BUSINESS ORGANISATION

UNIT III
GOVERNMENT AND BUSINESS INTERFACE
CONTENT
-Rationale, Forms of Government and Business Interface.
-Business Risk: Meaning, Nature, Causes, Types, Risk
Management, Methods of Handling Risk.

Interface between Government and Business

Let us discuss three dimensions of Government - PE Interface, which
are as follows:
1. The Government as Entrepreneur: It means that the ownership
comes in the hands of the government. This is called the emergence
of public sector. Heavy and basic industries involve high risk and
since they do not yield attractive return, they are ignored by the
private enterprises. Then there are certain industries where
considerable time duration is involved between their establishment
and start or production and sales. Therefore in the beginning there
might be chances of even earning losses. The government comes
forward and shows entrepreneurial lead in this direction. Steel,
minerals, chemical industry, engineering, irrigation, power and heavy
electrical plants are the examples.
2. Government as Promoter: Here the government neither interferes in
the functioning of the business nor makes any attempt to regulate.
But instead of playing as a member of the team it aims at promoting
the business by providing adequate infrastructure, providing suitable
environment and by offering various incentives so as to boost the
morale and operational activities of business. All types of economic
systems whether developed or developing look for the promotional
efforts of the government.
3. Government as Lender of Funds : Thirdly, as lender of funds, the
Government as a banker evaluates capital investment proposals and
working capital needs of PEs, and oversees effective utilization of
funds.
4. Government as a Regulator: The basic objective of regulating
business is to (i) prevent the market structure from becoming
monopolistic, (ii) developing the small and new entrepreneurs, and
(iii) Regulatory role involves regulating the business and economic
activities of the country by the government. Regulation means
directing with the objectives of assisting the conduct of business. It
includes controls through which general norms and standards are
laid down by the government
5. Government as a planner- In a developing country like India the role
of government as a planner is very important. This is so because in
modern times government is supposed to be the custodian of the
welfare of the society. At macro level the planning has to be done
collectively for the country and within the limits set by the
government, micro level planning is done. Thus the planning role of
the government means setting by the government the outer Limits or
the broader limits within which micro level operations will be planned
and executed.
6. Government as competitor-Today many private companies could not
provide Deposit Insurance, Home Mortgaging Insurance, Bank Loan
guarantees and thus Government has come into role and gives
competition to many private business firms.

Business Responsibilities to Government:

In any country the government tries to preserve the community and

improve its conditions. In that respect the business has to extend its
co-operation to the government. If the business discharges its
responsibilities the government sincerely and effectively, the
government can function more efficiently. This is in the interest of the
whole community and indirectly in the interest of the business.
The development of business depends upon the development of the
community; hence business has got to be very particular about
discharging its obligations towards the government.A few important
 responsibilities of business towards the government are explained
below:

• To obey Laws
The laws reflect the wishes of the community, they show what the
community wants the member to do and what the community wants the
member to avoid. The laws control the behavior of the individuals with each
other and with the community.
If business obeys laws the society can function smoothly and business can
prosper only when the society is functioning smoothly but if laws are
oppressive or obstructing the path of business, they can be opposed in
constitutional manner. The business can take the help of constitution or the
judiciary to oppose the laws and get them repealed. The Maharashtra
government banned the sale of gutkha in Maharashtra state. The
producers of gutkha approached the court which repealed the order of the
government of Maharashtra on the ground that tobacco is in the jurisdiction
of the central government.

• Payment of taxes
The expenditure of a modern government is heavy and is fast increasing.
The main source of income for the government is the different type of taxes
imposed by it. The business pays taxes on goods produced by them, taxes
on goods imported by them, taxes on own income and taxes on the
incomes of the employees. The bulk of the tax revenue is collected from
business. If business pays the taxes honestly and on time the government
can fulfill its responsibilities efficiently. If taxes are evaded by one group,
the burden of taxation increases on some other group. Nonpayment of a
tax is a political offence and also a social dishonesty.

• Social Responsibility
In addition to the legal and political responsibilities, the business has to
take up several moral responsibilities towards the society. Thus, the
business has to provide training facilities for the unemployed persons so
that they can get absorbed in some occupation or can setup self
employment units. Several business houses established educational
institutions, hospitals, libraries, recreation halls, playgrounds etc. for the
community. This is helpful in winning them sympathy from the community.
It is like an investment made by the business.

• Providing inputs to the government

Often the government requires inputs of technical economic financial or

political importance for framing appropriate policies. The business has
contacts in different sections of the community. They can be used for
collecting the required information and providing it to the government. Any
action based upon accurate inputs has greater chances of achieving a
higher success. For eg: before imposing a tax on commodity the
government likes to know the elasticity of demand for that commodity.

Other things remaining the same the government prefers to impose a tax
on a commodity which enjoys relatively less elastic demand.

• Government Contracts

The government has to take up several works such as construction of roads,

bridges, flyovers, airports etc. Sometimes these works are undertaken by the
government departments but a more common method of undertaking that
work is to invite tenders and give contracts to business. It is the responsibility
of the business to complete the work in time and maintain a high level of
quality of the work.

• Government Services

The business offers services of its leaders to the government to work on

different committees. The business leaders have practical experience of a
particular type of business. A committee appointed for doing something in
respect of that business is highly benefited if some prominent person from
that field is appointed as the chairman of that committee or commission.
• Active participation in politics

Sometimes the businessmen try to participate actively in politics. A

member of the TATA family contested election to the lok sabha.
Sometimes the leaders of the business are nominated to the Rajya
Sabha so that the government gets the benefit of their practical
experience of that field, but often the businessmen try to keep
themselves away from active politics.

• Tax Payment:
Taxes paid by business enterprises constitute a major source of
revenue to the government firms themselves pay regular taxes and
their sales, input and income and also deduct, at source income
taxes form salaries and wages at employees and remit the collection
to the government.

• Voluntary programmes:
In co-operation with the government, business firms train unemployed
and support non-discriminative recruitment of personnel and
workmen. Business extends these facilities under the name of social
responsibilities.

• Providing Information:
Political leaders, either because of inexperience or over enthusiasm,
make certain decisions which may not be in the overall interest of
business. Business leaders possess the necessary knowledge and
experience to place their points of view before the political leaders.
This transfer of information helps government to frame better policies
and implement them in a better way.

• Government Contracts:
May business firms bid for government contacts and, if successful,
carry out the resulting projects with the required specifications and
standards. Housing projects, oil pipelines, turnkey projects and others
are executed by private business house for the government.

• Government Service:
Business offers services of its leaders to the government. It is not
 unusual for business executives to lead or accompany delegations to
foreign countries for exploring trade and industry prospects, similarly,
business leaders serve on various advisory boards constituted by the
government.

• Political Activity:
Political participation is a much debated subject today. There are
arguments for and against participation of business in political
activities.

Government responsibilities to Business

Government responsibilities to business are much greater than the

obligation of business to the government, Government has the power,
will and resources to decide, shape, guide and control business
activities. The government responsibilities towards business are as
follows.
• Establishment and enforcement of laws:
Government Establishment and enforces laws and regulations
under which the business functions. Laws and regulations
covering all aspects of the business enacted by the
government. Government is responsible for providing the rules
of the game, which make the business systems function
smoothly. It is the responsibilities of government to enforce the
laws and to provide a system of courts for adjudicating
differences between business firms, individuals and
government agencies.

• Maintenance of order: Government has the responsibility of

maintaining order and protecting persons and property. It would
be impossible to carry as business in the absence of a peaceful
atmosphere.
• Money and credit:
• The govt. provides a system of money and credit by means of
which transactions can be affected. It is also responsibility of the
govt. to regulate money and credit and protect the integrity of the
rupee, that is, to grand against rapid fall in its value.
 • Orderly growth: Orderly growth implies balanced regional
development, distributive justice, full employment and protecting
the economy against ‘booms and bunts’ The Government has
the resources and capabilities to ensure orderly growth.
• Infrastructure:
Business needs for its effective functions such Infrastructural
facilities as transportation, power, finance, trained persons and
civic amenities. It is the responsibilities of the government to
provide these facilities.
• Information:
Government agencies publish and provide a large volume of
information which is used extensively by business firms. Included
are information services of the departments of commerce and
industry, agriculture labours, health, education, banking, atomic
energy and host of others. Many state and local governments
also provide information highly useful for business leaders in
conducting their activities.
• Government Competition: Government often competes with
private business firms for the purpose of regulating competition,
improving quantity or to supplement private activities with govt.
programs. In some cases the govt. regulates the prices which
may be charged from the buyers.

• Inspections and licenses:

Government agencies conduct inspection activities foods and drugs,
for example assuring quality products to consumers. Government
issues licenses to completed business establishment to carry as
different activities

• Tariffs and quotas:

Tariffs and quotas used by the government to protect business from
foreign completions. Incentives and subsidies are granted by the
government to encourage the development of home industries.
• Transfer of Technology: Government owned research
establishments transfer their discoveries to the private industry
in order to put them to commercial production more striking
 success in the technology transfers is in the areas of
instruments for processing remote sensing data.

BUSINESS RISK
Every business organization contains various risk elements while doing the
business. Business risks implies uncertainty in profits or danger of loss and
the events that could pose a risk due to some unforeseen events in future,
which causes business to fail. A business risk , is anything that threatens an
organization's ability to generate profits at its target levels and in the long
term, risks can threaten an organization’s sustainability.
Business risks can arise due to the influence by two major factors: internal
risks- risks arising from the events taking place within the organization
and external risks- risks arising from the events taking place outside the
organization. Internal risks arise from factors such as human factors like
talent management, strikes, technological factors due to emerging
technologies, physical factors, and operational factors. External risks arise
from factors which are exogenous variables, which cannot be controlled such
as economic factors, natural factors, political factors etc.
The Business risk can be classified into different 5 main types

1. Strategic Risk: They are the risks associated with the operations of
that particular industry. These kind of risks arise from
1. Business Environment: Buyers and sellers interacting to buy and
sell goods and services, changes in supply and demand,
competitive structures and introduction of new technologies.
2. Transaction: Assets relocation of mergers and acquisitions, spin-
offs, alliances and joint ventures.
3. Investor Relations: Strategy for communicating with individuals
who have invested in the business.
2. Financial Risk: These are the risks associated with the financial
structure and transactions of the particular industry.
3. Operational Risk: These are the risks associated with the operational
and administrative procedures of the particular industry.
4. Compliance Risk (Legal Risk): These are risks associated with the
need to comply with the rules and regulations of the government.
 External Risk/Other risks: There would be different risks like natural
disaster (floods) and others depend upon the nature and scale of the
industry.

RISK MANAGEMENT
Risk management is the process of identifying, assessing and
controlling threats to an organization's capital and earnings. These
threats, or risk, could stem from a wide variety of sources, including financial
uncertainty, legal liabilities, strategic management errors, accidents and
natural disasters. Risk management’s objective is to ensure uncertainty does
not deflect the operations of company from the business goals. Risks can
come from various sources including uncertainty in financial markets, threats
from project failures (at any phase in design, development, production, or
sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes
and disasters deliberate attack from an adversary, or events of uncertain or
unpredictable root cause .There are two types of events i.e. negative events
can be classified as risks while positive events are classified as
opportunities.

Importance of Risk Management

To highlight the importance of risk, here are some reasons all employees
should care about risk management.
1. Everyone Should Manage Risk
As most business people know well, sometimes the risk is necessary in
order to achieve success. Despite this, we sometimes see risk
management as “the department of no” — those who turn down any project
plan that seems to have any potential risk. The purpose of risk
management is not to wipe out all risks. It is to decrease the negative
consequence of risks. By working with risk managers, employees can
make smart decisions to prevent risks and improve the chance of being
rewarded.
2. Makes Jobs Safer
Health and safety are integral parts of a risk manager’s role. They actively
seek problem areas in the organization and look to identify them. They use
data analysis to identify damage and injury trends and implement strategies
to stop them from occurring again. This benefits employees in physical
work environments, such as construction, but can also benefit office
employees. A safer workplace is better for everyone and is impacted by
risk management dramatically.
3. Enables Project Success
Risk managers help employees from all departments succeed with their
projects. Just they have to evaluate risks and implement strategies to
maximize organizational success. It can also apply to individual projects. If
something goes wrong, there will already be a strategy in place to handle it.
This encourages employees to prepare for unexpected risks and maximize
project output.
4. Reduces Unexpected Events
Most people don’t like surprises, specifically when it has an organizational
impact A risk manager’s goal is to find out all possible risks and then work
to prevent them or best manage them. It’s impossible to figure out every
risk scenario and address them all, but a risk manager makes unpleasant
surprises less likely and serious. The risk management department should
first place an employee turns to when it seems like something serious could
go wrong and the risk management plan is already there for it.
5. Saves Time and Effort
Employees at all levels submit data to the risk management department
when incidents occur. These tasks are often completed in the most
inefficient ways. By integrating these tasks, the risk department can ease
the burden of tedious data submission from employees, allowing them to
direct time and energy towards their correct roles. With a solid process in
place, it is easy for employees to agree to high ROI risk management
initiatives and facilitate risk managers’ roles and receive the benefits of a
formal risk management system.
6. Benefits Culture
An effective risk management culture is better for all parties, including
frontline employees, risk managers, executives, and decision-makers. It
makes a mindset of prevention and safety that passes through the
organization and influences the actions of employees. It predicts
possibilities for performance and sends a positive image to the public.
7. Guides Decision-Making
Decision-making is a difficult process, especially when making important
choices that will have a large impact on future progress. Risk management
data and analytics can guide employees in making wise strategic decisions
that will help to fulfill organizational objectives. They can also evaluate the
strengths and the weaknesses of a decision and provide recommendations
on what risks to maintain and which to avoid.
Several risk management standards have been developed. Strategies to
manage threats (uncertainties with negative consequences) typically include
avoiding the threat, reducing the negative effect or probability of the threat,
transferring all or part of the threat to another party, and even retaining some
or all of the potential or actual consequences of a particular threat, and the
opposites for opportunities

TECHNIQUES/METHODS OF RISK MANAGEMENT:

Business risks come in a different form may it be tangible and intangible

forms over the course of the business life cycle. Some risks occur during the
ordinary course of business operations, while others are due to extraordinary
circumstances that are not easily identified. Regardless of a
company's business model, industry or level of earnings, business risks must
be identified as a strategic aspect of business planning. Once risks are
identified, companies take the appropriate steps to manage them to protect
their business assets. The most common types of risk
management implemented in business include avoidance, mitigation,
transfer and acceptance.

1. Avoidance of Risk

The easiest way for a business to manage its identified risk is to avoid it
altogether. In its most common form, avoidance takes place when a business
refuses to engage in activities known or perceived to carry risk of any kind.
For instance, a business could forgo purchasing a building for a new retail
location as the risk of the location not generating enough revenue to cover
the cost of the building is high. Similarly, a hospital or small medical practice
may avoid performing certain procedures known to carry a high degree of
risk to the well-being of the patient. Although avoiding risk is a simple method
to manage potential threats to a business, the strategy also results in
lost revenue potential.

2. Risk Mitigation /Risk Reduction

Businesses can also choose to manage risk through mitigation or reduction.

Mitigating business risk is meant to lessen any negative consequence or
impact of specific, known risks, and is most often used when business risks
are unavoidable. For example, an automaker reduces the risk of recalling a
certain model by performing research and detailed analysis of the potential
costs of such a recall. If the capital required to pay buyers for losses
incurred through a faulty vehicle is less than the total cost of the recall, the
automaker may choose to not issue a recall. Similarly, software companies
mitigate the risk of a new program not functioning correctly by releasing the
product in stages. The risk of capital waste can be reduced through this type
of strategy, but a degree of risk remains.

3. Transfer of Risk

In some instances, businesses choose to transfer the risk away from the
organization. Risk transfer typically takes place by paying a premium to an
insurance company in exchange for protection against substantial financial
loss. For example, property insurance can be used to protect a company
from the financial losses incurred when damage to a building or other facility
takes place. Similarly, professionals in the financial services industry can
purchase errors and omissions insurance to protect them from lawsuits
brought by customers or clients claiming they received poor or erroneous
advice.

4. Risk Acceptance

Risk management can also be implemented through the acceptance of risk.

Companies retain a certain level of risk brought on by specific projects or
expansion if the anticipated profit generated from the business activity is far
greater than its potential risk. For example, pharmaceutical companies often
utilize risk retention or acceptance when developing a new drug. The cost
of research and development does not outweigh the potential for revenue
generated from the sale of the new drug, so the risk is deemed acceptable.
 RISK MANAGEMENT PROCESS

There are five necessary steps that are taken to manage risk if now it is
accepted; these steps are considered as the risk management process. It
begins with identifying risks, evaluates risks, then the risk is prioritized, a
solution is implemented, and finally, the risk is controlled.

1. IDENTIFY THE RISK

The first step of risk management is to identify the risks that the business is
discovered to in its operating environment. There are many types of risks,
including legal risks, environmental risks, market risks, regulatory risks, and
much more. It is important to identify as many of these risk factors as
possible. In a manual management environment, these risks are written
down manually.
If the organization has employed a risk management solution, all this
information is included directly in the system. The advantage of this
strategy is that these risks are now transparent to every stakeholder in the
organization with access to the system. Rather than this crucial information
being locked away in a report which has to be requested via email, anyone
who wants to see which risks have been found can access the information
in the risk management system.

2. ANALYZE THE RISK

Once your team identifies potential problems, it’s time to go a little deeper.
How likely are these risks to take place? And if they take place, what will
the consequences be?
During this step, your team will examine the probability and fallout of each
risk to choose where to focus first. Factors such as possible financial loss
to the organization, time lost, and severity of impact all play a part in
precisely analyzing each risk. By placing each risk under the microscope,
you’ll also expose any common issues across a project and further improve
the risk management process for future projects.
 3. PRIORITIZE THE RISK

After analyzing the risks, prioritization begins. Rank each risk by factoring
in both its possibility of happening and its potential impact on the project.
This step gives you a comprehensive view of the project at hand and
pinpoints where the team’s focus should lie. It’ll help you identify useful
solutions for each risk. This way, the project itself is not interrupted in ways
during the treatment stage.

4. TREAT THE RISK

After prioritizing the risks, dispatch your treatment plan. While you can’t
expect every risk, you should have set up the previous steps for the
success of your risk management process. Starting with the highest priority
risk first, task your team with either solving or at least reducing the risk so
that it’s no longer a risk to the project.
Effectively treating and moderating the risk also means using your team’s
resources properly without hindering the project in the meantime. As time
goes on and you develop a larger database of past projects and their risk
logs, you can expect potential risks for a more proactive rather than
reactive approach for more efficient treatment.

5. MONITOR THE RISK

Transparent communication among your team and stakeholders is crucial

for the ongoing monitoring of potential threats. And while it may seem
you’re herding cats sometimes, with your risk management process and its
corresponding project risk register in place, putting tabs on those moving
targets becomes anything but risky business.