.
The data in the table below comes from the Central Statistics Office (CSO) and the Ministry of Statistics
and Programme Implementation (MOSPI).
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Table 1 shows the contribution of MSMEs in country’s economy at current price:
Table 1: Contribution of MSMEs in Country’s Economy at Current Price
Year MSME- Growth (%) Total Addition Share of Total GDP Share of
Addition of of Gross Value MSME in MSME in
Gross Value GVA (%) GDP (in %)
2011-12 2622574 – 8106946 32.35 8736329 30
2012-13 3020528 15.17 9202692 32.82 9944013 30.40
2013-14 3389922 12.23 10363153 32.71 11233522 30.20
2014-15 3704956 9.29 11504279 32.21 12467959 29.70
2015-16 4025595 8.65 12566646 32.03 13764037 29.20
2016-17 4405753 9.44 13841591 31.83 15253714 28.90
Source: Central Statistics Office (CSO), Ministry of Statistics & Programme Implementation (MOSPI)
Importance of MSMEs for the Indian Economy

MSMEs are widely recognised as a source of economic growth and a way of supporting equitable
development across the world. They are noted for having the highest rate of economic growth. MSMEs
have propelled India to new heights because of their low-investment needs, flexibility in operations, and
ability to produce relevant local technology.
1. MSMEs employ over 120 million people, making them the second-largest source of employment after
agriculture.
2. It provides roughly 6.11 percent of GDP from manufacturing and 24.63 percent of GDP from service
activities, with approximately 45 lac units across the country.
3. As India strives to become a $5 trillion economy, the MSME ministry aims to raise its contribution to
GDP by up to 50% by 2025.
4. Approximately 45 percent of India’s total exports.
5. MSMEs encourage inclusive growth by creating job opportunities, particularly for persons from
lower socio-economic groups in rural regions.
6. MSMEs in tier-2 and tier-3 cities assist in the creation of chances for individuals to utilise banking
services and products, perhaps resulting in the final inclusion of MSMEs’ contribution to the
economy.
7. MSMEs encourage innovation by assisting aspiring entrepreneurs in developing innovative goods,
hence increasing business rivalry and fueling development.
The MSME sector in India is a quiet supporter of the national economy, acting as a buffer against global
economic shocks and adversity. As a result, you can claim that India is on its way to becoming a strong
global economy thanks to a quiet revolution fueled by MSMEs.
6.2.3 Challenges Faced by MSME Sector

Some of the challenges that can cripple the MSME industry are as follows:
1. Lack of appropriate credit from banks: MSMEs encounter more difficulties in obtaining credit
from banks. The bank loan process is quite long, requiring a great deal of documents and a large
processing charge. Banks are not lending to small businesses in sufficient amounts.
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2. MNC Competition: MSME’s are up against a lot of competition from multinational corporations.
Because global corporations provide high-quality items at a reasonable cost.
3. Inadequate infrastructure: MSME’s are growing at a breakneck pace, yet infrastructure is lacking.
Their manufacturing capacity is quite low, and their production costs are very expensive, due to
insufficient infrastructure.
4. Inaccessibility: Resources are scarce due to a lack of raw materials, labour and other inputs on the
market. As a result, producing the items at a reasonable cost is quite challenging.
5. Dearth of modern technology: There is a lack of awareness about innovative manufacturing
technologies in the MSME sector. They manufacture things utilising traditional ways.
6. Lack of marketing channel distribution: MSME’s are not embracing creative concepts for product
distribution and advertising. Due to inadequate advertising and bad marketing channels, sales are
extremely low.
6.3 MSME DEVELOPMENT ACT, 2006

A single comprehensive act for the growth and regulation of small businesses has been a long demand
of the sector, in order to liberate it from a variety of rules and regulations, as well as inspections, which
it had to deal with limited awareness and resources. Stakeholders have stressed the necessity at various
fora on several occasions. Committees such as the Abid Hussain Committee (1997) and the Study Group
under Dr. S.P. Gupta presented proposals to establish a solid legal framework for the small sector to
relieve it of the obligations to comply with many laws and regulations (2000).
While small-scale industries remained essential to the economy, small-scale services have grown as a
key sector that contributes significantly to the economy and employs millions of people in recent years.
As a result, it became essential, as is customary across the world, to address the needs of both small
scale industries and services at the same time and to classify them as small businesses. The natural
movement of small businesses to medium businesses in a fast-growing economy such as ours must be
fostered via proper policy interventions and legal framework. With these goals in mind, the government
enacted a special law for micro, small, and medium businesses called the Micro, Small and Medium
Enterprises Development Act, 2006.
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006

The Micro, Small and Medium Enterprises Development Act, 2006 targets at enabling and assisting
the advancement, development improvement and upgrading the competitiveness of micro, small and
medium enterprises and for matters connected therewith or incidental thereto. The Act is functional
from second October 2006.
Definition Of Micro, Small & Medium Enterprises:

As per the provisions of Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the
Micro, Small and Medium Enterprises (MSME) are grouped in two categories:
a. Enterprises engaged in manufacturing: The undertakings occupied with the assembling or
creation of merchandise relating to any industry indicated in the first schedule to the industries
(Development and regulation) Act, 1951). The manufacturing enterprise are characterised in terms
of investment in plant & machinery.
b. Enterprises engaged in providing services: The undertakings occupied with giving or delivering of
services and characterised in terms of investment in gear and equipment’s.
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The limit for investment in plant and machinery/equipment for manufacturing/service enterprises, as
notified, vide S.O. 1642(E) dtd.29-09-2006 are as under:
Table 2 shows manufacturing and service sector:
Table 2: Manufacturing and Service Sector
Manufacturing Sector
Manufacturing Sector Investment in plant & machinery

Micro Enterprises Does not surpass 25 lakh rupees
Small Enterprises More than 25 lakh rupees yet doesn’t surpass 5 crore rupees
Medium Enterprises More than 5 crore rupees yet doesn’t surpass 10 crore rupees
Service Sector
Enterprises Investment in equipment’s

Micro Enterprises Doesn’t surpass 10 lakh rupees:
Small Enterprises In excess of 10 lakh rupees yet doesn’t surpass 2 crore rupees
Medium Enterprises More than 2 crore rupees yet doesn’t surpass 5 crore rupees
Object and Aim of the MSMED Act
MSMED targets at facilitating the promotion, advancement, improvement and enhancing the competing
intensity of small and medium scale enterprises and tries to:
 Furnish legal meanings and definitions of “small enterprise” and “medium enterprise”.
 Provide the foundation of a National Small and Medium Enterprises Board, a high-level forum
comprising of stake holders for participative audit of and making proposals on the polices.
6.4 MSME DEVELOPMENT INSTITUTE

The Micro, Small and Medium Enterprises Development Institute is situated in Okhla, New Delhi. It is a
field office of the Development Commissioner (MSME), Ministry of Micro, Small and Medium Enterprises,
Government of India.
For the progression, advancement, and up-gradation of small-scale units which are situated in the
locale of State of Delhi, District Faridabad of Haryana, Locale Gautam Budh Nagar and Ghaziabad
of Uttar Pradesh the Micro, Small and Medium Enterprises Development Institute provides a wide
range of services. The services include giving direction, consultancy and help on projects and areas
of investment including technical information for the selection of appropriate plant and machinery,
process of manufacturing, designing of products diversification, plant lay out preparation and so forth.
The Micro, Small and Medium Enterprises Development Institute helps the Micro, Small and Medium
Enterprises in improving and enhancing their knowledge and insights and also upgrading their
technical skills through organised management and skill expertise upgradation programmes.
8
Consultancy
The Micro, Small and Medium Enterprises Development Institute is one of the pioneer and leading
consultancy organisation offering specialised technical support services in field of:
 Identification of product
 Formulation of project
 Appropriate machinery selection
 Industrial designing
 Modernisation
 Project profiles preparation and evaluation of project
 Support service which is technical in nature
 Special promotional program for SSI including ecological activities, environmental projects,
pollution
 Up gradation/modernisation of SSI
 Specialised program on ISO-9000
 Development of product
6.5 NEED OF MSME FOR EMPLOYMENT AND BUSINESS

The need and importance of MSME in India is further explained below:
1. It creates large-scale employment: In order to establish a new firm in this industry, enterprises
that are inclusive require less money. Furthermore, it provides a large number of opportunities for
jobless individuals to take advantage of. India generates over 1.2 million graduates every year, with
approximately 0.8 million engineers. So far, no economy has been able to offer such a vast number
of freshmen in a single year. MSME is a godsend for India’s young talent.
2. Economic stability in terms of growth and leverage exports: It is India’s most important driver,
accounting for 8% of the country’s GDP. Because of MSME’s contribution to manufacturing, exports,
and jobs, it benefits other industries as well. MNCs are increasingly purchasing semi-finished and
auxiliary items from small businesses, such as clutches and brakes by vehicle manufacturers. It
is beneficial in establishing a relationship between MSME and large corporations, even after the
adoption of the GST. Forty percent of the MSME sector has registered for GST, which has helped the
government raise income by 11 percent.
3. Encourages inclusive growth: For numerous years, the Ministry of Medium, Small and Medium-
sized Enterprises has prioritised inclusive growth. Poverty and deprivation, on the other hand,
constitute a barrier to India’s progress. Furthermore, it comprises socially underprivileged groups,
which is a major concern for the Ministry of MSME.
4. Cheap labour and minimum overhead: One of the key issues in large-scale firms is to retain human
resources through an effective human resource management professional manager. However,
when it comes to MSME, the labour need is lower, and it does not necessitate the use of a highly
qualified employee. As a result, the owner’s indirect expenditures are similarly minimal.
5. Simple management structure for enterprises: MSME might begin with few resources within the
owner’s control. Making decisions becomes more easier and more efficient as a result of this. A major
firm, on the other hand, needs an expert for every departmental function due to its complicated
organisational structure. A tiny business, on the other hand, does not need to engage an outside
professional to handle it. The proprietor is capable of taking care of himself. As a result, it could run
on its own.
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6. The main role in the mission of “Make in India”: The Prime Minister of India’s trademark campaign,
“Make in India,” has been simplified thanks to MSME. It serves as a foundation for making these
ambitions a reality. Furthermore, the government has urged the banking institution to offer more
credit to small and medium-sized businesses.
6.6 SICKNESS IN MSME

An industry or enterprise is viewed as sick unit when its position in terms of finance and accounts
isn’t satisfactory and it keeps on getting worse year after year. That industrial unit incurs losses and
its capital reserves may be loosened up in course of time. Small Scale Industries are more inclined to
sickness as compared to medium and large scale industries Sickness in the MSME sector is concerning.
In the MSME sector, the concept of this sickness disease has evolved through time.
According to the extant guidelines, a Micro or Small Enterprise (as characterised in the MSMED Act
2006) might be said to have ended up being ‘sick’, if
 Any of the borrower account of the undertaking remains NPA (Non performing asset) for three
months or more
OR
 There is disintegration and decrease in the net worth because of aggregated losses to the degree of
half of its net worth during the past accounting year.
This criterion empowers and help banks to recognise sickness at a beginning phase and facilitate
corrective action for revival of the sick unit.
6.7 REASONS AND REMEDIES FOR SICKNESS OF MSMES

MSMEs have been plagued by a slew of serious issues, many of which are directly related to the country’s
economic and social growth. India, being a developing country, is not immune to the aforementioned
problems. MSMEs are fraught with a plethora of issues. Major factors for sickness/incipient sickness
in the MSME sector were found in the fourth All India Census of MSME sector. Table No. 3 displays the
different reasons for illness in MSMEs. The data clearly shows that the major causes of MSMEs’ disease
are a lack of product demand and a lack of operating capital. Nearly 42 percent of the total ill units are
suffering from a lack of demand for their product, while more than 20 percent of the total sick units are
experiencing a lack of working capital. Table 3 shows the percent for sickness/incipient sick units:
Table 3: Percent for Sickness/Incipient Sick Units
Percent for sickness/incipient sick units

Reason for sickness/incipient sickness
Registered MSME sector Unregistered MSME sector
Lack of demand 71.6 84.1
Shortage of working capital 48.0 47.1
Non-availability of raw material 15.1 15.2
Power shortage 21.4 14.8
Labour problems 7.4 5.1
Marketing problems 44.5 41.2
Equipment problems 10.6 12.9
Management problems 5.5 5.1
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Significant Causes and Reasons of MSME Sickness

There are numerous and differed explanations behind sickness in MSME sector. Some of these are:
 Deficiency of working capital, delay in sanction of working capital and delay between authorisation
of term credit and working capital.
 Out of date, i.e, not up to date and poor technology
 Issue connected with accessibility of raw material
 Deficient demand and other marketing issues
 Inconsistent supply of power
 Problems and issues related to labour
 Infrastructural limitations and constraints
 Deficient regard for R&D
 Redirection of assets and resources
 Failure of the units to confront developing rivalry because liberalisation and globalisation
 Inefficient and unproductive management
Remedies for Sickness of MSME

a. Identifying sickness at initial stage: Sickness in small-scale enterprises is not a sudden occurrence;
rather, it is a protracted process that takes 5 to 7 years to erode a unit’s health beyond repair. As
a result, the first and most important step in detecting and reducing occupational sickness is to
identify and recognise the illness early on. The early stages of illness must be detected.
b. Improving infrastructure: Setting up industrial parks can help to enhance infrastructure.
Infrastructural difficulties may be handled by upgrading highways, rivers, and developing
telecommunication infrastructure, among other things.
c. Technology up-gradation: Financial firms may contribute funds to the adoption of new technologies.
Similarly, training in the use of cutting-edge technologies to solve technological issues may be
offered.
d. Liquidation: When there is no hope of reviving the business, it is preferable to close it down.
e. Government Interventions: In order to prevent illness, the government must intervene. A periodic
study of financial statements can aid in the early detection and prevention of illness.
In order to prevent illness, the government must intervene. A periodic study of financial statements
can aid in the early detection and prevention of illness.
f. Financial support: For granting loans to the SSI, lending companies must ease their long process
and other regulations. To fight the spread of illness, financial institutions should provide financing
to the SSI sector as soon as possible.
g. Training: To compete with large-scale enterprises and international corporations, aright atmosphere
must be developed in which an entrepreneur is educated and has sufficient information, skill and
experience concerning the internal and external environment of business.
h. Rehabilitation: Sick units that have the potential to be rehabilitated should be treated with care.
Rehabilitation is a treatment option for industrial units that have already developed illnesses or are
on the point of collapsing.
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 The MSME sector is a significant pillar of Indian economy as it contributes enormously to the growth
and development of Indian economy
 MSME is an abbreviation for Micro, Small and Medium Enterprises.
 Micro, Small and Medium Enterprises (MSMEs) assume a significant part in the Indian economy.
MSMEs contribute essentially to the Indian economy as far as Gross Domestic Product (GDP),
exports, and employment generation is concerned.
 95 percent of industrial units and almost half of all exports are in the MSME sector. Furthermore,
the industry employs about 100 million people, making it the second-largest source of employment
after agriculture.
 Since its inception, the MSME sector has shown to be a very active sector of the Indian economy.
MSMEs create and produce a wide range of items for both domestic and international markets.
They have aided in the establishment and growth of the khadi, village and coir industries.
 MSMEs encourage innovation by assisting aspiring entrepreneurs in developing innovative goods,
hence increasing business rivalry and fuelling development.
 MSMEs encounter more difficulties in obtaining credit from banks. The bank loan process is quite
long, requiring a great deal of documents and a large processing charge. Banks are not lending to
small businesses in sufficient amounts.
 The Micro, Small and Medium Enterprises Development Act, 2006, targets at enabling and assisting
the advancement, development, improvement and upgrading the competitiveness of micro, small
and medium enterprises and for matters connected therewith or incidental thereto. The Act is
functional from 2nd October 2006.
 The Micro, Small and Medium Enterprises Development Institute helps the Micro, Small and Medium
Enterprises in improving and enhancing their knowledge and insights and also upgrading their
technical skills through organised management and skill expertise upgradation programs.
 Sickness in the MSME sector is concerning.
 An industry or enterprise is viewed as sick unit when its position in terms of finance and accounts
isn’t satisfactory and it keeps on getting worse year after year. That industrial unit incurs losses and
its capital reserves may be loosened up in course of time.
 Sick units that have the potential to be rehabilitated should be treated with care. Rehabilitation is
a treatment option for industrial units that have already developed illnesses or are on the point of
collapsing.
6.9 GLOSSARY
 MSME: Micro, Small and Medium Enterprises

 Investment: An asset or object purchased with the intention of generating income or appreciation
 Capital: The cash that a business has accessible to pay for its everyday tasks and to support its
future development
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6.10 CASE STUDY: INDIA’S MICRO, SMALL AND MEDIUM ENTERPRISES (MSME)
SECTOR
Case Objective
This study aims to show a picture of the situation of MSME’s in India.
India’s Micro, Small and Medium Enterprises (MSME) sector is poised for a mega transformation in 2020,
with the launch of an Alibaba-like e- marketplace, trendy yet affordable khadi products to appeal to the
masses and digital data-based credit ratings to help entrepreneurs avail loans. However, the MSME
sector is often considered the bulwark of the economy as it contributes around 29% to the GDP and 48% to
the Indian exports. There is an urgent need of major reforms and policy interventions towards ensuring
timely availability of low-cost credit, improving ease of doing business and technological upgradation,
to take on the formidable challenge of creating millions of jobs, ensure equitable distribution of national
income and achieving large-scale import substitution. The World Bank has recently approved loan
worth $750 million to address the immediate liquidity and credit needs of India’s MSME sector that has
been severely impacted by the Covid-19 crisis. This will give a push to the Atmanirbhar Bharat vision of
the government.
Questions
1. Identify which of the following is not an advantage of the MSME sector. (Choose the correct
alternative)
a. It is suited for the utilisation of local resources.
b. It is helpful in creation of employment opportunities
c. It requires more capital than labour
d. It ensures equitable distribution of income in the country.
(Hint: MSME requires less manpower or labour)
2. MSME sector suffered to a large extent in COVID-19 pandemic situation due . (fill up the
blank with correct answer)
(Hint: Liquidity crunch)
3. State whether the given statement is true or false. State the reason also.
Small Scale Industries are the largest employer of the labour force in India.

1. What do you mean by MSME.
2. Discuss the growth of MSME in India.
3. Explain the role of MSMEs in Indian economy.
4. Discuss the Sickness in MSME
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1. MSME is an abbreviation for Micro, Small, and Medium Enterprises. The micro, small, and medium
enterprise, or MSME, is an autonomous firm with explicit working and monetary limits laid out
by the states or groups of states with distinct logics, cultures, interests, and entrepreneurial spirit.
Refer to Section MSME.
2. Micro, Small and Medium Enterprises (MSMEs) assume a significant part in the Indian economy.
MSMEs contribute essentially to the Indian economy as far as Gross Domestic Product (GDP),
exports, and employment generation is concerned. Refer to Section MSME.
3. Since its inception, the MSME sector has shown to be a very active sector of the Indian economy.
MSMEs create and produce a wide range of items for both domestic and international markets.
They have aided in the establishment and growth of the khadi, village, and coir industries. They
have coordinated and worked with relevant ministries, state governments, and stakeholders to help
rural regions develop. Refer to Section MSME.
4. According to the extant guidelines, a Micro or Small Enterprise (as characterised in the MSMED Act
2006) might be said to have ended up being Sick for various reasons. Refer to Section Sickness in
MSME.
 https://msme.gov.in/
 https://www.worldbank.org/en/topic/smefinance
 Discuss the role and functions of MSME in your country with your friends.
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UNIT
07 Business Environment of Service

Sector
Names of Sub-Units
Service Sector, Importance of Service Sector in India, Trends in Service Sector Growth, Banking
Reforms and Challenges, Role of Banks, Public Sector Banks, Private Banks, Foreign Banks, Indian
Financial System
Overview
The unit begins by explaining the concept and importance of service sector. Further, it discusses
the trends in service sector growth. The unit explains the reforms and challenges in banking sector.
Further, it discusses the role of banks and types of banks. It also discusses the Indian financial system
- RBI, commercial banks, Co-operative banks and the contribution of banks towards the growth of
business. The unit also explains the importance and contribution of NBFC to unorganised sector of
India.
Learning Objectives

 Explain the concept and importance of service sector
 Describe the trends in service sector growth and reforms, challenges in banking sector
 Discuss the role of banks, types of banks and Indian financial system
 Summarise the contribution of banks towards the growth of business
 Interpret the importance and contribution of NBFC to unorganised sector of India
JGI JAIN
Learning Outcomes

 Assess the concept, trends and importance of service sector
 Appraise the reforms, challenges in banking sector
 Evaluate the role of banks, types of banks and Indian financial system
 Examine the contribution of banks towards the growth of business
 Analyse the importance and contribution of NBFC to unorganised sector of India
 https://www.ibef.org/industry/services.aspx#:~:text=India’s%20services%20sector%20covers%20
a,and%20services%20associated%20with%20construction.
 https://www.business-standard.com/article/finance/indian-banking-challenges-reforms-
expected-outcomes-114031900930_1.html
 https://www.geeksforgeeks.org/role-of-service-sector-in-modern-economic-development-of-
india/
7.1 INTRODUCTION
The services industry not only accounts for the majority of India’s GDP, but it also attracts considerable
foreign investment, contributes considerably to export, and employs a big number of people. Trade,
hotel and restaurant services, transportation, storage and communication, financial, insurance, real
estate, business services, community, social and personal services, and construction services are all
part of India’s services industry. India’s expansion in the services sector is a rare example of classic
economic growth patterns leapfrogging. In the 50 years since India’s independence, the service sector
has contributed more than 60% of the country’s GDP. However, it still only employs around a quarter of
the workforce and as a result, agriculture (which has remained stable) and industry (which has yet to
reach its full potential) continue to employ the majority of our workforce. This poses a unique challenge
for India’s future economic growth, necessitating out-of-the-box ideas to enable India quickly realise its
service industry’s potential.
7.2 SERVICE SECTOR

The service sector which is also known as tertiary sector is the part of economy that produces and offers
different types of intangible services, rather than just providing tangible goods such as vehicles and
TVs. Service sector holds the position of largest sector in developed nations and economies. Industries
like provider of financial services, information technology (IT) outsourcing firms, research based KPOs,
providers of healthcare and medical services, entertainment industries etc. are part of service sector.
Service-related industries or service sector is growing rapidly day by day and this growth might be
fuelled by expansion of information, data, knowledge sharing and advancements in technologies -
particularly, improvements in communication technology.
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UNIT 07: Business Environment of Service Sector JGI JAIN
7.2.1 Importance of Service Sector in India

The significance of service sector in India has been expanding consistently without fail. With the
ceaseless expansion of services sector, both in terms of volume and diversity, the significance of services
sector has been increasing at a high speed. Coming up next are a portion of the importance of services
sector in Indian economy:
i. GDP contribution: At current factor costs, the service sector provides the most to the country’s net
national product (national income). According to the year 2011-12, the service industry generated
55.7 percent of national GDP at factor cost (at current prices) in comparison to 50.8 per cent in 2010-
11 and 30.5 per cent in 1950- 51.
ii. Helps industrialisation: The performance and improvement of transportation, communication,
power, banking, and other infrastructure in a country determines the growth of industries. Raw
materials, completed items and labourers are transported through the transportation system.
Communication aids in the expansion of the industrial products market. Electricity and banking
services contribute to the growth of remote-area companies.
iii. Expands agriculture: By offering greater network facilities, the service sector aids in the
development of agricultural output. It aids in the transportation of raw resources and finished
items from one location to another.
iv. Remove Regional Imbalances: This industry offers a well-functioning transportation and
communication system. It also offers adequate financial services, as well as expanding education
and medical facilities in the country’s underdeveloped regions. As a result, it aids in the elimination
of the country’s regional imbalances and inequities.
v. Growth of market: This industry offers a variety of services to the agricultural and industrial sectors.
Though on the other hand, it contributes to the development of appropriate markets for agricultural
and industrial completed goods as well as raw materials and semi-finished commodities.
vi. High quality of life: Better services in the fields of transportation and communication, banking
and insurance, education and health, and other sectors must assist a country prepare the way for
economic development by raising the country’s quality of life or standard of living. It also aids in the
improvement of a country’s HDI (Human Development Index).
vii. Boost productivity: This industry aids the workforce by providing enough technical education
and medical care. Furthermore, a well-organised network of transportation and communication
systems improve worker mobility and information. All of this improves the laborer’s skill and
efficiency, resulting in an improvement in productivity (laborer’s ability to produce).
viii. Rise in international trade: A well-developed service sector, particularly in transportation,
communication, banking, and other areas, aids in the expansion of international commerce. As a
result, it will contribute to the country’s foreign exchange reserve.
7.2.2 Trends in Service Sector Growth

India’s service sector has proven to be the economic uplifter, providing a significant amount of the
country’s GDP. The government is also taking initiatives and enacting policies to liberalise and improve
the industry while maintaining the necessary and fundamental rules. It would be an exciting trip for the
Indian services industry to attain its anticipated levels, since the sector is influenced by both domestic
and global influences. Until recently, the overall outlook for this burgeoning industry appears to be
positive.
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With a share of 66.1 percent of the index, the service industry is a major contributor to our country’s
GDP. In the 2015-16 fiscal year, the industry grew at a rate of almost 10 percent each year. The sector,
which is attracting a lot of foreign investment, is creating additional job possibilities every year. Trade
and transportation, hotels, restaurants, telecommunications, financial services, real estate, business
services, social and personal services, services related to building and infrastructure development and
the recently developed e-commerce sector are all part of India’s service industry.
Ecommerce, a burgeoning service business sector, is altering the country’s retail chain operations. The
sector is sweeping away conventional trading techniques, thanks to huge companies such as Amazon,
Flipkart, and Snapdeal. Despite the fact that the figures for the E-commerce business in 2016 were not as
promising as projected, estimates suggest that it would expand at a y-o-y rate of 5 percent to become a
$120 billion sector by 2020. In 2016, the industry increased by only 12 percent, compared to a 180 percent
increase in 2015. The sales revenue for the 2015-16 fiscal year was $ 30 billion.
The expansion of the services sector in India is regulated and influenced by both domestic and
international actions and influences. In the fiscal year 2016-17, India’s service industry is predicted to
increase at an annual pace of 8.8 percent. India’s services industry is the second fastest expanding behind
China’s, which is increasing at a rate of 10.9 percent. For the financial years 2001-2014, the growth of the
services sector (6.8 percent) was higher than the increase of total GDP (4.7 percent).
7.3 BANKING REFORMS AND CHALLENGES

Banking Reforms in India in the Twenty-First Century
The important financial sector reforms in India in recent years are listed below. All of the changes are
aimed at building a more efficient and stable financial sector, which helps to boost growth.
The following are major reforms:
 With the enactment of the Banking Laws (Amendment) Bill in 2011, additional banks and international
investors have been able to enter the country. New bank entrance is expected to spur competition,
allowing banks to enhance their operational efficiency.
 The banking sector’s FDI cap has been raised from 49 percent to 74 percent.
 A policy of liberal branch licensing has been implemented.
 To fulfill the priority sector lending objectives, the RBI has released guidelines for priority sector
lending certificates (PSLCs).
 The Reserve Bank of India has enabled banks to raise their capital by retaining extra reserves tied
to property holdings, foreign currency translation reserves, and deferred tax assets of up to ` 35,000
crores (state-run banks) and ` 5,000 crores (privately held banks).
 Scheduled commercial banks are allowed to provide non-fund-based services, such as partial credit
enhancement (PEC), to clients who do not have a fund-based facility with any of India’s banks.
 The Ministry of Finance intends to provide capital support to state-owned banks by around ` 80,000-
100,000 crores in order to help them raise capital.
 As part of the Pradhan Mantri Jan Dhan Yojna (PMJDY) financial inclusion initiative, nearly 31 crore
bank accounts were opened by June 2018.
 In 2015, the National Investment and Infrastructure Fund (NIIF) were established as a special fund
to deal with bank stressed assets.
 The Reserve Bank of India has envisioned a new type of bank called a payments bank (2015). These
financial institutions can take a restricted deposit, which is currently limited to one lakh per customer.
4
These banks may or may not offer loans or credit cards, but they may offer checking and savings
accounts. Payments banks may provide ATM and debit cards, as well as online banking and mobile
banking services. Under Section 22 of the Banking Regulation Act of 1949, the banks will be licensed
as payment banks and registered as public limited companies under the Companies Act of 2013.
There are six different types of payment banks:
1. Airtel Payments Banks Ltd.
2. Fino Payments Bank Ltd.
3. India Post Payments Bank Ltd.
4. Jio Payments Bank Ltd.
5. NSDL Payments Bank Ltd.
6. PayTm Payments Bank Ltd.
In 2016, the RBI approved 10 businesses to establish small financing banks in order to achieve the goal of
financial inclusion. All 10 have since earned the required licences. A tiny finance bank is a specialty bank
that serves the requirements of those who have never used a standard bank. Each of these banks must
open at least 25 percent of its branches in areas where there are no other banks (unbanked regions).
A small finance bank’s net credits should be made up of 75 percent loans to priority sector enterprises
and 50 percent of the loans in its portfolio must be less than ` lakh (US$38,000).
There are 10 small financing institutions to choose from:
1. AU Small Finance Bank Ltd.
2. Capital Small Finance Bank Ltd.
3. Equitas Small Finance Bank Ltd.
4. ESAF Small Finance Bank Ltd.
5. Fincare Small Finance Bank Ltd.
6. Jana Small Finance Bank Ltd.
7. North East Small Finance Bank Ltd.
8. Suryoday Small Finance Bank Ltd.
9. Ujjivan Small Finance Bank Ltd.
10. Utkarsh Small Finance Bank Ltd.
Banking challenges
The most visible consequence of the reforms has been an increase in competition and a negative impact
on bank profitability. The issue for banks currently is to deal with the reduction of the overall profit
margins while simultaneously increasing efficiency.
Other challenges incorporate the following:
 Reinforcing and adopting better technology and innovation to satisfy consumer demands,
 Honing management abilities,
 Increasing customer focus,
 Honing risk management skills, and so on.
With increased competition, banks must solve the aforementioned concerns if they are to thrive in the
new millennium.
5
7.4 ROLE OF BANKS

Banks are one of the most established and oldest financial intermediaries in the financial system. They
play a significant role in the mobilisation of deposits and disbursement of credit to different areas
and sectors of the economy. A bank is a type of financial institution that lends and borrows money.
Banks accept deposits from consumers in exchange for an annual interest payment. The bulk of these
deposits are subsequently used by the bank to lend to other customers for a variety of purposes. The
profit margin for banks is basically the difference between the two interest rates. Banks are significant
in the economy because they provide a service for those who want to save money. Banks also play a vital
role in providing capital to businesses looking to develop and invest. These loans and investments in
businesses are critical for economic growth.
7.4.1 Public Sector Banks

A public sector bank is one in which the government owns a significant percentage of the stock. As an
example, SBI is a public sector bank with a government stake of 58.60 percent. Similarly, PNB is a public
sector bank, with the government owning 58.87 percent of the company. Government shares in public
sector banks are often greater than 50%. Further, public sector banks are divided into two groups:
1. Nationalised Banks.
2. State Bank and its Associates.
The government has authority over and oversees the operations of nationalised banks. SBI, PNB, BOB,
OBC, Allahabad Bank, and others are instances. The government, on the other hand, continues to
reduce its interest in PSU banks when shares are sold. As a result, they may be able to become minority
shareholders in these institutions to some extent. These, like their equivalents, are traded on Indian
stock exchanges.
7.4.2 Private Banks

Private sector banks are ones in which the majority of the stock is owned by the bank’s shareholders
rather than the government. Private sector banks in India include RBL Bank, HDFC Bank, ICICI Bank,
Yes Bank, and others. Customers may get all banking products and services from them. Fixed Deposits,
Savings Deposits, RDs, Home Loans, Personal Loans, Car Loans, Lockers, Demat Facilities, Debit/Credit
Cards, ATMs, Foreign Exchange Transactions, Insurance, Wealth Management, Net Banking, and so on
are just some of the products available. Private banks are noted for being early adopters of information
technology in the banking industry. Private promoters are in charge of managing and controlling
private banks.
These private banks have been classified into two main categories:
1. Pre-liberalisation
2. Post-liberalisation
 Pre-liberalisation: There are a total of 12 banks that date back to the period before India’s 1990
deregulation. Federal Bank, Karnataka Bank, Karur Vysya Bank, RBL Bank, and others are
among these banks.
 Post-liberalisation: There are a total of 9 banks that were licensed and established following
India’s liberalisation in 1990. HDFC Bank, ICICI Bank, Axis Bank, Yes Bank, and other new era
banks are among them. When compared to public sector banks, private sector banks offer more
6
innovative goods and better services, but typically charge a premium for these extra services.
Private banks’ financial performance has stayed stronger than public banks’ because they have
effectively controlled their net interest margin (NIM) and non-performing assets (NPA).
7.4.3 Foreign Banks

Foreign banks are registered in another nation and have headquarters elsewhere, yet they have branches
in our country. A foreign bank branch is a sort of foreign bank that must comply with the requirements
of both its home and host countries. In order to better service their global business clientele, banks
typically build an overseas branch.
There are 45 foreign banks functioning as foreign bank branches and 34 foreign banks operating as
representative offices at the moment. Foreign banks account for less than 1 percent of the overall branch
network in the nation. They do, however, contribute for around 7 percent of the overall banking sector’s
assets and about 11 percent of earnings.
7.5 INDIAN FINANCIAL SYSTEM

The financial system of a country assumes an indispensable part in the formation of capital in economy.
The phrase “financial system” refers to a collection of interconnected activities/services that operate
together to achieve a certain purpose or aim. It encompasses a variety of markets, institutions, tools,
services, and procedures that impact the development of savings, the formation of investment capital,
and growth. Financial institutions, markets, instruments, and services which are part of financial
system are involved in the savings, financing, and investment process.
7.5.1 RBI
The Reserve Bank of India (RBI) is India’s central bank, with the primary responsibility of managing
and governing the country’s financial system. The Reserve Bank of India Act, 1934, established it as a
legislative entity in 1935. The Indian rupee’s issue and supply are regulated by the central bank. It also
manages the funds of the federal government. The central bank oversees the banking sector and acts
as a bankers’ bank. It also contributes significantly to India’s growth by assisting the government with
developmental initiatives and policies.
The RBI’s headquarters, which were originally located in Kolkata when the bank was founded, were
relocated to Mumbai in 1937. Originally, the bank was a privately held corporation. However, after
India’s independence in 1947, it was nationalized in 1949 and is currently entirely controlled by the
Indian government.
“To regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability
in India and generally to operate the currency and credit system of the country to its advantage; to have
a modern monetary policy framework to meet the challenge of an increasingly complex economy, to
maintain price stability while keeping the objective of growth in mind,” the RBI’s preamble says.
7.5.2 Commercial Banks

A commercial bank is a type of financial organisation that handles all deposit and withdrawal operations
for the general public, as well as offering investment loans and other services. These are profit-making
institutions that do business only for the purpose of earning a profit.
Lending and borrowing are the two most important qualities of a commercial bank. The bank accepts
the deposits and distributes the funds to various initiatives in order to generate interest (profit). The
7
borrowing rate is the rate of interest that a bank gives to depositors, whereas the lending rate is the rate
at which a bank lends money. Commercial banks’ functions may be divided into two categories.
a. Primary functions:
 Accepts deposit: Deposits are accepted at the bank in the form of savings, current, and fixed
deposits. Surplus funds received from businesses and people are loaned to meet the short-term
needs of commercial operations.
 Provides loan and advances: Another important duty of this bank is to provide loans and
advances to entrepreneurs and business persons, as well as collect interest. It is the most
important source of earnings for every bank. A bank keeps a small amount of deposits as a
reserve and gives (lends) the rest to borrowers through demand loans, overdrafts, cash credit,
short-term loans, and other types of loans.
 Credit cash: When a consumer is given credit or a loan, he or she is not given liquid cash. The
customer’s bank account is opened first, and then the funds are sent to the account. The bank is
able to manufacture money through this technique.
b. Secondary functions:
 Discounting bills of exchange: A discount bill of exchange is a written agreement that
acknowledges the amount of money to be paid against items acquired at a future date. A
commercial bank’s discounting strategy can also be used to clear the payment before the
specified period.
 Overdraft facility: This is a loan offered to a client in exchange for keeping their current account
open and allowing them to overdraw up to a certain limit.
 Purchasing and selling securities: The bank provides you with the option of buying and selling
securities.
 Locker facilities: Customers can use a bank’s locker facilities to store their valuables or papers
discreetly. This service is charged at least once a year by the banks.
 Paying and gathering the credit: It employs various tools such as a promissory note, checks,
and bills of exchange to pay and collect credit.
7.5.3 Co-operative Banks

A cooperative bank is a financial entity that operates on a cooperative basis and conducts regular
banking operations. Cooperative banks, such as other banks, are formed by raising cash through
shares, accepting deposits, and making loans.
a. Cooperative banks offer unlimited liability shares, whereas joint stock banks issue restricted liability
shares.
b. In a cooperative bank, each shareholder has one vote, regardless of how many shares he owns. In a
joint stock bank, a shareholder’s voting power is defined by the number of shares he owns.
c. Cooperative banks are primarily focused with rural lending and give financial support to farmers
and rural businesses. Joint stock firms are largely concerned with trade and industrial credit needs.
d. In India, cooperative banking is organised on a federal level. Primary credit societies are at the
bottom of the food chain. Then there are district-level central cooperative banks and state-level
state cooperative banks. A federal framework does not exist for joint stock banks.
e. Cooperative credit societies can be found in villages around the country. The majority of joint stock
banks and their branches are located in metropolitan regions, notably in major cities.
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7.5.4 Contribution of Banks towards the Growth of Business

In today’s economy, the financial system is extremely vital. Individuals’ funds are collected by
banks, which then lend them to entrepreneurs and manufacturers. Bank loans make trade easier.
Manufacturers borrow money from banks to fund the acquisition of raw materials as well as other
needs such as operating capital. Banks are a safe place to keep money. Interest is also earned as a result
of this. As a result, the urge to save is stimulated, and the amount saved grows. The money saved can be
used to create new capital assets.
As a result, banks play a critical role in the generation of new capital (or capital formation) in a country,
hence assisting the growth process.
Shares and debentures are sold through banks. As a result, banks may help businesses and manufacturers
get fixed capital. Industrial banks aid in the development of new companies and industrial operations,
as well as providing long-term loans to manufacturers.
The financial system has the ability to produce money. As a company grows, more money is required
for exchange transactions. A country’s legal tender money cannot normally be extended fast. When
additional money is needed, bank money may be swiftly raised and utilised. Banks play a vital role as
money suppliers in a rising economy like India’s.
Internal and international trade is made easier by the financial system. Credit is used for a substantial
portion of commerce. On behalf of their consumers, banks give references and guarantees, allowing
vendors to deliver items on credit. This is especially crucial in international trade, since the partners are
typically strangers who live in separate countries.
Trade is also aided by the provision of loans, which may be obtained by discounting bills of exchange
or in other methods. Banks also handle foreign exchange transactions (exchanging one currency for
another).
Finally, banks serve as commercial and industrial organisations counsellors, counsellors and agents.
They contribute to the growth of trade and industry.
7.5.5 NBFCs, Their Importance and Contribution in Unorganised Sector of India

NBFCs are financial intermediaries that accept deposits and provide loans, and they play a critical
role in channelling scarce financial resources into capital production. They complement the banking
industry’s role in fulfilling the corporate sector’s growing financial demands by providing loans to
the unorganised sector and small local borrowers. They do not, however, cover services relating to
agriculture, manufacturing, or the sale, acquisition or development of immovable property. Despite
their differences from banks, NBFCs are subject to the same rules and regulations as banks in India.
Role of NBFCs
In the same way that banks and other financial institutions function as intermediates between ultimate
savers and ultimate borrowers, NBFCs do as well. Because of economies of scale, professional competence,
and the capacity to distribute risk over a large number of units, financial intermediaries can provide
a more cost-effective service. As a result, their activities provide the saver with the benefits of a better
return, less risk, and more liquidity. Borrowers, on the other hand, benefit from the intermediation of
9
JGI JAIN
financial institutions since they have more options. It’s worth noting that, whereas commercial banks’
loans are typically used for industrial, commercial, and agricultural objectives, NBFC loans are typically
used for transportation, trade, the acquisition of durable consumer items, the purchase and repair of
homes, or just simple consumption. Expert committees of the Reserve Bank of India recognised the need
for NBFCs in the following areas:
Sectors such as transportation and infrastructure are developing.

 Employment opportunities on a large scale
 Assist and boost wealth generation
 Economic growth on a broad scale
 In rural areas, it is an indispensable complement to bank credit.
 The emphasis is on semi-urban and rural areas, as well as first-time purchasers and users.
 To provide financial assistance to those who are economically disadvantaged
 A significant contribution to the state treasury.
Contributions of NBFCs
Financial Services Contributions (NBFCS vs. Banks) Financial institutions in India, such as banks and
NBFCs, provide some or all of the key financial services listed below. These services are frequently given
in conjunction with one another
i. Payments services are provided by certain financial organisations by issuing claims that may be
used to settle transactions. A claim must have a very stable and trustworthy value, be generally
recognised in trade and be linked to the procedures for final value settlement to serve as an effective
form of payment.
ii. Liquidity refers to how quickly an asset’s full market value may be realised after a sale decision has
been made. Specialisation and scale are used by financial organisations to increase liquidity.
iii. Divisibility refers to an asset’s ability to be exchanged in small increments. To suit the community’s
divisibility preferences, financial institutions split up high denomination claims and aggregate
small denomination claims.
iv. The extent to which an item delivers a consistent store of purchasing power over time — this is
critical for fulfilling saving preferences.
v. Obtaining and processing information is expensive. Financial institutions play an essential role in
providing economies of scale in processing and analysing risks.
vi. Risk pooling refers to how much an asset distributes the underlying promises’ default risk via
pooling. Financial firms have a lot more risk pooling flexibility than individuals since they pool their
assets.
10
 The services industry not only accounts for the majority of India’s GDP, but it also attracts
considerable foreign investment, contributes considerably to export, and employs a big number of
people.
 The service sector which is also known as tertiary sector is the part of economy that produces
and offers different types of intangible services, rather than just providing tangible goods such as
vehicles and TVs.
 The significance of service sector in India has been expanding consistently without fail. With the
ceaseless expansion of services sector, both in terms of volume and diversity, the significance of
services sector has been increasing at a high speed.
 India’s service sector has proven to be the economic uplifter, providing a significant amount of the
country’s GDP.
 With the enactment of the Banking Laws (Amendment) Bill in 2011, additional banks and international
investors have been able to enter the country. New bank entrance is expected to spur competition,
allowing banks to enhance their operational efficiency.
 The most visible consequence of the reforms has been an increase in competition and a negative
impact on bank profitability. The issue for banks currently is to deal with the reducing of the overall
profit margins while simultaneously increasing efficiency.
 Banks are one of the most established and oldest financial intermediaries in the financial system.
They play a significant role in the mobilisation of deposits and disbursement of credit to different
areas and sectors of the economy.
 A public sector bank is one in which the government owns a significant percentage of the stock.
 Private sector banks are ones in which the majority of the stock is owned by the bank’s shareholders
rather than the government.
 Foreign banks are registered in another nation and have headquarters elsewhere, yet they have
branches in our country.
 The phrase “financial system” refers to a collection of interconnected activities/services that operate
together to achieve a certain purpose or aim.
 The Reserve Bank of India (RBI) is India’s central bank, with the primary responsibility of managing
and governing the country’s financial system.
 The Reserve Bank of India Act, 1934, established it as a legislative entity in 1935.
 A commercial bank is a type of financial organisation that handles all deposit and withdrawal
operations for the general public, as well as offering investment loans and other services.
 A cooperative bank is a financial entity that operates on a cooperative basis and conducts regular
banking operations.
 NBFCs are financial intermediaries that accept deposits and provide loans, and they play a critical
role in channelling scarce financial resources into capital production.
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7.7 GLOSSARY
 Interconnected: Different components or items are interconnected or related to one another

 ATM: Automated Teller Machine
 Amendment: A change to a law that has not yet been put into effect and is currently being debated
 Borrow: To borrow money from a bank or other financial institution and repay it over time
7.8 CASE STUDY: PORTERS FIVE FORCES AT TESCO PLC
Case Objective
This study aims to show application of Porter’s five forces at Tesco.
This section looks at how Porter’s five forces may be applied to Tesco PLC’s challenges, including a look
at the danger of alternatives from rival supermarkets, buyer power in food purchases, grocery supplier
power, and consumer power at the checkout.
According to classical economics, corporate rivalry should push profits to zero. Part of this is due to the
danger of replacements. Tesco, for example, faces competition from competitors such as Sainsbury’s,
who might give replacements for their products. This lowers the cost of groceries for both firms’ clients.
Buyer power serves to drive down prices. Buyers will go to Sainsbury’s if Tesco’s beans are too pricey.
Tesco is fortunate in that there are few other major grocery chains. This indicates that the market is
disciplined, i.e., supermarkets use a disciplined approach to pricing. Discipline prevents them from
annihilating one another in a profit war.
The Porter Five Forces model emphasises the importance of supplier power. There are several
implications for Tesco. Suppliers exert supplier power by requiring retailers to pay a set price for their
goods. Retailers do not get things to sell if they do not pay the price. However, major supermarkets,
such as Tesco, have a significant advantage over small businesses in that they can set the price they
pay suppliers. If the provider does not lower the price, the market for their product will be significantly
reduced.
Tesco, Asda, Sainsbury’s, and other grocery groups have high entrance hurdles.
Existing supermarkets provide implicit or explicit impediments in the way of anyone founding a new
supermarket chain. For example, Tesco may have cornered the market for particular commodities,
making it impossible for the new store to locate low-cost, dependable suppliers. Tesco also benefits from
economies of scale. It pays suppliers a fraction of what a corner store does per item. It accomplishes this
in part by purchasing big quantities of items. A tiny grocery chain can only purchase a modest quantity
of items at a higher cost.
Consider different businesses, such as real estate firms and bicycle manufacturing, before constructing
a Porters five forces model for Tesco. This will provide you with the most comprehensive picture of how
Porter’s five forces may be used. We’ll look at two sectors that aren’t related to supermarkets in this
article.
12
Questions
1. What types of firms are found in the service sector?
(Hint: Retail, banking, hotels, real estate, education, health, social work, computer services, recreation,
media, communications, energy, gas, and water supply are all part of the service industry.)
2. What role does the service sector play?
(Hint: In most nations, the service sector contributes significantly to GDP through providing jobs,
inputs, and public services. Services trade can boost economic growth and open up a variety of old
and new export opportunities.)

1. Explain the importance of service sector in India?
2. What is role of banking sector?
3. What do understand by NBFC’s, explain the contribution of NBFCs in unorganized sector of India?
4. Explain these terms in detail
 Commercial Banks
 Co-operative Banks
7.10 HINTS FOR SELF-ASSESSMENT QUESTIONS

1. The significance of service sector in India has been expanding consistently without fail. With the
ceaseless expansion of services sector, both in terms of volume and diversity, the significance of
services sector has been increasing at a high speed. Refer to Section Service Sector.
2. A bank is a type of financial institution that lends and borrows money. Banks accept deposits from
consumers in exchange for an annual interest payment. The bulk of these deposits are subsequently
used by the bank to lend to other customers for a variety of purposes. The profit margin for banks is
basically the difference between the two interest rates. Refer to Section Role of Banks.
3. NBFC’s, their Importance and Contribution in Unorganised Sector of India
NBFCs are financial intermediaries that accept deposits and provide loans, and they play a critical
role in channelling scarce financial resources into capital production. They complement the banking
industry’s role in fulfilling the corporate sector’s growing financial demands by providing loans to
the unorganised sector and small local borrowers. Refer to Section Indian Financial System.
i. Payments services are provided by certain financial organisations by issuing claims that may be
used to settle transactions. A claim must have a very stable and trustworthy value, be generally
recognised in trade, and be linked to the procedures for final value settlement to serve as an
13
JGI JAIN
effective form of payment.
ii. Liquidity refers to how quickly an asset’s full market value may be realised after a sale decision
has been made. Specialisation and scale are used by financial organisations to increase liquidity.
iii. Divisibility refers to an asset’s ability to be exchanged in small increments. To suit the community’s
divisibility preferences, financial institutions split up high denomination claims and aggregate
small denomination claims.
4. Commercial Banks
A commercial bank is a type of financial organisation that handles all deposit and withdrawal
operations for the general public, as well as offering investment loans and other services.
Co-operative Banks
A cooperative bank is a financial entity that operates on a cooperative basis and conducts regular
banking operations. Refer to Section Indian Financial System.
14
 https://corporatefinanceinstitute.com/resources/knowledge/economics/service-sector/
 https://www.business-standard.com/article/finance/indian-banking-challenges-reforms-
expected-outcomes-114031900930_1.html
 https://en.wikipedia.org/wiki/Reserve_Bank_of_India
 Discuss the role and functions of Reserve Bank of India with friends.
15
UNIT
08 Monetary and Fiscal Policy
Names of Sub-Units
Introduction to Monetary and Fiscal Policy: Monetary Policy, Nature of Monetary policy, Implications
on Business Growth Instruments of Monetary Policy Tools and Its Role in Infusing Liquidity in the
Market for Business Growth, Fiscal Policy, Role of Fiscal Policy in Business Development.
Overview
The unit begins by explaining the meaning, nature and implications of monetary policy on Business
Growth. Further, it discusses the instruments of monetary policy tools and its role in infusing liquidity
in the market for business growth. The unit also explains the meaning and role of fiscal policy in
business development.
Learning Objectives

 Explain the impact of monetary and fiscal policy on a country’s economy
 Describe the nature of monetary policy
 State the functions of a central bank
 Explain the meaning of fiscal policy
JGI JAIN
Learning Outcomes

 Appraise the utilisation of monetary and fiscal policy
 Evaluate the implications of monetary policy on business growth
 Analyse the tools or instruments of monetary policy
 Examine the role of fiscal policy in business development
 https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/MPRA202113A99DAD95344334BF6145C
CBB26A744.PDF
 https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/02CH_26022021DDF8C0A7FA0F4BA1B34
F680A896BA4B1.PDF
 https://www.bis.org/publ/bppdf/bispap65g_rh.pdf
 https://www.imf.org/external/pubs/nft/2004/hcd/ch01.pdf
8.1 INTRODUCTION
Monetary and fiscal policy are the two most well-known techniques for affecting a country’s economic
activity. The Federal Reserve of the United States and RBI of India, for example, is in charge of monetary
policy, which is primarily concerned with interest rate control and the total quantity of money in
circulation. Fiscal policy refers to the actions of governments in terms of taxation and spending. In the
United States, national fiscal policy is decided by the executive and legislative arms of government.
To maintain and stimulate the economy, the government can utilise both monetary and fiscal policy.
Monetary policy, which is normally controlled by a central bank, deals with interest rates and the
amount of money in circulation. Fiscal policy, which is usually determined by law, deals with taxation
and government spending. The combined effects of monetary and fiscal policy have a considerable
impact on a country’s economy, businesses, and consumers.
8.2 MONETARY POLICY

Monetary policy refers to a collection of methods used by a country’s central bank to encourage long-
term economic growth by limiting the amount of money accessible to banks, consumers, and enterprises.
Its purpose is to keep the economy moving at a steady but not too fast or slow pace. The central bank
may raise borrowing rates to discourage expenditure or cut borrowing rates to encourage greater
borrowing and spending.
The country’s money is the major weapon at its disposal. The central bank determines the interest rates
that banks charge for lending money in the country. All financial organisations modify the rates they
charge all of their clients when they raise or drop their rates, from huge enterprises borrowing money
to house purchasers seeking for mortgages. They’re all affected by client rates. When rates are low, they
are more inclined to borrow, and when rates are high, they are less likely to borrow.
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UNIT 08: Monetary and Fiscal Policy JGI JAIN
8.2.1 Nature of Monetary Policy

The monetary policy has the following attributes:
1. Monetary policy is intended to direct, regulate and manage the size and growth pace of the money
supply as well as credit in the economy.
2. Monetary policy is an incredible tool to regulate macroeconomic factors like inflation and
unemployment.
3. The central bank of a nation or a similar administrative association is responsible for formulating
monetary policies.
4. The monetary authority of every single nation has a particular target or objective to which the
money policy is focused and these objectives are achieved by continuous use of instruments of
money and credit control.
8.2.2 Implications of Monetary Policy on Business Growth

Monetary policy significantly contributes to and influence economic growth and development in the
following manner:
 The central bank of a nation attempts to keep up with the stability in prices through controlling the
level of money supply with the help of monetary policy. Price Stability means promoting economic
development with extensive accentuation on stability of prices in the economy. The focal point here
is to facilitate the environment which is ideal to the architecture that empowers the developmental
projects to run quickly while also keeping up with reasonable price stability.
 Monetary policy additionally assumes a significant part in speeding up growth and development of
the economy by impacting the cost and accessibility of credit by controlling inflation. A low degree of
inflation is viewed as good for the economy however if inflation is high, a contractionary monetary
policy can resolve this issue. Monetary policy establishes appropriate environment for additional
investments by controlling inflationary strain in the economy. In this way, monetary policy can be
the best instrument of shaping the character of investment in the economy.
 Monetary policy can impact growth and development of the economy by helping with the
establishment of ideal environment for saving and investment. Government by following a cheap
money policy can help reduce the cost of credit which subsequently encourages investment. In this
way, monetary policy can promote and encourage capital formation in the economy.
 Monetary policy can prove helpful in accomplishing stability in foreign exchange rates. By utilising
its fiscal authority, the central bank of a nation can control and impact the exchange rates among
domestic and foreign currencies. For instance, the central bank might expand the supply of money
by issuing more currency. In such a case, the domestic currency turns out to be less expensive in
comparison with its foreign counterparts.
In this manner, monetary policy of a nation can influence economic growth and development.
8.3 INSTRUMENTS OF MONETARY POLICY TOOLS AND ITS ROLE IN INFUSING LIQUIDITY
IN THE MARKET FOR BUSINESS GROWTH
The central bank of any nation, be it India or USA, utilises the monetary policy and its instruments
to manage, control and direct liquidity or money supply in such a way that it balances inflation and
simultaneously helps in growth and development.
3
Here’s a look at the tools or instruments of monetary policy that RBI (Reserve Bank of India) which is the
central bank of India uses to manage monetary policy.
1. General Credit Controls: These are intended to control and change the size of a volume of deposits
made and the expense of bank credit in general regardless of the specific field of an enterprise or
economic activity wherein the credit is utilised.
 Bank Rate Policy: It is the base or least lending rate of the central bank at which it rediscounts
first-class bills of exchange and government securities that are held by the commercial banks.
Whenever the central bank observes that inflation has been expanding continuously in the
market, it raises the bank rate so that getting loan from the central bank turns out to be exorbitant
and subsequently commercial banks procure less money from it (RBI). The commercial banks,
in response, raise their loaning rates to the business community and borrowers who further
obtain less money from the commercial banks. There is a contraction of credit policy and prices
are checked from rising further. On the other hand, when inflation rate is depressed, the central
bank brings down the bank rate. Now it is easy to acquire money from the central bank on
the part of commercial banks. It also brings down their loaning rates of commercial banks.
Businessmen are encouraged to borrow more and investment is encouraged and all the process
is followed by rising output, employment, income and demand.
 Open Market Operations: Under open market operations there is sale and purchase of securities
in the money market by the central bank of the country. At the point when the general level of
prices begins rising and there is a need to control them, the central bank sells open market
securities. The reserves of commercial banks are decreased as a result and they are not in a
situation to loan more to the business community or general public. Further investment is
discouraged and the rise in prices is checked. On the other hand, when recessionary forces start
in the economy, the central bank purchases securities. The reserves of commercial banks are
raised so they loan more to the business community and the general public. It further raises
investment, output, employment, income and demand in the economy, and subsequently the fall
in price is checked.
 Changes in Reserve Ratios: Under this monetary policy strategy, CRR and SLR are two primary
deposit proportions, which diminish or expand idle cash balance of commercial banks. Each
bank is legally necessary to keep a specific level or percentage of its total deposits as a reserve
fund in its vaults and furthermore a specific percentage with the central bank. At the point
when prices are rising, the central bank raises the reserve ratio and the banks are expected to
keep more with the central bank. As a result, their reserves are decreased and they loan less. The
volume of investment, output and employment are antagonistically impacted. In the contrary
case, when the reserve proportion is brought down, the reserves of commercial banks are raised.
They loan more and the economic activity is favorably affected.
2. Selective Credit Controls: They are utilised to affect specific sorts of credit for particular purposes.
They ordinarily appear as changing margin requirements to control speculative activities within
the economy.
 Change in Margin Money: The outcome is that the borrowers are given less cash in loans
against specified securities. For example, raising the margin requirement to 80% implies that
the pledger of securities of the worth of ` 10,000 will be given 20% of their worth, for example
` 2,000 as a credit. If there should be an occurrence of a downturn in a specific sector, the central
bank encourages borrowing by bringing down margin requirements.
 Moral Suasion: In the case of moral suasion, central banks attempt to impact the public opinions
and market through convincing procedures and techniques which they are in control of the
economy and ready to act if necessary.
4
8.4 FISCAL POLICY

The use of government spending and tax policies to impact economic circumstances, particularly
macroeconomic variables such as aggregate demand for goods and services, employment, inflation,
and economic growth, is referred to as fiscal policy. Fiscal policy is sometimes contrasted with monetary
policy, which is implemented by central bankers rather than elected leaders.
The concepts of British economist John Maynard Keynes (1883–1946), who maintained that economic
recession is caused by a decrease in consumer spending and corporate investment components of
aggregate demand, are primarily based on fiscal policy. To compensate for the absence of the private
sector, Keynes argued that governments could stabilise the business cycle and manage economic output
by modifying spending and tax policies.
His beliefs arose in reaction to the Great Depression, which defied conventional economic assumptions
that economic fluctuations were self-correcting. Keynes’ theories were widely adopted, and the United
States spearheaded the New Deal, which featured large-scale public works projects and social welfare
programmes.
8.4.1 Role of Fiscal Policy in Business Development

The numerous tools of fiscal policy, such as the budget, taxation, public expenditure, public works,
and public debt, may go a long way toward ensuring full employment in undeveloped countries while
avoiding inflationary and deflationary tendencies. Clearly, taxation and public spending are potent
instruments in the hands of government that have a significant impact on changes in disposable
income, consumption, and investment.
During an inflationary period, such actions are taken to assist wash away surplus purchasing power
and consumer demand. The tax burden is increased in such a way that fresh investment is not stifled.
With all of the facts in mind, it can be concluded that fiscal policy plays a critical role in supporting
economic development and stability in developing nations.
1. To Mobilise Resources: In developing nations, the primary goal of fiscal policy is to mobilise
resources from both the private and governmental sectors. Because of the low rate of savings, the
national income and per capita income are both quite low. As a result, governments in these nations
drive the pace of investment and capital formation higher, which increases the rate of economic
development.
2. To Accelerate the Rate of Growth: Fiscal policy contributes to faster economic growth by increasing
investment in both the public and private sectors. As a result, diverse fiscal policy measures such
as taxes, public borrowing, deficit financing, and public enterprise surpluses should be employed in
concert so that they do not adversely influence wealth consumption, production, or distribution.
3. To Encourage Socially Optimal Investment: Fiscal policy in developing nations supports investment
in productive channels that are deemed socially and economically acceptable. This entails
efficient investment that supports economic development while avoiding ineffective and wasteful
expenditure.
4. Inducement to Investment and Capital Formation: Fiscal policy is critical in developing nations
because it encourages investment in strategic sectors and public-utility services on the one
hand, and it encourages private-sector investment by assisting new companies and introducing
sophisticated manufacturing processes on the other. Thus, investments in social and economic
overheads aid in enhancing social marginal productivity and, as a result, private investment and
capital creation marginal productivity. In this case, an optimal investment pattern can also help to
provide productive economic growth outcomes.
5
 Monetary and fiscal policy are the two most well-known techniques for affecting a country’s
economic activity.
 To maintain and stimulate the economy, a government can utilise both monetary and fiscal policy.
 Monetary policy, which is normally controlled by a central bank, deals with interest rates and the
amount of money in circulation.
 Monetary policy can impact growth and development of the economy by helping with the
establishment of ideal environment for saving and investment.
 The central bank of any nation, be it India or USA, utilises the monetary policy and its instruments
to manage, control and direct liquidity or money supply in such a way that it balances inflation and
simultaneously helps in growth and development.
 Bank rate is the base or least lending rate of the central bank at which it rediscounts first-class bills
of exchange and government securities that are held by the commercial banks.
 Under open market operations there is sale and purchase of securities in the money market by the
central bank of the country.
 The use of government spending and tax policies to impact economic circumstances, particularly
and economic growth, is referred to as fiscal policy.
 The combined effects of monetary and fiscal policy have a considerable impact on a country’s
economy, businesses, and consumers.
 Fiscal policy is sometimes contrasted with monetary policy, which is implemented by central bankers
rather than elected leaders.
8.6 GLOSSARY
 Taxation: The act of levying or imposing a tax by a taxing body

 Fiscal Policy: The process through which a government modifies its expenditure and tax rates in
order to track and impact the economy of a country
 Money Supply: How much money or currency is in circulation in an economy
 Monetary policy: It refers to a collection of methods used by a country’s central bank to encourage
long-term economic growth by limiting the amount of money accessible to banks, consumers, and
enterprises.
 Public Debt: How much cash a country administration owes to outside borrowers
8.7 CASE STUDY: MONETARY POLICY AND FISCAL STABILITY IN PANDEMIC TIMES
Case Objective
This case study aims to demonstrate how COVID-19 affected the global economy and what steps should
be taken to improve the economy.
6
With its startling speed and massive size, Covid-19 has thrown economies around the world into
disarray. This resulted in severe downturns in numerous industries across the globe. Despite global
governmental support, the pandemic is expected to have a 5.2 % negative impact on the world economy
in 2020, the highest in eight decades. This year, emerging and developing economies’ per capita incomes
have fallen significantly. If the pandemic takes longer to contain and financial hardship lingers, the
impact on the global economy would intensify. The pandemic emphasises the necessity for economic
activities in addition to urgent health-related policy actions to mitigate the epidemic’s vulnerable
impacts and strengthen countries’ pandemic response systems in the future. In some countries, severe
epidemics cause worldwide spillovers and have a negative influence on global value chains and financial
markets. Due to international spillover from South Asia’s GDP downgrade and the domestic outbreak
of the pandemic, which resulted in lockdown measures, GDP growth in Latin America, Central Asia,
and Europe has slowed. Many governments reduced the pandemic’s impact by enacting stringent fiscal
and monetary policies. In 2020, all emerging and developing economies are predicted to see a decrease
in per capita income. Covid-19 will leave permanent scars on economies, wreaking havoc on already
vulnerable developing countries.
Comprehensive reforms would be required to minimise the pandemic’s long-term impact on the nation’s
growth by improving governance, public health policies, and the general business environment.
Monetary and fiscal policy measures can mitigate the pandemic’s short-term impact on the economy
and productivity, while comprehensive reforms would be required to minimise the pandemic’s long-
term impact on the economy and productivity. The Covid-19 outbreak has resulted in a drop in oil
demand, an increase in oil stocks, and the lowest drop in oil prices in history. Oil prices cannot buffer
the impact of Covid-19 in the early stages of the pandemic because of all the lockdown limitations, but
they can undoubtedly help the economy recover once the restrictions are released. Energy-exporting
emerging economies’ economic positions have been challenged for some time, and the pandemic has
resulted in a drop in their oil income. As a result, fiscal policy must be adopted in order for a country’s
economy to remain stable. Even in affluent economies, let alone emerging and developing economies,
the number of viral sufferers has recently increased dramatically. Income, commerce, and investments
have all been lost as a result of the second wave of illness. The government’s fiscal policies and the
central bank’s monetary policies are likely to reignite the collapsed consumption of consumers in these
scenarios. Household borrowing capacity was limited as a result of low income, and they were unable
to maintain spending. Despite minimal savings, the loose monetary policy would offer liquidity and
purchasing power to consumers, allowing them to sustain their basic level of consumption. Monetary
policy and welfare systems’ ability to reduce income losses varies by country and is often weaker in
low-income countries. Domestic investment halts in the face of uncertainty, such as pandemics, and
outputs deteriorate. COVID-19 related restrictions limit the ability of fiscal and monetary interventions
to mitigate the pandemic’s effects. Businesses are harmed as a result of a lack of demand, a scarcity of
raw materials, and the price of protecting personnel from the infection. Even fiscal stimulus is ineffectual
in some areas since the processes are entirely shut down. Low-income countries are likely to experience
a worldwide recession as a result of their enormous fiscal obligations.
Source: https://www.frontiersin.org/articles/10.3389/fpubh.2020.627001/full
Questions
1. What impact did Covid-19 have on the world economy?
(Hint: Covid-19 has thrown economies around the world into disarray. This resulted in severe
downturns in numerous industries across the globe. Despite global governmental support, the
pandemic is expected to have a 5.2 % negative impact on the world economy in 2020, the highest in
eight decades.)
7
2. What must a country’s economy do to remain stable during the Covid-19 outbreak?
(Hint: Fiscal policy must be adopted in order for a country’s economy to remain stable.)

1. Compose a brief note on fiscal policy.
2. Explain the monetary policy instruments used by the RBI to manage monetary policy.
3. Write a brief note on monetary policy.
8.9 HINTS FOR SELF-ASSESSMENT QUESTIONS

1. The use of government spending and tax policies to impact economic circumstances, particularly
and economic growth, is referred to as fiscal policy. Refer to Section Fiscal Policy
2. The tools or instruments of monetary policy that RBI (Reserve Bank of India) which is the central
bank of India uses to manage monetary policy:
1. General Credit Controls: These are intended to control and change the size of a volume of
deposits made and the expense of bank credit in general regardless of the specific field of an
enterprise or economic activity wherein the credit is utilised.
Refer to Section Instruments of Monetary Policy Tools and Its Role in Infusing Liquidity in The Market
for Business Growth
3. Monetary policy refers to a collection of methods used by a country’s central bank to encourage
longterm economic growth by limiting the amount of money accessible to banks, consumers, and
enterprises. Its purpose is to keep the economy moving at a steady but not too fast or slow pace.
Refer to Section Monetary Policy.
 https://www.cbn.gov.ng/Out/EduSeries/Series11.pdf
 https://www.imf.org/external/pubs/ft/wp/wp9825.pdf
 https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.172.3149&rep=rep1&type=pdf
 Discuss the primary functions of fiscal policy with your friends.
8
UNIT
09 Business and Society
Names of Sub-Units
Social Responsibility of Business/Corporate Social Responsibility (CSR), CSR Models, Corporate

Governance, Theories of Corporate Governance, Towards Better Governance: Social Audit and its
Benefits
Overview
This unit explains the Social Responsibility of Business/Corporate Social Responsibility (CSR) and CSR
Models. Further, this unit describes the corporate governance and theories of corporate governance.
Also, this unit elaborates the ways towards better governance: social audit and its benefits.
Learning Objectives

 Describe the social responsibility of business
 Elaborate CSR models
 Discuss the corporate governance and theories of corporate governance
 Explain the ways towards better governance social audit and its benefits
JGI JAIN
Learning Outcomes

 Assess the meaning of business and society
 Analyse the social responsibility of business
 Evaluate the CSR models and theories of corporate governance
 State the ways towards better governance social audit and its benefits
 https://corporatefinanceinstitute.com/resources/knowledge/other/corporate-governance/
 https://www.accountingnotes.net/management/corporate-social-responsibility/corporate- social-
responsibility/17611
9.1 INTRODUCTION
The primary goal of business is to create, manufacture, and distribute goods and services to clients.
This must be done in a way that allows businesses to benefit, which needs considerably more than
simply knowledge of the company’s own sectors and operations. Smart businesspeople have an almost
instinctive awareness of the synergies that lead to success. Company owners’ social skills, as well as
relationships with customers, suppliers, and other business people, are always important if businesses
are to be operated successfully and grown for the future. Companies create materials and concepts to
better their resources.
If businesses are to thrive, the goods and services they provide must match the expectations of
consumers, other businesses, and government agencies. Customers are willing to pay more for goods
and services than it costs to generate them, resulting in profitability. The capacity to generate this sort
of additional value - profit – is not only a requirement for company, but also for societal success. Only
productive businesses are long-term viable and capable of producing goods, services, processes, returns
on capital, employment opportunities, and a tax base. This is something that business excels at more
than any other industry.
9.2 SOCIAL RESPONSIBILITY OF BUSINESS/CORPORATE SOCIAL RESPONSIBILITY (CSR)

Corporate social responsibility (CSR) is a management concept in which businesses incorporate
social and environmental issues into their operations and relationships with stakeholders. CSR helps
an organisation to accomplish economic balance, environmental imperatives and social imperatives
(“Triple-Bottom-Line-Attainment”). It also enables an organisation to meet the needs of shareholders
and stakeholders.
It’s crucial to distinguish between CSR, which may be a strategic corporate management idea,
and charity, sponsorships, or philanthropy in this context. Even if the latter can make a significant
contribution to poverty reduction and immediately improve a company’s reputation and brand, the
notion of CSR obviously extends beyond that.
Promoting CSR adoption among SMEs necessitates techniques that are tailored to the requirements
and capacity of these enterprises while also ensuring their economic sustainability. UNIDO’s CSR
2
UNIT 09: Business and Society JGI JAIN
programme is based on the Triple Bottom Line (TBL) Approach, which has shown to be an effective tool
for SMEs in developing countries in satisfying social and environmental requirements while maintaining
competitiveness.
The TBL framework is used to measure and report company performance in terms of economic, social,
and environmental factors. It’s an attempt to link private businesses with the goal of long-term global
development by giving them a broader range of goals to work toward than just profit.
The viewpoint is that an organisation must be financially secure, limit (or, preferably, eradicate) its
negative environmental consequences, and operate in accordance with society expectations in order to
be sustainable.
Environmental management, eco-efficiency, responsible sourcing, stakeholder engagement, labour
standards and working conditions, employee and community connections, social justice, gender balance,
human rights, good governance, and anti-corruption measures are some of the most important CSR
problems.
A properly implemented CSR concept can provide a number of competitive advantages, including
improved access to capital and markets, increased sales and profits, operational cost savings, improved
productivity and quality, a more efficient human resource base, improved brand image and reputation,
increased customer loyalty, and improved decision-making and risk management processes.
9.2.1 CSR Models

CSR (Corporate Social Responsibility) is a self-regulatory business approach that enables companies
to be socially responsible and accountable to its stakeholders and the general public. Over the years,
several CSR models have been developed. These models are used to plan and execute the CSR process,
as well as to monitor and regulate it. Businesses strengthen their flexibility to internal and external
changes in the environment by incorporating CSR concepts into their operations. Following are the
models of CSR:
 Carroll’s pyramid CSR model: This is one of the most popular CSR models. Carroll’s four-part
pyramid model is what it’s called formally. The model’s main goal is to encompass the whole range
of societal expectations of a firm, define them, and divide them into several groups.
 Intersecting Circle (IC) CSR model: The CSR model with Intersecting Circles (IC) is substantially
different from the pyramid model. The most significant difference between the two models is that:
1. it acknowledges the possibility of interrelationships between the various CSR domains.
2. It denies the concept of importance hierarchy.
 Concentric Circle CSR model: The CON model, also known as the Concentric Circle model, has some
similarities to Carroll›s Pyramid and IC model. For example, one of the main social obligations in the
CON model is economic responsibility.
 Contemporary innovative CSR models: Although the models outlined above have universal
application in the field of CSR, many organisations have developed their own. Coca-Cola, for
example, has implemented a CSR model known as the 5*20 Program, which aims to employ 5 million
women in underdeveloped nations in bottling and distribution roles by 2020.
9.3 CORPORATE GOVERNANCE

Corporate governance is a set of rules, practises, or regulations that govern how organisations are
run, regulated, and managed. Internal and external variables affecting the interests of a company’s
3
JGI JAIN
stakeholders, including shareholders, customers, suppliers, government regulators, and management,

are referred to as “internal and external factors.” The board of directors is in charge of developing a
corporate governance structure that best matches company behaviour with objectives.
While the form of corporate governance varies, most firms have the following fundamental elements:
 Each and every stakeholder should be treated fairly and equitably. Making sure shareholders are
informed of their rights and how to exercise them is a big part of it.
 Non-shareholder stakeholders have legal, contractual, and social duties that must be met. This
involves sharing important information to workers, investors, vendors, and other stakeholders on
a regular basis.
 The board of directors must remain committed to ensuring corporate governance accountability,
fairness, diversity, and openness. Members of the board must also have the required abilities to
evaluate management practises.
 Organisations should establish a code of behaviour for board members and executives, and new
members should only be appointed if they satisfy that level.
 All corporate governance rules and procedures should be public or made available to interested
parties.
9.3.1 Theories of Corporate Governance

This research aims to give a theoretical foundation for the discussion on corporate governance. The
examination of various corporate governance theories contributes to the primary goal of corporate
governance, which is to maximise shareholder profit by guaranteeing excellent social and environmental
performance. The implications of the theory of moral hazard are anchored in agency theory, which
is further developed under stewardship theory and stakeholder theory before emerging to resource
dependency theory, transaction cost theory, and political theory. The shift from industrial civilization to
a new sort of “informational” or “knowledge” society is defined by complex and deep developments in
many disciplines, with important ramifications in the economic, social, and environmental processes.
Fundamental theories of corporate governance are based on agency theory and the idea of moral hazard
implications, and they go through stewardship theory, stakeholder theory, and resource dependency
theory to resource dependence theory, transaction cost theory, and political theory. Later, ethics theory,
information asymmetry theory, and the theory of efficient markets were added to these ideas. Beyond
the legal regulatory framework, these theories are separated from the causes and consequences of
factors such as the composition of the board of directors, audit committee, independence managers,
the function of senior management, and their social ties.
These ideas are based on the causes and consequences of factors such as the board of directors’ and
audit committee’s configurations, the independence of directors, and the role of senior management
and their social relationships outside of the formal regulatory framework.
Following are the theories of corporate governance:
 Agency Theory: It describes the relation between the principals like shareholders of an organisation
and agents such as directors of an organisation. As per this theory, an orgaisation’s principal hire
the agents to do work. The work is delegated by the principals to the directors or managers who are
agents of shareholders. These agents act and make decisions. This theory focuses on the separation
of ownership and control.
4
Figure 1 shows the gist of agency theory:
Hires & delegate

Self
interest
Self
Principals Agents interest
Performs
Figure 1: Agency Theory

 Stewardship Theory: This theory states that a steward protects and maximises shareholders wealth
via organisational performance. Stewards refers to an organisation’s executives and managers
who perform work for the shareholders. They protects the wealth of shareholders and maximise
their profits. Personnel take ownership of their jobs and work at them diligently. Figure 2 shows
Stewardship theory:
Empower and
Shareholders’
trust
profits and
returns
Intrinsic and
Shareholders Stewards extrinsic
motivation
Protects and maximise

shareholders wealth
Figure 2: Stewardship Theory

 Stakeholder Theory: This theory helps in implementing the accountability of management to a
broad range of stakeholders. Stakeholder theory explains that the managers maintains a network
of relationships to serve. This theory includes:
 Suppliers  Employees  Business partners.
Figure 3 show stakeholder theory:
Investors
Government Political
Groups
Supplier FIRM Customers
Trade
Associations Communities
Employees
Figure 3: Stakeholder Theory
5
JGI JAIN
9.4 TOWARDS BETTER GOVERNANCE: SOCIAL AUDIT AND ITS BENEFITS

The community’s critical review of government programmes and actions, with active participation of
the major stakeholders, is known as a social audit. People perform social audits in collaboration with
local authorities. It involves an audit of the quality of work being done at various levels, as well as
information on disbursements, labourers used, and supplies used. Governance is influenced by social
auditing. It recognises the importance of stakeholders’ perspectives, particularly those of marginalized/
poor people whose voices are rarely heard.
How it aids in good governance?
1. Reduces corruption: The purpose of a social audit is to discover anomalies and malpractices in
the public sector while also maintaining monitoring of government operations, hence eliminating
leakages and corruption. To combat mass cheating under the MGNREGA, civil society organisations,
political representatives, government personnel, and workers in the Anantapur district of Andhra
Pradesh collaborate to organise social audits.
2. Monitoring and feedback: It keeps track of the social and ethical consequences of decisions and
gives feedback on the job. Official documents collected through RTI are utilised by the public to
uncover inconsistencies and so monitor and provide feedback to organisations, resulting in improved
performance.
3. Accountability and transparency: Social audit provides accountability and openness in local
government operations, as well as bridging the trust gap between citizens and governments. By
implementing the Right to Information in the planning and execution of local development initiatives,
social audit procedures improve transparency. Transparency in government programmes decreases
corruption and improves results.
4. Encourages community participation: Beneficiaries and producers of local social and productive
services benefit from social audits. The local community becomes a key partner in the success of
public welfare initiatives, resulting in better outcomes through periodic policy assessment. For
example, social audits in MGNREGA resulted in appropriate job card entries, greater awareness of
salary payment slips, and apparent improvements in worksite amenities.
5. Empowering marginalised: It is critical that marginalised socioeconomic groups, who are typically
excluded, have a role in local development concerns and activities, as well as a say in how local
elected authorities function. These groups can influence policy implementation and hence improve
results through social audits.
6. Policy evaluation: Not only can social audit help with policy implementation, but it also helps with
policy assessment. As a result, social audits evaluate the physical and financial gaps that exist for
local development, resulting in better policies and outcomes.
Benefits of Social Audit

Social auditing has a number of advantages. The following are the main advantages of social auditing:
1. It gives a well-known way for bringing the social perspective to management’s notice.
2. A person from outside the organisation evaluates the various corporations. As a result, they may
provide an unbiased and disinterested perspective on the company’s employees’ activities.
3. The social audit report is delivered to the firm rather than to the general public. As a result, the
social auditor can provide an honest assessment of the company’s social welfare programmes.
6
 The primary goal of business is to create, manufacture, and distribute goods and services to clients.
 This must be done in a way that allows businesses to benefit, which needs considerably more than
simply knowledge of the company’s own sectors and operations.
 Smart businesspeople have an almost instinctive awareness of the synergies that lead to success.
 Company owners’ social skills, as well as relationships with customers, suppliers, and other business
people, are always important if businesses are to be operated successfully and grown for the future.
 Companies create materials and concepts to better their resources.
 If businesses are to thrive, the goods and services they provide must match the expectations of
consumers, other businesses, and government agencies.
 Customers are willing to pay more for goods and services than it costs to generate them, resulting
in profitability.
 The capacity to generate this sort of additional value - profit – is not only a requirement for company,
but also for societal success.
 Only productive businesses are long-term viable and capable of producing goods, services, processes,
returns on capital, employment opportunities, and a tax base.
 This is something that business excels at more than any other industry.
 Corporate social responsibility (CSR) is a management concept in which businesses incorporate
social and environmental issues into their operations and relationships with stakeholders.
 CSR is commonly defined as the process through which a firm achieves a balance of economic,
environmental, and social imperatives (“Triple-Bottom-Line-Attainment”) while also meeting the
needs of shareholders and stakeholders.
 It’s crucial to distinguish between CSR, which may be a strategic corporate management idea, and
charity, sponsorships, or philanthropy in this context.
 Even if the latter can make a significant contribution to poverty reduction and immediately improve
a company’s reputation and brand, the notion of CSR obviously extends beyond that.
 CSR (Corporate Social Responsibility) is a self-regulatory business approach that enables companies
to be socially responsible and accountable to its stakeholders and the general public.
 Over the years, several CSR models have been developed. These models are used to plan and execute
the CSR process, as well as to monitor and regulate it.
 Businesses strengthen their flexibility to internal and external changes in the environment by
incorporating CSR concepts into their operations.
 Corporate governance is a set of rules, practises, or regulations that govern how organisations are
run, regulated, and managed.
 Internal and external variables affecting the interests of a company’s stakeholders, including
shareholders, customers, suppliers, government regulators, and management, are referred to as
“internal and external factors.”
 The board of directors is in charge of developing a corporate governance structure that best matches
company behaviour with objectives.
7
JGI JAIN
 The shift from industrial civilization to a new sort of “informational” or “knowledge” society is
defined by complex and deep developments in many disciplines, with important ramifications in
the economic, social, and environmental processes.
 Fundamental theories of corporate governance are based on agency theory and the idea of moral
hazard implications, and they go through stewardship theory, stakeholder theory, and resource
dependency theory to resource dependence theory, transaction cost theory, and political theory.
 Later, ethics theory, information asymmetry theory, and the theory of efficient markets were added
to these ideas.
 Beyond the legal regulatory framework, these theories are separated from the causes and
consequences of factors such as the composition of the board of directors, audit committee,
independence managers, the function of senior management, and their social ties.
 The community’s critical review of government programmes and actions, with active participation
of the major stakeholders, is known as a social audit.
 People perform social audits in collaboration with local authorities.
 It involves an audit of the quality of work being done at various levels, as well as information on
disbursements, labourers used, and supplies used.
9.6 GLOSSARY
 Manufacture: It is the process of producing goods and services by converting raw material into
finished goods.
 Employment: It refers to hiring people for performing organisational roles and responsibilities for
salary or wages.
 Industry: It is a collection of businesses that are linked by their core business activity.
 Capital: It refers to cash or liquid assets that are retained or gained for the purpose of making
purchases.
 Long-term: It means a lengthy period of time.
9.7 CASE STUDY: INDIA AT THE TIME OF GLOBAL CRISIS
Case Objective
The aim of this case is to describe India at the time of global crisis.
This morning, I held a meeting with the CEOs of the major banks, during which we announced the
Reserve Bank’s monetary policy for the remainder of 2009-10, based on the macroeconomic trends thus
far. The conference also gave the Reserve Bank and the commercial banks a chance to learn about and
respect each other’s viewpoints.
The Reserve Bank’s policy position was widely praised by bankers. They believed that maintaining the
status quo on policy rates would stabilise interest rate expectations, resulting in increased investment
demand. They said they’re seeing signs of a recovery in the domestic economy and that loan demand
would rise up in the second half of the year. In this context, I stressed the importance of increasing credit
flow, particularly to agricultural and micro, small, and medium-sized businesses. Banks were worried
that their liability structure was shortening due to the reduction in deposit term structure, while their
8
asset structure was lengthening due to the increased number of long-term loans, notably infrastructure
loans.
Several banks have also said that the percentage of current and savings (CASA) deposits is decreasing,
putting pressure on their net interest margins (NIM). In terms of credit quality, banks believe that
non-performing assets (NPAs) will rise, especially in the unsecured sector, but that they will remain
manageable. As risk-weighted assets become more prevalent in public sector banks’ asset portfolios,
public sector banks have emphasised the need to raise capital.
Global Economy
The global economy is beginning to show indications of stabilisation, albeit not recovery. The rate of fall
in some major advanced economies has moderated, credit markets have thawed, and equity markets
have begun to rebound. In a number of developing market economies, industrial activity has been
rebounding in recent months. Despite some encouraging signals, the direction and timing of global
recovery remain uncertain in light of weak consumer demand, rising unemployment, and the prospect
of additional contractions in global trade and private capital flows.
While business and consumer confidence have yet to show convincing signs of recovery, the financial
sector looks to be stabilising as a result of coordinated efforts taken by governments and central banks
across the world, the actual economy remains in recession. According to the International Monetary
Fund’s (IMF) latest forecast, the global economy would contract by 1.4 percent in 2009 before rebounding
and rising by 2.5 percent in 2010. The IMF, on the other hand, raised its growth forecast for emerging
Asia, citing improving prospects in China and India as reasons.
The Crisis and India

The Indian economy slowed significantly in 2008-09, compared to the solid growth record of the previous
five years, owing partly to the global financial crisis’ knock-on effect. India’s exports have been declining
for eight months in a row, affecting both the industrial and service sectors. Despite the significant stress
caused by the global deleveraging process, which spurred capital outflows in the second half of 2008-09,
the banking industry remained relatively untouched.
The effect of the global financial crisis was minimised by the government’s and the Reserve Bank’s quick
and robust policy actions. The supply of forex and rupee liquidity, together with significant reduction in
policy rates, a strong banking sector, and well-functioning financial markets, helped buffer the economy
from the worst effects of the crisis.
Food stocks have increased, industrial production has improved, corporate performance has improved,
business confidence surveys are optimistic, leading indicators show an upturn, interest rates have
declined, credit off-take has picked up since May 2009, stock prices have rebounded, the primary capital
market has seen some activity, and external financing conditions have improved in India. On the other
hand, there are some bad signals, such as a delayed and insufficient monsoon, food price inflation, a
recovery in global commodity prices, sluggish external demand, and a high budget deficit.
Questions
1. Discuss India’s performance at a period of economic recession.
(Hint: The Indian economy slowed significantly in 2008-09, compared to the solid growth record of
the previous five years, owing partly to the global financial crisis’ knock-on effect. India’s exports
have been declining for eight months in a row, affecting both the industrial and service sectors.)
9
2. Compare the current performance to that of the previous several years.

(Hint: The percentage of current and savings (CASA) deposits is decreasing, putting pressure on
their net interest margins (NIM).)

1. What do you mean by Corporate Social Responsibility?
2. Describe the CSR Models.
3. Discuss the Corporate Governance.
A. Hints for Essay Types Questions

1. Corporate social responsibility (CSR) is a management concept in which businesses incorporate
social and environmental issues into their operations and relationships with stakeholders. CSR
enables a firm in accomplishing economic balance environmental, and social imperatives (“Triple-
Bottom-Line-Attainment”). It helps in meeting the needs of shareholders and stakeholders. Refer to
Section Social Responsibility of Business/Corporate Social Responsibility (CSR)
2. CSR (Corporate Social Responsibility) is a self-regulatory business approach that enables companies
to be socially responsible and accountable to its stakeholders and the general public. Over the years,
several CSR models have been developed. These models are used to plan and execute the CSR process,
as well as to monitor and regulate it. Businesses strengthen their flexibility to internal and external
changes in the environment by incorporating CSR concepts into their operations. Refer to Section
Social Responsibility of Business/Corporate Social Responsibility (CSR)
3. Corporate governance is a set of rules, practises, or regulations that govern how organisations
are run, regulated, and managed. Internal and external variables affecting the interests of a
company’s stakeholders, including shareholders, customers, suppliers, government regulators,
and management, are referred to as “internal and external factors.” The board of directors is in
charge of developing a corporate governance structure that best matches company behaviour with
objectives. Refer to Section Corporate Governance
 https://allsemestermbanotes.blogspot.com/2017/05/introductionobjectivesneed-of-corporate.html
 https://www.mdos.si/wp-content/uploads/2018/04/defining-corporate-social-responsibility.pdf
 Discuss with your friends about the advantages of business and society.
10
UNIT
10 Introduction to Strategic
Management
Names of Sub-Units
Understanding Strategy, Business Environmental Scanning – Internal and External, Levels of Business
Strategy – Corporate, Business, Functional, Strategic Management Process, Hierarchy of Strategic
Intent
Overview
The unit begins by introduction to strategic management. Further, it discusses the concept of strategy.
The unit explains the business environmental scanning – internal and external. It also discusses the
levels of business strategy – corporate, business, functional, strategic management process, hierarchy
of strategic intent.
Learning Objectives

 Explain the concept of strategic management
 Define strategy
 Discuss business environmental scanning – internal and external
 State the levels of business strategy – corporate, business, functional
 Explain the strategic management process
 Define the hierarchy of strategic intent
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Learning Outcomes

 Analyse the strategies
 Evaluate the Business Environmental Scanning – Internal and External Analyse the Levels of
Business Strategy – Corporate, Business, Functional
 Examine the Strategic Management Process
 Assess the hierarchy of strategic intent
 https://www.tutorialspoint.com/strategic_management/strategic_management_tutorial.pdf
 https://www.managementstudyguide.com/strategic-management.htm
10.1 INTRODUCTION
Strategic management is all about identifying and describing the strategies that managers may use to
improve their organisation’s performance and gain a competitive edge. If an organisation’s profitability
exceeds that of all other organisations in its industry, it is considered to have a competitive edge.
Strategic management is also described as a set of decisions and actions taken by a manager to
determine the outcome of the firm’s performance. To make the best judgments, the manager must have
a complete understanding and analysis of the overall and competitive organisational environment.
They should undertake a SWOT Analysis (Strengths, Weaknesses, Opportunities, and Risks), which means
they should maximise the use of strengths, reduce organisational weaknesses, capitalise on business
environment opportunities, and avoid ignoring threats.
Strategic management is nothing more than preparing for both anticipated and unforeseeable events.
It is relevant to both small and large firms since even the smallest organisations confront competition
and may achieve a lasting competitive advantage by designing and implementing proper strategies.
It’s a method through which strategists define goals and work toward achieving them. It has to do
with making and implementing decisions concerning an organisation’s future orientation. It aids us in
determining the direction in which a company is heading.
Strategic management is a continuous process that evaluates and controls the business and industries
in which an organisation is involved; evaluates and controls its competitors and sets goals and strategies
to meet all existing and potential competitors; and then reevaluates strategies on a regular basis to
determine how well they have been implemented and whether they need to be replaced.
10.2 UNDERSTANDING STRATEGY

“A plan of action designed to attain a long-term or overall goal,” according to the definition of strategy.
Business plans assist in providing direction to the whole organisation while also ensuring that employees
do not lose sight of the final goals.
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UNIT 10: Introduction to Strategic Management JGI JAIN
According to Johnson and Scholes, “strategy is the long-term direction and scope of an organisation:
which produces advantage for the organisation by its configuration of resources within a tough
environment, to meet the demands of markets, and to satisfy stakeholder expectations.”
There are 3 levels of strategy depending on the different levels in the organisation:
 Corporate Strategy: The Company level plan, often known as Corporate strategy, is at the very top.
At this level, it refers to the organisation’s long-term strategy, which sets the tone for all divisions
and demonstrates how they may produce more value by working together than if they worked
separately. Corporate strategy aids in the organisation’s ability to make the most of its resources in
order to acquire a competitive edge in the market.
 Tactical Strategy: When we get down to the level of a department or a team, strategy becomes more
tactical. Every team has its own set of functional tasks that all contribute to the company’s overall
goals. Tactical tactics give teams explicit instructions on how to best complete a set of tasks within
a given time frame.
 Operational Strategy: Operational strategies are focused with the organisation’s resources, people,
and processes. They assist employees in determining a collection of activities (typical day-to-day
chores) that must be completed in the proper manner and at the appropriate time
10.3 BUSINESS ENVIRONMENTAL SCANNING – INTERNAL AND EXTERNAL

The success of your company is influenced by a variety of things. Understanding the external environment
in which your company operates is essential for staying ahead of the competition, making the best
decisions for the future of the company, and minimising losses. You’ll need to do an environmental scan to
learn about the issues that directly and indirectly effect your organisation. Learn about environmental
scanning tactics and why they’re crucial to your company’s success.
Environmental Scanning
Environmental scanning is the continuous examination of an organisation’s internal and external
environments. It’s used to assess the company’s possible prospects, dangers, market trends, and lessons
learned. Identifying these characteristics enables you to respond effectively by developing plans to
battle possible threats before they have an impact on the organisation, making optimum decisions
based on changing market landscapes, and developing strategies that fit the marketplace expectations
in your sector. Environmental scanning is beneficial to businesses of all sizes, from tiny, family-owned
businesses to multinational organisations.
Internal Components
Factors that occur within a corporation are considered internal environmental components. Any
modifications to these elements will have an impact on how the firm works and performs. The following
are internal components:
 Human resources
 Financial resources
 Organisational structure
 Corporate culture
 Technological resources
 Capital resources
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External Components
External elements that impact a company are more numerous and encompass both micro and macro
concerns. Competitors, clients, suppliers, consumers, and other components directly relevant to
company operations are examples of micro environmental influences. Components that are indirectly
relevant to the business are included in macro-environmental considerations, such as:
 Demographics: In order to design efficient marketing efforts that target certain groups, you must
first understand the demographics of your customers. Education level, age, income, marital status,
occupation, gender, religion, and ethnicity are all factors in demographics. Based on their cultural
ideas and social practises, different groups of people have different expectations from organisations
and different wants and aspirations.
 Economics: Price movements are influenced by economic developments. Whether the economy is in
a downturn, a company’s pricing plan should be reviewed to see if any modifications are required to
stay within the financial limitations of its customers.
 Politics/Legal: Every business must comply with local, state, and federal laws governing taxes,
public health and safety, and advertising. To prevent penalties and legal troubles, keep up with
changes in rules and check the business’s compliance.
 Technology: Organisations must use technology to communicate information, interact and engage
with customers, and keep up with the changing world. The internet and social media give excellent
venues for small companies to prosper, but each firm must investigate how to best use social media
and other technology.
10.4 LEVELS OF BUSINESS STRATEGY – CORPORATE, BUSINESS, FUNCTIONAL

Every choice that must be taken inside a company is built on the foundation of strategy. If senior
management chooses and formulates a strategy poorly, it has a significant influence on the effectiveness
of employees in almost every area within the firm.
Corporate-level Strategy
However, at the corporate level, management must evaluate not just how to obtain a competitive edge
in each of the company’s lines of business, but also which businesses they should be in in the first place.
It’s all about picking the best combination of enterprises and figuring out how to combine them into
a corporate whole: a portfolio. Top management often makes important investment and divestiture
decisions at this level. Mergers and acquisitions (M&A) are another crucial component of company
strategy. Only when the organisation operates in two or more business sectors via various business
units with different business-level plans that must be integrated to generate an internally consistent
corporate-level strategy is this level of strategy required. As a result, corporate strategy is frequently
found in multinational enterprises (MNEs) or conglomerates rather than small and medium-sized
businesses (SMBs).
Business-level Strategy
The business-level strategy is what most people are familiar with, and it revolves on the questions of
“How do we compete?” and “How do we achieve (a sustainable) competitive edge over our competitors?”
To answer these questions, you must first have a thorough awareness of a company’s internal operations
as well as its external surroundings. Internal analysis frameworks like the Value Chain Analysis and the
VRIO Model, as well as external analysis frameworks like Porter’s Five Forces and PESTEL Analysis,
4
can be used at this level. Top management can go on to strategy creation utilising frameworks such as
the Value Disciplines, Blue Ocean Strategy, and Porter’s Generic Strategies once a thorough strategic
study has been completed. Finally, the business-level strategy aims to achieve a competitive edge by
providing actual value to consumers while remaining a one-of-a-kind and difficult-to-copy player in the
competitive environment.
Functional-level Strategy
The question of “How do we support the business-level strategy inside functional departments like
Marketing, HR, Production, and R&D?” is central to functional-level strategy. These techniques are
frequently targeted at increasing the efficiency of a company’s internal operations. Workers in these
departments frequently refer to their ‘Marketing Strategy,’ ‘Human Resource Strategy,’ or ‘Research
and Development Strategy.’ The objective is to make these plans as aligned with the overall corporate
strategy as feasible. If the business plan, for example, is to sell items to students and young adults, the
marketing department should tailor their marketing efforts to these individuals as precisely as possible
by using the appropriate (social) media channels. Technically, these judgments are purely operational
and hence do not constitute strategy. As a result, it is preferable to refer to them as tactics rather than
strategies.
10.5 STRATEGIC MANAGEMENT PROCESS

Strategic management is a field of management concerned with an organisation’s long-term goals.
This might involve creating the organisation’s vision, defining its operational goals, and developing
and implementing the organisation’s strategy. If necessary, it may also entail the creation and
implementation of deviation correction procedures. The strategic management process is not to be
confused with the strategic planning process, which is related but not the same thing. The purpose of
this article is to provide a response to the question “what is strategic management process?” Before we
go any further, let’s define the strategic management process.
Consider the strategic management process as a philosophical approach to running business when
defining it. This is a catch-all word for the process through which managers devise and implement an
operational plan that gives their company a competitive edge. An organisation’s higher management
must employ data analytics to think strategically first, then use the strategic management process to
put that strategy into action.
So, what exactly is strategic management?
The strategic management process is a culture of continual evaluation that a company develops in
order to outperform its competition. As simple as it may appear, this is a multi-step process that includes
developing the organisation’s broad vision for current and future goals.
Various companies have different approaches to developing and implementing management strategies.
As a result, the company may choose from a variety of SMP models. The best model is determined by a
number of criteria, including:
 The existing culture of the organisation.
 Market dominance of the organisation.
 Leadership style.
 The organisation’s experience in creating and implementing SMPs.
 Industry and competition.
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10.6 HIERARCHY OF STRATEGIC INTENT

The intellectual foundation of the strategic management approach is known as strategic intent. It
denotes the goal that an organisation aspires to achieve. It is a declaration that gives a viewpoint on
the ways through which the company will achieve its long-term objective.
The goals that the corporation aspires to are referred to as strategic intent. These can be stated in terms
of a strategic intent hierarchy. The five sorts of factors that make up the Hierarchy of Strategic Intent
are Vision, Mission, Goals, Objectives, and Action Plans.
 Vision: The term “vision” refers to a set of broad, all-encompassing, and forward-thinking goals. A
vision is a wish for the future that does not identify the intended outcomes. A vision describes the
position that a company aspires to achieve in the future.
 Mission: A strategic mission specifies an organisation’s primary role or job. The traditional focus
of a company›s mission statement is on its current business scope - “who we are and what we do.”
 Goals: A mission statement aims to make vision statements more explicit, whereas goals aim to
enhance an organisation’s performance by making mission statements more tangible. Goals give
direction and a cohesive vision for the organisation’s employees. Goals can assist everyone in
understanding where the company is heading and why it is going there.
 Objectives: Objectives have operational definitions, which are called objectives. The goals and
outputs that an organisation seeks to attain are defined by its objectives.
 Strategy: The competitive efforts and commercial tactics that managers use to delight a client,
compete successfully, and achieve organisational objectives make up a company›s strategy.
 Action plans: Action plans encompass all strategies for detecting and performing all essential
functions to meet an organisation’s objectives and identifying their priority.
Figure 1 shows the Hierarchy of Strategic Intent:
Vision
Mission
Business
Definition
Business
Model
Goals and
Objectives
Figure 1: Hierarchy of Strategic Intent
6
 Strategic management is all about identifying and describing the strategies that managers may use
to improve their organisation’s performance and gain a competitive edge.
 If an organisation’s profitability exceeds that of all other organisations in its industry, it is considered
to have a competitive edge.
 Strategic management is also described as a set of decisions and actions taken by a manager to
determine the outcome of the firm’s performance.
 To make the best judgments, the manager must have a complete understanding and analysis of the
overall and competitive organisational environment.
 Business and industries in which an organisation is involved; evaluates and controls its competitors
and sets goals and strategies to meet all existing and potential competitors; and then reevaluates
strategies on a regular basis to determine how well they have been implemented and whether they
need to be replaced.
 The Company level plan, often known as Corporate strategy, is at the very top.
 At this level, it refers to the organisation’s long-term strategy, which sets the tone for all divisions
and demonstrates how they may produce more value by working together than if they worked
separately.
 Corporate strategy aids in the organisation’s ability to make the most of its resources in order to
acquire a competitive edge in the market.
 External elements that impact a company are more numerous and encompass both micro and
macro concerns.
 Competitors, clients, suppliers, consumers, and other components directly relevant to company
operations are examples of micro environmental influences.
 In order to design efficient marketing efforts that target certain groups, you must first understand
the demographics of your customers.
 Education level, age, income, marital status, occupation, gender, religion, and ethnicity are all
factors in demographics.
 Based on their cultural ideas and social practises, different groups of people have different
expectations from organisations and different wants and aspirations.
 Price movements are influenced by economic developments.
 Whether the economy is in a downturn, a company’s pricing plan should be reviewed to see if any
modifications are required to stay within the financial limitations of its customers.
 The business-level strategy is what most people are familiar with, and it revolves on the questions
of “How do we compete?” and “How do we achieve (a sustainable) competitive edge over our
competitors?” To answer these questions, you must first have a thorough awareness of a company’s
internal operations as well as its external surroundings.
 Strategic management is a field of management concerned with an organisation’s long-term goals.
 This might involve creating the organisation’s vision, defining its operational goals, and developing
and implementing the organisation’s strategy.
 If necessary, it may also entail the creation and implementation of deviation correction procedures.
7
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 The strategic management process is not to be confused with the strategic planning process, which
is related but not the same thing.
 The purpose of this article is to provide a response to the question “what is strategic management
process?” Before we go any further, let’s define the strategic management process.
 Consider the strategic management process as a philosophical approach to running business when
defining it.
 This is a catch-all word for the process through which managers devise and implement an operational
plan that gives their company a competitive edge.
 An organisation’s higher management must employ data analytics to think strategically first, then
use the strategic management process to put that strategy into action.
 The intellectual foundation of the strategic management approach is known as strategic intent.
 It denotes the goal that an organisation aspires to achieve.
 It is a declaration that gives a viewpoint on the ways through which the company will achieve its
long-term objective.
 The goals that the corporation aspires to are referred to as strategic intent.
 These can be stated in terms of a strategic intent hierarchy.
 The five sorts of factors that make up the Hierarchy of Strategic Intent are Vision, Mission, Goals,
Objectives, and Action Plans.
10.8 GLOSSARY
 Strategic management: It is the process of establishing goals, processes, and objectives in order to
improve the competitiveness of a firm or organisation
 Profitability: It is a metric for determining how efficient a company is
 Competitive: It involves individuals or organisations competing with one another
 Demographics: It refers to investigation of a population based on criteria such as age, race, and
gender
10.9 CASE STUDY: MOTOROLA AND IRIDIUM
Case Objective
This case aims to describe Motorola and Iridium’s network.
Star Struck
The 77th element, Iridium, was chosen to represent the 77 satellites that were expected to shoot signals
throughout the world, providing a global mobile satellite telephone service (MSS). Things, however, did
not go as planned. Motorola, Iridium’s main sponsor, has pledged not to invest any more money in the
business than the $1.6 billion it has already put in unless other investors follow suit. Iridium was aiming
for a low-key target of 27,000 subscribers by the end of July, up from 10,000 at the end of March.
As people try to figure out what went wrong, these two instances are indicative of broader issues inside
the Iridium network. Were its MSS market projections (between 32 million and 45 million customers in
8
10 years) too optimistic? Is it possible that Iridium’s issues stem from a lack of vision and inadequate
planning? In general, mobile telephony has been a fast-growing business, with 600 million customers
predicted in the next two years.
MSS providers hope to get 2.5 percent of the market by selling phones that can be used as both a landline
and a satellite phone when cellular coverage is absent. Other specialist users include truckers, civil
engineers, field scientists, disaster-relief agencies, news organisations, extractive companies, and
geologists, in addition to corporate executives. Shipping and aviation, as well as activities in developing
nations with limited telephone connectivity, are all prospective markets. Despite this, Iridium has been
unable to attract a large number of subscribers. Poor forecasting, marketing, production issues, and
even unanticipated competitor actions have been the problem.
The market size and value predicted by Iridium did not materialise. This might be attributed to a variety
of marketing issues. Handsets from Iridium cost more than $3,000, with call rates ranging from $2 to
$7 per minute. The handset for Iridium is big (7 inches) and heavy (1 pound), restricting its mobility.
Customers were left waiting for their phones due to manufacturing delays at Motorala and Kyocera.
In any event, Sprint and Telecom Italia, the company’s marketing partners, were unwilling to offer the
phones. According to John Richardson, Iridium’s new CEO, its generic, “schmoozy” and “generic life-
style marketing” was not appropriate for its specialised target demographic. Iridium’s already shaky
network was further harmed by competition.
Global star and ICO, two newcomers to the MSS market, have been able to guarantee the same service at
a lower price. For example, with a volume of 1 billion minutes per year, Iridium’s technology costs $1.28
per minute, compared to 51 cents for Global Star and 35 cents for ICO. The discrepancy is due to Iridium’s
many satellites and their higher power consumption in order to maintain their low earth orbit. This also
cuts their lifespan in half, to 5 to 7 years. The ICO satellites, on the other hand, travel 6000 miles higher
in medium-earth orbit and have a 12-year life period.
Iridium’s future is questionable, since it has been obliged to charge prices significantly lower than it had
intended, and two low-cost operators are ready to enter the market.
Questions
1. Examine how Motorola’s poor strategic management contributed to Iridium’s demise.
(Hint: Poor forecasting, marketing, production issues, and even unanticipated competitor actions
have been the problem.)
2. What actions do you believe Motorola, Kyocera, Sprint, and Telecom Italia should have done jointly
to rescue Iridium?
(Hint: Situational analysis, appropriate marketing and strategic decisions.)

1. What do you mean by Strategic management?
2. Explain the External components
3. What is Corporate-level strategy?
4. Discuss the Strategic Management Process.
9

1. Strategic management is all about identifying and describing the strategies that managers may
use to improve their organisation’s performance and gain a competitive edge. If an organisation’s
profitability exceeds that of all other organisations in its industry, it is considered to have a
competitive edge.
Strategic management is also described as a set of decisions and actions taken by a manager
to determine the outcome of the firm’s performance. To make the best judgments, the manager
must have a complete understanding and analysis of the overall and competitive organisational
environment. Refer to Section Introduction
2. External elements that impact a company are more numerous and encompass both micro and
macro concerns. Competitors, clients, suppliers, consumers, and other components directly relevant
to company operations are examples of micro environmental influences. Refer to Section Business
Environmental Scanning – Internal and External
3. However, at the corporate level, management must evaluate not just how to obtain a competitive
edge in each of the company’s lines of business, but also which businesses they should be in in the
first place. It’s all about picking the best combination of enterprises and figuring out how to combine
them into a corporate whole: a portfolio. Top management often makes important investment and
divestiture decisions at this level. Mergers and acquisitions (M&A) are another crucial component
of company strategy. Refer to Section Levels of Business Strategy – Corporate, Business, Functional
4. Strategic management is a field of management concerned with an organisation’s long-term goals.
This might involve creating the organisation’s vision, defining its operational goals, and developing
and implementing the organisation’s strategy. If necessary, it may also entail the creation and
implementation of deviation correction procedures. The strategic management process is not to
be confused with the strategic planning process, which is related but not the same thing. Refer to
Section Hierarchy of Strategic Intent
 https://www.managementstudyguide.com/strategic-management.htm
 https://www.techtarget.com/searchcio/definition/strategic-management
 Discuss with your friends about the advantages of strategic management
10
UNIT
11 Corporate Strategy Formulation
Names of Sub-Units
Corporate Strategic Planning and its Techniques, Integration Strategies, Diversification Strategies
and Value Creation, Michael Porter’s Five Forces Analysis, Corporate Parenting Styles, Portfolio
Manager, Restructurer, Synergy Manager, Parental Developer
Overview
The unit begins by explaining the meaning of corporate strategy formulation. Further, it discusses
corporate strategic planning and its techniques. The unit explains the integration strategies,
diversification strategies and value creation. It also discusses the Michael Porter’s five forces analysis
and corporate parenting styles.
Learning Objectives

 Explain the meaning of corporate strategy formulation
 Describe the corporate strategic planning and its techniques
 Discuss integration strategies, diversification strategies and value creation
 State the Michael Porter’s five forces analysis
 Explain the corporate parenting styles
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Learning Outcomes

 Analyse meaning of corporate strategy formulation
 Develop corporate strategic planning and its techniques
 Examine the integration strategies, diversification strategies and value creation
 Elaborate Michael Porter’s five forces analysis and corporate parenting styles
 https://www.cgma.org/resources/tools/essential-tools/porters-five-forces.html
 https://corporatefinanceinstitute.com/resources/knowledge/strategy/strategic-planning/
11.1 INTRODUCTION
In 1955, the Harvard Business School Association hosted the twenty-fifth National Business Conference,
which was one of the first attempts to address the notion of strategy. An off released a book called
“Corporate Strategy” in 1965, which was based on his experiences at Lockheed Aircraft. Chandler
suggested strategy as one of the most significant factors in the study of organisations in his historical
research of the evolution of several American firms. Strategic planning, according to the literature on
strategic management, refers to the management processes in companies that evaluate the future
impact of change and make present decisions to attain a planned future. The process of developing a
strategy often begins with strategic consideration of the organisation’s goal and vision, which affects
its long-term and overall character. The mission and vision serve as the foundation for strategic goals
and objectives. Strategic thinking aids in the definition of the desired state.
11.2 CORPORATE STRATEGIC PLANNING AND ITS TECHNIQUES

Several aspects, including as time management and resource allocation, are used in strategic planning
to generate attainable goals. Strategic planning, when done well, improves operations, offers focus,
establishes priorities, and fosters teamwork. It has the ability to lead and shape an organisation’s future.
If you are a member of a strategic planning committee, you may use the following stages to develop a
successful plan:
1. Clarify the company’s vision
2. Make an outline
3. Create detailed goals
4. Decide how to track your progress
5. Involve all employees
6. Follow up routinely
1. Clarify the company’s vision: Defining the organisation’s vision, values, and mission is one of the
initial phases in strategic planning. The vision is the company’s long-term aim, and it should be
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UNIT 11: Corporate Strategy Formulation JGI JAIN
based on ambitious yet achievable objectives. Values are core principles that shape the company’s
basis and influence all aspect of operations, from marketing strategy to workplace culture. Values
should be principles that you want your staff to live by on a regular basis, whereas the mission
should clarify your company’s purpose.
Because your group will need to agree on the same definitions for all high-level components of the
organisation, this might be one of the longer procedures.
2. Make an outline: You should make a list of everything you want to talk about during your planning
session. The framework walks you through a number of phases, including doing an evaluation,
establishing a plan, and conveying the activities required to get the organisation closer to its
strategic goal.
To contribute to the outline, department heads should do study and acquire information on their
departments. The planning staff must be aware of the company’s present state as well as elements
that may influence it in the future. In order for the team to fulfil its goals, the outline also outlines
which personnel should perform duties.
3. Create detailed goals: Discuss the team’s goals once you’ve established your purpose and overview.
These objectives should be defined, with deadlines and metrics in place. For example, a marketing
department team may decide to create five articles for the corporate website in the following 30
days in order to achieve a total of 15,000 page views. They may check their statistics once a week to
see how near they are to achieving their objective.
4. Decide how to track your progress: Creating a mechanism for tracking your success is an important
aspect of the strategic planning process. This may be accomplished by writing and reviewing reports
on a regular basis. It’s possible that your organisation currently produces reports that are relevant
to your plans. Use these to track your progress and tie your efforts to your overall plan.
5. Involve all employees: Every employee makes a difference in a company’s success. Your team should
share the mission and outline with all members of the team and solicit their feedback. Employees may
have a better knowledge of the company’s capabilities and limitations. Employee communication
also guarantees that everyone is working toward the same goals and that they have a say in the
company’s future plans.
6. Follow up routinely: After you’ve completed the strategic plan, come back to it on a regular basis.
Meet with employees to discuss how the organisation is doing in terms of achieving its goals. If a
target is falling behind, talk to your staff about why and how you can improve it. You should also
update the rest of the firm on your progress on a regular basis.
11.2.1 Integration Strategies, Diversification Strategies and Value Creation
Integration Strategies
Integration plans are a crucial part of growing a successful organisation. Various integration tac tics can
be used by businesses to strengthen their influence in supply and distribution or to reduce competition.
This can aid them in consolidating and expanding their market position, as well as increasing their
competitiveness. In this post, we’ll look at the many sorts of integration techniques used by corporations,
their benefits and drawbacks, and some instances of each.
Businesses can employ integration techniques to improve their competitiveness, efficiency, or market
share by spreading their influence into other sectors. Supply, distribution, and rivalry are examples of
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these sectors. Each sector necessitates a unique integration approach, and organisations can choose
from a variety of options. Diversification techniques allow businesses to branch out into new sectors.
While vertical integration entails a company entering a new segment of an existing value chain,
diversification necessitates entering new value chains. Many companies do this through merging or
acquiring another company, while others grow into new areas without the help of another company.
Diversification Strategies
Diversification may be considered by a corporation for some reasons. Diversifications techniques
can assist a firm that only operates in one industry reduce its risk. Being in several businesses might
help mitigate the impact if one area has problems or slows down. Diversification within a company’s
industry is also an option. Diversification techniques allow businesses to branch out into new sectors.
While vertical integration entails a company entering a new segment of an existing value chain,
diversification necessitates entering new value chains. Many companies do this through merging or
acquiring another company, while others grow into new areas without the help of another company.
Diversification may be divided into three categories:
1. Related Diversification: Extending into different business areas within the same industry; an
example is Volkswagen’s acquisition of Audi.
2. Unrelated Diversification: Expanding into other industries, such as Amazon’s purchase of Whole
Foods, which allowed it to join the grocery store market.
3. Geographic Diversification: Operating in a variety of geographic markets, as Starbucks, Target,
and KFC has done. The purpose of all three diversification techniques is to create synergy.
Value Creation
Any company entity’s principal goal is to create value. Generating value for consumers helps sell products
and services, while creating value for shareholders ensures the future availability of investment money
to support operations through stock price rises. When a firm makes income (or a return on capital) that
exceeds costs, value is considered to be produced from a financial standpoint (or the cost of capital).
However, some analysts argue for a broader definition of “value creation” that is distinct from standard
financial metrics According to value based management. Net, “traditional techniques of judging
organizational performance are no longer appropriate in today’s environment.” “Earnings and asset
base are becoming less and less important in determining stock price. In today’s businesses, intangible
drivers such as innovation, people, ideas, and brand are more important.”
11.3 MICHAEL PORTER’S FIVE FORCES ANALYSIS

Porter identifies five factors as the primary drivers of competitive pressure within a given sector. They
are as follows:
1. Competitive Rivalry
2. Supplier Power
3. Buyer Power
4. Threat of Substitution
5. Threat of New Entry
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Let us discuss this analysis in detail.

1. Competitive Rivalry: The quantity and strength of your opponents is the first of Porter’s Five
Forces. What is the number of rivals you have? Who are they, and how do their products and services
compare to yours in terms of quality?
2. Supplier Power: The ease with which your suppliers can raise their pricing determines their supplier
power. What is the number of possible suppliers you have? How distinctive is the product or service
they offer? And how much would switching from one provider to another cost?
3. Buyer Power: Buyer power exists when the number of customers in a certain industry is low in
comparison to the number of providers. This means they’ll likely find it simple to move to new, lower-
cost rivals, lowering costs in the long run.
4. Threat of Substitution: This refers to the possibility that your consumers will find a better method
to do what you do. If you have a unique software solution that automates a critical function, for
example, customers may opt to execute the task themselves or outsource it instead.
A simple and inexpensive substitute might damage your position and jeopardise your profits.
5. Threat of New Entry: The ability of people to enter your market might have an impact on your
position. Competitors can swiftly enter your market and harm your position if it costs little money
and effort to enter and compete successfully, or if your core technology are not well protected.
11.4 CORPORATE PARENTING STYLES

This reaffirms the notion of producing advantage via parenting (Parenting Advantage), which should
influence judgments concerning the nature of the portfolio’s companies and its structure. Multi-business
corporate enterprises, on the other hand, are made up of companies and a corporate hierarchy of line
managers, functions, and staffs outside of these businesses, known as the corporate parent, which is in
charge of making corporate decisions.
All layers of management that are not part of customer-facing, profit-responsible business units, or
simply whatever is left outside the business units but inside the firm, might be referred to as parent.
Making choices regarding new firms to support or acquisitions to make, deciding the structure of
the enterprise, defining budgeting and capital spending processes, and creating corporate values
and attitudes are all part of the parent’s job. The firms perform better as a group under the parent’s
ownership than they would as separate enterprises. In addition, the parent must offer more value to the
portfolio’s businesses than it costs.
The following are the three main types of corporate parenting:
1 Financial Control: The corporate parent’s job in this structure is to oversee and analyse the financial
performance of the different business units’ investment portfolio. Corporate executives discover
and buy viable assets and businesses on behalf of shareholders and financial markets. Business
unit managers are allowed liberty to conduct business and make choices at their own level. The
corporate parent, on the other hand, establishes performance requirements for control purposes.
2. Strategic planning: The corporate parent’s function in this strategy is to improve synergies among
the business units. This may be accomplished through imagining a shared goal, allowing cross-
business collaboration, and offering central services and resources.
3. Strategic control: The corporate parent uses its resources and competencies to create value for its
enterprises in this approach. A company could, for example, have a valuable brand or a specialised
talent.
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11.4.1 Portfolio Manager

He invests actively in a way that stock market shareholders are unable to accomplish because they are too
scattered or inexperienced. Portfolio managers work as agents for financial markets and shareholders,
attempting to extract more value from diverse enterprises than they could achieve on their own. His
job include locating and acquiring undervalued assets or enterprises, as well as improving them. His
job is not to get too engaged in the day-to-day operations of the company, but rather to move quickly to
enhance performance. He focuses on intervention and investment provision or withdrawal. He wants
to keep the cost of the centre as low as possible. He establishes explicit financial goals for those chef
executives, rewarding them handsomely if they meet them and threatening to fire them if they don’t.
He operates as a leader, defining financial goals, making central assessments of the health and future
prospects of businesses and investments, and intervening or divesting as necessary.
11.4.2 Restructurer
The process of corporate restructuring is seen as critical for resolving the financial crisis and improving
the company’s performance. The concerned business entity’s management appoints a financial and
legal specialist for advice and support in the negotiation and transaction transactions when they are
suffering financial difficulties.
Typically, the corporation in question will consider debt financing, operations downsizing, or selling
a piece of the business to potential investors. Furthermore, the necessity for corporate restructuring
develops as a result of a change in a company’s ownership structure. Takeovers, mergers, severe
economic situations, undesirable developments in business such as buyouts, bankruptcy, lack of
integration between divisions, over-employed staff, and other factors might all contribute to a change
in the company’s ownership structure.
11.4.3 Synergy Manager

When two or more organisations connect or collaborate to achieve a combined impact that is larger
than the sum of its parts, this is known as synergy. Although the term is new, the concept is ancient
enough to have a catchy phrase connected to it. “Two heads are better than one,” we’ve all heard. That’s
just another word for “synergy.”
However, it’s wise not to embrace conventional knowledge until you’ve given it some thought. It stated
that communication is the key to success. When more than one group is working on a project, it’s
critical to understand how they feel about the answers to questions and how confident they are in the
judgments made. This is accomplished when each group is able to discuss their various points of view.
The consequence might be unfavourable if one has faulty knowledge, is incompetent, or overconfident.
The capacity to appropriately measure and report our own competence is essential for successful
teamwork. The corporate parent’s primary motivation is frequently perceived as obtaining synergy.
By managing synergies among business units, the synergy manager aims to increase value for business
units. When it comes to value-creating activities, the focus is on envisioning a shared purpose, facilitating
cross-business collaboration, and delivering central services and resources.
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11.4.4 Parental Developer

A corporate parent who brings some of its own talents to bear on SBUs to help them develop and provide
value is known as a parental developer. (This is different from synergy management, which looks at how
sub-units might benefit one another.) The corporate parent teaches some of its own competencies to the
SBUs in this case.) For instance, a corporate parent may have excellent worldwide marketing abilities,
which might be applied to an SBU aiming to sell its products in other nations. Parental developers must
be explicit about the unique talents, capabilities, and resources they possess that may help an SBU
create value. A ‘parenting opportunity’ is an SBU that is not performing to its full potential and where
the parent possesses certain abilities or competencies that can aid the SBU’s improvement.
 Apply specialised talents required by business units for a specific purpose, such as financial
management or research and development, to provide value to the companies through their own
key competences.
 A thorough knowledge of the parent’s value-adding capabilities and the needs of the business units
is required in order to determine how they might be utilised to create value to the business units.
 They must be able to provide value to all firms or be willing to divest those in which they have no
competitive edge.
 An off released a book called “Corporate Strategy” in 1965, which was based on his experiences at
Lockheed Aircraft. Chandler suggested strategy as one of the most significant factors in the study of
organisations in his historical research of the evolution of several American firms.
 Strategic planning, when done well, improves operations, offers focus, establishes priorities, and
fosters teamwork. It has the ability to lead and shape an organisation’s future.
 Integration plans are a crucial part of growing a successful organisation. Various integration
tactics can be used by businesses to strengthen their influence in supply and distribution or to
reduce competition.
 Diversification may be considered by a corporation for some reasons. Diversifications techniques
can assist a firm that only operates in one industry reduce its risk.
 Any company entity’s principal goal is to create value. Generating value for consumers helps sell
products and services, while creating value for shareholders ensures the future availability of
investment money to support operations through stock price rises.
 Porter identifies five factors as the primary drivers of competitive pressure within a given sector.
They are as follows: Competitive Rivalry, Supplier Power, Buyer Power, Threat of Substitution and
Threat of New Entry.
 Multi-business corporate enterprises, on the other hand, are made up of companies and a corporate
hierarchy of line managers, functions, and staffs outside of these businesses, known as the corporate
parent, which is in charge of making corporate decisions.
 Portfolio managers work as agents for financial markets and shareholders, attempting to extract
more value from diverse enterprises than they could achieve on their own.
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11.6 GLOSSARY
 Portfolio: It is a collection of business stock and other investments controlled by a single individual
or organisation.
 Enterprises: It is an organisation, especially a business, or a difficult and important plan, especially
one that will earn money.
 Diversification: It is a practice of incorporating more diverse sorts of objects.
 Consumers: It refers to a person who purchases goods or services only for personal consumption.
11.7 CASE STUDY: MICROSOFT BROADENS VISION STATEMENT BEYOND PCS
Case Objective
This case describes the vision statement of Microsoft.
Microsoft modified its “PC centric” vision statement to one that welcomes the effect of the Internet on
technology in response to what it sees as major threats. The transition is specifically from “a computer
on every desk and in every house” to “empowering people with amasing software at any time, anywhere,
and on any device.”
The most severe concern is that developers may produce programmes that can be accessed through
web browsers, reducing the necessity for Windows software and PCs. While the number of developers
writing for Windows has remained consistent, the percentage of developers working for the web has
climbed from 21% to 38% in the last year.
Microsoft has also included a pop-up notes function to their online MSN, which is compatible with AOl’s
Instant Messaging (IM) feature and competes with it (Wall Street Journal, July 29, 1990). Microsoft’s
“hacking” into AOL’s instant messaging function has been prevented since the technology is now “closed.”
AOL is being courted by Microsoft and other Internet service providers such as Yahoo and Prodigy to
collaborate and establish compatible solutions (Wall Street Joumal, July 26, 1999b). However, in keeping
with its new vision, Microsoft continues to alter its software to allow Hotmail members to maintain
immediate communication through the Internet.
Microsoft’s new corporate strategy also signals the company’s ambition to seize fresh possibilities.
Consumers use their computers and the Internet to exchange photos and listen to new music. Digital
photography and music, technology, and internet services will all be integrated into the Windows
operating system (Wall Street Journal, July 26, 1999c.)
While the corporation is still being investigated for antitrust violations, they are hoping to present
product integration as a competitive reaction to changing sectors and markets. Clearly, such measures
are required by their new vision.
Questions
1. What does a company strategy look like?
(Hint: A gas station company purchasing an oil refinery is an example. Diversification is a business
strategy in which a corporation buys or starts a business that is not related to its present product.
Diversification can take place at either the business unit or corporate level.)
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2. What are the many sorts of company strategies?

(Hint: Stability Strategy, Expansion Strategy, Retrenchment Strategy, and Combination Strategy are
the four major types of corporate level strategy.)

1. Explain the corporate strategic planning and its techniques.
2. What do you mean by integration strategies?
3. Explain the diversification strategies.
4. Discuss the corporate parenting styles.

1. Several aspects, including as time management and resource allocation, are used in strategic
planning to generate attainable goals. Strategic planning, when done well, improves operations,
offers focus, establishes priorities, and fosters teamwork. It has the ability to lead and shape an
organisation’s future.
If you are a member of a strategic planning committee, you may use the following stages to develop
a successful plan:
1. Clarify the company’s vision
2. Make an outline
3. Create detailed goals
4. Decide how to track your progress
5. Involve all employees
Refer to Section Corporate Strategic Planning and its Techniques
2. Integration plans are a crucial part of growing a successful organisation. Various integration tactics
can be used by businesses to strengthen their influence in supply and distribution or to reduce
competition. This can aid them in consolidating and expanding their market position, as well as
increasing their competitiveness. In this post, we’ll look at the many sorts of integration techniques
used by corporations, their benefits and drawbacks, and some instances of each. Refer to Section
Corporate Strategic Planning and its Techniques
3. Diversification may be considered by a corporation for some reasons. Diversifications techniques
can assist a firm that only operates in one industry reduce its risk. Being in several businesses
might help mitigate the impact if one area has problems or slows down. Diversification within a
company’s industry is also an option. Diversification techniques allow businesses to branch out into
new sectors. While vertical integration entails a company entering a new segment of an existing
value chain, diversification necessitates entering new value chains. Refer to Section Corporate
Strategic Planning and its Techniques
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4. This reaffirms the notion of producing advantage via parenting (Parenting Advantage), which
should influence judgments concerning the nature of the portfolio’s companies and its structure.
Multi-business corporate enterprises, on the other hand, are made up of companies and a corporate
hierarchy of line managers, functions, and staffs outside of these businesses, known as the corporate
parent, which is in charge of making corporate decisions. All layers of management that are not part
of customer-facing, profit-responsible business units, or simply whatever is left outside the business
units but inside the firm, might be referred to as parent. Refer to Section Corporate Parenting Styles
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 https://www.cleverism.com/strategy-formulation-guide/
 https://businessjargons.com/strategy-formulation.html
 https://www.slideshare.net/BushraIram2/strategic-formulation-corporate-strategy
 Discuss the strategy formulation and the levels of strategy formulation with friends.
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UNIT
12 Business Strategy Formulation
Names of Sub-Units
Competitive Advantage and Core Competence, Strategic Analysis, Strategic Analysis Methods, BCG
Matrix, Ansoff Matrix, Scenario Planning, Value Chain Analysis, GAP Analysis, VRIO Model, McKinsey
7S Framework, Porter’s Generic Model, Blue Ocean Strategy, Turnaround Strategy
Overview
The unit begins by explaining the meaning of business strategy formulation. Further, this unit describes
Competitive Advantage and Core Competence. The unit explains the Strategic with its methods.
Learning Objectives

 Explain the meaning of business strategy formulation
 Describe the competitive advantage and core competence
 Discuss strategic analysis
 State the methods of strategic analysis
Learning Outcomes

 Analyse the competitive advantage and core competence
 Define strategic analysis and its Methods
 Elaborate the McKinsey 7S Framework and Porter’s Generic Model
 Assess blue ocean strategy and turnaround strategy
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 https://www.managementstudyguide.com/strategy-formulation-process.htm
 https://www.economicsdiscussion.net/strategic-management/strategy-formulation-meaning-
aspects-process-approaches-and-challenges/31506
12.1 INTRODUCTION
Over the last seven years, this sophisticated strategy formulation approach has been created and
verified. Pfizer, Hewlett-Packard, United Technologies, Medtronic, Motorola, Johnson & Johnson, and
other corporations in the United States, the Pacific Rim, and Europe have successfully implemented
it. Its application frequently yields strategies and solutions that have been shown to offer up to ten
times more value than those developed using standard strategy formulation methodologies. This level
of advancement has been made possible because to a unique combination of structure, data, and
computing power. This approach is being used by organisations to leverage their collective knowledge
and wisdom, make fact-based decisions, and develop the strategies and solutions needed to tackle their
most pressing issues.
This method is used to develop overall business strategies, product and service strategies, as well as
plans to improve an organisation’s operational, support, and managerial processes. It allows companies
to put the theories of strategists and academics like Michael Porter, Gary Hamel, C. K. Prahalad, Peter
Senge, Kenichi Ohmae, and others into reality.
12.2 COMPETITIVE ADVANTAGE AND CORE COMPETENCE
Competitive Advantage
In relation to other businesses in the market, a competitive advantage refers to a company’s advantage
over its competitors in terms of its goods, services, competences, strategies, and so on, which allows
it to create more sales, profit margins, and/or retain more consumers. A competitive advantage, in
other terms, is something that puts a corporation ahead of its competitors. A company’s competitive
advantages might include things like its distinct product offers, cost structure, customer service, and
supply and distribution methods. A competitive advantage allows a company to produce more value for
its owners, customers, and employees.
The stronger the competitive advantage’s long-term viability, the more difficult it is for competitors
to catch up to the firm. Cost leadership, differentiation, and market segmentation are the three key
strategies for businesses to gain a competitive edge. When a corporation is able to supply low-cost items
to its consumers, it is known as cost leadership.
This may be accomplished by making organisational procedures more efficient. When a firm
differentiates itself from its competitors, it gives customers new and improved items. Companies must
incorporate innovation and creativity into their operations in order to differentiate themselves. Finally,
market segmentation, also known as focus, necessitates a deeper understanding of the target market’s
specific demands than the competition.
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Core Competence
A company’s core competency refers to the specific abilities and expertise that set it apart from its
rivals. It is made up of a variety of resources, skills, and expertise that enable a firm to gain a competitive
advantage.
A company’s core competence is defined as anything that meets three important characteristics. To
begin with, a core competency should have the ability to acquire access to a variety of marketplaces.
This demonstrates that the product has a starting value and has the potential to grow in value in the
future. The second benefit of core competency is that it is helpful to customers in terms of lower prices
and higher product quality.
Finally, core competency is a distinguishing feature that can’t be readily imitated or replicated by
competitors. When a rival is unable to duplicate a firm’s core skill, it signifies that the competition will
not be able to achieve the same level of success as the company.
Technological expertise, skilled personnel, supply routes and processes, customer relationship
management abilities, and so on are examples of core competences held by businesses. Companies
that have achieved great success have developed core competencies that they employ to optimise
profitability. For example, Amazon’s goal is to become the world’s most “customer-centric corporation,”
and this is its fundamental competency, which gives it a competitive advantage over other shops.
12.3 STRATEGIC ANALYSIS

Strategic analysis (also known as strategic market analysis) is the process of obtaining data to assist
a company’s management in determining objectives and goals, as well as developing (or modifying)
the company’s long-term strategy. It enables a corporation to comprehend its surroundings and build
a strategy plan in response. Strategic analysis is critical in every organisation because it offers the
backdrop and foundation for formulating the company’s strategy and overall position.
Why is not it sufficient to build a future plan just based on quantitative facts and charts? Because it
is hard for an organisation to grasp how it will accomplish success without first obtaining contextual
information about its internal resources and external environment (in the form of both qualitative and
quantitative data). The process of doing a strategic analysis is what gives quantitative data perspective.
Identifying and analysing data trends and patterns will help your organisation’s long-term strategy.
If you are doing a strategic analysis, you will see that you are:
 Focusing on high-level strategy: Organisation-wide strategic analysis will not happen if you
prioritise operations, sales, marketing, or any other department. The emphasis should be on data
that has a direct influence on your long-term strategy and objectives.
 Looking both backward and forward: Strategic analysis is analysing data from the past in order to
understand the consequences of that performance and forecast what is likely to occur in the future.
The better your reports are at looking backward, the more forward-thinking your company will be.
 Involving company leaders in the process: The information may be gathered by junior analysts,
but the leadership team must make judgments and take action based on it.
12.4 STRATEGIC ANALYSIS METHODS

The process of strategic analysis include analysing an organisation’s business environment in which
it works. Strategic analysis is required to develop strategic plans for decision-making and the smooth
operation of an organisation. The organisation’s aim or goals may be accomplished with the aid of
strategic planning.
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A SWOT analysis is a straightforward yet commonly used method for determining the strengths,
weaknesses, opportunities, and threats that a project or commercial activity may face. It begins with
establishing the project or business activity’s goal and then identifying the internal and external
elements that are critical to accomplishing that goal. The organisation’s strengths and weaknesses
are generally internal, whereas opportunities and dangers are usually external. These are frequently
plotted on a 2x2 matrix.
One of the most often used strategic analysis models is the SWOT analysis. It entails assessing the
strengths and weaknesses of your company’s capabilities, as well as potential possibilities and threats.
Once you’ve identified them, consider how you can:
 Capitalise on your strengths
 Limit the impact of your flaws
 Take advantage of any possibilities that come your way
 Lessen the severity of any threats
Other Strategic Analysis Tools

In addition to SWOT, other useful techniques include:
 PESTLE analysis: A methodology for analysing the many external impacts on a firm, in addition to
SWOT analysis
 Scenario planning: A strategy for constructing multiple believable projections of a company’s
probable futures
 Critical success factor analysis: A strategy for identifying the areas where a company must succeed
in order to meet its goals
 The Five Forces: A methodology for assessing the strength of five key competitive factors: new
entrants, incumbent rivals, customers, suppliers, and alternative products/services
12.4.1 BCG Matrix

Simply explained, the growth share matrix is a portfolio management framework that assists firms in
determining how to prioritise their various operations. It’s a table divided into four quadrants, each
with its own distinctive symbol representing a different level of profitability: question marks, stars, pets
(usually a dog), and cash cows. Executives could determine where to spend their resources and money
to produce the most value, as well as where to cut their losses, by allocating each firm to one of these
four categories.
BCG’s decision to specialise in “strategy” sparked a revolution that would change company management
forever. Bruce Henderson’s love for ideas has always been the firm’s distinguishing feature.
His works and thoughts reflect a visionary who excelled at challenging the established quo, a clever
thinker, and a doer with a strong sense of purpose.
12.4.2 Ansoff Matrix

An off Matrix, also known as the Product-Market Expansion Grid, is a strategic planning tool created
by Igor Ansoff to assist businesses in developing product and market expansion strategies. It’s a type of
company study that’s great for spotting growth prospects.
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The matrix best demonstrates numerous intensification options before the firm, i.e. the business gets
a concept of how the firm’s performance is dependent on its current and projected markets and goods.
The grid has two dimensions: product and market, which when combined yield four growth methods.
Growth Strategies
1. Market Penetration: A growth strategy in which a company attempts to sell current products
to existing markets in order to increase total market share. This can only be accomplished if the
corporation increases sales to existing consumers or finds new clients within the existing market
without drastically altering the items. Penetration necessitates a significant investment in
advertising and personal selling. To stay ahead of the competition in a crowded industry, you will
need an aggressive advertising campaign backed by a price plan that draws in new clients.
2. Market Development: Market development is the second quadrant of the Ansoff Matrix. When
companies decide to offer their current product in new areas, they use this technique. It is a
company’s growth strategy in which it identifies and develops new markets for its present products.
This method is riskier than market penetration since the organisation is entering a new market
about which the managers are unfamiliar. There are two ways to accomplish this:
 When a corporation expands its product into new geographic markets by hiring more salespeople,
hiring sales agents, or franchising.
 Making minor adjustments to the product, such as new packaging or product specifications, to
increase sales and attract new market segments.
3. Product Development: A growth strategy in which a company aims to expand by bringing a new
product into an existing market. The company continues in its current market but expands its
product line in order to achieve future growth and expansion, i.e., if the new product generates high
returns in the form of more sales, the market share will increase. In order to appeal to the current
market, product development can be accomplished by investing in the R&D of a different product or
purchasing the rights to produce someone else’s product.
4. Diversification: As the name implies, diversification is a business strategy in which a corporation
enters a new market with a new product. In this approach, the corporation starts or buys a new
business that has nothing to do with its current product line or market. It might be in the form of:
 Diversification in a Related Field
 Diversification in unrelated fields
Diversification is the riskiest growth strategy since it is not dependent on a company’s successful
product or market position.
12.4.3 Scenario Planning

The United States military pioneered scenario planning, which is now used to direct R&D activities
up to 20 years in the future. Scenario planning allows company decision-makers to define ranges of
possible outcomes and projected implications, assess actions, and plan for both good and bad outcomes.
Scenario planning is more than simply a financial planning tool; it’s an integrated method to dealing
with uncertainty, from predicting financial earnings and calculating cash flow to devising mitigation
actions.
But it’s more than simply a means of identifying and mitigating risk or preparing for development
opportunities. Scenario planning also include picturing many scenarios for an organisation’s future
based on assumptions about market dynamics - some favourable, some harmful.
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12.4.4 Value Chain Analysis

A value chain analysis is a visual representation of a company’s commercial operations to identify how
it might gain a competitive edge. Value chain analysis enables a firm to comprehend how it adds value
to something and, as a result, how it may offer its product or service for a higher price than the cost
of adding value, resulting in a profit margin. In other words, if they are operated effectively, the value
obtained should outweigh the expenses of operating them, i.e. clients should freely and voluntarily deal
with the organisation.
Value chain analysis, coined by Michael Porter in the 1980s, is the conceptual notion of value-added in
the form of a value chain. He proposed dividing an organisation into “primary operations” and “support
activities.” According to Porter’s Value Chain Analysis model, activities are divided into primary and
support activities.
The whole amount (i.e. total income) that purchasers are willing to pay for a company’s goods is referred
to as value. The margin is the difference between the overall value and the entire cost of doing all of the
firm’s activities.
The capacity to manage the links between all activities in the value chain determines the profit margin
that firms achieve. In other words, the company can provide a product or service for which the consumer
is ready to pay more than the total cost of all value chain operations.
12.4.5 GAP Analysis

Organisations may use a gap analysis approach to figure out how to effectively achieve their business
objectives. It contrasts the existing situation with a desired state or set of goals, highlighting flaws and
areas for development.
What should you reduce, correct, extend, or modify to take your company to the next level? That’s how:
you do a gap analysis.
You may have a number of theories about what’s going on, and your team may have diverse ideas about
how to achieve your goals. Rather of stumbling about in the dark, a gap analysis guides you through a
thorough investigation of where your company is now and where it wants to go, allowing you to act on
facts rather than assumptions to achieve your goals.
Follow these four simple steps if you are unsure how to do a gap analysis. Regardless of your sector, you
will be able to use these techniques to achieve your business objectives in any area.
12.4.6 VRIO Model

Every business is designed to provide a distinct benefit or resource to its target market. The VRIO
framework is an internal assessment tool that assists firms in identifying the advantages and resources
that provide them a competitive advantage.
The VRIO framework is an acronym that stands for the numerous success metrics that apply to your
company. Value, rarity, imitability, and organisation are all factors.
These four areas are indicators of your company’s distinctive worth and resources, and data research
may help you figure out what your company’s long-term benefits are.
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You can start strategising how your firm can leverage on this competitive edge and establish a sustainable
plan for success after you have a thorough grasp of your unique value and how your resources help
bring it to life.
When considering your distinctive worth, keep in mind that long-term success necessitates attributes
that are difficult to duplicate or incorporate by your competition. Maintaining a competitive edge is
vital to your success, and doing so necessitates a sophisticated knowledge of why you are valuable and
distinct.
12.4.7 McKinsey 7S Framework

Do you know how effectively your company is positioned to meet its objectives? Or what factors impact
its ability to successfully execute change?
Organisational effectiveness models come and go, but the McKinsey 7-S framework has been around for
a long time.
Former McKinsey & Company consultants Tom Peters and Robert Waterman created the concept in the
late 1970s. They identified seven internal organisational factors that must be in sync for a company to
be successful. The seven elements are classified as “hard” or “soft” in the model:
Table 1: The Seven Elements of the McKinsey 7-S Framework
Hard Elements Soft Elements

Shared Values
Strategy Skills
Structure Style
Systems Staff
The three “hard” elements include:

 Strategy.
 Structures (such as organisation charts and reporting lines).
 Systems (such as formal processes and IT systems.)
These aspects are rather straightforward to spot, and management has direct control over them.
The four “soft” characteristics, on the other hand, are more difficult to define, less concrete, and more
impacted by your company’s culture. However, if the organisation is to succeed, they are equally as
necessary as the hard aspects.
12.4.8 Porter’s Generic Model

Porter developed four general tactics that may be used to categorise and steer organisational activity.
They’re all about acquiring a competitive edge, so if you are presently considering your approach, it’s a
good idea to refresh your memory on the generic tactics.
The four tactics are referred to as:
 Cost-cutting strategy
 Strategy for Differentiation
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 Cost-cutting strategy
 Focus on Differentiation Strategy
You will see that the techniques have a lot in common right immediately. Read each term carefully
because some are unclear - for example, Cost Focus does not imply a focus on cost to market.
1. Cost leadership strategy: The Cost Leadership Strategy is when a company focuses on lowering
the cost of delivering products or services to customers, resulting in increased profitability and the
ability to generate shareholder value or invest in other areas of the company.
2. Differentiation strategy: A business’s Differentiation Strategy focuses on distinguishing its goods
or services from those of rivals. This approach covers a broad range of topics, from complete product
variety to distinct features inside a main product.
3. Cost focus strategy: The Cost Leadership Strategy has evolved into the Cost Focus Strategy.
This approach has two components, as the name implies. When a corporation concentrates on a
niche market, either by industry or geographical, and becomes an expert in delivering for that
industry, it is referred to as “Focus.” The “Cost” refers to the corporation that produces the product
or service ata low cost to them, similar to the Cost Leadership Strategy we covered previously.
4. Differentiation focus: You target a narrow market (low competition, ‘focused market’) and your
product or service has distinctive characteristics if you adopt the differentiation focus approach.
Consumer loyalty is generally a key component of this strategy. In order to stay ahead of the
competition, it’s critical to maintain your product’s uniqueness while focusing on distinctiveness.
12.4.9 Blue Ocean Strategy

Blue ocean strategy is the pursuit of distinctiveness and low cost at the same time in order to generate
new market space and demand. Blue ocean strategy is concerned with securing uncontested market
space and rendering the competitors obsolete. It is based on the concept that market limits and industry
structure are not set in stone and may be recreated by industry participants’ actions and beliefs.
BLUE OCEANS, on the other hand, represent all of the sectors that do not exist now - the untapped
market area that is free of competition. Demand is produced rather than fought over in blue waters.
There is plenty of room for both lucrative and quick expansion. Competition is meaningless in blue
waters since the rules of the game are yet to be established.
The term “blue ocean” is used to express the vast, untapped potential of untapped market area. In terms
of lucrative growth, a blue ocean is broad, deep, and strong.
12.4.10 Turnaround Strategy

When a corporation acknowledges that it has made poor judgments in the past, it implements
a turnaround strategy. It now has to reverse some of its actions before they have an impact on the
company’s profitability and income. It’s a strategy that involves backing away from a previous bad
judgement and turning the firm around from a loss to a profit.
The question now is when the corporation should implement the turnaround plan. Because of changes in
the external environment, it becomes vital for the firm to implement the turnaround plan. Government
rules, market demand, danger of a replacement product, shifts in client tastes, and the external
environment are just a few examples.
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When a firm is experiencing a loss phase, it must implement a turnaround strategy. As the saying
goes, “health is wealth,” which means that your business can only produce money if it is in good shape.
Turnaround, on the other hand, is a great way to deal with concerns like industrial disease. The process
of restructuring and changing a firm from loss to profit is known as a turnaround plan. It enables the
firm to maintain its performance by returning industrial units to their original configurations. The
strategy’s success now depends on senior management’s commitment and dedication.
When it comes to the survival of failing enterprises and corporations, a turnaround strategy is critical.
It improves the company’s performance in order to achieve the intended outcomes. Implementing
a successful turnaround plan, on the other hand, is a difficult process that necessitates a strong
corporate foundation and a competent management team. Trust, capital, management, leadership,
and shareholder and employee support are some of the other components of the turnaround approach.
 Over the last seven years, this sophisticated strategy formulation approach has been created and
verified. Pfizer, Hewlett-Packard, United Technologies, Medtronic, Motorola, Johnson & Johnson, and
other corporations in the United States, the Pacific Rim, and Europe have successfully implemented it.
 Its application frequently yields strategies and solutions that have been shown to offer up to ten
times more value than those developed using standard strategy formulation methodologies.
 This level of advancement has been made possible because to a unique combination of structure,
data, and computing power.
 This approach is being used by organisations to leverage their collective knowledge and wisdom,
make fact-based decisions, and develop the strategies and solutions needed to tackle their most
pressing issues.
 In relation to other businesses in the market, a competitive advantage refers to a company’s
advantage over its competitors in terms of its goods, services, competences, strategies, and so on,
which allows it to create more sales, profit margins, and/or retain more consumers.
 A competitive advantage, in other terms, is something that puts a corporation ahead of its
competitors.
 A company’s competitive advantages might include things like its distinct product offers, cost
structure, customer service, and supply and distribution methods.
 A competitive advantage allows a company to produce more value for its owners, customers, and
employees.
 The stronger the competitive advantage’s long-term viability, the more difficult it is for competitors
to catch up to the firm.
 Cost leadership, differentiation, and market segmentation are the three key strategies for businesses
to gain a competitive edge.
 When a corporation is able to supply low-cost items to its consumers, it is known as cost leadership.
 This may be accomplished by making organisational procedures more efficient.
 When a firm differentiates itself from its competitors, it gives customers new and improved items.
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 Companies must incorporate innovation and creativity into their operations in order to differentiate
themselves. Finally, market segmentation, also known as focus, necessitates a deeper understanding
of the target market’s specific demands than the competition.
 A company’s core competency refers to the specific abilities and expertise that set it apart from its
rivals.
 It is made up of a variety of resources, skills, and expertise that enable a firm to gain a competitive
advantage.
 A company’s core competence is defined as anything that meets three important characteristics.
 To begin with, a core competency should have the ability to acquire access to a variety of marketplaces.
 This demonstrates that the product has a starting value and has the potential to grow in value in
the future.
 The second benefit of core competency is that it is helpful to customers in terms of lower prices and
higher product quality.
 Strategic analysis (also known as strategic market analysis) is the process of obtaining data to assist
the company’s long-term strategy.
 It enables a corporation to comprehend its surroundings and build a strategy plan in response.
 Strategic analysis is critical in every organisation because it offers the backdrop and foundation for
formulating the company’s strategy and overall position.
 The process of strategic analysis include analysing an organisation’s business environment in
which it works.
 Strategic analysis is required to develop strategic plans for decision-making and the smooth
operation of an organisation.
 The organisation’s aim or goals may be accomplished with the aid of strategic planning.
 A SWOT analysis is a straightforward yet commonly used method for determining the strengths,
weaknesses, opportunities, and threats that a project or commercial activity may face.
 It begins with establishing the project or business activity’s goal and then identifying the internal
and external elements that are critical to accomplishing that goal.
 The organisation’s strengths and weaknesses are generally internal, whereas opportunities and
dangers are usually external.
 An off Matrix, also known as the Product-Market Expansion Grid, is a strategic planning tool created
by Igor Ansoff to assist businesses in developing product and market expansion strategies.
 It’s a type of company study that’s great for spotting growth prospects.
 The United States military pioneered scenario planning, which is now used to direct R&D activities
up to 20 years in the future.
 Scenario planning allows company decision-makers to define ranges of possible outcomes and
projected implications, assess actions, and plan for both good and bad outcomes.
 Scenario planning is more than simply a financial planning tool; it’s an integrated method to
dealing with uncertainty, from predicting financial earnings and calculating cash flow to devising
mitigation actions.
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 A value chain analysis is a visual representation of a company’s commercial operations to identify

how it might gain a competitive edge.
 Value chain analysis enables a firm to comprehend how it adds value to something and, as a result,
how it may offer its product or service for a higher price than the cost of adding value, resulting in
a profit margin.
 In other words, if they are operated effectively, the value obtained should outweigh the expenses of
operating them, i.e. clients should freely and voluntarily deal with the organisation.
 Organisations may use a gap analysis approach to figure out how to effectively achieve their
business objectives.
 It contrasts the existing situation with a desired state or set of goals, highlighting flaws and areas
for development.
 Every business is designed to provide a distinct benefit or resource to its target market.
 The VRIO framework is an internal assessment tool that assists firms in identifying the advantages
and resources that provide them a competitive advantage.
 When a corporation acknowledges that it has made poor judgments in the past, it implements a
turnaround strategy.
 It now has to reverse some of its actions before they have an impact on the company’s profitability
and income.
 It’s a strategy that involves backing away from a previous bad judgement and turning the firm
around from a loss to a profit.
 The question now is when the corporation should implement the turnaround plan. Because of
changes in the external environment, it becomes vital for the firm to implement the turnaround
plan. Government rules, market demand, danger of a replacement product, shifts in client tastes,
and the external environment are just a few examples.
 When a firm is experiencing a loss phase, it must implement a turnaround strategy.
 As the saying goes, “health is wealth,” which means that your business can only produce money if it
is in good shape.
 Turnaround, on the other hand, is a great way to deal with concerns like industrial disease.
 The process of restructuring and changing a firm from loss to profit is known as a turnaround plan.
 It enables the firm to maintain its performance by returning industrial units to their original
configurations.
 The strategy’s success now depends on senior management’s commitment and dedication.
 When it comes to the survival of failing enterprises and corporations, a turnaround strategy is
critical.
 It improves the company’s performance in order to achieve the intended outcomes.
12.6 GLOSSARY
 Strategy: It is the action taken by the managers to achieve one or more of the organisation’s
objectives.
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 Formulation: It is the act or process of formulating.

 Core Competence: It is the resources and talents that make up a company’s strategic advantages.
 Cost leadership: When a corporation portrays itself as the cheapest maker or provider of a certain
product or commodity in a competition, it is referred to as cost leadership.
12.7 CASE STUDY: BRAND REPOSITIONING – MARUTI SUZUKI WAGON R
Case Objective
The aim of this case is to describe brand positioning.
The Wagon R, Maruti Udyog’s premium product in the B category of the passenger vehicle market, is
getting a new marketing positioning, shifting from “Feel at Home” to “Inspired Engineering.”
According to corporate executives, this shift in emphasis is due to the Multi-Activity Vehicle’s
extraordinary success.
Maruti’s decision to proceed with this new brand strategy was spurred by an almost 100 percent rise in
sales in October 2002 over October 2001, and a 23 percent increase in sales for the April-October 2002
period over the same time prior year.
According to company executives, Maruti sold 3,381 Wagon Rs in October 2002, compared to 1,680 in
October 2001, a 101 percent increase. Similarly, the business sold 17,531 units of the automobile from
April to October 2002, compared to 14,291 units in the same time the previous year.
Maruti will soon unveil a new campaign based on the ‘Inspired Engineering’ concept, officials believe,
buoyed by the good sales. It builds on a previous campaign that focused on the ‘Feel at Home’ concept,
which they claim helped create a strong emotional link with the target customer.
Wagon R, a distinctively developed product for individuals who live intriguing lifestyles, will be the
subject of the new campaign. Their lifestyle is reflected in the product, which reflects their self-assurance
and complex personality. The executives point out that the sheer quality of engineering allows them to
be anything they want to be — and that is what attracts purchasers.
According to them, the new positioning “Wagon R — Inspired Engineering” represents the car’s
unrivalled, exceptional engineering and the fact that it is driven by some of the most intriguing and
discriminating people.
“It challenged tradition and transformed people’s perceptions of automobiles.” In terms of performance
and comfort, it is absolutely unrivalled. “Try one and you will never settle for anything ordinary again,”
says one of the print ads, while another says, “There are those people who tower over the others.” They
listen to their feelings, make their own rules, and live far more fulfilling lives. This is where the Wagon R
comes in. It bucked convention and transformed the way people looked at cars as a result of innovative
engineering.
The new brand strategy, according to authorities, is based on research that revealed the Wagon R
customer to be balanced, ambitious, discriminating, self-assured, and intellectual. They have deep-
seated human values at the same time. As a result, they enjoy fuller lives. “As a result, the new positioning
is in line with the buyer’s personality as well as the product,” the authorities explain.
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Questions
1. Which of the three main business strategies are you familiar with?
(Hint: Only three fundamental business strategies exist in practise: a cost strategy, a differentiated
product or service strategy, and a niche-focused approach. To write a strong strategic business plan,
you must first understand these strategies.)
2. What factors do you consider while deciding on a company strategy?
(Hint: In following easy steps, you can create a company plan.
 Create a genuine vision
 Determine what constitutes
 A competitive advantage
 Define your objectives
 Concentrate on long-term growth
 Make judgments based on facts
 Consider the long term
 But keep your wits about you
 Make an effort to be inclusive)

1. What do you mean by Competitive advantage?
2. Explain the concept of Core competence.
3. Discuss the Strategic Analysis.
4. What is Ansoff Matrix?

1. In relation to other businesses in the market, a competitive advantage refers to a company’s
advantage over its competitors in terms of its goods, services, competences, strategies, and so on,
which allows it to create more sales, profit margins, and/or retain more consumers. A competitive
advantage, in other terms, is something that puts a corporation ahead of its competitors.
A company’s competitive advantages might include things like its distinct product offers, cost
structure, customer service, and supply and distribution methods. A competitive advantage allows
a company to produce more value for its owners, customers, and employees. Refer to Section
Competitive Advantage and Core Competence
2. A company’s core competency refers to the specific abilities and expertise that set it apart from
its rivals. It is made up of a variety of resources, skills, and expertise that enable a firm to gain a
competitive advantage.
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A company’s core competence is defined as anything that meets three important characteristics. To
begin with, a core competency should have the ability to acquire access to a variety of marketplaces.
This demonstrates that the product has a starting value and has the potential to grow in value in
the future. The second benefit of core competency is that it is helpful to customers in terms of lower
prices and higher product quality. Refer to Section Competitive Advantage and Core Competence
3. Strategic analysis (also known as strategic market analysis) is the process of obtaining data to assist
the company’s long-term strategy. It enables a corporation to comprehend its surroundings and
build a strategy plan in response. Strategic analysis is critical in every organisation because it offers
the backdrop and foundation for formulating the company’s strategy and overall position. Refer to
Section Strategic Analysis
4. An off Matrix, also known as the Product-Market Expansion Grid, is a strategic planning tool created
by Igor Ansoff to assist businesses in developing product and market expansion strategies. It’s a
type of company study that’s great for spotting growth prospects.
The matrix best demonstrates numerous intensification options before the firm, i.e. the business
gets a concept of how the firm’s performance is dependent on its current and projected markets and
goods. The grid has two dimensions: product and market, which when combined yield four growth
methods. Refer to Section Strategic Analysis Methods
 https://businessjargons.com/strategy-formulation.html
 https://www.nibusinessinfo.co.uk/content/swot-pestle-and-other-models-strategic-analysis
 https://www.imanet.org/-/media/8fd1f1b0e9854bdf8d0d97903471ee26.ashx
 Discuss the advantages of Business strategy formulation.
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UNIT
13 Strategic Planning and Leadership
Names of Sub-Units
Strategic Planning System, Scenario Planning, Balanced Scorecard Approach, Logical Incrementalism,
Learning Organisations, Characteristics of Learning Organisations, Inhibitors to Becoming a Learning
Organisation, Strategic Leadership, Strategic Intent, Building an Organisation, 3 P’s of Strategic
leadership (Perseverance, Principles and Passion), Roles and Competencies of Strategic Leaders
Overview
The unit begins by explaining the strategic planning system, scenario planning, and balanced
scorecard approach. This unit elaborates the logical incrementalism and learning organisations.
Further, this unit describes the characteristics of learning organisations and inhibitors to becoming
a learning organisation. This unit examines the strategic leadership and strategic Intent. Towards
the end, this unit elaborates building an organisation, 3 P’s of strategic leadership (Perseverance,
Principles and Passion), roles and competencies of strategic leaders.
Learning Objectives

 Explain the meaning of strategic planning system
 Describe the strategic leadership
 Discuss building an organisation
 State the importance of 3 p’s of strategic leadership (perseverance, principles and passion)
 Explain the roles and competencies of strategic leaders
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Learning Outcomes

 Examine the strategic planning system
 Define scenario planning and balanced scorecard approach.
 Elaborate the logical incrementalism and learning organisations
 Describe the characteristics of learning organisations and inhibitors to becoming a learning
organisation
 Analyse the strategic leadership and strategic Intent
 State building an organisation and 3 P’s of strategic leadership (Perseverance, Principles and
Passion)
 Describe the roles and competencies of strategic leaders
 https://www.strategy-business.com/article/10-Principles-of-Strategic-Leadership
 https://www.youtube.com/watch?v=6c5kI5rJyBo
13.1 INTRODUCTION
Strategic planning is a management activity that is used to set priorities, focus energy and resources,
strengthen operations, ensure that employees and other stakeholders are working toward common
goals, establish agreement around desired outcomes/results, and assess and adjust the organisation’s
direction in response to changing circumstances. It is a systematic process that results in basic choices
and activities that form and govern what a company is, who it serves, what it does, and why it does it,
all while keeping an eye on the future. Effective strategic planning lays out not just where a company is
heading and the steps it has to take to get there, but also how it will know when it’s done.
A strategic plan is a document that communicates the business’s goals, the actions required to
accomplish those goals, and all of the other key aspects established throughout the planning process to
the rest of the organisation.
Leadership is an act or action that allows group members to know how to execute a goal, such as
establishing a framework. “Motivation,” as in the capacity to encourage others to do tasks, is a word
that is frequently connected with leadership. Leadership also includes the qualities of encouragement,
authority, and consensus to achieve certain group or organisational goals. To establish a vision and
direction for the group, the level of leadership relies on the social and group relationships that are
present.
In a group scenario, leadership is described as a social connection between two or more people who rely
on one other to achieve particular common goals. By concentrating on the group’s maintenance needs
(the need for individuals to fit and operate together) and task needs, good leadership helps individuals
and groups achieve their goals (the need for the group to make progress toward attaining the goal).
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UNIT 13: Strategic Planning and Leadership JGI JAIN
Individuals who will take command of an organisation and transfer responsibilities to other members
in order to achieve the greatest outcomes are known as leaders.
13.2 STRATEGIC PLANNING SYSTEM

Strategic planning is a high-impact organisational approach employed by small and large businesses
in almost every industry. Learning more about the strategic planning process may help all members
of a company. It’s extremely important to grasp essential parts of the process and develop successful
execution techniques.
This article will explain strategic planning, explore when it should be used, provide useful next
actions, and address a few commonly asked questions about utilising strategic planning to build your
organisation.
Organisations utilise strategic planning to determine their goals, the tactics needed to achieve those
goals, and the internal performance management system to track and assess progress. To discover the
fundamental variables driving their present performance, most firms utilise a SWOT or gap analysis. As
a result, information on the most high-leverage change initiatives becomes available.
A strategic planner, or someone who is exclusively committed to meticulously preparing the activities
a firm has to take to realise its greatest potential, is used by companies trying to maximise their
performance and growth.
The strategic planning process concludes with the creation of a strategic plan document that acts
as the organisation’s overall road map. While each business is different, the following are the basic
components of a strategic plan:
 The document’s context is set by clear mission and vision statements.
 Timelines for implementing the strategy and tracking progress
 Quarterly benchmarks or objectives that will help you track your progress toward your yearly
objectives
 Identifying the data sources that will be utilised to measure progress
 Identification of the people and/or offices in charge of each strategy
All organisational activities, from human resource policy execution to financial development goals,
require an effective strategic planning process. Whatever your objective, you may develop a performance
improvement strategy to help you streamline the procedures you use to help your organisation flourish.
13.3 SCENARIO PLANNING

The United States military pioneered scenario planning, this is now used to direct R&D activities up to
20 years in the future.
“Scenarios are thorough and probable views of how business environments might extend in to the
future (Ringland, 2002).”
Scenario planning refers to the technique of strategic planning that depends on tools and technologies
to face and manage the uncertainties of the future. Also, scenario planning develops various plausible
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representations of the future of the organisation on the basis of assumptions related to the forces
driving the market and include different uncertainties (Kotler and Keller, 2011).
Scenario planning allows company decision-makers to define ranges of possible outcomes and projected
implications, assess actions, and plan for both good and bad outcomes. Scenario planning is more than
simply a financial planning tool; it’s an integrated method to dealing with uncertainty, from predicting
financial earnings and calculating cash flow to devising mitigation actions.
But it’s more than simply a means of identifying and mitigating risk or preparing for development
opportunities. Scenario planning also include picturing many scenarios for an organisation’s future
based on assumptions about market dynamics - some favourable, some harmful.
13.4 BALANCED SCORECARD APPROACH

A Balanced Scorecard (BSC) is a management system that offers feedback on both internal and external
company operations in order to enhance strategic performance and results over time. A balanced
scorecard enables continual development at the strategic performance and results level by bringing
together measurements around internal processes and external outcomes.
The balanced scorecard is a strategic management tool that looks at the company from several angles,
generally the following:
 Financial: Your shareholders’ point of view
 Customer: What your customers think and feel about you.
 Business process: The primary processes you employ to fulfil and exceed the needs of your customers
and shareholders.
 Learning and growth: How do you encourage continuing change and improvement?
The balanced scorecard invites you to define measures, set performance objectives, and gather and
evaluate data for each of these viewpoints. As a result, your scorecard provides an effective framework
for measuring and analysing plan execution.
A balanced scorecard can assist your company in articulating and implementing its vision and strategy.
It can be used to:
 Facilitate effective and consistent communication by ensuring that everyone speaks the same
metrics language
 Maintain a laser-like focus on critical needs
 Schedule frequent reviews with your team
 Ensure that the organisation is on the same page.
13.5 LOGICAL INCREMENTALISM

Quinn (1980) is credited for pioneering the gradual technique, thanks to Lindblom’s influence (1959).
Logical incrementalism is a method that effectively combines strategy design with execution. Strategy
is viewed as a loosely linked series of decisions that are addressed progressively in incremental
techniques. Individual decisions are made below the corporate level because decentralisation is
politically advantageous.
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The approach’s merits include its capacity to deal with complexity and change, its focus on both little
and important choices, its attention to both informal and formal procedures, and its political realism.
The approach’s main flaw is that it doesn’t ensure that the different loosely connected actions will add
up to the achievement of company goals.
Logical incrementalism refers to the process approach which in effect, fuses formulation of strategy
and its implementation. This approach has strength i.e., ability to deal with the complexities and
modification. Logical incrementalism focuses on decision both minor and major,informal and formal
processes and political realism.
This approach does not guarantee that the various loosely linked decisions will add up to fulfillment of
corporate purposes and goals.
Logical incrementalism is applicable to public and non-profit organisations, as long as it is possible to

establish some overarching set of strategic objectives to be served by the approach.
13.6 LEARNING ORGANISATIONS

“A learning organisation is one that has established the ability to learn, adapt, and change on a
continual basis.” — B. P. Robbins and M. Coulter
Organisations function in a constantly changing environment. In the field of information and computer
technology, there are always new developments. Markets are global, and clients are located all over
the world. Despite the fact that the globe has gotten more global, not all clients are the same. They are
influenced by the culture, attitudes, and beliefs of their home nation.
Organisations must adapt and respond to changes fast in order to be successful. They learn how to
challenge conventional wisdom successfully, manage the organisation’s knowledge base, and implement
the needed changes. All members of the organisation take an active role in identifying and addressing
work-related difficulties. Employees in a learning organisation perform knowledge management.
13.6.1 Characteristics of Learning Organisations

There are four features that distinguish learning organisations:
1. Consideration of systems: As the old adage goes, we sometimes miss the forest for the trees. You may
perceive patterns and interrelationships, or the big picture, using systems thinking as a framework.
Businesses, for example, are frequently focused on the next fiscal quarter. Most of their choices are
made with the next quarter in mind, with little, if any, attention given to the decision’s long-term
ramifications. Looking beyond immediate worries and challenges, systems thinking invites you to
see the problem as part of a larger system.
2. Self-awareness: For you to achieve personal mastery, you’ll need three things. To begin, you must
develop a personal vision, which is a tangible representation of the future you seek. Second, you
must embrace and capitalise on creative friction. You must make every effort to bring reality closer
to your ideal. Third, you must be dedicated to the truth and refuse to fool yourself, no matter how
soothing or convenient it may seem.
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3. Mental representations: You must alter your mental models, which are simplified frameworks that
we employ to comprehend the world and have an impact on our behaviour. Managers, for example,
have a prevalent mental model that low-level production employees are lazy. We can bring about
this transformation by identifying models, evaluating their validity, and working to improve them.
4. A common goal: A common vision is more than a canned’mission statement,’ it’s a response to the
question, ‘What do we want to produce or accomplish?’ It’s important to note that it’s not simply
what the impersonal organisation wants to develop or accomplish; it’s also what the organisation’s
members want. Because all members of the company will desire to achieve the same vision, a shared
vision supports learning and the pursuit of excellence in goal implementation.
13.6.2 Inhibitors to Becoming a Learning Organisation

Organisational learning barriers are defined as systems and practises that restrict or inhibit companies
from adjusting to their key decision-making issues. They can also occur as a result of the processes of
discovering and adopting new habits and practises as a result of successes and failures. Individual and
group processes and behaviours are involved in these barriers, which can occur at numerous levels
within and between organisations.
The following are the most prevalent organisational learning and training programme barriers:
1. Organisational vs. Program Focus 5. Leadership Deficit
2. Scarce Resources 6. Culture of Non-Learning
3. Change Resistance 7. Aim for the short term
4. The Work-Learning Divide
13.7 STRATEGIC LEADERSHIP

Strategic leadership is a management style in which CEOs construct a vision for their company that
allows it to adapt to or remain competitive in a changing economic and technical environment. This
vision may be used by strategic leaders to excite workers and departments, generating a feeling of unity
and direction among them in order to execute change inside their firm.
Strategic leadership is defined as the ability to influence others to voluntarily make day-to-day
decisions that enhance the long-term viability of the organization while maintaining its short-term
financial stability. (W. Glann Rowe, 2001).
The basic goals of strategic leadership are to streamline procedures, increase strategic efficiency,
promote innovation, and foster a climate that encourages workers to be productive, self-sufficient, and
to pursue their own ideas. Strategic leaders may utilise reward or incentive programmes to motivate
personnel and assist them in achieving their objectives.
According to a 2015 PwC study of 6,000 senior executives, there is a strategic leadership shortage across
industries. Respondents were asked a series of questions aimed at eliciting their leadership preferences,
and their responses were examined to identify their leadership style. Only 8% of the responders were
strategic leaders who were capable of directing reforms.
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13.8 STRATEGIC INTENT

The intellectual foundation of the strategic management approach is known as strategic intent. It
denotes the goal that an organisation aspires to achieve. It is a declaration that gives a viewpoint on
the ways through which the company will achieve its long-term objective.
The strategic intent of an organisation describes what it hopes to achieve in the future. It responds to
the question of what the organisation aspires to or represents. It denotes the long-term market position
that the company wishes to establish or occupy, as well as the potential to explore new opportunities.
13.9 BUILDING AN ORGANISATION

Managers’ primary responsibilities include planning, organising, leading, and controlling. The
organising function is the emphasis of this module. Organising entails organising and assigning a
company’s resources in order for it to carry out its plans and meet its objectives.
 Determining work activities and splitting up duties (division of labour)
 Grouping jobs and workers This organising, or structuring, process is performed by:
(departmentalisation)
 Assigning responsibility and power (delegation)
An organisation’s formal structure is the consequence of the organising process. The structure and
design of ties inside a corporation or enterprise is referred to as an organisation. It is made up of two or
more persons who collaborate on a common goal with a clear aim. Formal organisations also feature well
defined lines of authority, information flow routes, and control mechanisms. The corporate organisation
is made up of human, material, financial, and information resources that are purposefully linked. Some
ties, such as those between workers in the finance or marketing departments, are long-lasting. Others
can be altered at any moment, such as when a committee is created to investigate a situation. Every
organisation has a structure below it. Organisations’ frameworks are often based on conventional,
modern, or team-based approaches. Employees are grouped by function, goods, processes, clients, or
regions in traditional organisations. Modern, team-based organisations are more adaptable and can
swiftly assemble people to response to changing business conditions. Regardless of the organisational
structure that a company decides to apply, all managers must first examine the type of work that needs
to be done within the company.
13.10 3P’S OF STRATEGIC LEADERSHIP (PERSEVERANCE, PRINCIPLES AND PASSION)

 Perseverance: Perseverance is a crucial quality for achieving success in life. It entails the
determination to work hard in the face of adversity, to stick to one’s goals, and to maintain consistency.
When things don’t go our way, we may be unable to finish a task or obtain what we desire. We can,
however, succeed if we persevere. Those who lack the required stamina can cultivate it from within.
 Principles: Leadership is the skill of influencing a group of people in order to achieve a common
set of objectives. To put it another way, leadership is a set of inter-personal connections in which a
person tries to influence the behaviour of others in order to achieve pre-determined goals. Influence
and goal accomplishment are common denominators among the numerous persons who have
defined leadership.
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 Passion: “An intense, driving, or overmastering sentiment or conviction,” according to Webster’s

Dictionary. Because passion is typically shown via strong ideas, beliefs, and profound engagement
in a specific activity, it might be mistaken for emotional conduct (a person’s inability to retain their
cool). Passion and emotion, on the other hand, are not the same thing. The key distinction is that
emotion is a “mental reaction,” whereas passion is a “activity” that arises as a result of intense
feeling. Others see passion as the energy that keeps us motivated and engaged, which I discovered
in my quest to understand passion. Leaders that are passionate are filled with joy, excitement,
optimism, anticipation, and meaning. Passion is a strong tool for achieving your objectives.
13.11 ROLES AND COMPETENCIES OF STRATEGIC LEADERS

Transitioning from an operational to a strategic level is a critical step that every leader must complete.
It entails several difficulties. Many leaders struggle to get through this level and fail to do so. Because of
the rapid changes in the business environment, increasing competition, and shifting employee attitudes
from one generation to the next, organisations must develop strategic leaders who can formulate
and implement strategies that deliver the desired results in order to achieve long-term sustainability.
Leaders who transition from operational leadership to strategic leadership must play multiple sorts
of responsibilities in order to achieve long-term strategic goals, as opposed to operational leadership,
which is confined to managing simply day-to-day operations.
The following are the duties of top strategic leadership:
1. Navigator: In this function, the leader responds swiftly and clearly to challenges, solves problems,
and seizes numerous possibilities to impact current work and people. The leader’s Navigator job
requires them to examine a huge quantity of contradictory information, grasp the fundamental
cause of issues, and propose realistic and optimal solutions.
2. Strategist: A leader’s strategist function allows him or her to build a long-term plan and set goals
that align with the organisation’s vision.
The approach is centred on the immediate establishment of future plans and essential activities.
The strategist function allows the leader to provide the company direction in order to attain the
desired goal.
3. Entrepreneur: The leader takes on the role of an entrepreneur in this function. He or she recognises
and seizes possibilities to grow the firm by developing new goods, services, or markets. The leader
produces new ideas, takes advantage of possibilities or suggestions, and converts them into a
new route by thinking like an entrepreneur and owner of the company. Through his acumen and
shrewdness, the leader has the capacity to handle issues quickly and builds a new leadership style.
4. Mobilizer: As a mobiliser, the strategic leader gathers a wide range of resources and forms teams
and partners to collaborate with them by utilising the synergy of diverse skills. In addition, he or she
develops a capacity that allows for the quick execution of tasks in order to meet difficult goals.
5. Talent advocate: In this function, the strategic leader discovers talented and skilled workers both
inside and externally, and maintains contact with them so that they may be tapped as needed. He or
she fosters a culture of talent development by promoting new ideas, giving training, and empowering
talented workers to achieve their full potential.
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The abilities and actions of a leader that contribute to outstanding performance are known as
leadership competencies. Organisations may better identify and train their next generation of
leaders by employing a competency-based approach to leadership.
2 Researchers have established essential leadership qualities and global competences. Future
business trends and strategy, on the other hand, should stimulate the development of new leadership
skills. While some leadership skills are required of all businesses, in order to gain a competitive edge,
a company needs identify which leadership qualities are unique to it.
 Leadership is an act or action that allows group members to know how to execute a goal, such as
establishing a framework.
 A strategic planner, or someone who is exclusively committed to meticulously preparing the
activities a firm has to take to realise its greatest potential, is used by companies trying to maximise
their performance and growth.
 Scenario planning allows company decision-makers to define ranges of possible outcomes and
projected implications, assess actions, and plan for both good and bad outcomes.
 A balanced scorecard (BSC) is a management system that offers feedback on both internal and
external company operations in order to enhance strategic performance and results over time.
 Logical incrementalism is a method that effectively combines strategy design with execution.
 “A learning organisation is one that has established the ability to learn, adapt, and change on a
continual basis.” — B. P. Robbins and M. Coulter
 Organisational learning barriers are defined as systems and practises that restrict or inhibit
companies from adjusting to their key decision-making issues.
 Strategic leadership is a management style in which CEOs construct a vision for their company that
allows it to adapt to or remain competitive in a changing economic and technical environment.
 The strategic intent of an organisation describes what it hopes to achieve in the future. It responds
to the question of what the organisation aspires to or represents.
 Managers’ primary responsibilities include planning, organising, leading, and controlling. The
organising function is the emphasis of this module.
 Leaders who transition from operational leadership to strategic leadership must play multiple
sorts of responsibilities in order to achieve long-term strategic goals, as opposed to operational
leadership, which is confined to managing simply day-to-day operations.
13.13 GLOSSARY
 Strategic Planning: It is the process through which an organisation defines its strategy, or direction,
and decides how to allocate resources to execute that goal. It might also include control measures
for directing the strategy’s execution.
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 Leadership: It is the art of encouraging a group of individuals to work together toward a single goal.
 Management: It is the process of planning and organising a company’s resources and operations to
achieve particular objectives in the most efficient way possible.
 Framework: It is a conceptual, value, custom, or rule-based framework, plan, or system.
13.14 CASE STUDY: ORGANISATIONAL CULTURE AT SOUTHWEST AIRLINES
Case Objective
The aim of this case is to explain organisational culture.
Rollin King and John Parker founded Air Southwest Co. (later Southwest Airlines Co.) in 1967, and Herbert
D. Kelleher joined them later.
For short-haul, frequent-flying, and point-to-point ‘non-interlining’ customers, they sought to deliver the
greatest service at the lowest costs. The three chose to launch their business in Texas, linking Houston,
Dallas, and San Antonio (the ‘Golden Triangle’ of the state). These cities were quickly expanding and
were also too far apart for rail or road travel to be practical. Southwest saw an opportunity when rival
airlines raised their ticket prices to levels that were unaffordable for most Texans.
Southwest’s goal was to provide low-cost air service that was safe, dependable, and short in length. With
an average flight distance of 400 miles and a duration of little over an hour, the business has compared
its expenses to ground transportation. Southwest concentrated on short-haul flights, which were costly
since planes spent more time on the ground than in the air, lowering aircraft productivity. As a result,
Southwest needed to have speedy aircraft turnarounds in order to reduce the amount of time its planes
were on the ground.
Southwest has strived to foster a close-knit, supportive, and long-lasting family-like culture from its
foundation. The organisation took a number of steps to encourage staff closeness and informality.
Southwest encourages its employees to treat one another with respect. Employees were required to
show concern for others and act in ways that reinforced their value and dignity. Instead of paintings,
the corporation placed pictures of its workers at corporate events, news clippings, letters, articles, and
advertising on the walls of its offices. Colleen Barrett even went so far as to send birthday cards to all of
her coworkers.
Kelleher’s leadership also moulded the company’s organisational culture. Kelleher’s personality had
a significant impact on Southwest culture, which reflected his spontaneity, energy, and competition.
“Our company’s culture is the glue that ties it together. Beliefs, expectations, conventions, rituals,
communication patterns, symbols, heroes, and incentive structures all fall under this umbrella. Culture
is a mash-up of a thousand things, not a magic formula or a hidden plan “, he would add.
Love, pleasure, and efficiency were the three pillars of Southwest’s culture. All of Kelleher’s employees
were treated as though they were a “beautiful and caring family.” Most of the staff knew Kelleher’s
name and insisted on calling him Herb or Herbie. Workers were enchanted by Kelleher’s charisma, and
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they responded with devotion and dedication. The company’s client connections were also marked by
friendliness and familiarity.
Kelleher believed in the culture so deeply that he famously declared, “Nothing destroys your company’s
culture like layoffs.” At Southwest, no one has ever been furloughed, which is unparalleled in the airline
business. It’s been one of our greatest assets. It has undoubtedly aided us in negotiating our union
contracts. “We know we don’t need to chat with you about job security,” one of the union officials stated
when he came in to negotiate. We might have furloughed at different periods to save money, but I always
thought it was stupid. Southwest avoided laying off any employees after September 11, 2001, while most
US airlines went through huge layoffs.
Southwest demonstrated that it respected its employees and would not jeopardise their well-being in
order to make a bit more money in the near run. The company’s culture reflected its conviction in the
idea that not furloughing employees creates loyalty. It instilled a sense of safety and trust at Southwest.
So, in hard times, the organisation looked after them, and in good times, they were considered, possibly,
a liability “We’ve never been laid off. That’s a really compelling argument to stay.”
As a result, since the September 11 attacks, Southwest has been the only airline to stay profitable in
every quarter. Despite a 25% reduction in its stock price after September 11, it was still worth more than
any of the other major airlines combined. It had a healthy balance sheet, with a debt-to-equity ratio
of 43 percent and $1.8 billion in cash and $575 million in untapped credit lines. The whole profit was
attributed to the company’s devoted staff base, which could only be established as a result of Southwest’s
organisational culture. Many competitors followed suit after the corporation went to great lengths to
increase staff loyalty and morale.
Questions
1. What do you think the most influential feature of Southwest culture is?
(Hint: it respected its employees and would not jeopardise their well-being in order to make a bit
more money in the near run.)
2. Do you believe that Southwest’s profit was due to its culture or that the leadership was simply being
modest?
(Hint: Instilled a sense of safety and trust at Southwest. So, in hard times, the organisation looked
after them, and in good times, they were considered, possibly, a liability “We’ve never been laid off.
A. Multiple Choice Questions
B. Essay Type Questions

1. What is Strategic Planning?
2. Explain Characteristics of Learning Organisations.
3. Describe the Roles and Competencies of Strategic Leaders.
4. What do you mean by Building an Organisation?
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1. Strategic planning is a management activity that is used to set priorities, focus energy and
resources, strengthen operations, ensure that employees and other stakeholders are working toward
common goals, establish agreement around desired outcomes/results, and assess and adjust the
organisation’s direction in response to changing circumstances. Refer to Section Introduction
2. As the old adage goes, we sometimes miss the forest for the trees. You may perceive patterns and
interrelationships, or the big picture, using systems thinking as a framework. Businesses, for
example, are frequently focused on the next fiscal quarter. Most of their choices are made with the
next quarter in mind, with little, if any, attention given to the decision’s long-term ramifications.
Refer to Section Learning Organisations
3. Transitioning from an operational to a strategic level is a critical step that every leader must
complete. It entails several difficulties. Many leaders struggle to get through this level and fail to do
so. Because of the rapid changes in the business environment, increasing competition, and shifting
employee attitudes from one generation to the next, organisations must develop strategic leaders
who can formulate and implement strategies that deliver the desired results in order to achieve
long-term sustainability. Refer to Section Roles and Competencies of Strategic Leaders
4. Managers’ primary responsibilities include planning, organising, leading, and controlling. The
organising function is the emphasis of this module. Organising entails organising and assigning
a company’s resources in order for it to carry out its plans and meet its objectives. Refer to Section
Building an Organisation
 https://www.mtsu.edu/cohre/services-and-solutions/leadership-development.php
 https://www.open.edu/openlearn/ocw/mod/resource/view.php?id=64843
 https://www.nasp.com/blog/strategic-leadership-focuses-your-strategic-planning/
 Discuss with your friends about the advantages of strategic planning and leadership
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UNIT
14 Strategy Implementation and Control
Names of Sub-Units
Strategy Implementation Process, Issues in Strategy Implementation, Implementing Strategy through

Organisational Design (Organisational Structure, Control and Culture), Analysing Reasons for Poor
Performance, Organisational Inertia, Strategic Change, Types of Strategic Fit, Levels of Organisational
Control, Strategic Control System, Steps in Defining an Effective Control System, Techniques of
Strategic Evaluation and Control, Barriers in Strategic Evaluation and Control
Overview
This unit explains the strategy implementation process and issues in Strategy Implementation. It
describes how to implement strategy through organisational design and also analyse the reasons for
poor performance. Further, it examines the organisational inertia, strategic change, types of strategic
fit and levels of organisational control. It describes the strategic control system, steps in defining an
effective control system, techniques of strategic evaluation and control. Towards the end, it examines
the barriers in strategic evaluation and control.
Learning Objectives

 After studying this unit, you will be able to:
 Explain the meaning of strategy implementation and control
 Describe the analysing reasons for poor performance
 Discuss strategic control system
 State the importance of techniques of strategic evaluation and control
 Explain the organisational inertia
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Learning Outcomes

 Assess the strategy implementation and control
 Appraise the analysing reasons for poor performance
 Evaluate the strategic control system
 Analyse the importance of techniques of strategic evaluation and control
 Examine the organisational inertia
 https://www.managementstudyguide.com/strategy-implementation.htm
 https://www.tutorialspoint.com/strategic_management/index.htm
14.1 INTRODUCTION
The translation of a decided strategy into organisational action in order to accomplish strategic goals
and objectives is known as strategy implementation. The way in which a company should establish,
employ, and amalgamate organisational structure, control systems, and culture to follow strategies
that lead to competitive advantage and improved performance is also characterised as strategy
implementation.
Employees are assigned particular value developing activities and duties, and organisational structure
specifies how these tasks and roles might be associated to optimise efficiency, quality, and customer
satisfaction—the pillars of competitive advantage. However, organisational structure alone is
insufficient to encourage employees.
A system of organisational control is also necessary. This management tool provides managers with
staff motivating incentives as well as feedback on employee and organisational performance. The
specific collection of values, attitudes, conventions, and beliefs held by organisational people and groups
is referred to as organisational culture.
This guide will teach you all you need to know about strategic control. Strategic controls are meant to
guide the firm in the direction of its long-term strategic goals.
Strategic controls are meant to guide the firm in the direction of its long-term strategic goals. Following
the selection of a strategy, it is applied throughout time to steer a company through a rapidly changing
environment. Strategies are forward-looking and based on management assumptions about a variety
of yet-to-happen events.
14.2 STRATEGY IMPLEMENTATION PROCESS

The execution of a new strategy is not the first step. Rather, plan implementation comes after three other
stages in the strategic management process. Identifying your purpose, vision, values, and objectives is
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UNIT 14: Strategy Implementation and Control JGI JAIN
the first stage. Research and organisational analysis are used to accomplish this. This investigation
focuses on all areas of a business.
A company’s first step is to identify possible areas for improvement. Following that, a plan is devised
to best address the changes. After that, strategic implementation takes place. Following that, leaders
examine the strategies that have been applied on a regular basis.
Strategy Implementation: A Step-by-Step Process

The strategy implementation process consists of various phases. A strategy’s long-term success is
determined by a number of factors. A number of factors influence strategic implementation, including:
 People: Do you have enough individuals to put the strategy into action? Are they the most qualified
candidates? You’ll need your present staff to demonstrate that they have the necessary skills and
abilities.
 Resources: This term encompasses both financial and non-financial assistance.
 Organisational structure: The organisational structure should be well-defined, with clear
leadership and authority. Each team member is aware of who they are responsible for and who they
are accountable to.
 Systems: What systems, capabilities, and tools are in place to help you implement your strategy?
What role do they play?
 Workplace culture: Do all employees feel at ease in their jobs? Do they know what the company’s
overarching goals are? Are workers committed to the brand’s vision and values?
14.2.1 Issues in Strategy Implementation

For the contemporary business, strategic adjustments may take various shapes. A new vertical
emphasis, a fresh leadership style, or an inventive product pivot might all be possibilities. A sound
business strategy sharpens your organisation’s focus and establishes the foundation for future growth
and development. It goes without saying that a company strategy is critical. The difficulty is in doing it
correctly.
Every business needs a strategic strategy. A broad strategy - make, sell, profit – is sufficient to get any
business off the ground, but in order to innovate, expand, and evolve; a firm must restrict its vision. A
strategic plan also establishes the framework for improving the areas that require some (or a lot of)
attention. The appropriate vision demonstrates to corporate executives where they should focus their
time, people capital, and financial resources.
According to Harvard Business School, 90 percent of firms fail to properly implement their strategic
goals. A lack of objectives for personnel, wrong resource allocation, a lack of structure and leadership,
and a lack of communication are all signs of a poorly executed plan. That’s why it’s crucial to get it
correctly.
Thecausesforfailingstrategiesvary, butthemajorityofthemrevolveonthefactthatplanimplementation
is time consuming and difficult. Understanding the most prevalent problems in strategy execution can
help you avoid them and better position your organisation for success.
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14.3 IMPLEMENTING STRATEGY THROUGH ORGANISATIONAL DESIGN (ORGANISATIONAL

STRUCTURE, CONTROL AND CULTURE)
Let us discuss how to implement strategy through organisational design.
 Structure of the Organisation: One of the most important aspects of implementing strategy is the
need to institutionalise it so that it pervades daily decisions and activities in a way that ensures
long-term strategic success. Strategic management is based on the alignment of an organisation’s
internal structure with its strategy. Internal organisation issues can obstruct or inhibit the creation
and implementation of a plan.
If a strategy is to be properly institutionalised, three key factors must be controlled to “fit” it:
organisational structure, leadership, and culture. By studying a variety of different structural
forms, you can examine the important problems of the nature of organisation structure and the
links between strategy and structure.
Organisational control is necessary for determining how effectively a company is operating,
identifying areas of concern, and taking appropriate action. Executives can use three different
sorts of control systems: (1) output control, (2) behavioural control, and (3) clan control. Different
corporations utilise different methods of control, but many companies use a combination of all
three.
 Controlling the output: Within an organisation, output control focuses on quantifiable outcomes.
Executives must decide on an acceptable level of performance, explain the general expectations
to staff, track whether the performance values satisfy the expectations, and make any necessary
modifications in output control.
 Controlling Behaviour: Behavioural control, unlike output control, focuses on regulating actions
rather than outcomes. Specific rules and processes are employed to structure or dictate behaviour
in particular. For example, to avoid employee theft, some businesses have a regulation that checks
must be signed by two persons.
 Clan Command: Clan control is a sort of control that isn’t standardised. Traditions, expectations,
values, and standards all have a role. Clan control is popular in businesses that need a high level of
innovation.
Organisational culture is a complicated topic. Every business, like people, has its own distinct identity.
The culture of an organisation refers to its distinct characteristics.
Organisational culture is an invisible but powerful factor that impacts the behaviour of members of a
group of people who work together.
Organisational culture appears to be widely agreed upon as a shared meaning shared by members that
distinguishes the company from others.
14.4 ANALYSING REASONS FOR POOR PERFORMANCE

A gap between the employee’s actual performance and the degree of performance demanded by the
organisation is a basic definition of unsatisfactory work performance. Poor performance can be divided
into three categories:
1. Work content that is unacceptable in terms of quantity, quality, and so on;
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2. Occupational health and safety violations, excessive absenteeism, theft, harassment of co-worker’s,
and other violations of work practises, procedures, and regulations; and
3. Employees’ personal concerns, which are frequently ‘off-the-job’ issues that have an impact on their
work performance.
14.5 ORGANISATIONAL INERTIA

The propensity of a mature organisation to stay on its existing path is known as organisational inertia.
This inertia may be broken down into two categories: resource rigidity and routine stiffness. Routine
rigidity originates from incapacity to modify the patterns and logic that underpin such investments,
whereas resource rigidity stems from a refusal to invest. Routine rigidity refers to the framework of a
reaction, whereas resource rigidity refers to the incentive to respond.
If a company is to thrive in the face of fast or discontinuous external change, it must overcome
organisational inertia. In a competitive environment when new companies are entering the market,
incumbents are more vulnerable to the negative effects of inertia. In this scenario, the phenomenon is
known as incumbent inertia.
14.6 STRATEGIC CHANGE

The implementation of changes to essential aspects of a firm, such as in reaction to new market
challenges or opportunities, is known as strategic transformation. This transformation is the duty of
upper management, particularly the Chief Executive Officer.
Having a strategy and then changing it is what strategic transformation is all about. A strategy is a
long-term plan for achieving certain goals. Strategies should be geared toward the future and should
result in long-term transformation. Staying relevant in a rapidly changing market necessitates this.
The practice of managing strategy in an organised manner to fulfil organisational objectives and
missions is known as strategic change management.
14.7 TYPES OF STRATEGIC FIT

Three categories of strategic fit were identified by Thompson and Strickland:
 Fits That Are Market-Related: Market-related strategic fit can result in a variety of cost-saving
opportunities (or economies of scope): using a single sales force for all related products rather than
separate sales forces for each business, advertising related products rather than separate sales
forces for each business, advertising related products in the same ads and brochures, using the
same brand names, coordinating delivery and shipping, combining after-sale service and repair
organisations, and so on. Furthermore, market related fit might lead to possibilities to transfer
selling, promotional, advertising, and product differentiation talents from one company to the next.
 Operating Fit: When there is the opportunity for cost-sharing or talent transfer in purchasing
resources, conducting R&D, creating technologies, producing components, assembling completed
items, or performing administrative support activities, different enterprises have operating fit.
Operating fit offers cost-cutting options; some come from the economies of scale that come with
merging operations into a larger-scale operation (economies of scale), while others come from the
capacity to decrease expenses by doing things together rather than separately (economies of scope).
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 Management Suitability: When managerial talents and abilities may be transferred from one
company or industry to solve difficulties in another, this is known as management fit. Managerial
skills can be transferred at any point along the activity-cost chain.
14.8 LEVELS OF ORGANISATIONAL CONTROL

Organisational control entails creating rules, procedures, or other protocols for guiding and monitoring
workers’ and processes’ work. The goal of organisational control is to guarantee that a certain task is
completed in accordance with set guidelines. Typically, organisational control consists of four steps:
1. Set standards,
2. Assess performance,
3. Compare performance to standards, and
4. Take corrective action as needed.
Organisational Control: The most common types organisational control may be divided into three
categories:
1. Strategic control,
2. Management control, and
3. Operational control.
After the strategy is established and after it is executed, strategic control, or the process of reviewing
strategy, is used.
14.9 STRATEGIC CONTROL SYSTEM

A way of supervising the execution of a strategic strategy is strategic control. It is unique in the
management process since it can deal with the unknown and ambiguous while tracking the
implementation of a plan and the results. To put it another way, strategic control is a means of
determining multiple methods of strategy execution by responding to changing external and internal
circumstances in order to meet strategic objectives.
The process is the same for all strategic evaluation techniques. The six phases of the strategic control
process are as follows:
1. Working out what to control: Prioritise the examination of aspects that are directly related to the
organisation’s purpose and vision and can have an impact on the organisation’s goals.
2. Establishing standards: Actions from the past, present, and future must all be assessed. Setting
qualitative or quantitative control criteria aids managers in determining how to assess progress
and quantify objectives.
3. Validation of performance: Measuring, addressing, and analysing performance on a monthly
or quarterly basis can assist in determining the success of a plan and ensuring that criteria are
fulfilled.
4. Performance comparison: The purpose of a performance comparison is to see if an organisation is
falling short of the established benchmark and if the gaps between goal and actuals are typical for
the industry.
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5. Deviation analysis: Managers must examine performance criteria and discover why performance
was below par if there are any variances.
6. Corrective measure: If a deviation is caused by internal causes such as a lack of resources, managers
might intervene to correct the problem. However, if it is caused by external events beyond one’s
control, inappropriate behaviours might exacerbate the situation.
14.10 STEPS IN DEFINING AN EFFECTIVE CONTROL SYSTEM

Managers are in charge of controlling in their organisations, and they must increase the efficacy of the
control system. They can do a lot to improve the effectiveness of their control systems.
Controlling is the final phase in management, when the effectiveness of the executed plan is evaluated
and corrective actions are made.
The following are nine principles of a successful control system:

1. Controls must be matched to plans and positions.
2. Ensure control flexibility.
3. Maintaining a high level of precision.
4. Control objectivity is sought.
5. Achieving the control economy.
6. Delegating power to certain managers.
7. Highlighting exceptions.
8. Adapting the control system to the organisation’s culture.
9. Using control to ensure remedial action.
14.11 TECHNIQUES OF STRATEGIC EVALUATION AND CONTROL

Strategic Control Techniques of Evaluation
 Strategic Momentum Control: Strategic momentum control assessment procedures try to reassure
strategists that the strategies they have devised and implemented are still acceptable since their
assumptions or premises have not altered and are still relevant.
 Strategic Jump Control: In the event of organisations operating in turbulent or hazardous
environments, there is no choice but to leap or skip in order to modify organisational strategy and
align the organisation with the unpredictable environment. As a result, strategic jump control
assists such businesses in effectively exiting a whirlpool.
Operational Control Techniques of Evaluation
Operational control is concerned with the most efficient allocation and utilisation of organisational
resources. As a result, operational control procedures rely on internal analysis rather than external
environmental scanning or monitoring, which falls within strategic control’s purview. These are fairly
common or common procedures when it comes to internal analysis. The following are:
1. Financial Techniques: These financial techniques are primarily concerned with an organisation’s
financial analysis.
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2. Networking Methodologies: PERT, CPM, and networks are the most prevalent variants of network
approaches used in operations research.
3. Management by Objectives (MBO): MBO is based on a very simple concept. In its most basic form,
MBO is a method of planning that aids in the removal of some of the obstacles.
4. Memorandum of Understanding: Like the MBO, the MOU is built on the innovative concept of
commitment. A Memorandum of Understanding (MOU) is an agreement between a company and
its governing body in which the parties communicate their obligations and duties.
14.12 BARRIERS IN STRATEGIC EVALUATION AND CONTROL

Strategic assessment and control refers to the component of strategic management in which a company
checks to see if it is reaching the goals set out in its strategic plan.
Strategic evaluation and control, as an assessment process for the entire organisation and those involved
in strategic management, whether at the stage of strategy design, strategy execution, or both, is not
without its challenges. The motivational and operational elements are at the root of these roadblocks
and issues. Let’s take a look at what these issues are and how they may be addressed.
Problems with Motivation

The first issue with strategic assessment is managers’ (strategists’) desire to assess whether they adopted
the proper approach when the outcomes are revealed. Motivation to assess the plan is frequently
hampered by two issues: psychological issues and a lack of a direct link between success and incentives.
Problems with Operations

Even if management agree to review the plan, the challenge of strategic evaluation remains unsolved,
despite the fact that a start has been made. This is because strategic evaluation is a hazy process
with numerous variables that aren’t as obvious as the managers would want. These variables include
determining assessment standards, measuring performance, and implementing appropriate remedial
measures. All of these are part of the strategic review and control process.
 The execution of a new strategy is not the first step. Rather, plan implementation comes after three
other stages in the strategic management process.
 Identifying your purpose, vision, values, and objectives is the first stage.
 Research and organisational analysis are used to accomplish this. This investigation focuses on all
areas of a business.
 For the contemporary business, strategic adjustments may take various shapes.
 A new vertical emphasis, a fresh leadership style, or an inventive product pivot might all be
possibilities. A sound business strategy sharpens your organisation’s focus and establishes the
foundation for future growth and development.
8
 A way of supervising the execution of a strategic strategy is strategic control. It is unique in the
implementation of a plan and the results.
 To put it another way, strategic control is a means of determining multiple methods of strategy
execution by responding to changing external and internal circumstances in order to meet strategic
objectives.
 Managers are in charge of controlling in their organisations, and they must increase the efficacy of
the control system. They can do a lot to improve the effectiveness of their control systems.
 Operational control is concerned with the most efficient allocation and utilisation of organisational
resources.
14.14 GLOSSARY
 Techniques: It is a method of accomplishing a certain objective, such as the creation or performance

of an artistic piece or a scientific technique.
 Implementation: It is the process of putting a decision or plan into action.
 Barriers: It refers to the obstacle that hinders movement or access.
14.15 CASE STUDY: COST REDUCTION STRATEGY AT BAJAJ
Case Objective
This case aims to explain the cost reduction strategy at Bajaj.
Bajaj Auto is India’s largest scooter and motorcycle manufacturer, yet it competes fiercely with some
of the world’s most well-known scooter and motorbike brands. This case study looks at how it used
supplier tactics to save costs and stay competitive.
In 1998, Bajaj Auto, India’s largest scooter and motorbike manufacturer, was fighting a tough battle in
its home market against Honda, Suzuki, and Piaggio. Because it lacked the technological resources of
its competitors, the family-owned business had to compensate by cutting costs. Its goal is to remain the
world’s lowest-cost manufacturer.
However, no matter how hard Bajaj tried to cut costs and boost efficiency at its operations near Pune,
West India, the incremental savings were insignificant. This is due to the fact that the majority of the
expenditures are expended before the components arrive at Bajaj’s manufacturing. Only roughly 10% to
12% of the sales price is spent on internal expenditures. Another 3 to 4% of the budget goes to advertising
and distribution. ‘On the other hand, costs beyond Bajaj’s direct control account for around 65 percent
of the sales price.’ For new models, this figure can reach 75%. Bajaj has lately realised that additional
significant cost savings would most likely come from its suppliers rather than the manufacturing
method.
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GM Style Supplier Management
Sanjiv Bajaj is in charge of a project to adopt US-style supply chain management, based on GM as a
model. It’s a job he’s perfectly equipped for. He moved into finance as a professional engineer since
his older brother, Rajiv, had been groomed to take over the key manufacturing tasks. His engineering
background aids him in determining where cost savings might be made. Bajaj has roughly 900 direct
tier-1 suppliers and manufactures 1.3 million automobiles each year. It should have 80, according to
the GM model. Many are small, low-tech, family-owned firms with limited productivity and inadequate
quality control.
‘We need to figure out who the excellent suppliers are, cut down on the number of sellers, and give them
a greater piece of the pie,’ Sanjiv Bajaj adds. The corporation will next try to negotiate cheaper costs for
bigger volumes, he says. Bajaj, like GM, seeks to enhance ‘quality and dependability’ by working with its
suppliers. With ‘our future requirements’ in mind, the corporation wants to assist its chosen suppliers in
investing in new equipment and increasing efficiency over time.
Difficulties with Applying US-style Strategy
But that’s where the resemblance to GM ends. Sanjiv Bajaj argues, “You can’t employ textbook theories.”
‘In India, you have to think about things like labour and power.’ Unlike GM, Bajaj cannot rely on a single
supplier for a certain item since its operations would be halted if that supplier’s employees went on
strike, which is typical in India’s heavily unionised manufacturing industry. Having only one provider
is also problematic since its production might be affected by power outages, which are a common
occurrence. It makes logical to have providers in separate places because power outages are less likely
to occur at the same time.
Bajaj also needs to deal with issues such as India’s inadequate road system, which has an impact on
distribution and emphasises the importance of location. Few Indian suppliers are capable of shouldering
the duties that General Motors places on its US suppliers. There are other component-specific
considerations to consider. “Two of our three shock absorber suppliers are rivals’ subsidiaries,” says
Sanjiv Bajaj. “This is debatable in the long run.” In a ‘interdependence’ arrangement, the corporation
may choose to build up a third supplier.
It will take several years to rationalise the supply chain. When it’s all said and done, Bajaj will still have
considerably more suppliers than the GM model predicts. Sanjiv Bajaj mentions ‘200, 300, or 400,’ but
adds the ultimate amount will be determined ‘from the bottom up.’
Bajaj expects that by doing so, it would be able to save money and enhance quality, allowing it to compete
against world-class products in a more discriminating market. It remains to be seen if this is sufficient.
Bajaj will also have to compete in terms of design, engine technology, and marketing with Honda and its
competitors. While effective supplier management does not ensure success, it is likely to be an essential
need.
Progress to 2005
Bajaj Auto has established itself as a significant motorbike manufacturer in India by 2005. At its
Pune headquarters, it had built a large manufacturing complex. It had built a robust distribution
10
and servicing network, as well as a significant research and development centre, which had led to the
launch of revolutionary Digital Twin Spark Ignition Technology. The firm had also grown into a major
motorbike exporter in Asia, and was in the process of establishing a manufacturing plant in Indonesia.
Despite the fact that it was not mentioned in the lawsuit, the firm possessed a significant vehicle line —
Bajaj was the market leader in the Indian three-wheeler industry and had a solid income stream from
this sector.
Bajaj Auto, on the other hand, has lost its market leadership in motorcycles to a competitor, Hero Honda.
Part of this was due to Hero Honda’s lack of success in bringing successful models into the fast-growing
executive segment of the Indian motorcycle industry, where the company was the market leader. In the
standard market sector, where low production costs were critical to profitability, Bajaj was still locked in
a pricing battle with Hero Honda. Furthermore, Honda, the original Japanese motorcycle manufacturer,
joined the Indian market in 2004 as a new competitor to both Hero Honda and Bajaj.
Finally, in 2005, Bajaj was so delighted with Mr Rajiv Bajaj’s overall performance that he was named
managing director of the company. He had overseen a significant change in the company’s fortunes
since 1998 and was well positioned to lead the company forward.
Questions
1. What are the key issues that Bajaj Auto is facing? How much do they have to do with operational
issues?
(Hint: Fighting a tough battle in its home market against Honda, Suzuki, and Piaggio)
2. What can organisations learn from the implementation of strategic issues from Bajaj’s experience?
(Hint: Pricing battle, robust distribution and servicing network)

1. What is strategy implementation?
2. Explain strategic control system.
3. Describe barriers in strategic evaluation and control.
4. What do you understand by steps in defining an effective control system?

1. The translation of a decided strategy into organisational action in order to accomplish strategic
goals and objectives is known as strategy implementation. The way in which a company should
establish, employ, and amalgamate organisational structure, control systems, and culture to follow
strategies that lead to competitive advantage and improved performance is also characterised as
strategy implementation. Refer to Section Introduction
11
2. A way of supervising the execution of a strategic strategy is strategic control. It is unique in the
implementation of a plan and the results. To put it another way, strategic control is a means of
determining multiple methods of strategy execution by responding to changing external and internal
circumstances in order to meet strategic objectives. Refer to Section Strategic Control System
3. Strategic assessment and control refers to the component of strategic management in which a
company checks to see if it is reaching the goals set out in its strategic plan. Strategic evaluation
and control, as an assessment process for the entire organisation and those involved in strategic
management, whether at the stage of strategy design, strategy execution, or both, is not without its
challenges. Refer to Section Barriers in Strategic Evaluation and Control
4. Managers are in charge of controlling in their organisations, and they must increase the efficacy of
the control system. They can do a lot to improve the effectiveness of their control systems.
Controlling is the final phase in management, when the effectiveness of the executed plan is
evaluated and corrective actions are made. Refer to Section Steps in Defining an Effective Control
System
 https://www.cliffsnotes.com/study-guides/principles-of-management/control-the-linking-
function/types-of-organizational-controls
 https://www.pdffiles.in/techniques-of-strategic-evaluation-and-control/
 Discuss with your friends about the levels of organisational control.
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UNIT
15 Business Strategy and Globalisation
Names of Sub-Units
Globalisation and its Impact on the Indian Industry, Effects of Globalisation, Mode of Entries in
International Market, Exporting, Licensing, Franchising, Strategic Alliances, Joint Ventures, Mergers
& Acquisitions (M&As), Types of International Trade Strategies, Environment for Foreign Trade and
Investment, Exchange Rate Movements and their Impact, Globalisation Trends and Challenges,
Balance of Payments Trends
Overview
This unit explains the Globalisation and its impact on the Indian industry. Also, it describes the
effects of Globalisation and mode of entries in international market. Further, it defines exporting,
licensing, franchising, strategic Alliances, Joint Ventures, Mergers & Acquisitions (M&As). It also types
of international trade strategies, environment for foreign trade and investment. Towards the end,
it elaborates exchange rate movements and their Impact, Globalisation trends and challenges and
balance of payments trends.
Learning Objectives

 Explain the meaning of business strategy and Globalisation
 Describe the effects of Globalisation
 Discuss types of international trade strategies
 State the importance of balance of payments trends
 Explain the Globalisation trends and challenges
JGI JAIN
Learning Outcomes

 Assess the business strategy and Globalisation
 State the effects of Globalisation
 Evaluate the types of international trade strategies
 Analyse the importance of balance of payments trends
 Examine the Globalisation trends and challenges
 https://www.mbaknol.com/international-business/modes-of-entry-into-international-markets/
 https://www.tutorialspoint.com/international_marketing/international_marketing_basic_
modes_entry.htm
15.1 INTRODUCTION
A business strategy is the sum of all the decisions and activities done by a company in order to achieve
its objectives and maintain a competitive position in the market.
It is the business’s backbone, since it is the road map that leads to the intended outcomes. Any flaw in
this roadmap might cause the company to become lost in a sea of overpowering competition.
The process through which the globe is becoming increasingly interconnected as a result of enormously
expanded commerce and cultural interchange is known as Globalisation. The production of products
and services has risen as a result of Globalisation. The most powerful enterprises are no longer national
businesses, but international conglomerates with subsidiaries in several countries.
Globalisation has been happening for hundreds of years, but it has accelerated dramatically in the last
half-century.
As a result of Globalisation, we now have:
 An expansion of foreign trade
 A business that operates in many countries
 A stronger reliance on the global economy
 Greater freedom of capital, commodities, and services movement
Why businesses like McDonald’s and Starbucks are recognised in LEDCs?
Although Globalisation is likely to help developing nations produce more wealth, it is not helping to
reduce the gap between the world’s poorest and richest countries.
15.2 GLOBALISATION AND ITS IMPACT ON THE INDIAN INDUSTRY

The process through which the globe is becoming increasingly interconnected as a result of enormously
expanded commerce and cultural interchange is known as Globalisation. The production of products
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UNIT 15: Business Strategy and Globalisation JGI JAIN
and services has risen as a result of Globalisation. The most powerful enterprises are no longer national
businesses, but international conglomerates with subsidiaries in several countries.
Globalisation has been happening for hundreds of years, but it has accelerated dramatically in the last
half-century.
The effects of Globalisation on Indian industry began in the early 1990s, when the government opened
the country’s markets to international investment. Steel, pharmaceuticals, petroleum, chemical, textile,
cement, retail, and BPO are only a few examples of Indian industry’s Globalisation.
Globalisation refers to the removal of trade barriers between countries and the integration of
economies through financial flows, commerce in commodities and services, and cross-national
business investments. Globalisation has accelerated in recent years as a result of rapid technological
advancements, particularly in the areas of communications and transportation. In 1991, India’s
government made modifications to its economic strategy, allowing direct foreign investment into the
nation. As a result, the Indian industry has experienced significant Globalisation.
Globalisation has had a variety of positive benefits in Indian business, including bringing in large
amounts of foreign investment, particularly in the BPO, pharmaceutical, petroleum, and manufacturing
industries. Huge quantities of foreign direct investment poured into the Indian economy, boosting the
country’s GDP tremendously.
15.2.1 Effects of Globalisation

The process through which corporations or other organisations gain worldwide influence or begin
functioning on a global scale, according to the official definition of “Globalisation.”
Globalisation, to put it another way, is the free movement of information, technology, and products
between nations and customers. Business, geopolitics, and technology, as well as travel, culture, and the
media, all contribute to this openness.
Globalisation has a variety of effects on businesses. Those that want to expand internationally, however,
get various rewards, including:
1. Exposure to Diverse Cultures: Globalisation has made foreign culture, such as cuisine, film, music,
and art, more accessible than ever before. Because of this free movement of people, commodities, art,
and information, you can have Thai cuisine delivered to your flat while listening to your favourite
UK-based musician or watching a Bollywood movie on Netflix.
2. Technology and Innovation Dissemination: Because many countries throughout the world are
always linked, information and technology advancements circulate swiftly. Because knowledge
travels so quickly, scientific breakthroughs produced in Asia may be put to use in the United States
in a matter of days.
3. Product Costs are Lower: Companies can develop more cost-effective ways to create their goods as a
result of Globalisation. It also boosts global competition, which lowers costs and provides customers
with a wider range of options. People in both emerging and developed nations benefit from lower
prices since they can live better on less money.
4. Achieving Higher Living Standards Around the World: Globalisation has enhanced the level of
living in developing countries. Extreme poverty has dropped by 35% since 1990, according to the
World Bank. Furthermore, the first Millennium Development Goal called for halving the poverty rate
in 1990 by 2015. In 2010, this was accomplished five years ahead of plan. Since then, approximately
1.1 billion people have risen out of severe poverty throughout the world.
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5. Gaining Entry to New Markets: Globalisation benefits businesses in many ways, including new
consumers and income sources. Companies interested in these advantages seek for flexible and
inventive methods to expand their operations internationally. International Professional Employer
Organizations (PEOs) make it easier than ever to promptly and compliantly hire personnel from
other nations. This means that many organisations will no longer need to form a foreign corporation
in order to develop internationally.
6. Obtaining New Talent: Globalisation helps organisations to locate fresh, specialised expertise
that is not available in their present market, in addition to new markets. Through Globalisation,
companies see IT talent in Berlin or Stockholm rather than Silicon Valley. Again, International PEO
enables organisations to legally hire individuals in other countries without the need to form a legal
corporation, making global recruiting easier than ever.
15.3 MODE OF ENTRIES IN INTERNATIONAL MARkET

Every multinational corporation began as a local corporation and has evolved into various ways of
international commercial entrance through time. When businesses succeed in their domestic markets,
they attempt to expand into international markets in order to replicate their success.
15.3.1 Exporting
Direct exporting entails sending your goods and products straight to a foreign market. It is the quickest
way for certain firms to enter the worldwide market.
In this situation, direct exporting might also be referred to as direct sales. This implies that you, as a
product owner in India, go to the Middle East with your own sales staff to find consumers.
Following are the benefits of direct exporting:
 You have the option of choosing your foreign agents in the international market.
 You may use the direct exporting technique to test your items in international markets before
committing to a larger expenditure.
 You may use this method to safeguard your patents, goodwill, trademarks, and other intangible
assets.
15.3.2 Licensing
Licensing is a commercial agreement in which a firm grants another company temporary access to
its intellectual property rights, such as its manufacturing method, brand name, copyright, trademark,
patent, technology, trade secret, and so on, in exchange for a fee and under certain restrictions. The
licensor is the company that allows another company to utilise its intangible assets, while the licensee
is the company that receives the licence. The licensor charges the licensee a fee or royalty for the use of
intellectual property rights.
Coca-Cola and Pepsi, for example, are internationally manufactured and distributed by local bottlers in
various nations under the licensing system.
In more technical words, it is the most basic type of commercial partnership, in which a corporation
rents out its product-based expertise in return for market access.
The licensor gains the benefit of joining the foreign market with less risk when licensing. The licensor, on
the other hand, has little to no influence over the licensee in terms of product manufacturing, distribution,
and sales. Furthermore, if the licensee succeeds, the company will have foregone earnings, and when
the licensing agreement expires, the company may discover that it has given birth to a competitor.
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15.3.3 Franchising
Let us understand franchising from the below mentioned points.
 Franchising is a business structure in which a franchisor (one party) provides or licenses franchisees
certain rights and powers (another party). Franchising is a well-known business growth marketing
approach.
 Between the Franchisor and the Franchisee, a contract is formed. Franchisees are given permission
to sell the franchisor’s products, goods, and services, as well as the ability to utilise the franchisor’s
trademark and brand name. And the franchisee operates as though he or she were a merchant.
 In exchange, the franchisee pays the franchisor a one-time fee or commission, as well as a portion of
the earnings. Franchisees benefit from not having to spend money on employee training and getting
to learn about business techniques.
 A franchise can utilise franchising to create a business using the franchisor’s pre-established brand
name. As a consequence, the franchise can forecast his performance and minimise the chances of
failure.
 Another advantage is that a franchisee may acquire exclusive rights to sell the franchisor’s products
within a given region, which means the franchisee does not have to spend money on training and
help because the franchisor offers it.
 Franchisees will learn about brand business practises and trade secrets.
15.3.4 Strategic Alliances

Business alliances are formed when two or more companies join forces. They’re about people you know
in business, and they augment your talents and shortcomings with strengths, much like a personal
network. Each alliance is a partnership in which two or more companies collaborate to achieve a
common objective while staying distinct and autonomous.
Strategic alliance is a cooperative venture that supports a fundamental corporate strategy, generates a
competitive advantage, and prevents competitors from entering a market. It enables enterprises to do
more as a group than they could on their own.
A good strategic alliance meets the following criteria:
1. It is crucial to the achievement of a key corporate aim or target.
2. It is necessary for the development or maintenance of a core competency or other competitive
advantage.
3. It prevents a competitor from gaining an advantage.
4. It makes or maintains strategic decisions for the company.
5. It reduces a considerable risk to the company.
Strategic partnerships have a number of advantages

 Expertise and resources are shared. A strategic alliance should bring together the best of both
organisations’ strengths. This might be a better grasp of the product, sales or marketing expertise,
or just additional hands on deck to speed up time to market.
 Market penetration in new areas, in certain circumstances, a strategic partnership provides
access to new markets with a solution that neither business could provide on its own. For example,
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companies expanding globally frequently collaborate with a trusted local partner to gain a
competitive advantage in a developing market.
15.3.5 Joint Ventures

A joint venture is one of the most popular ways for companies to enter the foreign market if they don’t
mind sharing their brand, information, and skills. Companies interested in expanding into international
markets can create joint ventures with local enterprises in the target market, in which both joint venture
partners share the profits and risks of the endeavor.The investment, costs, earnings, and losses are
shared in a specified proportion by both corporate organisations.
This method of entering international company is appropriate in nations where laws prohibit foreign
ownership of 100% of specific sectors.
Joint Venture Benefits

 Both parties may use their individual skills to grow and expand within a specified market
 Political risks are reduced in joint ventures owing to the presence of a local partner who is familiar
with the local market and its business climate.
 Facilitates the transfer of technology, intellectual property, and assets, as well as market expertise,
among the collaborating companies.
15.3.6 Mergers & Acquisitions (M&As)

In the worldwide market, merger and acquisition (M&A) has become the most important strategic
alliance for business, product, and geographic approaches. We undertake a synthesis study on M&A
using a meta-literature review to evaluate motivations, techniques, funding sources, announcement
impacts, cross-border competitors, success-failure, valuation concerns, and business strategies.
Through a bibliometric investigation and content analysis, we examine 155 current and relevant papers
published in 58 prominent business journals of ISI-WOS between 2015 and 2020. Journals, authors,
papers, subjects, thematic areas, discoveries, contributions, research needs, suggestions, and the
current M&A environment are all highlighted. Firms with limits might consider using productive M&A
to consolidate their energy. Finally, we identify future research issues in order to broaden the scope of
the study.
Overall, this academic innovation makes a substantial contribution to expanding our understanding
of dynamic management capacities, laying out a research agenda for future research, and finally
presenting corporate strategy and investment implications in a global context.
15.4 TYPES OF INTERNATIONAL TRADE STRATEGIES

A healthy global economy is built on international commerce. Having international trading partners
opens up new markets for a country’s enterprises, particularly Canadian businesses wishing to expand
globally. In actuality, exports made for little more than 32% of Canada’s GDP in 2018. According to recent
figures, foreign commerce supports 2.9 million jobs in the United States, accounting for roughly 17% of
total employment.
International commerce has a tremendous influence on economic growth. Businesses who have yet to
implement an international business plan have plenty of reasons to do so, even if they must first answer
a few key questions.
6
Understanding how to discover the correct market, establish the right regional and local strategies, and
becoming aware with the legal ramifications of international commerce are just a few of the many things
any business owner should think about while developing their strategy. Developing an international
trade plan for a company of any size may be a daunting task. As a result, creating one for a small firm
presents numerous distinct obstacles. Any global commerce plan must be built on six basic concepts:
 Market Opportunity with Strong Offerings
 Logistics in the Supply Chain
 Compliance with International Law
 Strategic Collaborations
 Resources available in the area
For businesses, the benefits of international trade on economic growth outweigh the challenges and
effort required to get started. Although there are several aspects that go into a strong, successful
international company line of business, how they are handled makes a significant impact.
15.5 ENVIRONMENT FOR FOREIGN TRADE AND INVESTMENT

The literature on international commerce and the environment exploded in the 1990s, with both
theoretical and empirical contributions. This literature is reviewed in the study. It examines conventional
Heckscher–Ohlin models of international commerce before moving on to non competitive models and
the strategic application of environmental policy in open economies. Public-choice approaches to
environmental policy are covered in a separate area. Furthermore, the study discusses factor mobility
and interjurisdictional rivalry, as well as intertemporal concerns like renewable resources and foreign
debt, empirical data, and institutional issues like the World Trade Organization and international
environmental accords.
Essentially, three questions are addressed from various perspectives:
 Is increasing factor mobility and trade liberalisation beneficial or harmful for the environment
 If economies are more open, are there greater incentives to loosen environmental policies?
 Is a race to the bottom in environmental regulation inevitable if trade and international factor
movements are liberalised?
All of these questions have uncertain answers. Because many recent theoretical contributions
represent second-best worlds, in which the environmental externality is only one among multiple
economic distortions, the conclusions are very dependent on the nature of the other distortions. This
comprehensive study provides an overview of the literature and explains why some of the findings are
conflicting. On the empirical side, the findings are also inconclusive. Given the intensity and polarization
of the policy discussion around the turn of the century, the relationship between environmental policies
and international commerce and factor movements is considerably weaker than one might assume.
Finally, the study attempts to propose prospective areas of future research based on theoretical insights
and actual data. Despite significant improvement over the previous decade, there is still more work to
be done.
15.6 EXCHANGE RATE MOVEMENTS AND THEIR IMPACT

A relative price of one currency expressed in terms of another currency is known as an exchange rate (or
group of currencies). The exchange rate is an important economic variable for economies like Australia
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that engage in international trade. Economic activity, inflation, and the nation’s balance of payments
are all affected by changes in it.
When exchange rates vary, terminology like depreciation, devaluation, appreciation, and revaluation
are frequently used to describe the shift. What do all of these phrases mean? They did, however, break
into two sections. Two of the words are used to describe an increase in the exchange rate. They are as
follows:
 Appreciation: An upward increase in a freely floating currency rate is referred to as appreciation.
This could happen on a daily basis, or even minute by minute.
 Revaluation: Under a fixed exchange rate system, this also refers to an upward movement in an
exchange rate. This will be a rare occurrence (if at all), and it indicates that the government has
purposefully adjusted the fixed value of the exchange rate higher.
The other two phrases are similar, but they refer to a decrease in the value of an exchange rate. They
are as follows:
 Depreciation: A downward movement in a floating exchange rate is referred to as depreciation.
 Devaluation: When the government lowers the fixed rate of a fixed exchange rate, it is referred to
as devaluation.
The relative pricing of imports and exports will alter when the currency rate appreciates or depreciates.
Exports will seem to be cheaper internationally as a result of the devaluation, while imports will be more
costly.
15.7 GLOBALISATION TRENDS AND CHALLENGES

The unrestricted movement of information, technology, and products between nations and customers
is referred to as Globalisation. Business, geopolitics, and technology, as well as travel, culture, and the
media, all contribute to this openness. Globalisation is one of the defining themes in the modern economy,
and it can be seen even in places where other aspects of the global economy are either not visible or
altogether missing. Several important factors aided Globalisation, including the liberalisation of foreign
trade and financial markets, the establishment of supranational regulatory systems, the improvement
of stock markets, the international expansion of national companies, and the advancement of scientific
and technological progress. Globalisation has also benefited from the increased prominence of financial
metrics including as profitability and shareholder wealth maximisation.
While Globalisation has many advantages, it also has its drawbacks. The Technology Industry in Velocity
Global’s 2020 State of Global ExpansionTM Report outlines some of the major issues that U.S. and UK
tech executives face when expanding their businesses globally, and leaders of other organisations are
expected to encounter similar challenges. The following are some of the challenges that businesses face
when going global:
1. International Recruiting
2. Employee Immigration Management
3. Imposing Tariffs and Fees on Exports
4. Challenges in Payroll and Compliance
5. Cultural Identity Loss
6. Exploitation of Foreign Workers
7. Difficulties in Global Expansion
8
15.8 BALANCE OF PAYMENTS TRENDS

The Balance of Payments (BOP) is a statement that keeps track of all monetary transactions between
residents of a country and the rest of the world over a given time period. These statement summaries all
transactions made by/to people, corporations, and the government, and aids in the tracking of finances
for economic development.
In a perfect circumstance, the BOP should amount to zero when all of the constituents are accurately
included. This means that money inflows and outflows should be equal. In most circumstances, however,
this does not occur optimally.
A country’s BOP statement shows if the country has a fund surplus or deficit, i.e. when a country’s
exports exceed its imports, the BOP is considered to be in surplus. The BOP deficit, on the other hand,
implies that a country’s imports exceed its exports.
The BOP transaction tracking system is comparable to the double entry accounting method. This implies
that each transaction will have a debit entry and a credit entry.
 A business strategy is the sum of all the decisions and activities done by a company in order to
achieve its objectives and maintain a competitive position in the market.
 The process through which the globe is becoming increasingly interconnected as a result of
enormously expanded commerce and cultural interchange is known as Globalisation.
 Direct exporting entails sending your goods and products straight to a foreign market. It is the
quickest way for certain firms to enter the worldwide market.
 Licensing is a commercial agreement in which a firm grants another company temporary access
to its intellectual property rights, such as its manufacturing method, brand name, copyright,
trademark, patent, technology, trade secret, and so on, in exchange for a fee and under certain
restrictions.
 Franchising is a business structure in which a franchisor (one party) provides or licenses franchisees
certain rights and powers (another party). Franchising is a well-known business growth marketing
approach.
 Business alliances are formed when two or more companies join forces.
 A joint venture is one of the most popular ways for companies to enter the foreign market if they
don’t mind sharing their brand, information, and skills.
 A relative price of one currency expressed in terms of another currency is known as an exchange
rate (or group of currencies).
 The Balance of Payments (BOP) is a statement that keeps track of all monetary transactions between
residents of a country and the rest of the world over a given time period.
15.10 GLOSSARY
 Business strategy: It is a long-term plan of action to achieve a specific goal or set of goals or
objectives is known as a business strategy.
 Liberalisation: It refers to the loosening or removal of constraints on something, usually an
economic or political system.
9
JGI JAIN
 Alliances: It is a group of countries or organisations that have created a union or partnership for
mutual benefit.
 Acquisitions: It refers to the purchase or acquisition of an asset or artefact.
15.11 CASE STUDY: NARAYAN MURTHY COMMITTEE: AN APPROACH TOWARDS

CORPORATE GOVERNANCE
Case Objective
This case aims to describe the Narayan Murthy Committee: An Approach towards Corporate
Governance.
SEBI established a corporate governance committee, which is chaired by N.R. Narayana Murthy.
Representatives from the stock market, chamber of business and industry, investor groups, and
professional organisations made up the committee. They discussed major topics and offered the
following recommendations:
1. All members of the audit committee should be ‘financially educated.’ At least one person should
have experience in accounting or financial management.
2. A simple explanation of why a corporation used a different accounting standard than the authorised
norm will not suffice.
3. Risk assessment and risk minimization processes should be communicated to board members.
4. Board members should be educated on the company’s business model, as well as the risk profile of
the business parameters, their roles as directors, and the best approach to discharge them.
5. The audit committee shall be informed on the use of the IPO funds.
6. When a director is to be nominated to the board, there should be no nomination directors, and such
appointment shall be made by shareholders.
7. The Board of Directors may set the compensation given to non-executive directors, including the
maximum amount of stock options that can be issued to non-executive directors in each fiscal year.
8. Non-executive board members’ performance shall be assessed by a peer group comprised of the
whole Board of Directors, except the director being examined.
The Narayana Murthy Committee has determined the best strategy for effective corporate governance.
It has been stated:
“Corporate governance is a topic that is not covered by the law. It is a result of management’s culture
and thinking, and it cannot be controlled just by regulation. Corporate governance is the process
of managing a company’s affairs in such a way that all stakeholders are treated fairly and that the
company’s activities benefit the maximum number of people. It’s all about transparency, honesty, and
accountability. Legislation may and should provide a common framework - the “form” - to guarantee that
standards are met. The process’ legitimacy and integrity will eventually be determined by the’substance.’
The attitude and ethical norms of management are inextricably tied to substance.”
The Department of Company Affairs (DOC) and SEBI, on the government’s side, have taken quick
efforts through legislation and regulations to speed the process of improving a corporation’s operation.
Through the Companies (Amendment) Act 2000, a number of corporate governance measures were
added to the Companies Act.
10
The following are significant improvements that will strengthen Corporate Governance:
1. Providing for a declaration of director responsibility [Section 217 (2AA)]
2. The Board must file a report if the repurchase is not completed within the timeframe stipulated in
Section 77, subsection (4).
3. Small shareholders will be represented by a director (Section 252).
4. Restrictions on company directorships (Sections 274 & 275).
5. Audit committee constitutions.
6. Increasing the penalty for violations of different parts of the Companies Act (by a factor of 10).
Questions
1. Evaluate the Narayan Murthy Committee’s recommendations critically.
(Hint: all about transparency, honesty, and accountability. Legislation may and should provide a
common framework - the “form” - to guarantee that standards are met.)
2. How does one go about establishing an effective governance system in an organisation?
(Hint: Restrictions on company directorships (Sections 274 & 275), Audit committee constitutions.)

1. What do you understand by business strategy?
2. Explain the effects of Globalisation.
3. Describe the type of international trade strategies.
4. What do you mean by Globalisation trends and challenges?

1. A business strategy is the sum of all the decisions and activities done by a company in order to
achieve its objectives and maintain a competitive position in the market.
It is the business’s backbone, since it is the road map that leads to the intended outcomes. Any flaw
in this roadmap might cause the company to become lost in a sea of overpowering competition.
Refer to Section Introduction
2. The process through which corporations or other organisations gain worldwide influence or begin
functioning on a global scale, according to the official definition of “Globalisation.”
Globalisation, to put it another way, is the free movement of information, technology, and products
between nations and customers. Business, geopolitics, and technology, as well as travel, culture,
and the media, all contribute to this openness. Refer to Section Globalisation and its Impact on the
Indian Industry
11
3. A healthy global economy is built on international commerce. Having international trading
partners opens up new markets for a country’s enterprises, particularly Canadian businesses
wishing to expand globally. In actuality, exports made for little more than 32% of Canada’s GDP in
2018. According to recent figures, foreign commerce supports 2.9 million jobs in the United States,
accounting for roughly 17% of total employment. Refer to Section Types of International Trade
Strategies
4. The unrestricted movement of information, technology, and products between nations and
customers is referred to as Globalisation. Business, geopolitics, and technology, as well as travel,
culture, and the media, all contribute to this openness. Globalisation is one of the defining themes in
the modern economy, and it can be seen even in places where other aspects of the global economy
are either not visible or altogether missing. Refer to Section Globalisation Trends and Challenges
 https://www.referenceforbusiness.com/management/Ex-Gov/Globalisation.html
 https://www.legalserviceindia.com/legal/article-5908-impact-of-globalisation-on-business-
strategies.html
 Discuss with your friends about the Mode of Entries in International Market.
12

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UNIT

Introduction to Business Environment: Business, Scope of a Business/Business Scope, Goals and

In this unit, you will learn to:

At the end of this unit, you would:

Pre-Unit Preparatory Material

1.2.1 Scope of a Business/Business Scope

1.2.2 Goals and Objectives of a Business

Figure 1: Business Objectives

Let us explain these business objectives in detail.

1.3 BUSINESS ENVIRONMENT

1.3.1 Nature of Business Environment

1.3.2 Scope of Business Environment

of strategic thinking. It enables managers to regulate and improve corporate performance by

1.3.3 Importance of Business Environment

1.4 COMPONENTS OF BUSINESS ENVIRONMENT

Internal Environment External Environment

Micro Environment Macro Environment

• Strategy • Suppliers • Political factors

Figure 2: Factors Affecting Business Environment

1.5 RELATION BETWEEN BUSINESS ENVIRONMENT AND STRATEGIC MANAGEMENT

Conclusion 1.6 CONCLUSION

 A business is an economic activity performed by an enterprising entity or an organisation often

 Business: An activity of making money by producing or buying and selling products

1.8 CASE STUDY: TATA NANO–ENVIRONMENTAL ANALYSIS

1.9 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1.10 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

@ 1.11 POST-UNIT READING MATERIAL

1.12 TOPICS FOR DISCUSSION FORUMS

02 Environmental Scanning and Micro

In this unit, you will learn to:

At the end of this unit, you would:

Pre-Unit Preparatory Material

2.2 ENVIRONMENTAL SCANNING – MEANING AND CONCEPT

Figure 1: Environmental Scanning Process

2.2.1 Importance of Environmental Scanning

2.3 BUSINESS ENVIRONMENTAL ANALYSIS

2.3.1 Steps in Business Environmental Analysis

2.4 SWOT ANALYSIS

2.5 ASSESSING RISK IN A BUSINESS ENVIRONMENT

2.6 MICRO BUSINESS ENVIRONMENT -NATURE AND SIGNIFICANCE

2.6.1 Meaning of Micro Business Environment

2.6.2 Elements of Micro Environment (Customers, Suppliers and Competitors)

2.6.3 Significance of Micro Business Environment

Conclusion 2.7 CONCLUSION

 An organisation’s internal and external environments are intertwined.

 The microenvironment of several firms in an industry might sometimes be nearly identical.

 Environmental Scanning: The continuous observation of trends and events in an organisation’s

2.9 CASE STUDY: DOORDARSHAN’S PROBLEMS

2.10 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

2.11 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

@ 2.12 POST-UNIT READING MATERIAL

2.13 TOPICS FOR DISCUSSION FORUMS

03 Macro Business Environment

Macro Business Environment – Meaning, Constituents of Macro Business Environment, Factors

In this unit, you will learn to: