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Business Organization and Management Text and Cases

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Reliance Industries is one of the several companies operating in India that have grown big and are successful. Some of such companies are ITC, Tata Steel, Tata Motors, ONGC, L&T, Infosys and Bharti Airtel. In addition to these big companies, there are a large number of small and medium-size enterprises that employ a large number of people in the country. A majority of business enterprises are owned and managed by the private sector. However, in terms of the total investment in industry in India as a whole, a substantial share is controlled by public sector companies that are owned and managed by the Government of India, such as BHEL, ONGC, BSNL, MTNL and OIL. Some of these companies are engaged in manufacturing tangible products and others off er services. All these companies are engaged in business activities. Th is raises several questions in our mind: What is business? What types of activities are part of business? How has the technology, especially information and communication technology, given rise to a number of new business activities? How is a business organized by individuals or a group of individuals? What is the purpose of establishing these companies? How do these companies manage their operations to make profi t and grow? In what way do the business environment and government policy infl uence the business activities? How has the Indian business sector evolved over time? What relationship do these enterprises have with the society at large and the economy as a whole? If you look around, you will fi nd that business is everywhere. Th e goods and services we consume are produced and delivered by business. For instance, the food we consume, the clothing we wear, the transportation we use, the books we read, the computer, the Internet services, the telephone and communication facilities we use and the TV programmes we watch are all provided by business. Business performs most of the economic activities in our economy. Most businesses exist to generate a profi t. Th ere are some businesses that exist to perform a function other than generating profi t, such as cooperatives and other non-profi t organizations.
Content may be subject to copyright.
Vijay Kumar Kaul
Business Organization
and Management
Text and Cases
Dean, Faculty of Applied Social Sciences and Humanities
and
Head, Department of Business Economics
University of Delhi
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Associate Editor—Acquisitions: Anshul Yadav
Assistant Editor—Production: Barun Kumar Sarkar
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd
This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold,
hired out, or otherwise circulated without the publisher’s prior written consent in any form of binding
or cover other than that in which it is published and without a similar condition including this condition
being imposed on the subsequent purchaser and without limiting the rights under copyright reserved
above, no part of this publication may be reproduced, stored in or introduced into a retrieval system,
or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or other-
wise), without the prior written permission of both the copyright owner and the publisher of this book.
ISBN: 978-81-317-5449-8
First Impression
Published by Dorling Kindersley (India) Pvt. Ltd, licensees of Pearson Education in South Asia.
Head Of ce: 7th Floor, Knowledge Boulevard, A-8(A), Sector 62, Noida, UP 201309, India.
Registered Of ce: 11 Community Centre, Panchsheel Park, New Delhi 110017, India.
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To
my mother, Smt. Madan Mohini Kaul,
and my father, the late Shri Madhusudan Kaul
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Contents
Preface xxv
Acknowledgement xxix
About the Author xxxi
PART I: UNDERSTANDING THE ENVIRONMENT
OF BUSINESS
1. Introducing Business and Economy 2
1.1 Introduction 3
1.2 What is business? 4
1.2.1 Understanding business 4
1.3 Different business activities 6
1.3.1 Business activities 6 z 1.3.2 Business activities in India 7
1.4 Evolution of business and emerging markets 10
1.4.1 Evolution of business 10
1.5 Why study business? 13
1.6 Business: Executing for the present and adapting for
the future 13
1.7 Business and economy 14
1.7.1 Economic system 15 z 1.7.2 Global economic system 15
1.7.3 Micro- and macroeconomics 16 z 1.7.4 Different types of economic
systems 16
1.8 Indian economy and business today 17
1.8.1 Indian economic policies 17 z 1.8.2 Performance of Indian
economy and business 18 z 1.8.3 Innovation and Indian
business 20
1.9 Challenges ahead 21
Summary 25
Questions 26
Endnotes 26
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2. Dynamics of Business Environment:
Globalization, Liberalization and Privatization 29
2.1 Introduction 30
2.2 Dynamics of business environment 31
2.2.1 Economic environment 31 z 2.2.2 Competitive environment 32
2.2.3 Political and legal environment 33 z 2.2.4 Technological
environment 33 z 2.2.5 Socio-cultural environment 34
2.2.6 Ecological environment 34
2.3 Changes in economic policy and Indian business environment 34
2.4 Globalization 35
2.4.1 De ning globalization 35 z 2.4.2 Features of
globalization 36 z 2.4.3 Evaluation of globalization 39
2.4.4 The case for globalization 39 z 2.4.5 The case against
globalization 40 z 2.4.6 India’s experience with globalization 40
2.5 Liberalization 41
2.5.1 Concept and features of liberalization 41 z 2.5.2 Indian context of
liberalization 41 z 2.5.3 Impact of liberalization in India 42
2.6 Privatization 43
2.6.1 Concept and features of privatization 43 z 2.6.2 Privatization
in India 43 z 2.6.3 Bene ts 44 z 2.6.4 Criticism 44
2.6.5 India’s experience with privatization 44
2.7 Impact of globalization, liberalization and privatization 45
2.7.1 Expansion of markets and increased competition 45 z 2.7.2 New
avenues of entrepreneurial opportunities 46 z 2.7.3 Increased
availability of nance 46 z 2.7.4 Availability of global
funds 46 z 2.7.5 Ef ciently managed businesses have global
opportunities 46 z 2.7.6 Increased demand for ethical and socially
responsible behaviour 46
2.8 Response of Indian enterprises 47
Summary 48
Questions 50
Endnotes 50
3. Global Business and Multinational Corporations: Rise
of Multinational Corporations from Emerging Markets 53
3.1 Introduction 54
3.2 Domestic to international business 54
3.2.1 Logic of international business 54 z 3.2.2 Restrictions on
international business 56 z 3.2.3 Status of global business 56
3.3 Motivation to internationalize 58
3.3.1 Motivation 58 z 3.3.2 Emergence of multinational enterprises 58
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3.4 Multinational corporations (MNCs) 60
3.4.1 De ning MNCs 60 z 3.4.2 Types of MNCs 60
3.4.3 Features of MNCs 60
3.5 Methods of entering foreign markets 61
3.6 Role of MNCs 63
3.6.1 The case for MNCs 63 z 3.6.2 The case against MNCs 64
3.7 Emergence of MNCs from emerging markets 64
3.7.1 History of MNCs in India 64 z 3.7.2 New industrial policy, 1991 65
3.8 Indian multinational enterprises 65
3.8.1 Rise of Indian enterprises 65 z 3.8.2 Indian multinational
enterprises: Features and challenges 67
Summary 69
Questions 70
Endnotes 71
4. Business, Society and Ethics 73
4.1 Introduction 74
4.2 Relationship between business and society 74
4.3 The evolution of social responsibility (SR) in business 76
4.3.1 De ning SR 76 z 4.3.2 Evolution of SR 77 z 4.3.3 SR in
India 78 z 4.3.4 Why should business be socially responsible? 79
4.4 Areas of social responsibility 79
4.4.1 Responsibility to employees: Creating jobs that work 80
4.4.2 Responsibility to customers 80 z 4.4.3 Responsibility to
investors 80 z 4.4.4 Responsibility to community 81
4.4.5 Responsibility to the environment 81
4.5 Business ethics 82
4.5.1 De ning business ethics 82 z 4.5.2 Ethical issues 83
4.6 Ethical behaviour 84
4.6.1 Factors affecting ethical behaviour 84 z 4.6.2 Encouraging
ethical behaviour 87
Summary 88
Questions 89
Endnotes 89
PART II: ENTREPRENEURIAL OPPORTUNITIES
IN BUSINESS
5. Entrepreneurship and Innovation 94
5.1 Introduction 95
5.2 Entrepreneurs and innovators 95
Contents vii
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5.2.1 Understanding the entrepreneur and the innovator 95
5.2.2 Entrepreneurs and innovators in developing countries 95
5.2.3 Entrepreneurship 96 z 5.2.4 Who can be an entrepreneur? 97
5.3 Entrepreneurship in India 98
5.4 Motivation and importance of entrepreneurs 99
5.4.1 Motivation 99 z 5.4.2 Importance of entrepreneurs 100
5.5 Process of innovation and its types 101
5.5.1 Innovation types 102 z 5.5.2 What drives
innovation? 102 z 5.5.3 Innovation process 102
5.5.4 Evolution of the life cycles of industries and enterprises 103
5.6 Entrepreneurial opportunities 104
5.6.1 Identifying opportunities 104 z 5.6.2 Entrepreneurship
opportunities in India 106 z 5.6.3 Challenges to entrepreneurship
in India 107
Summary 109
Questions 110
Endnotes 110
Further readings 111
6. Small Businesses and Franchising 113
6.1 Introduction 114
6.2 Small enterprises in India 114
6.2.1 De ning small enterprises 114 z 6.2.2 Status of small businesses 116
6.3 Importance of SMEs 117
6.3.1 Advantages of small businesses 117 z 6.3.2 Disadvantages of
small businesses 118 z 6.3.3 Entrepreneurs opportunities and small
enterprises 118
6.4 Small businesses, globalization and government support 120
6.5 Franchising 122
6.5.1 Understanding franchising 123 z 6.5.2 Types of franchising 124
6.5.3 Franchising: Small and big businesses 125 z 6.5.4 Successful
entrepreneurship through franchising 126 z 6.5.5 Growth of franchising
in India 126 z 6.5.6 Challenges 127
6.6 Network marketing 127
6.6.1 Concept and business model 129
6.7 Challenges for small businesses 131
6.7.1 Globalization and WTO 131 z 6.7.2 Absence of entrepreneurial
mindset 131 z 6.7.3 Lack of business thinking and ethical
base 131 z 6.7.4 Infrastructural and other challenges 131
Summary 133
Questions 134
Endnotes 135
Further readings 135
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Contents ix
7. Outsourcing to BPOs and KPOs 137
7.1 Introduction 138
7.2 Outsourcing: Strengthening big and empowering small 138
7.2.1 Outsourcing and small business 138 z 7.2.2 Nature and scope of
business activities in BPO industry 139
7.3 Advantages and limitations of BPO 142
7.3.1 Advantages 143 z 7.3.2 Limitations 144 z 7.3.3 BPO risks
faced by Indian companies 144
7.4 BPO in India: Opportunities and challenges 145
7.4.1 Opportunities 145 z 7.4.2 Challenges 145
7.4.3 Opportunities 146 z 7.4.4 South to see rural BPO revolution 147
7.5 From BPO to KPO—moving up the value chain 148
7.5.1 Knowledge process outsourcing 148 z 7.5.2 Importance
of KPO 150 z 7.5.3 Differentiating KPO from BPO 150
7.6 Factors affecting growth of KPO 151
7.6.1 Key factors in uencing KPO growth 151 z 7.6.2 Future of BPO
and KPO 151
Summary 153
Questions 154
Endnotes 154
Further readings 155
8. Information Technology Revolution: E-commerce
to E-business 157
8.1 Introduction 158
8.2 Information and electronic revolution 159
8.3 E-commerce and its operation 160
8.3.1 De ning e-commerce 160 z 8.3.2 Scope and importance of
e-commerce 161 z 8.3.3 Bene ts and limitations of
e-commerce 163 z 8.3.4 E-commerce operation 164
8.3.5 Resources required for implementation of e-commerce 164
8.4 E-commerce models and their growth 165
8.4.1 Types of e-commerce models 165 z 8.4.2 Growth of
e-commerce 166 z 8.4.3 Government support to e-commerce 167
8.5 M-commerce 168
8.6 E-business 168
8.6.1 De ning e-business 168
8.7 The future of e-commerce in India 169
8.8 Ethical and social issues 170
Summary 172
Questions 173
Endnotes 173
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PART III: SETTING UP OPERATIONS
9. Setting Up and Managing Business 178
9.1 Introduction 179
9.2 Identifying business opportunities and undertaking market
analysis 181
9.2.1 Identifying business opportunities 181 z 9.2.2 Evaluating business
ideas 182 z 9.2.3 Assessing markets and competitions 182
9.3 Business plan and getting started 184
9.3.1 Establishing goals and objectives 184 z 9.3.2 Ownership pattern
and location decision 184 z 9.3.3 Examining processes and
technologies 184 z 9.3.4 Early funding and nancial plan 184
9.3.5 Marketing and distribution decisions 185 z 9.3.6 Internal
organization and personnel 185 z 9.3.7 Preparing business plan 185
9.4 Implementing a business plan 186
9.4.1 Developing business model 187 z 9.4.2 Competitive
advantages 187 z 9.4.3 Launching of a business 187
9.4.4 Deciding growth and scaling up 187
9.5 Risk management by entrepreneurs 188
9.6 Social and ethical issues 188
Summary 190
Questions 192
Endnotes 192
10. Deciding Business Ownership Pattern, Size
and Location 194
10.1 Introduction 195
10.2 Basic forms of business ownership 195
10.2.1 Sole proprietorship 195 z 10.2.2 Partnership 196
10.2.3 Company 196 z 10.2.4 Special types of business
ownership 196 z 10.2.5 Features of an ideal form of ownership 197
10.2.6 Factors affecting the choice of ownership form 197
10.3 Size and capacity of business 199
10.4 Location 200
10.4.1 Importance of location 200 z 10.4.2 Factors determining
location decisions 200 z 10.4.3 Selection of plant site 201
10.4.4 Factors determining the location 202 z 10.4.5 Clustering
and special economic zones 203 z 10.4.6 Globalization,
technology development and location 204
10.5 Ethical and social consideration in location decision 205
Summary 206
Questions 207
Endnotes 208
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11. Operations: Designing and Producing Quality
Products and Services 210
11.1 Introduction 211
11.2 Production and operations management 212
11.2.1 De ning production and operation 212 z 11.2.2 Importance
of production and operation 213 z 11.2.3 Evolution of production
technology 215
11.3 Planning and controlling of operations 216
11.3.1 Planning the production process 216 z 11.3.2 Operational
control 220 z 11.3.3 Mass production and mass customization 222
11.4 Supply chain management 222
11.5 Issues in operations management 224
11.5.1 Managing productivity 224 z 11.5.2 Quality 226
11.5.3 Ethics and environmental issues 227
Summary 229
Questions 230
Endnotes 231
PART IV: MARKETING
12. Understanding Consumer and Marketing 234
12.1 Introduction 235
12.2 Customer and marketing 236
12.2.1 Marketing concept 236 z 12.2.2 Four types of utility 237
12.3 Evolution of marketing 238
12.3.1 Production orientation 238 z 12.3.2 Sales orientation 238
12.3.3 Marketing orientation 239
12.4 Markets and market research 239
12.5 Understanding consumers and building relationships 239
12.6 Developing marketing strategy 240
12.6.1 Market segmentations 240 z 12.6.2 Target marketing 241
12.6.3 Positioning 241 z 12.6.4 Marketing mix 242
12.6.5 Application of marketing mix 243
12.7 Ethics and social issues in marketing strategy 244
Summary 246
Questions 247
Endnotes 248
Further readings 248
13. Creating and Pricing Products 250
13.1 Introduction 251
13.2 Products, PLC and product mix 252
Contents xi
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13.2.1 De ning a product 252 z 13.2.2 Product line and product
mix 254 z 13.2.3 Product life cycle 255 z 13.2.4 Managing
the product mix 256
13.3 Branding, packaging and labelling 258
13.3.1 De ning brand 258 z 13.3.2 Choosing, protecting and building
brands 261 z 13.3.3 Packaging 263 z 13.3.4 Labelling 263
13.4 Pricing products 263
13.4.1 The meaning of price 264 z 13.4.2 Factors affecting pricing 264
13.5 General pricing strategies 266
13.5.1 Basic pricing strategies 266 z 13.5.2 Other pricing strategies 266
13.6 Ethical issues in product and pricing 267
Summary 269
Questions 271
Endnote 271
Further readings 271
14. Promotion of Products and Services 273
14.1 Introduction 274
14.2 Integrated marketing communications 274
14.2.1 De ning the concept 274 z 14.2.2 The role of promotion 275
14.2.3 Promotion mix 277 z 14.2.4 Elements of promotion mix 277
14.3 Advertising 277
14.3.1 Major steps in developing an advertising campaign 278
14.3.2 Advertising media selection 279 z 14.3.3 Advertising planning
process 281 z 14.3.4 Endorsement of brands by celebrities 282
14.4 Personal selling and sales promotion 282
14.4.1 Personal selling 282 z 14.4.2 Sales promotion 282
14.5 Public relations and publicity 284
14.5.1 Public relations 284 z 14.5.2 Publicity 285
14.6 Promotional planning 285
14.6.1 Planning 285 z 14.6.2 Factors in uencing promotion mix 285
14.6.3 Determination of promotion mix 286 z 14.6.4 Innovation
and promotion 286
14.7 Promotion and some issues 287
14.7.1 Entrepreneurial opportunities in promotion/advertising 287
14.7.2 Ethical and social considerations in advertising and promotion 287
Summary 290
Questions 291
15. Physical Distribution, Wholesaling and Retailing 294
15.1 Introduction 295
15.2 Distribution: getting the product at the right place 296
15.2.1 Meaning and importance of distribution 296
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15.3 Types of distribution channels 298
15.3.1 Distribution channels 298 z 15.3.2 Choice of channel of
distribution 300
15.4 Marketing intermediaries: Wholesalers 303
15.5 Marketing intermediaries: Retailers 304
15.5.1 Retailers 304 z 15.5.2 Classi cation of store formats 306
15.5.3 Types of retail formats 306 z 15.5.4 Theories of retailing 307
15.5.5 Innovations in retailing 307 z 15.5.6 Retail marketing
strategies 308
15.6 Physical distribution and other issues 309
15.6.1 Elements of physical distribution system 309 z 15.6.2 Ethical
and social concerns 310
Summary 312
Questions 312
PART V: MONEY, FINANCE AND INVESTMENT
16. Money, Finance and Financial Institutions 316
16.1 Introduction 317
16.2 Money 317
16.2.1 De nition of money 317 z 16.2.2 Kinds of money 318
16.2.3 Importance of money 319 z 16.2.4 Functions of money 319
16.2.5 Money supply 320
16.3 Finance and nancial systems 320
16.3.1 De nition of nance 320 z 16.3.2 Financial system 321
16.3.3 The Indian nancial system 322 z 16.3.4 Financial
institutions 322 z 16.3.5 Financial markets 322
16.4 Globalization of nancial systems 324
16.5 Banks as nancial institutions 325
16.5.1 De nition of a bank 325 z 16.5.2 Banking in India and its
evolution 326
16.6 Types of banks 327
16.6.1 Commercial banks 327 z 16.6.2 Development banks 328
16.6.3 Cooperative banks 329 z 16.6.4 Specialized banks 329
16.7 Functions of commercial banks 329
16.7.1 Primary functions 329 z 16.7.2 Secondary functions 330
16.8 E-banking (electronic banking) 330
16.9 The reserve bank of India: A central bank 331
16.9.1 Functions of a central bank 331 z 16.9.2 The Reserve Bank of
India 331 z 16.9.3 Evolution of the Reserve Bank of India and economic
challenges 332
16.10 Ethics and social responsiveness 332
Contents xiii
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16.10.1 Inclusive banking 333 z 16.10.2 Social responsiveness 333
16.10.3 Islamic banking 333
Summary 334
Questions 335
Endnotes 336
Further readings 336
17. Financial Management 338
17.1 Introduction 339
17.2 Financial management 340
17.2.1 De ning nancial management 340 z 17.2.2 Evolution
of nancial management 341 z 17.2.3 Objectives of nancial
management 341 z 17.2.4 Scope or role of nancial management 342
17.2.5 Functions of a nance manager 344
17.3 Meaning of nancial planning 345
17.3.1 Developing the nancial plan 346
17.4 Alternative sources of funds 347
17.4.1 Short-term nance 347 z 17.4.2 Sources of long-term nance 349
17.5 Capital structure: Making decisions on using nancial leverage 351
17.5.1 Capital structure and capital gearing 351 z 17.5.2 Factors
affecting capital structure 352 z 17.5.3 Optimum capital structure 353
Summary 355
Questions 355
Endnotes 356
18. Understanding Securities Markets and Investment
Opportunities 358
18.1 Introduction 359
18.2 Developing an investment programme 360
18.3 Securities markets 363
18.3.1 De ning securities markets 363 z 18.3.2 Stock exchange 364
18.3.3 Functions of the stock exchange 365 z 18.3.4 Globalization,
integration of stock exchanges and increased volatility 366
18.3.5 Methods or techniques for marketing new securities 366
18.4 Stock exchanges in India 368
18.4.1 Origin of Indian stock exchanges 368 z 18.4.2 Over-the-Counter
Exchange of India (OTCEI) 368 z 18.4.3 NSE 368 z 18.4.4 BSE and
SENSEX 369 z 18.4.5 SENSEX movement: Impact of economic factors
or sentiments 371
18.5 Regulations of securities markets 373
18.5.1 Objectives of SEBI 373 z 18.5.2 Functions and the role
of SEBI 373
18.6 Ethical and social issues in securities market and investment 374
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Summary 377
Questions 378
Endnotes 378
19. Risk and Insurance 380
19.1 Introduction 381
19.2 Business risk: Meaning and causes 381
19.2.1 Meaning of business risks 382 z 19.2.2 Nature of business
risks 382 z 19.2.3 Causes of business risks 382 z 19.2.4 Types of
business risks 384
19.3 Risk management 386
19.3.1 Avoiding risks 387 z 19.3.2 Preventing risks 388
19.3.3 Shifting risks 388 z 19.3.4 Assuming risks 389 z 19.3.5 Sharing
or spreading risks 389
19.4 Insurance 389
19.4.1 Meaning of insurance 389 z 19.4.2 Brief history of
insurance 390 z 19.4.3 Importance of insurance 390
19.4.4 Principles of insurance 392
19.5 Insurance in India: Status and challenges 393
19.5.1 Status 393 z 19.5.2 Performance 394 z 19.5.3 Constraints
and challenges 396
Summary 397
Questions 398
Endnotes 398
PART VI: HUMAN RESOURCES
20. Planning and Management of Human Resources 402
20.1 Introduction 403
20.2 Human resource management: A people-centred approach 404
20.2.1 Importance of HRM 404 z 20.2.2 De ning HRM 405
20.3 Human resource management process 406
20.3.1 Identify and selecting competent employees 406
20.3.2 Imparting knowledge and skills 410 z 20.3.3 Retaining
competent and talented employees 410
20.4 Factors affecting the HRM process 410
20.4.1 Governmental laws 411 z 20.4.2 Employee/labour unions 411
20.4.3 Demographic trends 411
20.5 Current issues and challenges 411
20.5.1 Globalization and ethics 412 z 20.5.2 Managing downsizing 412
20.5.3 Managing workforce diversity 413 z 20.5.4 Managing sexual
harassment 413 z 20.5.5 Managing work–life balance 413
Contents xv
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Summary 414
Questions 416
Endnotes 416
21. Talent Management: Attracting and Retaining
Human Resources 418
21.1 Introduction 419
21.2 Talent shortage and need for special focus 419
21.2.1 Talent and shortage 419 z 21.2.2 Importance of talent 420
21.2.3 Talent management: Changing orientation of human resource
management 422
21.3 Developing talents through training and development 423
21.3.1 Nature and purpose of training 423 z 21.3.2 Importance and
need for training 423 z 21.3.3 Orientation 424 z 21.3.4 Training
process 424
21.4 Strategies for retaining talent 426
21.4.1 Employee performance appraisal 426 z 21.4.2 Compensation
and bene ts 427 z 21.4.3 Career systems and development 429
Summary 431
Questions 432
Endnotes 432
PART VII: MANAGEMENT PROCESS, PLANNING
AND ORGANIZING
22. Understanding the Management Process 436
22.1 Introduction 437
22.2 Management 438
22.2.1 Manager, challenges and salary 438 z 22.2.2 De ning
management 440 z 22.2.3 Nature of management 440
22.2.4 Manager 441 z 22.2.5 Levels of management 441
22.3 What do managers do? 442
22.3.1 Management functions 442 z 22.3.2 Management roles 443
22.4 Managerial skills and competence: Key to managerial success 444
22.4.1 Managerial competencies 445
22.5 Changing nature of management: Need for value-based management 447
22.5.1 Changes in uencing management 448
Summary 452
Questions 453
Endnotes 453
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23. Evolution of Management Thinking 456
23.1 Introduction 457
23.2 Evolution of management 459
23.2.1 Adam Smith, industrial revolution and management thoughts 459
23.2.2 Lean manufacturing, toyotism and recall of cars 460
23.3 The classical approach 461
23.3.1 Scienti c management 461 z 23.3.2 The theory of
bureaucracy 462 z 23.3.3 Administrative management 463
23.4 Behavioural approaches 463
23.4.1 Early advocates 464 z 23.4.2 Hawthorne studies and human
relation movement 464 z 23.4.3 Organizational behaviour 464
23.5 Management science approach 465
23.5.1 Quantitative management and operations research 465
23.5.2 Total quality management 465 z 23.5.3 Management
information system 465
23.6 Contemporary approaches 465
23.6.1 System approach 466 z 23.6.2 Contingency approach 466
23.7 Management theory and the twenty- rst century 467
Summary 469
Questions 470
Endnotes 471
24. Planning 473
24.1 Introduction 474
24.2 Planning: Coping with uncertainty 474
24.2.1 De ning planning 474 z 24.2.2 Purpose of planning 475
24.2.3 Types of planning 476
24.3 Organizational planning process 477
24.4 Organizational objectives and plans 478
24.4.1 Objectives 478 z 24.4.2 Characteristics of well-designed
objectives 479 z 24.4.3 Importance of objectives 479
24.4.4 Types of objectives 479 z 24.4.5 Budgets 479
24.4.6 Management by objectives 480 z 24.4.7 Strengths and
weaknesses of MBO 481 z 24.4.8 Types of plans 481
24.5 Social and environmental issues in planning 483
Summary 485
Questions 486
Endnotes 486
25. Strategic Management: Planning and Growth
Strategies 488
25.1 Introduction 489
25.2 Strategic planning 489
Contents xvii
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25.3 Strategic management 491
25.3.1 The strategic management process 491 z 25.3.2 Business
model and strategy 493 z 25.3.3 Importance of strategic
management 494
25.4 Strategy formulation: Three types of strategies 495
25.4.1 Corporate strategies 496 z 25.4.2 Growth strategies 496
25.4.3 Stability strategies 502 z 25.4.4 Renewal and divestment
strategies 502 z 25.4.5 Managing corporate strategies 502
25.5 Business strategy 503
25.5.1 Porter’s model of competitive forces 504 z 25.5.2 Competitive
strategies 504
25.6 Strategy implementations and control 505
Summary 507
Questions 508
Endnote 509
26. Decision-making Process and Creative
Problem-solving 511
26.1 Introduction 512
26.2 Decision making 513
26.2.1 De ning decision making 513 z 26.2.2 Characteristics of
decision making 513 z 26.2.3 Coping with uncertainty 514
26.2.4 Increased complexity of decisions 515
26.3 Types of decisions 516
26.3.1 Programmed decisions 516 z 26.3.2 Non-programmed
decisions 517 z 26.3.3 Three types of decisions 518
26.3.4 Individual and group decisions 519
26.4 Decision-making process 519
26.4.1 De ning and diagnosing a problem 520 z 26.4.2 Developing
objectives and criteria 521 z 26.4.3 Developing alternatives 521
26.4.4 Analysing alternatives 521 z 26.4.5 Selecting an
alternative 521 z 26.4.6 Implementing the alternative 521
26.4.7 Evaluating decision effectiveness 521
26.5 Decision-making models 522
26.5.1 The economic model or the rational model 522 z 26.5.2 The
administrative man model or the bounded rationality model 522
26.5.3 Intuition and decision making 523
26.6 Creativity and innovation in decision making 523
26.7 Information technology and decision making 524
Summary 526
Questions 527
Endnotes 527
xviii Contents
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27. Organizational Structure and Design:
Creating Flexible Organization 529
27.1 Introduction 530
27.2 Organizing and organizational structure 531
27.2.1 De ning organizing 531 z 27.2.2 Organizational structure 531
27.2.3 Evolution of organizational structure 532
27.3 Key elements of organizational structure 533
27.3.1 Work specialization 533 z 27.3.2 Formalization or standard-
ization 534 z 27.3.3 Departmentalization 534 z 27.3.4 Coordina-
tion 537 z 27.3.5 Chain of command 538 z 27.3.6 Authority 538
27.3.7 Centralization and decentralization 539 z 27.3.8 Line and staff
authority 539
27.4 Forms of organizational structure 540
27.4.1 Mechanistic and organic structures 540 z 27.4.2 Traditional
organizational designs 541
27.5 Contemporary organizational structure 541
27.5.1 Factors in uencing organizational structure 541 z 27.5.2 Project
organization 542 z 27.5.3 Matrix organization 543 z 27.5.4 Network
organization or virtual organization 544
Summary 546
Questions 546
Endnotes 547
PART VIII: DIRECTING AND CONTROLLING
28. Motivating and Satisfying Employees 550
28.1 Introduction 551
28.2 Motivation: Concept, nature and signi cance 552
28.2.1 Concept 552 z 28.2.2 Nature of motivation 552
28.2.3 Sources of motivation 552 z 28.2.4 Signi cance 553
28.3 Early theories of motivation 553
28.3.1 Maslow’s hierarchy of needs theory 553 z 28.3.2 Herzberg’s
two-factor theory 554 z 28.3.3 Comparison between Maslow’s and
Herzberg’s theories 555 z 28.3.4 Mcgregor’s Theory X and
Theory Y 556 z 28.3.5 Ouchi’s Theory Z 556
28.4 Contemporary theories of motivation 557
28.4.1 Goal-setting theory 557 z 28.4.2 Reinforcement theory 557
28.4.3 Job-design theory 557 z 28.4.4 Equity theory 558
28.4.5 Expectancy theory 558
28.5 Current issues in motivation 559
28.5.1 From theory to practice 559 z 28.5.2 Cross-cultural
challenges 560 z 28.5.3 Ethics and motivation 560 z 28.5.4 Stock
options 561
Contents xix
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Summary 562
Questions 563
Endnotes 563
29. Leadership: Developing Vision to Transforming
Organizations 565
29.1 Introduction 566
29.2 Leadership 567
29.2.1 Concept 567 z 29.2.2 Characteristics of leadership 567
29.2.3 Leading and managing 567 z 29.2.4 Signi cance of
leadership 568 z 29.2.5 Leadership and power 568
29.2.6 Leadership styles 569 z 29.2.7 Likert’s system
4 management 570
29.3 Evolution of leadership theories 571
29.3.1 Trait theories 572 z 29.3.2 Behavioural theories 572
29.3.3 The managerial grid 572 z 29.3.4 Contingency theories or
situational approach 572 z 29.3.5 Transformational–transactional
leadership 574
29.4 Current issues 574
29.4.1 Ethics and corporate social responsibility 574 z 29.4.2 Leading
across cultures 575
Summary 576
Questions 577
Endnotes 577
30. Communicating in the Age of Internet 579
30.1 Introduction 580
30.2 The nature and function of communication 581
30.2.1 De ning communication 581 z 30.2.2 Functions of
communication 581
30.3 The communication process 582
30.3.1 Channels and information richness 583 z 30.3.2 Methods
of communicating interpersonally 583 z 30.3.3 Organizational
communication 584
30.4 Information technology and communication 586
30.5 Communication problems 587
30.5.1 Barriers to communication 587 z 30.5.2 Overcoming
barriers to communication 588 z 30.5.3 Fostering effective
communication 589 z 30.5.4 Ethics and communication 589
Summary 591
Questions 591
Endnotes 592
xx Contents
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31. Managerial Control and Techniques 593
31.1 Introduction 594
31.2 Control: Nature and signi cance 594
31.2.1 Nature of control 594 z 31.2.2 Signi cance of control 595
31.3 The control process 596
31.4 Controlling for organizational performance 597
31.4.1 Organizational performance 597 z 31.4.2 Measures of organizational
performance 597 z 31.4.3 Types of control 598 z 31.4.4 Financial
controls 599 z 31.4.5 The balanced scorecard approach 600
31.4.6 Information controls 602 z 31.4.7 Benchmarking of best
practices 602 z 31.4.8 Automation-based control 602
31.5 Current issues 603
31.5.1 Ethics and accountability 603 z 31.5.2 Control for cross-cultural
differences 604
Summary 605
Questions 606
PART IX: MANAGING FOR FUTURE
32. Contemporary Management Thinking 610
32.1 Introduction 611
32.2 Challenges before business and management 611
32.3 Peter F. Drucker: change, innovation and global managers 612
32.3.1 Change: Shift to knowledge and knowledge society 612
32.3.2 Management concepts: MBO, knowledge workers, core
competencies 612 z 32.3.3 Ethics and social responsibility 613
32.4 Michael Porter: Competitive strategies, innovation, clusters 613
32.4.1 Change: Globalization of businesses, innovation and entrepre-
neurs 613 z 32.4.2 Management concepts: The ve-forces model and
the value chain 614 z 32.4.3 Ethics and social responsibility 616
32.5 Peter Senge: Learning and organizations 616
32.5.1 Change: System and learning 616 z 32.5.2 Management concepts:
Learning organization 616 z 32.5.3 Ethics and social responsibility 618
32.6 C. K. Prahalad: Core competency to bottom of the pyramid 618
32.6.1 Change 618 z 32.6.2 Management concepts: strategic intent and
core competency 619 z 32.6.3 Ethics and social responsibility 620
32.7 Michael Hammer: Quality, business process reengineering 620
32.7.1 Change 620 z 32.7.2 Management concepts: Business process
reengineering 620 z 32.7.3 Ethics and social responsibility 621
32.8 Thomas J. Peters: Management by chaos; excellent companies 621
32.8.1 Change 622 z 32.8.2 Management concepts 622
32.8.3 Ethics and social responsibility 622
Contents xxi
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Summary 624
Questions 624
Endnotes 624
33. Strategic Change: Managing Change and Renewal 627
33.1 Introduction 628
33.2 Strategic change 629
33.2.1 De ning changes 629 z 33.2.2 Nature of strategic
change 629 z 33.2.3 Need for strategic change 630
33.3 Management of strategic change 631
33.3.1 Factors in uencing change 631 z 33.3.2 Planning and
preparation for change 632 z 33.3.3 Anticipating resistance to
change 633 z 33.3.4 Strategies to overcome resistance to change 633
33.4 Implementing changes 634
33.4.1 Technology-based methods 634 z 33.4.2 Organizational redesign
methods 634 z 33.4.3 Task-based methods 635 z 33.4.4 People-
oriented methods 635
33.5 Social change and the entrepreneur 637
Summary 639
Questions 639
Endnotes 640
34. Knowledge Management and Learning Organizations 641
34.1 Introduction 642
34.2 Learning, learning organizations and knowledge management 642
34.3 Knowledge management 644
34.3.1 Knowledge 644 z 34.3.2 The importance of knowledge 645
34.3.3 Process of knowledge management 646 z 34.3.4 Knowledge cre-
ation 647
34.4 Learning organization 648
34.4.1 Peter Senge’s learning organization 649 z 34.4.2 Features
of a learning organization 650
Summary 653
Questions 653
Endnotes 654
35. Managing Diversity 656
35.1 Introduction 656
35.2 Diversity 657
35.2.1 De ning diversity 657 z 35.2.2 Diversity: National context
and legal frameworks 658 z 35.2.3 Advantages of diversity in
organizations 658
xxii Contents
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35.3 Managing diversity 659
35.3.1 Challenges that managers face when working with a diverse
population 659 z 35.3.2 Strategies for promoting diversity in
organization 660
35.4 Implementing diversity programmes 663
35.4.1 Elements of a successful diversity programme 663
35.4.2 The diversity of cer 663
Summary 665
Questions 665
Endnotes 665
36. Corporate Governance 667
36.1 Introduction 668
36.2 Corporate governance: Need and signi cance 668
36.2.1 De ning corporate governance 668 z 36.2.2 Driving forces
for CG 670 z 36.2.3 Signi cance of CG 671
36.3 Problems of CG in India 673
36.4 Fundamental principles of CG 674
36.5 Development of CG 675
36.5.1 Companies Act, 1956 675 z 36.5.2 Other acts and
regulations 675 z 36.5.3 Development of best practices 676
36.6 The mechanism for CG 677
36.6.1 Main issues 677 z 36.6.2 SEBI code on CG 678
36.7 CG and emerging issues 679
Summary 680
Questions 681
Endnotes 681
Index 683
Contents xxiii
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is book is the outcome of my academic journey spanning three decades.  e process of transformation
of the business environment of a nation and its management, and the role of innovation in ushering in
this change, have always fascinated me. In the course of my persistent research on these issues, I have
noticed that people, institutions, enterprises and societies in general respond to the forces of change
in two distinct ways.  ere are some who react to survive; others, probably fewer in number, behave
proactively by anticipating the forces of change and continuously endeavour to strengthen their capa-
bilities and knowledge base by inventing new modes of behaviour, objects and systems to deal with the
unfolding reality.  e latter, undoubtedly, add much more value, and create wealth and happiness not
only for them, but for the society at large.
Changes in business environment, business practices and innovative measures are governed by global
competitiveness, institutional initiatives and government policy. In my academic pursuit, somehow,
since the very beginning, I have closely tracked responses of business enterprises to changes in business
environment ushered in by the factors mentioned above. As a young scholar during the 1980s, when the
Government of India initiated long overdue reforms in trade and industrial policies aimed at promot-
ing e ciency and productivity of Indian industries, I wrote an M.Phil. dissertation entitled ‘ Managerial
attitude towards change and innovation . e study found that the middle-level management was most
responsive to the gathering challenges of a new business environment as re ected in the adoption of a
slew of innovative measures by  rms aimed at improving their operational e ciencies. Subsequently, my
Ph.D. thesis, ‘ Success strategies of Indian enterprises , examined the issue of business strategy adopted by
rms in view of the changing business climate of the country.  e study found that during the latter half
of the 1980s, in order to expand and make pro t, large  rms, apart from improving their operational
e ciency, went in for sharpening their marketing and competitive strategies. Indian enterprises were
found to have increased their product diversi cation in the pre-1980s era. However, as the decade of the
’90s unfolded and economic reforms went deep and wide, large  rms switched over to acquiring focus by
restructuring and realigning their operations and product lines. Simultaneously, there was an attempt to
modernize their plants, acquire knowledge through strategic alliances and outright purchase of technol-
ogy and knowledge systems.  ere was increased focus on knowledge acquisition and innovation.
Globalization of national economies and establishment of the World Trade Organization (WTO), with
its own rules for regulating the conduct of international business, has opened up vast world markets for the
Indian rms. However, to cash in on this opportunity, Indian  rms, and the economy, in general, will have to
strive hard to develop themselves as a competitive hub of knowledge creation, and set up new institutions and
strengthen existing ones, wherever required—tasks, by no means small, in an era of global competitiveness.
Knowledge, without doubt, will continue to be the key driver in global economic growth throughout
the twenty- rst century. No wonder, global  rms and nations have, therefore, laid extraordinary emphasis
on knowledge acquisition and innovation. In this context, an important feature of knowledge-related
Preface
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activity—its spatial distribution—is worth emphasizing. Knowledge and capability creations are clustered
in regions and locales spread all over the world, with strong linkages to each other. Performance of a
rm, today, critically depends on the cluster to which it belongs. Policies and new institutional initiatives
aimed at promoting e ciency and productivity of  rms, therefore, needs to take note of this fact.  e
study ‘ Emerging knowledge-based economy, Canadian competitiveness and strategic response of high-
tech  rms (2000), sponsored by Shastri Indo-Canadian Institute and conducted by me in the University
of Alberta, Canada, clearly demonstrates the pivotal role of clusters and an intertwined, well-calibrated
government policy towards them, in promoting innovation and knowledge growth. In my own account
of the tale of two cities, I discovered to my delight, how two entirely di erent routes to industrial growth
were adopted by the cities of Calgary and Edmonton, both located in the state of Alberta.
A window of opportunity to see these ideas in operation in the Indian context came my way when
I had to write a report on the ‘Impact of WTO on small-scale industries in Punjab and Haryana’ as part
of the core group of Y. K. Alagh Committee set up by the Punjab and Haryana governments to examine
the impact of WTO on agriculture and small-scale industries (SSIs) of their respective states.  e study
took me to several district industrial centres in Punjab and Haryana and enabled me to have extensive
interaction, among others, with entrepreneurs and representatives of trade associations and government
o cials to understand the problems faced by the SSIs, in particular with regard to those with linkages
to WTO, and identify possible solutions. As it turned out, few districts in these states could throw up
vibrant industrial clusters with strong trade associations and quality educational institutions.  e vast
majority of districts wore the picture of being a mere agglomeration of industries without any linkage or
interaction with each other. To develop these industrial districts into innovative clusters clearly called for
setting up of institutions such as knowledge parks, along with institutional mechanisms that would allow
greater e ective collaboration among the industry, the academia and the government.
e role of policy and institutions in business innovations were further underlined in another study,
A strategic approach to innovation and international competitiveness of chemical industry in India’ ,
sponsored by the Department of Scienti c and Industrial Research (DSIR), Ministry of Science and
Technology, Government of India in 2003–04.  e chemical industry is a global industry representing
big multinational corporations (MNCs) operating on a global scale.  e study led to suggestions of
strengthening of the dynamic capabilities of Indian enterprises and chemical innovation systems along
with the setting up of chemical parks and knowledge parks. In 2006, a visit to innovative clusters in
France, such as ‘Sophia Antipolis’, and automobiles clusters near Paris further strengthened my views
regarding the e cacy of clusters and government policy in promoting innovation.
In promoting innovation in emerging areas such as nanotechnology, and in international cooperation
and collaboration, is becoming increasingly important.  ere is a need to strengthen capabilities in new
technology through training and education, along with generous  nancial support and an appropriate
policy framework. In trying to be innovative in the areas of new technology, the ethical dimension must
not be forgotten.  is is what was learnt in a research project sponsored by the European Commission
and completed in 2007—‘ Bridging the gap between Europe and Indias nanotechnology knowledge
bases: Towards an understanding of innovative support structures, training programs and policies .
Insights acquired during all the above-mentioned research projects and my experience of teaching
courses on strategic management, strategic marketing and international marketing to MBE and MBA
students have gone into the writing of this book on Business and Management.  e aim has been at
understanding—with the help of real-life cases and illustrations—the de ning changes sweeping the
Indian business scenario and the innovations that have taken place in their working and management
during the last few decades. It is especially targeted at undergraduate students of commerce, management
and engineering for strengthening their understanding of Indian business and management.  e focus
on change, innovation, capabilities and strategies will be evident in all the chapters.
xxvi Preface
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OVERVIEW OF THE BOOK
e Indian economic and business environment has changed dramatically a er the 1990s. Indian
companies have been building capabilities through restructuring and modernization of plants, using
knowledge through joint ventures or outright purchase of technology. Some companies are focusing on
innovation also and using this to internationalize their activities. A large number of companies having
global ambitions are developing strategies to capture the global market. It is now well researched that it is
the Indian entrepreneurs and companies who are driving the growth of the national economy and pushing
it to develop as an economic power in the years to come.  is feature of the Indian economy di erentiates
India from China, another global economic power where growth is driven by government enterprises.
Business Insights: ere are real-life cases of Indian enterprises at the beginning ( Business Insight ) and
the end ( Business Insight: A Revisit and Case Study ) of each chapter.  ere is a wide diversity in the corpo-
rate cases discussed in the book.  ese cases discuss renowned companies from various manufacturing
and services sectors of the Indian economy. Some of the prominent names among these companies are:
Reliance, Oil and Natural Gas Corporation, Tata Steel, Tata Motors, M&M, Maruti, Hero Honda, Bajaj
Auto, Bharti Airtel, ITC, Infosys, Wipro, Mahindra Satyam, Ranbaxy, Sintex, Jubilant Life Science, ICICI
Bank, State Bank of India, Aptech, Genpact, Britania, Hindustan Unilever and Asian Paints. All these
cases have been designed and developed for this book.
e book is primarily intended for readers interested to know about business and its management
in the Indian context. Readers may have the ambition to work for a business as an employee, or be a
manager, or a consumer or an investor, or a successful business person.  is book would be useful for
students of B.Com. (Hons), B.Com., BBS, BBA and other similar professional and vocational courses. It
would also be a much helpful introductory book for MBA students. For candidates interested in learning
about business and management, it would be an e ective aid during training programmes.
Exhibits: In a country like India, with a population of over 1.2 billions and large numbers of consumers
having low to medium level of income, not only a whole range of business opportunities exists but new
opportunities are also being explored by enterprising individuals and groups. In this book, I have attempted
to focus on the entrepreneurial opportunities for businesses and challenges facing them. Each chapter
has an exhibit illustrating entrepreneurial challenge in a real-life Indian enterprise. Indian enterprises
are functioning in a globalized business environment.  ese enterprises have proved their strength and
competitiveness in a number of industries and services. To achieve their global objectives, they are going
for mergers and acquisitions, and transforming themselves into multinational enterprises. In each chapter,
there is also an exhibit illustrating global business implications for Indian enterprises using a real-life
example. As Indian business is becoming global, these enterprises are expanding in the foreign market,
raising funds from foreign institutional investors and forming strategic alliances with MNCs. All this has
necessitated Indian enterprises to be more transparent and ethical in their functioning. A third exhibit
highlighting the ethical and social responsibilities of di erent functional areas in business and management
functions is present in each chapter. Such an exhibit also deals with the case study of an Indian enterprise.
Every chapter has been supported by theory and research inputs related to the issues of discussion.
ORGANIZATION OF THE BOOK
ere are nine parts in this book: Understanding the Environment of Business; Entrepreneurial
Opportunities in Business; Setting Up Operations; Marketing; Money, Finance and Investment; Human
Resources; Management Process, Planning and Organizing; Directing and Controlling; and Managing
for Future.  ese nine parts comprise 36 chapters.  ey give a comprehensive view of the functional
areas, management processes and contemporary topics related to business enterprises.
Preface xxvii
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PEDAGOGY
e book has been designed to adopt a pedagogy that would help in understanding the content easily.
Every chapter follows this pedagogy.
Chapter Objectives: ese have been outlined at the beginning of each chapter.
Business Insight and Business Insight: A Revisit: Every chapter starts with the feature Business
Insight , focusing on a real-life situation and on managerial issues involved in an Indian company.
e purpose of this is to stimulate students’ thinking and awareness of various aspects of the topic
to be discussed in the chapter.
A second feature, Business Insight: A Revisit , marks the closing of the same case and is presented a er
the main text ends, before the summary.  is is intended to stir students’ thoughts about the issues and
approaches covered in the chapter they have just read, and then to apply these ideas to the dilemma or
challenge and the decision posed by the case description.  e cases are meant to engage students in some
serious consideration of the issues. At the end of this feature are given a set of questions related to the
key aspects of the case.
Exhibits: ere are over a hundred exhibits illustrating cases of various Indian enterprises with a
focus on the following areas:
z entrepreneurial challenges
z global business implications
z ethical and social considerations.
Figures and Tables: In every chapter there are  gures and tables clarifying the issues discussed in
the text.
Chapter-end Summaries: Each chapter has summarized the main points at the end, keeping in
view the chapter objectives.
Questions: Each chapter has questions that provide a fairly comprehensive coverage of the major
points and topics contained in the text.  e purpose of the questions is to encourage thinking vis-à
-vis mere memorizing of the chapter contents.
Endnotes and References: Endnotes and references are given in the chapters as and where neces-
sary, in order to amplify certain points or provide source details.
Case Studies : Each chapter closes with an exercise in the form of a Case Study , with relevant
questions.
TEACHING AIDS
Teaching aids for students and teachers in the form of PowerPoint presentations and case teaching notes
for chapter-end cases are available at www.pearsoned.co.in/vijaykumarkaul/.
Vijay Kumar Kaul
xxviii Preface
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Acknowledgement
A book of this size would have been impossible to complete without the help of friends and well-wishers
who provided much support and encouragement. Although it is di cult to give all the names here,
some who played a key role cannot but be identi ed and sincerely thanked. At the outset, I would like
to thank all the scholars, writers and academicians who have so far worked in the area of Business and
Management. Some such scholars have been referred to in the book; others are more generally known
for their contribution to the disciplines of Business and Management. I sincerely show my indebtedness
to all such scholars from whose work I have learned and drawn necessary knowledge.
Some of my friends, colleagues and research students have been associated with me throughout the
development of this book.  ey have helped me by reading and editing the manuscript, and suggesting
missing points.  ey have provided support at di erent stages during my writing which helped and encour-
aged me to  nish the work at the earliest possible. I will be failing in my duty if I do not mention their names.
Some are associated with various organizations under the University of Delhi: J. K. Bareja, Shyam Lal
College; Surendra Kumar, P.G.D.A.V. College; Anu Pandey, Motilal Nehru College; Dr Poonam Verma,
Principal, S. S. College of Business Studies; Dr Usha Krishna, Janki Devi Memorial College; Dr Gayatri
Verma, Lakshmibai College; Dr M. S. Verma, Ram Lal Anand College; Dr Inderjit, Principal, College
of Vocational Studies; Shekhar Singh, Dayal Singh College; Dr Asif Zamir, Fore School of Management;
Dr Neelam Singh, Lady Shriram College; Anshul Taneja, Maharaja Agrasen College; Dr Raman Kumar,
College of Vocational Studies; Dr P. V. Khatri, Shri Shardhanand College; Dr Rabi Narayan Kar, Shaheed
Bhagat Singh Evening College; and Nomita Sharma, S. S. College of Business Studies. Sharma has helped
me in preparing teaching notes in the form of PowerPoint slides and cases teaching notes.
Others are teachers in various departments at the University of Delhi: Professor V. K. Vasal,
Department of Financial Studies; Professor C. P. Gupta, Department of Financial Studies; Professor
I. M. Pandey, Department of Financial Studies; Professor Surender Kumar Bansal, Department of
Business Economics; Dr Ananya Ghosh Dastidar, Department of Business Economics; and Dr Yamini
Gupt, Department of Business Economics.
I am also thankful to Shailendra Kumar, Department of Personnel and Training, Government of
India, and Pankaj Varshney, APJ Institute of Management. My sincere thanks to all of them for their
support and encouragement. I wish that my association with them grows in the days to come.
is book could not have reached the readers without the help of a good publisher.  e editorial sup-
port provided by an excellent team consisting of Anshul Yadav, Praveen Tiwari and Barun Kumar Sarkar
of Pearson Education is worth mentioning. My interaction with this team and their suggestions and
editing has added great value to my work. I express my gratitude to all of them for their support. Anshul
Yadav deserves a special word of thanks for his involvement and help.
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xxx Acknowledgement
I have heard that writing a book involves much patience and hard work; that one needs to incur
certain costs as well. In the course of writing this book, I could not give time to my family, especially to
my two lovely little daughters, Vijayeswari and Rajeshwari. Both of them understand their father well
and are very supportive. My wife Surekha needs special mention. She is not only very supportive and
accommodative, but also a good manager. She would complain but understand quickly. I have gained a
lot of knowledge about management from her experience of establishing and managing several libraries
over the last two decades. Another family member who is closely associated with my all pursuits is my
younger brother Omkar Nath Kaul. Sharing of his managerial experiences in the corporate sector has
helped me to understand the intricacies of management, which largely impacted my writing.
Whatever I am today, it is all because of my guru Paramhansa Advaitanadaji and my parents. I have
learnt my real lesson of life, to face ups and downs and do something for the society, from Paramhansaji.
His blessings will continue to enlighten my soul in the years to come. My father has always been encour-
aging me to read and study more and more. Till his last, he had been by my side and guided me. By the
grace of God, my mother is still with me with her blessings.  e present work is the fruit of all their
blessings.
Vijay Kumar Kaul
A01_KAUL4498_01_SE_PREL.indd xxxA01_KAUL4498_01_SE_PREL.indd xxx 04/08/11 4:53 PM04/08/11 4:53 PM
Vijay Kumar Kaul is Head, Department of Business Economics and Dean,
Faculty of Applied Social Sciences and Humanities in the University of
Delhi. He completed his postgraduation, M.Phil. and Ph.D. from the
same university. Professor Kaul has over thirty-three years of experience
as teacher, consultant and researcher. His main focus of teaching, training
and research has been in the areas of Innovation and Technology, Business
Policy and Strategy, Strategic Marketing, and International Marketing.
He has also been associated with the Indian Council for Social Science
Research (ICSSR), other professional bodies and several industrial and
trade associations.
Professor Kaul was awarded the Development Study Fellowship by the
Shastri Indo-Canadian Institute to work on a research project in Canada.
He has also worked on projects for several governments and international agencies, such as the
Government of Punjab; the Government of Himachal Pradesh; ICSSR; the Department of Scienti c &
Industrial Research (DSIR), Ministry of Science and Technology, Government of India; and the European
Commission.
To his credit, Professor Kaul has over  y research papers and articles published in reputed jour-
nals. He has participated in and presented research papers at various seminars and conferences in India
and abroad. He made a presentation at the UN Commission on Human Rights in Geneva, Switzerland.
As a part of a delegation on Indo-French cooperation, he visited France and made presentations on
the Indian Industry. He has successfully guided and supervised Ph.D. and M.Phil. research students
working in areas such as Business Strategies, Corporate Governance, Innovation, Small Enterprises and
Entrepreneurship and the World Trade Organization.
About the Author
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DYNAMICS OF BUSINESS
ENVIRONMENT
GLOBALIZATION, LIBERALIZATION
AND PRIVATIZATION 2
To defi ne business environment.
To outline the impact of government policy
on changing the business environment.
To defi ne the concept and rationale of glo-
balization and its impact on business.
To defi ne the policy of liberalization, its con-
cept and its impact on business.
To evaluate the concept of privatization and its
impact on business.
To examine the impact of changing business
environment on indian enterprises and the
response of enterprises to the change.
Chapter Objectives
After taking over Corus, a European steel giant, Tata Steel became the  fth-
largest steel company in the world. The total sales of the company has jumped
to ` 118753 crores by the year ending 31 March 2011. Tata Steel was established
in 1907 by Jamsetji Tata. With the acquisition of Corus in 2007, exactly after 100
years of its existence, the company has expanded both within Asia (by acquir-
ing Thailand’s Millennium Steel and Singapore’s NatSteel Asia) and beyond
Asia (through Corus, UK, as well as a host of smaller acquisitions, joint ventures
and associations). Tata Steel has created a manufacturing and marketing network in Europe, Southeast Asia
and the Paci c Rim countries through investments in Corus, Millennium Steel and NatSteel Holdings.
After Independence in 1947, the Government of India made steel a priority area for industrial development,
but the expansion in this area was primarily reserved for the public sector. Tata Steel was not able to expand
and grow. As liberalization started in 1991, things started changing for the company. During the period 1991
to 2000, Tata Steel launched a modernization programme to replace outdated technologies and processes.
This cost the company ` 9,500 crore, leaving little scope for growth or acquisitions. However, by late-1990s,
its competitiveness was rati ed by the industry’s premier analysis  rm World Steel Dynamics, which ranked it
third after Korea’s POSCO and China’s Baosteel . The ranking, based on parameters such as management, tech-
nology and cost of production, is one of the most respected benchmarks in the steel industry. The company
started making pro ts and looking for global acquisitions. The result was several acquisitions after 2000, and
currently it is one of the largest steelmakers in the world.
Business Insight Tata Steel Managing the Dynamic Business
Environment
(Continued )
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30 Understanding the Environment of Business
2.1 INTRODUCTION
e case of Tata Steel clearly shows that the government policy in a country a ects the growth and per-
formance of the business .  e government policy is the most important factor of the overall business
environment, which in uences the other constituents of the environment.  ere are several factors which
contribute to the business environment in a country: economic, competitive, technological, political and
legal, social and cultural, and ecological.  e companies which understand this and respond appropri-
ately are successful and survive for a long time, while others struggle to survive. For instance, Hindustan
Motors was enjoying the protected markets under the restrictive economic policy. As the government
liberalized its policy and opened the automobile sector for global players, Hindustan Motors could not
respond to the change and is struggling to survive (see Exhibit 2.1). As the business has become global-
ized, understanding the global environment becomes important for the growth and performance of the
business enterprises.
e business environment has been changing very fast globally. A er the Cold War, globalization
has become the most outstanding characteristic of international economic a airs. Started by the US
president Ronald Reagan and the British prime minister Margaret  atcher, the process of liberalization
Tata Steel has witnessed the changes in the Indian economy over a very long period and has also
contributed to bringing about those changes. It was established during pre-Independence period. It faced a
number of problems in setting up its plant, as the country was ruled by the British government. Immediately
after Independence, it wished and endeavoured to grow and expand its activities. But since the public sector
was considered important for the industrial development, only public sector units were allowed to set up steel
business. However, things started changing from 1991 with the liberalization of the Indian economy, and cur-
rently Tata Steel is a global company with steel plants all over the world.
Exhibit 2.1 Entrepreneurial Challenges: Hindustan Motors Struggling
to Survive
After Independence, only two players were operating in the
Indian passenger car industry—Hindustan Motors and Premier
Automobiles. From 1948, Ambassador cars manufactured by
Hindustan Motors started ruling the Indian roads. Ambassador and
Padmini (manufactured by Premier Automobiles) were the only two
cars available in the Indian market. Ambassador was the vehicle of
choice for the Government of India and the offi cial car for almost
every Indian prime minister after Independence. Till 1981, it had 80 per cent of the market share. Because
of restriction on production capacity, buyers were on the waiting list for the cars. However, with the
changed government policy, the entry of Maruti Suzuki and, later on, of other multinational companies,
the industry scenario of the passenger car changed radically. Hindustan Motors made several attempts
at turning around its operations, but it is still struggling. New players introduced new models of cars,
which started ruling the Indian car markets. Premier Automobiles became bankrupt and Hindustan
Motors is still learning to respond to the new business environment.
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Dynamics of Business Environment: Globalization, Liberalization and Privatization 31
and privatization has substantially altered the economic policy and the business environment in which
enterprises operate.  e establishment of the World Trade Organization (WTO) has further pushed
the opening up of domestic markets of di erent countries for the entry of foreign goods and foreign
companies. A er the United States, Europe and other Asian countries, India too embarked on the
process of liberalization and globalization. Starting from the 1990s, several sectors have been opened
up for private and foreign participation. State monopolies in some of the sectors
have been removed. A number of public-sector companies have been and are
being privatized.  e change in the global business environment and the  ve forces
a ecting it have been outlined in a recent survey of Mckinsey Quarterly.
1 ese
ve forces o er the opportunities for companies to innovate and change: rst , the
emergence of increased growth from the emerging market countries than from
the developed ones will require new products and innovations; second , developed-
world economies will need to generate pronounced gains in productivity to
power continued economic growth; third , global economy is growing ever more
connected. Complex  ows of capital, goods, information and people are creating
an interlinked network that spans geographies, social groups and economies in
ways that permit large-scale interactions at any moment; fourth , a collision is shaping up among the
rising demand for resources, constrained supplies and changing social attitudes towards environmental
protection; and h , the o en contradictory demands of driving economic growth and providing the
necessary safety nets to maintain social stability have put governments under extraordinary pressure.
It needs to be emphasized here that the business environment of the world is under constant change.
One may look at the history of past 100 years. Change is the permanent feature of the global economy.
e business enterprises should scan the change and accordingly modify and innovate their products
and business model. Let us  rst understand the di erent constituents of business environment and how
they in uence business enterprises.
2.2 DYNAMICS OF BUSINESS ENVIRONMENT
Figure 2.1 exhibits di erent constituents of the business environment and their relationship with the
enterprises.  e environmental forces are economic, technological, competitive, political and legal,
socio-cultural and ecological . All these forces are beyond the control of an enterprise. Enterprises should
understand the environmental forces as they in uence strategy decisions .  ese forces give a general
view of the market trends .  e impact of these forces on the enterprise is through the industry in which it
operates. For a diversi ed enterprise operating in a number of industries, a broader view of the environ-
mental forces is important. An enterprise must evaluate and recognize the elements, severity and impact
of these forces. It must identify, evaluate and react to the forces triggered by the external environment.
Let us discuss these forces one by one.
2.2.1 Economic Environment
e economic environment consists of factors that a ect consumer purchasing
power and spending patterns. Economic factors include business cycles, in ation,
unemployment, interest rates and income. Changes in major economic variables
have a signi cant impact on the marketplace. For example, income a ects consumer
spending, which in turn a ects sales of organizations. One related dimension is the
The change in the
global business
environment and
the ve forces
a ectingit o er the
richest opportunities
for companies
to innovate and
change.
The economic
environment
consistsof factors
that a ect consumer
purchasing power
and spending
patterns.
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32 Understanding the Environment of Business
demographic pro le of consumers. Demography helps marketers in the identi cation of current and
potential customers, where they are, and how many are likely to buy the products sold by them. Changes
in the demographic environment can result in signi cant opportunities and threats to the organization.
e major trends for marketers in the demographic environment include worldwide explosive popula-
tion growth; a changing age, and an ethnic and educational mix; new types of households and geographi-
cal shi s in population.  e emergence of the middle class in the emerging markets such as China, India
and Brazil is an important economic factor which is going to change the overall competitive strategies
of the companies.
2.2.2 Competitive Environment
To measure the competitive environment in an industry, Michael Porter’s simple
model of  ve competitive forces is considered.  is model focuses on  ve forces:
the bargaining power of suppliers, the bargaining power of customers, the rivalry
among competing sellers in an industry, the availability of substitute product
o ered by the  rms in other industries, and the potential threat of entry of new
competitors. Figure 2.2 shows the  ve-forces model of competition.
Figure 2.1 Business environment and enterprises
Industry
Enterprise
Competitive
Environment
Economic
Environment
Socio-cultural
Environment
Technological
Environment
Ecological
Environment
Political and
Legal
Environment
Figure 2.2 The  ve-forces model of competition
Ease of New Entry
Availability of Substitutes
Industry
Rivalry
Power
over
Suppliers
Power
over
Customers
Competitive
environment focuses
on  ve forces:
bargaining power of
suppliers, bargaining
power of custom-
ers, rivalry among
competing sellers in an
industry, availability
of substitute product
o ered by the  rms
in other industries
and potential threat
of entry of new
competitors.
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Dynamics of Business Environment: Globalization, Liberalization and Privatization 33
2.2.3 Political and Legal Environment
Enterprises operate within a framework of governmental regulation and legislation.
Government relationships with business enterprises encompass taxes, subsidies,
tari s, import quotas and deregulation of industries.  e political environment
includes governmental and special interest groups that in uence and limit various
organizations and individuals in a given society.  e public expects enterprises to
be ethical and responsible.  e purposes of business legislation include protec-
tion of companies from unfair competition, protection of consumers from unfair
business practices and protection of the interests of the society from unbridled
business behaviour.  e legal environment becomes more complicated as enter-
prises expand globally and face governmental regulations di erent from those
within India.
2.2.4 Technological Environment
e technological environment refers to new technologies, which create new product
and market opportunities. Technological developments are the most uncontrollable
forces faced by enterprises. Organizations need to be aware of new technologies to
turn these advances into opportunities and a competitive edge. Technology has a
tremendous e ect on lifestyles, consumption patterns and the economy. Advances
in technology can enable starting new industries, radically altering or destroying
existing industries and stimulating entirely separate markets.  e fast pace at which
technology changes has forced organizations to quickly adapt in terms of how they develop, price, dis-
tribute and promote their products. A recent example of development of a cutting-edge technology to
extract shale gas and its likely impact on the global oil and gas industry are discussed in Exhibit 2.2.
The political
environment
includes
governmental and
special interest
groups that in uence
and limit various
organizations and
individuals in a given
society.
Organizations need
to be aware of new
technologies to turn
these advances into
opportunities and a
competitive edge.
In 2008, the prices of oil moved up globally, and there
was concern that this would aff ect the global economy.
Oil crisis, global warming and economic crisis together
attracted the attention of global political leadership. In
the case of the global oil and gas market, there were
no other substitutes for oil and no new fi ndings of oil.
However, it was found that there was plenty of shale gas
in rocks, but there was no technology to extract it cheaply.
The end of the era of cheap oil prompted oil companies to
look for new forms of energy. It was in the early 1980s that
companies in the United States fi rst started looking for shale gas. In 1989, production of shale gas started,
and after 2000, with energy crisis, it drew the attention of big oil companies.
Exhibit 2.2 Global Business and Technological Change: Shale Gas Changing
the Game in the Global Oil and Gas Market
Conventional
Non-Associated
Gas
Sandstone
Seal
Gas-Rich Shale
Tight Sand
Gas
Oil
Conventional
Associated
Gas
Coalbed Methane
Land Surface
US Energy
Information
Administration
(Continued )
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34 Understanding the Environment of Business
2.2.5 Socio-cultural Environment
Socio-cultural forces are the most di cult uncontrollable variables to predict.
Marketers should understand and appreciate the cultural values of the environ-
ment in which they operate.  e cultural environment is made up of forces that
a ect society’s basic values, perceptions, preferences and behaviours. Changes in
social or cultural environment a ect customer behaviour, which in turn a ects
sales of products. Trends in the cultural environment include individuals changing
their views of themselves, of others, and of the world around them and the move-
ment toward self-ful lment, immediate grati cation and secularism.
2.2.6 Ecological Environment
e ecosystem refers to natural systems and its resources that are needed as inputs by marketers or are
a ected by marketing activities. Green marketing or environmental concern about the physical environ-
ment has intensi ed in recent years. To avoid shortage in raw materials, organizations can use renewable
resources (such as forests) and alternatives (such as solar and wind energy) for non-renewable resources
(such as oil and coal). Organizations can limit their energy usage by increasing e ciency. Goodwill can
be built by voluntarily engaging in pollution prevention activities and conservation of natural resources.
Government’s regulations over time have increased on account of global warming and climate-change
concerns.
2.3 CHANGES IN ECONOMIC POLICY AND INDIAN
BUSINESS ENVIRONMENT
In a country like India, the government has been directing, in uencing and
controlling the business environment. As discussed in Chapter 1, a er gaining
Independence in 1947 , the Government of India embarked on a mixed economy
model with equal focus on private and public sectors.  e policy ethos was the
The cultural
environment is made
up of forces that
a ect society’s basic
values, perceptions,
preferences and
behaviours.
In 1947, the
Government of
India embarked on
a mixed economy
model with equal
focus on private and
public sectors.
The shale gas is a type of natural gas found in rock formations, below and above the ground. It
is referred to as a non-conventional gas, as it calls for more intricate production techniques. The
production technology is expensive, and the amount of gas produced from each well is low. Hence,
the cost of production of shale gas works out to about two to three times that of conventional gas. Still,
the cost is cheaper than that of producing oil. Development of horizontal drilling has changed the sce-
nario of gas exploration. Only the United States and Canada have explored shale gas seriously. Recently,
Reliance industries acquired three US shale gas assets for US$2 billion, which has attracted the attention
of companies in India towards shale gas . Shale gas has changed the international oil and gas market. It
is likely to change the power of the Organization of the Petroleum Exporting Countries (OPEC) to play
with the price of oil. Shale gas is the future of the oil and gas market and is a game changer that has
taken the market by surprise .
Shale gas is a non-conventional and green gas. It can be used in virtually every energy application—
automobile fuel, industrial feedstock (petrochemicals, power, fertilizer), heating and cooking. It is a sub-
stitute oil, which is likely to change the energy equation in the world. Companies are yet to look into
this direction seriously.
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Dynamics of Business Environment: Globalization, Liberalization and Privatization 35
development of national capabilities; the state’s primary role was to step in where
private capital was not forthcoming in actual quantity, and the secondary role was
to correct regional imbalance in industrial development.
However, a er 1956, the policy started changing and more restrictions were
imposed on the functioning of business enterprises.  e policy started control-
ling the investment, production and technology decisions of the enterprises. In
1956, a second industrial policy resolution was enunciated.  is resolution guided
industrial policy making in India for almost a quarter of a century.  e principle
that the state was to be dominant in industrialization was to be maintained and
extended. Implementation of industrial policy was also extremely ad hoc and con-
fusing to the industry. For instance, the late 1970s were characterized by contra-
dictory policy-related actions. IBM and Coca-Cola, multinational corporations (MNCs), were asked to
leave India. At the same time, Siemens, a major supplier of power-generation equipment projects, was
welcomed to India by the Indian administration .
A er 1980, the government again started changing its policy to allow expansion
and investment decisions of the enterprises.  e industrial policy began to aim
at pushing progress and development, through enhancement of the competitive
process.  e Seventh Five-Year Plan (1985 to 1990; Government of India, 1985)
document is unique among plan documents in signifying the role of  rm-level,
microeconomic variables that would drive industrial progress and in laying out the
appropriate policy regimes that would foster the development of  rm-level capa-
bilities.  us, the role of  rms, particularly private  rms, as key microeconomic
variables was explicitly recognized.
In 1990, due to the Gulf War and collapse of the USSR, there was sudden drying
up of inward remittances.  is resulted in balance-of-payments problem. India
wasforced to go for standby arrangement with the International Monetary Fund
(IMF).  e government initiated liberalization and globalization with the vision to
be internationally competitive. E orts were made to integrate the Indian economy
with the global economy. In 1991, bold new measures were initiated in the indus-
trial policy. In the following section, the policies of globalization, liberalization and
privatization are examined.
2
2.4 GLOBALIZATION
2.4.1 De ning Globalization
Globalization means free trade, free  ow of capital and people, and free access to ideas
and technology across the world. It is well accepted that wisely managed globalization
can deliver unprecedented material progress, generate more productive and better
jobs for all and contribute signi cantly to reducing world poverty. At the same time,
it has been observed that it has widened the gap between the rich and the poor. It is
also widely acknowledged that globalization has been achieved through the combined
e ect of two underlying factors: (i) policy decisions to reduce national barriers to inter-
national economic transactions and (ii) the impact of new technology , especially in the
sphere of information and communications.  ese developments created the enabling
After 1956, the policy
started changing
and more restrictions
were imposed on
the functioning of
business enterprises.
After 1980, the
government again
started changing
its policy to allow
expansion and
investment decisions
of the enterprises.
Globalization
means free trade,
free  ow of capital
and people, and free
access to ideas and
technology across
the world.
In 1991, bold new
measures were
initiated in the
industrial policy.
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36 Understanding the Environment of Business
conditions for the onset of globalization.  e evolution of globalization has been outlined in Exhibit 2.3.
Table 2.1 shows the main features of globalization waves consisting of growth of population, GDP, trade,
investment and movement of people. Figure 2.3 shows the major drivers of globalization—market drivers,
cost drivers, competitive drivers, technological drivers and government drivers. Market drivers include
common customer needs, global customers and global channels. Cost drivers consist of economies of scale,
economies of scope and sourcing advantages. Competitive drivers include global competition and global
distribution. Technological drivers consist of production technology, telecommunications and the Internet.
Government drivers include free trade, global standards and regulations. All these forces are linked with
each other also and have hastened the globalization of industries over time.
3
2.4.2 Features of Globalization
As shown in Table 2.1 and Figure 2.2, some of the key drivers of globalization have been the liberaliza-
tion of international trade, the expansion of FDI and the emergence of massive cross-border  nancial
ows.  ese have resulted in increased competition in global markets.
2.4.2.1 Expansion of Global Trade World trade has expanded rapidly over the past two decades.
roughout the 1970s, trade liberalization was modest and gradual. However, from the early 1980s,
trade liberalization began to accelerate, especially in the developing countries.
Globalization is not a new phenomenon. The fi rst great expansion of
European capitalism took place in the sixteenth century, and the late
nineteenth century saw a great expansion in world trade and invest-
ment. This trend was slowed down by the World War I and the subse-
quent disillusionment with free trade. However, this was a temporary
phenomenon. The rapid industrialization following the World War II
hastened free trade; the fall of the Berlin Wall and the collapse of the
Soviet Union removed the remaining obstacles. The development of
the Internet enabled the organization of business on a wider scale
with far greater facility and speed than ever before.
The latest round of globalization was started in the mid-1980s
by the MNCs and their foreign direct investment (FDI). In the 1960s
and 1970s, increased international trade transformed world eco-
nomic scene. Subsequently, in the 1980s, the overseas expansion of
multinational fi rms integrated more and more national economies.
During this period, the MNCs belonging to several other countries
also joined American MNCs in a big way to expand internationally.
The MNCs have led the globalization in both services and manu-
facturing. What is new in this era is the incredible speed with which
the fl ow of capital and ideas takes place across the world. This has
opened up enormous opportunities for creativity and economic
growth. However, the benefi ts of globalization have not been felt
universally, and some countries have lost out.
Exhibit 2.3 Globalization in the Historical Context
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Dynamics of Business Environment: Globalization, Liberalization and Privatization 37
Source: Yip, G. S., Total Global Strategy,’ Prentice Hall, 1992.
Figure 2.3 Drivers of globalization
Cost Drivers
Globalization
Potential
• Global competition
• Global distribution
• Economies of scale
• Economies of scope
• Sourcing advantages
• Production technology
• Telecomm unications
• Internet
• Free trade
• Global standards
• Regulations
Globalization Drivers
Government Drivers
Technological
Competitive Drivers
Market Drivers
• Common customer needs
• Global customers
• Global channels
• Transferable marketing
Table 2.1 Globalization waves in the nineteenth and twentieth centuries (percentage change unless
indicated otherwise)
World 1850–1913 1950–2007 1950–73 1974–2007
Population growth 0.8* 1.7 1.9 1.6
GDP growth (real) 2.1* 3.8 5.1 2.9
Per capita 1.3* 2.0 3.1 1.2
Trade growth (real) 3.8 6.2 8.2 5.0
Migration (net) in million
United States,
Canada, Australia,
New Zealand
(cumulative)
17.9* 50.1 12.7 37.4
United States,
Canada, Australia,
New Zealand
(annual)
0.42* 0.90 0.55 1.17
Industrial countries
(except Japan;
cumulative)
64.3
Global FDI outward
stock, year
1982 2006
FDI as per cent of
GDP (world)
5.2 25.3
Sources: Maddison, A., The World Economy: A Millennial Perspective, OCED, Paris, 2001.
Lewis, W. A. The rate of growth of world trade, 1830–1973’, In Grassman, S. and Lundberg, E. (eds), The World Economic
Orders: Pasts and Prospects, MacMillan, London, 1981, pp. 11–74.
UNCTAD, UNCTAD Investment Report 2007, UNCTAD, Geneva, 2007.
World Trade Organization (WTO), International Trade Statistics 2007, WTO, Geneva, 2007.
WTO, World Trade Report, WTO, 2008, www.wto.org.
*Refers to the period 1870–1913.
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38 Understanding the Environment of Business
2.4.2.2 Growth of Foreign Investment Since 1980, the policy environment worldwide has been
far more conducive to the growth of foreign investment . Over the 1990s, the number of countries adopt-
ing signi cant liberalization measures towards foreign investment increased steadily. Apart from their
increased volume, the nature of these investments has also changed. Figures 2.4 and 2.5 show the total
FDI in the world and also the increasing proportion of developing countries .
2.4.2.3 Integration of Financial Markets e most dramatic element of globalization over the
past two decades has been the rapid integration of  nancial markets . Although  nancial liberalization
created the policy environment for expanded capital mobility, the increase in capital  ows was greatly
boosted by the revolution in information and communication technologies (ICT) .
Source : UNCTAD, World Investment Report, 2009.
Figure 2.4 FDI in ows, global and by groups of economies, 1980–2008 (billions of dollars)
800
1,000
1,200
1,400
1,600
1,800
2,000 World Total
Developing Economies
Developed Economies
Transition Economies
600
400
200
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
90
80
70
60
50
40
30
20
10
0
Developed Economies Developing Economies Transition Economies
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Figure 2.5 Shares of the three major groups of economies in global FDI in ows from
1990 to 2008 (per cent)
S o u r c e : UNCTAD, World Investment Report, 2009.
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Dynamics of Business Environment: Globalization, Liberalization and Privatization 39
2.4.2.4 Technological Revolution e industrialized countries were the source of the technological
revolution that facilitated globalization, but that revolution has also had ripple e ects on the rest of the
global economy.  is has had a positive e ect on the development of the developing economy.
2.4.2.5 Global Competition ese changes in trade, foreign investment,  nancial  ows and tech-
nological di usion are increasingly becoming part of a new systemic whole. An underlying common
factor is that all these elements necessarily evolved in the context of increasing economic openness and
the growing in uence of global market forces .  is is a profound change a ecting the role of the state
and the behaviour of economic agents.
2.4.3 Evaluation of Globalization
e globalization has both positive and negative dimensions. Although it has bene ted enterprises and
countries having some strength, smaller enterprises and many underdeveloped countries have su ered
also. Table 2.2 presents the arguments both in support of and against globalization.
Table 2.2 Arguments in favour of and against globalization
Arguments in Favour of Globalization Arguments Against Globalization
Access to global market
Availability of foreign investment
Access to advanced technology
Better product quality and reduced cost
Growing competitive strength
Opportunities to grow and internationalize  rms’
operation
Increased consumer welfare
Uneven impact across countries
Increasing unemployment, inequality and
poverty
The uneven impact on di erent groups of people
Crisis in one country spreading to a number of
other countries
2.4.4 The Case for Globalization
Access to global market: Opening up of the economies of a large number of countries has
increased the access of  rms to wider markets. As various tari s and non-tari barriers have
been reduced over time, the volume of trade has increased.  is has helped  rms to increase their
production and enjoy the bene ts of economies of scale.
Availability of foreign investment: With growing  nancial liberalization, the availability of
foreign funds has increased. Introduction of information and communication technology has
improved the availability and mobility of investments across the world.
Access to advanced technology: Increased availability of funds has made it possible to acquire
the available latest technology. Technology can be procured through outright purchase or through
collaboration with MNCs by forming joint ventures.
Better product quality and reduced cost: Induction of modern technology and large-scale
production has helped companies to produce better quality products at reduced costs.
Growing competitive strength: Competition from the international  rms has forced  rms to
improve their e ciency and productivity.
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40 Understanding the Environment of Business
Opportunities to grow and internationalize  rms’ operations: With increased e ciency,
production of quality products at reduced cost and improved competitive strength have moti-
vated  rms to internationalize their activities.  e rms are exploiting all the strategies, including
exports, strategic alliances and collaboration, and establishing production units in foreign coun-
tries to expand.
Increased consumer welfare: Globalization has exposed customers to the latest information
about di erent products and services.  ey demand latest and better products and services at
competitive prices. Firms have improved their o erings through better products with reasonable
prices.  is has improved consumer welfare.
2.4.5 The Case Against Globalization
Uneven impact across countries: Globalization has resulted in the growth of a number of
countries. However, the growth has been unevenly distributed across countries, among both
industrialized and developing countries. At the same time, the income gap between the richest
and the poorest countries has increased signi cantly.  e industrial countries with strong initial
economic base, abundance of capital and skill, and technological leadership were well placed to
gain substantial bene ts from increasing globalization of the world economy.
Unemployment, inequality and poverty: A study by ILO
4 has pointed out that the impact of
globalization on employment has not been favourable in many countries. It has increased inequal-
ity and poverty also.
e impact on people: e economic bene ts and social costs of globalization are not evenly
distributed among social groups. In many countries, some groups of workers have been adversely
a ected by trade liberalization and the relocation of production to low-wage economies. People
with capital, entrepreneurial ability, and education and skills have bene ted. Others who have lost
out, except in countries that have experienced rapid growth, are the poor, the assetless, the illiter-
ate and unskilled workers, and the indigenous people.
Crisis in one country spreading to many other countries: One of the negative aspects of
globalization and increased interdependence on other countries through movement of trade,
investment and production has been the origin of  nancial and economic crises in one country
spreading to all other countries. A recent example is the sub-prime crisis of the US  nancial crisis
in 2008 which affected a large number of other countries.
2.4.6 India’s Experience with Globalization
e Indian policy makers have taken several measures to integrate India with global economy.  is
integration has several positive and favourable impacts on the growth of the economy and industry.
However, there has been some bad impact as well. Many sections of the society have been marginalized.
Trade liberalization: Changes in trade policy by removing quantitative restriction, removal of
open general license and rationalization of tari structure under WTO regime have brought about
a big change in the Indian economy.  is has increased the share of Indias foreign trade across the
world.
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Dynamics of Business Environment: Globalization, Liberalization and Privatization 41
Foreign investment and technology: Progressive opening up of the Indian economy to foreign
investment, both FDI and portfolio investment, has increased the  ow of investment to India.
Further, there has been a liberal policy towards technology collaboration.
Reform in foreign exchange management: ere have been a number of reforms in foreign
exchange management. All investments are allowed on repatriation basis. Original investment,
pro ts and dividend can be freely repatriated. Foreign investors can acquire immovable prop-
erty incidental to or required for their activity. Rupee has been made fully convertible on current
account. Companies incorporated in India are treated as Indian companies for taxation. Many
countries adopt a convention on avoidance of double taxation.
Capital market reforms: e reforms include opening up of India’s equity markets in 1992 to
investment by foreign institutional investors and permitting Indian  rms to raise capital on inter-
national markets by issuing Global Depository Receipts (GDRs), American Depository Receipts
(ADRs) and Indian Depository Receipts.
Globalization of Indian enterprises: An increasing number of Indian enterprises are using the
opportunity o ered by liberalization to expand their activities abroad by acquiring foreign  rms,
establishing their subsidiaries abroad and forming joint ventures.
2.5 LIBERALIZATION
2.5.1 Concept and Features of Liberalization
Liberalization, in general, refers to a relaxation of government restrictions in areas of
social or economic policy. Liberalization in the social policy may be a relaxation of
laws relating to social behaviour such as divorce, adoption and abortion. However,
the term liberalization more commonly refers to economic liberalization.
Economic activities such as production and distribution of goods and services
have been carried out since ages by individuals and  rms as well as by the state. In
advanced western countries, the role of the state in managing economic a airs of
the society has been declining over time. In these countries, the task of coordination
between consumers and producers is carried out by the market mechanism rather
than by the state bureaucracy. However, in the case of communist countries, the state has been control-
ling and coordinating all the activities. In other countries, the role for both state and entrepreneurs/ rms
has been varying. For instance, in India, government control on economy increased during the period of
1956 to 1980. Since 1980, a process of reforms and liberalization started in the country.
2.5.2 Indian Context of Liberalization
Industrial policy: ere has been a progressive movement towards delicensing and deregulation.
Currently, the licensing required is limited to only  ve sectors, keeping in mind security, public
health and safety considerations. In the industrial sector, industrial licensing was cut, leaving only
18 industries subject to licensing. Industrial regulation was rationalized. A number of industries
reserved for the public sector were opened up for private investment.
Liberalization,
in general, refers
to a relaxation
of government
restrictions in areas
of social or economic
policy.
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42 Understanding the Environment of Business
Trade liberalization: As mentioned in the preceding section, the government reduced restriction
on export and import.  ere was reduction of tari s from an average of 85 to 25 per cent and roll-
ing back of quantitative controls.  e rupee was made convertible on current account.
Foreign investment and technology: To encourage FDI, the maximum limit on share of foreign
capital in joint ventures was increased from 40 to 51 per cent with 100 per cent foreign equity permit-
ted in priority sectors. Further, there was relaxation of procedures for FDI approvals, and in at least
35 industries, automatic approval for projects within the limits was given for foreign participation.
Freedom for expansion and mergers of business undertakings: e limit on the monopoly
business was increased substantially.  e purpose was to allow the expansion of the business
undertakings so that they can avail the advantages of economies of scale and become more e -
cient to compete in the globalized market environment.
Public sector reforms: Government decided to allow the privatization of large, ine cient and
loss-making government corporations. Many public sectors have been corporatized to allow them
more  exibility to operate and expand.  ese units have been allowed to raise money from the
capital markets.
Capital market reforms: In 1992, a decision was taken to abolish the Controller of Capital Issues,
which decided the prices and the number of shares that  rms could issue. Further, the Securities
and Exchange Board of India (SEBI) Act of 1992 and the Security Laws (Amendment), which
gave SEBI the legal authority to register and regulate all security market intermediaries, were
enacted. In 1994, a new stock exchange—the National Stock Exchange—was established to allow
a computer-based trading system that served as an instrument to leverage reforms of India’s other
stock exchanges.  e NSE emerged as India’s largest exchange by 1996.
2.5.3 Impact of Liberalization in India
Growth of Indian business: e policy of liberalization allowed Indian enterprises to modern-
ize their operations and expand their activities. Removal of the constraints of Monopolies and
Restrictive Trade Practices (MRTP) Act and delicensing of a number of sectors along with the
opening of new sectors have helped the enterprises to grow big.
Improved e ciency: As the competition increased in the domestic market, enterprises started
restructuring their operations. Removal of restriction on purchase of modern technology from
abroad and availability of funds helped them to be more e cient and productive.
Finance availability: Liberalization in the  nancial sector and relaxation on foreign exchange
management helped to increase the availability of funds for expansion and growth. Firms were
allowed to raise funds from foreign markets also.
Opening of new sector: A number of sectors were opened for private investment; this has led to
expansion of sectors such as telecom and power with a positive impact on employment.
However, there have been some negative aspects of the liberalization, which are listed in the following
section .
Unemployment: As companies started restructuring their businesses and modernized their
technology, they reduced the labour employed.  is has increased unemployment in some sectors .
Increased gap between the poor and the rich: ere are studies that show that liberalization has
resulted in the increased gap between the rich and the poor.
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Dynamics of Business Environment: Globalization, Liberalization and Privatization 43
reatening small enterprises: Competition from big sector enterprises and MNCs increased the
di culties faced by small sector enterprises.
2.6 PRIVATIZATION
2.6.1 Concept and Features of Privatization
A wave of privatization of public sector companies and public utilities has occurred
in the world during the last three decades, embracing the industrial economies,
the transition economies of East Europe and large parts of the less-developed
world. The term privatization refers primarily to two things: any shi of activities
or functions from the state to the private sector, and more speci cally, any shi
of the production of goods and services from the public sector to private sectors .
5
Governments have sought to justify privatization in relation to certain objectives.
ese objectives include one or more of the following:
To promote increased e ciency
To raise revenues for the state (and thereby bridge  scal de cits)
To reduce government interference in the economy and promote greater
private initiative
To promote wider share ownership and the development of the capital market.
2.6.2 Privatization in India
Since the decade of the 1990s, liberalization has been the guiding star for Indias
policy framework. International institutions, consulting  rms and national govern-
ment have pushed liberalization in India by advocating policy measures such as
privatization, disinvestment, commercialization, deregulation and international
integration. An important and ongoing component of the reform process con-
sists of privatization and disinvestment. Privatization is de ned as the exit of the
government as a producer in a given market and complete transfer of government
ownership to the private company. Disinvestment is de ned as the reduction in
government equity in public sector enterprises. With the growing acceptance of
libertarianism, the government is increasingly cautious of its burgeoning size and
its unnecessary involvement in commercial activities.
India has a large, well-diversi ed public sector. Privatization is seen as a neces-
sary concomitant of deregulation of industry to enable  rms in the public sector
to compete and survive in the new environment.  e major element in industrial
deregulation has been the Industrial Policy Statement of June 1991, which drasti-
cally reduced the number of sectors of industry reserved for the public sector from 17 to 8.  is list has
since been truncated to four: defence, atomic energy, speci ed minerals and railway transport. Table 2.3
shows the number of public sector companies sold o to private sector and the companies which have
sold o equity stakes to private investors through capital markets.
The term ‘privatization’
refers primarily to two
things: any shift of
activities or functions
from the state to the
private sector, and
more speci cally, any
shift of the production
of goods and services
from the public sector
to private sectors.5
Privatization is
de ned as the exit of
the government as a
producer in a given
market and complete
transfer of government
ownership to the
private company.
Disinvestment
is de ned as
the reduction in
government equity
in public sector
enterprises.
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44 Understanding the Environment of Business
Table 2.3 Privatization of the Indian public sector
Companies Sold O Disinvestment Through Public O er of Equity
Modern Food ONGC
Madras Aluminium BHEL
Hindustan Zinc MTNL
BALCO Oil India
VSNL NTPC
IPCL Gail
Sesa Goa
2.6.3 Bene ts
e bene ts of privatization have been stressed by highlighting the problems faced by the public sector
units. Privatization through disinvestment or selling o has been implemented to overcome these
problems . e problems faced by the public sector companies are as follows:
Continuous losses
Ine ciency
Under-utilization of capacity
Surplus manpower
Lack of professional management
Lack of accountability
2.6.4 Criticism
ere have been several criticisms of the privatization and disinvestment process:
First, valuations of public sector enterprises sold o to private companies were unsound and that the
government gave away its stakes too cheaply
Second, disinvestment has been merely a revenue-raising activity for the government, with little
thought being given to the requirements of the  rms concerned
ird, it is contended that the government’s reluctance to disinvest more than 51 per cent and
relinquish control over PSUs has meant that the government has been unable to attract suitably
priced bids , as bidders do not believe that the  rms’ performance would improve signi cantly with
small government stakes being o oaded.
2.6.5 India’s Experience with Privatization
India’s experience with privatization can be explained with the following points:
De-reservation of industries: A number of industries earlier reserved for the public sector have
been opened up for private sector investment.  is has increased competition in the market.
Disinvestment in public enterprises: e government has disinvested its shares in a number of
pro t-making public sector enterprises. Currently, these enterprises are managed professionally.
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Dynamics of Business Environment: Globalization, Liberalization and Privatization 45
Issue of fresh equity: In many public sector enterprises, the government has allowed expansion,
and for that these enterprises have raised fresh equity also from the market.
Phasing out budgetary support: As the government has disinvested some of the companies,
the budgetary support to them has been reduced to the minimum.  ese companies have been
directed to raise money from the market.
Restructuring: To be more e cient and competitive in the market, public sector enterprises have
been allowed to restructure their operations.
Exit policy: In many companies having surplus labour, the government used voluntary retirement
scheme to reduce the workforce.
Mismatch between targeted and actual disinvestment: Table 2.4 shows that the government has
not been able to achieve its targeted amount of disinvestment. Political hurdles in disinvestment,
intervention of stakeholders and poor  nancial state of sold-o PSUs have all contributed to this
p e r f o r m a n c e .
2.7 IMPACT OF GLOBALIZATION, LIBERALIZATION AND
PRIVATIZATION
e globalization has given a big boost to international businesses. Indian business has also bene ted
from this and has expanded to other countries.
2.7.1 Expansion of Markets and Increased Competition
One of the impacts of globalization is expansion of markets. Several markets
which were closed for others have been opened up by the government. It has also
increased competition not only in the global market but also in the domestic market.
Several markets which
were closed for others
have been opened up
by the government.
Table 2.4 Budgeted target and actual receipts of disinvestment in India
Yea r
Budgeted Receipt
( ` crore)
Total Receipts
( ` crore) Year
Budgeted Receipt
( ` crore)
Total Receipts
( ` crore)
1991–92 2,500 3,037.74 2000–01 10,000 1,871.26
1992–93 2,500 1,912.51 2001–02 12,000 5,657.69
1993–94 3,500 2002–03 12,000 3,347.98
1994–95 4,000 4,843.10 2003–04 14,500 15,547.41
1995–96 7,000 168.48 2004–05 4,000 2,764.87
1996–97 5,000 379.67 2005–06 No target  xed 1,569.68
1997–98 4,800 910.00 2006–07 No target  xed
1998–99 5,000 5,371.11 2007–08 No target  xed 4,181.39
1999–2000 10,000 1,860.14 2008–09 No target  xed
2009–10 No target  xed 4,259.90
Source: Government of India, Economic Surveys, 2010.
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46 Understanding the Environment of Business
e integration of the Indian economy with the global economy has allowed MNCs to enter into the
domestic markets. MNCs with superior technology, better products and management skills have given
tough competition to the domestic players.  e opening up and expansion of markets have improved
the pro tability of MNCs also.
2.7.2 New Avenues of Entrepreneurial Opportunities
e technological development in the forms of IT and Internet has given birth to
several new industries. Indian entrepreneurs have taken advantages of that and
have established business in these and allied activities. India’s emergence in IT and
IT-enabled services on the world business map is a result of this change.
2.7.3 Increased Availability of Finance
Globalization has been a cause of increased  ow of money across border, and it
has also been accelerated by the easy availability of money. Increased  ow of easy
money at cheap rates has been responsible for recurrence of crisis in the global
economy as well.
2.7.4 Availability of Global Funds
Easy availability of funds has given rise to new types of  nancial services and organizations, and innovative
nancial instruments, namely, equity fund, venture fund, hedge funds and GDR-ADR. Sometimes, the
method of functioning of these new types of  nancial organizations has also been questionable.  is has
led to the increased demand of increasing regulation on these  nancial organizations.
2.7.5 E ciently Managed Businesses Have
Global Opportunities
Opening of new entrepreneurial opportunities, easy availability of money and
opening and expansion of global markets have provided global opportunities
for e ciently and well-managed businesses. Enterprises operating in emerging
markets are also expanding and making use of these opportunities.  ese enter-
prises are internationalizing through merger, acquisitions and other methods of
internationalization.
2.7.6 Increased Demand for Ethical and Socially
Responsible Behaviour
Along with the expansion of global markets, opening up of new avenues of
entrepreneurial opportunities and easy availability of money, a demand for more
The technological
development in
the forms of IT and
Internet has given
birth to several new
industries.
Globalization has been
a cause of increased
ow of money across
border, and it has also
been accelerated by
the easy availability of
money.
Opening of new
entrepreneurial
opportunities, easy
availability of money
and opening and
expansion of global
markets have provided
global opportunities
for e ciently and
well-managed
businesses.
A demand for
more transparent,
ethical and socially
responsible behaviour
on the part of
enterprises is made.
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Dynamics of Business Environment: Globalization, Liberalization and Privatization 47
2.8 RESPONSE OF INDIAN ENTERPRISES
Big enterprises and business houses have responded to the changed environment by going in for
restructuring, modernization and expansion of their businesses to be more e cient and productive.  is
has resulted in improved performance of these enterprises.  ese enterprises have become very e cient
over time.  e use of IT and other modern management tools and professional management techniques
have been deployed by majority of these enterprises.
A er becoming e cient and pro table, these enterprises are internationalizing their operations.  e
easy availability of money at very competitive prices has further fuelled their ambitions.  ese enterprises
have gone abroad and acquired companies to expand further. All the methods of internationalizations—
exporting, setting up of units abroad, joint venture and acquiring of foreign  rms—are being used by
the companies.  e companies that have shown their strength in knowledge-based industries, such as
pharmaceutical industry, are forming joint ventures or are going for activities like outsourcing, contract
manufacturing or contract research .
Small-scale enterprises faced problems of closure and losses. However, there are large numbers of
small  rms also which have used government funding and modernized their operations to be competi-
tiv e . Firms located in industrial clusters such as Ludhiana and Tirpur, clusters where the trade associa-
tions are dynamic and the  rms take collective actions, are better o .
transparent, ethical and socially responsible behaviour on the part of enterprises is made.
Di erent governments have enacted new laws to monitor the behaviour of enterprises and regulate
them. Exhibit 2.4 shows the ethical dilemma resulting from globalization .
Globalization has increased the competition in all markets. As a result, the small fi rms have been
adversely aff ected. Small firms have been using simple equipment and machinery and targeting local
markets. They have been facing several problems with regard to labour turnover, quality of their prod-
ucts, marketing of products and fi nancial constraints. The globalization has multiplied their problems.
It has forced many small units out of business and rendered many without jobs.
There is the ethical dilemma for the policy maker to continue with the reservation of several prod-
ucts for small-scale enterprises or discontinue the reservations and allow large enterprises to produce
these products to exploit growing international opportunity. Over time, the government decided to do
away with the reservation, and it allowed large fi rms to enter into the fi elds such as textile garments.
However, there is a need to support small enterprises as these units are able to absorb large numbers
of people. There is a solution in terms of providing institutional support to the small enterprises in the
areas such as fi nance, technology, production and marketing.
Exhibit 2.4 Ethical Dilemma: Impact of Globalization on Small Enterprises
and Unemployment
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48 Understanding the Environment of Business
5Business environment
To study the dynamics of business environment and its impact on enterprises, Tata Steel is the
most appropriate example.  e chapter started with the case of Tata Steel. Tata Steel has witnessed
SUMMARY
Tata Steel is one among the low-cost producers of steel in the world. The
company plans to enhance its capacity to 50 million tonnes by 2015
through organic growth. Jamsetji Tata dreamt of building Tata Steel, but
it was JRD Tata who took it to new heights. JRD Tata had the rare ability to
create leaders. In 1984, he chose Russi Mody, a manager par excellence, to
succeed him.
Russi Mody beefed up marketing operations and started an export
cell. JRD Tata’s successor, Ratan Tata, took over from Mody as chairman in
1992, and J. J. Irani assumed the role of managing director.
As the Indian government announced a number of reform measures to liberalize the economy and
integrate the Indian economy with the world economy, competitive conditions were created in the mar-
ket, which resulted in problems for domestic companies in India. The entry of multinationals into India
exposed the quality problems of many local companies. The whole business environment in the country
started changing. Ratan Tata and other company executives concluded that they would have to revi-
talize their business and move outside India’s borders. Tata Steel started its expansion plan, and drastic
changes were brought about. The company was right-sized with innovative schemes so as not to disturb
the industrial harmony, from about 80,000 to less than 40,000 today. The company also exited a host of
non-core activities. The product mix was changed as Tata Steel moved up the value chain to set up a cold
rolling mill.
B. Muthuraman stepped into J. J. Irani’s shoes in 2001. During 2001–02, steel prices touched rock bottom,
but Tata Steel emerged as one of the  ve steel manufacturers across the world to post pro ts. E orts to break
the commodity cycle with branding initiatives and retailing followed. The steel cycle had also turned. In the
past couple of years, under the leadership of Muthuraman, the company has pulled o several global acquisi-
tions, Corus Group being the most historic one.
Source: Annual Report of Tata Steel for the year 2009–10, www.tata.com
Questions
1. In what way has the business environment in which the company operated changed after the liberalization
of Indian economy?
2. How has the company responded to the changes in its business environment?
Business Insight: A Revisit Tata Steel Managing Business Environment
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Dynamics of Business Environment: Globalization, Liberalization and Privatization 49
the changes in the economic history of India during the past 100 years. Business environment
refers to the sum of internal and external forces which in uence the operation of an enterprise.
e external forces consisting of economic, competitive, technological, political-legal, socio-
cultural and ecological factors a ect the operation and performance of enterprises.
e example of Hindustan Motors also shows the impact of environment on the performance.
e changes in technology and its impact on the global business have been illustrated with the
brief write-up on shale gas.
5Impact of government policy on changing the business environment
In India, the government policy has played an important role in in uencing the business environ-
ment.  e government policy was deciding and directing investment, production and technology
decisions. A er 1980, government started liberalizing the control on Indian business.  e process
was further accelerated in the 1990s.  e business environment started becoming more liberalized
and globalized.
5Globalization and its impact on business
Globalization means free trade, free  ow of capital and people, and free access to ideas and tech-
nology across the world. Technological development, more open policies by many countries,
WTO etc. have all led to more globalization. Globalization has got its positive and negative dimen-
sions.  is has led to the opening up of a number of economies and thereby to increased access
to themarket, increased availability of foreign investment, access to advanced technology, avail-
ability of better products and increased consumer welfare. On the negative side, globalization
has increased the gap between poor and rich countries, increased unemployment, inequality and
poverty, and has led to spreading of crisis and risk from one country to others.
5Liberalization and its impact on business
Liberalization in general refers to a relaxation of government restrictions in the areas of social or
economic policy. More commonly, the term liberalization refers to economic liberalization. A er
1980, the Indian government has liberalized its industrial policy and trade policy, reduced restric-
tion on foreign investment and technology and initiated public sector reforms and capital market
reforms.  is liberalization policy has led to the growth of Indian business, improved its e ciency
and productivity and new sectors were opened up. However, it also has some negative aspects
such as increased unemployment, increased employment in informal sector and small businesses
facing the problem of survival.
5Privatization and its impact on business
Privatization refers to shi of production of goods and services from the public sector to the pri-
vate sector, and then shi of activities or function from the state to the private sector.  e positive
aspect of the privatization is explained in terms of improving the functioning of the public sector
units which were privatized.
5Impact of changing business environment and the response of Indian enterprises to the change
e overall impact of globalization, liberalization and privatization on the Indian enterprises has
been positive as it has increased new avenues of entrepreneurial opportunities, increased the com-
petition in the market, forced enterprises to improve their e ciency and productivity, increased
M02_KAUL4498_01_SE_C02.indd 49M02_KAUL4498_01_SE_C02.indd 49 20/07/11 10:37 PM20/07/11 10:37 PM
50 Understanding the Environment of Business
the availability of funds and led to the achievement of the global ambition of Indian companies.  e
big enterprises responded to the changed environment by going in for restructuring, expansion,
modernization of their businesses to be more e cient and productive. Further, using the easy
availability of funds helped them to expand their activities abroad by exporting, setting up of
units abroad, joint venturing and acquiring foreign  rms. Small-scale enterprises faced problems
of closure and losses. However, there are a large number of small  rms which used government
funding and modernized their operations to be competitive. Firms located in clusters in which the
associations are dynamic and which took collective action were better o .  e chapter ends with
the discussion of the case of Tata Steel.
1. De ne business environment. What is the importance of economic environment? How do changes
in it a ect the enterprises?
2. What is globalization? Has it a ected the Indian business adversely? Give your arguments in
favour of and against globalization.
3.  e globalization of the Indian economy has bene ted Indian consumers. Do you agree with this
or not? Explain.
4. What do you understand by liberalization in Indian economy? Has it achieved its objectives?
5. Explain the positive and negative impact of liberalization on Indian economy.
6. What is meant by privatization? Explain its various forms.
7. Describe India’s experiences with privatization.
8. How do globalization, liberalization and privatization change the business environment in India?
9. What is the impact of globalization, liberalization and privatization on the Indian enterprises?
10. How has the Indian enterprises responded to the changes in business environment?
QUESTIONS
ENDNOTES
1. Bisson, P., Stephenson, E., and Viguerie, S.P. Global Forces: An Introduction, Mckinsey Quarterly,
June 2010 Mckinsey Quarterly.
2. Bhagwati, J. N. India in Transition: Freeing the Economy. Oxford University. Press, Oxford,
1993; Government of India, 1951, Industries (Development and Regulation) Act, New Delhi;
Government of India, Seventh Five-Year Plan, New Delhi, 1985; Marathe, S. S. Regulation and
Development: India’s Policy Experience of Controls Over Industry, Sage Publications, New Delhi,
1989; Mohan, R., and Aggarwal, V. Commands and controls: planning for Indian Industrial
Development, 1951–1990, Journal of Comparative Economics, 14, December 1990, 681–712.
M02_KAUL4498_01_SE_C02.indd 50M02_KAUL4498_01_SE_C02.indd 50 20/07/11 10:37 PM20/07/11 10:37 PM
Dynamics of Business Environment: Globalization, Liberalization and Privatization 51
3. Sreenivasan, K. R. Globalization, Society and Policy Making, 24 August, 2006.
4. ILO, A Fair Globalization: Creating Opportunities for All, World Commission on the Social
Dimension of Globalization, 2004.
5. Starr, P.  e meaning of privatization. Yale Law and Policy Review, 1998, 6, 6–41.
India started its telecommunication operations in 1851. However, during
the past 20 years, the telecommunication sector has moved very fast and
has become one of the most dynamic sectors in the country. Its fast-track
growth has made it a key contributor to India’s progress.
Currently, the Indian telecom market is one of the fastest-growing
markets in the world. With its 429.21 million telephone connections as
on 31 December 2009, it is the second largest network in the world after
the Chinese telecom network. About 15 million connections are added
every month, which makes its annual growth rate to be 42.68 per cent.
Its target of having 500 million telephones by 2010 had been achieved
in September 2009 itself. The share of private sector in the total sector is about 82.33 per cent. The overall
teledensity has reached about 47.88 per cent. The size of the Indian telecom equipment market in 2008–09
was US$ 24.99 billion. The total market of handsets in 2008–09 was US$ 5.82 billion. It is expected that the
mobile subscriber base in 2013 would be about
771 million.
India adopted a phased approach for reform-
ing the telecom sector right from the beginning.
Privatization was gradually introduced, fi rst in
value-added services, followed by cellular and
basic services. An independent regulatory body,
Telecom Regulatory Authority of India (TRAI),
was established to deal with competition in a
balanced manner. This gradual and thought-
ful reform process in India has favoured industry
growth. It has changed the way people and busi-
ness communicate and operate.
Several foreign players have entered the
sector either on their own or through joint ventures with Indian companies. Indian companies are
also globalizing their activities. The Indian companies have also started acquiring telecom compa-
nies operating in other countries. In March 2010, Bharti Airtel took over Zain, a company operating in
the African market. All these have been possible because of liberalized and globalized business envi-
ronment. One of the results of this competitive environment is the deterioration of public sector
telecom companies. For instance, a cash-rich public sector company, BSNL, has recently showed
Case Study Changing Competitive Scenarios of the Telecom Sector in IndiaCase Study
Effective Charge (INR/Min) Mobile Subscriber Base (in million)
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
Mar-
98
Mar-
99
Mar-
00
Mar-
01
Mar-
02
Mar-
03
Mar-
04
Mar-
05
Mar-
05
Mar-
07
Effective Charge
(Indian Rupee (INR) per Minute)
Mobile Subscriber Base (in million)
0.88 1.88 3.58 6.50 13.00
33.69
57.03
98.78
165.11
15.32
15.32
7.24
4.25 3.14 3.10
1.20 1.901.20
1.01
CPP Introduced
WLL Introduced
Telecom
Tariff Order
NTP TTO (44th Amendment)
on Roaming Charges
Competition in Long
Distance Service
3rd & 4th
Cellular Operator
Unified Access
Licesning Regime
Mobile Growth and Effective Charge per Minute
Impact of Steps Taken for Increasing Growth
(Continued )
M02_KAUL4498_01_SE_C02.indd 51M02_KAUL4498_01_SE_C02.indd 51 20/07/11 10:37 PM20/07/11 10:37 PM
52 Understanding the Environment of Business
a revenue loss and declining market share. A committee headed by Sam Pitroda suggested that BSNL
should restructure and reduce its workforce to one-third.
Questions
1. Why have public sector companies, such as BSNL and MTNL, facing problems in the telecom sector not
been benefi ted by the liberalization and globalization policy of the government?
2. How has the private sector benefi ted from such an environment?
3. What are the factors a company should consider to be successful in a competitive environment?
M02_KAUL4498_01_SE_C02.indd 52M02_KAUL4498_01_SE_C02.indd 52 20/07/11 10:37 PM20/07/11 10:37 PM
ResearchGate has not been able to resolve any citations for this publication.
Article
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This book is the eagerly awaited successor to Robert Gilpin's 1987 The Political Economy of International Relations, the classic statement of the field of international political economy that continues to command the attention of students, researchers, and policymakers. The world economy and political system have changed dramatically since the 1987 book was published. The end of the Cold War has unleashed new economic and political forces, and new regionalisms have emerged. Computing power is increasingly an impetus to the world economy, and technological developments have changed and are changing almost every aspect of contemporary economic affairs. Gilpin's Global Political Economy considers each of these developments. Reflecting a lifetime of scholarship, it offers a masterful survey of the approaches that have been used to understand international economic relations and the problems faced in the new economy. Gilpin focuses on the powerful economic, political, and technological forces that have transformed the world. He gives particular attention to economic globalization, its real and alleged implications for economic affairs, and the degree to which its nature, extent, and significance have been exaggerated and misunderstood. Moreover, he demonstrates that national policies and domestic economies remain the most critical determinants of economic affairs. The book also stresses the importance of economic regionalism, multinational corporations, and financial upheavals. Gilpin integrates economic and political analysis in his discussion of "global political economy." He employs the conventional theory of international trade, insights from the theory of industrial organization, and endogenous growth theory. In addition, ideas from political science, history, and other disciplines are employed to enrich understanding of the new international economic order. This wide-ranging book is destined to become a landmark in the field.
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Privatization is a fuzzy concept that evokes sharp political reactions. It covers a great range of ideas and policies, varying from the eminently reasonable to the wildly impractical. Yet however varied and at times unclear in its meaning, privatization has unambiguous political origins and objectives. It emerges from the countermovement against the growth of government in the West and represents the most serious conservative effort of our time to formulate a positive alternative. Privatization proposals do not aim merely to return services to their original location in the private sphere. Some proposals seek to create new kinds of market relations and promise results comparable or superior to conventional public programs. Hence it is a mistake to define and dismiss the movement as simply a replay of traditional opposition to state intervention and expenditure. The current wave of privatization initiatives opens a new chapter in the conflict over the public-private balance. This Article attempts to clarify the meaning of privatization as an idea, as theory and rhetoric, and as a political practice. In the process I hope to explain why I generally oppose privatization, even though I favor some specific proposals that privatization covers. But apart from this political judgment, I take privatization seriously as a policy movement and as a process that show every sign of reconstituting major institutional domains of contemporary society.
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Jagdish Bhagwati, one of the world's leading economists, offers a fascinating overview of the policies that produced India's sorry economic performance over a third of a century. His analysis puts into sharp focus the crippling effects of the inward-looking, bureaucratic regime that grew to Kafkaesque dimensions, starting in the early 1950s. It provides therefore a coherent and convincing rationale for the economic reforms begun in June 1991 by the new government of Prime Minister Rao. These reforms, also discussed by Professor Bhagwati, are thus set into historical and analytical perspective. Written with wit and elegance, this text of the 1992 Radhakrishnan Lectures at Oxford is readily accessible to a wide readership.
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Hubbard, R.G., and Duggan, W. Roots of Prosperity, Strategy + Business, February 23, 2010/ Spring 2010, Issue 58, www.strategy-business.com.
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Bhagwati, J. N. India in Transition: Freeing the Economy. Oxford University. Press, Oxford, 1993; Government of India, 1951, Industries (Development and Regulation) Act, New Delhi; Government of India, Seventh Five-Year Plan, New Delhi, 1985; Marathe, S. S. Regulation and Development: India's Policy Experience of Controls Over Industry, Sage Publications, New Delhi, 1989; Mohan, R., and Aggarwal, V. Commands and controls: planning for Indian Industrial Development, 1951-1990, Journal of Comparative Economics, 14, December 1990, 681-712.
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