MBA 2nd Semester - Business
Environment and Legal Aspects of
Business
1. Micro Environment Factors
The micro environment refers to the immediate external forces that directly affect
an organization’s operations and performance. Unlike the macro environment,
which comprises broader forces, the micro environment elements are closely
related to the business and can be influenced or managed to some extent.
Understanding these factors is crucial for any organization to strategize effectively
and sustain its market position.
Customers: Customers are central to the existence of any business. Understanding
customer needs, preferences, and behavior is essential for formulating marketing
strategies. Businesses often segment customers by demographics, geography, and
behavior to better serve and retain them. Customer satisfaction and loyalty directly
impact the organization's revenue and reputation.
Suppliers: Suppliers provide raw materials, components, and services necessary for
production. A strong relationship with reliable suppliers ensures timely delivery,
consistent quality, and favorable pricing. However, dependence on a few suppliers
can increase risk, especially if there are price fluctuations or supply disruptions.
Strategic sourcing and multiple supplier partnerships can mitigate such risks.
Competitors: Every business faces competition, whether direct or indirect.
Monitoring competitors' products, pricing, marketing tactics, and customer
feedback helps a firm identify its strengths and weaknesses relative to others.
Competitive analysis enables innovation, improved customer service, and better
product differentiation, helping the business maintain a competitive edge.
Intermediaries: Marketing intermediaries include agents, distributors, wholesalers,
and retailers who assist in the distribution and promotion of products. These
entities help businesses reach end customers efficiently. Effective coordination with
intermediaries ensures better market coverage and customer satisfaction. Poor
relations or inefficiencies at this level can lead to lost sales and brand dilution.
Public: The public comprises various groups such as media, environmental groups,
local communities, and social media audiences that can impact an organization’s
image. A favorable public perception can enhance brand value and trust, while
negative publicity can damage reputation significantly. Public relations (PR)
strategies are essential in maintaining a positive image.
Employees and Internal Stakeholders: Though sometimes considered part of the
internal environment, employees, management, and shareholders are crucial
components of the micro environment. Employee satisfaction, leadership
effectiveness, and internal communication significantly impact operational
efficiency and organizational culture.
In conclusion, a firm must continuously analyze and adapt to its micro environment
to achieve business goals. Effective stakeholder engagement, strategic partnerships,
and proactive decision-making are key to thriving in a dynamic and competitive
business setting.
2. Macro Environment Factors
The macro environment consists of the broader external forces that influence an
organization’s decision-making, performance, and strategy. These factors are largely
uncontrollable but must be monitored and assessed to adapt effectively. A sound
understanding of the macro environment helps businesses to anticipate changes
and develop proactive strategies.
Political Environment: This includes government policies, political stability, taxation
policies, trade restrictions, labor laws, and environmental regulations. A stable
political environment encourages investment and growth. In contrast, political
turmoil, corruption, or frequent policy changes create uncertainty and discourage
long-term business plans.
Economic Environment: Economic conditions such as inflation rates, interest rates,
employment levels, disposable income, and GDP growth significantly influence
consumer spending and investment behavior. A booming economy promotes
business expansion, while a recession may result in cost-cutting, reduced demand,
and operational downsizing.
Social Environment: Social and cultural factors like population demographics,
education levels, social values, lifestyle trends, and consumer attitudes shape
product demand and marketing strategies. For instance, an aging population may
increase demand for healthcare services, while a young demographic may favor
digital innovations.
Technological Environment: Advancements in technology drive innovation and can
disrupt entire industries. Automation, artificial intelligence, e-commerce, and digital
communication tools are changing how businesses operate. Companies that adopt
and integrate new technologies gain competitive advantages and can reach wider
markets.
Environmental (Ecological) Factors: Climate change, sustainability concerns, carbon
footprints, and resource scarcity are increasingly affecting business operations.
Companies are expected to follow green practices and adopt environmentally
friendly methods. Regulatory pressure and growing consumer awareness have
made corporate social responsibility (CSR) a business necessity.
Legal Environment: This encompasses laws and regulations concerning
employment, consumer protection, safety standards, environmental protection, and
business operations. A robust legal framework promotes fair competition and
protects the rights of various stakeholders. Non-compliance can result in heavy
penalties and damage to reputation.
In conclusion, macro environment factors operate on a large scale and impact all
businesses, regardless of size or industry. Though these elements are beyond the
control of a single firm, understanding and anticipating their influence is essential
for long-term success. Strategic analysis tools like PESTEL (Political, Economic,
Social, Technological, Environmental, and Legal) are commonly used to assess these
macro-environmental forces and integrate them into planning and decision-making
processes.
3. Types of Economic Systems
An economic system is a mechanism by which societies allocate resources,
distribute goods and services, and manage economic activities. Each system reflects
a society’s values, political beliefs, and economic goals. The four major types of
economic systems are capitalism, socialism, mixed economy, and traditional
economy.
Capitalist Economy: Also known as a free-market economy, capitalism is
characterized by private ownership of resources and minimal government
interference. The market forces of supply and demand determine prices, production,
and investment decisions. Profit is the main motive, and competition drives
efficiency and innovation. The United States is a prime example of a capitalist
economy.
Socialist Economy: In a socialist system, the government owns and controls major
means of production and distribution. The goal is to reduce income inequality and
promote social welfare. Central planning guides economic decisions, and essential
services like healthcare, education, and transportation are often provided free or at
subsidized rates. North Korea and Cuba exhibit features of socialist economies.
Mixed Economy: This system combines elements of both capitalism and socialism.
Private enterprise exists alongside significant government intervention. The
government may regulate key sectors like healthcare, education, and defense, while
allowing market freedom in others. India, the UK, and many European countries
follow a mixed economic system, balancing market freedom with social welfare
goals.
Traditional Economy: Traditional economies are based on customs, beliefs, and
traditions handed down through generations. Economic activities like farming,
hunting, and barter are conducted the same way they have been for years. These
economies are typically found in rural or tribal communities and are often resistant
to change and technological progress.
Each system has its advantages and limitations. Capitalism promotes innovation but
can lead to inequality. Socialism ensures basic needs but may reduce efficiency. A
mixed economy offers balance but can face bureaucratic delays. Traditional
economies preserve culture but often lack modern growth.
In the modern globalized world, most nations adopt a hybrid or mixed approach,
choosing elements that best suit their economic and social objectives. Policymakers
must continuously evaluate and adjust the structure to respond to evolving
domestic and international challenges. The choice of economic system profoundly
influences a country’s development path, income distribution, and social structure.
4. LPG Model in Business Environment
The LPG model, which stands for Liberalization, Privatization, and Globalization,
was introduced in India in 1991 as part of a series of economic reforms to overcome
a severe balance of payments crisis. Spearheaded by then Finance Minister Dr.
Manmohan Singh under the leadership of Prime Minister P.V. Narasimha Rao, the
LPG reforms fundamentally changed the structure and operation of the Indian
economy.
Liberalization: This refers to the process of eliminating government restrictions and
regulations in the economy to facilitate private sector participation and competition.
Before 1991, India followed a license-raj system where businesses needed multiple
approvals to operate. Liberalization reduced import tariffs, removed industrial
licensing in most sectors, and allowed foreign investment, thereby increasing
efficiency, productivity, and innovation in various industries.
Privatization: This involves the transfer of ownership and management of
enterprises from the public sector to the private sector. The Indian government
started divesting its stake in public sector undertakings (PSUs) to reduce fiscal
burdens and increase efficiency. The belief was that private ownership would bring
better management, reduce political interference, and improve customer
satisfaction and profitability.
Globalization: Globalization refers to the integration of the Indian economy with the
world economy. Through this process, India opened its markets to foreign trade,
investment, and technology. Policies were implemented to facilitate Foreign Direct
Investment (FDI), simplify trade procedures, and enhance competitiveness.
Globalization allowed Indian companies to compete globally, while also attracting
multinational corporations to India.
The LPG reforms led to remarkable changes in the Indian economy. GDP growth
accelerated, foreign exchange reserves increased, exports diversified, and new
industries such as IT and telecom flourished. Consumer choices expanded,
employment in services rose, and India emerged as a significant player in global
markets.
However, the model also faced criticisms. It led to jobless growth in certain sectors,
increased income inequality, and over-reliance on service industries. Moreover,
privatization of essential services raised concerns about accessibility and
affordability. Nevertheless, the LPG model is credited with transforming India from
a closed, inward-looking economy to a dynamic and open-market system.
In conclusion, the LPG model was a watershed moment in Indian economic history.
It brought a paradigm shift in economic thinking, encouraging entrepreneurship,
competition, and global engagement. These reforms continue to shape India’s
development strategy and economic policy framework in the 21st century.
5. Essentials of a Valid Contract
A contract is a legally enforceable agreement between two or more parties. In the
context of the Indian Contract Act, 1872, an agreement becomes a valid contract
only when it fulfills certain essential conditions. These essentials ensure that the
contract is binding and can be upheld in a court of law.
1. Offer and Acceptance: There must be a lawful offer by one party and a lawful
acceptance of the offer by the other. The acceptance must be absolute and
unqualified, and it must be communicated properly.
2. Intention to Create Legal Relationship: The parties must intend to enter into a
legally binding agreement. Social or domestic arrangements are generally not
enforceable due to lack of such intention.
3. Lawful Consideration: Consideration refers to the price paid by one party for the
promise of the other. It must be lawful, real, and not prohibited by law. Contracts
without consideration are generally void unless they fall under exceptions such as
natural love and affection or past voluntary service.
4. Capacity of Parties: The parties entering into a contract must be competent to
contract. This means they must be of the age of majority, of sound mind, and not
disqualified by any law.
5. Free Consent: Consent of the parties must be free and not obtained through
coercion, undue influence, fraud, misrepresentation, or mistake. If consent is not
free, the contract becomes voidable at the option of the aggrieved party.
6. Lawful Object: The objective of the agreement must not be illegal, immoral, or
opposed to public policy. Any contract made for an unlawful object is void.
7. Certainty and Possibility of Performance: The terms of the contract must be clear
and certain. If the terms are vague or impossible to perform, the contract is void.
8. Legal Formalities: Where law requires certain formalities like registration,
writing, or stamping, they must be fulfilled. For example, contracts involving the sale
of immovable property must be in writing and registered.
These essential elements form the foundation of a valid contract. If any of these are
missing, the contract may be void, voidable, or unenforceable. Thus, understanding
these essentials is crucial for individuals and businesses entering into agreements,
ensuring they are protected under the law.
6. Types and Formation of Companies
A company is a legal entity formed under the Companies Act, 2013 in India. It has a
separate legal identity from its owners and offers limited liability to its members.
Companies are formed for various purposes such as profit-making, charitable
activities, or professional services. The types and formation process of companies
are key topics in corporate law and business environment studies.
Types of Companies:
1. Private Limited Company: This company restricts the right to transfer shares,
limits the number of members to 200, and prohibits public subscription. It requires
a minimum of two members and two directors.
2. Public Limited Company: This company can invite the public to subscribe to its
shares. It requires a minimum of seven members and three directors. There is no
restriction on the transfer of shares.
3. One Person Company (OPC): Introduced to support individual entrepreneurs, an
OPC allows a single person to form a company with limited liability. It enjoys fewer
compliance requirements compared to other companies.
4. Section 8 Company: These are non-profit organizations formed for charitable
purposes like education, art, religion, and social welfare. Profits are reinvested into
the company rather than distributed.
5. Limited Liability Partnership (LLP): This combines the benefits of a partnership
with those of a company, offering limited liability to its partners while allowing
operational flexibility.
Formation of a Company:
The formation process typically involves the following steps:
1. Name Approval: The applicant must select a unique name and get it approved by
the Registrar of Companies (ROC) through the Ministry of Corporate Affairs (MCA)
portal.
2. Drafting of MOA and AOA: The Memorandum of Association (MOA) defines the
company’s objectives, while the Articles of Association (AOA) contain the rules for
internal management.
3. Filing of Incorporation Documents: Forms like SPICe+ are filed along with
identification proofs, address proofs, MOA, AOA, and declarations.
4. Certificate of Incorporation: Once documents are verified, the ROC issues a
Certificate of Incorporation, giving legal existence to the company.
5. Commencement of Business: For companies with share capital, a declaration of
receipt of subscription money is filed before commencing operations.
Understanding these types and formation steps is vital for entrepreneurs, legal
professionals, and business managers. Each type of company serves different needs,
and the formation process ensures legal compliance, governance, and recognition
under the law.
7. Consumer Protection Act & Role of Consumer Councils
The Consumer Protection Act, 2019 was enacted to empower consumers and
safeguard their rights in India. It replaced the earlier Consumer Protection Act,
1986, with enhanced provisions, including the establishment of the Central
Consumer Protection Authority (CCPA), introduction of e-filing, mediation, and
stricter penalties for unfair practices.
Key Features of the Consumer Protection Act, 2019:
1. Consumer Rights: The Act defines six fundamental consumer rights — protection
against hazardous goods/services, right to information, right to choose, right to be
heard, right to redressal, and right to consumer education.
2. Consumer Disputes Redressal Commissions: A three-tier quasi-judicial system
includes District, State, and National Commissions for resolving disputes quickly and
effectively.
3. Product Liability: The Act introduces liability for manufacturers, service
providers, and sellers for defective products and services, even if the consumer has
no direct contract with the manufacturer.
4. E-Commerce Provisions: Online platforms are now accountable for the safety and
authenticity of products and services. They must disclose sellers' details and resolve
grievances efficiently.
5. Mediation: A new provision for voluntary mediation aims to speed up the
resolution of disputes without going through litigation.
Role of Consumer Protection Councils:
Consumer Protection Councils are advisory bodies set up at the central, state, and
district levels. Their main functions include:
1. Spreading Awareness: Councils educate consumers about their rights,
responsibilities, and available remedies.
2. Advising Governments: They recommend policy measures to enhance consumer
protection, identify market malpractices, and suggest amendments to laws.
3. Promoting Consumer Welfare: Councils collaborate with NGOs, academic
institutions, and industries to develop consumer-centric initiatives.
4. Encouraging Participation: They encourage public engagement and help
consumers raise their voices against unethical practices.
5. Building a Grievance-Handling Network: They facilitate linkages between
consumer forums, helplines, and legal aid bodies.
Impact and Importance:
The Act and the councils collectively aim to establish a strong consumer justice
framework in India. By ensuring access to timely and affordable redressal, they
build trust in the market system. The councils also act as a bridge between the
government and the consumer, promoting accountability and transparency in
business practices.
In conclusion, the Consumer Protection Act, 2019, along with consumer councils,
plays a pivotal role in safeguarding consumer interests and enhancing the overall
business environment in the country.
